AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
OCTOBER 1, 2001
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______ to ________
Commission File Number 000-30772
VIDESH SANCHAR NIGAM LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
The Republic of India
(Jurisdiction of incorporation or organization)
Videsh Sanchar Bhavan
Mahatma Gandhi Road
Mumbai 400 001
India
+91-22 262 4020
(Address of principal executive offices)
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* New York Stock Exchange
Equity Shares, par value New York Stock Exchange
Rs.10 per share
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 last fiscal year covered by this
Annual Report.
83,133,086 Equity Shares.
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 | |
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 |_| Item 18 |X|
* American Depositary Shares evidenced by American Depositary Receipts. Each
American Depositary Share represents two Equity Shares. Not for trading, but
only in connection with the listing of American Depositary Shares pursuant
to the requirements of the New York Stock Exchange.
TABLE OF CONTENTS
Certain Defined Terms..........................................................2
Currency of Presentation.......................................................2
Exchange Rates .............................................................2
Cautionary Statement with Respect to Forward-Looking Statements ...............2
Part I.........................................................................3
Item 1. Identity of Directors, Senior Management and Advisers........3
Item 2. Offer Statistics and Expected Timetable......................3
Item 3. Key Information..............................................3
Item 4. Information on the Company..................................17
Item 5. Operating and Financial Review and Prospects................46
Item 6. Directors, Senior Management and Employees..................60
Item 7. Major Shareholders and Related Party Transactions...........65
Item 8. Financial Information:Consolidated Financial Information....66
Item 9. The Offer and Listing.......................................67
Item 10. Additional Information......................................71
Item 11. Quantitative and Qualitative Disclosures About Market Risks.93
Item 12. Description of Securities Other Than Equity Securities......93
Part II.......................................................................93
Item 13. Defaults, Dividend Arrearages and Delinquencies.............93
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds.......................................93
Item 15. Reserved....................................................93
Item 16. Reserved....................................................93
Part III......................................................................93
Item 17. Financial Statements........................................93
Item 18. Financial Statements........................................93
Item 19. Exhibits....................................................94
Signatures....................................................................95
CERTAIN DEFINED TERMS
Unless the context otherwise requires, references herein to "we," "us,"
"our," the "Company" and "VSNL" are to Videsh Sanchar Nigam Limited, a limited
liability company organized under the laws of the Republic of India. References
to "Equity Shares" or "Shares" are to the equity shares, par value Rupees 10 per
share of the Company. References to the American Depositary Shares or "ADSs" are
to American Depositary Shares, each representing two Shares. The ADSs are
evidenced by American Depositary Receipts ("ADRs"). References to the
"Department of Telecommunications" or "DOT" are to the Department of
Telecommunications/Telecom Commission/Department of Telecom Operations and to
the Department of Telecom Services of the Government of India, collectively. The
Government of India is sometimes referred to herein as the "Government."
Effective October 1, 2000, the operations of the Department of Telecom Services
and Department of Telecom Operations have been transferred to Bharat Sanchar
Nigam Limited, sometimes referred to herein as "BSNL", a company wholly owned by
the Government.
CURRENCY OF PRESENTATION
In this annual report, references to "$" or "Dollars" or "US Dollars"
are to the legal currency of the United States and references to "Rs" or
"Rupees" or "Indian Rupees" are to the legal currency of India. The Company's
financial statements included in this annual report are presented in Indian
Rupees and are prepared in accordance with United States generally accepted
accounting principles ("US GAAP"). For the convenience of the reader, this
annual report contains translations of certain Indian Rupee amounts into US
Dollars, which should not be construed as a representation that such Indian
Rupee or US Dollar amounts referred to herein could have been, or could be,
converted to US Dollars or Indian Rupees, as the case may be, at any particular
rate, the rates stated, or at all. References to "Indian GAAP" are to Indian
generally accepted accounting principles. References to a particular "fiscal"
year are to the Company's fiscal year ended March 31 of such year. References to
years not specified as being fiscal years are to calendar years.
EXCHANGE RATES
The noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York (the "Noon Buying Rate") was Rs.46.85 per $1.00 on March 30, 2001 for the
conversion of Rupees into US Dollars.
Unless otherwise specified herein, financial information has been
converted into US Dollars at such Noon Buying Rate. Any discrepancies in any
table between totals and sums of the amounts listed are due to rounding. For
more information regarding rates of exchange between Indian Rupees and US
Dollars, see "Item 3. Key Information--Selected Financial Data--Exchange Rates."
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "ITEM 3. KEY INFORMATION-RISK FACTORS," "ITEM 5. OPERATING AND
FINANCIAL REVIEW AND PROSPECTS" AND ELSEWHERE IN THIS ANNUAL REPORT. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL REPORT. IN
ADDITION, READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL
REPORT AND IN THE COMPANY'S PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") FROM TIME TO TIME.
2
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
SELECTED FINANCIAL DATA
The following information should be read in conjunction with and is
qualified in its entirety by reference to the audited financial statements of
the Company, including the Notes thereto, also included in this annual report.
The information should also be read in conjunction with "Item 5. Operating and
Financial Review and Prospects", included elsewhere in this annual report. The
financial statements comprising the balance sheets of the Company as of March
31, 2000 and March 31, 2001 and the related statements of income, cash flows and
shareholders' equity for the years ended March 31, 1999, 2000 and 2001 have been
audited by Deloitte Haskins & Sells, independent accountants, in accordance with
US GAAP. The data derived from these financial statements, along with the Notes
thereto, and included in this annual report, are prepared in Indian Rupees and
presented in accordance with US GAAP. Financial statements for the year ended
March 31, 2001, along with the Notes thereto, also have been translated into US
Dollars for your convenience.
Balance sheets for the Company as of March 31, 1997, 1998 and 1999 and
the related statements of income, cash flows and shareholders' equity for the
years ended March 31, 1997 and 1998 were prepared under International Accounting
Standards. It is not practicable, without unreasonable effort or expense, to
convert the data for these years from International Accounting Standards to US
GAAP.
The Company has no subsidiaries.
3
Years ended March 31,
--------------------------------------------------
1999 2000 2001 2001
---------------- ---------------- ---------------- ----------------
millions of
millions of Rupees(1) US$(1)
-------------------------------------------------- ----------------
Income Statement Data(6)
Total operating revenue 67,938 70,377 73,076 1,560
Total cost of revenue 49,296 50,333 50,172 1,071
Gross Margin 18,642 20,044 22,904 489
Total other operating costs 2,894 4,156 4,752 102
------ ------ ------ -----
Operating profit 15,748 15,888 18,152 387
Total other income (expense), net (746) 3,443 7,021 150
------- ------ ------ ---
Income before income tax 15,002 19,331 25,173 537
Income tax expense (6,298) (6,156) (9,646) (206)
Dividend tax (38) (84) (105) (2)
--------- -------- ------- -----
Net income 8,666 13,091 15,422 329
===== ====== ====== ====
Earnings per equity share - basic and
diluted (2)&(5) Rs.30.41 Rs.45.93 Rs.54.11 US$1.15
Weighted average number of Equity Shares
outstanding(3) 285 285 285 285
Earnings per ADS-
basic and diluted (where each ADS
represents two equity shares) Rs.60.82 Rs.91.86 Rs.108.22 US$2.30
Dividends per share Rs.4 Rs.8 Rs.8 US$0.17
Other Financial Data(6)
Net cash provided by operating activities 6,679 7,947 23,121 493
Net cash used by investing activities(4) (6,601) (3,898) (41,416) (884)
Dividends (380) (760) (760) (16)
Net cash used by financing activities (1,916) (740) (806) (17)
Balance Sheet Data(6) As at March 31
2000 2001 2001
-------- -------- ------
Total assets 83,211 100,425 2,144
Trade payables 13,535 11,309 242
Accrued expenses and other liabilities 6,365 10,731 229
------ ------ ----
Total liabilities 19,900 22,040 471
Total shareholders' equity 63,311 78,385 1,673
-------------------
Note
(1) Except per share data.
(2) Calculated on a weighted average basis giving retroactive effect to stock
dividends issued during November 2000.
(3) In millions.
(4) Comprise purchases of property, plant and equipment, capital work in
progress and expenditure on investments, including net investments in
various satellite consortia.
(5) On September 26, 2000, the shareholders of the Company approved a stock
dividend of Equity Shares in the ratio of two Equity Shares for every one
Equity Share held, which was distributed on November 24, 2000 to
shareholders of record as of November 16, 2000. The Company has capitalized
the legally required face value of the Equity Shares issued.
(6) The above data should be read along with the Notes included with the
financial statements.
DIVIDENDS
Although the amount varies, it is customary for public companies in
India to pay cash dividends. Under Indian law, a corporation pays dividends upon
a recommendation by the Board of Directors and approval by a majority of the
shareholders, who have the right to decrease but not increase the amount of the
dividend recommended by the Board of Directors. In addition, the Board of
Directors is empowered to approve interim dividends. Under the Indian Companies
Act, dividends may be paid out of profits of a company in the year in which the
dividend is declared or out of the undistributed profits of previous fiscal
years. In 1996, the Ministry of Finance adopted non-binding guidelines regarding
the payment of dividends by "public sector undertakings" ("PSUs"), including the
4
Company. According to such guidelines, profit-making PSUs which are commercial
enterprises should generally declare a minimum dividend each fiscal year of 20
percent of the higher of paid-up share capital as of year-end and profit after
tax for such year. These guidelines have not been complied with by a substantial
number of PSUs, including the Company. The Ministry of Finance has requested
that PSUs that have not complied with the guidelines for the fiscal year ended
March 31, 1996 declare an interim dividend for the year ending March 31, 1997,
and 1998, which would be adjusted against the final dividend payable for such
year. The Company has requested the Department of Telecommunications to inform
the Ministry of Finance that the Company prefers to retain its earnings instead
of paying substantial dividends in accordance with such request or the
guidelines, since the former serves to enhance shareholder value in the Company.
Owners of ADRs are entitled to receive dividends payable in respect of
the Equity Shares represented by their ADSs. The Equity Shares represented by
ADSs rank pari passu with existing Equity Shares of the Company in respect of
dividends. Cash dividends in respect of the Equity Shares represented by the
ADSs will be paid to the Company's depositary for the ADSs ("The Bank of New
York" or "Depositary") in Rupees and except as otherwise described in the
Deposit Agreement will be converted by the Depositary into US Dollars and
distributed, net of Depositary fees and expenses, to the holders of such ADRs.
With respect to Shares issued by the Company during a particular fiscal
year, dividends declared and paid for such fiscal year generally will be
prorated from the date of issuance to the end of such fiscal year. Holders of
ADRs will only receive dividends prorated from the date of issuance of the
underlying Equity Shares to the end of the fiscal year for which such dividends
are declared and paid.
The following table sets forth the annual dividends paid per Share for
each of the fiscal years indicated.
DIVIDEND PER SHARE
FOR THE FISCAL ACTUAL DIVIDEND BASED ON INCREASE
YEAR ENDED MARCH 31, PAID PER SHARE(1) IN SHARE CAPITAL(3)
-------------------- ----------------- -------------------
INDIAN RUPEES US$(2) INDIAN RUPEES US$(2)
------------- ------ ------------- ------
2001 50.00 1.04 50.00 1.04
2000 8.00 0.17 2.67 0.06
1999 8.00 0.18 2.67 0.06
1998 4.50 0.09 1.33 0.03
1997 3.50 0.10 1.16 0.33
----------------
(1) Dividends are payable pro rata from the date of allotment. Based on the
recommendation of the Board of Directors at a Shareholders meeting held
on September 27, 2001, the shareholders approved a dividend of Rs.50
per share for fiscal year 2001, payable October 2001 to shareholders
registered as shareholders of the Company on September 16, 2001.
(2) The conversion of the dividends paid per Share from Indian Rupees to US
Dollars is based on the Noon Buying Rate at each respective dividend
payment date. For fiscal year 2001, the figure in the chart is based on
the Noon Buying Rate for September 27, 2001. However, the actual
dividends paid per share will be based on the Noon Buying Rate on the
date of payment of the dividends.
(3) On September 26, 2000, the shareholders of the Company approved the
distribution of bonus shares to shareholders. Consequently, each
shareholder received two shares for every share held by such
shareholder. Accordingly the dividend per share information presented
here has been computed retroactively to reflect the distribution of
bonus shares and the consequent increase in the share capital of the
Company.
Although the Company has no current intention to discontinue dividend
payments, there can be no assurance that any future dividends will be declared
or paid or that the amount thereof will not be decreased.
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian Rupee and the US
Dollar will affect the US Dollar equivalent of the Indian Rupee price of the
Company's Equity Shares on the Indian stock exchanges and, as a result, will
likely affect the market price of the Company's ADSs, listed on the New York
Stock Exchange, and vice versa. Such fluctuations will also affect the US Dollar
conversion by Depositary of any cash dividends paid in Indian Rupees on the
Company's Equity Shares represented by the ADSs.
5
The following table sets forth, for the fiscal years indicated,
information concerning the number of Indian Rupees for which one US Dollar could
be exchanged based on the average of the Noon Buying Rate in the City of New
York on the last business day of each month during the period for cable
transfers in Indian Rupees as certified for customs purchases by the Federal
Reserve Bank of New York. The column titled "Average" in the table below is the
average of the daily Noon Buying Rate on the last business day of each month
during the year.
FISCAL YEAR ENDED MARCH 31, PERIOD END AVERAGE HIGH LOW
--------------------------- ---------- ------- ---- ---
1996 (From January 1, 1996) Rs.34.35 Rs.33.47 Rs.36.46 Rs.31.41
1997 35.88 35.70 35.95 35.00
1998 39.53 37.36 39.55 35.72
1999 42.50 42.27 42.83 39.75
2000 43.65 43.46 43.65 42.84
2001 46.85 45.88 46.90 43.70
The following table sets forth the high and low exchange rates for the
previous six months and are based on the average of the noon buying rate in the
City of New York on the last business day of each month 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
----- ---- ---
March 2001 Rs.46.85 Rs.46.53
April 2001 47.07 46.58
May 2001 47.06 46.83
June 2001 47.40 47.00
July 2001 47.21 47.11
August 2001 47.19 47.11
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
RISK FACTORS
In addition to the other information contained in this annual report,
prospective investors should carefully consider the risks described below.
Additional risks not currently known to the Company or that the Company now
deems immaterial may also impair the Company's business operations. This annual
report also contains forward-looking information that involves risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks the Company faces as described below and elsewhere in this
annual report.
THE NEW TELECOMMUNICATIONS POLICY AND OTHER REGULATORY CHANGES WITH
RESPECT TO THE TELECOMMUNICATIONS INDUSTRY COULD HAVE THE EFFECT OF EXPOSING US
TO INCREASED COMPETITION, THUS ADVERSELY AFFECTING OUR REVENUES AND MARKET SHARE
AND THE PRICE OF OUR EQUITY SHARES AND ADSS.
The New Telecom Policy 1999 (the "Policy") came into effect on April 1,
1999.
6
The Policy sets forth a new policy framework for telecommunications
regulations in India. One of the stated goals of the Policy is to foster greater
competition in the telecommunications industry and it addresses a broad range of
matters, including cellular mobile services, fixed line service, domestic long
distance, global mobile personal communications, the Department of
Telecommunications restructuring, spectrum management, the role of the Telecom
Regulatory Authority of India (the "TRAI") and Internet telephony. The Policy
states, among other things, that the opening up of international telephony
service to competition will be reviewed by the year 2004. The Department of
Telecommunications retains the right to modify the terms and conditions of the
Company's license (including its monopoly status) 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. However, in September
2000, the Government announced the early termination of the Company's monopoly
in international telephony services. Thus, instead of ending on March 31, 2004,
the Company's monopoly is now scheduled to end on March 31, 2002. To offset the
likely loss to the Company due to the early termination of its monopoly, the
Government has announced the following compensation package:
(1) Grant of a license to offer domestic long distance services with
the following terms:
(a) Government would pay to the Company a sum equal to the
amount paid by the Company as entry fee and license fee for
a period of 5 years commencing from April, 2001, net of
taxes, and
(b) Performance Bank Guarantee of Rs.4 billion for the
prescribed roll out will be waived;
(2) the Company will be granted a Category `A' Internet Service
Provider ("ISP") license which will enable it to provide Internet
access at locations across the country; and
(3) The Government may also consider additional compensation if found
to be necessary based on a detailed review when undertaken.
In an Extraordinary General Meeting requisitioned by the Government of
India, the shareholders passed a resolution accepting the above compensation
package. Prior to such meeting, the Company had represented to the Government
that the compensation package should be arrived at through an objective process.
The Company had appointed external consultants for this purpose and had
submitted their reports to the Government for due consideration. The Company has
been granted a Category "A" ISP license to provide Internet access at locations
across the country. However, the Company has not yet applied for the license to
provide domestic long distance telephone services and there can be no assurance
that the license will be granted. No payments have yet been made by the
Government to the Company towards the entry fee and license fee as the Company
has not yet paid such amounts towards domestic long distance services.
In addition, the Government recently announced that private operators
were to be permitted to provide domestic long distance service and basic service
on all telecom circles in the very near future. The use of Internet telephony
and voice messaging could cause a reduction in revenues realized by the Company.
While Internet service providers are currently prohibited from providing
Internet telephony, this prohibition may be removed in the near future
especially in view of the fact that Internet service providers have recently
been allowed to purchase capacity on long distance cable networks.
Changes implemented as a result of these evolving regulations and
policies, as well as increased competition from foreign operators that enter the
Indian market, could have the effect of exposing the Company to increased
competition and thus adversely affecting the Company's revenues and market share
and the price of the Shares and ADSs.
THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED BY ANY SLOWDOWN IN ECONOMIC
GROWTH IN INDIA OR THE UNITED STATES.
Since mid-1997, the economies of a number of Asian countries have
experienced significant downturns. Most Asian economies currently are facing
7
contractions in real economic activity. For example, several countries recorded
lower or negative Gross Domestic Product growth during the first six months of
2001. According to the Reserve Bank of India's annual report for 2000-01, India
experienced an estimated real Gross Domestic Product growth of 5.2 percent
during the year ended March 31, 2001, compared with 6.4 percent growth during
the year ended March 31, 2000. The general slowdown in regional economies and in
India has resulted in slower growth in the Company's traffic.
Similarly, since approximately 39 percent of the Company's traffic is
between India and the United States, any economic slowdown in economic activity
in the United States, particularly in the information technology-related sector,
could adversely affect the Company's business.
A SUBSTANTIAL PORTION OF THE COMPANY'S ASSETS AND OPERATIONS ARE LOCATED IN
INDIA AND THE OUTSTANDING SHARES ARE LISTED ON THE INDIAN STOCK EXCHANGES.
ACCORDINGLY, THE COMPANY'S PERFORMANCE AND THE MARKET PRICE AND LIQUIDITY OF THE
SHARES AND OF THE ADSS MAY BE AFFECTED BY CHANGES IN EXCHANGE RATES AND
CONTROLS, INTEREST RATES, GOVERNMENT POLICY AND TAXATION AND OTHER POLITICAL,
ECONOMIC OR SOCIAL DEVELOPMENTS IN OR AFFECTING INDIA.
Since achieving independence in 1947, India has had a mixed economy
with a large public sector and extensive regulation of the private sector.
Indian central and state governments have in the past, among other things,
imposed controls on prices of a broad range of goods and services, restricted
the ability of private sector enterprises to expand capacity, increase
production, reduce employment or enter new businesses and imposed controls on
the allocation of raw materials and foreign exchange. During the past decade and
especially since 1991, the Government has significantly relaxed restrictions on
the private sector and introduced policies to liberalize the economy.
Nevertheless, the role of the Indian central and state governments in the Indian
economy as producers, consumers and regulators remains significant in ways which
affect all Indian companies, including companies controlled by the Government,
such as the Company.
India held elections for a new Government in October 1999 and the
Government changed for the fifth time since 1996. No party won a majority of the
seats in the Lok Sabha (the lower house of Parliament) in the elections. The
present Government is made up of a multiparty coalition led by the Bharatiya
Janata Party ("BJP") with Mr. A. B. Vajpayee as Prime Minister. There can be no
assurance that the BJP-led government, which is presently supported by political
parties from outside the Government, will continue to receive such support.
The budget and the policies for the fiscal year ending March 31, 2002
presented by the Government propose the continuation of policies designed to
promote economic deregulation and liberalization.
In May 1998 India tested five nuclear devices at Pokhran in the State
of Rajasthan. In response to the nuclear tests, certain countries, including the
United States, announced economic sanctions against India. The United States
economic sanctions, among other things, prohibited US banks from extending any
loan or providing any credit to the Government, other than for the purchase of
food or humanitarian aid, and further prohibited the export from the United
States to India (directly or indirectly) of specified goods and technology which
are subject to the export licensing requirements of the US Commerce Department.
These sanctions have now been lifted. No assurance can be given, however, that
these sanctions would not be reactivated or that additional economic sanctions
of this nature will not be imposed by the United States or any other country, or
that such sanctions if reimposed, would not have a material adverse effect on
the Company's business or the price of the Shares and the ADSs. Although the
Company is not listed as a company to which the sanctions would apply, export
prohibitions and controls may have an adverse effect on the ability of the
Company to import (directly or indirectly) certain types of computer equipment
and software from the United States.
IF REGIONAL HOSTILITIES INCREASE, OUR BUSINESS COULD SUFFER AND THE PRICE OF THE
EQUITY SHARES AND THE ADSS COULD GO DOWN.
India has from time to time experienced unrest relating to religious
and political differences within India's population. In addition, India has in
the past been involved in hostilities with neighboring countries. There have
been armed conflicts over parts of Kashmir involving the Indian army and
infiltrators from Pakistan into Indian territory. India and Pakistan have been
in a heightened state of hostilities with significant loss of life in troop
conflicts. The hostilities have since substantially abated. The hostilities
between India and Pakistan are particularly threatening because both India and
Pakistan are nuclear powers. Although the hostilities did not have an adverse
impact on the business of the Company, future events of this nature could affect
the Indian economy and government policy and could have an adverse effect on the
Company's operations.
8
FURTHER DEVELOPMENTS STEMMING FROM THE RECENT TERRORIST ATTACKS IN THE UNITED
STATES COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE TRADING PRICE OF
THE ADSS.
The United States government has indicated that any military response
to the recent terrorist attacks is likely to include military action in
Afghanistan. Due in part to India's proximity to Afghanistan, the Company's
business and the trading price of the ADSs could be adversely affected by
military and other related activity in the region.
WE DO NOT CONTROL EITHER THE DOMESTIC TELEPHONE NETWORK ON WHICH ALL CALLS
CARRIED BY US EITHER ORIGINATE OR TERMINATE NOR DO WE CONTROL THE RATES CHARGED
TO END USERS OF SUCH SERVICES. CONSEQUENTLY, WE CANNOT ENSURE THE QUALITY OF OR
RATES FOR, THE DOMESTIC TELEPHONE NETWORK USED BY OUR CUSTOMERS.
The Company's principal business is providing international telephone
services to and from India. All calls carried by the Company either originate or
terminate on India's domestic telephone network, which the Company does not own
or control. Growth in demand for the Company's international services will
depend, to a significant degree, on the development and maintenance of India's
domestic telephone network. Demand for the Company's basic services also will
depend on the rates charged to end users of such services, which rates are not
controlled by the Company. See "Item 4. Information on the Company - Industry
Overview" and "Government Regulation."
THE NEW TARIFF REGIME COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The TRAI has authority, among other things, to set the tariffs charged
by telecommunications service providers in India, including the Company.
Effective May 1999, the TRAI implemented the Telecommunications Tariff Order
1999 (the "Tariff Order"), which is intended to take account of a shift to a
more competitive environment through cost-based, transparent tariffs. The Tariff
Order envisages reductions of up to 50 percent in peak international call
tariffs, phased over three years ending March 31, 2002. In response to these
changes, the Department of Telecommunications has issued its tariff orders
effective from May 1999 pursuant to which international long distance tariffs
have been reduced by approximately 27 percent and further tariff orders
effective from October 1, 2000. The Tariff Order implements similar reductions
for domestic long distance charges. In addition, the Tariff Order sets maximum
tariffs for other services provided by the Company, including Internet services
and leased lines. The Company's current revenue sharing arrangement with Bharat
Sanchar Nigam Limited will remain in force until March 31, 2002. The arrangement
beyond that date will have to be negotiated and finalized. As per the Policy
(NTP-99), the revised tariff to become effective from April 2002 for
international telephony is yet to be notified by TRAI. Effective April 2002, the
international long distance sector is scheduled to be opened up for competition.
However, TRAI has floated a consultation paper titled "International Long
Distance Services" on September 3, 2001. Therefore, the Company anticipates that
the policy will be announced only after the consultation process is completed.
There can be no assurance that the new tariff regime or an unfavorable revision
of the current revenue sharing arrangement would not have a material adverse
effect on the Company's results of operations and financial condition.
ANY UNFAVORABLE REVISIONS OF THE TERMS OF OUR REVENUE SHARING ARRANGEMENT WITH
BHARAT SANCHAR NIGAM LIMITED COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION AND THEREFORE THE PRICE OF OUR SHARES AND ADSS COULD GO
DOWN.
Pursuant to the terms of a revenue sharing arrangement, the Company and
Bharat Sanchar Nigam Limited share revenue received by the Company from foreign
telecommunications administrations and carriers on incoming international calls
terminating on India's domestic network and revenue received by Bharat Sanchar
Nigam Limited from Indian domestic subscribers on outgoing international calls
initiated on such network. Payments received by the Company from Bharat Sanchar
Nigam Limited under such revenue sharing arrangement have historically accounted
for a substantial portion of the Company's revenue. The current revenue sharing
arrangement between the Company and Bharat Sanchar Nigam Limited covers the
period from April 1, 1997 to March 31, 2002. The current arrangement resulted in
average gross profit to the Company of Rs.9.39 per call minute in the fiscal
year ended March 31, 2001. In the fiscal years ending March 31, 2000, 2001 and
2002, however, the Company has been and will continue to be required
9
under the current arrangement to absorb an increasing portion of any decline in
the combined international traffic revenue per call minute of the Company and
Bharat Sanchar Nigam Limited (net payments by the Company to foreign
administrations and carriers and by the Company and Bharat Sanchar Nigam Limited
to each other in respect of delivery of incoming and outgoing calls) compared to
the fiscal year ending March 31, 1997. See "Item 4. Information on the Company -
Traffic Revenue and Revenue Sharing Arrangement--Revenue Sharing Arrangement."
The arrangement beyond that date will have to be negotiated and finalized.
Effective April 2002, the international long distance sector is scheduled to be
opened up for competition. There can be no assurance that an unfavorable
revision of the terms of the revenue sharing arrangement or any subsequent
arrangement agreed between the Company and Bharat Sanchar Nigam Limited upon
expiration of the current arrangement will not be less favorable to the Company
than the current arrangement and will not adversely affect the Company's results
of operations and financial condition.
WE ARE SUBJECT TO EXTENSIVE REGULATION AND SUPERVISION BY THE GOVERNMENT AND
THIS COULD PREVENT US FROM OPERATING OUR BUSINESS OR ENTERING INTO TRANSACTIONS
THAT ARE IN THE BEST INTERESTS OF OUR SHAREHOLDERS.
The Company and its business are subject to extensive regulation and
supervision by the Government of India and its departments, including the
Department of Telecommunications and the TRAI. Major policy and management
decisions by the Company require the approval of the Department of
Telecommunications or the Telecom Commission under the Ministry of
Communications of the Government of India. As noted above, the TRAI sets the
tariffs for telecommunication services. In addition, so long as the Government's
shareholding in the Company equals or exceeds 51 percent, the Company is deemed
to be an Indian Government company and is subject to laws and regulations
generally applicable to public sector enterprises in India. These laws and
regulations concern personnel matters including appointment of key management
personnel and the hiring, dismissal and compensation of employees, as well as
budgeting and capital expenditures and the generation of funds through the
issuance of securities. See "Item 4. Information on the Company - Government
Regulations."
Under current Government policy, disputes between Government
enterprises (such as the Company) and Government departments must be referred to
a Committee of Secretaries of the Government before any legal action may be
commenced. The policy would apply, for example, to disputes between the Company
and the Department of Telecommunications with respect to interpretation of the
Company's license and its revenue sharing arrangement with Bharat Sanchar Nigam
Limited. Although the Company may bring a claim in a court of law or to the
Telecom Disputes Settlement and Appellate Tribunal (the "TDSAT"), which has been
set up to adjudicate disputes, disposal of appeals and to protect the interest
of telecommunication service providers and consumers. If the referral to such
committee does not result in a resolution of the dispute, it is likely that any
decision by the Company to bring such claim would require approval of its Board
of Directors, which, as discussed below, is controlled by the Government of
India acting through the Department of Telecommunications. The Company's
Internet license provides that disputes relating to the terms of the Company's
Internet license are required to be submitted for compulsory and binding
arbitration before the Government's Director General of Telecommunications.
The TRAI has primary responsibility for, among other things,
facilitating competition and promoting efficiency, protecting the interests of
consumers, regulating revenue sharing among service providers and ensuring
compliance with license conditions and to set the rates at which domestic and
international telecommunication services are provided in India. The TRAI also
has the power to (1) call upon service providers to furnish information relating
to their operations, (2) appoint persons to make official inquiries, (3) inspect
the books of service providers and (4) issue directives to service providers to
ensure their proper functioning. Failure to follow the TRAI directives may lead
to the imposition of fines. Differences between government departments and/or
public sector entities such as the Department of Telecommunications, Bharat
Sanchar Nigam Limited, Mahanagar Telephone Nigam Limited and the Company,
however, will continue to be referred initially to a Committee of Secretaries of
the Government for mediation as discussed above, prior to referral to the
Telecom Disputes Settlement and Appellate Tribunal . See "Item 4. Information on
the Company - Government Regulations."
REGULATORY CLARIFICATIONS AWAITED FROM THE DOT / TRAI MAY DELAY COMPLETION OF
THE DISINVESTMENT PROCESS.
The Government proposes to sell from its holding, shares equivalent to
25 percent of the outstanding equity of the Company to a strategic partner along
with the right to management. The Government proposes to simultaneously
disinvest 1.97 percent to the employees of the Company. On completion of the
proposed disinvestment, certain procedures and regulations that are currently
applicable to a Government company will no longer be applicable. Any delays by
10
DOT or TRAI in clarifying any aspect of the regulatory regime applicable to the
Company could adversely affect the timing for completion of the proposed
disinvestment by the Government.
THE GOVERNMENT CONTROLS OUR LICENSE TO PROVIDE TELEPHONY SERVICES AND ANY
MATERIAL MODIFICATIONS OF THE TERMS AND CONDITIONS OF THE LICENSE COULD DISRUPT
OUR BUSINESS AND HAVE A MATERIAL ADVERSE EFFECT ON OUR PROSPECTS.
The Company operates substantially all of the services it provides,
including basic international telephony services to and from India, pursuant to
the License from the DOT that has been extended until March 31, 2004. The DOT
retains the right, however, to modify the terms and conditions of the Company's
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
telecommunication sector. A change in certain significant terms of the License,
such as its duration, the range of services permitted or the scope of
exclusivity, could have a material adverse effect on the Company's business and
prospects. See "Item 4. Information on the Company - Government Regulations."
THE GOVERNMENT CONTROLS THE COMPANY AND MAY HAVE INTERESTS THAT CONFLICT WITH
THOSE OF THE COMPANY'S OTHER SHAREHOLDERS OR HOLDERS OF THE COMPANY'S ADSS,
INCLUDING IN AREAS IN WHICH THE COMPANY MAY COMPETE WITH OTHER GOVERNMENT
COMPANIES.
As of the date hereof, approximately 52.97 percent of the outstanding
Shares of the Company are held by the Government of India. Consequently, the
Government, acting through DOT, controls the Company and has the power to
approve the appointment of its directors and to determine the outcome of most
actions requiring the approval of the Board of Directors or shareholders of the
Company's business (including in areas in which the Company may compete with
Bharat Sanchar Nigam Limited), transactions with Bharat Sanchar Nigam Limited or
the assertion of claims against Bharat Sanchar Nigam Limited. In addition, under
the Company's Articles of Association, the President of India, on behalf of the
Government of India, may issue directives with respect to the conduct of the
business and affairs of the Company, and certain matters with respect to the
Company's business, including the appointment and remuneration of the Company's
Chairman and Managing Director and the declaration of dividends, are reserved
for the decision of the President of India. The Company may not take action in
respect of any matter reserved for the President of India without his approval.
See "Item 10. Additional Information."
SIGNIFICANT GOVERNMENT DISINVESTMENT COULD RESULT IN A CHANGE IN THE WAY IN
WHICH WE DO BUSINESS AND THE PRICE OF THE EQUITY SHARES AND THE ADSS COULD GO
DOWN.
The Government currently holds approximately 52.97 percent of the
outstanding Shares of the Company and the Government, therefore, has the power
to control the Company. However, the Government proposes to sell from its
holding, shares equivalent to 25 percent of the outstanding equity of the
Company to a strategic partner along with the right to management. The
Government proposes to simultaneously divest 1.97 percent of the outstanding
equity of the Company to its employees. It has been widely reported in the
Indian press that the Government has decided to complete the disinvestment
process by the end of fiscal year 2002. In the event that the Government
divests, the way in which the Company does business could change and the price
of the Shares and the ADSs could go down. There can be no assurance that the
Company will not issue, or that the Government will not dispose of, additional
Shares or related securities.
IF THE DISINVESTMENT PROCESS IS COMPLETED, THE COMPANY MAY BE REQUIRED TO PAY
ROYALTIES AND OTHER FEES WHICH AROSE IN PRIOR PERIODS.
To date, the Company has not had to pay the Government certain
royalties and other fees which arose in prior periods. There can be no assurance
that the Company will not be required to make such payments in the future,
particularly if the Company is no longer majority-controlled by the Government.
11
IF THE DISINVESTMENT PROCESS IS COMPLETED, THE COMPANY MAY BE ADVERSELY AFFECTED
BY PROBLEMS ASSOCIATED WITH A CHANGE IN MANAGEMENT CONTROL OF THE COMPANY.
The Government has stated that the disinvestment process is to include
a change in control of management of the Company from the Government to the
winning bidder. As is the case with other privatizations, the challenges of
transferring control to the private sector may be magnified by different
corporate cultures, different reporting systems and processes and different
operating processes. In addition, the Company could be adversely affected by
labor issues and compliance issues arising from the privatization process and
the obligations assumed by the winning bidder.
THE INDIAN TAX AUTHORITIES CLAIM THAT WE OWE CERTAIN TAX PAYMENTS. WE HAVE NOT
MADE PROVISION IN OUR FINANCIAL STATEMENTS FOR SUCH CLAIMS AND IN THE EVENT THAT
THE TAX AUTHORITIES PREVAIL ON THEIR CLAIMS THERE COULD BE A SIGNIFICANT
NEGATIVE IMPACT ON OUR OPERATIONS.
The Indian tax authorities have taken the position that the Company is
not entitled to a tax deduction it took in the year ended March 31, 1995 for
license fees paid by it to the DOT. The Indian tax authorities claim that the
Company owes approximately Rs.2.8 billion, Rs.2.4 billion, Rs.2.5 billion,
Rs.3.0 billion and Rs.2.6 billion in respect of taxes due (including interest,
but excluding penalties) in connection with the license fees for the years ended
March 31, 1994, 1995, 1996, 1997 and 1998, respectively. Tax refunds otherwise
due to the Company for subsequent years, amounting to approximately Rs.6.46
billion, have been applied by the Indian income tax authorities to a portion of
this disputed claim. In addition, the Company has paid the tax authorities
Rs.3.6 billion with respect to this claim. However, the outstanding amount
continues to accrue interest at a rate of two percent per month. The Company
disputed this claim and lodged an appeal with the Commissioner of Income-tax
(Appeals) - I, Mumbai for each of the relevant years. The Company subsequently
appealed to the Income-tax Appellate Tribunal, Mumbai as the Commissioner of
Income-tax (Appeals) - I. Mumbai denied the Company's claim with respect to the
year ended March 31, 1995. The appeals with respect to the other years are still
pending with the Commissioner of Income-tax (Appeals) - I, Mumbai. On September
14, 2000, the Income-tax Appellate Tribunal, Mumbai issued an order in the
Company's favor and held that the license fee paid by the Company to the DOT is
an allowable tax deductible expenditure under the Income Tax Act. Consequent to
this order, the refund due to the Company was adjusted against the demand due
for the subsequent years. In addition, the Company can request the Commissioner
of Income-tax (Appeals) - I, Mumbai to expedite the orders for the other years.
The Income Tax Department has the right to appeal the order of the
Income Tax Appellate Tribunal in the High Court within a period of 120 days from
the date of the order. The Company has so far not received any communications
from the department/High Court on whether the department has disputed this claim
of the Company in the High Court. If the Company loses that case, the tax
authorities may make the Company liable for similar claims for subsequent years
and this could result in an aggregate potential liability of approximately
Rs.12.4 billion (US$264.8 million) including interest, but excluding penalties,
thereon as of March 31, 2001 and additional amounts for the periods thereafter.
The Company has been advised by independent Indian counsel that it believes that
the Company has a strong case with respect to this claim.
The Indian tax authorities have also taken the position that the
Company is not entitled to a tax benefit claimed by it in the years ended March
31, 1996, 1997 and 1998 with respect to certain of its profits which the Company
claims were generated by an enterprise engaged in infrastructure development.
The Indian tax authorities claim that the Company owes approximately Rs.0.1
billion, Rs.0.3 billion and Rs.0.5 billion in respect of taxes due (including
interest) in connection with such profits for the years ended March 31, 1996,
1997 and 1998, respectively. The Company disputes this claim and has lodged an
appeal with the Commissioner of Income-tax (Appeals) - I, Mumbai. The
outstanding amount of the claim continues to accrue interest at a rate of two
percent per month. If the Company loses its case, the tax authorities may make
similar claims for subsequent years, resulting in an aggregate potential
liability of approximately Rs.5.7 billion (US$121.66 million) including
interest, but excluding penalties thereon as of March 31, 2001 and additional
amounts for periods thereafter. The Company believes that it has a reasonable
basis for its claim and that its appeal will succeed.
Furthermore, the Indian tax authorities have taken the position that
the Company has not offered for tax certain reimbursements it received from the
Government during the year ended March 31, 1994. The Indian tax authorities
claim that the Company owes approximately Rs.1.1 billion in respect of taxes due
in connection with such reimbursements for the year ended March 31, 1994. The
12
Company disputes this claim and has lodged an appeal with the Commissioner of
Income Tax (Appeals) - I, Mumbai. The outstanding amount of the claim continues
to accrue interest at the rate of two percent per month. If the Company loses
its case, the Company's aggregate potential liability would be approximately
Rs.2.7 billion (US$57.63million) including interest, but excluding penalties,
thereon as of March 31, 2001. The Company believes that it has a reasonable
basis for its claim and that its appeal will succeed.
Consequently, the Company has not made provision for the potential
liability arising from these claims.
WE INTEND TO MAKE SUBSTANTIAL CAPITAL INVESTMENTS IN NEW TELECOMMUNICATIONS
PROJECTS WHICH MAY BE SUBJECT TO EXECUTION RISK AND, IF NOT OFFSET BY ADDITIONAL
REVENUE, WILL ADVERSELY AFFECT OUR OPERATING RESULTS.
The Company intends to make substantial additional investments in new
telecommunications projects, which require significant capital expenditures. See
"Item 5. Operating and Financial Review and Prospects." Such projects entail
engineering, construction and other normal commercial risks, and there can be no
assurance that the projects currently contemplated by the Company will not
encounter cost overruns or project delays, will be completed or will operate as
planned. Furthermore, there can be no assurance that future financing for
additional facilities, whether within India or elsewhere, would be available on
attractive terms or at all. In addition, the Company's procedures for preparing
budgets and appraising and monitoring capital expenditure projects are less
precise than those used by comparable private sector companies. See "Item 5.
Operating and Financial Review and Prospects - Financial and Management
Accounting and Reporting Systems." Although approval in principle for certain of
these projects has been received from the Department of Telecommunications,
certain technical studies remain to be completed and actual terms have not yet
been finalized. Most of the specific projects contemplated by the Company remain
subject to further review and approval by the Board of Directors of the Company.
In addition, some of such projects may not be possible without further approval
by the Department of Telecommunications and other agencies of the Government and
further liberalization of or other changes to the regulatory regime. There can
be no assurance that such approvals will be issued or such regulatory changes
will be made or that such projects will be implemented as currently planned.
Furthermore, there can be no assurance that currently contemplated capital
expenditures will be incurred as described herein or that if the projects are
completed the capital investments made in such projects will be offset by
additional revenue.
DELAYS IN REACHING FINAL AGREEMENT WITH OTHER MAJOR CARRIERS REGARDING RATES
COULD CAUSE A SIGNIFICANT INCREASE IN OUR WORKING CAPITAL WHICH IN TURN COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
A substantial portion of the Company's revenue consists of amounts
received from foreign telecommunications administrations and carriers for
connection to the Indian telecommunications network. As with most developing
countries, the volume of incoming calls to India exceeds the volume of outgoing
calls from India by a significant margin, which continues to increase, resulting
in larger net settlement payments being made to the Company from foreign
administrations and carriers. The amounts of the settlement payments required to
be made are determined by the accounting rates under the Company's agreements
with the foreign administrations and carriers, which are subject to periodic
renegotiation.
In recent years, international organizations such as the International
Telecommunications Union and the OECD have expressed the need for revision of
the international accounting rate system, and certain foreign telecommunications
administrations and carriers have sought to reduce applicable accounting rates
in bilateral negotiations with the Company. In August 1997, the United States
Federal Communications Commission (the "FCC") issued an order (the "Order")
establishing FCC Benchmarks that US carriers must comply with in establishing
settlement rates for international calls with non-US telecommunications
administrations and carriers. The Order requires, effective as of January 1,
1998, the accounting rate between US carriers and the Company to be reduced
substantially over a four year transition period. See "Item 4. Information on
the Company--Traffic Revenue and Revenue Sharing Arrangement--Payments to and
from Foreign Administrations or Carriers." Any such reduction in the accounting
rates in effect between the Company and US or other foreign administrations or
carriers may reduce the amount of net settlement payments received by the
Company. The Company believes that, under the current revenue sharing
arrangement agreed between the Company and the DOT, any such reductions in net
settlement payments received by the Company will result in substantially
corresponding reductions in net payments made by the Company to Bharat Sanchar
13
Nigam Limited, although the Company has been required indirectly to absorb an
increasing portion of such reductions after the fiscal year ending March 31,
1999. See "Item 4. Information on the Company--Traffic Revenue and Revenue
Sharing Arrangement--Revenue Sharing Arrangement." The authority of the FCC to
issue the Order and the Order itself have been upheld by a United States federal
court of appeals. In upholding the Order, the United States federal court of
appeals held that the Order was a valid exercise of the FCC's regulatory
authority under the United States Communications Act and rejected the argument
that the FCC's unilateral establishment of benchmark settlement rates
constituted an unlawful assertion of extraterritorial jurisdiction over foreign
carriers and foreign telecommunication services. However, the United States
federal court of appeals also stated that the Order does not apply to foreign
carriers, and only permits the FCC to contact responsible foreign government
authorities to seek their support in lowering settlement rates. There can be no
assurance that the FCC, acting pursuant to the Order, will not seek to force US
carriers to agree to the benchmark rates, which are lower than the rates in
effect between the Company and its correspondent US carriers.
Substantial delays in reaching final agreement with US carriers or
other major carriers regarding rates could cause a significant decrease in the
Company's working capital (net of cash) which in turn could have a material
adverse effect on the Company's financial condition and results of operations.
There can be no assurance that such delays will not occur in the future. See
"Item 5. Operating and Financial Review and Prospects."
THE USE OF ILLEGAL CALL BACK SERVICES HAS THE EFFECT OF LOWERING OUR REVENUE.
The relative levels of incoming call volume from different countries is
affected by the practice of "refile" and by "call-back" services. Refile
involves the re-routing of calls to India through a third country by carriers in
the country of origination of such calls. Refile seeks to take advantage of a
lower accounting rate applicable to calls between India and the third country
compared to the rate between India and the country of origination. Due to such
lower applicable accounting rate, refile has the effect of lowering the revenue
of the Company with respect to an incoming call. Call-back services involve
access to an international dial tone in a foreign country, usually in the United
States, from which a caller in India can originate calls. These calls are billed
in foreign exchange in the foreign country and are therefore treated as incoming
calls. 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 and has
contributed to the increase in recent years in the Company's ratio of incoming
to outgoing calls. It is believed that refile and call-back have contributed in
particular to the significant increase in recent years in incoming traffic from
the United States.
WEAKNESSES IN OUR FINANCIAL AND MANAGEMENT ACCOUNTING AND REPORTING SYSTEMS AND
PROCEDURES COULD LEAD TO DIFFICULTIES IN OUR GENERATING TIMELY AND ACCURATE
INFORMATION WHICH IS NECESSARY TO MANAGE AND CONTROL OUR BUSINESS EFFICIENTLY.
The Company was established in 1986 by a transfer of all of the assets
and employees of the Overseas Communications Service, a department of the
Ministry of Communications of the Government of India, to the Company. The
Company, which remained wholly owned by the Government until 1992, continues to
be subject to various laws and Government policies in respect of public sector
enterprises and to follow procedures appropriate for a public sector entity. See
"Item 4. Information on the Company--Government Regulations--General."
Consequently, the financial and management accounting and reporting systems of
the Company are not as developed as those of certain comparable companies
outside India. The Company believes that, due to weaknesses in its financial and
management accounting and reporting systems and procedures, it has experienced
in the past and continues to experience difficulties in generating timely and
accurate information to manage and control its business efficiently. There can
be no assurance that the Company will be able to remedy the deficiencies in its
current systems and procedures. See "Item 5. Operating and Financial Review and
Prospects--Financial and Management Accounting and Reporting Systems."
YOU WILL NOT BE ABLE TO VOTE ON YOUR ADSS.
Investors in ADSs will have no voting rights unlike holders of the
Equity Shares who will have voting rights. It is contemplated that the
Depositary will exercise its right to vote on the Equity Shares represented by
the ADSs as directed by the Company's Board of Directors. If you wish, you may
withdraw the Equity Shares underlying the ADSs and seek to vote the Equity
Shares you obtain from the withdrawal. However, for foreign investors, this
withdrawal process may be subject to delays.
14
THERE IS A LIMITED MARKET FOR THE ADSS.
Even though we have listed the ADSs on the New York Stock Exchange, we
cannot be sure that any trading market for the ADSs will be sustained.
YOU ARE UNABLE TO WITHDRAW AND REDEPOSIT SHARES IN THE DEPOSITARY FACILITY.
Because of certain Indian legal restrictions, the supply of ADSs may be
limited. The only way to add to the supply of ADSs will be through a primary
issuance because the depositary will not be permitted to accept deposits of
outstanding Equity Shares and issue ADSs representing such shares. Therefore, an
investor in ADSs who surrenders an ADS and withdraws Equity Shares will not be
permitted to redeposit his Equity Shares in the depositary facility. In
addition, an investor who has purchased Equity Shares on the Indian market will
not be able to deposit them in the ADS program. The inability of investors to
withdraw from and re-enter the depositary facility increases the risk that the
market price of the ADSs will be below that of the Shares.
On September 24, 2001, the last reported sale price of the Company's
ADSs was US$7.55 per ADS on the New York Stock Exchange.
The Shares are listed on the BSE and the other Indian stock exchanges.
As settlement on such stock exchanges may be subject to delays in certain
circumstances, a holder of Shares received upon surrender of ADSs may not be
able to settle trades on such stock exchanges in a timely manner. In addition, a
holder seeking to sell in India any Shares received upon surrender of ADSs will
be required to obtain approval from the Reserve Bank of India for each such
transaction. There can be no assurance that any such approval will be obtainable
in a timely manner or at all. Due to possible delays in settlement or in
obtaining requisite approvals, holders of Shares represented by ADSs may be
prevented from realizing gains with respect to such Shares during periods of
price increases or from limiting losses with respect to such Shares during
periods of price declines.
CONDITIONS IN THE INDIAN SECURITIES MARKET MAY AFFECT THE PRICE OR LIQUIDITY OF
THE SHARES AND THE ADSS.
The Indian securities markets are smaller in terms of trading volume
and more volatile than the securities markets in the United States and certain
European and other countries. The Indian stock exchanges have in the past
experienced substantial fluctuations in the prices of listed securities. There
is a lower level of regulation and monitoring of the Indian securities markets
and the activities of investors, brokers and other participants than in
securities markets in the United States and certain European and other
countries.
The Indian stock exchanges have experienced problems, including
temporary exchange closures, disputes between listed companies and exchanges,
broker defaults, settlement delays, custody problems and strikes by brokers.
Such problems or similar problems, if they were to recur or continue, could
affect the market price and liquidity of the securities of Indian companies,
including the Shares and ADSs, in both domestic and international markets. 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. Similar problems could occur in the future
and, if they did, they could affect the market price and liquidity of the Shares
and the ADSs.
THERE MAY BE LESS COMPANY INFORMATION AVAILABLE IN INDIAN SECURITIES MARKETS
THAN SECURITIES MARKETS IN DEVELOPED COUNTRIES.
There is a difference between the level of regulation and monitoring of
the Indian securities markets 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 ("SEBI") received statutory
powers in 1992 to improve disclosure and other regulatory standards for the
Indian securities markets. SEBI has prescribed certain regulations and
guidelines in relation to disclosure requirements, insider trading and other
matters relevant to the Indian securities market. There may, however, be less
publicly available information about Indian companies than is regularly made
available by public companies in the United States and certain European and
other countries.
15
YOU AND THE COMPANY 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.
Fluctuations in the exchange rate between the Rupee and the Dollar will
affect, among other things, the Dollar equivalents of the price of the Shares in
Rupees as quoted on the Indian stock exchanges and, as a result, may affect the
market price of the ADSs. Such fluctuations will also affect the Dollar
equivalent of any cash dividends in Rupees received on the Shares represented by
the ADSs and the Dollar equivalent of the proceeds in Rupees of a sale of Shares
in India.
Fluctuations in the exchange rate between the Rupee and other
currencies also affect the Rupee amount of foreign currency settlement payments
received by the Company from, and paid by the Company to, foreign
telecommunications administrations and therefore the revenue and operating costs
of the Company. The Company may as a result be exposed to the risk of
fluctuations in the exchange rate between the Rupee and foreign currencies,
which has effectively increased the cost in Rupee terms of foreign exchange
payments required to be made by the Company, including payments to foreign
telecommunications administrations and payments for imported equipment and
technology.
YOUR ABILITY TO SELL IN INDIA ANY EQUITY SHARES WITHDRAWN FROM THE DEPOSITARY
FACILITY MAY BE SUBJECT TO DELAYS IF SPECIFIC GOVERNMENT APPROVAL IS REQUIRED.
Holders who seek to sell in India any Equity Shares received upon
surrender of any ADS, and to convert the Rupee proceeds of such sale into
foreign currency and remit such foreign currency outside of India, will require
the approval of the Reserve Bank of India for each such transaction. Although
such approvals are generally forthcoming, there can be no assurance that any
such approval can be obtained in a timely manner or at all.
YOU MAY NOT BE ABLE TO ENFORCE A JUDGMENT OF A FOREIGN COURT AGAINST THE
COMPANY.
The Company is a limited liability company organized under the laws of
India. All of the directors and officers of the Company and certain other
persons named herein are residents of India, and all or a significant portion of
the assets of all of the directors and officers and a substantial portion of the
assets of the Company are located in India. As a result, it may be difficult for
investors to effect service of process upon the Company or such directors or
officers outside India or to enforce against them judgments obtained from courts
outside India, including judgments predicated on the civil liability provisions
of the United States federal securities laws. The statutory basis for
recognition and enforcement of foreign judgments in India is provided in Section
13 of the Indian Code of Civil Procedure 1908 (the "Code"), which provides that
a foreign judgment shall be conclusive as to any matter thereby directly
adjudicated upon except (1) where the judgment has not been pronounced by a
court of competent jurisdiction, (2) where the judgment has not been given on
the merits of the case, (3) where the judgment appears on the face of the
proceedings to be founded on an incorrect view of international law or a refusal
to recognize the law of India in cases where such law is applicable, (4) where
the proceedings in which the judgment was obtained were opposed to natural
justice, (5) where the judgment has been obtained by fraud and (6) where the
judgment sustains a claim founded on a breach of any law in force in India.
Section 44A of the Code provides that where a foreign judgement has been
rendered by a court in any country or territory outside India which the
Government of India has by notification declared to be a reciprocating
territory, it may be enforced in India by proceedings in execution as if the
judgment had been rendered by the relevant court in India. The United Kingdom,
but not the United States, has been declared by the Government of India to be a
reciprocating territory for the purposes of Section 44A. Accordingly, a
judgement of a court in the United States may be enforced only by a suit upon
the judgment, not by proceedings in execution. The suit must be brought in India
within three years from the date of the judgment in the same manner as any other
suit filed to enforce a civil liability claim in India. 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 awarded as
excessive or inconsistent with Indian practice. A party seeking to enforce a
foreign judgment in India is required to obtain approval under the Foreign
Exchange Regulation Act of 1973 (now the Foreign Exchange Management Act, 1999)
from the Reserve Bank of India to execute such a judgment or to repatriate any
amount recovered. The date of passing of the judgment would be the date for
fixing the rate of exchange at which the foreign currency amount should be
converted to Rupees.
16
ITEM 4. INFORMATION ON THE COMPANY.
HISTORY AND DEVELOPMENT OF THE COMPANY
The Company, Videsh Sanchar Nigam Limited, was incorporated as a
limited liability company under the laws of the Republic of India pursuant to
the provisions of the Companies Act on March 19, 1986 and was, at that time,
wholly-owned by the Government. On April 1, 1986, the Company assumed control
and management of all of the assets and employees of the Overseas Communications
Service, a department of the Ministry of Communications of the Government. In
1992 and 1999, as part of its general policy of gradually reducing its holdings
in public sector enterprises, the Government divested a portion of the equity of
the Company to certain funds, banks and financial institutions controlled by the
Government and the general public. In 1997 and 1999, the Government also sold
some of its equity holdings through the issuance of global depositary receipts.
Currently, approximately 47 percent of the Shares of the Company is held by
various institutions and other private shareholders. The divested shares were
initially traded on The Stock Exchange, Mumbai (formerly the Bombay Stock
Exchange, the "BSE") in December 1992.
In January 2001, the Government announced its intention to sell from
its holding, shares equivalent to 25 percent of the outstanding equity of the
Company to a strategic partner along with the right to management. The
Government proposes to simultaneously divest 1.97 percent of the outstanding
equity of the Company to its employees. It has been widely reported in the
Indian press that the Government has decided to complete the disinvestment
process by the end of fiscal year 2002.
The Company's Internet website address is HTTP://WWW.VSNL.COM. The
information on the Company's website is not incorporated into this document. The
Company's registered office is located at Mahatma Gandhi Road, Mumbai 400 001
India (+91-22-262-4020). The Company's process agent for the Company's ADR
facility is State Bank of India, New York office, 460 Park Avenue, New York, New
York 10022.
The Company has no subsidiaries as of the date hereof.
BUSINESS OVERVIEW
The Company is the exclusive provider of public international
telecommunication services in India, directly and indirectly linking the
domestic telecommunications network to approximately 237 territories worldwide.
The Company provides international telephone, telex and telegraph services and
as of March 31, 2001 operated eight international switching and transmission
facilities ("gateways") in Mumbai, Kolkata, Delhi, Chennai, Ernakulam,
Gandhinagar, Jalandhar and Kanpur which route international traffic to and from
the domestic telecommunications network using a combination of satellite and
undersea cable links. The Company is the only entity authorized by the
Government to provide basic international telephony services to and from India.
The Department of Telecommunications retains the right, however, to modify the
terms and conditions of the Company's license (including its monopoly status) 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 telecommunication
sector. In September 2000, the Government announced the early termination of the
Company's monopoly in international telephony services. Thus, instead of ending
on March 31, 2004, the Company's monopoly is now scheduled to end on March 31,
2002. To offset the likely loss to the Company due to the early termination of
monopoly, the Government has announced the following compensation package:
(1) Grant of a license to offer domestic long distance services with
the following terms:
(a) Government would pay to the Company a sum equal to the
amount paid by Company as entry fee and license fee for a
period of 5 years commencing from April 2001, net of taxes,
and
17
(b) Performance Bank Guarantee of Rs.4 billion for the
prescribed roll out will be waived;
(2) The Company will be granted a Category `A' ISP license which will
enable it to provide Internet access at locations across the
country; and
(3) The Government may also consider additional compensation if found
to be necessary based on a detailed review when undertaken.
On May 2, 2001, in an Extraordinary General Meeting requisitioned by
the Government, the shareholders passed a resolution accepting the above
compensation package. Prior to such meeting, the Company had represented to the
Government that the compensation package should be arrived at through an
objective process. The Company had appointed external consultants for this
purpose and had submitted their reports to the Government for due consideration.
The Company has been granted a Category "A" ISP license to provide Internet
access at locations across the country. However, the Company has not yet applied
for the license to provide domestic long distance telephony services and there
can be no assurance that the licenwe will be granted under this compensation
package. No payments have yet been made by the Government to the Company towards
the entry fee and license fee as the Company has not yet paid such amounts
towards domestic long distance services.
The Company derives the bulk of its revenue from payments from foreign
telecommunications administrations and private carriers for the delivery of
international calls to India and from payments from Bharat Sanchar Nigam Limited
for the delivery of international calls abroad. The Company and Bharat Sanchar
Nigam Limited share revenue received by the Company from foreign
telecommunications administrations and carriers on incoming international calls
terminating on India's domestic network and revenue received by Bharat Sanchar
Nigam Limited from Indian domestic subscribers on outgoing international calls
initiated on such network, pursuant to the terms of a revenue sharing
arrangement between the Company and Bharat Sanchar Nigam Limited covering the
period from April 1, 1997 to March 31, 2002. With the formation of Bharat
Sanchar Nigam Limited, the revenue sharing arrangement continues. See "--Traffic
Revenue and Revenue Sharing Arrangement." In January, 1999 the DOT stated that
no change to the current revenue sharing arrangements is presently contemplated.
The Company's services have grown rapidly in recent years reflecting
both the overall economic growth of India and the increasing emphasis placed by
the Government on improving the domestic telecommunications network. The total
volume of telephone traffic transmitted over the Company's network has risen
from 1,148 million paid minutes for the year ended March 31, 1996 to 2,688
million paid minutes for the year ended March 31, 2001, a compound annual growth
rate of approximately 17 percent. The total number of effective telephone
circuits operated by the Company increased from 12,873 at March 31, 1996 to
20,495 circuits at March 31, 2001. In addition, the Company has made significant
enhancements to the efficiency of its transmission and switching capabilities,
particularly through investment in digital equipment.
The Company believes that there remains significant unsatisfied demand
for telecommunication services in India. As reported in The Hindu Business Line,
as of September 2001 the penetration of telephone lines in India was
approximately 3.7 lines per 100 inhabitants. This penetration is significantly
below that in the Organization for Economic Cooperation and Development "OECD"
member countries and many other developing countries. The Company expects that
continued expansion of the domestic network, movement towards cost-based tariffs
and private sector participation in local fixed line and mobile
telecommunications will significantly increase the level of telephone line
penetration and quality of service in India in the future, resulting in growth
in demand for its international telecommunication services.
The Company also provides a number of specialized value-added services
such as international leased lines, Inmarsat satellite mobile
telecommunications, Internet dial-up access in 12 cities, Internet leased lines
access throughout India, transmission of standard business information
("electronic data interchange"), provision of connection to business information
and applications ("managed data network services"), video conferencing, the
transmission of television signals (both video and audio), transmission of data
over public data network for customers ("packet switched data transmission"),
E-mail services and television uplinking.
Demand for the Company's specialized and value-added services,
particularly international leased lines and Internet access, has grown
significantly in the past few years. The total leased lines (64 KBP equivalent)
capacity has grown from 298 as of March 31, 1996, to 4,898 as of March 31, 2001.
The Company's subscriber base for Internet access has increased from 4,151 as of
March 31, 1996 (the fiscal year in which the service was first offered by the
Company) to 630,970 as of March 31, 2001. The Company believes that this growth
is consistent with increasing demand for data services worldwide and in India.
The Company expects continued growth in its specialized and value-added services
so as to build and maintain a base of direct retail customers.
18
Seasonality does not materially affect the Company's business.
BUSINESS STRATEGY
The Company's objectives are to remain the dominant provider of
international telecommunication services in India, to diversify its products and
services by entering into related areas and offering specialized, value-added
and Internet related services, and to take advantage of new technologies to
support and enhance its position as a leading telecommunications and Internet
service provider in India. To meet these objectives, the Company plans to
continue developing its international telecommunication services in a manner
that
o meets the demand of users for such services,
o optimizes the utilization of its facilities and, as a result, the
revenue derived from such facilities and
o positions the Company for significant participation in an
increasingly liberalized Indian telecommunications industry.
The Company intends to implement this strategy as follows:
IMPROVING THE CAPACITY AND QUALITY OF ITS INTERNATIONAL
TELECOMMUNICATION SERVICES AND FACILITIES. In addition to increasing the number
of international circuits to meet increasing demand, the Company seeks to
improve the efficient use of its international telecommunication services and
capacity by increasing its capacity to connect digital circuits to a switch and
by improving transmission capacity through the use of advanced technologies. For
example, the Company continues to invest in undersea fiber optic cables and
satellite transmission capacity to enhance its ability to handle efficiently
increased voice and data traffic. The Company has embarked on a program for
enhancing its connectivity to corporate customers and software exporters. See
"--Property, Plants and Equipment--Description of Property." The Company is also
seeking to upgrade its switching facilities through the installation of
technologically superior switches which enable more efficient transmission of
voice and broadband data traffic. See "Item 5. Operating and Financial Review
and Prospects--Investment Program--Ninth Five Year Plan Projects--Expansion of
Transmission Capacity" and "--Expansion of Number of Switches."
LEVERAGING EXISTING INFRASTRUCTURE TO PROVIDE SPECIALIZED AND
VALUE-ADDED SERVICES. The Company has introduced several international
specialized and value-added services in recent years and seeks to increase the
portion of its revenues derived from such services. These services typically
involve the transmission of data rather than only voice traffic. To meet
increasing demand, the Company is expanding and upgrading its infrastructure so
as to be in a position to provide bandwidth for such services. The Company
currently provides Internet dial-up access in 12 cities and Internet leased line
access throughout India. The Company also provides other services including
Inmarsat satellite mobile telecommunications, electronic data interchange,
managed data network services, video conferencing, transmission of television
signals, packet switched data transmission and E-mail services. See "--Services
of the Company--Specialized and Value-Added Services." In addition, the Company
is considering spinning off certain of its specialized and value-added services,
such as the Internet access it is licensed to provide nationwide, E-mail,
electronic data interchange and video conferencing services, into a proposed
subsidiary, VSNL Seamless Services Private Limited. VSNL Seamless Services
Private Limited is expected to develop and maintain a retail customer base to
position the Company for continued growth of its specialized and value-added
services. The Company is also pursuing opportunities to participate in consortia
developing satellite-based telecommunication services. See "Item 5. Operating
and Financial Review and Prospects--Investment Program--Ninth Five Year Plan
Projects--Capital Contributions to Intelsat and Inmarsat and Acquisition of
Indefeasible Rights of Use."
ENHANCING INTERNET OPPORTUNITIES. The Company is the leading Internet
service provider in India with market share of approximately 43 percent of the
country's current Internet subscriber base, according to IT Space Research
Telecom programs January 2001. The Company has taken the initiative in
19
developing the Internet market in India and will continue to strive to be the
market leader in promoting and facilitating growth of the Internet in India. The
Company believes that its strategy of focusing on market leadership in Internet
access will position it to lead the development and introduction of higher-value
Internet services for its consumers and corporate customers.
POSITIONING FOR NEW INTERNATIONAL OPPORTUNITIES. The Company seeks to
enter into joint ventures with domestic and foreign companies to develop
telecommunications projects both inside and outside India. The Company, along
with Telecommunication Consultants of India Limited ("TCIL"), Mahanagar
Telephone Nijam Limited ("MTNL"), and Nepal Ventures Private Limited signed a
memorandum of understanding for joining together to provide basic services in
Nepal through the use of wireless local loop technology. The Company's
participation in these ventures will be designed to permit the Company to
utilize its existing expertise and to enable the Company to gain additional
experience with potential strategic partners. For example, the Company has
entered into bilateral arrangements with foreign telecommunications carriers for
the provision of private data transmission services. See "Item 5. Operating and
Financial Review and Prospects-Services of the Company--Specialized and
Value-Added Services."
POSITIONING FOR OPPORTUNITIES IN A LIBERALIZED ENVIRONMENT. As part of
the multilateral agreement on basic telecommunication services agreed to by
member governments of the World Trade Organization in February 1997, the
Government of India agreed to review the possibility of allowing competition in
the area of domestic long distance telephone services. The Government of India
recently opened this area for competition . The Company aims to position itself
to provide domestic long distance services through the continued upgrading of
its transmission and switching capabilities. See "Item 5. Operating and
Financial Review and Prospects--Investment Program--Ninth Five Year Plan
Projects--Provision for Other Projects and Investments."
SERVICES OF THE COMPANY
The Company's primary business is the provision of public international
switched telecommunication services (telephone, telex and telegraph). The
Company also provides a variety of specialized and value-added services, such as
international leased lines, Inmarsat satellite mobile telecommunications,
Internet dial-up access in 12 cities, Internet leased line access throughout
India, electronic data interchange, managed data network services, video
conferencing, the transmission of television signals, packet switched data
transmission and E-mail services. These types of services typically involve
greater bandwidth use for the transmission of data rather than voice traffic.
20
The following table sets forth certain operating data with respect to
the Company's international services as of the dates and for the periods
indicated.
YEAR ENDED MARCH 31,
--------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- ------
BASIC SERVICES
TELEPHONE(1)
Incoming paid minutes(2) (millions)......... 1,000 1,257 1,499 1,773 2,161
Outgoing paid minutes (millions)............ 385 428 436 473 527
Total paid minutes (millions)............... 1,385 1,685 1,935 2,246 2,688
Change from previous period (%)............. 20.6 21.7 14.84 16.07 19.68
Ratio of incoming to outgoing............... 2.60x 2.94x 3.44x 3.75x 4.10x
Effective circuits (as of period end)....... 14,184 15,431 17,922 19,722 20,495
Change from previous period end (%)......... 10.2 8.8 16.14 10.04 3.92
TELEX
Paid minutes (millions)..................... 17 14 11 10 9
Change from previous period (%)............. (15.0) (17.6) (21.0) (10.58) (8.80)
Effective circuits (as of period end)....... 1,081 1,012 787 682 658
Change from previous period end (%)......... (4.2) (6.4) 22.23 (13.34) (3.52)
TELEGRAPH
Paid words (millions)....................... 19 16 15 9 7
Change from previous period (%)............. (10.8) (15.79) (6.67) (40.00) (22.22)
Effective circuits (as of period end)....... 35 35 34 25 24
Change from previous period end (%)......... (7.9) 0.0 (2.86) (26.47) (4)
SPECIALIZED AND VALUE-ADDED SERVICES
LEASED LINES (CAPACITY)
Number of lines (as of period end).......... 564 913 1,098 1,654 4,913
Change from previous period (%)............. 40.65 61.88 20.26 50.64 197.04
PACKET SWITCHED DATA TRANSMISSION
Segments (millions)(3)...................... 521 613 469 267 194
Change from previous period (%)............. (7.5) 17.7 (23.49) (43.07) (27.34)
INTERNET ACCESS(4)
Subscribers (as of period end)(in thousands) 28.04 90.04 213.05 366.43 630.97
Change from previous period (%)............. 575.5 221.1 136.61 72.00 72.19
(1) Telephone paid minutes comprise voice, facsimile and public switched
telephone network (PSTN) data traffic sent through the telephone network.
(2) Includes calls placed in India but billed in another country, such as
operator-assisted collect and home-country direct calls.
(3) One segment equals 64 characters, with each character representing eight
bits of data.
(4) Internet access services were first offered in August 1995.
BASIC SERVICES
The Company operates the necessary switching and transmission
infrastructure to connect the Indian domestic telecommunications network with
foreign networks and, in coordination with foreign telecommunications
administrations and carriers, to ensure the smooth flow of international traffic
between these networks. An outgoing international telephone call from India
originates on one of the local Indian telephone exchanges operated by Bharat
Sanchar Nigam Limited (formerly the Department of Telecommunications) or
Mahanagar Telephone Nigam Limited, (in Mumbai and Delhi), or by private fixed
line or cellular network operators, and is transferred to one of the Company's
gateways through Mahanagar Telephone Nigam Limited's and Bharat Sanchar Nigam
Limited's domestic networks. The call is then switched by the Company's system
to the desired international destination via satellite, undersea cable or both
based on a pre-determined routing plan developed by the Company in coordination
with the foreign telecommunications administration or carrier. The foreign
administration or carrier receiving the call through the international circuit
is then responsible for final delivery of the call to the recipient. Similarly,
when an international call is received at one of the Company's gateways, the
call is switched from the gateway via the Indian domestic network to one of the
local exchanges, from which it is transmitted to the recipient. See "-Industry
Overview." This process is illustrated in the following chart:
21
[GRAPHIC OMITTED]
INTERNATIONAL TELEPHONE SERVICES. The Company provides public basic
international switched telephone services, including voice, facsimile and data
transmission services. Approximately 92.40, 91.23 and 90.41 percent of the
traffic revenue of the Company for the years ended March 31, 1999, 2000 and 2001
respectively was attributable to international telephone services. The volume of
international telephone traffic to and from India, and the Company's revenues
from such calls, have grown rapidly in recent years. These increases reflect the
growth in the number of private and public telephone lines in India, an
improvement in the quality of the domestic telephone network (which has resulted
in a higher percentage of completed calls) and an increase in the quality and
capacity of the Company's facilities.
The Company offers International Direct Dialing and Home Country Direct
Services and also provides operator assisted international calls. International
Direct Dialing permits telephone subscribers to dial international calls
directly without operator assistance. Rates for International Direct Dialing
calls are lower than for operator-assisted calls and are charged based on the
duration of the call. The availability and use of International Direct Dialing
in India has increased steadily. As of January, 2001, International Direct
Dialing was available from approximately 25,679 cities and towns within India to
approximately 240 territories worldwide. For the year ended March 31, 2001,
approximately 99 percent of international calls from India were made using
International Direct Dialing.
Home country direct services, which permit a caller to reach an
operator in his home country directly and place a collect or charge call, was
available to 32 countries as of March 31, 2001. These calls are treated as
incoming calls, as they are billed in the country being called. Home country
direct services permit a user to speak in his native language to an operator in
his own country and facilitates payment for the call since it is billed to the
user at home in his own currency.
OTHER BASIC SERVICES. The Company provides international telex
services, including automatic direct dial telex service, to approximately 237
territories worldwide and handles on average more than 20,000 international
telex calls each day. This service is mainly used by the business community.
Advanced telex services offered by the Company include forwarding facsimiles to
telex mail boxes, telex to fax transmission (T-Fax) and transmission from telex
to E-mail services.
International telegram service is the oldest of the international
telecommunication services provided by the Company. Each day the Company handles
on average approximately 1,000 telegrams.
The volume of telex and telegraph traffic has been declining
significantly in recent years, consistent with global trends, as users switch to
facsimile and other methods of data transmission. The Company expects this trend
to continue, but without any adverse impact on the Company since such methods of
data transmission generate limited revenue for the Company.
22
SPECIALIZED AND VALUE-ADDED SERVICES
The Company provides a variety of specialized and value-added services,
such as international leased lines, Inmarsat satellite mobile
telecommunications, Internet dial-up access, Internet leased line access,
electronic data interchange, managed data network services, video conferencing,
the transmission of television signals and other value-added services which
typically involve the transmission of data or video rather than voice traffic.
By offering such value-added services, the Company believes it can benefit from
the increasing migration of traffic to these modes and build a direct retail
customer base from which it may more effectively compete in a liberalized
environment. The Company expects aggregate demand for these services to continue
to rise with the continued growth and increasing sophistication of the Indian
economy and its increasing integration with the world economy.
INTERNATIONAL LEASED LINES. The Company arranges dedicated
point-to-point international leased lines for those customers who need reliable,
24-hour communications from a fixed point in India to a fixed point abroad.
International leased lines, the speeds of which range from 50 bits per second
("bps") to 2 megabits per second ("mbps"), are provided through the Company's
international gateways, earth stations and cable stations. The Company's earth
stations/cable stations communicate with satellites and submarine cable systems
respectively for data traffic. The demand for high speed leased lines (64 kbps
and above) has increased significantly in recent years, with the number of such
lines (64 kbps equivalent) increasing from 564 circuits as of March 31, 1996 to
4,913 as of March 31, 2001. In connection with providing high speed leased
lines, the Company makes all arrangements, in coordination with Bharat Sanchar
Nigam Limited or Mahanagar Telephone Nigam Limited and foreign
telecommunications administrations or carriers, for connecting the customer
through Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited lines
and one of the Company's international gateways to the foreign destination via
satellite or undersea cable.
As part of its international leased line services, the Company offers
the Intermediate Data Rates Service and the Intelsat Business Service, which are
dedicated satellite-based services that provide high speed, high quality data
circuits on a point-to-point basis through earth stations strategically located
near the customer's premises. These services utilized a total of 1,284 satellite
circuits as of March 31, 2001 leased by subscribers such as software and other
high technology companies in Bangalore, Hyderabad, Pune and other major cities
in India.
INMARSAT MOBILE SERVICES. The Company commenced offering satellite
mobile telecommunication services via the Inmarsat A system (which carries
telephone, telex, Duplex High Speed Data on a channel that carries 64 kbps of
data, and facsimile traffic) through a land earth station located near Pune,
which was commissioned in May 1992. This earth station currently handles on
average approximately 1,800 call minutes of Inmarsat A traffic per day. In
November 1993, the Company introduced Inmarsat C service, which permits
transmission of messages via small portable terminals. In November 1995, the
Company also introduced Inmarsat B services for voice and data transmissions and
Inmarsat M services for voice transmissions, both in digital format. The
Company's latest Inmarsat service, Inmarsat Mini M, was introduced in May 1997.
The Company's land earth station located near Pune currently handles on average
approximately 1,300, 270 and 5,600 holding time (in minutes) per day of Inmarsat
B, M and Mini M traffic, respectively, and approximately 109.56 kilobits per day
of Inmarsat C traffic.
GATEWAY INTERNET ACCESS SERVICES. The Company commenced providing
Internet access services in August 1995. The Company is the leading Internet
service provider in India with market share of approximately 43 percent of the
country's current Internet subscriber base, according to IT Space Research
Telecom programs January 2001. Private Internet service providers were not
permitted until November 1998 after which they were also permitted to provide
such services with the liberalization of the Government's Internet policies. See
"--Industry Overview--Recent Developments." Demand for the Company's Internet
services has increased rapidly with the number of subscribers growing from about
200 as of September 30, 1995 to 630,970 as of March 31, 2001. The Company's main
access nodes for the Internet are situated in 12 cities, including Mumbai, Pune,
Kolkata, Delhi, Bangalore and Chennai. In addition, the Company provides
connectivity to remote access nodes throughout India in conjunction with Bharat
Sanchar Nigam Limited, each of which is connected to one of the Company's access
nodes. A host computer to which subscribers have dial-up access is located at
each access node. Access to these services is also available through the
Company's packet switched data transmission services. In addition, the Company
currently provides Internet backbone access services to approximately 90 private
Internet service providers and leased line access to its corporate customers.
The Company has also opened state-of-the-art data centers for co-location
services in 6 cities.
23
MANAGED DATA NETWORK SERVICES. The Company introduced managed data
network services in January 1997, and now offers such services through the
global alliance networks of global partners - British Telecommunications, Cable
& Wireless, EQUANT, Global One, IBM Global Services, and Tele Media
International. The Company's managed data network services utilize global frame
relay and X.25 access protocols and data transmission speeds of up to 64 kbps,
providing managed private data communications services to corporate customers in
India.
GATEWAY ELECTRONIC DATA INTERCHANGE SERVICE. First offered by the
Company in November 1993, this service acts as a clearinghouse between the
computer systems of a subscriber and its trading partners for the electronic
transmission and processing of trade documents, such as purchase orders,
invoices and other inquiries. The service operates domestically between major
metropolitan areas in India and offers connections to major international
electronic data interchange networks. These services offer efficient data
packaging and transfer through the use of higher bandwidths. The Company
currently has approximately 35 corporate subscribers for these services.
VIDEO CONFERENCING, TRANSMISSION OF TELEVISION SIGNALS AND OTHER
SERVICES. The Company introduced a video conferencing service in 1993 (both
domestic and international) through studios located at the Company's
international gateways at Mumbai, Delhi, Kolkata and Chennai. The Company also
provides international relay of television programs and news services via
satellite on a contractual basis and leases satellite transponder capacity owned
by the Company to television broadcast companies in India. The Company
transmitted approximately 185,000 minutes of television traffic to and from
India during the year ended March 31, 2001, including principally broadcasts of
news, sports and entertainment events. News media services provided by the
Company include sending and receiving radio photos to and from locations outside
India and direct transmission of recorded and live programming abroad, including
the transmission of newscasts by Indian national news agencies.
TELEVISION UPLINKING. The Company started providing television
uplinking facilities in October 1998. The Company provides uplinking facilities
to, among others, SunTV (Tamil), Surya (Malayalam), Udaya TV (Kannada), Eenadu
TV (Telugu), Gemini TV (Telugu) and Asianet (Malyalam). The Company's satellite
broadcast operations on the INSAT-2E (APR) satellite are provided through its
Standard-A earth station located in Chennai, and also through its earth stations
located in Delhi and Ernakulam.
GATEWAY PACKET SWITCHED SERVICE. The Company began operation of a
packet switched data transmission service in 1988. Subscribers to the service
may exchange data with users of other public packet switched data. Primary
packet switching exchanges and access points are located at Mumbai, Kolkata and
Delhi, which are connected with international networks and with each other by
high speed (64 kbps) data lines. The primary exchanges are linked to packet
switching access points of the Company located at six other sites within India
and to approximately 45 additional such access points operated by Bharat Sanchar
Nigam Limited via dedicated domestic long-distance lines. Subscribers may access
this service via dial-up lines or dedicated lines to any of the access points at
transmission speeds up to 9,600 bps or 64 kbps, respectively. This service is
also linked to Indian domestic packet switched data networks and carries all
international traffic generated by these networks. The Company currently has
approximately 235 subscribers for this service and handled approximately 194.4
million segments of data in the year ended March 31, 2001, a decline of 27
percent over the period ended March 31, 2000. No growth in this service is
anticipated as its advantages have eroded due to increased Internet access.
GATEWAY ELECTRONIC MAIL SERVICE. The Company introduced GEMS.400, an
international E-mail and fax forwarding service, in 1991, which was subsequently
expanded to cover the domestic market. This E-mail service, permits subscribers
to send E-mail both to other subscribers within India and to approximately 242
public E-mail systems in about 74 countries. This service had approximately
4,951 subscribers as of March 31, 2001. No growth in E-mail service is
anticipated as its advantages have eroded due to increased Internet access.
24
TRAFFIC REVENUE AND REVENUE SHARING ARRANGEMENT
The Company's principal source of revenue is traffic revenue from its
public international telecommunication services (telephone and telex), which
accounted for 92.40 percent, 91.23 percent and 90.41 percent of the Company's
traffic revenues for the fiscal years ended March 31, 1999, March 31, 2000 and
March 31, 2001, respectively. The Company's traffic revenue has two sources:
foreign telecommunications carriers, and the Bharat Sanchar Nigam Limited. The
Company does not receive any payments directly from the end users of its public
international telecommunication services and has no control over the rates
charged by the Bharat Sanchar Nigam Limited or foreign administrations or
carriers for such calls. For the fiscal years ended March 31, 1999, March 31,
2000 and March 31, 2001, approximately 65 percent of the Company's traffic
revenue was derived from payments by foreign administrations or carriers for
incoming calls and approximately 26 percent of such traffic revenue was derived
from amounts payable by the Bharat Sanchar Nigam Limited under a revenue sharing
arrangement for calls originating in India.
PAYMENTS TO AND FROM FOREIGN ADMINISTRATIONS OR CARRIERS
Arrangements for the provision of international telecommunication
services between two countries are normally established between two
telecommunications administrations or recognized private operating carriers on a
bilateral basis. The Company has operating arrangements with approximately 244
foreign telecommunications administrations or private carriers that govern the
rates of payment by the Company to the foreign administrations or carriers for
use of their facilities in connecting international calls billed in India, and
by the foreign administrations or carriers to the Company for use of its
facilities (and the local Indian networks) in connecting international calls
billed abroad. Among other factors, the rates negotiated take into account the
technical and operating costs for providing such telecommunication services and
the volume of incoming and outgoing telecommunications traffic. Such operating
arrangements are generally reviewed every year, and any resulting revision of
accounting rates or change in settlement arrangements also is agreed upon
through bilateral negotiations.
The practice among carriers is for charges due in respect of the use of
overseas networks to be recorded, collected and forwarded by the carrier from
the country in which the call is billed. Based on the accounting rate negotiated
with each foreign telecommunications administration or carrier, the Company
makes payments to the administration or carrier for outgoing traffic billed in
India and receives payments from such administration or carrier for incoming
traffic billed outside India. Settlements between the Company and the major
carriers, including US carriers, are made monthly. Settlements between the
Company and other carriers are normally made quarterly. Settlements are made on
a net basis at the applicable settlement rate, which represents each carrier's
portion of the accounting rate. The accounting rates under the Company's
agreements vary but are generally divided into equal settlement rates for
incoming and outgoing calls from or to a particular country. The Company has in
the recent past sought to rationalize its accounting rates by moving towards a
system of three basic rates. The three basic rates cover the United States,
countries of the South Asian Association for Regional Cooperation (SAARC)
(comprising India, Pakistan, Sri Lanka, Bhutan, Bangladesh, the Maldives and
Nepal), and Europe and the rest of the world. The three basic accounting rates
are currently in effect for approximately 150 of the 244 foreign administrations
and carriers with which the Company has operating arrangements. The settlement
rates applicable to the Company currently range from approximately US$0.32 to
US$2.47 per minute.
Accounting rates are negotiated annually, and negotiations may in some
cases take several months to conclude. During the negotiations, foreign
administrations and carriers may reduce their payments to the Company to a level
at or near the rates they expect to achieve. In other cases, new rates are
applied retroactively from the date on which they are agreed, which in the case
of a reduction in rates requires the Company to make a payment representing the
difference between the prior rate and the newly negotiated accounting rate,
calculated at the applicable settlement rate.
The Company's largest correspondent carriers are those in the United
States, the United Arab Emirates and the United Kingdom, which together
represented approximately 58.29 percent, 61.35 percent and 64.47 percent of the
Company's paid telephone minutes during the years ended March 31, 1999, March
31, 2000 and March 31, 2001 respectively. The Company believes that the level of
traffic with a particular country is determined primarily by the level of
international business between such country and India and the number of Indian
expatriates living in such country. In addition, the relative levels of incoming
call volume from different countries is affected by the practice of "refile."
25
Refile involves the re-routing of calls to India through a third country by
carriers in the country of origination of such calls. Refile seeks to take
advantage of a lower accounting rate applicable to calls between India and the
third country compared to the rate between India and the country of origination.
Due to such lower applicable accounting rate, refile has the effect of lowering
the revenue of the Company with respect to an incoming call. Refile has
contributed in particular to the significant increase in recent years in
incoming traffic from the United States.
The following table sets forth the number of paid minutes of
international telephone calls for the Company for certain countries for the
periods indicated.
YEARS ENDED MARCH 31,
---------------------
1999 2000 2001
---- ---- ----
INCOMING OUTGOING DIFFERENCE INCOMING OUTGOING DIFFERENCE INCOMING OUTGOING DIFFERENCE
-------- -------- ---------- ----------------- ---------- -------- -------- ----------
(MINUTES IN MILLIONS)
United States................. 663 52 611 907 60 847 1,182 75 1,107
United Arab Emirates.......... 266 35 231 233 42 191 286 48 238
United Kingdom................ 76 36 40 94 42 52 94 48 46
Saudi Arabia.................. 122 91 31 127 91 36 173 90 83
Canada........................ 37 10 27 14 9 5 22 11 11
Singapore..................... 31 18 13 42 21 21 42 24 18
Germany....................... 23 13 10 14 14 0 40 14 26
Hong Kong..................... 6 8 (2) 5 8 (3) 15 11 4
Bahrain....................... 25 3 22 26 4 22 26 6 20
Oman.......................... 29 15 14 31 16 15 34 17 17
Others........................ 221 155 66 280 166 114 247 183 64
----- --- ----- ----- --- ----- ----- --- -----
Total........... 1,499 436 1,063 1,773 473 1,300 2,161 527 1,634
===== === ===== ===== === ===== ===== === =====
As is typical in developing countries, the volume of incoming calls to
India has historically exceeded the volume of outgoing calls, and as a result
the Company has received net settlement payments from foreign administrations
and carriers. The Company expects this situation to continue. In 1994, various
unlicensed private agencies in India commenced offering "call-back" services as
a low-cost alternative for making international calls from India. A caller using
this service is provided with access to an international dial tone in a foreign
country, usually in the United States, from which the caller can originate
calls. These calls are billed in foreign exchange in the foreign country and are
therefore treated as incoming calls. 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 appears to
have grown and has contributed to the increase in recent years in the Company's
ratio of incoming to outgoing calls, particularly in the case of traffic between
India and the United States.
In recent years, international organizations such as the International
Telecommunications Union and the OECD countries have expressed the need for
revision of the international accounting rate system, and certain foreign
telecommunications administrations and carriers have sought to reduce applicable
accounting rates in bilateral negotiations with the Company. In August 1997, the
FCC issued an order (the "Order") establishing FCC benchmarks that US carriers
generally must comply with in establishing settlement rates for international
calls with non-US telecommunications administrations and carriers. The Order
became effective as of January 1, 1998. Pursuant to the Order, the FCC
categorizes countries by level of economic development and establishes
cost-based benchmark ranges and transition periods for each country category,
whereby higher benchmark ranges and longer transition periods would apply to
less developed countries. The FCC requires US carriers to negotiate settlement
rates falling within the applicable benchmark range with each country during the
transition period. As a result, the effective settlement rate between US
carriers and the Company for calendar year 1998 of US$0.64 per minute, which
already represented a 10.5 percent decrease of the settlement rate from the
prior calendar year, needs to be reduced to no more than US$0.23 per minute by
2002. If such reduction is not agreed to in bilateral settlement rate
negotiations, the FCC may require US carriers to make settlement payments to the
Company at a rate no higher than such benchmark rate.
26
Item 3. Key Information
The authority of the FCC to issue the Order and the Order itself has
been upheld by a United States federal court of appeals. In upholding the Order,
the United States federal court of appeals held that the Order was a valid
exercise of the FCC's regulatory authority under the United States
Communications Act and rejected the argument that the FCC's unilateral
establishment of benchmark settlement rates constituted an unlawful assertion of
extraterritorial jurisdiction over foreign carriers and foreign
telecommunication services. However, the United States federal court of appeals
also stated that the Order does not apply to foreign carriers and only permits
the FCC to contact responsible foreign government authorities to seek their
support in lowering settlement rates. There can be no assurance that the FCC,
acting pursuant to the Order, will not seek to force US carriers to agree to the
benchmark rates, which are lower than the rates in effect between the Company
and its correspondent US carriers. See "Item 3. Key Information--Risk
Factors--Payments to and from Foreign Telecommunications Administrations and
Carriers."
The Company was unable to conclude its annual negotiations with its
four correspondent US carriers as to accounting rates for calendar year 1998
until early January 1999. The calendar year 1998 accounting rate with one of its
four US carriers was approved by the FCC in late November 1998, and shortly
thereafter the three remaining US carriers agreed to the same rate. The Company
has concluded since then accounting rates agreements for fiscal 2000 with US
carriers and other major foreign correspondent carriers and administrations with
a gradual reduction of settlement rates. Moving towards FCC's benchmark
settlement rate, the Company has also concluded settlement rate agreements of
US$0.54 per minute, US$0.425 per minute and US$0.34 per minute for fiscal 2000,
2001 and 2002, respectively, with US carriers.
REVENUE SHARING ARRANGEMENT
The Company had a revenue sharing arrangement with the DOT for the
fiscal period 1997-2002. Pursuant to the corporatization of the service
provision functions of the DOT, to the newly formed company, Bharat Sanchar
Nigam Limited, the revenue sharing agreements entered into by the DOT were
transferred and assigned to Bharat Sanchar Nigam Limited with effective October
1, 2000. License fees shall continue to be paid to the DOT under the revenue
sharing agreement.
Although the Company provides international gateway access out of and
into India, all calls must either initiate or terminate on or pass through
Mahanagar Telephone Nigam Limited's and Bharat Sanchar Nigam Limited's domestic
network. The Company and Bharat Sanchar Nigam Limited share revenues received by
each entity from international calls pursuant to a revenue sharing arrangement
between the two entities. Through the year ended March 31, 1997, the Company and
Bharat Sanchar Nigam Limited shared revenues under a revenue sharing arrangement
(the "previous revenue sharing arrangement") which was agreed to in February
1994, took effect retroactively beginning April 1, 1993 and remained effective
until March 31, 1997. In February 1997, the Company and the DOT agreed to the
current revenue sharing arrangement, which took effect on April 1, 1997 and is
to remain in effect until March 31, 2002.
PREVIOUS REVENUE SHARING ARRANGEMENT. Under the previous revenue
sharing arrangement the Company paid the DOT a terminal charge of Rs.21.60 per
minute for use of the DOT's domestic network on all incoming international
calls. In turn, the DOT paid the Company a carrying charge of Rs.41.60 per
minute for all outgoing international calls. The previous revenue sharing
arrangement was intended to result in average gross earnings per call minute of
Rs.10 for the Company, based on the following parameters and base values: an
average settlement rate between the Company and foreign telecommunications
administrations and carriers of US$1.00 per minute, a Rupee/Dollar exchange rate
of Rs.31.60 per US$1.00 and a ratio of incoming to outgoing call minutes of
1.4x.
The following chart illustrates payment flows under the previous
revenue sharing arrangement assuming the base value for these parameters.
27
[GRAPHIC OMITTED]
For the years ended March 31, 1999, March 31, 2000 and March 31, 2001,
the Company's actual average gross earnings per telephone minute were Rs.10.63,
Rs.9.43 and Rs.9.39 (US$0.20), respectively.
Under the previous revenue sharing arrangement, the Company also paid
to the DOT a license fee of Rs.3 million (US$0.07 million) for each one million
paid minutes (or portion thereof) of the Company's total annual international
traffic. In addition, the Company paid to the DOT a surcharge of 15 percent on
charges for lines leased from the DOT as an additional charge for using
Department of Telecommunication's domestic network.
CURRENT REVENUE SHARING ARRANGEMENT. In February 1997, the Company and
Bharat Sanchar Nigam Limited (formerly, the Department of Telecommunications)
agreed to the current revenue sharing arrangement, which took effect on April 1,
1997 and is to remain in effect until March 31, 2002. Under the current revenue
sharing arrangement, the Company pays to Bharat Sanchar Nigam Limited a charge
per minute equal to the "weighted average incoming settlement rate" minus Rs.10
on all incoming international calls, and Bharat Sanchar Nigam Limited in turn
pays to the Company a charge per minute equal to the "weighted average outgoing
settlement rate" plus Rs.10 on all outgoing international calls, in each of the
fiscal years covered by the arrangement. The "weighted average incoming
settlement rate" and the "weighted average outgoing settlement rate" for a
fiscal year is the average of the various settlement rates in effect as of the
beginning of the fiscal year between the Company and foreign administrations and
carriers (converted into Rupees at the exchange rates prevailing as of the
beginning of the fiscal year), weighted to reflect the volume of total incoming
traffic and total outgoing traffic, respectively, accounted for by each foreign
administration or carrier during the immediately preceding fiscal year. The
current arrangement is intended to result in average gross earnings to the
Company of Rs.10 per call minute in each fiscal year (assuming that applicable
settlement rates and exchange rates and the composition of incoming and outgoing
traffic from and to particular destinations remain constant during the year). In
the years ended March 31, 2000 and March 31, 2001 the Company's actual average
gross profit per telephone minute were Rs.9.43 and Rs.9.39, respectively.
Under the current revenue sharing arrangement, any increase or decrease
in the combined international traffic revenue per call minute of the Company and
Bharat Sanchar Nigam Limited (net of payments by the Company to foreign
administrations and carriers and by the Company and Bharat Sanchar Nigam Limited
to each other in respect of delivery of incoming and outgoing calls) for each
fiscal year, compared to the fiscal year ended March 31, 1997, will be shared
between the Company and Bharat Sanchar Nigam Limited according to the following
percentages:
28
YEAR ENDING BHARAT SANCHAR
MARCH 31 COMPANY'S SHARE NIGAM LIMITED'S SHARE
----------- --------------- ---------------------
1999 0% 100%
2000 15% 85%
2001 20% 80%
2002 25% 75%
In computing the international traffic revenue of Bharat Sanchar Nigam
Limited for purposes of calculating the combined international traffic revenue
per call minute of the Company and Bharat Sanchar Nigam Limited, the tariff
charged by Bharat Sanchar Nigam Limited to subscribers for outgoing
international calls is assumed to remain constant at Rs.62.35 (US$1.33) per
minute, which was the weighted average tariff rate for the year ended March 31,
1997. It is therefore intended that the Company's average gross profit per call
minute under the current revenue sharing arrangement will not be affected
directly by any decrease or increase in the actual tariffs charged by Bharat
Sanchar Nigam Limited for outgoing international calls.
The following chart illustrates payment flows under the revenue sharing
arrangement.
[GRAPHIC OMITTED]
--------------
* Subject to review, as described below.
The current revenue sharing arrangement is subject to review (with the
objective of correcting the imbalance caused) in the event that the Rupee/Dollar
exchange rate fluctuates by more than ten percent from the rate at the base year
(January 4, 1997), or the Company's actual average gross earnings per call
minute is less than Rs.9 or more than Rs.11, in any fiscal year covered by the
arrangement. No such review has occurred since the current revenue sharing
arrangement came into effect.
Under the current revenue sharing arrangement, the Company is required
to pay to Department of Telecommunications an annual license fee based on the
number of its commissioned circuits, instead of on the volume of its
international traffic. The license fee amounts to Rs.250,000 (US$5,336.18) per
commissioned circuit, and the number of circuits is calculated as an average of
the number of commissioned circuits at the beginning and end of the applicable
fiscal year. For the years ended March 31, 2000 and March 31, 2001, the Company
paid annual license fees of approximately Rs.4,712 million and Rs.5,022 million
(US$107.19 million), respectively.
29
BREAKDOWN OF SALES AND REVENUES
The following table breaks down the Company's revenue by type of
service for each of the years in the three year period ended March 31, 2001.
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
1999 2000 2001 2001
-------- -------- -------- -------
(IN MILLIONS)
Revenues from incoming traffic
Telephone Rs.43,834 Rs.45,161 Rs.46,674 US$996
Telex 186 128 112 2
Revenues from outgoing traffic
Telephone 18,243 18,375 18,345 392
Telex 173 175 112 2
Leased circuits 2,499 2,986 3,140 67
Internet access services 1,733 2,095 2,980 64
Television relay 78 72 184 4
Telegraph 50 37 29 1
Other revenue 385 611 340 7
Total revenue 67,181 69,640 71,916 1,535
====== ====== ====== =====
Since the Company only provides services in India there is no breakdown
of the Company's revenues by geographical market.
Trends and events affecting the Company's operating revenue are
discussed under "Item 5. Operating and Financial Review and Prospects."
INDUSTRY OVERVIEW
THE INDIAN DOMESTIC TELECOMMUNICATIONS NETWORK
The following table sets forth certain basic measures of the
development of the Indian domestic telecommunications network as of the dates
and for the periods indicated.
AS OF MARCH 31,
1997 1998 1999 2000 2001
-------- -------- -------- -------- ------
Telephones in service (thousands)............. 15,399 18,620 22,467 27,390 N/A
Telephones per 100 inhabitants................ 1.61 1.91 2.29 2.74 N/A
New lines installed (thousands)............... 2,564 3,259 3,791 4,917 7,652
Lines in service (thousands).................. 14,543 17,802 21,593 28,431 36,083
Lines in service per 100 inhabitants.......... 1.53 1.72 2.20 2.85 3.56
Long-distance route kilometers................ 179,955 219,781 288,271 340,451 416,831
Number of village public telephones........... 267,832 303,582 340,640 334,605 408,922
Local calls pulses (billions)................. 96.1 115.1 N/A 162.6 N/A
Registered waiting list for telephones 2,894 2,706 1,983 3,680 2,916
(thousands)...................................
Cellular subscribers (thousands).............. 369 882 1,073 1,793 3,577
----------------
Source: Department of Telecommunications.
The Indian domestic telecommunications network has grown rapidly in
recent years. As of March 31, 2001, the Indian telephone system comprised 36.08
million lines in service, having grown at a compound annual rate of 24 percent
since 1994. In the fiscal year ended March 31, 2001, Bharat Sanchar Nigam
Limited installed approximately 7.65 million new local lines and 7.15 million
switching terminations, increases of 26.91 percent and 21.81 percent,
respectively, over the levels as of March 31, 2000. All subscribers have access
to international telecommunication services. Subscribers in approximately 25,679
cities and towns in India had direct dial access as of March 31, 2001.
30
Despite this growth, the registered waiting list for telephone lines
has remained high. For example, in the fiscal year ended March 31, 2001, while
approximately 7.65 million new lines were added, the registered waiting list for
new lines decreased from 3.68 million to 2.916 million. Bharat Sanchar Nigam
Limited and the Company believe that the registered waiting list understates
actual demand because a potential subscriber must deposit at least Rs.3,000
(US$64 ) with Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited
in order to be placed on the waiting list and, depending on the subscriber's
location, may then have to wait up to three years before receiving a telephone
line. Moreover, the penetration of India's domestic telephone network of 3.56
lines in service per 100 inhabitants as of March 31, 2001 remained significantly
lower than in OECD countries and many other developing countries. The following
table presents, for selected countries, lines in service as of December 31, 2000
(the latest date for which such information is currently available) and gross
domestic product per capita for the year then ended.
LINES IN SERVICE PER
100 INHABITANTS AS OF 2000 GROSS DOMESTIC
DECEMBER 31, 2000 PRODUCT PER CAPITA (IN DOLLARS)
----------------- -------------------------------
India(1).......................... 3.6 468
Pakistan.......................... 2.2 458
Indonesia......................... 3.1 763
China............................. 11.6 840
Philippines....................... 4.0 988
Thailand.......................... 9.6 2,260
Turkey............................ 27.8 2,849
Malaysia.......................... 23.5 3,970
Mexico............................ 12.5 4,966
South Korea....................... 47.0 9,890
United Kingdom.................... 56.7 33,750
United States..................... 67.3 34,102
Japan............................. 49.3 36,300
----------------
SOURCES: The Department of Telecommunications; International Telecommunications
Union; International Monetary Fund; INTERNATIONAL FINANCIAL STATISTICS, DECEMBER
1998. (1) As of March 31, 2001, lines in service for India.
The existing lines in service in India are concentrated in large urban
areas. Of all lines in service, approximately 23.76 percent are in the four
major metropolitan areas of Mumbai, Kolkata, Delhi and Chennai; in these and
other major cities, the density of lines in service is considerably higher than
in India as a whole.
Cellular mobile service has experienced substantial growth since it was
introduced in the end of 1995. By March 31, 2001, there were approximately 3.58
million cellular subscribers, representing a compound annual growth rate of 115
percent since March 31, 1996 when the number of cellular subscribers was
approximately 77,000.
The efficiency of the domestic telecommunications network, as reflected
by the ratio of seizure attempts (calls) made on a telephone circuit that result
in successful complete calls to the total number of seizure attempts, has been
low in India principally because of restricted capacity on the network. However,
improvements have recently been made in the quality of the domestic
telecommunications network. Improving this ratio permits the Company's network
to operate more efficiently as it results in a decrease in the number of
circuits used by subscribers attempting to re-dial failed calls. In turn, this
reduces the need to invest in additional facilities and infrastructure. As of
March 31, 2001, the average answer to seizure ratio for incoming and outgoing
international calls in all of India was 35.80 percent and 43.62 percent,
respectively, compared to 27.63 percent and 43.99 percent as of March 31, 1995.
However, the average such ratio for calls to and from India remains much lower
than that for calls between two countries with well developed and high quality
domestic telecommunications networks, which would be at least 60 percent to 65
percent.
31
CURRENT STRUCTURE
The following chart illustrates the current operational structure of
India's telecommunication services industry.
[GRAPHIC OMITTED]
HISTORY
Until the mid-1980's, the telecommunications sector in India was a
monopoly managed by the public sector, and virtually all telecommunication
services, both domestic and international, were controlled by the Government of
India through the Department of Posts and Telegraphs of the Ministry of
Communications. The Indian Telegraph Act, 1885 established the Government's
monopoly in the sector and, together with the Indian Wireless Telegraphy Act of
1933, provided the legal framework for the regulation of the telecommunications
industry. Development of the telecommunications sector historically was seen as
a relatively low priority and received limited budgetary support from the
Government. As a result, the telecommunications infrastructure in India grew at
a relatively slow rate.
In the mid-1980s, faced with rapidly increasing demands for
telecommunication services and equipment, the Government of India commenced a
reorganization of the sector designed to facilitate the rapid introduction of
new technology, to stimulate the growth of the telecommunications industry and
to 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 Department of Telecommunications and
the Department of Posts and the establishment of public sector entities for the
manufacture of certain telecommunications equipment.
As part of the reorganization, the Company was incorporated on March
19, 1986 as a wholly-owned Government company and on April 1, 1986 assumed
control and management of international telecommunication services from the
Overseas Communications Service, a department of the Ministry of Communications.
Mahanagar Telephone Nigam Limited was established at the same time to operate
local telephone and telex services in Mumbai and Delhi, two of the largest
metropolitan areas in India. Bharat Sanchar Nigam Limited retained
responsibility for providing all other telecommunication services throughout
32
India. The Department of Telecommunications also assumed regulatory authority
over the Company, Mahanagar Telephone Nigam Limited and other public sector
enterprises established through the reorganization and was given responsibility
for acting on behalf of the Government of India as the sole shareholder of such
entities. 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 1991 and 1992, as part of its general policy of gradually reducing
its mutual holdings in public sector enterprises, the Government divested a
portion of the equity of the Company to certain funds, banks and financial
institutions controlled by the Government, and approximately 47.03 percent of
the Shares is currently held by such institutions and other private
shareholders. The divested Shares were initially traded on the BSE in December
1992.
LIBERALIZATION INITIATIVES
BACKGROUND. In May 1994, the Government of India announced a National
Telecommunications Policy (the "1994 Telecom Policy") which included as its
objectives ensuring the availability of telephones on demand as soon as
possible, providing basic telecommunication services at affordable prices and
introducing value-added services to raise the range and quality of
telecommunication services available in India to international levels. The 1994
Telecom Policy recognized that Government financial resources would be
insufficient to meet these objectives.
BASIC SERVICES. Accordingly, in September 1994, the Government of India
announced Guidelines for Private Sector Entry into Basic Telecom Services, which
provide for the grant of a license for the provision of local fixed line
services to one new licensee (a "New Licensee") in each of the 21
telecommunications "circles" into which the country has been divided for such
purposes. Within each circle, the New Licensee will compete with Bharat Sanchar
Nigam Limited (or Mahanagar Telephone Nigam Limited, in the case of circles that
include Delhi or Mumbai). Foreign ownership of each New Licensee is restricted
under the guidelines to a maximum of 49 percent. The Government initially
invited tenders for new licenses in January 1995, in response to which bids were
submitted by numerous Indian companies in combination with major global
telecommunications companies. Initially, licenses for six states of the Indian
union were issued to successful bidders. Recently, another 20 licenses have been
issued.
As part of the bidding process, the bidders for the licenses were
required to make certain commitments on the build-out of their respective
networks by the end of each of the first three years after the issue of the
licenses for which they were bidding. The license conditions require the New
Licensees to meet these commitments. The 13 successful bidders referred to above
have in the aggregate committed to provide over 3.9 million new lines by the end
of the third year following the issue of their licenses. In addition, under the
terms of the bid, if by the end of such third year telephone lines are not
available on demand in its respective circle, the New Licensee will be required
to expand the number of lines in its network by at least 15 percent per year
until such time as telephone lines become available on demand. A separate
license condition also requires New Licensees to allocate at least 10 percent of
the lines installed in each calendar quarter as village public telephones until
there is at least one such telephone in every village within its circle.
The New Licensees will have access to the Company's international
network only through Bharat Sanchar Nigam Limited. Under the tariff specified in
the tender conditions, the New Licensees will pay an international access charge
of Rs.0.70 per unit measured call at the point of interconnection to Bharat
Sanchar Nigam Limited for all outgoing international traffic originating on
their networks. No corresponding access charge will be payable by Bharat Sanchar
Nigam Limited to the New Licensees for any incoming international traffic
delivered on their networks. Only two of the New Licensees have commenced
services.
CELLULAR SERVICES. In December 1991, the Department of
Telecommunications invited bids from Indian companies with no more than 49
percent foreign ownership for non-exclusive digital cellular mobile licenses in
Mumbai, Delhi, Kolkata and Chennai. After protracted litigation arising from the
selection process, the Department of Telecommunications finally settled upon two
licensees for each of the four metropolitan areas. In January 1995, the
Department of Telecommunications invited tenders from Indian companies with no
more than 49 percent foreign ownership for non-exclusive licenses to provide
digital cellular mobile services in 20 telecommunications circles, excluding
those that include the four cities with existing licensees. Two licenses were to
be awarded per circle. There are eight cellular licensees in Mumbai, Chennai,
New Delhi and Kolkata and 14 cellular licensees in 18 state circles. Mahanagar
33
Telephone Nigam Limited has also announced plans to install wireless local loop
telecommunications equipment and provide cellular mobile service using code
division multiple access technology (CDMA) in Mumbai. Cellular licensees have
access to the Company's international network only through Bharat Sanchar Nigam
Limited.
Numerous private sector cellular licensees other than the metro
licenses of Mumbai, Delhi, Kolkata and Chennai have faced difficulties in
attaining financial closure for their projects. Consequently, network completion
has been significantly delayed, resulting in less than anticipated cellular
traffic. The Government has recently agreed to extend the period of license of
the non-metro licensees from 10 to 15 years.
In February 1997, a multilateral agreement on basic telecommunication
services was agreed to among member governments of the World Trade Organization.
As part of this agreement, the Government of India has reaffirmed its commitment
to further liberalize the Indian telecommunications sector through the licensing
of new local fixed line and cellular service providers. The Government of India
has also agreed to review the possibility of allowing competition in the area of
domestic long-distance telephone services and international telephone services.
INTERNATIONAL LONG DISTANCE SERVICES. On September 7, 2000, the Company
received a letter from the Ministry of Communications, Department of Telecom
Services stating that the Government has decided that the Company's monopoly on
international long distance services shall terminate on March 31, 2002 rather
than on March 31, 2004. This letter states that the Government proposes to
compensate the Company for the early withdrawal of its monopoly status in the
field of international telephony with the following package: (1) the Company
will be granted a license to provide national long distance telephony services;
(2) the Company shall be reimbursed by the Government for all license fees,
entry fees and revenue sharing fees (net of taxes) that may be payable by the
Company with respect to such license for a period of five years commencing on
April 2001; (3) the Government will not insist upon a performance bank guarantee
with respect to such license as long as the Company remains a public sector
undertaking and (4) the Company will be granted a Category - A, Internet service
provider license which will enable it to provide Internet services nationally.
In addition, the Government recently announced that private operators were to be
permitted to provide domestic long distance service and basic services in all
telecom circles in the very near future.
Effective April 2002, the international long distance sector is
scheduled to be opened up for competition. However, TRAI has floated a
consultation paper titled "International Long Distance Services" on September 3,
2001. The Company anticipates that the policy will therefore be announced only
after the consultation process is completed.
OTHER SERVICES: The Government allowed private sector participation in
value-added services such as paging services in 1992. The Government has also
announced the opening up of global mobile personal communications by satellite
("GMPCS") and has issued one provisional license. The issuance of licenses to
other prospective GMPCS operators is currently under consideration.
DEVELOPMENTS
TRAI. In furtherance of the 1994 Telecom Policy, the Government of
India in 1994 announced its intention to establish an independent regulatory
authority to resolve disputes between service providers, to ensure technical
compatibility and effective interconnection between service providers, to
regulate tariffs and protect consumer interests, to facilitate competition and
to promote efficiency in the operation of telecommunication services so as to
facilitate the growth of such services in India. In January 1997, the President
of India issued an ordinance providing for the establishment of the TRAI, an
autonomous body with quasi-judicial powers to regulate telecommunication
services in India. The TRAI was established and became functional in March 1997.
See "--Government Regulations--Supervision".
In September 1998, the TRAI initiated a series of nation-wide
consultations as part of a process to, among other things, formulate
telecommunications pricing policies and set tariffs for a wide variety of
telecommunication services. See "--Government Regulations--Rates." One of TRAI's
notifications envisages a reduction of approximately 50% in STD and ISD charges
over the three year period ending March 31, 2002. In conformance with this
notification Department of Telecommunications issued a tariff order for fiscal
2000 that reduces international long distance rates by approximately 27 percent
and further tariff orders effective between October 1, 2000 and March 31, 2002
pursuant to which international long distance tariffs have been further reduced
by 16 to 20 percent. The TRAI has also announced its intention to review a
number of other policy and regulatory matters, including the quality standards
for service provision generally.
34
INTERNET POLICY. In November 1998, the Government announced a new
Internet policy, which aims to increase the usage of the Internet by allowing
private ISPs to provide Internet access services in India. Under the policy,
private ISPs will be allowed (1) foreign ownership not exceeding 49 percent, (2)
a license fee moratorium for the first five years, and a token fee of Rs.1, (3)
the autonomy to fix tariffs, (4) direct interconnectivity between any two
separate ISPs, (5) to set up international gateways after obtaining the
necessary security clearances and (vi) to offer "last mile" linkages within
local areas by optical fiber cable communications after obtaining the necessary
approvals. The policy has enabled the Company to add a new revenue stream by
providing gateway connectivity and bandwidth provisioning to private Internet
service providers. The Company has already invested in upgrading its existing
infrastructure with a strong Internet backbone. As of March 31, 2001, there were
approximately 441 licensed Internet service providers who were licensed to
provide Internet services throughout India.
NEW TELECOM POLICY. The New Telecom Policy came into effect on April 1,
1999. Under this policy, the subject of opening up international telephone
services to competition will be reviewed by the year 2004. The policy also
provides for direct inter-connectivity between telecom services providers.
NEW TRAI. In January 2000, the Government amended the TRAI Act and
established two independent authorities: the New TRAI and the Appellate
Tribunal. See "--Government Regulations--Supervision."
FUTURE DEVELOPMENT OF THE DOMESTIC NETWORK
The Department of Telecommunications, in conjunction with the Company
and other telecommunication service providers regulated by the Department of
Telecommunications, has prepared a telecommunications investment program for
India's Ninth Five Year Plan (the "Ninth Plan"), covering the period from April
1997 to March 2002. Total investment expected under the plan amounts to
approximately Rs.832.5 billion (US$19.07 billion). The principal objectives of
the Ninth Plan include the addition of approximately 23.5 million lines, with a
view to (1) making telephone lines available on demand, (2) providing at least
one long-distance public telephone in each of India's villages by the year 2002,
(3) increasing the number of working telephones in villages where only one
working telephone is available, to support increased rural economic activity,
(4) providing at least one public telephone for every 500 individuals in urban
areas and (5) providing at least one subscriber trunk dialing public telephone
for every ten kilometers on national highways. The Department of
Telecommunications has received commitments from prospective New Licensees with
respect to targets for the build-out of new local fixed line networks. Other
objectives of the Ninth Plan include the modernization and upgrading of the
domestic telephone network, including the replacement of analog systems with
digital systems and the introduction of fiber optic cables, and the expansion of
existing (and the introduction of new) value-added services such as Internet
access services, satellite mobile communication services and personal
communications services. In this connection, the plan envisages the granting of
additional licenses on a non-exclusive basis to private and public sector
entities for the provision of certain value-added services in India, including
cellular mobile telephone, radio paging, Internet access, E-mail and video
conferencing services.
A significant factor affecting Bharat Sanchar Nigam Limited's ability
to meet its objectives has been the availability of sufficient financing.
Historically, financing for the development of the Indian domestic
telecommunications network has come from a combination of Bharat Sanchar Nigam
Limited's internal resources (predominantly revenues from subscribers and
payments from the Company and Mahanagar Telephone Nigam Limited), budgetary
support from the central Government and market borrowings through Mahanagar
Telephone Nigam Limited (the amount of which is limited by the central
government). In recent years, however, the Government's contribution through
budgetary support has declined steadily to the point that no support was
extended for India's Eighth Five Year Plan (the "Eighth Plan," covering the
period from April 1992 to March 1997). The Ministry of Finance has indicated
that the telecommunications sector is expected to remain self-financing. Bharat
Sanchar Nigam Limited has funded its expenditures in connection with Bharat
Sanchar Nigam Limited's telecommunications investment program for the Eighth
Plan and the Ninth Plan, and intends to continue to fund its expenditures under
the Ninth Plan (including those in connection with the Ninth Plan), solely
through internally generated resources, market borrowings and leasing
arrangements, while placing increasing emphasis on private sector participation
in funding the development of the domestic telecommunications network.
35
GOVERNMENT REGULATIONS
GENERAL
The business of the Company is subject to comprehensive regulation by
the Ministry of Communications through the Telecom Commission and the Department
of Telecommunications pursuant to the provisions of the Indian Telegraph Act of
1885 (the "Telegraph Act") and the terms of the license from the Department of
Telecommunications under which the Company operates. While the Telegraph Act
sets the legal framework for regulation of the telecommunications sector, much
of the supervision and regulation of the Company is implemented more informally
through the general administrative powers of the Department of
Telecommunications, including those reserved to the Department of
Telecommunications under the Company's license, and of other Government
agencies.
In October 1999 the Department of Telecommunications, which had
performed the role of licensor and policy maker for the Ministry of
Communications and operated as India's domestic long distance service provider
and fixed-line service provider, except for the areas of Delhi and Mumbai, was
bifurcated into two departments: (1) the Department of
Telecommunications/Telecom Commission to perform the role of licensor and policy
maker and control the Company's Equity Shares held by the Government and (2) the
Department of Telecom Services to function as the service provider. With effect
from October 1, 2000, the Department of Telecom Services was incorporated and
renamed Bharat Sanchar Nigam Limited. The Government has also established an
independent Information Technology Ministry to promote the Internet, e-commerce
and knowledge-based industries. Licensing functions, however, continue to be
with the Department of Telecommunications/Telecom Commission.
The Communication Convergence Bill 2001 was placed in the Parliament in
August 2001. If the Communication Convergence Bill 2001 is converted into an Act
of the Parliament, the existing Acts, namely, The Indian Telegraph Act, 1885;
The Indian Wireless Telegraphy Act, 1933; Telegraph Wire Unlawful Possession
Act, 1950; Cable Television Networks (Regulation) Act 1995 and The Telecom
Regulatory Authority of India Act, 1997 would stand repealed. The Communication
Convergence Bill provides for the formation of an independent authority -The
Communications Commission of India ("CCI")-to regulate the converging sectors of
broadcasting, information and telecommunications.
So long as the Government's shareholding in the Company equals or
exceeds 51 percent, the Company is deemed to be an Indian Government company and
is subject to laws and regulations generally applicable to public sector
enterprises in India. These laws and regulations concern personnel matters,
including appointment of key management personnel and the hiring, dismissal and
compensation of employees, as well as budgeting and capital expenditures and the
generation of funds through the issuance of securities. For example, all persons
appointed to the Company's Board of Directors must first be recommended by the
Public Enterprises Selection Board. Disputes between Government enterprises
(such as the Company) and Government departments generally must be referred to a
Committee of Secretaries of the Government for mediation before either party may
bring a claim in a court of law or tribunal. See "Item 3. Key Information--Risk
Factors--Regulation; Dispute Resolution." A single Government ministry or
department is designated as the primary supervisor of each public sector
enterprise: the Department of Telecommunications has been so designated for the
Company. The Company's activities also are subject to scrutiny by India's
Parliament, and the Department of Telecommunications must submit an annual
report to Parliament regarding the Company's activities.
The Government has granted "Navratna" status to selected public sector
enterprises. Videsh Sanchar Nigam Limited is one of such selected "Navratna"
public sector enterprises. "Navratna" status gives the Company, among other
things, enhanced autonomy, a greater degree of administrative efficiency
regarding capital expenditures and the ability to make joint venture investments
(subject to certain limits). In addition, the Company has achieved an
"Excellent" rating for the eighth successive year ending in 2001, based on
certain targets agreed upon with the Government of India for the relevant fiscal
year.
36
SUPERVISION
Major policy and management decisions by the Company require
consultation with, and/or approval of, Department of Telecommunications or the
Telecom Commission. The Department of Telecommunications and the Telecom
Commission approve the Company's Five Year Plans and the Company's annual
budget, which must be prepared in accordance with the Indian Government's
current Five Year Plan. Since the fiscal year ended March 31, 1992, the Company
and the Department of Telecommunications have entered into a Memorandum of
Understanding each year setting targets for the Company's performance during the
upcoming year.
The Department of Telecommunications, in addition to supervising the
Company as its primary regulator, also acts as representative of the Company's
majority shareholder, the Government. As a result, the Department of
Telecommunications controls the Company and has the power to elect its Directors
to determine the outcome of actions requiring approval of the Company's Board of
Directors or shareholders. The Department of Telecommunications also has the
authority to exercise the special powers granted to the President of India under
the Company's Articles of Association. These include the right to appoint the
Company's Chairman and Managing Director and to issue directives with respect to
the Company's business. See "Item 10. Additional Information--Powers of the
President of India."
In March 1997, the Government first established the Telecom Regulatory
Authority of India ("TRAI"), an independent regulatory authority under the
provisions of the TRAI Act.
The TRAI Act was amended in 2000. The amended Act established two
independent authorities: the TRAI to regulate telecommunication services and the
Telecom Disputes Settlement and Appellate Tribunal (the "TDSAT") to adjudicate
disputes, disposal of appeals and to protect the interest of telecommunication
service providers and consumers. The regulatory functions of the TRAI fall
within two broad categories -- (1) recommendatory and (2) mandatory.
The recommendatory functions may be exercised either suo moto or on
request from the licensor on the following matters: (1) need and timing for
introduction of new service providers; (2) terms and conditions of licences to
service providers; (3) revocation of licences for non-compliance with the terms
and conditions of the licence; (4) measures to facilitate competition and
promote efficiency in the operation of telecommunication services; (5)
technological improvements in the services provided by the service providers;
(6) type of equipment to be used by the service providers; (7) measures for the
development of telecommunication technology and any other matter related to the
telecommunication industry in general; (8) efficient management of the available
spectrum.
The mandatory functions of TRAI include the following: (1) ensure
compliance of terms and conditions of licenses; (2) fix the terms and conditions
of inter-connectivity arrangements between service providers; (3) ensure
technical compatibility and effective inter-connection between different service
providers; (4) regulate revenue sharing arrangements among service providers;
(5) lay down standards of quality of service to be provided by service providers
and ensure the quality of service and conduct and periodically survey such
service in order to protect the interest of the consumers; (6) lay down and
ensure the time period for providing local and long distance circuits between
different service providers; (7) maintain register of interconnect agreements
and of all such other matters as may be provided in the regulations; (8) keep
such register open for inspection; and (9) ensure effective compliance of
universal service obligations.
The TRAI also has the authority to levy fees and other charges at such
rates and in respect of such services as may be determined by regulations and to
perform such other functions including such administrative and financial
functions as may be entrusted to it by the Government or as may be necessary to
carry out the provisions of the TRAI Act.
The recommendations of the TRAI with respect to the matters referred to
above are not binding upon the Government. However, the Government must seek the
recommendations of the TRAI in relation to the following matters: (1) need and
timing for introduction of new service providers; and (2) terms and conditions
of new licences given to a service provider. The TRAI is required to forward its
recommendations with respect to these matters to the Government within a period
of 60 days from the date on which such recommendations are sought or such
extended time as may be mutually agreed to between the Government and the TRAI.
37
The TRAI has the authority to request the Government to furnish such
information or documents as may be necessary for the purpose of making
recommendations and the Government is obliged to furnish such information within
seven days of such request from TRAI. In the event that the Government comes to
a prima facie conclusion that the recommendations of TRAI with respect to these
matters cannot be accepted or need modification, the Government is required to
refer the recommendations back to the TRAI for its reconsideration and the TRAI
may, within 15 days from the date of receipt of such reference, forward to the
Government its recommendations after considering the reference made by the
Government and the Government shall make its final decision after receipt of
such recommendation from the TRAI.
The TDSAT has jurisdiction to adjudicate any dispute between a licensor
and a licensee, between two or more service providers, or between a service
provider and a group of consumers. The TDSAT also has the jurisdiction to hear
and dispose of appeals against any direction, decision or order of the TRAI.
The Communication Convergence Bill 2001, introduced in the Parliament
in August 2001, envisages the creation of the Communications Commission of India
("CCI") which would be an all-encompassing umbrella body to look into licensing,
spectrum management, dispute resolution and determination of regulation codes,
technical standards, tariffs, rates for licensed services as well as determine
the conditions for fair, equitable and non-discriminatory access to network
facility and service. It would also have the powers of a civil court under the
Code of Civil Procedure, 1908.
LICENSE
Pursuant to the Telegraph Act, the provision of any telecommunication
services in India requires a license from the Government, obtained through the
Department of Telecommunications.
The Company operates substantially all of the services it provides
under a single license (the "License") initially granted by the Department of
Telecommunications to the Company upon its establishment in 1986. The License
identifies specific services that the Company is permitted to provide, which
encompass all of the services currently provided by the Company, other than
Internet services. The License initially granted to the Company was effective
for a five-year period ended March 31, 1991. The term of the License was
subsequently extended four times, first until March 31, 1993, then until March
31, 1994, then until March 31, 1999, and most recently, until March 31, 2004,
each time with minor expansions to the scope of services which the Company was
permitted to offer. In January 1999 the Company received a letter from the
Department of Telecommunications stating that the Company is the only entity
authorized by Government of India to provide basic international telephony
services to and from India until 2004. However, in September 2000, the
Government announced the early termination of the Company's monopoly in
international telephony services. Thus, instead of ending on March 31, 2004, the
Company's monopoly will now end on March 31, 2002. To offset the likely loss to
the Company due to the early termination of monopoly, the Government has
announced the following compensation package:
(1) Grant of a license to offer Domestic Long Distance services with
the following terms:
(a) Government would pay to the Company a sum equal to the
amount paid by the Company as entry fee and license fee for
a period of 5 years commencing from April, 2001, net of
taxes; and
(b) Performance Bank Guarantee of Rs.4 billion for the
prescribed roll out will be waived;
(2) The Company will be granted a Category `A' ISP license which will
enable it to provide Internet access at locations across the
country; and
(3) The Government may also consider additional compensation if found
to be necessary based on a detailed review when undertaken.
38
On May 2, 2001, in an Extraordinary General Meeting the shareholders
passed a resolution requisitioned by the Government, the majority shareholder,
accepting the above compensation package. The Company has subsequently been
granted a Category "A" ISP license to provide Internet access at locations
across the country. However, the Company has not yet applied for the license to
provide domestic long distance telephony services and there can be no assurance
that the license will be granted under this compensation package. No payments
have been made by the Government to the Company from April 2001 towards the
entry fee and license fee since the Company has not yet paid such amounts
towards domestic long distance services.
The License requires the Company to share with the Department of
Telecommunications revenues from international telecommunication services in the
manner specified by the Department of Telecommunications from time to time. In
February 1997, the Company and the Department of Telecommunications agreed to a
revenue sharing arrangement, which covers the period from April 1, 1997 to March
31, 2002. The revenue sharing arrangement provides for the retention or receipt
by the Company of a fixed amount per call minute, and provides the Company with
a degree of protection from adverse changes in settlement rates and exchange
rate fluctuations. Starting in the year ended March 31, 2000, decreases in
combined international call revenue, if any, will be shared by the Company and
Bharat Sanchar Nigam Limited with effect from October 1, 2000. Bharat Sanchar
Nigam Limited has stated that no change to the revenue sharing arrangement is
currently contemplated. See "--Traffic Revenue and Revenue Sharing
Arrangement--Revenue Sharing Arrangement."
The Department of Telecommunications retains the right to modify the
terms and conditions of the License (including the Company's monopoly status) 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 Department of Telecommunications may also terminate the License
before its scheduled expiration upon breach by the Company of any of its terms.
In addition, the Department of Telecommunications retains certain rights under
the License to receive telecommunication services on a priority or emergency
basis. Under the Telegraph Act, the Government and state governments also have
the right to take possession and/or control of the Company's facilities and
business in cases of public emergency or in the interest of public safety. The
Government also has the power to intercept communications carried by the
Company, subject to certain constitutional safeguards.
The Company began offering Internet access services in August 1995, and
the Company operates 12 main Internet access nodes. The Company also provides
Bharat Sanchar Nigam Limited with Internet connectivity at approximately 60
remote access nodes owned by Bharat Sanchar Nigam Limited (formerly the
Department of Telecommunications), although the Company and Bharat Sanchar Nigam
Limited have not yet finalized the terms and conditions under which they will
share the related revenue. In November 1998, the Government opened the Internet
service provider market to private competition, and the Department of
Telecommunications instituted a mandatory license requirement for the provision
of Internet services. The Company entered into a license agreement with the
Department of Telecommunications on January 25, 1999 with effect from the same
day, under which the Company was granted a license to provide Internet services
in Delhi, Mumbai, Kolkata, Chennai, Bangalore and Pune on a non-exclusive basis.
The Company has been granted a license from the Department of
Telecommunications to provide Internet services on an All-India basis by a
communication dated November 22, 2000. The terms of the Company's Internet
license are generally consistent with the policy for licensing Internet service
providers. The term of the license is 15 years. The license can be revoked by
the Department of Telecommunications if the Company breaches the terms and
conditions of the Internet license. The Department of Telecommunications retains
the right to modify the terms and conditions of the Internet 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 or
for security considerations. The Department of Telecommunications also retains
the right to review the terms of the Internet license based on changes in
national telecommunications policy. The Company is not allowed to assign or
transfer its rights under the Internet license without the prior written consent
of the Department of Telecommunications. Although under the terms of the
Internet license the Company is free to fix the tariff charged to its
subscribers, the TRAI could set a tariff for the provision of Internet access
services generally. See "--Government Regulations--Rates." License fees are
waived through October 31, 2003, and a nominal license fee of Rs.1 per annum is
payable from November 1, 2003.
39
RATES
The Company does not control the rates charged to end users of its
international telecommunication services. The rates for such services are
established and collected by the relevant foreign telecommunications
administration or carrier for international calls originating (and billed)
outside of India and by the Bharat Sanchar Nigam Limited for international calls
originating (and billed) in India.
The Company and the Department of Telecommunications share revenues
received by each entity from international calls pursuant to a revenue sharing
arrangement between the two entities, and the Company receives settlement
payments with respect to international calls from, or makes such payments to,
foreign telecommunications administrations and carriers based on applicable
accounting rates. See "--Traffic Revenue and Revenue Sharing Arrangement."
The License provides that the tariffs for all services offered by the
Company are subject to the approval of the Department of Telecommunications. The
Memorandum of Understanding signed by the Company and the Department of
Telecommunications each year, however, has permitted the Company to establish
the rates for its specialized services, such as leased lines. Inmarsat mobile
services, Internet access services, electronic mail and facsimile forwarding
services, services through which subscribers may exchange data with users of
other data networks and video conferencing, subject to filing with TRAI.
In June 1995, the then Department of Telecommunications introduced an
off-peak discount of between 17 and 25 percent for international calls made
between 11:00 p.m. and 6:00 a.m. In May 1999, the then Department of
Telecommunications issued a tariff order pursuant to which international and
domestic long distance tariffs have been reduced by approximately 30%.
International telephone call rates are ranging from approximately Rs.24 to Rs.60
per minute.
THE TARIFF ORDER 1999
Effective May 1, 1999, the TRAI implemented the telecommunication
tariff Order 1999 ("TTO"), which reduced the tariffs that telecommunications
service providers may charge with the intended effect of protecting consumers by
aligning tariffs that the telecommunications providers may charge with the cost
of the applicable service provided while ensuring the commercial viability of
the various service providers so as to encourage the expansion of the Indian
telecommunications industries. The tariff order reduced the maximum charge per
pulse (or metered unit) from Rs.1.40 to Rs.1.20, increased monthly line rental
rates for high use subscribers, decreased local call pulse durations (thereby
effectively increasing the local call charges) and increased domestic and
international call pulse durations (thereby effectively reducing long distance
and international call charges). The tariff order allows providers the
flexibility to set tariffs below the maximum levels. The tariff order also
specifies further reductions in domestic and international long distance and
internal call tariff and other tariff adjustments implemented in the year
2000-2001. Accordingly, TRAI for second phase of tariff re-balancing has
notified reduced tariffs of 9 to 20 percent for international long distance
calls effective from October 1, 2000 to March 31, 2002. Based on the TRAI order,
Bharat Sanchar Nigam Limited has revised tariffs for long distance and
international call charges effective from October 1, 2000.
ORGANIZATIONAL STRUCTURE
The Company has no subsidiaries as of the date of this annual report.
40
PROPERTY, PLANTS AND EQUIPMENT
DESCRIPTION OF PROPERTY
The following table sets forth the principal real properties owned or
leased by the Company that were used in its operations as of March 31, 2001.
LOCATION FUNCTION AREA (ACRES) OWNED/LEASED
-------- -------- ------------ ------------
MUMBAI
Fort VSB Company's registered office 0.3 Owned
Mumbai gateway
Prabhadevi LVSB Undersea cable station 1.8 Owned
Switching facilities
Vashi Infotech Park 0.039 Leased
Mahape Millenium Business Park 3.115 Leased
NEW DELHI
VSB Connaught Place Delhi gateway 1.0 Owned
Greater Kailash Satellite earth station 127.4 Owned
Chattarpur Satellite access node (under 126.0 Owned
construction)
Dasghara Repeater station 1.0 Leased
Meerut Repeater station 1.0 Owned
JALANDHAR
JP Nagar Jalandhar gateway 0.5 Owned
KOLKATA
Halisahar Kolkata earth station 82.2 Owned
Ultadanga Switching facilities 1.7 Owned
SDF Salt Lake Switching facilities 1.7 Leased
CHENNAI
Adams Road Chennai gateway 2.0 Owned
Korathur Earth station 37.08 Owned
ERNAKULAM
Shive Ernakulam gateway 1.5 Owned
PUNE
Dighi Pune gateway 774.5 Owned
Arvi Satellite earth station 228.0 Owned
BANGALORE Satellite earth station 0.4 Leased
ITPL IT Park 0.104 Leased
DEHRADUN
Ahmed Satellite earth station 75.4 Owned
Purkaji Repeater station 1.138 Owned
Daurala Repeater station 1.784 Owned
Muzaffarnagar Repeater station 1.5 Owned
Roorkee Repeater station 1.5 Owned
Mussoorie Repeater station 2.487 Owned
KANPUR Kanpur gateway 2.0 Leased
PATNA Earth Station 0.094 Leased
In addition to the above, the Company has staff quarters at the locations
wherever it has its operations.
None of the above described properties are subject to a major lien or
encumbrance.
Upon the establishment of the Company in 1986, all of the assets and
properties of the Overseas Communications Service were transferred to it by an
order of the Government of India which contemplated that details of the transfer
would be set forth in a transfer deed. A formal transfer deed has not been
executed. While the order of the Government was sufficient to transfer to the
Company valid title to all of the non-real estate assets of the Overseas
Communication Service, Indian law generally requires that transfers of real
estate be evidenced by a formal deed of transfer and registered with a central
land registry within a certain period after the transfer in order to protect the
transferee against subsequent claims by third parties. Since the transfer of the
real estate from the Overseas Communications Service to the Company has not been
41
executed or registered, the Company has been advised by its Indian counsel that,
even if a transfer deed is registered, the Company's title to its real property
may be subject to potential claims of third parties in respect of the period
prior to the date of registration of the deed. The Company does not anticipate
any such claims.
Indian law requires payment of stamp duty (at rates which vary among
states) on instruments which effect transfer of title to real estate. The formal
transfer deed, if executed, may be subject to stamp duty at rates ranging from
approximately three to 14 percent of the fair market value of the real estate
transferred. Such stamp duty may be payable by the Company.
As of March 31, 2001, the Company operated eight gateways at Mumbai,
Kolkata, Delhi, Chennai, Ernakulam, Gandhinagar, Jalandhar and Kanpur which
provide substantially all the connectivity for the Company's services to the
international telecommunications network. The Company's international traffic is
carried via international satellite links and or by undersea cables.
The following table sets forth, as of March 31, 2001, the major
facilities, links and circuits at each main gateway, at the three earth stations
at Bangalore and at the earth station located near Pune.
NUMBER OF EFFECTIVE CIRCUITS
GATEWAY FACILITIES LINK VOICE DATA
------- -------------------- ----------------------------------------- --------- ------
MUMBAI Vikram-1 Satellite Intelsat Atlantic Ocean Region ("AOR") 1,702 79
Earth Station Satellite (359(0))(1)
Vikram-2 Satellite Intelsat Indian Ocean Region ("IOR") 1,957 55
Earth Station Satellite (60(0))(1)
Vikram-4 Satellite Intelsat TOR Satellite (66(0))(1) 0 0
Earth Station
Vikram-5 Satellite Intelsat IOR Satellite (64(0))(1) 208 8
Earth Station
Jawahar Satellite Intelsat IOR Satellite (64(0))(1) 0 0
Earth Station
Arvi Land Earth Immarsat IOR Satellite (64.5(0))(1) 120 0
Station
India-U.A.E. Mumbai-Fujiarah (U.A.E.) 1,081 0
Undersea Cable
System (Gulf Cable)
SEA-ME-WE 2 Singapore, Indonesia, Sri Lanka, India, 4,099 461
Undersea Optical Djibouti, Saudi Arabia, Egypt, Turkey,
Fibre Cable System Cyprus, Italy, Tunisia, Algeria and
France
Fibre Optic Link Japan, Korea, China, Hong King, 2,525 482
Around the Globe Thailand, Malaysia, India, U.A.E.,
Undersea Optical Egypt, Saudi Arabia, Italy, Spain and
Fibre Cable System United Kingdom
SMW-3 Undersea Japan, S. Korea, China, Taiwan, Hong 362 1,693
Optical Fibre Cable Kong, Philippines, Vietnam, Brunei,
System Malaysia, Singapore, Thailand,
Indonesia, Australia, Sri Lanka, India,
Pakistan, UAE, Oman, Saudi Arabia,
Egypt, Djibouti, Cyprus, Turkey,
Greece, Italy, Portugal, France, UK, 0 107
Belgium, Germany
Intelsat IOR Satellite (66(0))(1)
42
KOLKATA Kolkata Satellite Intersputnik Express IOR Satellite 8 0
Earth Station (80(0))(1)
Bose-1 Satellite Intelsat IOR Satellite (64(0))(1) 822 64
Earth Station
Bose-4 Satellite Intelsat IOR Satellite (62(0))(1) 120 0
Earth Station
DELHI Ahmed Satellite Intelsat IOR Satellite (62(0))(1) 2,274 319
Earth Station
Ahmed Satellite Intelsat IOR Satellite (57(0))(1) 0 0
Earth Station(2)
Greater Kailash Intelsat IOR Satellite (64(0))(1) 232 57
Satellite
Earth Station
New Delhi Satellite Intelsat IOR Satellite (64(0))(1) 0 0
Earth Station
Coaxial Cable System The Department of Telecommunications 30 0
CHENNAI Indian Ocean Chennai-Penang (Malaysia) 323 0
Commonwealth
Undersea Cable
("IOCOM")
Chennai Satellite Intelsat IOR Satellite (66(0))(1) 0 0
Earth Station(2)
Thiruvalluvar Intelsat IOR Satellite (64(0))(1) 1,391 252
Satellite Earth
Station
43
ERNAKULAM Ernakulam Satellite Intelsat IOR Satellite (60(0))(1) 793 0
Earth Station
SMW-3 Undersea Japan, S. Korea, China, Taiwan, Hong 1,299 996
Optical Fibre Cable Kong, Philippines, Vietnam, Brunei,
System Malaysia, Singapore, Thailand,
Indonesia, Australia, Sri Lanka, India,
Pakistan, UAE, Oman, Saudi Arabia,
Egypt, Djibouti, Cyprus, Turkey,
Greece, Italy, Portugal, France, UK,
Belgium, Germany
GANDHINAGAR Gandhinagar Intelsat IOR Satellite (64(0))(1) 210 0
Satellite
Earth Station
JALANDHAR Jalandhar Satellite Intelsat IOR Satellite (64(0))(1) 671 0
Earth Station
BANGALORE Sona Towers Intelsat IOR Satellite (64(0))(1) 0 19
Satellite Earth
Station
Aeronautical Intelsat IOR Satellite (62(0))(1) 0 241
Development Agency
Satellite Earth
Station
Information Intelsat IOR Satellite (64(0))(1) 0 79
Technology Park
Ltd. Satellite
Earth Station
PUNE Information Intelsat AOR Satellite (359(0))(1) 0 4
Technology Park
Ltd. Satellite
Earth Station
KANPUR Kanpur-1 Satellite Intelsat IOR Satellite (64(0))(1) 268 0
Earth Station
TOTAL EFFECTIVE CIRCUITS 20,495 4,916
====== =====
(1) The satellite degrees referred to in the table denote the degree at which
the Company's earth station antenna point at the satellite and at which
they transmit and receive communications.
(2) Facilities used exclusively for television broadcasting services.
CIRCUITS
As of March 31, 2001, the Company operated 20,495 effective
international voice circuits, of which 10,776 were satellite circuits and 9,719
were cable circuits. As of such date, the Company had digital connections with
244 of the foreign administrations and carriers with which it had direct links.
The Company intends to establish digital connections with the remainder of the
foreign administrations and carriers with which it has direct links when such
administrations and carriers upgrade their facilities. From April 1, 2000 to
March 31, 2001, the Company recorded an average of 437 international paid
minutes per day per circuit, compared to an international norm of approximately
250 paid minutes per day per circuit.
44
The Company's policy is to maintain a sufficient number of
international circuits so that no more than one percent of call attempts are
blocked due to lack of an international circuit. The Company, through the
acquisition of additional circuits, is also seeking to reduce the average number
of international paid minutes carried per day per circuit from 437 to levels
closer to the international norm.
The Company meets periodically with most of its correspondent foreign
telecommunications administrations and carriers, either bilaterally or through
conferences organized by satellite or cable consortia, to project future demand
for international circuits between India and other countries, to allocate
capacity on existing telecommunications satellites and undersea cables and to
plan for expanding capacity to meet future demand.
SATELLITES. As of March 31, 2001, the company operated a total of
10,776 satellite voice circuits and 1,284 satellite data circuits through 14
earth stations at its eight gateways, two earthstations located at Bangalore and
its earth station located in Pune. Satellite capacity is obtained from
International Telecommunications Satellite Organization ("Intelsat") and
International Mobile Satellite Organization ("Inmarsat"), two satellite
consortia established by national telecommunications administrations for the
purpose of owning and operating satellite communication systems. As of March 31,
2001, the Company had an interest of approximately 5.42 % in Intelsat.
Telecommunications administrations and carriers from 145 countries have
investment shares in Intelsat. Intelsat charges international telecommunications
administrations and carriers for the use of their satellites in order to meet
its operating expenses and amortization costs. Any surplus then remaining is
distributed annually to consortium members based on their respective ownership
share in Intelsat.
Intelsat had been privatized with effect from July 18, 2001. The
holding company is known as Intelsat Ltd., incorporated in Bermuda. After
conversion, the Company holds 5.4 % (27,045,940 shares of par value US $ 1 each)
in Intelsat. The Chairman and Managing Director of the Company is a member of
the Board of Directors of Intelsat Ltd.
During 1998-99, Intelsat as part of its restructuring process
incorporated New Skies Satellite (NSS) as a corporation with limited liability
under the laws of Netherlands and transferred certain assets and liabilities to
NSS accounted for at historic book values. In return, NSS issued 10, 000,000
shares of common stock of Dutch Guilder 1 each to Intelsat. Intelsat distributed
9,000,000 shares of NSS in the year 1998-99 and 1,000,000 shares of NSS in
1999-2000 in proportion to the investment share of its members at the time of
distribution. Consequently, the Company acquired 301,215 shares in 1998-99 and
43,000 shares in 1999-2000. NSS announced a 10: 1 stock split prior to its
initial public offer (IPO) in October 2000 and redesignated its shares from
Guilders to Euros. Thus, the Company's total holding in NSS as of March 31, 2001
stands at 3,442,150 ordinary shares of 0.05 Euros each. The market value per
share as of March 30, 2001 was US $ 7.75 per share.
The intergovernmental organization Inmarsat was privatized on April 15,
1999. The Company's shareholding in Inmarsat Ventures Plc, (formerly Inmarsat
Holdings Limited) is in proportion to its investment share in privatization
which is 2.02 %.
UNDERSEA CABLES. As of March, 31, 2001, the Company operated a total of
9,719 effective voice circuits and 3,632 data circuits on undersea cables
landing in India. The Company has ownership interests and access to capacity in
undersea cables interconnecting the South Asia region, as well as those linking
the region with Europe, North America and Asia/Pacific. The Company holds a 47.5
percent ownership interest in the analog IOCOM cable between Chennai, India and
Penang, Malaysia and as of March 31, 2001 was operating approximately 323 of its
total capacity of 480 circuits. The Company also holds a 50 percent ownership
interest in an analogue undersea cable between Mumbai and Fujiarah, U.A.E.,
which has a total capacity of 1,380 circuits, of which 1,081 were being used as
of March 31, 2001.
The Company also holds an interest of approximately 10 percent in the
South East Asia-Middle East-Western Europe 2 optical fiber cable, which lands in
13 countries between Singapore and France, including India. This cable, which
became fully operational in June 1994, was operating 4,099 and 461 effective
high speed circuits as of March 31, 2001. In addition to expanding significantly
the number of international circuits available to the Company, this cable has
also led to an improvement in the Company's international services, since fiber
optic cables provide relatively higher quality transmission than satellites and
enhance the Company's ability to offer high quality, high capacity digital data
transmission services.
45
The Company entered into a Construction and Maintenance Agreement with
other international telecommunications carriers for the construction of the
South East Asia-Middle East-Western Europe 3 (SEA-ME-WE 3), a high capacity
undersea optical fiber cable extending from Germany to Japan and Australia that
lands in a total of 33 countries (including India, with landing points at Mumbai
and Cochin). The Company made a provision of Rs.2.5 billion (US$53.36 million)
investment in this cable in its revised Ninth Plan and the Company has acquired
a 3.5 percent interest in the cable. This cable added a total of approximately
11,340 Voice Circuits to the Company's transmission capacity from Mumbai and
Cochin out of which a total of 10,901 circuits were utilized as of March 31,
2001. This cable operated at a total of 362 effective Voice and 1,693 Data
circuits from Mumbai as also 1299 effective Voice and 996 Data circuits
respectively from Cochin as of March 2001.
The Company has in addition purchased 4,650 circuits in the Fibre Optic
Link Around the Globe (FLAG-Europe Asia) cable system, a high capacity fiber
optic cable with 19 landings in 13 countries (including India) linking Asia and
Europe. This cable system was commissioned in December 1997. As of March 31,
2001, 3,007 of the Company's purchased circuits on this cable system were in
use.
The Company also has ownership interests in various undersea cables
that do not land in India, but which provide connections between various
locations served by the Company. These cables include the Trans-Atlantic 12/13
Cable (connecting the United Kingdom, France and the United States), the
Trans-Pacific Cable (connecting the United States, Canada and Japan), the Asia
Pacific Cable (Segment S-J) (connecting Singapore and Japan) and the Columbus
2-America 1 Cable (connecting Italy and the United States). In addition to its
direct ownership interests in such undersea cables, the Company has purchased
indefeasible rights of use guaranteeing access to other undersea cables in the
Atlantic and Pacific Oceans.
SWITCHES
As of March 31, 2001, the Company had the capacity to connect 37,271
international telephone, 2,386 telex and 198 telegraph circuits or channels to
its switches. Substantially all of the Company's telephone capacity is digital,
provided by 12 digital switches installed at the Company's eight gateways. Each
gateway is linked to the other gateways via dedicated digital lines leased from
Bharat Sanchar Nigam Limited, which permits multiple routing options for each
call and provides the system with back-up capability in case of equipment
failure or over-crowding at any gateway. The switches operated by the Company
are supplied by Ericsson and NEC.
With a view to obtaining secure and competitive supplies, the Company
procures equipment from a wide range of sources, and the Company considers that
in all major areas of procurement there are sufficient alternative suppliers to
make it unlikely that interruption of supply from any one source would cause
more than a temporary delay in the implementation of the Company's plans.
OTHER FACILITIES
In addition to the circuits and switches described above, the Company's
infrastructure includes various facilities used primarily for its specialized
and value-added services. As of March 31, 2001, the Company owned five high
capacity underground fiber optic cables between Pune and Chennai, approximately
50 earth stations, six terrestrial radio communication wires connecting the
Company's international switches with its earth stations and a variety of
hardware used for the Company's six main Internet access nodes.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of the results of operations and financial
condition of the Company for the fiscal years ended March 31, 1999, 2000 and
2001 should be read in conjunction with the financial statements of the Company
and the Notes thereto included elsewhere herein. The following discussion is
based on the Company's audited financial statements for the fiscal years ended
1999, 2000 and 2001, which have been prepared by the Company in accordance with
US GAAP.
46
OPERATING RESULTS
The following table sets forth information regarding the Company's
operating data for the fiscal years ended March 31, 1999, 2000 and 2001.
YEARS ENDED MARCH 31,
---------------------------------------------------------------
1999 2000 2001
-------------------- -------------------- ---------------------
Paid telephone minutes (millions).............
Incoming...................................... 1,499 1,773 2,161
Outgoing...................................... 436 473 527
Total...................................... 1,935 2,246 2,688
Ratio (incoming/outgoing)..................... 3.44 3.75 4.10
Average revenue received from Bharat
Sanchar Nigam Limited for outgoing
telephone calls ...
(Rs./minute)................................. 41.84 38.85 34.81
Average settlement rate received from foreign
administrations for incoming telephone calls..
(Rs./minute).................................. 29.24 25.47 21.60
(US$/minute)(1)............................... 0.69 0.58 0.46
------------------
(1) Translated at the average of the Market Rates on the last day of each month
during the period which was Rs.42.50, Rs.43.65 and Rs. 46.85 per US$ for
the fiscal years ended March 31, 1999, 2000 and 2001 respectively.
The following table sets forth information regarding the Company's
operating revenue for the fiscal years ended March 31, 1999, 2000 and 2001.
YEARS ENDED MARCH 31,
------------------------------------------------------------------------
1999 2000 2001 2001
----- ---- ---- ----
(RS. IN MILLIONS) US$ in millions
------------------------------------------------- -----------------
OPERATING REVENUE
Incoming telephone............. 43,834 45,161 46,674 996
Incoming telex................. 186 128 112 2
Outgoing telephone............. 18,243 18,375 18,345 392
Outgoing telex................. 173 175 112 2
Leased circuits................ 2,499 2,986 3,140 67
Internet access services....... 1,733 2,095 2,980 64
Other revenue.................. 513 720 553 12
------ ------ ------ -----
Total traffic revenue.......... 67,181 69,640 71,916 1,535
====== ====== ====== =====
REVENUE
The principal components of the Company's revenue are (1) payments from
foreign telecommunications administrations and carriers for incoming traffic
(prior to deducting amounts payable by the Company for outgoing traffic), which
are typically denominated in mostly Special Drawing Rights ("SDRs") or Dollars,
and (2) payments from Bharat Sanchar Nigam Limited for outgoing traffic (prior
to deducting amounts payable by the Company for incoming traffic), which are
denominated in Rupees. The major factors influencing revenue include traffic
volume and its composition in terms of incoming and outgoing calls and country
of origination and destination, the revenue sharing arrangement with Bharat
Sanchar Nigam Limited, accounting rates negotiated with foreign administrations
and the Rupee/SDR and the Rupee/Dollar exchange rates. See "Item 4. Information
on the Company--Traffic Revenue and Revenue Sharing Arrangement."
47
TELEPHONE REVENUE. Revenue from telephone traffic historically has
constituted the most substantial component of the Company's revenue, accounting
for 92.40, 91.23 percent and 90.41 percent of revenue for the fiscal years,
1999, 2000 and 2001, respectively. The decline in telephone traffic revenue as a
percentage of total revenue is due primarily to the increasing revenue
contribution from specialized and value-added services such as Internet access
and international leased lines.
Telephone revenue grew by 2.35 percent during fiscal 2000 and by 2.33
percent during fiscal 2001, reflecting increases in total call volumes (as
measured in paid telephone minutes) of 16.07 percent and 19.68 percent,
respectively. Incoming call revenue increased by 3.03 percent during fiscal 2000
and by 3.35 percent during fiscal 2001 primarily as a result of increases in
incoming call volume of 18.28 percent and 21.88 percent, respectively, and the
depreciation of the Rupee against the SDR and the Dollar which increased in
Rupee terms the amount of foreign currency received from foreign administrations
and carriers. This increase was in spite of reductions in accounting rates
between the Company and foreign administrations and carriers in the same period.
The average settlement rate received from foreign administrations and carriers
in respect of incoming telephone traffic for fiscal 1999, 2000 and 2001
decreased in Dollar terms from US$0.69, to US$0.58 and to US$0.46 minute,
respectively as a result of decreases in accounting rates applicable to the
Company.
Outgoing call revenue increased by 0.72 percent during fiscal 2000 due
to an increase in outgoing call volume of 8.49 percent; Outgoing call revenue
decreased by 0.16 percent in fiscal 2001 despite an increase in call volume of
11.42 percent (due primarily to decreases in the applicable accounting rates.)
The increases in incoming call volume in fiscal 2000 and fiscal 2001
were attributable, among other things, to decreases in average tariff rates for
international calls charged by foreign administrations and carriers, including
those in the United States, which resulted in part from decreases in accounting
rates. See "Item 4. Information on the Company--Traffic Revenue and Revenue
Sharing Arrangement--Payments to and from Foreign Administrations or Carriers."
Increases in incoming call volume are also attributable to the increasing volume
of calls from India made through call-back and home country direct services,
which calls are billed outside of India and are therefore treated as incoming
calls. The increases in outgoing call volume in such periods were attributable
principally to the expansion and upgrading of the domestic telephone network
which resulted in improved access to the Company's international telephone
services and to the reduction in tariffs for outgoing international calls.
The ratio of incoming to outgoing calls increased steadily from 3.44 in
fiscal 1999, to 3.75 in fiscal 2000 and to 4.10 in fiscal 2001. Such increases
in the ratio of incoming to outgoing calls are due, among other things, to
continuing decreases in average tariff for international calls charged by
foreign administrations and carriers, including those in the United States, as a
result of which it is cheaper to place a long-distance call to India from an
international destination than to place an international long-distance call from
India, and the effect of call-back and home country direct services.
The Company is facing further declines in international accounting
rates, particularly with US carriers. See "Item 4. Information on the Company
--Traffic Revenue and Revenue Sharing Arrangements--Payments to and from Foreign
Administrations or Carriers." Declines in tariff rates for telephone services
offered by the Company, including an approximately 27 percent reduction in peak
international call tariffs for fiscal 2000, have also been mandated by the TRAI.
TRAI has also mandated a further 23 percent reduction in peak international call
tariffs over the two fiscal years ended 2002. Accordingly, the TRAI has mandated
a further reduction in tariffs of 16 to 20 percent for international long
distance calls. Such reduced tariffs are between October 1, 2000 and March 31,
2002. See "Item 3. Key Information--Risk Factors--Tariff Reform." While further
declines in tariff rates can be expected to increase traffic volume, there can
be no assurance that lower tariff rates will not lead to unfavorable revisions
to the revenue sharing arrangement with Bharat Sanchar Nigam Limited or
otherwise adversely affect the Company's business and prospects.
TELEX REVENUE. Total revenue from telex services decreased from Rs.359
million in fiscal 1999, to Rs.303 million in fiscal 2000 and to Rs.224 million
(US$4.78 million) in fiscal 2001. Such decreases are attributable principally to
a decline in telex traffic volume as customers switched from using telex
services to other forms of communication such as facsimile, telephone and
E-mail. Telex revenue accounted for 0.53 percent of total traffic revenues in
fiscal 1999, 0.44 percent in fiscal 2000 and 0.31 percent in fiscal 2001.
48
LEASED CIRCUITS REVENUE. Revenue from leased circuits increased by
19.49 percent during fiscal 2000 and by 5.16 percent during fiscal 2001.
Increase in revenue from leased circuits is lower as compared to the increase in
the number of customers due to the drastic reduction in tariffs over the period.
INTERNET ACCESS SERVICES REVENUE. Internet access services were first
introduced by the Company in India in August 1995. Revenues from Internet
services were Rs.1,733 million, Rs.2,095 million and Rs 2,980 million (US$64
million) during fiscal 1999, fiscal 2000 and fiscal 2001, respectively, an
increase of 20.89 percent and 42.24 percent during fiscal 2000 and fiscal 2001,
respectively. The Company's Internet subscribers, inclusive of customers
connectd across the remote access nodes of Bharat Sanchar Nigham Limited, have
grown from 213, 045 as of March 31,1999 to 366,432 as of March 31, 2000 and had
reached 630,970 as of March 31,2001. Increase in Internet revenues is lower as
compared to increase in customers due to the drastic reduction in tariffs over
the period. The Company was initially the sole provider of Internet services in
India. However, the Government announced a new Internet policy in November 1998
which allows the entry of private Internet service providers. As of March 31,
2001, there were approximately 400 licensed Internet service providers in India.
See "Item 4. Information on the Company--Industry Overview--Recent
Developments."
In late 1998, the Department of Telecommunications instituted a
mandatory license requirement for the provision of Internet services. The
Company and the Department of Telecommunications entered into a license
agreement on January 25, 1999, with effect on the same day, under which the
Company was granted a license to provide Internet access service in six cities
on a non-exclusive basis.
OTHER REVENUE. Other traffic revenues include revenues from services
such as the transmission of television signals, telegraph services, electronic
mail and facsimile forwarding services, services through which subscribers may
exchange data with users of other data networks, electronic data interchange,
and video conferencing. Revenue from these sources accounted for 0.76 percent in
fiscal 1999, 1.03 percent in fiscal 2000 and 0.77 percent in fiscal 2001.
ACCOUNTING RATES. The Company has concluded its annual negotiations
with its US correspondent carriers and with other major foreign correspondent
carriers and administrations with respect to accounting rates applicable to
fiscal 2001. The Company recorded revenues on its incoming calls and costs on
its outgoing calls for the year ended March 31, 2001 at the accounting rates at
which final settlement was reached.
INCOME FROM SATELLITE CONSORTIA. This income accrues from investment in
satellite consortia, which are on account of amounts paid to Intelsat for the
use of its satellites, which are paid to the signatories in the form of
compensation for the use of Capital. Such income decreased by 2.64 percent in
fiscal 2000- and increased by 57.39 percent in fiscal 2001. The increase was on
account of additional special distribution on account of the privatization of
Intelsat.
OPERATING COSTS
The principal components of the Company's operating costs are network
and transmission costs, other operating costs and the license fee paid to
Department of Telecommunications.
The following table sets forth certain information regarding the
components of the Company's operating costs for the fiscal years ended March
31,1999, 2000 and 2001.
49
YEARS ENDED MARCH 31,
-----------------------------------------------------
1999 2000 2001
----------------- ----------------- -----------------
Average revenue sharing rate paid to Bharat Sanchar
Nigam Limited for incoming telephone calls .........
(Rs./minute)........................................ 18.28 16.46 12.53
Average settlement rate paid to foreign
administrations for outgoing telephone calls........
(Rs./minute)........................................ 32.33 26.33 23.81
(US$/minute)(1)..................................... 0.76 0.60 0.51
Network and transmission costs
(in millions).......................................
Transmission costs to Bharat Sanchar Nigam Limited(2) Rs.27,682 Rs.29,254 27,341
Transmission costs to foreign administrations(3).... 14,762 13,374 13,866
Other transmission costs............................ 2,695 2,993 3,943
----- ----- -----
Total............................................... 45,139 45,621 45,150
Other operating costs including depreciation (in
millions)........................................... 2,894 4,156 4,752
Government levy/license fee
(in millions)....................................... 4,157 4,712 5,022
----- ----- -----
Total operating costs (in millions)................. 52,190 54,489 54,924
====== ====== ======
--------------
(1) Translated at the average of the market rates on the last day of each month
during the period which was Rs.42.50, Rs.43.65 and Rs.46.85 per US$1.00 for
the fiscal years ended March 31,1999, 2000 and 2001 respectively.
(2) Out of such amounts, payments in respect of incoming telephone calls
amounted to Rs.27,405 million, Rs.29,176 million and Rs.27,079 million for
the fiscal years ended March 31, 1999, 2000 and 2001 respectively.
(3) Of such amounts, payments in respect of outgoing telephone calls amounted
to Rs.14,095 million, Rs.12,455 million and Rs.12,578 million for the
fiscal years ended March 31, 1999, 2000 and 2001 respectively.
NETWORK AND TRANSMISSION COSTS. Network and transmission costs include
transmission costs to Bharat Sanchar Nigam Limited for incoming traffic and to
foreign administrations and carriers for outgoing traffic (See "Item 4.
Information on the Company--Traffic Revenue and Revenue Sharing Arrangement"),
as well as the cost of leasing certain transmission facilities, including lines
from Bharat Sanchar Nigam Limited and satellite circuits from Intelsat, Inmarsat
and New Skies Satellites, NV.
Transmission costs to Bharat Sanchar Nigam Limited for incoming traffic
increased by 5.68 percent during fiscal 2000 while these costs have decreased by
6.54 percent during fiscal 2001, principally due to decrease in settlement rates
being higher than the increase in volume. The average revenue sharing rate paid
to Bharat Sanchar Nigam Limited per minute for incoming traffic decreased over
this period. Transmission costs to foreign administrations and carriers for
outgoing traffic decreased by 9.4 percent during fiscal 2000 due principally to
decrease in settlement rates. Payments to foreign administrations and carriers
for outgoing traffic increased by 3.68 percent in fiscal 2001 due to an increase
in call volume being higher than the increase in settlement rates. The average
settlement rate paid to foreign administrations and carriers decreased in US
Dollar terms from US$0.76, to US$0.60 per minute and to US$0.51 per minute, and
in Rupee terms from Rs.32.33, to Rs.26.33 and to Rs.23.81 per minute for the
fiscal years ending March 31, 1999, 2000 and 2001 respectively. This decrease
was primarily as a result of decreases in accounting rates applicable to the
Company.
The cost of leasing transmission facilities increased by 11.06 percent
and 31.74 percent during fiscal 2000 and fiscal 2001 respectively. Such
increases are attributable primarily to increases in both incoming and outgoing
call volume, which necessitated leases of additional lines and satellite
circuits.
OTHER OPERATING COSTS. Other operating costs consist of staff costs,
depreciation, energy costs and other costs, including for repairs, maintenance
and marketing. During fiscal 2000 other operating costs increased by 43.61
percent and during fiscal 2001 other operating costs increased 14.34 percent due
principally to greater expenditures relating to repairs and maintenance, spares
and electricity charges and substantial increases in staff costs.
50
LICENSE FEE. For fiscal 1999, fiscal 2000 and fiscal 2001 under the
current revenue sharing arrangement with the Department of Telecommunications,
the Company paid to the Department of Telecommunications a license fee of
Rs.0.25 million per circuit commissioned on average per annum. Under the current
revenue sharing arrangement with the Department of Telecommunications, the
amount of the license fee paid by the Company increased by 13.35 percent during
fiscal 2000 and by 6.58 percent due fiscal 2001 due to the addition of
commissioned circuits.
OPERATING PROFIT
The following table sets forth certain information regarding the
Company's gross telephone and operating profits for the fiscal years ended March
31, 1999, 2000 and 2001.
YEARS ENDED MARCH 31,
--------------------------------------------------
1999 2000 2001
---------------- ---------------- ----------------
Gross profit on telephone services (in millions)(1).... Rs.20,577 Rs.21,174 Rs.25,251
Gross profit per telephone minute...................... 10.63 9.43 9.39
Incoming(2).......................................... 9.92 12.54 8.99
Outgoing(2).......................................... 10.84 8.60 11.05
Operating profit (in millions)....................... 15,748 15,888 18,152
-----------------
(1) Telephone revenue net of revenue sharing payments to Bharat Sanchar Nigam
Limited for incoming telephone calls and settlement payments to foreign
administrations and carriers for outgoing telephone calls after prior year
adjustments.
(2) The actual gross profit per telephone minute with respect to incoming calls
from, and outgoing calls to, particular countries varies depending on the
settlement rates negotiated with the telecommunications administrations or
carriers of such countries.
Gross profit on telephone services increased 2.90 percent and 19.25
percent in fiscal 2000 and fiscal 2001 respectively. These increases are due
primarily to increases in total traffic volume of 16.07 percent and 19.68
percent, for the fiscal years ended March 31, 2000 and 2001 respectively. The
increase in gross profit on telephone services in fiscal 2000 and 2001 was
despite a 11.29 and 0.42 percent decrease in gross profit per telephone minute
due to drastic reductions in settlement rates and changes in traffic patterns.
Gross profit per telephone minute is the average of gross profit per
telephone minute for incoming and outgoing traffic, weighted by the ratio of
incoming to outgoing calls.
Gross profit per telephone minute for incoming traffic increased by
26.41 percent during fiscal 2000 and decreased by 28.31 percent during fiscal
2001 the Company due to an increase in losses borne by the Company in connection
with its revenue sharing arrangements with Bharat Sanchar Nigam Limited. In
fiscal 1998 the current revenue sharing arrangement came into effect, and under
the current revenue sharing arrangement, payments between the Company and Bharat
Sanchar Nigam Limited over the course of the fiscal year are based on settlement
rates and exchange rates prevailing at the beginning of the fiscal year. See
"Item 4. Information on the Company--Traffic Revenue and Revenue Sharing
Arrangement." During fiscal 2000 and fiscal year 2001, the fall in the
depreciation of the Rupee against the SDR and the US Dollar exceeded the fall in
the average incoming settlement rates. Consequently, the payments made by the
Company in fiscal 1999 and fiscal 2000 were based on lower incoming settlement
rates than the Company actually received from foreign administrations and
carriers during the course of the year. Coupled with the larger fall in the
value of the Rupee relative to incoming settlement rates the Company earned a
gross profit per incoming telephone minute that was higher than the Rs.10 per
minute provided under the revenue sharing agreement.
Gross profit per telephone minute for outgoing traffic decreased by
20.66 percent during fiscal 2000 and increased by 28.49 percent in fiscal 2001.
In fiscal 1999, fiscal 2000 and fiscal 2001, the Company was operating under the
current revenue sharing arrangement under which the payments between the Company
and Bharat Sanchar Nigam Limited are based on settlement rates and exchange
rates prevailing at the beginning of the fiscal year. See "Item 4. Information
on the Company-- Traffic Revenue and Revenue Sharing Arrangement." During fiscal
2000 and fiscal 2001, the depreciation of the Rupee against the SDR and the US
51
Dollar exceeded the fall in average outgoing settlement rates. Consequently, the
payments received by the Company from Bharat Sanchar Nigam Limited in fiscal
1999, 2000 and fiscal 2001 were based on lower outgoing settlement rates than
the Company actually paid to foreign administrations and carriers during the
course of the year. Coupled with the lesser depreciation of the Rupee against
the SDR and the US Dollar relative to the fall in average outgoing settlement
rates, the Company earned a gross profit per outgoing telephone minute that was
higher than the Rs.10 per minute provided under the revenue sharing arrangement.
Operating profit increased by marginally 0.89 percent during fiscal
2000. Operating profit increased by 14.25 percent during fiscal 2001 due to
primarily increase in gross profit on telephone services as well as revenues
from leased circuits, Internet access services, offset by increases in rent of
transmission facilities and other operating costs.
INVESTMENT AND OTHER INCOME
The following table sets forth certain information regarding the
components of the Company's investment and other income for the fiscal years
ended March 31, 1999, 2000 and 2001.
YEARS ENDED MARCH 31,
-------------------------------------------------
1999 2000 2001
---------------- ---------------- ---------------
(IN MILLIONS)
Revenue from Intelsat................................. 507 737 1,160
Revenue from Inmarsat................................. 250 - -
Profit / (loss) on sale of investments................ 10 86 (5)
Forex gains........................................... 3,168 1,449 2,878
Other income.......................................... 1,523 1,968 4,148
----- ----- -----
Total................................................. 5,458 4,240 8,181
===== ===== =====
The principal components of investment and other income are net foreign
exchange gains (comprised mainly of net gains arising from period-end
retranslations of settlement payments owed by foreign administrations and
carriers, as well as net gains realized upon receipt of such settlement
payments, and net gains arising from the retranslation of period-end cash
balances) and revenues from Intelsat and Inmarsat.
In April 1999, Inmarsat was restructured as a corporate entity and the
Company was allotted shares in lieu of its investment in Inmarsat. Consequently,
any future revenues from this investment will be in the form of dividends.
Investment and other income decreased during fiscal 2000 by 37.18 percent and in
fiscal 2001, increased by 64.89 percent primarily due to an increase of
compensation from Intelsat on account of special distribution and higher foreign
exchange gains.
NET INTEREST
Net interest represents the net interest amount receivable or payable
by the Company on its bank and other deposits and borrowings under its overdraft
facilities. Net interest receivable increased during fiscal 2000 from Rs.1,387
million in fiscal 1999 to Rs.1,683 million and during fiscal 2001 to Rs.3,964
million (US$84.61 million) due to an improvement in the Company's cash position.
INCOME BEFORE TAXATION
Income before taxation increased by 28.86 percent from Rs.15,002
million in fiscal 1999 to Rs.19,331 million in fiscal 2000. Income before
taxation increased by 30.22 percent in fiscal 2001 to Rs.25,173 million
(US$537.31 million).
52
INCOME TAX EXPENSE
The Company's effective tax rates (including dividend tax) were 42.23
percent, 32.28 percent and 38.32 percent for fiscal 1999, fiscal 2000 and fiscal
2001, respectively, compared to the statutory rate of 38.5, 39.2, 35 percent for
all such fiscal years. Such effective rates were attributable to exchange gains
treated as capital receipts for income tax provision, provision in dimunition in
the value of investments not allowed for tax, etc..
The Indian tax authorities have taken the position that the Company is
not entitled to a tax deduction it took in the year ended March 31, 1995 for
license fees paid by it to the DOT. The Indian tax authorities claim that the
Company owes approximately Rs.2.8 billion, Rs.2.4 billion, Rs.2.5 billion,
Rs.3.0 billion and Rs.2.6 billion in respect of taxes due (including interest,
but excluding penalties) in connection with the license fees for the years ended
March 31, 1994, 1995, 1996, 1997 and 1998, respectively. Tax refunds otherwise
due to the Company for subsequent years, amounting to approximately Rs.6.46
billion, have been applied by the Indian income tax authorities to a portion of
this disputed claim. In addition, the Company has paid the tax authorities
Rs.3.6 billion with respect to this claim. However, the outstanding amount
continues to accrue interest at a rate of two percent per month. The Company
disputed this claim and lodged an appeal with the Commissioner of Income-tax
(Appeals) - I, Mumbai for each of the four relevant years. The Company
subsequently appealed to the Income-tax Appellate Tribunal, Mumbai as the
Commissioner of Income-tax (Appeals) - I. Mumbai denied the Company's claim with
respect to the year ended March 31, 1995. The appeals with respect to the other
years are still pending with the Commissioner of Income-tax (Appeals) - I,
Mumbai. On September 14, 2000 the Income-tax Appellate Tribunal, Mumbai issued
an order in the Company's favor and held that the license fee paid by the
Company to the DOT is an allowable tax deductible expenditure under the Income
Tax Act. Consequent to this order, the refund due to the Company is adjusted
against the demand due for the subsequent years. In addition, the Company can
request the Commissioner of Income-tax (Appeals) - I, Mumbai to expedite the
orders for the other years.
The Income Tax Department has the right to appeal the order of the
Income Tax Appellate Tribunal in the High Court within a period of 120 days from
the date of the order. The Company has so far not received any communications
from the department/High Court on whether the department has disputed this claim
of the Company in the High Court. If the Company loses that case, the tax
authorities may make the Company liable for similar claims for subsequent years
and this could result in an aggregate potential liability of approximately
Rs.12.4 billion (US$264.8 million) including interest, but excluding penalties,
thereon as of March 31, 2001 and additional amounts for the periods thereafter.
The Company has been advised by independent Indian counsel that it believes that
the Company has a strong case with respect to this claim.
The Indian tax authorities have also taken the position that the
Company is not entitled to a tax benefit claimed by it in the years ended March
31, 1996, 1997 and 1998 with respect to certain of its profits which the Company
claims were generated by an enterprise engaged in infrastructure development.
The Indian tax authorities claim that the Company owes approximately Rs.0.1
billion, Rs.0.3 billion and Rs.0.5 billion in respect of taxes due (including
interest) in connection with such profits for the years ended March 31, 1996,
1997 and 1998, respectively. The Company disputes this claim and has lodged an
appeal with the Commissioner of Income-tax (Appeals) - I, Mumbai. The
outstanding amount of the claim continues to accrue interest at a rate of two
percent per month. If the Company loses its case, the tax authorities may make
similar claims for subsequent years, resulting in an aggregate potential
liability of approximately Rs.5.7 billion (US$121.66 million) including
interest, but excluding penalties, thereon as of March 31, 2001 and additional
amounts for periods thereafter. The Company believes that it has a reasonable
basis for its claim and that its appeal will succeed.
Furthermore, the Indian tax authorities have taken the position that
the Company has not offered for tax certain reimbursements it received from the
Government during the year ended March 31, 1994. The Indian tax authorities
claim that the Company owes approximately Rs.1.1 billion in respect of taxes due
in connection with such reimbursements for the year ended March 31, 1994. The
Company disputes this claim and has lodged an appeal with the Commissioner of
Income Tax (Appeals) - I. Mumbai. The outstanding amount of the claim continues
to accrue interest at the rate of two percent per month. If the Company loses
its case, the Company's aggregate potential liability would be approximately
Rs.2.7 billion (US$57.63 million) including interest, but excluding penalties,
thereon as of March 31, 2001. The Company believes that it has a reasonable
basis for its claim and that its appeal will succeed.
53
Consequently, the Company has not made provision for the potential
liability arising from these claims.
NET INCOME
Net income increased by 51.06 percent in fiscal 2000 from Rs.8,666
million in fiscal 1999 to Rs.13,091 million in fiscal 2000. Net income increased
by 17.81 percent in fiscal 2001 to Rs.15,422 million (US$329 million) from
Rs.13,091 in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company traditionally has met its working capital and capital
expenditure requirements with cash flow generated from operations. In addition,
the Company borrows funds under short term overdraft facilities from time to
time in order to meet temporary working capital deficits. The Company has no
long-term loans or other long-term borrowings.
As of March 31, 2001, the Company's cash and bank balances were
Rs.2,200 million (US$47 million), reflecting a decrease of Rs.18,646 million
(US$398 million) since March 31, 2000.
The Company's working capital (net of cash) has increased from
Rs.41,752 million (US$891 million) as of March 31, 2000 to Rs.53,733 million as
of March 31, 2001. This increase is primarily due to an increase in short term
investments and other assets.
OTHER INVESTMENTS
ICO GLOBAL COMMUNICATIONS (HOLDINGS) LIMITED
ICO, a company registered in Bermuda, was incorporated in January 1995
to provide Global Mobile Personal Communications Services. ICO was listed on
NASDAQ in July 1998. The Company has invested a sum of US$150 million in ICO. As
of March 31, 1999 the Company's investment in ICO stood at Rs.5,471 million.
On August 27, 1999, ICO filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court in the district of Delaware. In May 2000, ICO emerged from
bankruptcy protection with a plan to reduce the equity stake of the existing
investors to 1%. The Company had, therefore, made a provision for a loss of 99
percent of its investment in ICO in its consolidated financial statements for
the fiscal year ended March 31, 1999. The Company recognized a charge of
Rs.5,416 million and Rs.54 million as permanent impairment in the fiscal years
ended 1999 and 2000 respectively. Subsequent to March 31, 2000, the Company has
been allotted 180,053 shares of New ICO, representing 0.65 percent of the total
equity of New ICO. In addition, the Company has been allotted 975,398 warrants,
each convertible into two Equity Shares of New ICO upon the payment of US$90 per
warrant. Such warrants are exercisable until May 15, 2006.
CAPITAL EXPENDITURES
PROCESS OF THE COMPANY'S FIVE YEAR PLANS
Indian government agencies and public sector companies, including the
Company, implement capital expenditure programs through a series of five year
plans. The Company's five year plans are typically subject to mid-term review,
which have historically led to material changes in the Company's estimates of
both the amount and the types of capital expenditures on specific projects.
The materiality of these changes has also been compounded by the
Company's weaknesses in preparing budgets and appraising and monitoring capital
expenditure projects. In addition, the aggregate capital expenditures under any
five year plan are often revised upward or downward as may be required by
changes in the telecommunications market and the evolving needs of the Company.
54
EIGHTH FIVE YEAR PLAN PROJECTS
The Company's Eighth Five Year Plan (the "Eighth Plan"), which covered
the period from April 1992 to March 1997 (the period covered by the Department
of Telecommunications' investment program for India's Eighth Five Year Plan),
originally provided for total capital expenditures by the Company of
approximately Rs.9 billion (US$192.10 million), primarily for facility and
equipment investments within India to augment transmission (both satellite and
cable) and connecting capacity and for securing rights to use additional
circuits on the Intelsat and Inmarsat systems and on cables in the Atlantic and
Pacific regions. Principally as a result of faster-than-projected growth in
domestic demand for international telecommunication services, during the
mid-term review of the Eighth Plan in 1995, the amount of estimated capital
expenditures was revised upwards to a total of approximately Rs.14 billion (US$
298.83 million) for the entire five year period. Upon completion of the Eighth
Plan in March 1997, the Company had made actual capital expenditures of
approximately Rs.15.4 billion (US$ 328.71 million).
During the Eighth Plan, two new standard A Intelsat earth stations and
the South East Asia-Middle East-Western Europe 2 cable were commissioned,
numerous facilities were digitalized, connecting capacity of switches was
increased from 7,000 to 30,000 lines, an earth station was established to
provide Inmarsat mobile services, and additional value-added services were
introduced, including Inmarsat related services, Internet access, electronic
data interchange, video conferencing, managed data network services and high
speed leased line circuits.
NINTH FIVE YEAR PLAN PROJECTS
The Company's Ninth Five Year Plan (the "Ninth Plan"), covering the
period from April 1997 to March 2002 (the period covered by the Department of
Telecommunications' investment program for India's Ninth Five Year Plan), was
originally adopted by the Board of Directors of the Company (the "Board of
Directors") in November 1996. The original Ninth Plan provided for total capital
expenditures by the Company of approximately Rs.50.3 billion (US$1074 million).
In preparation for the mid-term review of the Ninth Plan by the Board of
Directors, the Ninth Plan was revised by management of the Company in January
1999 and proposed an increase in total capital expenditures from Rs.50.3 billion
(US$1,074 million) to Rs.73.19 billion (US$1,562 million). The proposed increase
primarily reflected increases resulting from the depreciation of the Rupee
against the US Dollar and substantial changes to the scale and scope of certain
individual projects caused by changes in the telecommunications industry, the
evolving needs of the Company and imprecise estimations and inaccuracies in the
information provided in the original Ninth Plan. See "--Financial and Management
Accounting and Reporting Systems." The Ninth Plan was further revised by
management and at the mid-term review of the Ninth Plan in September 2000 the
Board of Directors approved the newly revised plan which provided for total
capital expenditures of Rs.59.1 billion (US$1261 million). Such capital
expenditures were primarily for additional facility and equipment investments
within India to augment transmission (both satellite and cable) and connecting
capacity of the switches, for securing rights to use additional circuits on the
Intelsat and Inmarsat systems and for participating in various undersea cable
projects in the Atlantic and Pacific regions and various satellite mobile
telecommunications systems. These investments are planned in response to
telecommunications network, including through the future participation of new
licensees in domestic long distance fixed line and mobile telecommunication
services. See "Item 4. Information on the Company--Industry Overview." In
addition, these infrastructure investments are expected to provide the Company
with a platform from which additional services may be launched. The Ninth Plan
also contemplates significant capital expenditures in the areas of enhanced
Internet access and other specialized and value-added services, such as
satellite video uplinking and direct-to-home television systems, as well as
maintenance, repair and replacement projects and various building and civil
works at Company locations.
The original Ninth Plan was approved in principle by the Department of
Telecommunications. Certain projects envisioned by the revised Ninth Plan that
exceed defined expenditure levels or the current scope of the Company's
operations remain subject to further review and formal approval by the
Department of Telecommunications and other Government entities pursuant to
established rules and procedures of the Government. There can be no assurance
that such approvals will be issued or that such projects will be implemented as
currently planned.
The total expenditures of approximately Rs.59.1 billion (US$1261
million) covered by the revised Ninth Plan were calculated using different
exchange rates, in accordance with Indian GAAP. For all capital expenditures
planned or provided for under the revised Ninth Plan during the three-year
period ending March 31, 2002, calculations were made assuming that 61 percent of
the cost will be denominated in currencies other than Rupees.
55
The following table sets forth the actual and planned capital
expenditures of the Company under the revised Ninth Plan by type of investment
for the periods indicated. The planned capital expenditures of the Company for
the years ended March 31, 1997 through March 31, 2002 represent actual
expenditures for the years ended March 31, 1997 through March 31, 2001, and
management's estimates of projected expenditures for the year ended March 31,
2002. There can be no assurance that the Company's capital expenditure plan will
be implemented as described below. See "Item 3. Key Information--Risk
Factors--Significant Additional Capital Expenditures."
YEAR ENDED MARCH 31, TOTAL
----------------------------------------------------------- -----
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
MILLIONS OF RUPEES
Transmission..................... 1,062 3,513 1,464 2,527 5,127 13,693
Switching........................ 294 202 50 149 1,713 2,408
Specialized and value-added 323 662 659 3,832 4,310 9,786
services......................
Satellite mobile services........ 521 62 6 9 7 605
Restoration/replacement.......... 29 41 36 71 100 277
Technical and office equipment... 247 330 153 231 353 1,314
Buildings and civil works........ 180 163 582 1,083 779 2,787
Capital contributions to 786 671 922 2,998 4,707 10,084
Intelsat/Inmarsat and IRUs....
Other projects and investments... 1,135 1,972 442 8,816 5,786 18,151
----- ----- ------ ------- ------- ------
Total....................... 4,577 7,616 4,314 19,716 22,882 59,105
===== ===== ===== ====== ====== ======
The Company has funded the above capital expenditures to the extent
incurred and intends to fund the remaining capital expenditures primarily from
the remaining net proceeds of its offering of Global Depositary Receipts
("GDRs") in 1997 and cash flow from operations. The Company may consider other
options for raising any additional funds that may be required, including through
debt financing, additional equity financing and leasing arrangements, in the
event that such funds are needed.
The principal areas of investment contemplated by the revised Ninth
Plan are as follows:
EXPANSION OF TRANSMISSION CAPACITY. The Company intends to invest more
on the expansion of the Company's existing transmission facilities than any
other single category in the revised Ninth Plan. The Company has provisions for
investing approximately Rs.5.7 billion (US$121.66 million) on additional
capacity in undersea fiber optic cables, approximately Rs.3.6 billion (US$76.84
million) on additional satellite earth stations, antennas and other related
equipment, and approximately Rs.825 billion (US$17,609.39 million) on new
terrestrial radio communication links. The Company also plans on improving
transmission efficiency by investing in new multiplex equipment and equipment
that allows more trunk channels to be concentrated on a particular transmission
channel. In addition, the Company plans to establish additional international
gateways at Hyderabad by the end of 2001, each equipped with satellite earth
stations and other facilities.
The Company entered into a Construction and Maintenance Agreement with
other international telecommunications carriers for the construction of the
South East Asia-Middle East-Western Europe 3 cable system, a high capacity
undersea optical fiber cable extending from Germany to Japan and Australia that
lands in a total of 33 countries (including India with landing points at Mumbai
and Cochin). The Company made a provision of Rs.2.5 billion (US$53.36 million)
investment in this cable in its revised Ninth Plan and the Company has acquired
a 3.5 percent interest in the cable. This cable will have added approximately
9000 circuits to the Company's transmission capacity. The cable became
operational in March 2000.
The Company has entered into a Construction and Maintenance Agreement
with other international telecommunications carriers for the construction of a
broadband high capacity, undersea, fiber optic cable system, about 28,000
kilometers long, which will connect Southeast Asia to South Africa, West Africa
and the Mediterranean region. It will have many landing points including in Cape
Town, Mauritius, Reunion, Cochin (India) and Penang (Malaysia). Presently,
56
connections to African countries from India are by means of satellite
transmission or through longer alternative routes involving a number of transit
points. This cable system provides the Company a direct link to Africa and
indirect links to the Mediterranean region. The Company has made provision in
the revised Ninth Plan for an investment of up to Rs.2.6 billion (US$55.50
million) in this cable system, which is scheduled to be ready for service by
December 2001.
The Company also plans to complete the construction of a new satellite
earth station at Hyderabad, and equipment that allows more trunk channels to be
concentrated on a particular transmission channel and other equipment and fiber
optic systems at its existing transmission facilities.
EXPANSION OF NUMBER OF SWITCHES. The Company plans to invest Rs.1.5
billion (US$32 million) for switches in order to establish an international
information highway for broadband traffic at Mumbai, Delhi, Chennai, Bangalore
and other cities. The Company believes that these switches will enable the
Company to integrate and allocate bandwidth for voice, data and other broadband
traffic through improving the bandwidth efficiency, and provide the Company with
the ability to keep pace with convergence of voice, data and multimedia.
Commencing in the year ending March 31, 2001, the revised Ninth Plan
anticipates a need for digital switch expansion and other advanced switching
equipment to be used in connection with the Company's facilities. In addition,
the Company has completed the establishment of an additional international
gateway exchange at Kanpur in March 2000 and has made a provision for the
establishment of two additional VOIP international gateway exchanges at
Bangalore and Hyderabad in the revised Ninth Plan. The Company has made a total
provision of Rs.400 million (US$8.54 million) in the revised Ninth Plan for
these three gateway exchanges.
SPECIALIZED AND VALUE-ADDED SERVICES. The Company plans to invest Rs.60
million (US$1.28 million) for the installation of electronic data interchange
facilities at Chennai, New Delhi and Kolkata, and to upgrade and augment its
existing such facilities at Mumbai. The Company also intends to complete the
construction of video conferencing facilities in all of its international
gateways and has provided for up to Rs.107 million (US$2.28 million) for this
purpose in the revised Ninth Plan. The Company has also made provisions for up
to Rs.7.5 billion (US$160 million) throughout the balance of the revised Ninth
Plan to augment its Internet gateways by installing additional main and remote
access nodes, network management systems and more advanced routing switches.
The Company is in discussions with potential global partners for the
provision of new E-commerce and voice over Internet protocol in India.
Accordingly, the Company has provided for up to Rs.500 million (US$10.67
million) to invest in systems equipment which may be required during the Ninth
Plan period in connection with the formation of new global alliances and the
expansion of managed data network services provided through current global
alliances.
Provisions have been made under the revised Ninth Plan for capital
expenditures of up to Rs.1.1 billion (US$23.48 million) to be used in connection
with investments in video uplinking facilities and direct-to-home satellite
television systems.
SATELLITE MOBILE SERVICES. The Company is one of the founding investors
in ICO Global Communications (Holdings) Limited ("ICO"), which was formed in
1995 by a consortium of international telecommunications companies, governments
and satellite and telephone equipment manufacturers to establish and operate a
satellite-based mobile telecommunications system is designed to offer worldwide
digital voice, data. facsimile and message services primarily through hand-held
mobile terminals.
The Company has made capital contributions to ICO of US$150 million
until March 31, 2000 and owned an interest of approximately 6.50 percent in
ICO's equity as of such date. In mid 1999, ICO filed for bankruptcy and emerged
from bankruptcy protection in May 2000. The bailout package envisages the
creation of New ICO Limited ("New ICO"), and the liquidation of ICO. The Company
is entitled to a very small percentage of the share capital of New ICO and as
such its investment in ICO is substantially reduced. Subsequent to March 31,
2000, the Company has been allotted 180,053 shares of New ICO, representing 0.65
percent of the total equity of New ICO. In addition, the Company has been
allotted 975,398 warrants, each convertible to two Equity Shares of New ICO upon
the payment of US$90 per warrant. Such warrants are exercisable until May 15,
2006. Prior to ICO's bankruptcy filing the Company signed a prelaunch agreement
with ICO which specified that the Company was to be designated as the exclusive
provider of satellite mobile services for ICO in India. As a result of the
bankruptcy proceedings, this agreement is no longer in effect and will have to
be renegotiated with New ICO at a later date.
57
The Company provided gateway services for Iridium India Telecom
Limited; the Company provisionally licensed to provide Iridium GMPCS services in
India. However, Iridium LLC, USA, the Company owning the constellation of 66
Iridium satellites, closed its services worldwide with effect from March 18,
2000 after the United States bankruptcy court for the Southern District of New
York approved its wind down operations. Accordingly, Iridium India Telecom
Limited was not able to perform its commercial services and gateway operations
from the gateway at Pune and decided to close its commercial operations in a
phased manner. Such operations ceased on April 1, 2000.
In addition, the Company has also provided approximately Rs.8.0 billion
(US$171.76 million) for possible future acquisitions of satellite capacity in
the Indian Ocean region in collaboration with the Indian Space Research
Organization.
CAPITAL CONTRIBUTIONS TO INTELSAT AND INMARSAT AND ACQUISITION OF IRUs.
The Company has made provisions for investments of Rs.2.00 billion (US$42.69
million) and Rs.220 million (US$4.69 million) in Intelsat and Inmarsat,
respectively, in the revised Ninth Plan. The planned capital contributions to
Intelsat and Inmarsat are expected to assist the Company in meeting its growing
transmission needs by increasing its available satellite capacity. In addition
to these investments, the Company plans additional investments of up to Rs.6.86
billion (US$146.42 million) in IRU's, representing cable capacity on systems in
which there are no landing rights in India, throughout the balance of the Ninth
Plan period.
PROVISION FOR OTHER PROJECTS AND INVESTMENTS. If following the end of
Bharat Sanchar Nigam Limited monopoly, the Company is licensed to provide
domestic long distance services, the Company expects to invest approximately
Rs.4.5 billion (US$96.05 million) in additional transmission and switching
facilities.
Other capital expenditures in the Ninth Plan include provisions for
projects involving upgrading various internal management facilities, for Company
management and new employees in amounts of up to Rs.100 million (US$2.13
million).
The Company's revised Ninth Plan provides for total capital
expenditures of approximately Rs.73.19 billion (US$1562.22 million) further
revised to Rs.59.10 billion (US$1,261 million) during the five years ending
March 31, 2002, of which Rs.36.22 billion (US$773.17 million) had been expended
as of March 31, 2001. See "--Investment Program." The Company intends to fund
the balance of these capital expenditures primarily from the remaining proceeds
of the 1997 GDR issue, and from cash flow from operations. The Company may
consider other options for raising and leasing arrangements, in the event such
funds are needed.
TENTH FIVE YEAR PLAN PROJECTS
The Company's Tenth Five Year Plan (the "Tenth Plan"), covering the
period from April 2002 to March 2007 is provisionally finalised and the total
provisional outlay under the Tenth Plan is Rs.63.3156 billion (US$1.35 billion)
which is further subject to approval by the Board of the Company and consequent
approval by the Department of Telecommunications. While the Company has achieved
significant development in the Ninth Five Year Plan period, the Company
anticipates liberalization and opening of International Long Distance Service to
competition during the Tenth Plan period. The Company hopes to achieve
continuous growth and enhancement in existing telephony business and Internet
dial up services while simultaneously doing backward integration by entering
into the domestic long distance market. The Company also expects to introduce
newer technologies like ATM and VoIP in its network. The Company also expects to
equip its infrastructure to provide new value added services like Bandwidth on
Demand, VPN services, Broadband Services and DTH services.
58
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
The Company maintains a level of spending on research and development
activity which enables it to keep abreast of the latest developments in the
industry. The Company conducts its own internal research activity in order to
achieve its strategic goals and to participate in current technological
advancements. The Company plans to continue spending on internal research and
development. The main focus of the Company's internal research and development
activity is software development for communications applications and the
development of telecommunications equipment for specific requirements of the
Company. The research and development of the Company with respect to
communications applications has focused, in recent years, on web based
electronic data interchange, store and forward fax and graphic user interface
terminal for Internet applications.
In addition to conducting research in its own facilities the Company
has recently started considering funding certain projects recommended by the
Telecom Research and Development Council. The Company is a member of this
council which is constituted by the Ministry of Communications of the Government
of India. This council coordinates the research and development activities in
the field of telecommunications and identifies various key areas of research. It
also identifies various projects in these areas and aids in obtaining funding
for such projects.
In accordance with the accounting policy on research and development
adopted by the Company in fiscal 2000 onwards, all costs incurred on research
and development by the Company are charged to the income statement under the
relevant line items. In addition, costs incurred with respect to the purchase of
capital equipment for research and development are capitalized. The Company is
unable to accurately state its annual research and development expenses from
fiscal 2000.
TREND INFORMATION
The Company derives a major part of its revenues through telephony
traffic originating from and terminating in the U.S. An economic slowdown or
such other negative impact on the economy of the U.S may affect the revenue
growth and operating results for fiscal 2002. The economic slowdown has affected
the information technology sector and there is a likelihood that this sector may
cut their spending. Such cutbacks are likely to affect the revenues of the
Company as a part of its operations are related to this sector. For further
information, please see "Item 3. Key Information--Risk Factors" referenced
herein.
The opening up of international telephony in India to private operators
and the loss of monopoly of the Company would impact revenues of the Company.
The Company, however, believes that the private operators may not be able to put
up the infrastructure to cause major share erosions for at least a year after
the monopoly loss.
BUSINESS OUTLOOK FOR FISCAL 2002
Based on currently available information, the Company expects its
business outlook for the fiscal year ending March 31, 2002 to be as follows:
Gross revenue for the fiscal year ending March 31, 2002 is expected to
be in the range of Rs.70490 million (US$1504 million) against which the
Company has achieved over Rs.16422 million (US$350 million) for the
first quarter ending June 2001.
The above mentioned expectations and projections regarding our future
performance are forward-looking statements. These expectations and projections
are based on currently available economic and financial information along with
our operating plans and are subject to future uncertainties that could cause
actual results to differ materially from those that may be indicated by these
statements. We do not undertake to update any forward-looking statement that may
be made from time to time by or on our behalf.
FINANCIAL AND MANAGEMENT ACCOUNTING AND REPORTING SYSTEMS
The Company, which remained wholly owned by the Government until late
1992, continues to be subject to various laws and Government policies in respect
of public sector enterprises and to follow procedures appropriate for a public
sector entity. Consequently, the Company's financial and management accounting
and reporting systems are not as developed as those of certain comparable
companies outside India. In addition, the Company's procedures for preparing
budgets and appraising and monitoring capital expenditure projects are less
59
precise than those used by comparable private sector companies. In order to
address certain of these deficiencies, the Company continues to improve data
input for its traffic accounts, has increased the number and quality of its
financial and accounting personnel, and is in the process of installing new
systems and procedures, including an integrated financial accounting and
budgeting system.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND OFFICERS OF THE REGISTRANT
The Company's Board of Directors has ultimate responsibility for the
administration and management of the affairs of the Company, except for certain
matters that are reserved by the Company's Articles of Association (the
"Articles") for the approval of the President of India. The Company's Articles
provide for a Board of not less than three and not more than twelve Directors.
The President of India is empowered by Article 66A to appoint one-third of the
total number of Directors sitting at any time as non-retiring directors and to
designate the Chairman and Managing Director. The remaining directors of the
Company are liable to retire by rotation, and one-third of such directors are
elected by the shareholders each year at the company's Annual General Meeting.
After the Company was declared by the Government in July 1997 as a
"Navratna" company, the Board of Directors was reconstituted to comprise eleven
members, including the Chairman and Managing Director, four other full-time
directors, two directors nominated by the Department of Telecommunications and
four other external directors. The Company must notify the Public Enterprises
Selection Board, a Government Agency, of all vacancies in full-time director
positions of the Company. The Public Enterprises Selection Board then recommends
an appropriate person for the Company to appoint pursuant to the relevant
provisions of the Indian Companies Act of 1956.
The business address of each of the directors is the registered office
of the Company. The current directors and their positions are as follows:
Current Term
Name Age Position Expires In Director Since
------------------------------ ------- ---------------------------------- -------------------- -----------------
Shailendra Kumar Gupta....... 59 Chairman and Managing Director September 2002 September 1999
Rajneesh Gupta............... 53 Director (Network) November 2003 November 1998
R.S.P. Sinha ................ 50 Director (Finance) January 2004 January 1999
Sadhana Dikshit.............. 48 Government Nominee (Deputy (1) January 2001
Director General (LF), the
Department of Telecommunications)
P.V. Vaidyanathan............ 54 Government Nominee (Advisor (1) August 2001
(Technology) the Department of
Telecommunications)
Subodh Bhargava.............. 59 External Director (Advisor, December 2001(2) December 1998
Eicher Goodearth Limited)
N.R. Narayana Murthy......... 55 External Director (Chairman and December 2001(2) December 1998
Chief Executive Officer, Infosys
Technologies Limited)
Ashok Wadhwa................. 41 External Director (Managing December 2001(2) December 1998
Partner, Ratan S. Mama & Co.)
H.P. Wagle................... 66 External Director (Ex-Chairman, December 2001(2) December 1998
Telecom Commission and Secretary,
the Department of
Telecommunications)
60
---------------
(1) Government nominee directors are not appointed by the Government for a
fixed term. They are eligible to retire by rotation. However, typically,
nominee directors continue on the Board of the Company for so long as the
nomination is not changed by the Government.
(2) These are independent directors liable to retire by rotation. However,
their appointment has been indicated by the Government to be nominated for
a period of three years each. However, this three year nomination period
will have to be implemented in accordance with the provisions of the
Companies Act and other applicable regulations.
OTHER PRINCIPAL OFFICERS
The following individuals are the principal executive officers of the
Company in addition to those officers who are members of the Board of Directors:
NAME AGE POSITION OFFICE HELD SINCE
------------------------ ------- ------------------------------------------------------ ------------------
Parminder Mathur..... 52 Chief Vigilance Officer May 1999
S.G. Ranade.......... 48 Company Secretary May 1987
Hardev Singh......... 57 Chief General Manager (Corporate January 1995
Affairs/Headquarters/Marketing)
K.P. Tiwari.......... 51 Chief General Manager (Internet) January 1995
M.G.Wasnikar......... 58 Chief General Manager (Operations and Human Resources) January 1995
Arun Gupta........... 44 Chief General Manager (Finance and Accounts) May 1998
S.S. Bodh............ 41 Chief General Manager (Finance and Accounts) May 1998
G.C. Banik........... 57 Chief General Manager (Public Relations) April 2000
C. Sudershan Rao..... 57 Chief General Manager (Finance and Accounts) May 2000
Debajit Dutta........ 48 Chief General Manager (Vigilance) June, 2000
Apart from Ms. Parminder Mathur, of the Indian Administrative Service,
all other principal executive officers of the Company are on the rolls of the
Company as permanent employees.
Set forth below is selected biographical information for certain of the
Company's directors and officers:
Mr. Shailendra Kumar Gupta (Chairman and Managing Director), has been a
director of the Company since September 1999. Mr. Gupta has more than three
decades of experience in the Indian domestic telecommunications industry and has
held various government positions in the telecommunications field, including
Chief General Manager (Telecom - Gujarat Circle) of the Department of
Telecommunications, Principal General Manager (New Delhi) of Mahanagar Telephone
Nigam Limited and General Manager, Telephones (Jaipur). Mr. Gupta holds a
Bachelors degree in Electrical Engineering from Rourkee University and also won
the National Award of Excellence for telecommunications in 1989.
Mr. Rajneesh Gupta, Director (Network), has been a director of the
Company since November 1998. Mr. Gupta has held various government positions in
the telecommunications and education fields, including General Manager
(Materials Management) and General Manager (south Delhi) of Mahanagar Telephone
Nigam Limited, Chief General Manager (North East Task Force) of the Department
of Telecommunications, and Director (Technical Education) of Department of
Education of the Ministry of Human Resources Development. Mr. Gupta holds a
Bachelors degree in Electrical Engineering and Science.
61
Mr. R.S.P. Sinha, Director (Finance), has been a director of the
Company since January 1999. Prior to joining the Company, Mr. Sinha held
positions of Director (Finance), Hindustan Organic Chemicals Limited, and Deputy
General Manager (Finance), Tehri Hydro Development Corporation. Mr. Sinha is a
fellow member of Institute of Cost and Works Accountants of India. Mr. Sinha
holds a Bachelors degree in Electrical Engineering and a Masters degree in
Business Management with a specialization in Finance, both from Patna
University, a Bachelors degree in law from Magadh University and passed the exam
of the Certified Associate of Indian Institute of Bankers.
Ms. Parminder Mathur, Chief Vigilance Officer of the Company, has been
on deputation from the Government of India to the Company since May 1999. She is
a postgraduate in political science and holds a Masters degree in Business
Administration from Leeds University, U.K. Prior to her taking over as Chief
Vigilance Officer, she was the Chief Electoral Officer of Himachal Pradesh and
also the Commissioner-cum-Secretary (Election) of Himachal Pradesh.
Mr. S.G. Ranade, Company Secretary, has been with the Company since
1987. Prior to joining the Company, Mr. Ranade was Deputy Secretary of
Maharashtra Elektrosmelt Limited, Bombay. Mr. Ranade has over 26 years of
experience in his field. He is a fellow member of the institute of Company
Secretaries of India. Mr. Ranade holds degrees in commerce and law from the
University of Bombay.
Mr. Hardev Singh, Chief General Manager (Corporate
Affairs/Headquarters/Marketing), joined the Overseas Communications Service in
1964 and has been with the company since its establishment. Mr. Singh held
positions in the area of satellite communications, troposscatter communications,
submarine cables, technical planning and Inmarsat. Mr. Singh holds a Diploma
from Punjab State Board of Technical Education and a Degree in Electrical
Engineering from the Institute of Engineers, Kolkata.
Mr. K.P. Tiwari, Chief General Manager (Internet/Operations) joined the
Overseas Communications Services in 1976 and has been employed by the Company
since its establishment. Prior to joining the Overseas Communications Services,
Mr. Tiwari worked for the Indian Post and Telegraph Department for 4 years. Mr.
K.P. Tiwari holds a Master of Science Degree in Electronics from Kanpur
University.
Mr. M.G. Wasnikar, Chief General Manager (Human Resources), joined the
Overseas Communications Service in 1975 as Deputy Engineer-in-Charge (Class I
Service) through the Union Public Service Commission and has been with the
Company since its establishment. Mr. Wasnikar holds a Bachelors degree in
Electronics Engineering from Vishweshwarayya Regional College of Engineering,
Nagpur.
Mr. Arun Gupta, Chief General Manager (Finance), joined the Company in
his present capacity in 1998. Prior to joining the Company, Mr. Gupta worked in
Finance for 18 years in various capacities at Sikkim Industrial Development &
Investment Corporation Ltd., Pradeshiya Industrial & Investment Corporation of
UP Ltd., and Risk Capital & Technology Finance Corporation Ltd. (a subsidiary of
Industrial Finance Corporation of India Ltd.). He also officiated as Managing
Director at RC&TFC. Mr. Gupta holds a Bachelor of Science degree from University
of Delhi, a Master of Business Administration degree with a concentration on
finance from A.M. University and a Bachelor of law degree from the University of
Delhi.
Mr. S.S. Bodh, Chief General Manager (Finance), joined the Company in
his present capacity in 1998. Prior to joining the Company, Mr. Bodh worked for
13 years as Gazetted Class I officer (Indian Railways Accounts Service) in
various areas of Finance and Accounting in Indian Railways. He also headed the
Finance department of the Northern Region of the Container Corporation of India
for more than two years. Mr. Bodh holds a Master of arts degree from Punjab
University.
Dr. G.C. Banik, Chief General Manager (Public Relations), joined the
Company in 1987. Prior to joining the Company, Mr. Banik served in various media
units of the Ministry of Information Service for twenty years. Dr. Banik holds a
post graduate degree in Journalism, a Master of Business Administration degree
and a degree of Doctor of Philosophy in Sociology, all from the University of
Mumbai. Dr. Banik was the National President of the Association of Business
Communicators of India and Chairman of the Public Relations Society of India. He
has authored two books on Journalism and Public Relations.
62
Mr. C. Sudershan Rao, Chief General Manager (Finance), has been with
the Company since 1989. He is a Fellow Member of the Institute of Chartered
Accountants of India and an Associate Member of the Institute of Costs & Works
Accounts of India. Mr. Rao also holds a post graduate diploma in Public
Enterprise Management from Osmania University. Mr. Rao has over 20 years of
experience in finance related functions and has worked at Siddhartha Oil
Equipments Ltd., R.G. Foundry Forge Ltd., A.P. State Textile Dev. Corporation
Ltd. and A.P. Construction Co. Ltd., and as a practising Chartered Accountant
prior to joining the Company.
Mr. Debajit Dutta, Chief General Manager (Vigilance) joined Videsh
Sanchar Nigam Limited in 1992. Mr. Dutta was employed as the Deputy Director
(Personnel & Administration)- Vigilance by Oil and Natural Gas Corporation
Limited for a period of nine years prior to taking up his post with Videsh
Sanchar Nigam Limited. He has served for two years as a gazetted police officer
of the rank of Deputy Superintendent of Police. Mr. Dutta was a practicing
lawyer specialising in labour matters and civil cases prior to his employment by
the police department. Mr. Dutta holds a law degree and a post graduate diploma
in Personnel Management and Industrial Relations.
No director or officer of the Company has any family relationship with
any other officer or director of the Company.
There are no arrangements or understandings among any director or any
officer and any other person regarding their election to their post with the
Company.
COMPENSATION OF DIRECTORS AND OFFICERS
The directors, other than the full-time directors and the Government
nominee Directors, of the Company received a sitting fee not exceeding Rs.2,000
(US$ 42.68) for attending every Board and a Committee meeting. In fiscal 2001,
Rs.135,000 (US$2,882) were paid towards sitting fees. The Directors are also
reimbursed for travel and out-of-pocket expenses in connection with their
attendence at Board and Committee meetings.
For the fiscal year ended March 31, 2001, the aggregate amount of
compensation paid by the Company to all directors and principal officers of the
Company was approximately Rs.10.27 million. No director or principal officer
received remuneration from the Company (salary, bonus, housing allowance, perks
and benefits,etc.) in excess of Rs.1.50 million for fiscal 2001.
For the fiscal year ended March 31, 2001, the aggregate amount set
aside or accrued by the Company to provide pension, retirement or similar
benefits for principal officers and directors of the Company was approximately
Rs.2.5 million.
OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
There are no employee share option schemes or other similar schemes
relating to the capital of the Company.
BOARD COMMITTEES
AUDIT COMMITTEE
The committee has four members including one full time director and
three non-official, part-time directors. The committee is chaired by
non-official director Mr. Ashok Wadhwa, with Mr. Subodh Bhargava and Mr. H.P.
Wagle non-official directors and Mr. S.K. Gupta, Chairman and Managing Director,
as members. The broad scope of the committee is as follows:
(1) To oversee the Company's financial reporting process and the
disclosure of its financial information to ensure that the financial statements
are correct, sufficient and credible; to recommend the appointment and removal
of external auditors, fix audit fees and approve payment for any other services,
as applicable; to review the annual financial statements with management before
they are submitted to the board, focusing primarily on: changes in accounting
policies and practices, major accounting entries based on exercise of judgement
63
by management, qualifications in the draft audit report, significant adjustments
arising out of audit, the going concern assumption, compliance with stock
exchange and legal requirements concerning financial statements, and any related
party transactions, that is, company transactions of a material nature with
promoters or the management, their subsidiaries or relatives, that may have a
potential conflict with the interests of the Company; to review external and
internal auditors and the adequacy of internal control systems with the
management; to review the adequacy of the internal audit function, including the
structure of the internal audit department, staffing, reporting structure
coverage and the frequency of internal audits; to discuss any significant
findings with the internal auditors and follow these up; to review and report to
the Board of Directors on the findings of any internal investigations by the
internal auditors concerning suspected frauds or irregularities or a failure of
internal control systems; to discuss the nature and scope of the audit with
external auditors before the audit commences, and to have post-audit discussions
to ascertain any areas of concern; to review the company's financial and risk
management policies; and to look into the reasons for any substantial defaults
in payments to depositors, debenture holders, shareholders (in case of
non-payment of declared dividends) and creditors.
The Company does not have a remuneration committee.
EMPLOYEES
As of March 31, 2001, the Company had 2,991 employees, of whom 1,177
were executive employees (technical employees and other employees with the rank
of officer or higher, including fulltime directors of the Company) and 1,814
were non-executive employees. As of March 31, 2000, and March 31, 1999, the
Company had 3,014 employees and 2,975 employees, respectively. Upon its
establishment in 1986, the Company assumed responsibility for all the 3,148
employees of the Overseas Communications Service (690 executives and 2,458
non-executives). Since then, the Company has gradually rationalized its work
force, both reducing the total number of employees and increasing the proportion
of employees who are engineers or otherwise highly skilled. The Company seeks to
improve employee productivity through continuing education and training and by
emphasizing the importance of quality of service and customer satisfaction.
As a public sector enterprise, the Company abides by general Indian
governmental personnel policies which, among other things, limit its ability to
reduce employment levels and control the amount of salaries and other
remuneration that the Company may pay to its employees. The Company believes
that the average salary it pays to its employees is significantly lower than the
average salary of employees at equivalent ranks in the private sector.
All non-executive employees of the Company are members of local unions
organized at each Company site, which are affiliated as the Federation of the
Videsh Sanchar Nigam Limited Employees Unions (the "Federation"). The Federation
is a Company-wide union and is not affiliated with any larger industry-wide or
national union. Every five years the Company and the Federation negotiate and
enter into a collective bargaining agreement, which governs the terms of
employment of non-executive employees. The most recent agreement, executed in
November 2000, is for the pay revisions effective from January 1, 1997.
Most executive employees (other than directors) of the Company are
members of a similarly organized Officers' Association, which acts as an
informal consultative mechanism for conveying the officers' views regarding
personnel policies to the Company's management.
On August 1, 2001, the Company announced a Voluntary Retirement Scheme.
The primary objective for the scheme is to optimize the mix of experience and
overall skill level of the Company's employees. The scheme remains open from
September 1, 2001 to October 31, 2001. Employees who are at least 50 years of
age and have rendered a minimum of 10 years service to the Company are eligible
to opt for voluntary retirement. Apart from normal retirement benefits,
employees opting for voluntary retirement will be entitled to (1) a "one-time"
payment of 60 days salary (including a basic and dearness allowance) for each
completed year of service or (2) a payment of salary for the balance months of
service left before retirement, whichever is less.
As of June 30, 2001, the members of the Board of Directors and the
executive officers of the Company as a group owned an aggregate of 6,600 shares,
representing 0.002% of the Company's shares issued and outstanding at such date.
64
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
As of the date hereof, approximately 52.97 percent of the outstanding
Shares of the Company are held by the Government. Consequently, the Government,
acting through the Department of Telecommunications, controls the Company and
has the power to approve the appointment of its directors and to determine the
outcome of most actions requiring approval of the Board of Directors or
shareholders of the Company's business (including into areas in which the
Company may compete with Bharat Sanchar Nigam Limited), transactions with Bharat
Sanchar Nigam Limited or the assertion of claims against Bharat Sanchar Nigam
Limited. In addition, under the Company's Articles of Association, the President
of India, on behalf of the Government of India, may issue directives with
respect to the conduct of the business and affairs of the Company, and certain
matters with respect to the Company's business, including the appointment and
remuneration of the Company's Chairman and Managing Director and the declaration
of dividends are reserved for the decision of the President of India. The
Company may not take action in respect of any matter reserved for the President
without his approval. See "Item 10. Additional Information--Description of the
Shares."
The following table sets forth certain information regarding the
beneficial ownership of the Equity Shares at June 30, 2001, including the
beneficial ownership of Shares of each person or group known by the Company to
own beneficially 5 percent or more of the outstanding Shares, as reported by
such persons.
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE
------------------------ --------------------- ----------
Government of India (2)....... 150,961,440 52.97
-------------------
(1) Number of shares and percentage ownership is based on 285,000,000 Equity
Shares outstanding as of June 30, 2001, Beneficial ownership is determined
in accordance with rules of the SEC and includes voting and investment
power with respect to such shares. Shares subject to options that are
currently exercisable or exercisable within 60 days of June 30, 2001 are
deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other person.
All information with respect to the beneficial ownership of any principal
shareholder has been furnished by such shareholder and, unless otherwise
indicated below, the Company believes that persons named in the table have
sole voting and sole investment power with respect to all the shares shown
as beneficially owned, subject to community property laws, where
applicable.
(2) The Shares owned by the Government are registered in the name of the
President of India or his nominees in the register of shareholders of the
Company.
The Company's ADSs are listed on the New York Stock Exchange. Each ADS
represents two Equity Shares. As of June 30,2001, approximately 81,599,086
Equity Shares (28.63% of the total Equity Shares outstanding as of such date)
were held by the custodian, ICICI Limited (the "Custodian") for The Bank of New
York, as depositary for the Company's ADSs. The Company is unable to estimate
the percentage of ADSs or Equity Shares held in the United States or the number
of record holders in the United States.
Except as mentioned elsewhere in this annual report regarding the
disinvestment process by the Government of India which would include a change in
the control of management, there are no arrangements known to the Company which
may at a subsequent date result in a change in control of the Company.
RELATED PARTY TRANSACTIONS
The Company's principal related parties consist of government
departments, government owned or controlled companies and affiliates of the
Company. The Company routinely enters into transactions with its related
parties, such as providing telecommunication services, sharing costs and
revenues and subletting premises. Transactions other than with the DoT are at
arm's length in accordance with law. Transactions with the DoT are subject to
the revenue sharing agreement discussed in Note 1d. The Company's significant
related party balances and transactions with DoT are detailed in the Statement
of Income and in Notes 5, 10, 14 and 15. Other related party transactions and
balances are immaterial individually and in the aggregate.
65
The Company is controlled by the Government of India, which holds 52.97
percent of the total equity. The Company's principal related parties consist of
government departments, government owned or controlled companies and affiliates
of the Company. The Company is not aware of transactions between the Government
and such other entities.
The Company had a revenue sharing arrangement with the Department of
Telecommunications for the fiscal period 1997-2002. Pursuant to the
corporatisation of the service provision functions of the Department of
Telecommunications, to the newly formed and wholly owned Government company,
Bharat Sanchar Nigam Limited with effect from October 1, 2000 the revenue
sharing agreement entered into by Department of Telecommunications was
transferred and assigned to Bharat Sanchar Nigam Limited with effect from
October 1, 2000. License fee shall continue to be paid to Department of
Telecommunications under the revenue sharing agreement.
The Company routinely enters into transactions with its related
parties, such as providing telecommunication services, sharing costs and
revenues and subletting premises. Transactions other than with the Department of
Telecommunications are at arm's length in accordance with law.
Telstra Vishesh Communications Limited is a joint venture between the
Company, Telstra, Australia and Infrastructure Leasing & Financial Services Ltd.
Currently, the Company holds Rs.92 million out of the total paid up capital of
Rs.314 million. TVCL has invested in a hybrid VSAT project and has diversified
into consultancy, facility management services and turnkey VSAT projects for
large organizations.The Company had entered into agreements for purchase of VSAT
equipments during the fiscal year ended 2001 amounting to Rs.10.20 million
(US$0.22 million). The Company believes that the foregoing transactions were on
terms no less favourable than could have been obtained from independent third
parties.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not applicable.
ITEM 8. FINANCIAL INFORMATION: CONSOLIDATED FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
We have elected to provide financial statements pursuant to Item 18 of
this Form 20-F.
LEGAL PROCEEDINGS
The Company is not currently a party to any material commercial legal
proceedings. However, the Indian tax authorities have taken the position that
the Company is not entitled to a tax deduction it took in the year ended March
31, 1995 for license fees paid by it to the DOT. The Indian tax authorities
claim that the Company owes approximately Rs.2.8 billion, Rs.2.4 billion, Rs.2.5
billion, Rs.3.0 billion and Rs.2.6 billion in respect of taxes due (including
interest, but excluding penalties) in connection with the license fees for the
years ended March 31, 1994, 1995, 1996, 1997 and 1998 respectively. Tax refunds
otherwise due to the Company for subsequent years, amounting to approximately
Rs.6.46 billion, have been applied by the Indian tax authorities to a portion of
this disputed claim. In addition, the Company has paid the tax authorities
Rs.3.6 billion with respect to this claim. However, the outstanding amount
continues to accrue interest at a rate of two percent per month. The Company
disputed this claim and lodged an appeal with the Commissioner of Income-tax
(Appeals) - I, Mumbai for each of the relevant years. The Company subsequently
appealed to the Income-tax Appellate Tribunal, Mumbai as the Commissioner of
Income-tax (Appeals) - I. Mumbai denied the Company's claim with respect to the
year ended March 31, 1995. The appeals with respect to the other years are still
pending with the Commissioner of Income-tax (Appeals) - I, Mumbai. On September
14, 2000 the Income-tax Appellate Tribunal, Mumbai issued an order in the
Company's favor and held that the license fee paid by the Company to the DOT is
an allowable tax deductible expenditure under the Income Tax Act. Consequent to
this order, a refund due to the Company is adjusted against the demand due for
the subsequent years. In addition, the Company can request the Commissioner of
Income-tax (Appeals) - I, Mumbai to expedite the orders for the other years.
The Income Tax Department has the right to appeal the order of the
Income Tax Appellate Tribunal in the High Court within a period of 120 days from
the date of the order. The Company has so far not received any communications
from the department/High Court on whether the department has disputed this claim
of the Company in the High Court. If the Company loses that case, the tax
authorities may make the Company liable for similar claims for subsequent years
and this could result in an aggregate potential liability of approximately
Rs.12.4 billion (US$264.8 million) including interest, but excluding penalties,
66
thereon as of March 31, 2000 and additional amounts for the periods thereafter.
The Company has been advised by independent Indian counsel that it believes that
the Company has a strong case with respect to this claim.
The Indian tax authorities have also taken the position that the
Company is not entitled to a tax benefit claimed by it in the years ended March
31, 1996, 1997 and 1998 with respect to certain of its profits which the Company
claims were generated by an enterprise engaged in infrastructure development.
The Indian tax authorities claim that the Company owes approximately Rs.0.1
billion, Rs.0.3 billion and 0.5 billion in respect of taxes due (including
interest) in connection with such profits for the years ended March 31, 1996,
1997 and 1998, respectively. The Company disputes this claim and has lodged an
appeal with the Commissioner of Income-tax (Appeals) - I, Mumbai. The
outstanding amount of the claim continues to accrue interest at a rate of two
percent per month. If the Company loses its case, the tax authorities may make
similar claims for subsequent years, resulting in an aggregate potential
liability of approximately Rs.5.7 billion (US$121.66 million) including
interest, but excluding penalties, thereon as of March 31, 2001 and additional
amounts for periods thereafter. The Company believes that it has a reasonable
basis for its claim and that its appeal will succeed.
Furthermore, the Indian tax authorities have taken the position that
the Company has not offered for tax certain reimbursements it received from the
Government during the year ended March 31, 1994. The Indian tax authorities
claim that the Company owes approximately Rs.1.1 billion in respect of taxes due
in connection with such reimbursements for the year ended March 31, 1994. The
Company disputes this claim and has lodged an appeal with the Commissioner of
Income Tax (Appeals) - I, Mumbai. The outstanding amount of the claim continues
to accrue interest at the rate of two percent per month. If the Company loses
its case, the Company's aggregate potential liability would be approximately
Rs.2.7 billion (US$57.63 million) including interest, but excluding penalties,
thereon as of March 31, 2001. The Company believes that it has a reasonable
basis for its claim and that its appeal will succeed.
Consequently, the Company has not made provision for the potential
liability arising from these claims.
ITEM 9. THE OFFER AND LISTING
TRADING MARKETS
GENERAL
The Company's Shares are traded on the stock exchanges of Mumbai,
Kolkata, Delhi and Chennai and the National Stock Exchange of India Ltd.
(collectively, the "Indian Stock Exchanges"). The Company's American Depositary
Shares (ADSs) represented by American Depositary Receipts (ADRs) are listed on
the New York Stock Exchange and on September 24, 2001, the last reported sale
price was US$7.55 per ADS on the New York Stock Exchange. Each ADS represents
two Shares. The ADSs were issued by The Bank of New York (the "Depositary"),
pursuant to a Deposit Agreement.
The number of outstanding Shares of the Company as of March 31, 2001
was 285,000,000. As of March 31, 2001, there were 68,271 record holders of the
Shares listed and traded on the Indian Stock Exchanges. As of March 31, 2001,
there were approximately 41,634,110 of the Company's ADRs (equivalent to
83,268,219 Shares).
67
PRICE HISTORY
PRINCIPAL MARKET FOR THE COMPANY'S ADSs
The table below set forth, for the periods indicated, the high and low
sales prices on the New York Stock Exchange for the ADSs since August 2000, the
original date of listing of the ADSs.
ADS PRICE
-------------------------
HIGH LOW
---- ---
IN US DOLLARS
Yearly Period:
Fiscal 2001 (beginning August 15, 2000)....... 18.75 9.50
Quarterly Periods:
2001 Quarterly Periods:
First Quarter.............................. N/A N/A
Second Quarter (beginning August 15, 18.75 10.25
2000)......................................
Third Quarter.............................. 15.50 9.50
Fourth Quarter............................. 17.88 11.77
2002 Quarterly Periods:
First Quarter....................... 15.74 11.40
Second Quarter (up to August 31, 13.95 11.23
2001)..................................
2001 Monthly Periods:
March...................................... 14.45 11.77
April ..................................... 13.75 11.40
May........................................ 15.74 12.85
June....................................... 15.00 13.35
July....................................... 13.95 11.23
August..................................... 12.20 11.36
----------------
On September 24,2001, the closing price of the Company's ADSs on the New York
Stock Exchange was US$7.75. SOURCE: Bloomberg L.P.
68
The table below sets forth, for the periods indicated, the high, low
and closing sales prices for the Shares on the BSE.
THE STOCK EXCHANGE, MUMBAI
-------------------------------------------------------------------------------
PRICE PER
PERIOD SHARE(1)
---------------------------------------------- ------------------------------
HIGH LOW
-------- -------
Yearly Periods:
1997....................................... 1475 900
1998....................................... 1300 700
1999....................................... 970 660
2000....................................... 3250 565
2001....................................... 1938.6 198.35(2)
Quarterly Periods:
2000
First Quarter.............................. 976.75 565
Second Quarter............................. 1149.9 890
Third Quarter.............................. 2110 1005
Fourth Quarter............................. 3250 1600
2001
First Quarter.............................. 1938.6 826.05
Second Quarter............................. 1240.05 675
Third Quarter.............................. 355.95(2) 198.35(2)
Fourth Quarter............................. 415 280
2001 Monthly Periods:
March...................................... 375 280
April...................................... 332 272
May........................................ 402 305.35
June....................................... 366 312
July....................................... 345 256.8
August..................................... 299 261.25
-------------------
(1) On September 24, 2001, the closing price of a Share on the BSE was Rs.
197.25.
(2) Post-Bonus price - A bonus of 2:1 was declared and became effective during
November 2000.
SOURCE: The Stock Exchange, Mumbai
69
The table below sets forth, for the periods indicated, the high, low
and closing sales prices and the average daily trading volume for the Shares on
the NSE.
NATIONAL STOCK EXCHANGE
----------------------------------------------------------------------------
PRICE PER
PERIOD SHARE(1)
------------------------------------------------- ------------------------
HIGH LOW
------- ------
Yearly Periods:
1997....................................... 1450 855
1998....................................... 1300 715
1999....................................... 995 640
2000....................................... 3298 561
2001....................................... 1990 210(2)
Quarterly Periods:
2000
First Quarter.............................. 1042.2 561
Second Quarter............................. 1132.4 898.8
Third Quarter.............................. 2087.9 1024
Fourth Quarter............................. 3298 1600
2001
First Quarter.............................. 1990 801
Second Quarter............................. 1248.9 673.05
Third Quarter.............................. 355.6(2) 210(2)
Fourth Quarter............................. 414.5 279.5
2001 Monthly Periods:
March...................................... 367.7 279.5
April...................................... 333 270
May........................................ 400 306
June....................................... 366.7 311.05
July....................................... 340.1 258.05
August..................................... 296 230
-------------------
(1) On September 24, 2001, the closing price of a Share on the National Stock
Exchange was Rs.196.05. (2) Post-Bonus price - A bonus of 2:1 was declared
and became effective during November 2000.
SOURCE: The National Stock Exchange
The Company is not aware of trading having taken place at the stock
exchanges in Kolkata, Delhi and Chennai.
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. In May
70
1996, Securities and Exchange Board of India ("SEBI") 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 depositories
participants and the issuers. Every depositary is required to be registered with
SEBI. The depositary system is expected eventually to improve significantly the
operations of the Indian securities markets. Pursuant to the Depositories Act,
the National Securities Depositary Limited was established by the Unit Trust of
India, the Industrial Development Bank of India and the NSE in 1996 to provide
electronic depositary facilities for trading in equity and debt securities. The
National Securities Depositary Limited, which commenced operations in November
1996, was the first depositary in India. The BSE announced plans to establish
another depositary, and has accordingly incorporated the Central Depository
Services Limited, which commenced operations on July 15, 1999. The depository
system has significantly improved the operations of India's securities market.
Trading of securities in book-entry form commenced in December 1996 and
is available for securities of more than 600 companies at January 2000. In order
to encourage "dematerialization" of securities, SEBI has set up a working group
on dematerialization of securities comprising Foreign Institutional Investors,
custodians, stock exchanges, mutual funds and the National Securities Depositary
Limited to review the progress of securities and trading in dematerialized form
and to recommend scrips for compulsory dematerialized trading in a phased
manner. Accordingly, commencing January 1998, SEBI has notified scrips of
various companies for compulsory dematerialized trading by certain categories of
investors such as foreign and other institutional investors and has also
notified compulsory dematerialized trading in specified scrips for all retail
investors. SEBI proposes to increase the number of scrips in which
dematerialized trading is compulsory for all investors significantly in the near
future. SEBI has also provided that the issue and allotment of shares in public,
rights or offer for sale after a specified date (to be notified to SEBI) shall
only be in dematerialized form and an investor shall be compulsorily required to
open a depository account with a participant.
However, even in case of scripts notified for compulsory dematerialized
trading, investors, other than institutional investors, are permitted to trade
in physical shares on transactions outside the stock exchange where there are no
requirements of reporting such transactions to the stock exchange and
transactions on the stock exchange involving lots less than 500 securities.
Under the Takeover Code, upon the acquisition of more than 5 percent of
the outstanding shares of a public Indian Company, a purchaser is required to
notify the Company and all the stock exchanges on which the shares of the
Company are listed. Upon the acquisition of 15 percent or more of such shares or
a change in control of the Company, the purchaser is required to make an open
offer to the other shareholders offering to purchase at least 20% of all the
outstanding shares of the Company at a minimum offer price as determined
pursuant to the rules of the Takeover Code. Upon conversion of ADSs into Equity
Shares, an ADS holder will be subject to the Takeover Code. Open market
purchases of securities of Indian companies in India by Foreign Direct Investors
or investments by Non-Resident Indians, Overseas Corporate Bodies and Foreign
Institutional Investors above the ownership levels set forth above require
Government of India approval on a case-by-case basis.
ITEM 10. ADDITIONAL INFORMATION
SHARE CAPITAL
Not applicable.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is information relating to the share capital of the
Company, including certain provisions of its Articles and the Companies Act,
71
1956 (the "Companies Act"). The Company is registered under the Companies Act
with the Registrar of Companies, Mumbai, India with Company No. 39266. The
following description of the Company's Articles of Association and Memorandum of
Association does purport to be complete and are qualified in their entirety by
the Company's Articles of Association and Memorandum of Association that are
included as exhibits to the Company's Annual Report on Form 20-F, filed with the
United States Securities and Exchange Commission on October 13, 2000 and are
incorporated herein by reference.
GENERAL
The Company's authorized share capital is Rs.3,000,000,000, divided
into 300,000,000 Shares with a face value of Rs.10 each. At the date hereof,
285,000,000 Shares were issued and fully paid. SEBI has recently allowed Indian
companies to split the par value of their Equity Shares into denominations lower
than Rs.10 per share. All Share and per Share amounts appearing in the financial
data presented elsewhere herein have been retroactively restated to reflect this
bonus issue.
The Shares are in registered form. The Shares are the only class of
share capital of the Company currently in existence. There are no convertible
debentures or warrants of the Company currently in existence.
Under our Memorandum of Association, the main objects of the Company
include:
o Managing, controlling and maintaining the operations of the
Overseas Communications Service of the Department of
Telecommunication, Ministry of Communications, Government of
India, with all its assets and liabilities including contractual
rights and obligations on such terms and conditions as may be
prescribed by the Government of India from time to time.
o Planning, establishing, developing, providing, operating and
maintaining all types of international telecommunication
networks, systems and services including, Telephone, Telex,
Message Relay, Data transmission, Facsimile, Television,
Telematics, value Added Network Services, New Business Services,
Audio and Video Services, Maritime and Aeronautical Communication
Services and other international telecommunications services as
are in use elsewhere or to be developed in future.
o Planning, establishing, developing, providing, operating and
maintaining telecommunications systems and networks within India
as are found necessary for international telecommunications.
o Providing and maintaining international leased telecommunication
services.
o Designing, developing, installing, maintaining and operating long
distance domestic and international basic and value added
telecommunications, global mobile telecommunications, electronic
mail services, globally managed data networks, data telecom
networks, video conferencing, international gateway networks and
satellite networks in and outside India.
DIRECTORS
COMPENSATION. The fulltime directors are entitled to receive
compensation for their service to the Company. The external directors are
entitled to receive a fee for each meeting of the Board or a committee thereof
72
that they attend. The fee for attending any meeting may be determined by the
Board from time to time but must be within the maximum limit prescribed under
the Companies Act. Subject to any provisions of the Companies Act, directors may
be entitled to additional remuneration, if the director is called upon to
perform an extraordinary service in behalf of the Company. In addition,
directors may be reimbursed for reasonable traveling and other related expenses
in connection with attending any meetings of the Board or a committee thereof.
BORROWING POWERS. Subject to the provisions of the Company Act, the
Board may pass a resolution at a meeting of the Board from time to time to
borrow and/or secure the payment of any sum or sums of money for the purposes of
the Company. The Board has the power, in its discretion, to determine the terms
and conditions of such borrowing, including issuing bonds, debentures or any
mortgage, charge or other security on the undertaking of any property of the
Company.
QUALIFICATION; RETIREMENT. A director need not hold any of the
Company's Shares to qualify as a director. There is no age limit requirement for
a director's retirement.
The President of India is empowered by Article 66A of the Companies Act
to appoint one-third of the total number of Directors sitting at any time as
non-retiring directors and to designate the Chairman and Managing Director. The
remaining directors of the Company are liable to retire by rotation, and
one-third of such directors are elected by the shareholders each year at the
Company's Annual General Meeting. The directors to retire in every year shall be
those who have been longest in office since their last election, but as between
persons who became directors on the same day shall be determined by lot unless
they otherwise agree between themselves. The retiring directors shall be
eligible for re-election.
DIVIDENDS
The Company's shareholders, acting at the Annual General Meeting, may
declare a dividend upon the recommendation of the Board of Directors. The amount
of the dividend so declared may not exceed the amount recommended by the Board
although a lesser amount may be declared. Dividends are distributed and paid
within 30 days of the declaration by the shareholders. The Company's Board also
is authorized under the Articles to declare and pay interim dividends to
shareholders. It is customary in India to pay to holders of shares issued in any
fiscal year a pro rata portion of the annual dividend for the portion of the
year such shares were issued.
Dividends are payable only in cash to registered holders on a record
date fixed prior to the relevant General Meeting.
Dividends may be paid only out of profits of the Company for the
relevant year, after transfer to the reserves of the Company of a percentage of
its profits for that year of not less then 2.5 percent if the dividend is in
excess of 10 percent. The Companies Act further provides that, in the event of
inadequacy or absence of profits in any year, a dividend may be declared for
such year out of the Company's accumulated profits, subject to certain
limitations.
Under the Companies Act, the dividend amount is required to be
maintained in a separate bank account within five days of declaration of such
dividend.
The Board of Directors of the Company had recommended a dividend of
Rs.50 on every share of Rs.10 for the financial year ended March 31, 2001, and
the same has been approved at the Annual General Meeting held on September 27,
2001.
73
The Company is subject to nonbinding Ministry of Finance guidelines
regarding the payout of dividends by PSUs. See "Dividends."
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 ten percent 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.
Any shareholder of the Company may appoint a proxy. The instrument
appointing a proxy must be lodged with the Company 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 alteration of the Articles,
commencement of a new line of business, issuance of further Shares without
preemptive rights and reduction of share capital, require that the votes cast in
favor of the resolution (whether by show of hands or upon a poll) be not less
than three times the number of votes, if any, cast against the resolution.
BONUS SHARES
In addition to permitting dividends to be paid out of current or
retained earnings, the Companies Act permits the Company to distribute bonus
Shares to shareholders. Upon any such distribution an amount equal to the face
value of such bonus Shares is transferred from the general reserve or share
premium account to share capital. Such bonus Shares must be distributed to
shareholders in proportion to the number of Shares owned by them.
PREEMPTIVE RIGHTS AND ISSUE OF ADDITIONAL SHARES
Subject to the approval of the President of India, the Company may by
ordinary resolution increase its 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 shareholders holding 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 special resolution to that
effect adopted at an Annual General Meeting of shareholders. Under the Companies
Act, in the event of an issuance of securities, subject to the limitations the
Company must first offer such Shares to existing shareholders by notice
specifying (1) the number of Shares offered and the date, within 30 days from
the date of offer, by which the offer must be accepted and (2) the right,
exercisable by the shareholder, to renounce the shares offered in favor of any
other person. The Board 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 the Company in accordance with the Articles.
GENERAL MEETING OF SHAREHOLDERS
The Company is required to convene an Annual General Meeting of its
shareholders within six months after the end of each fiscal year and may convene
an Extraordinary General Meeting of shareholders when necessary or at the
request of a shareholder or shareholders holding not less than ten percent of
the paid-up capital of the Company 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. 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 the
registered office of the Company 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 if so determined by the Board.
74
The Articles provide that a quorum for a General Meeting is the
presence of at least five shareholders, including a representative of the
President of India.
REGISTER OF SHAREHOLDERS; RECORD DATES; TRANSFER OF SHARES
The Company's share transfer agent maintains a register of shareholders
of the Company. For the purpose of determining Shares entitled to annual
dividends the register is closed for a specified period prior to the Annual
General Meeting. The Companies Act and the Company's listing agreement with the
BSE (and the other Indian Stock Exchanges) permit the Company, pursuant to a
resolution of the Board and upon at least 42 days' advance notice to the BSE
(and such 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 the Company to determine
which shareholders are entitled to certain rights pertaining 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 various laws affecting companies in India
may, on application made by an investor, SEBI or certain other parties, direct
the rectification of the register of records. 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 such 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 if the Company Law Board so orders.
Transfer of Shares of the Company is effected by an instrument of
transfer in the form prescribed by the Government of India coupled with delivery
of the share certificates. The transfer agent of the Company is M/s.Sharepro
Services, located in Mumbai.
The above procedure is not applicable where the Shares are
dematerialized and transferred electronically. To encourage "dematerialization"
of securities in India, SEBI has required certain types of securities of certain
Indian companies to be traded and settled in book-entry form. The Shares of the
Company have been designated as one of such securities. To effect transfer of
Shares in book-entry form, the seller and purchaser must establish accounts with
a depositary participant appointed by the National Securities Depository
Limited, a depositary established pursuant to the Depositories Act, 1996, and
the only functioning depositary in India to date. Charges for opening an account
with an National Securities Depositary Limited participant, transaction charges
for each trade and custodian charges for securities held in each account vary
depending upon the business practice of each National Securities Depositary
Limited participant. Upon delivery, the Shares purchased will be registered in
the name of the National Securities Depositary Limited participant and held by
such National Securities Depositary Limited participant for the account of the
purchaser. So long as the Shares are traded through the book-entry system of
National Securities Depositary Limited, ownership of beneficial interest in the
Shares will be shown on, and transfer of such ownership will be effected only
through, records maintained by National Securities Depositary Limited
participants.
The requirement for dematerialization of the Shares may apply to the
ADR holders when the underlying Shares are withdrawn from the depositary
facility upon surrender of the ADRs.In order to trade the underlying Shares in
the Indian market, the withdrawing ADR holder will be required to hold such
Shares in book-entry form and to comply with the National Securities Depositary
Limited procedures described above. If dematerialization of any underlying
Shares is requested by an ADR holder, the cost incurred by the Depositary
therefor will be borne by the withdrawing ADR holder. Transfer of Shares in
book-entry form is not subject to any Indian transfer tax.
See "Taxation--Indian Taxation."
75
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 ADRs of a company, investors who exchange ADRs 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.l,000 for each day such failure continues.
Furthermore, any charge, promissory note 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 in the Company equals
or exceeds 51 percent, Section 187C will not apply to holders of the Company's
equity securities, including holders of either the ADRs or the Shares.
AUDIT AND ANNUAL REPORT
At least 21 days before the Annual General Meeting of shareholders, the
Company must circulate a detailed version of the Company's audited balance sheet
and profit and loss account and the reports of the Board of Directors and the
auditors thereon. The Company also is required under the Companies Act to make
available upon request of any shareholder a complete balance sheet and profit
and loss account of the Company in the case of circulation of abridged accounts.
The Comptroller and Auditor General of India has the power to direct
the manner in which the Company's accounts shall be audited by the auditors
appointed by the Government of India and to conduct a supplementary or test
audit of the Company's accounts by such auditors. The Comptroller and Auditor
General of India also has the right to comment on or supplement the audit report
to the Comptroller and Auditor General of India which must be placed before the
Annual General Meeting of the Company at the same time and in the same manner as
the audit report.
Under the Companies Act, the Company must file with the Registrar of
Companies the balance sheet and annual profit and loss account presented to the
shareholders within 30 days of the conclusion of the Annual General Meeting and
an annual return within 60 days of the conclusion of the meeting.
POWERS OF THE PRESIDENT OF INDIA
Under Article 66B of the Articles, the President of India is entitled
to appoint the Company's Chairman and Managing Director, Article 69(i) requires
the Chairman to reserve for decision of the President of India such 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 such important issue 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 capital expenditures in excess of Rs.2 billion
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, the Company may not take
action in respect of any proposal or decision of the Board reserved for approval
of the President until his approval is obtained. The President may modify such
proposals or decisions.
Article 70 grants the President of India the power to issue directives
in regard to the conduct of business and affairs of the Company, which
directives are binding on the Company's Board of Directors.
ACQUISITION BY THE COMPANY OF ITS OWN SHARES
Until recently, 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 amended the Indian Companies Act and
consequently this reduction in capital is now permitted in certain
circumstances. The reduction of capital requires compliance with specific
buy-back guidelines specified in the Indian Companies (Amendment) Act, 1999, and
by SEBI.
ADR holders will not be eligible to participate in a buyback in case of
tender offers, odd lots and open market purchases unless they surrender their
ADSs and receive delivery of the underlying Shares. ADR holders should note that
Shares withdrawn from the depositary facility may not be redeposited into such
depositary facility. See "--Description of American Depositary Receipts--Deposit
of Shares and Other Securities."
76
There can be no assurance that the underlying Shares offered by the ADR
holders in any buyback of Shares by the Company will be accepted by the Company.
The regulations relating to the buyback of securities have only been introduced
recently and there is very limited experience in the interpretation of such
regulations. ADR Holders are advised to consult their Indian legal advisers
prior to participating in any buyback by the Company, including in relation to
any tax issues relating to such buyback.
Foreign Institutional Investors should note that in the event of a
buyback by the Company, the prescribed threshold limit for shareholdings by
Foreign Institutional Investors may be exceeded by default regardless of any
participation or non-participation by them in the buyback. The treatment of the
Foreign Institutional Investors threshold limits in the buyback context is
uncertain, and Foreign Institutional Investors are advised to consult their
Indian legal advisers in this regard.
LIQUIDATION RIGHTS
Subject to the rights of creditors, employees and of the holders of any
other shares entitled by their terms to preferential repayment over the Shares,
in the event of winding up of the Company, the holders of the Shares are
entitled to be repaid the amounts of capital paid up or credited as paid up on
such 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.
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 (the "Takeover Code"), which prescribes certain
thresholds or trigger points that give rise to these obligations. The Takeover
Code is under constant review by SEBI and was recently amended.
The most important features of the Takeover Code, as amended, are as
follows:
o 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 percent of the shares or voting rights in a company
is required to disclose the aggregate of his shareholding or
voting rights 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 four working days of (a) the
receipt of allotment information or (b) the acquisition of shares
or voting rights, as the case may be.
o A person who holds more than 15 percent of the shares or voting
rights in any company is required to make annual disclosure 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).
o Promoters or persons in control of a company are also required to
make annual disclosure in respect of their holdings in the same
manner.
With respect to takeovers (other than bail-out takeovers) of listed
companies, the Takeover Code, as amended, provides for mandatory bid and open
offer requirements, summarised below:
o An acquiror 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
acquiror to exercise 15 percent or more of the voting rights in a
company, unless such acquiror makes a public announcement
offering to acquire an additional 20 percent of the shares of the
company.
o An acquiror who, together with persons acting in concert with
him, holds between 15 percent and 75 percent cannot acquire
additional shares or voting rights that would entitle him to
exercise more than 5 percent of the voting rights in any period
of twelve months unless such acquiror makes a public announcement
offering to acquire an additional 20 percent of the shares of the
company.
77
o Any further acquisition of shares or voting rights by an acquiror
who holds 75 percent of the shares or voting rights in a company
triggers the same public announcement requirements.
o In addition, regardless of whether there has been any acquisition
of shares or voting rights in a company, an acquiror 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 acquiror makes a
public announcement offering to acquire a minimum of 20 percent
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, as amended, permits conditional offers as well as
the acquisition and subsequent delisting of all shares of a company and provides
specific guidelines for the gradual acquisition of shares or voting rights.
Specific obligations of the acquiror and of the board of directors of the target
company in the offer process have also been set out. Acquirors making a public
offer will be required to deposit in an escrow account 25 percent of the total
consideration (if the total consideration is Rs.1.0 billion (US$0.02 billion) or
less) up to and including Rs.1 billion (US$0.02 billion) and 10 percent for the
excess over Rs.1 billion, which amount will be forfeited in the event that the
acquiror does not fulfill his obligations. In addition, the Takeover Code
introduces the "chain principle" whereby the acquisition of a holding company
will obligate the acquiror to make a public offer to the shareholders of each of
the publicly listed companies acquired through the acquisition of the holding
company.
The general requirements to make such a public announcement do not,
however, apply entirely to bail-out takeovers when a promoter (i.e., 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 fiscal year, accumulated losses resulting in erosion of more than 50
percent (but less than 100 percent) of the total sum of its paid-up capital and
free reserves at the end of the previous fiscal year. A "sick industrial
company" is a company registered for more than five years which has, at the end
of any fiscal 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 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. In addition, the Takeover Code does not apply to shares represented
by ADSs so long as such shares remain in the ADR depositary facility.
The Company has 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 percent or more of the
company's outstanding Equity Shares, the acquirer must report its holding to the
relevant stock exchange(s). If an acquisition could result in the acquirer and
its associates holding Equity Shares which carry 10 percent or more of the
voting rights, then the acquirer must notify the relevant stock exchange(s). If
such acquisition is deemed a takeover, the acquirer must, before acquiring such
shares, offer (in accordance with Clause 40B of the listing agreements) on a
uniform basis to all remaining shareholders of the company to acquire a minimum
of a further 20 percent 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. Clauses 40A and 40B and such regulations will not apply to
Shares so long as they are represented by ADRs.
78
MATERIAL CONTRACTS
Not applicable.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
RESTRICTION ON CONVERSION OF RUPEES
There are restrictions on the conversion of Rupees into US 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% of the foreign exchange
received on the trade or current account at a market-determined rate and the
remaining 40% at the official rate. All importers were, however, required to buy
foreign exchange at the market rate except for importers of certain specified
priority imports. In March 1993, the exchange rate was unified and allowed to
float and made convertible on the revenue account. In February 1994 and again in
August 1994, the Reserve Bank of India announced relaxations in payment
restrictions for 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 1999, the process of current account
convertibility was advanced by relaxing restrictions on foreign exchange for
various purposes, such as foreign travel and medical treatment.
RESTRICTIONS ON SALE OF THE EQUITY SHARES UNDERLYING THE COMPANY'S
AMERICAN DEPOSITARY RECEIPTS AND FOR REPATRIATION OF SALE PROCEEDS
American Depositary Receipts 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 Shares underlying the ADRs by a non-resident of India to a
resident of India as well as for renunciation of rights to a resident of India.
Further, the Depositary cannot accept deposits of outstanding Equity Shares and
issue American Depositary Receipts evidencing American Depositary Shares
representing such Equity Shares. Therefore, an investor in the ADSs who
surrenders ADSs and withdraws Shares is not permitted subsequently to deposit
such Shares and obtain ADSs. Nor would a holder to whom such Shares are
transferred be permitted to deposit such Shares. Investors who seek to sell in
India any Equity Shares 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 obtain
Reserve Bank of India approval for such transaction.
GENERAL
Shares of Indian companies represented by ADSs may be approved for
issuance to foreign investors by the Government of India under the Issue of
Foreign Currency Convertible Bonds and Equity Shares (through Depositary Receipt
Mechanism) Scheme, 1993 (the "1993 Regulation"), as modified from time to time,
promulgated by the Government. The 1993 Regulation is distinct from other
policies or facilities, as described below, relating to investments in Indian
companies by foreign investors. The issuance of ADSs pursuant to the 1993
Regulation also affords to holders of the ADSs the benefits of Section 115AC of
the Indian Income Tax Act, 1961 for purposes of the application of Indian tax
law.
FOREIGN DIRECT INVESTMENT
In July 1991, the Government raised the limit on foreign equity
holdings in Indian companies from 40 percent to 51 percent in certain high
priority industries. The Reserve Bank of India gives automatic approval for such
foreign equity holdings. The Foreign Investment Promotion Board, currently under
the Ministry of Industry, was thereafter formed to negotiate with large foreign
companies wishing to make long-term investments in India. Foreign equity
participation in excess of 51 percent in such high priority industries or in any
other industries up to Rupees six billion is currently allowed only with the
approval of the Foreign Investment Promotion Board. Proposals in excess of
79
Rupees six billion require the approval of the Cabinet committee on Foreign
Investment. Proposals involving the public sector and other sensitive areas
require the approval of Cabinet Committee on Economic Affairs. These facilities
are designed for direct foreign investments by non-residents of India who do not
qualify as Non-Resident Indians, Overseas Corporate Bodies or Foreign
Institutional Investors (as each term is defined below) ("Foreign Direct
Investors"). The Department of Industrial Policy and Promotion, a part of the
Ministry of Industry, issued detailed guidelines in January 1997 for
consideration of foreign direct investment proposals by the Foreign Investment
Promotion Board (the "Guidelines"). Under the Guidelines, sector specific
guidelines for foreign direct investment and the levels of permitted equity
participation have been established. In January 1998, the Reserve Bank of India
issued a notification that foreign ownership of up to 50 percent, 51 percent, 74
percent or 100 percent depending on the category of industry, would be allowed
without prior permission of the Reserve Bank of India. The issues to be
considered by the Foreign Investment Promotion Board, and the Foreign Investment
Promotion Board's areas of priority in granting approvals are also set out in
the Guidelines. The basic objective of the Guidelines is to improve the
transparency and objectivity of the Foreign Investment Promotion Board's
consideration of proposals. However, because the Guidelines are administrative
guidelines and have not been codified as either law or regulations, they are not
legally binding with respect to any recommendation made by the Foreign
Investment Promotion Board or with respect to any decision taken by the
Government of India in cases involving foreign direct investment.
In May 1994, the Government announced that purchases by foreign
investors of ADSs as evidenced by ADRs and foreign currency convertible bonds of
Indian companies will be treated as direct foreign investment in the equity
issued by Indian companies for such offerings. Therefore, offerings that involve
the issuance of equity that results in Foreign Direct Investors holding more
than the stipulated percentage of direct foreign investments (which depends on
the category of industry) would require approval from the Foreign Investment
Promotion Board. In addition, in connection with offerings of any such
securities to foreign investors, approval of the Foreign Investment Promotion
Board is required for Indian companies whether or not the stipulated percentage
limit would be reached, if the proceeds therefrom are to be used for investment
in non-high priority industries. With respect to the activities of the Company,
Foreign Investment Promotion Board approval is required for any direct foreign
investment in the Company which exceeds 51 percent of the total issued share
capital of the Company.
In July 1997, the Government issued guidelines to the effect that
foreign investment in preferred shares will be considered as part of the share
capital of a company and will be processed through the automatic Reserve Bank of
India route or will require the approval of the Foreign Investment Promotion
Board, as the case may be. Investments in preferred shares are included as
foreign direct investment for the purposes of sectoral caps on foreign equity,
if such preferred shares carry a conversion option. If the preferred shares are
structured without a conversion option, they would fall outside the foreign
direct investment limit but would be treated as debt and would be subject to
special Government of India guidelines and approvals.
INVESTMENT BY NON-RESIDENT INDIANS, PERSONS OF INDIAN ORIGIN AND
OVERSEAS CORPORATE BODIES
A variety of special facilities for making investments in India in
shares of Indian companies are available to individuals of Indian nationality or
origin residing outside India, persons of Indian origin and to overseas
corporate bodies ("OCBs"), at least 60 percent owned by such persons. These
facilities permit Non-Resident Indians, Persons of Indian Origin and OCBs to
make portfolio investments in shares and other securities of Indian companies on
a basis not generally available to other foreign investors. These facilities are
different and distinct from investments by Foreign Direct Investors described
above.
INVESTMENT BY FOREIGN INSTITUTIONAL INVESTORS
In September 1992, the Government issued guidelines which enable
Foreign Institutional Investors, including institutions such as pension funds,
investment trusts, asset management companies, nominee companies and
incorporated/institutional portfolio managers, to invest in all the securities
80
traded on the primary and secondary markets in India. Under the guidelines,
Foreign Institutional Investors are required to obtain an initial registration
from SEBI and a general permission from the Reserve Bank of India to engage in
transactions regulated under the Foreign Exchange Management Act of 1999.
Foreign Institutional Investors must also comply with the provisions of the SEBI
Foreign Institutional Investors Regulations, 1995. When it receives the initial
registration, Foreign Institutional Investors also obtain general permission
from the Reserve Bank of India to engage in transactions regulated under the
Foreign Exchange Management Act of 1999. Together, the initial registration and
the Reserve Bank of India's general permission enable registered Foreign
Institutional Investors to buy (subject to the ownership restrictions discussed
below) and sell freely securities issued by Indian companies, to realize capital
gains on investments made through the initial amount invested in India, to
subscribe or renounce rights offerings for shares, to appoint a domestic
custodian for custody of investments held and to repatriate the capital, capital
gains, dividends, and income received by way of interest and any compensation
received towards sale or renunciation of rights offerings of shares.
OWNERSHIP RESTRICTIONS
SEBI and the Reserve Bank of India regulations restrict investments in
Indian companies by Foreign Direct Investors. Under current SEBI regulations
applicable to the Company, Foreign Direct Investors in aggregate may hold no
more than 40 percent of the Company's Equity Shares, excluding the Equity Shares
underlying the ADSs, and Non-Resident Indians and Overseas Corporate Bodies in
aggregate may hold no more than 10 percent of the Company's Equity Shares,
excluding the Equity Shares underlying the ADSs. Furthermore, SEBI regulations
provide that no single Foreign Institutional Investor may hold more than 10
percent of the Company's total Equity Shares and no single Non-Resident Indian
or OCB may hold more than 5 percent of the Company's total Equity Shares.
Foreign Institutional Investors may only purchase securities of public
Indian companies (other than ADSs) through a procedure known as a "preferential
allotment of shares," which is subject to certain restrictions. These
restrictions will not apply to Equity Shares issued as stock dividends or in
connection with rights offerings applicable to the Equity Shares underlying
ADSs. There is uncertainty under Indian law about the tax regime applicable to
Foreign Institutional Investors which hold and trade ADSs. Foreign Institutional
Investors are urged to consult with their Indian legal and tax advisers about
the relationship between the Foreign Institutional Investors guidelines and the
ADSs and any Equity Shares withdrawn upon surrender of ADSs.
More detailed provisions relating to Foreign Institutional Investors
investment have been introduced by the SEBI with the introduction of the SEBI
Foreign Institutional Investors Regulations, 1995. These provisions relate to
the registration of Foreign Institutional Investors, their general obligations
and responsibilities, and certain investment conditions and restrictions. One
such restriction is that the total investment in equity and equity-related
instruments should not be less than 70 percent of the aggregate of all
investments of the Foreign Institutional Investors in India. The SEBI has also
permitted private placements of shares by listed companies with Foreign
Institutional Investors, subject to the prior approval of the Reserve Bank of
India under the Foreign Exchange Regulation Act of 1973. Such private placement
must be at the average of the weekly highs and lows of the closing price over
the preceding six months of the preceding two weeks, whichever is higher.
VOTING RIGHTS
Holders of the Company's ADSs will not be entitled to instruct the
Depositary how to vote the Shares underlying the ADSs. Rather, each holder, by
accepting an ADR, authorized and directed the Depositary to vote as set forth
below.
The Depositary will vote the deposited Shares as instructed by the
Company's Board of Directors or give a proxy or power of attorney to vote the
deposited Shares to a person designated by the Board of Directors. However, the
Depositary will only do this upon the Company's legal counsel issuing an opinion
to the Depositary stating it is legal for the Depositary to do so and that doing
so will not expose the Depositary to legal liability. If the Company does not
provide the legal opinion referred to above, the Depositary will not vote the
deposited Shares or give a proxy or power of attorney to anyone else to vote the
deposited Shares.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
AMERICAN DEPOSITARY RECEIPTS
The Bank of New York, also referred to as the Depositary, will execute
and deliver the ADRs. ADRs are American Depositary Receipts. Each ADR is a
certificate evidencing a specific number of American Depositary Shares, also
referred to as ADSs. Each ADS will represent two Shares (or a right to receive
two Shares) deposited with ICICI Limited, as custodian for the Depositary in
India. Each ADS will also represent any other securities, cash or other property
which may be held by the Depositary under the deposit agreement. The
Depositary's office at which the ADRs will be administered is located at 101
Barclay Street, New York, New York 10286. The custodian's office is located at
ICICI Towers, Bandrakurla Complex, Bandra East, Mumbai 400 051, India.
YOU MAY HOLD ADSS EITHER DIRECTLY (BY HAVING AN ADR REGISTERED IN YOUR
NAME) OR INDIRECTLY THROUGH YOUR BROKER OR OTHER FINANCIAL INSTITUTION. IF YOU
HOLD ADSS DIRECTLY, YOU ARE AN ADR HOLDER. THIS DESCRIPTION ASSUMES YOU HOLD
YOUR ADSS DIRECTLY. IF YOU HOLD THE ADSS INDIRECTLY, YOU MUST RELY ON THE
PROCEDURES OF YOUR BROKER OR OTHER FINANCIAL INSTITUTION TO ASSERT THE RIGHTS OF
ADR HOLDERS DESCRIBED IN THIS SECTION. YOU SHOULD CONSULT WITH YOUR BROKER OR
FINANCIAL INSTITUTION TO FIND OUT WHAT THOSE PROCEDURES ARE.
AS AN ADR HOLDER, WE WILL NOT TREAT YOU AS ONE OF OUR SHAREHOLDERS AND
YOU WILL NOT HAVE SHAREHOLDER RIGHTS. INDIAN LAW GOVERNS SHAREHOLDER RIGHTS. THE
DEPOSITARY IS THE HOLDER OF THE SHARES UNDERLYING YOUR ADSS. AS A HOLDER OF
ADRS, YOU HAVE ADR HOLDER RIGHTS. A DEPOSIT AGREEMENT AMONG US, THE DEPOSITARY
AND YOU, AS AN ADR HOLDER SET OUT ADR HOLDER RIGHTS AS WELL AS THE RIGHTS AND
OBLIGATIONS OF THE DEPOSITARY, AS DEPOSITARY. NEW YORK LAW GOVERNS THE DEPOSIT
AGREEMENT AND THE ADRS.
THE FOLLOWING IS A SUMMARY OF THE DEPOSIT AGREEMENT. BECAUSE IT IS A
SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU.
FOR MORE COMPLETE INFORMATION, YOU SHOULD READ THE ENTIRE DEPOSIT AGREEMENT AND
THE FORM OF ADR. COPIES OF THE DEPOSIT AGREEMENT INCLUDING THE FORM OF ADR ARE
AVAILABLE FOR INSPECTION AT THE OFFICE OF THE DEPOSITARY AND AT THE OFFICE OF
THE CUSTODIAN SET FORTH ABOVE.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
HOW WILL YOU RECEIVE DIVIDENDS AND OTHER DISTRIBUTIONS ON THE SHARES?
The Depositary has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on Shares or other deposited
securities, after deducting its fees and expenses. You will receive these
distributions in proportion to the number of Shares your ADSs represent.
o CASH. The Depositary will, as promptly as practicable, convert
any cash dividend or other cash distribution we pay on the Shares
into US dollars, if it can do so on a reasonable basis and can
transfer the US dollars to the United States. If that is not
possible or if any approval from any government or regulatory
authority is needed and can not be obtained, the deposit
agreement allows the Depositary to distribute the foreign
currency only to those ADR holders to whom it is possible to do
so. It will hold the foreign currency it cannot convert for the
account of the ADR holders who have not been paid. It will not
invest the foreign currency and it will not be liable for any
interest.
Before making a distribution the Depositary will deduct any withholding taxes
that must be paid under Indian law. See "--Taxation". It will distribute only
whole US dollars and cents and will round fractional cents to the nearest whole
cent. IF THE EXCHANGE RATES FLUCTUATE DURING A TIME WHEN THE DEPOSITARY CANNOT
CONVERT THE FOREIGN CURRENCY, YOU MAY LOSE SOME OR ALL OF THE VALUE OF THE
DISTRIBUTION.
o SHARES. The Depositary may, and will if we tell it to, distribute
additional ADSs representing any Shares we distribute as a
dividend or free distribution, if we furnish it promptly with
82
satisfactory evidence that it is legal to do so. The Depositary
will only DISTRIBUTE whole ADSs. It will sell Shares which would
require it to issue a fractional ADS and distribute the net
proceeds in the same way as it does with cash. If the Depositary
does not distribute additional ADS, the ADSs will also represent
the new Shares.
o RIGHTS TO RECEIVE ADDITIONAL SHARES. If we offer holders of our
securities any rights to subscribe for additional shares or any
other rights, the Depositary may make these rights available to
you. The Depositary must first consult with us and we must
furnish the Depositary with SATISFACTORY evidence that it is
legal to do so. If we don't furnish this evidence, and the
Depositary decides it is practical to sell the rights, the
Depositary will sell the rights and distribute the proceeds in
the same way as it does with cash. The Depositary may allow
rights that are not distributed or sold to lapse. IN THAT CASE,
YOU WILL RECEIVE NO VALUE FOR THEM.
If the Depositary makes rights available to you, it will exercise the rights and
purchase the Shares on your behalf upon your instruction. The Depositary will
then deposit the Shares and deliver ADSs to you. It will only exercise rights if
you pay it the exercise price and any other charges the rights require you to
pay.
US securities laws may restrict sales, transfers and cancellation of the ADSs
represented by Shares purchased upon exercise of rights. For example, you may
not be able to trade these ADSs freely in the United States. In this case, the
Depositary may deliver the ADSs under a separate restricted deposit agreement
which will contain the same provisions as the deposit agreement, except for
changes needed to put the necessary restrictions in place.
o OTHER DISTRIBUTIONS. The Depositary will send to you anything
else we distribute on deposited securities by any means it thinks
is legal, fair and practical. If it cannot make the distribution
in that way, the Depositary has a choice, after consulting with
us. It may decide to sell what we distributed and distribute the
net proceeds, in the same way as it does with cash. Or, it may
decide to hold what we distributed, in which case the ADSs will
also represent the newly distributed property.
The Depositary is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADR holders. We have no
obligation to register ADSs, Shares, rights or other securities under the
Securities Act. We also have no obligation to take any other action to permit
the distribution of ADRs, Shares, rights or anything else to ADR holders. THIS
MEANS THAT YOU MAY NOT RECEIVE THE DISTRIBUTIONS WE MAKE ON OUR SHARES OR ANY
VALUE FOR THEM IF IT IS ILLEGAL OR IMPRACTICAL FOR US TO MAKE THEM AVAILABLE TO
YOU.
DEPOSIT, WITHDRAWAL AND CANCELLATION
HOW ARE ADSs ISSUED?
Subject to Indian law, the Depositary will deliver ADSs if you or your
broker deposit Shares or evidence of rights to receive Shares with the
custodian. Upon payment of its fees and expenses and of any taxes or charges,
such as stamp taxes or stock transfer taxes or fees, the Depositary will
register the appropriate number of ADSs in the names you request and will
deliver the ADRs at its office to the persons you request. Under current Indian
laws and regulations, the Depositary cannot accept deposits of Shares other than
from us (except for Shares issued as bonus shares or pursuant to rights
offerings, and except for Shares withdrawn from our ADR facility which are
immediately deposited under the deposit agreement) and deliver ADSs representing
Shares.
HOW DO ADS HOLDERS CANCEL AN ADR AND OBTAIN SHARES?
You may turn in your ADRs at the Depositary's office. Upon payment of
its fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, the Depositary will deliver the deposited securities
represented by your ADRs (1) to an account designated by you in the book-entry
83
system in India, if that is feasible, or (2) at the office of the custodian to
you or to a person you designate, if feasible. Or, at your request, risk and
expense, the Depositary will deliver the Deposited Securities at its office, if
feasible .
If you surrender ADRs and withdraw Shares, you will have to take the
Shares in dematerialized book-entry form. You will be required to establish an
account with a participant of the Indian book-entry system to hold or sell the
shares in dematerialized book-entry form, and you may incur customary fees and
expenses in doing so. In addition, the sale of withdrawn Shares by a
non-resident of India may require approval from the Reserve Bank of India. For
further details on the sale of underlying Shares, see "Item 10. Additional
Information -- Register of Shareholders, Records Dates, Transfer of Shares".
VOTING RIGHTS
You will not be entitled to instruct the Depositary how to vote the
Shares underlying your ADSs. Rather, by accepting an ADR, you will authorize and
direct the Depositary to vote as set forth below.
The Depositary will vote the deposited Shares as instructed by our
Board of Directors or give a proxy or power of attorney to vote the deposited
Shares to a person our Board of Directors designates. However, the Depositary
will only do this if we arrange for our lawyers to give the Depositary an
opinion saying it is legal for the Depositary to do so and that doing so will
not expose the Depositary to legal liability. If we do not provide the legal
opinion referred to above, the Depositary will not vote the deposited Shares or
give a proxy or power of attorney to anyone else to vote the deposited Shares.
FEES AND EXPENSES
ADR HOLDERS MUST PAY: FOR:
---------------------------------------------------- ------------------------------------------------------------
$5.00 (or less) per 100 ADSs o Each issuance of an ADR , including as a result of
a distribution of Shares or rights or other property
o Each cancellation of an ADR for the purpose of
withdrawal, including if the deposit agreement
terminates
$.02 (or less) per ADS (to the extent o Any cash distribution
permitted by the rules of any stock exchange
on which ADSs are listed for trading)
A fee equivalent to the fee that would be o Distribution of securities distributed to holders of
payable upon deposit of Shares for deposited securities which are distributed by the
issuance of ADSs Depositary to ADR holders
Registration or transfer fees o Transfer 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 o Conversion of foreign currency to US dollars
Expenses of the Depositary o Cable, telex and facsimile transmission expenses
(if expressly provided in the deposit agreement)
Taxes and other governmental charges the o As necessary.
Depositary or the custodian have to pay on
any ADR or Share underlying an ADR, for
example, stock transfer taxes, stamp duty or
withholding taxes
Any charges payable by the Depositary or its o As incurred.
agents in connection with servicing the
deposited securities.
84
INSPECTION OF TRANSFER BOOKS
The Depositary will maintain at its office facilities for the execution
and delivery, registration of transfer, combination or split-up of ADRs and a
register for the registration of ADRs and the registration of the transfer of
ADRs that at reasonable times will be open for inspection by you and us provided
that such inspection shall not be for the purpose of communication with
investors in the ADRs in the interest of a business or object other than our
business or a matter related to the deposit agreement or the ADRs.
PAYMENT OF TAXES
The Depositary may deduct the amount of any taxes owed from any
payments due to you. It may also sell deposited securities, by public or private
sale, to pay any taxes owed. You will remain liable for any deficiency if the
proceeds of the sale are not enough to pay the taxes. If the Depositary sells
deposited securities, it will, if appropriate, reduce the number of ADSs to
reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
IF WE: THEN:
------------------------------------------------ ---------------------------------------------------------
o Change the nominal or par value of our The cash, Shares or other securities received by the
shares Depositary will become deposited securities. Each
ADS will automatically represent its equal share of
the new deposited securities.
o Reclassify, split up or consolidate any of
the deposited securities
The Depositary may, and will if we ask it to,
o Distribute securities on the shares that distribute some or all of the cash, Shares or other
are not distributed to you securities it received. It may also deliver new
ADSs or ask you to surrender your outstanding
o Recapitalize, reorganize, merge, liquidate, ADRs in exchange for new ADRs identifying the
sell all or substantially all of our new deposited securities.
assets, or take any similar action
AMENDMENT AND TERMINATION
HOW MAY THE DEPOSIT AGREEMENT BE AMENDED?
We may agree with the Depositary to amend the deposit agreement and the
ADRs without your consent for any reason. If the deposit amendment adds or
increases fees or charges, except for taxes and other governmental charges or
out-of-pocket expenses of the Depositary, or prejudices a substantial right of
ADR holders, it will only become effective 30 days after the Depositary notifies
you of the amendment. At the time an amendment becomes effective, you are
considered, by continuing to hold your ADR, to agree to the amendment and to be
bound by the ADRs and the deposit agreement as amended.
HOW MAY THE DEPOSIT AGREEMENT BE TERMINATED?
The Depositary will terminate the deposit agreement if we ask it to do
so. the Depositary may also terminate the deposit agreement if the Depositary
has told us that it would like to resign and we have not appointed a new
depositary bank within 90 days. In both cases, the Depositary must notify you at
least 30 days before termination.
After termination, the Depositary and its agents will do the following
under the deposit agreement but nothing else: (1) advise you that the agreement
is terminated, (2) collect dividends and other distributions on the deposited
securities, (3) sell rights offered to shareholders and (4) deliver Shares and
other deposited securities upon cancellation of ADRs. One year after
termination, the Depositary may sell any remaining deposited securities by
public or private sale. After that, the Depositary will hold the proceeds of the
sale, as well as any other cash it is holding under the deposit agreement for
the PRO RATA benefit of the ADR holders that have not surrendered their ADRs. It
85
will not invest the money and has no liability for interest. The Depositary's
only obligations will be to account for the proceeds of the sale and other cash
and to indemnify us. After termination our only obligations will be to indemnify
the Depositary and to pay certain amounts to the Depositary.
LIMITATIONS ON OBLIGATIONS AND LIABILITY
LIMITS ON OUR OBLIGATIONS AND THE OBLIGATIONS OF THE DEPOSITARY; LIMITS ON
LIABILITY TO HOLDERS OF ADRS
The deposit agreement expressly limits our obligations and the
obligations of the Depositary. It also limits our liability and the liability of
the Depositary. We and the Depositary:
o are only obligated to take the actions specifically set forth in
the deposit agreement without negligence or bad faith;
o are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations
under the deposit agreement;
o are not liable if either of us exercises discretion permitted
under the deposit agreement;
o have no obligation to become involved in a lawsuit or other
proceeding related to the ADRs or the deposit agreement on your
behalf or on behalf of any other person; and
o may rely upon any documents we believe or it believes in good
faith to be genuine and to have been signed or presented by the
proper party, and may rely on advice or information from any
person we believe or it believes, in good faith, to be competent
to give such advice or information.
In the deposit agreement, we agree to indemnify the Depositary for
acting as depositary, except for losses caused by the Depositary's own
negligence or bad faith, and the Depositary agrees to indemnify us for losses
resulting from its negligence or bad faith.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before the Depositary will deliver or register a transfer of an ADR,
make a distribution on an ADR, or permit withdrawal of Shares, the Depositary
may require:
o payment of stock transfer or other taxes or other governmental
charges and transfer or registration fees charged by third
parties for the transfer of any Shares or other deposited
securities;
o satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
o compliance with such reasonable regulations it may establish,
from time to time, consistent with the agreement, including
presentation of transfer documents.
o The Depositary may refuse to deliver ADRs, register transfers of
ADRs or permit withdrawal of Shares when the transfer books of
the Depositary or our transfer books are closed or at any time if
the Depositary or we think it advisable to do so.
YOUR RIGHT TO RECEIVE THE SHARES UNDERLYING YOUR ADRS
You have the right to cancel your ADRs and withdraw the underlying
Shares at any time except:
o When temporary delays arise because: (1) the Depositary has
closed its transfer books or we have closed our transfer books;
(2) the transfer of Shares is blocked to permit voting at a
shareholders' meeting; or (3) we are paying a dividend on our
Shares.
86
o When you or other ADR holders seeking to withdraw Shares owe
money to pay fees, taxes and similar charges.
o When it is necessary to prohibit withdrawals in order to comply
with any laws or governmental regulations that apply to ADRs or
to the withdrawal of Shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement. Foreign investors who withdraw Shares will be subject to
Indian legal restrictions governing the ownership of Indian securities. For a
discussion, see "--Restriction on Foreign Ownership of Indian Securities".
PRE-RELEASE OF ADRS
Unless we tell the Depositary to cease doing so, the Depositary may,
but is not required to, deliver ADRs before deposit of the underlying Shares.
This is called a pre-release of the ADR. The Depositary may also deliver Shares
upon cancellation of pre-released ADRs (even if the ADRs are canceled before the
pre-release transaction has been closed out). A pre-release is closed out as
soon as the underlying Shares are delivered to the Depositary. the Depositary
may receive ADRs instead of Shares to close out a pre-release. the Depositary
may pre-release ADRs only under the following conditions: (1) before or at the
time of the pre-release, the person to whom the pre-release is being made must
represent to the Depositary in writing that it or its customer owns the Shares
or ADRs to be deposited; (2) the pre-release must be fully collateralized with
cash or other collateral that the Depositary considers appropriate; and (3) the
Depositary must be able to close out the pre-release on not more than five (5)
business days' notice. In addition, the Depositary will limit the number of ADSs
that may be outstanding at any time as a result of pre-release, although the
Depositary may disregard the limit from time to time, if it thinks it is
appropriate to do so.
TAXATION
INDIAN TAXATION
GENERAL. The following summary is based on the provisions of the Income
Tax Act, 1961 (the "Indian Tax Act"), including the special tax regime contained
in Section 115AC (the "Section 115AC Regime") and the 1993 Regulation. The
Indian Tax Act is amended every year by the Finance Act of the relevant year.
Some or all of the tax consequences of the Section 115 AC Regime may be amended
or changed by future amendments of the Indian Tax Act.
The summary set forth below is not intended to constitute a complete
analysis of the individual tax consequences to non-resident holders under Indian
law for the acquisition, ownership and sale of ADSs and Equity Shares by
non-resident holders. Personal tax consequences of an investment may vary for
investors in various circumstances and 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 the law of
the jurisdiction of their residence and any tax treaty between India and their
country of residence.
RESIDENCE
For purposes of the Indian Tax Act, an individual is considered to be a
resident of India during any fiscal year if he or she:
o is in India in that year for a period or periods amounting to 182
days or more; or
o is in India in that year for 60 days or more and, in case of a
citizen of India or a person of Indian origin, who, being outside
India, comes on a visit to India, is in India for more than 182
days in each case within the four preceding years has been in
India for a period or periods amounting to 365 days or more.
A company is resident in India if it is registered in India or the control and
management of its affairs is situated wholly in India.
87
TAXATION OF DISTRIBUTIONS
Pursuant to the Finance Act, 1997, withholding tax on dividends paid to
shareholders no longer applies. However, the Company is now required to pay a
10.2 percent tax on any amount declared, distributed or paid as dividends
including present surcharge of 2 percent. Distributions to non-resident holders
of additional ADSs or Equity Shares or rights to subscribe for Equity Shares
("Rights") granted with respect to ADSs or Equity Shares are not subject to
Indian tax.
TAXATION ON SURRENDER OF ADSs
The acquisition by a non-resident holder of Shares upon surrender of
ADSs does not constitute a taxable event for Indian income tax purposes. Such
exchange will, however, give rise to stamp duty as described below under "Stamp
Duty and Transfer Tax."
TAXATION OF CAPITAL GAINS
Any gain realized on the sale of ADSs or Equity Shares by a
non-resident holder to another non-resident holder outside India is not subject
to Indian capital gains tax. However, as Rights are not expressly covered by the
Indian Income Tax Act, 1961, it is unclear, as to whether capital gain derived
from the sale of Rights by a non-resident holder (not entitled to an exemption
under a tax treaty) to another non-resident holder outside India will be subject
to Indian capital gains tax. If such Rights are deemed by the Indian tax
authorities to be situated within India, the gains realized on the sale of such
Rights will be subject to customary Indian taxation as discussed below.
Since the issuance of the ADSs has been approved by the Government of
India under the Section 115AC Regime, Non-resident Holders of the ADSs will have
the benefit of tax concessions available under the Section 115AC Regime. The
Section 115AC Regime provides that if the Equity Shares are sold on an Indian
Stock Exchange against payment in Indian rupees, they will no longer be eligible
for such concessional tax treatment. However, the Section 115AC Regime is
unclear, as to whether such tax treatment is available to a non-resident who
acquires Equity Shares outside India from a non-resident holder of Equity Shares
after receipt of the Equity Shares upon surrender of the ADSs. If concessional
tax treatment is not available, gains realized on the sale of such Equity Shares
will be subject to customary Indian taxations discussed below.
Subject to any relief provided pursuant to an applicable tax treaty,
any gain realized on the sale of Equity Shares to an Indian resident or inside
India generally will be subject to Indian capital gains tax. For the purpose of
computing capital gains tax, the cost of acquisition of Equity Shares received
in exchange for ADSs will be determined on the basis of the prevailing price of
the shares on any of the Indian stock exchanges on the date that the Depositary
instructs the custodian to deliver Equity Shares in exchange for ADSs. A
non-resident holder's holding period (for purpose of determining the applicable
Indian capital gains tax rate) in respect of Equity Shares received in exchange
for ADSs commences on the date of the notice of the redemption by the Depositary
to the Custodian. The Indo-US Treaty does not provide an exemption from the
imposition of Indian capital gains tax.
Taxable gain realized on Equity Shares (calculated in the manner set
forth in the prior paragraph) for more than 12 months (long-term gain) is
subject to tax at the rate of 10 percent. Taxable gain realized on Equity Shares
held for 12 months for less (short-term gain) is subject to tax at variable
rates with a maximum rate of 48 percent. The actual rate of tax on short-term
gain depends on a number of factors, including the legal status of the
Non-resident and the type of income chargeable in India.
STAMP DUTY AND TRANSFER TAX
Upon issuance of the Equity Shares, the Company is required to pay a
stamp duty of 0.1 percent per share of the issue price of the underlying Equity
Shares. A transfer of ADSs is not subject to the Indian stamp duty. However,
upon the acquisition of Equity Shares from the Depositary in exchange for ADSs,
the holder will be liable for Indian stamp duty at the rate of 0.5 percent of
the market value of the ADSs or Equity Shares exchanged. A sale of Equity Shares
by a registered holder will also be subject to Indian stamp duty at the rate of
88
0.5 percent of the market value of the Equity Shares on the trade date, although
customarily such tax is borne by the transferee. However, in case of Equity
Shares held with the Depositary in electronic mode, there will not be any
incidence of stamp duty.
GIFT AND WEALTH TAX
ADSs held by non-resident holders and the underlying Equity Shares held
by the Depositary and the transfer of ADSs between non-resident holders and the
Depositary will be exempt from Indian gift tax and Indian wealth tax.
ESTATE DUTY
Under current Indian law, there is no estate duty applicable to a
non-resident holder of ADSs or Equity Shares.
UNITED STATES FEDERAL TAXATION
The following summary describes the material United States federal
income tax consequences of ownership of Shares and ADSs as of the date hereof.
The discussion set forth below is applicable to US Holders (as defined below).
Except where noted, it deals only with Shares and ADSs held as capital assets
and does not deal with special situations, such as those of dealers in
securities or currencies, traders in securities that elect to use a
mark-to-market method of accounting for their securities holdings, financial
institutions, tax-exempt entities, life insurance companies, persons holding
Shares or ADSs as part of a hedging, integrated, conversion or constructive sale
transaction or a straddle, corporations that accumulate earnings to avoid US
federal income tax, persons owning 10 percent or more of the voting stock of the
Company, or persons whose "functional currency" is not the United States dollar.
Furthermore, the discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in United States federal income
tax consequences different from those discussed below. In addition, this summary
is based, in part, upon representations made by the Depositary to the Company
and assumes that the Deposit Agreement, and all other related agreements, will
be performed in accordance with their terms. PERSONS CONSIDERING THE PURCHASE,
OWNERSHIP OR DISPOSITION OF SHARES OR ADSS SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
As used herein, the term "US Holder" means a beneficial holder of a
Share or ADS that is (1) a citizen or resident of the United States, (2) a
corporation or partnership created or organized in or under the laws of the
United States or any political subdivision thereof, (3) an estate the income of
which is subject to United States federal income taxation regardless of its
source or (4) a trust (X) which is subject to the supervision of a court within
the United States and the control of one or more United States persons as
described in section 7701(a)(30) of the Code or (Y) that has a valid election in
effect under applicable US Treasury regulations to be treated as a United States
person.
OWNERSHIP OF ADSS
In general, for United States federal income tax purposes, US holders
of ADSs will be treated as the owners of the underlying Shares that are
represented by such ADSs. Deposits or withdrawal of Shares by US Holders for
ADSs will not be subject to United States federal income tax.
TAXATION OF DIVIDENDS
Dividends (other than certain dividends of Shares or rights to
subscribe for Shares) paid to US Holders of Shares or ADSs will be treated as
dividend income to such holders, to the extent paid out of current or
accumulated earnings and profits, as determined under United States federal
income tax principles. Such income will be includable in the gross income of a
US Holder as ordinary income on the day received by the US Holder, in the case
of Shares, or by the Depositary, in the case of ADSs. Such dividends will not be
eligible for the dividends received deduction allowed to corporations under the
Code.
89
The amount of any dividend paid in Indian Rupees will equal the United
States dollar value of the Indian Rupees received calculated by reference to the
exchange rate in effect on the date the dividend is received by the US Holder,
in the case of Shares, or by the Depositary, in the case of ADSs, regardless of
whether the Indian Rupees are converted into United States dollars. If the
Indian Rupees received as a dividend are not converted into United States
dollars on the date of receipt, a US Holder will have a basis in the Indian
Rupees equal to their United States dollar value on the date of receipt. Any
gain or loss realized on a subsequent conversion or other disposition of the
Indian Rupees will be treated as ordinary income or loss.
A US Holder will not be eligible for a foreign tax credit against its
United States federal income tax liability for Indian taxes paid by the Company
and deemed under Indian law to have been paid by the shareholders of the
Company, unless it is a US Company holding at least 10 percent of the Indian
Company paying the dividends. Dividends paid on the Shares or ADSs will be
treated as income from sources outside the United States and will generally
constitute "passive income" or, in the case of certain US Holders, "financial
services income."
To the extent that the amount of any distribution by the Company
exceeds the Company's current and accumulated earnings and profits as determined
under United States federal income tax principles for a taxable year, the
distribution will first be treated as a tax-free return of capital, causing a
reduction in the adjusted basis of the Shares or ADSs (thereby increasing the
amount of gain, or decreasing the amount of loss, to be recognized by the US
Holder on a subsequent disposition of the Shares or ADSs), and the balance in
excess of adjusted basis will be taxed as capital gain recognized on a sale or
exchange. Consequently, such distributions in excess of the Company's current
and accumulated earnings and profits would not give rise to foreign source
income.
Distributions of Shares or rights to subscribe for Shares that are
received as part of a pro rata distribution to all shareholders of the Company
in certain circumstances should not be subject to United States federal income
tax. The basis of the new Shares or rights so received will be determined by
allocating the US Holder's basis in the old Shares between the old Shares and
the new Shares or rights received, based on their relative fair market values on
the date of distribution. However, the basis of the rights will be zero if (1)
the fair market of the rights is less than 15 percent of the fair market value
of the old Shares at the time of distribution or (2) the rights are not
exercised and thus expire.
PASSIVE FOREIGN INVESTMENT COMPANY
Based on the composition of its income and valuation of its assets,
including goodwill, the Company is not a passive foreign investment company
("PFIC") for fiscal year 2001 and does not expect to become one in the future,
although there can be no assurance in this regard.
In general, a company is considered a PFIC for any taxable year if
either:
o at least 75 percent of its gross income is passive income, or
o at least 50 percent of the value of its assets is attributable to
assets that produce or are held for the production of passive
income.
The 50 percent of value test is based on the average of the value of
the Company's assets for each quarter during the taxable year. If the Company
owns at least 25 percent, by value, of another company's stock, it will be
treated, for purposes of the PFIC rules, as owning its proportionate share of
the assets and receiving its proportionate share of the income of that company.
In determining that the Company is not a PFIC, the Company is relying
on its projected capital expenditure plans for the current year and for future
years. In addition, the determination is based on a current valuation of the
Company's assets, including goodwill. In calculating goodwill, the Company has
valued its total assets based on the market value of its Shares or ADSs, which
is subject to change. In addition, the Company has made a number of assumptions
regarding the amount of this value allocable to goodwill. The Company believes
its valuation approach is reasonable. However, it is possible that the Internal
90
Revenue Service ("IRS") will challenge the valuation of the Company's goodwill,
which may also result in the Company being classified as a PFIC.
In addition, the determination of whether the Company is a PFIC is made
annually. Accordingly, it is possible that the Company may be a PFIC in the
current or any future taxable year due to changes in the Company's asset or
income composition or if the Company's projections are not accurate. Because the
Company has valued its goodwill based on the anticipated market value of its
Shares or ADSs immediately following the offering, a decrease in the price of
the Company's Shares or ADSs may also result in its becoming a PFIC.
If the Company were a PFIC for any taxable year during which a US
Holder holds Shares or ADSs, unless such holder makes the mark-to-market
election discussed below, such holder will be subject to special tax rules with
respect to any "excess distribution" that such holder receives and any gain such
holder realizes from a sale or other disposition (including a pledge) of the
Shares or ADSs. These special tax rules generally will apply even if the Company
ceases to be a PFIC in subsequent years. Distributions a US Holder receives in a
taxable year that are greater than 125 percent of the average annual
distributions such holder received during the shorter of the three preceding
taxable years or such holder's holding period for the Shares or ADSs will be
treated as excess distributions. Under these special tax rules:
o the excess distribution or gain will be allocated ratably over
such holder's holding period for the Shares or ADSs,
o the amount allocated to the current taxable year, and any taxable
year prior to the first taxable year in which the Company was a
PFIC, will be treated as ordinary income, and
o the amount allocated to each other year will be subject to tax at
the highest tax rate in effect for that year and the interest
charge generally applicable to underpayments of tax will be
imposed on the resulting tax attributable to each such year.
If a US Holder holds Shares or ADSs in any year in which the Company is
a PFIC, such holder will be required to file IRS Form 8621.
As long as the Shares or ADSs are regularly traded on a national
securities exchange, a US Holder can avoid the special PFIC rules discussed
above by making an election to mark such holder's Shares or ADSs to market. It
is intended that the ADSs will be listed on the New York Stock Exchange which is
a national securities exchange for purposes of the mark-to-market election,
although there can be no assurance that the ADSs will be "regularly traded", and
it should be noted that only the ADSs and not the Shares will be traded on the
New York Stock Exchange. The Shares will not be listed in the United States but
will continue to be listed on the Indian Stock Exchanges.
If a US Holder makes an effective mark-to-market election, such holder
will include in income each year as ordinary income (rather than capital gain)
the excess, if any, of the fair market value of such holder's PFIC Shares or
ADSs at the end of the taxable year over the adjusted basis in the Shares or
ADSs and will be permitted an ordinary loss in respect of the excess, if any, of
the adjusted basis of such Shares or ADSs over their fair market value at the
end of the taxable year, but only to the extent of the net amount previously
included in income as a result of the mark to market election. A US Holder's
basis in the Shares or ADSs will be adjusted to reflect any such income or loss
amounts. Any gain or loss on the sale of the Shares or ADSs will be ordinary
income or loss, except that such loss will be ordinary loss only to the extent
of the previously included net mark to market gain.
If a US Holder makes a mark-to-market election it will be effective for
the taxable year for which the election is made and all subsequent taxable years
unless the Shares or ADSs are no longer regularly traded on a national
securities exchange or the IRS consents to the revocation of the election. US
Holders are urged to consult their own tax advisors about the availability of
the mark-to-market election, and the desirability of making such an election
under their particular circumstances.
Alternatively, a US Holder of Shares or ADSs in a PFIC can sometimes
avoid the rules described above by electing to treat the Company as a "qualified
electing fund" under section 1295 of the Code. This option is not available to
91
US Holders of the Shares or ADSs because the Company does not intend to comply
with the requirements necessary to permit such holders to make this election.
Persons considering the purchase, ownership or disposition of Shares or
ADSs should consult their own tax advisors concerning the United States federal
income tax consequences of holding the Shares or ADSs if the Company were
considered a PFIC in any taxable year.
TAXATION OF CAPITAL GAINS
For United States federal income tax purposes, a US Holder will
recognize taxable gain or loss on the sale or exchange of a right, Share or ADS
in an amount equal to the difference between the amount realized for the right,
Share or ADS and the US Holder's tax basis in the right, Share or ADS. Such gain
or loss will be capital gain or loss. Capital gains of individuals derived with
respect to capital assets held for more than one year are eligible for reduced
rates of taxation. Any gain or loss recognized by a US holder will generally be
treated as United States source gain or loss.
ESTATE TAXATION
An individual shareholder who is a citizen or resident of the United
States for United States federal estate tax purposes will have the value of the
equity Shares or ADSs owned by such holder included in his or her gross estate
for United States federal estate tax purposes. India does not impose an estate
tax on a Non-Resident Holder who owns Shares or ADSs. See "--Indian
Taxation-Estate Duty" above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to dividends
in respect of the Shares or ADSs or the proceeds received on the sale, exchange,
or redemption of the Shares or ADSs paid within the United States (and in
certain cases, outside of the United States) to US Holders other than certain
exempt recipients (such as corporations), and a 30.5 percent backup withholding
may apply to such amounts (30 percent for payments made after December 31, 2000)
if the US Holder fails to provide an accurate taxpayer identification number to
the Company or its payment agent or to report interest and dividends required to
be shown on its federal income tax returns. The amount of any backup withholding
from a payment to a US Holder will be allowed as a credit against the US
Holder's United States federal income tax liability.
DOCUMENTS ON DISPLAY
This report and other information filed or to be filed by the Company
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at:
Judiciary Plaza
450 Fifth Avenue N.W.
Room 1024
Washington, D.C. 20529
Northwestern Atrium Center
500 West Madison Street
Suite 1400
Chicago, IL 60661-2511
Copies of these materials can also be obtained from the Public
Reference Section of the SEC, 450th Street, N.W. , Washington, DC 20549, at
prescribed rates. The public may obtain information on the operation of the
SEC's Public Reference Room by calling the SEC in the United States at
1-800-SEC-0330.
The SEC maintains a website at www.sec.gov that contains reports, proxy
and information statements, and other information regarding registrants that
make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are not required to use the EDGAR system. This annual report
is our initial EDGAR filing and we intend to continue to make our future SEC
filings available over the Internet.
92
Additionally, documents referred to in this Form 20-F may be inspected
at our corporate offices which are located at Videsh Sanchar Bhavan, Mahatma
Gandhi Road, Mumbai 400001, India.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk from changes in foreign currency
exchange rates because certain of its costs are denominated in currencies
(primarily SDRs and US Dollars) other than those in which it earns revenues
(primarily the Rupee). Fluctuations in the exchange rate between the Rupee and
other currencies affect the Rupee amount of foreign currency settlement payments
received by the Company from, and paid by the Company to, foreign
telecommunications administrations and therefore the revenues and operating
costs of the Company. The Company may as a result be exposed to the risk of
fluctuations in the exchange rate between the Rupee and foreign currencies,
which has effectively increased the cost in Rupee terms of foreign exchange
payments required to be made by it including payments to foreign
telecommunications administrations and payments for imported equipment and
technology. However, the Company does not use derivative instruments, such as
foreign exchange forward contracts, foreign currency options, interest rate
swaps and forward rate agreements, to manage these market risks, nor does it
hold or issue derivative or other financial instruments for trading purposes.
The Company does not have any loans denominated in foreign currencies.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. RESERVED
ITEM 16. RESERVED
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company has elected to provide financial statements pursuant to
Item 18 of Form 20-F.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements comprising of balance sheets of the
Company as of March 31, 2000 and March 31, 2001 and the related statements of
income, cash flows and shareholders' equity for the years ended March 31, 1999,
2000 and 2001 have been audited by Deloitte Haskins & Sells, independent
accountants, in accordance with US GAAP. The financial statement pages appear on
pages F-1 through F-27.
93
ITEM 19. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------
1.1* Certificate of Incorporation of Videsh Sanchar Nigam Limited, dated
March 19, 1986 and as currently in effect.
1.2 Articles of Association of Videsh Sanchar Nigam Limited, dated September
26, 2000 and as currently in effect.
1.3 Memorandum of Association of Videsh Sanchar Nigam Limited, dated
September 26, 2000 and as currently in effect.
1.4* Certificate for Commencement of Business, dated March 21, 1986 and as
currently in effect.
1.5* Specimen Certificate for Equity Shares of Videsh Sanchar Nigam Limited.
2.1* Form of Deposit Agreement, among Videsh Sanchar Nigam Limited, The Bank
of New York, as Depositary and owners and beneficial owners of American
Depositary Receipts issued thereunder (including as an exhibit, the form
of American Depositary Receipt).
2.2 Amendment No. 1 to Deposit Agreement, among Videsh Sanchar Nigam
Limited, The Bank of New York, as Depositary and owners and beneficial
owners of American Depositary Receipts, issued thereunder (including as
an exhibit the form of American Depository Receipt).
4.1* License Agreement for the provision of Internet Service between the
President of India and Videsh Sanchar Nigam Limited, dated January 25,
1999.
4.2+ Total Accounting Rate Arrangement between Videsh Sanchar Nigam Limited
and Concert--USA.
4.3+ Total Accounting Rate Arrangement between Videsh Sanchar Nigam Limited
and Concert (UK).
4.4+ Total Accounting Rate Arrangement letter between Videsh Sanchar Nigam
Limited and UAE.
4.5 Memorandum of Understanding between Videsh Sanchar Nigam Limited and
Ministry of Communications Department of Telecommunications for the year
2001-2002.
4.6 Memorandum of Settlement Over the Revision of Pay and Certain Allowances
between Management of Videsh Sanchar Nigam Limited and Their Workmen,
dated December 2, 2000.
4.7* Letter from the Department of Telecommunications with respect to the
Revenue Sharing Arrangement between the Bharat Sanchar Nigam Limited and
Videsh Sanchar Nigam Limited, dated April 22, 1997.
10.1 The Hindu Business Line, article titled "Teledensity Set to Exceed
Target", dated September 15, 2001.
10.2 IT Space.com, article regarding analysis of VSNL, dated April 2001.
10.3* License granted under the Indian Telegraph Act, 1885 to Videsh Sanchar
Nigam Limited, dated January 22, 1999 by the Department of
Telecommunications.
10.4 Letter from the Ministry of Communications, Department of
Telecommunications regarding termination of the monopoly granted to
Videsh Sanchar Nigam Limited, dated July 9, 2000.
10.5 Telecom Regulatory Authority of India Consultation Paper No. 2001/2 on
International Long Distance Services, dated September 3, 2001.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.
* Previously filed as an exhibit to the Company's Annual Statement on Form 20-F
(Registration Statement No. 000-30772) filed with the Commission on October 13,
2000 and incorporated herein by reference.
94
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.
September 30, 2001
VIDESH SANCHAR NIGAM LIMITED
By: /S/ S.K. GUPTA
----------------------------------------
Name: S.K. Gupta
Title: Chairman & Managing Director
By: /S/ R.S.P. SINHA
----------------------------------------
Name: R.S.P. Sinha
Title: Director (Finance)
95
VIDESH SANCHAR NIGAM LIMITED
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF VIDESH SANCHAR NIGAM LIMITED (PREPARED IN ACCORDANCE
WITH US GAAP)
PAGE
Report of independent auditors.........................................F-2
Balance sheets as of March 31, 2000 and 2001...........................F-3
Statements of income for the years ended
March 31, 1999, 2000 and 2001........................................F-4
Statements of shareholders' equity for the
years ended March 31, 1999, 2000 and 2001............................F-5
Statements of cash flows for the years ended
March 31, 1999, 2000 and 2001........................................F-6
Notes to financial statements..........................................F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Videsh Sanchar Nigam Limited:
We have audited the accompanying balance sheets of Videsh Sanchar Nigam
Limited (the "Company") as of March 31, 2000 and 2001, and the related
statements of income, cash flows and shareholders' equity for each of the three
years in the period ended March 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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. 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. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Videsh Sanchar Nigam Limited as of
March 31, 2000 and 2001, and the results of its operations and cash flows for
each of the three years in the period ended March 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 2(a) to the financial statements, these financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, which differ in certain material
respects from accounting principles generally accepted in India, which form the
basis of the Company's general purpose financial statements.
/s/ Deloitte Haskins & Sells
Mumbai, India
September 24, 2001
F-2
VIDESH SANCHAR NIGAM LIMITED
BALANCE SHEETS
AS OF MARCH 31, 2000 AND 2001
AS OF MARCH 31,
----------------------------------------------
2000 2001 2001
--------------- --------------- --------------
(IN MILLIONS, EXCEPT PAR VALUE AND NUMBER OF
SHARES)
ASSETS:
Cash and cash equivalents Rs.20,846 Rs.2,200 US$47
Short term investments 8,778 46,050 983
Trade and other receivables, net of allowances of Rs.1,021
million and Rs.979 million (US$21
million), respectively 25,651 19,745 421
Investments 3,657 4,247 91
Property, plant and equipment 15,920 18,077 386
Capital work-in-progress 1,982 2,328 50
Other assets 6,377 7,778 166
--------------- --------------- --------------
TOTAL ASSETS Rs.83,211 Rs.100,425 US$2,144
=============== =============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES
Trade payables Rs.13,535 Rs.11,309 US$242
Accrued expenses and other liabilities 6,365 10,731 229
--------------- --------------- --------------
TOTAL LIABILITIES 19,900 22,040 471
--------------- --------------- --------------
COMMITMENTS AND CONTINGENCIES (SEE NOTES 1B, 1C AND 20) - - -
SHAREHOLDERS' EQUITY:
Equity shares: par value - Rs. 10 each;
authorized: 100,000,000 shares and 300,000,000 shares at March
31, 2000 and 2001, respectively; issued and outstanding:
95,000,000 shares and 285,000,000 shares at March 31, 2000 and
2001, respectively (See Note 13) 950 2,850 61
Additional paid in capital 14,481 14,481 309
Retained earnings 47,880 60,642 1,294
Accumulated comprehensive income - 412 9
--------------- --------------- --------------
TOTAL SHAREHOLDERS' EQUITY 63,311 78,385 1,673
--------------- --------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Rs.83,211 Rs.100,425 US$2,144
=============== =============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
VIDESH SANCHAR NIGAM LIMITED
STATEMENTS OF INCOME
FOR EACH OF THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
YEARS ENDED MARCH 31,
-----------------------------------------------------------
1999 2000 2001 2001
------------- -------------- --------------- --------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
OPERATING REVENUE:
Traffic revenues Rs.67,181 Rs.69,640 Rs.71,916 US$1,535
Income from satellite consortia 757 737 1,160 25
------------- -------------- --------------- --------------
TOTAL OPERATING REVENUE 67,938 70,377 73,076 1,560
------------- -------------- --------------- --------------
COST OF REVENUE:
Network and transmission costs 45,139 45,621 45,150 964
License fee paid to DoT 4,157 4,712 5,022 107
------------- -------------- --------------- --------------
TOTAL COST OF REVENUE 49,296 50,333 50,172 1,071
------------- -------------- --------------- --------------
GROSS MARGIN 18,642 20,044 22,904 489
------------- -------------- --------------- --------------
OTHER OPERATING COSTS
Depreciation and amortization 1,266 1,534 1,729 37
Other operating costs 1,628 2,622 3,023 65
------------- -------------- --------------- --------------
TOTAL OTHER OPERATING COSTS 2,894 4,156 4,752 102
------------- -------------- --------------- --------------
OPERATING PROFIT 15,748 15,888 18,152 387
------------- -------------- --------------- --------------
OTHER INCOME (EXPENSE), NET:
Non-operating income 3,314 1,821 3,058 65
Interest income 1,387 1,683 3,964 85
Interest cost (1) (7) (1) -
Permanent impairment in the value of investment (5,416) (54) - -
Share of loss of affiliate (30) - - -
------------- -------------- --------------- --------------
TOTAL OTHER INCOME (EXPENSE), NET (746) 3,443 7,021 150
------------- -------------- --------------- --------------
INCOME BEFORE INCOME TAX 15,002 19,331 25,173 537
Income-tax expense (6,298) (6,156) (9,646) (206)
Dividend tax (38) (84) (105) (2)
------------- -------------- --------------- --------------
NET INCOME Rs.8,666 Rs.13,091 Rs.15,422 US$329
------------- -------------- --------------- --------------
PER SHARE INFORMATION:
Earnings per equity share - basic and diluted Rs.30.41 Rs.45.93 Rs.54.11 US$1.15
Weighted average number of equity shares outstanding 285,000,000 285,000,000 285,000,000 285,000,000
Earnings per ADS - basic and diluted (where each ADS
represents two equity shares) Rs.60.82 Rs.91.86 Rs.108.22 US$2.30
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
VIDESH SANCHAR NIGAM LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
NUMBER OF EQUITY ADDITIONAL ACCUMULATED TOTAL
EQUITY SHARE PAID IN RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES (SEE CAPITAL CAPITAL EARNINGS INCOME EQUITY INCOME
NOTE 13)
------------- ----------- ------------ ------------- -------------- ------------- --------------
(IN MILLIONS, EXCEPT NUMBER OF EQUITY SHARES)
BALANCE AT APRIL 1, 1998 95,000,000 Rs.950 Rs.14,481 Rs.27,263 Rs.- Rs.42,694 Rs.-
Net income 8,666 8,666 8,666
Dividends (380) (380)
--------------
COMPREHENSIVE INCOME 8,666
------------- ----------- ------------ ------------- -------------- ------------- --------------
BALANCE AT MARCH 31, 1999 95,000,000 950 14,481 35,549 - 50,980
Net income 13,091 13,091 13,091
Dividends (760) (760)
--------------
COMPREHENSIVE INCOME 13,091
------------- ----------- ------------ ------------- -------------- ------------- --------------
BALANCE AT MARCH 31, 2000 95,000,000 950 14,481 47,880 - 63,311
Issue of stock dividends 190,000,000 1,900 (1,900) -
Net income 15,422 15,422 15,422
Dividends (760) (760)
Unrealized gain on
available for sale - 412 412 412
securities, net
--------------
COMPREHENSIVE INCOME Rs.15,834
==============
COMPREHENSIVE INCOME US$338
------------- ----------- ------------ ------------- -------------- ------------- ==============
BALANCE AT MARCH 31, 2001 285,000,000 Rs.2,850 Rs.14,481 Rs.60,642 Rs.412 Rs.78,385
============= =========== ============ ============= ============== =============
BALANCE AT MARCH 31, 2001 285,000,000 US$61 US$309 US$1,294 US$9 US$1,673
============= =========== ============ ============= ============== =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
VIDESH SANCHAR NIGAM LIMITED
STATEMENTS OF CASH FLOWS FOR EACH
OF THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
YEARS ENDED MARCH 31,
-------------------------------------------------------------
1999 2000 2001 2001
--------------- --------------- ---------------- ------------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income Rs.8,666 Rs.13,091 Rs.15,422 US$329
ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,266 1,534 1,729 37
Share of loss of affiliates 30 - - -
Permanent impairment in the value of investment 5,416 54 - -
Allowance for impairment of property, plant and - 356 - -
equipment
(Profit)/loss on sale of fixed assets - (81) 5 -
Deferred tax charge / (benefit) 404 (219) 1,759 38
Unrealized exchange loss (1,637) (1,009) (526) (11)
Net change in:
Trade and other receivables (3,521) (4,694) 5,977 127
Other assets (2,157) (2,742) (1,400) (30)
Trade payables (1,752) 1,331 (2,225) (47)
Accrued expenses and other liabilities (36) 326 2,380 50
--------------- --------------- ---------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,679 7,947 23,121 493
--------------- --------------- ---------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,615) (956) (2,957) (63)
Expenditure on capital work-in-progress (1,735) (2,665) (1,281) (27)
(Increase)/decrease in investments (2,308) (871) 92 2
(Increase)/decrease in short-term investments, net 57 494 (37,272) (796)
Sale of property, plant and equipment - 100 2 -
--------------- --------------- ---------------- ------------
NET CASH USED BY INVESTING ACTIVITIES (6,601) (3,898) (41,416) (884)
--------------- --------------- ---------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (380) (760) (760) (16)
Bank overdraft (1,536) 20 (46) (1)
--------------- --------------- ---------------- ------------
NET CASH USED BY FINANCING ACTIVITIES (1,916) (740) (806) (17)
--------------- --------------- ---------------- ------------
Unrealized exchange gain on cash and cash equivalents 1,560 879 455 10
--------------- --------------- ---------------- ------------
NET CHANGE IN CASH FLOWS (278) 4,188 (18,646) (398)
Cash and cash equivalents, beginning of year Rs.16,936 Rs.16,658 Rs.20,846 US$445
--------------- --------------- ---------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR Rs.16,658 Rs.20,846 Rs.2,200 US$47
=============== =============== ================ ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid Rs. 1 Rs.7 Rs.1 US$-
Income taxes paid Rs.(7,564) Rs. (9,316) Rs.(9,597) US$(205)
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
VIDESH SANCHAR NIGAM LIMITED
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND
A. THE COMPANY
Videsh Sanchar Nigam Limited ("VSNL" or the "Company") is incorporated
in India as a limited liability company under the Indian Companies Act,
1956, with its registered office at Videsh Sanchar Bhavan, M.G.Road, Mumbai
400001, India. The Company is listed on major stock exchanges in India and
on the New York Stock Exchange. The Government of India currently holds
approximately 52.97% of the Company's equity share capital. The Company is
the exclusive provider of international telecommunications services in
India, directly and indirectly linking the domestic Indian
telecommunications network to 237 territories worldwide. VSNL operates from
its corporate office at Mumbai and through its branches at Mumbai, Pune,
Arvi, Gandhinagar, New Delhi, Dehradun, Jalandhar, Kanpur, Kolkata,
Chennai, Bangalore, Ernakulam and Hyderabad.
VSNL offers basic and specialized services. Basic services include
telephony, telex and telegraph. Specialized services include gateway packet
data transmission, electronic data interchange, e-mail, Internet,
international maritime satellite mobile services, leased channels,
transmission of signals for international television broadcasts and video
conferencing.
B. MONOPOLY STATUS
In September 2000, the Government of India (the "Government")
announced its intention to allow private players to provide international
telephone services from April 1, 2002, thus terminating VSNL's monopoly two
years ahead of schedule. The Government plans to compensate the Company for
this early termination with the following package:
1. A license to operate domestic long distance ("DLD") service.
2. Re-imbursement by the Government for all license fees, entry fees and
revenue sharing fees, net of taxes, that the Company may have to pay
with respect to the DLD license, for five years with effect from April
2001.
3. Exemption from the performance bank guarantee of Rs.4 billion with
respect to the DLD license.
4. A category 'A' Internet Service Provider ("ISP") license, which will
allow the Company to expand internet access services to the entire
country.
5. The Government may also consider additional compensation, if
necessary, after a detailed review is undertaken.
The Company has accepted the Government's decision to terminate the
Company's monopoly before the year 2004. The shareholders of the Company
have approved the compensation package at the meeting held in May 2001.
F-7
C. DISINVESTMENT
The Government currently holds a majority stake of 52.97% in the
Company's equity. The Government has announced its decision to divest a 25%
stake to a strategic partner, along with the right to management and
simultaneously disinvest 1.97% to the Company's employees. If the
Government achieves successful divestment, certain procedures that are
currently mandatory for public sector companies will no longer be
applicable to the company. The disinvestment process commenced in January
2001. There can be no assurance that a strategic buyer will be found or
that negotiations will result in a sale.
D. REVENUE SHARING ARRANGEMENT
The Company operates its business pursuant to a license from
Department of Telecommunications ("DoT"), Government of India. In pursuance
of the New Telecom Policy 1999, the Government decided to corporatise the
service provision functions of the DoT. Accordingly, the Government
transferred the business of providing telecom services in the country to
the newly formed company, Bharat Sanchar Nigam Limited ("BSNL") with effect
from October 1, 2000. Further, the existing contracts, agreements and MoU's
including the revenue sharing agreement entered into by DoT for the supply
of services were transferred and assigned to BSNL with effect from October
1, 2000.
The license is periodically renewed by the DoT subject to certain
conditions and is currently valid up to March 31, 2004. Under the current
arrangements, although the Company provides international gateway access
out of and into India, all calls must either initiate or terminate on or
pass through the DoT's network. The Company derives substantially all its
revenue from payments from foreign telecommunication administrations and
private carriers for the delivery of international calls to India and from
payments from DoT for the delivery of international calls abroad.
Consequently, the Company and DoT share revenues received by each entity
from international calls pursuant to a revenue sharing arrangement between
them. The arrangement is effective from April 1, 1997 and is valid until
March 31, 2002.
Under the revenue sharing arrangement, the Company pays to DoT, a
charge per minute equal to the weighted average incoming settlement rate,
minus Rs. 10.00 on all incoming international calls and DoT pays to the
Company, a charge per minute equal to the weighted average outgoing
settlement rate plus Rs.10.00 on all outgoing international calls. The
weighted average incoming settlement rate and weighted average outgoing
settlement rate for any financial year is the average of the various
settlement rates in effect as of the beginning of the financial year
between the Company and the foreign administrations and carriers (converted
to Indian rupees at the exchange rate prevailing as of the beginning of the
financial year), weighted to reflect the volume of total incoming traffic
and the outgoing traffic respectively, of the immediately preceding
financial year.
The above arrangement was intended to result in an average gross
profit to VSNL of approximately Rs.10.00 per call minute for each of the
financial years ended March 31, 1998 and March 31, 1999. This was based on
the assumption that applicable settlement rates, exchange rates and the
composition of the incoming and outgoing traffic from and to particular
destinations remain constant during the year. Any fluctuation in these
variables, either to the benefit or detriment of VSNL, was borne by VSNL.
F-8
With effect from April 1, 1999, the revenue sharing arrangement
provides for a comparison of the combined international traffic revenue per
call minute of the Company and DoT (net of payments by the Company to
foreign administrations and carriers and by the Company and DoT to each
other in respect of incoming and outgoing calls) for each fiscal year,
compared to the corresponding amount in the base fiscal year ended March
31, 1997. Increases or decreases are shared between the Company and DoT
according to the following percentages:
INCREASE/DECREASE
YEARS ENDED MARCH 31 COMPANY'S SHARE DOT'S SHARE
-------------------- --------------- -----------------
2000 15% 85%
2001 20% 80%
2002 25% 75%
In computing the international traffic revenue of DoT for purposes of
calculating the combined international traffic revenue per call minute of
the Company and DoT, the tariff charged by DoT to subscribers for outgoing
international calls is assumed to remain constant at Rs.62.35 per minute,
which was the weighted average tariff rate for the year ended March 31,
1997. It is therefore intended that the Company's average gross profit per
call minute under the current revenue sharing arrangement will not be
affected directly by any decrease or increase in the actual tariffs charged
by DoT from its subscribers for outgoing international calls.
The current revenue sharing arrangement is subject to review in the
event that the exchange rate fluctuates more than 10 per cent from the rate
at the beginning of the year or the Company's actual average gross earnings
per call minute is less than Rs.9.00 or more than Rs.11.00 in any financial
year covered by the arrangement. The objective of the review would be to
renegotiate terms that correct the imbalance.
For the years ended March 31, 1999, 2000 and 2001 the gross profit per
call minute was Rs.10.63, Rs.9.43 and Rs.9.39, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND CONSOLIDATION
The Company does not have any subsidiaries. Entities where the Company
controls between 20% to 50% of the voting stock of the investee company are
considered affiliates and are accounted for using the equity method.
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). US GAAP differs in certain material respects from accounting
principles generally accepted in India and the requirements of India's
Companies Act, 1956, which form the basis of the statutory general purpose
financial statements of the Company in India. Principal differences insofar
as they relate to the Company include valuation of investments, accounting
for property, plant and equipment and depreciation thereon, deferred income
taxes, retirement benefits, investment in affiliates and the presentation
and format of the financial statements and related notes.
B. USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
F-9
liabilities at the date of these financial statements and the reported
amounts of revenues and expenses for the years presented. Actual results
could differ from these estimates. Material estimates included in these
financial statements that are susceptible to change include traffic
revenue, allowances for trade and other receivables and valuation of
unlisted investments.
C. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments, which
are readily convertible into cash and have original maturities of three
months or less on the date of purchase, to be cash equivalents. The
carrying value of cash equivalents approximates fair value.
D. TRADE AND OTHER RECEIVABLES
Trade and other receivables are stated at their expected realizable
values, net of provisions for bad and doubtful amounts. Amounts payable to,
and receivable from, the same administration and the DoT are shown on a net
basis, where a legal right of set-off exists. These payables and
receivables are intended to be settled on a net basis.
E. INVESTMENTS
The Company accounts for its investments in securities of
telecommunication satellite companies for which readily determinable fair
values are available in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. SFAS No.115 requires that investments that are not
classified as held to maturity or trading are classified as available for
sale and recorded at fair value. Unrealized gains and losses on such
securities, net of applicable taxes, are reported in other comprehensive
income, a separate component of shareholders' equity.
Investments in telecommunication satellite corporations which are not
freely transferable and for which fair values are not readily obtainable
are accounted for in accordance with APB OPINION NO. 18, THE EQUITY METHOD
OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK. These investments are
reflected at cost less permanent impairment, if any. Declines in the value
of investments that are other than temporary are reflected in earnings as
realized losses, based on management's best estimate of the value of the
investment.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. All costs relating to the acquisition and installation of
property, plant and equipment are capitalized.
F-10
Depreciation is charged on property, plant and equipment on a
straight-line basis from the time they are available for use, so as to make
an economic allocation of the cost at which the assets are acquired less
their estimated residual values, over their remaining estimated economic
lives. Depreciation on freehold land is not provided. The estimated useful
lives of various assets are shown below:
YEARS
------
Buildings 61
Plant and machinery:
Earth stations 12
Cables 10-25
Exchanges 12
Other network equipment 8
Office equipment 20
Computers 6
Furniture, fittings and vehicles 10-15
Land acquired on lease is amortized over the period of the lease.
Assets gifted by unrelated parties have been accounted for in
accordance with SFAS No. 116, ACCOUNTING FOR CONTRIBUTIONS RECEIVED AND
CONTRIBUTIONS MADE at fair value and recognized as revenue and an asset in
the period received. Such assets are depreciated over their remaining
useful economic lives.
Property, plant and equipment includes intangible assets in the nature
of indefeasible rights of use for international telecommunication circuits
in submarine cables, which the Company acquires from time to time. These
rights extend over specific time periods. The amounts paid according to the
terms of these transactions are recorded as additions to property, plant
and equipment, respectively, and amortized over the contracted period of
use.
G. IMPAIRMENT OF LONG LIVED ASSETS
The Company evaluates the carrying value of its property and equipment
whenever events or circumstances indicate the carrying value of assets may
exceed their recoverable amounts. An impairment loss is recognized when the
estimated future cash flows (undiscounted and without interest) expected to
result from the use of an asset are less than the carrying amount of the
asset. Measurement of an impairment loss is based on fair value of the
asset computed using discounted cash flows as if the asset is expected to
be held and used. Measurement of an impairment loss for an asset held for
sale would be based on fair market value less estimated costs to sell.
H. OPERATING LEASES
Costs in respect of operating leases are expensed on a straight-line
basis over the lease term.
I. RETIREMENT BENEFITS
GRATUITY
In accordance with Indian law, the Company provides for gratuity, a
defined benefit retirement plan covering all employees. The plan provides
for lump sum payments to vested employees at retirement, death while in
F-11
employment or on termination of employment in an amount equivalent to 15
days salary payable for each completed year of service or part thereof in
excess of six months subject to a maximum of Rs.350,000. Vesting occurs
upon completion of five years of service. The Company makes annual
contributions to a fund administered by trustees, based on an external
actuarial valuation carried out annually. The Company accounts for its
liability for future gratuity benefits in accordance with SFAS No. 87,
EMPLOYERS' ACCOUNTING FOR PENSIONS.
LEAVE ENCASHMENT
Leave encashment benefits comprise of encashment of vacation
entitlement carried forward by employees. These balances are encashable
during the tenure of employment, on the employee leaving the Company or on
retirement. The Company makes a provision towards leave encashment
liability based on the total unavailed leave credited to each employee's
account and his respective salary as at the end of each reporting date.
PROVIDENT FUND
In addition to the above benefits, all employees receive benefits from
a provident fund, a defined contribution plan. The employee and employer
each make monthly contributions to the plan equal to 12% of the employee's
salary (basic and dearness allowance). The contributions are made to the
provident fund trust established by the Company. The Company is obligated
to make good any shortfall in the statutorily assured rate of return on the
assets of the trust, which was 11% and 9.5% as of March 31, 2000 and 2001,
respectively. Currently, the Company has no further obligation under the
provident fund beyond its contribution, which is expensed when incurred.
J. REVENUE RECOGNITION
Revenues for long distance telephone services are recognized at the
end of each month based upon minutes of incoming or outgoing traffic
completed in such month. Revenues from leased circuits are recognized based
upon contracted fee schedules. Revenues from Internet services are
recognized based on usage by subscribers. The majority of revenues are
derived from payments by the DoT for completing outgoing calls made from
India and from payments by foreign administrations for incoming calls that
originate outside India.
Income from the Company's investments in International
Telecommunications Satellite Organisation ("Intelsat"), which represent the
surplus earned by Intelsat during the year, is accrued on the basis of the
statements received and is included as part of non-operating income. The
charges paid to Intelsat for the use of satellites is included in network
and transmission costs.
K. OPERATING COSTS
The principal components of the Company's operating costs are network
and transmission costs, license fees paid to the DoT and other operating
costs.
Network and transmission costs include payments to DoT for incoming
traffic and to foreign administrations and carriers for outgoing traffic,
as well as the cost of leasing transmission facilities, including lines
from DoT and satellite circuits from Intelsat and International Mobile
F-12
Satellite Organisation ("Inmarsat"). As discussed in note 1(b), the Company
must pay a proportion of the amounts received from the DoT to transit and
destination foreign administrations. Similarly, a proportion of the
payments from the foreign administrations is paid to DoT for completing
calls within India.
Under the current revenue sharing agreement with DoT, the Company pays
to DoT a license fee of Rs.0.25 million per annum on average circuits
commissioned.
Other operating costs include general and administrative expenses
other than network and transmission costs and license fees.
L. FOREIGN CURRENCY TRANSACTIONS
The Company's functional currency is the Indian rupee. Foreign
currency transactions are recorded at the exchange rate prevailing on the
date of the transaction. Foreign currency denominated monetary assets and
liabilities are converted into Indian rupees using exchange rates
prevailing on the balance sheet dates. Gains and losses arising on
conversion of foreign currency denominated monetary assets and liabilities
and on settlement of foreign currency transactions are included in the
determination of net income.
M. INCOME TAX
Income tax comprises the current tax provision and the net change in
the deferred tax asset or liability in the year. Temporary differences are
identified and the provision is made using the asset and liability method
for all such differences. Deferred tax benefits are recognized on assets to
the extent that it is more likely than not that future taxable profits will
be available against which the asset can be utilized. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the temporary differences are expected
to be received or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the income statement
in the period of enactment of the change.
N. DIVIDENDS
Any dividends declared by the Company are based on the profit
available for distribution as reported in the statutory financial
statements of the Company prepared in accordance with Indian GAAP.
Accordingly, in certain years, the net income reported in these financial
statements may not be fully distributable. As of March 31, 2000 and 2001,
the amounts available for distribution are Rs.1,002 million and Rs.16,147
million, respectively. Dividends for the years ended March 31, 1999, 2000
and 2001 were Rs.8, Rs.8 and Rs.50 per equity share, respectively. The
Company paid dividends of Rs.380 million, Rs.760 million and Rs.760 million
during the years ended March 31, 1999, 2000 and 2001, respectively.
O. EARNINGS PER SHARE
The Company reports basic and diluted earnings per equity share in
accordance with SFAS No. 123, EARNINGS PER SHARE. Basic earnings per equity
share has been computed by dividing net income by the weighted average
number of equity shares outstanding for the period. For the purposes of
earnings per share, stock dividends declared by the Company have been given
retroactive effect for all the years presented.
F-13
P. COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS
No.130, REPORTING COMPREHENSIVE INCOME. Accounting principles generally
require that recognized revenues, expenses, gains and losses be included in
net income. Unrealized gains and losses on available for sale securities
along with net income are components of comprehensive income.
Q. SEGMENT INFORMATION
The Company identifies basic telephony, Internet and leased line
services as its operating segments. Segment-wise information has been
provided in Note 22.
R. NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 141
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, BUSINESS COMBINATIONS. The provisions of this Statement apply
to all business combinations initiated after June 30, 2001. This Statement
also applies to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001 or later. This
Statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, BUSINESS COMBINATIONS, and
SFAS No. 38, ACCOUNTING FOR PREACQUISITION CONTINGENCIES OF PURCHASED
ENTERPRISES. All business combinations in the scope of this Statement are
to be accounted for using the purchase method only. This Statement is not
applicable as the Company has not initiated any business combinations.
SFAS NO. 142
In June 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. The provisions of this Statement are required to be
applied starting with fiscal years beginning after December 15, 2001. This
Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
INTANGIBLE ASSETS. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Statement states that goodwill
and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment.
Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but without the constraint of an
arbitrary ceiling. The Company does not have goodwill and intangible assets
with indefinite useful lives. Intangible assets that have finite useful
lives are already being amortized over their useful lives. Hence, the
Company's current amortization policy complies with SFAS No. 142.
SFAS NO. 143
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. This
Statement addresses financial accounting and reporting for obligations
F-14
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and applies to all entities. It applies
to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the
normal operation of a long-lived asset, except for certain obligations of
lessees. The Company does not have material asset retirement obligations.
S. CONVENIENCE TRANSLATION
The accompanying financial statements have been expressed in Indian
rupees ("Rs."), the Company's functional currency. For the convenience of
the reader, the financial statements as at and for the year ended March 31,
2001 have been translated into US dollars at US$1.00 = Rs.46.85 based on
the noon buying rate for cable transfers on March 30, 2001 as certified for
customs purposes by the Federal Reserve Bank of New York. Such convenience
translation should not be construed as a representation that the Indian
rupee amounts referred to in these financial statements have been, or could
be converted into US dollars at this or at any other rate of exchange, or
at all.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include the following:
AS OF MARCH 31,
------------------------------------------------
2000 2001 2001
---------------- -------------- --------------
(IN MILLIONS)
Cash in hand Rs.1 Rs.15 US$-
Bank balances:
Current accounts 19,449 485 10
Time deposits 1,396 1,700 37
---------------- -------------- --------------
TOTAL Rs.20,846 Rs.2,200 US$47
================ ============== ==============
Time deposits are interest-bearing deposits with original maturities
ranging from 15 days to 90 days. Interest rates on such time deposits
during the year ended March 31, 2001, ranged from approximately 6.10% to
6.98% on foreign currency deposits and 7.00% to 11.25% on Indian rupee
deposits.
4. SHORT-TERM INVESTMENTS
Short-term investments include the following:
AS OF MARCH 31,
-------------- -------------- -------------
2000 2001 2001
-------------- -------------- -------------
(IN MILLIONS)
Restricted cash balances Rs.6,658 Rs.7,730 US$165
Time deposits with maturity
exceeding 90 days 2,120 38,320 818
-------------- -------------- -------------
TOTAL Rs.8,778 Rs.46,050 US$983
============== ============== =============
Restricted cash balances comprise of time deposits, the use of which
is restricted to the import of capital equipment.
F-15
5. TRADE AND OTHER RECEIVABLES
Trade and other receivables include the following:
AS OF MARCH 31,
-------------------------------------------------------
2000 2001 2001
------------------ ---------------- -------------
(IN MILLIONS)
Trade accounts receivables:
Amount due from foreign administrations Rs.24,564 Rs.17,347 US$370
Domestic trade debtors 527 792 17
Interest receivable on bank deposits 134 1,231 26
Other sundry deposits 49 56 1
Other receivables 377 319 7
------------------ ---------------- -------------
TOTAL Rs.25,651 Rs.19,745 US$421
================== ================ =============
Trade accounts receivables are net of an allowance for doubtful debts
of Rs.1,021 million and Rs.979 million for the years ended March 31, 2000
and 2001, respectively.
Amounts due from DoT for traffic settlement are netted against amounts
due to DoT for traffic settlement and are reported in trade payables. The
Company has legal right of setoff.
6. INVESTMENTS
The portfolio of investments as of March 31, 2000 and 2001 is as
follows:
AS OF MARCH 31, 2000 AS OF MARCH 31, 2001
------------ ------------ --------------- --------------- ----------------- --------------
GROSS GROSS
AMORTIZED UNREALIZED CARRYING AMORTIZED UNREALIZED CARRYING
COST GAINS VALUE COST GAINS VALUE
------------ ------------ --------------- --------------- ----------------- --------------
(IN MILLIONS)
Investment carried at fair value:
Satellite companies Rs.- Rs.- Rs.- Rs.562 Rs.681 Rs.1,243
============ ============ =============== =================
Investment carried at cost:
Satellite companies 9,127 8,474
Less: Permanent
impairment (5,470) (5,470)
--------------- --------------
TOTAL Rs.3,657 Rs.4,247
=============== ==============
TOTAL US$91
==============
INTELSAT
Intelsat is an Inter Government Organisation ("IGO") formed in 1964
that owns and operates satellite communication systems. It offers Internet,
broadcast, telephony and corporate network solutions to customers in over
200 countries through its network of 20 geostationary satellites. It
currently has 10 new next-generation satellites under construction.
F-16
The Company's ownership share in this organization is adjusted
quarterly to conform to the respective percentage of total use of the
system or another percentage based on the terms of the agreement.
Accordingly, on the basis of share re-determinations, as of March 1999,
2000 and 2001, the Company's investment was at 4.3%, 5.2% and 5.4%,
respectively, of the total shareholding of Intelsat.
Net capital contributions are billed by Intelsat to the Company from
time to time in proportion to the ownership share determined. The total of
such net capital contributions are disclosed as investments in
communication satellites under investments.
In November 2000, Intelsat's member nations formally decided to
privatise it to increase flexibility.
NEW SKIES SATELLITE NV ("NSS")
During 1998-99, Intelsat as part of its restructuring process
incorporated NSS as a corporation with limited liability under the laws of
Netherlands and transferred certain assets and liabilities to NSS accounted
for at historic book values. In return, NSS issued 10,000,000 shares of
common stock of Dutch Guilder 1 to Intelsat. Intelsat distributed 9,000,000
shares of NSS in the year 1998-99, and 1,000,000 shares of NSS in 1999-2000
in proportion to the investment shares of its members at the time of
distribution. Consequently, the Company acquired 301,215 shares in 1998-99
and 43,000 shares in 1999-2000, shares which were recorded as a reduction
in the investment in Intelsat and a new investment in NSS at face values.
NSS announced a 10:1 stock split prior to its initial public offering
("IPO") in October 2000 and redesignated its shares from Guilders to Euros.
Thus, the Company's total holding in NSS as of March 31, 2001 stands at
3,442,150 ordinary shares of 0.05 Euros each. The market value per share as
of March 30, 2001 was US$7.75 per share.
INTERNATIONAL MOBILE SATELLITE ORGANISATION ("INMARSAT")
Inmarsat was an intergovernmental organization with membership from 88
countries providing satellite mobile communications in air, on land and at
sea. Inmarsat was converted into a national law company incorporated in the
United Kingdom effective April 15, 1999. The Company's investment in the
holding company, Inmarsat Ventures Plc is 202,219 shares representing 2.0%
of the paid up capital. Further, there had been a 10:1 stock split in March
2001. Consequently, the Company now holds 2,022,190 shares of 10 pence each
in Inmarsat Ventures Plc.
ICO GLOBAL COMMUNICATIONS HOLDINGS LTD. ("ICO")
ICO, a company registered in Bermuda, was incorporated in January 1995
to provide global mobile personal communication services. ICO was listed on
the NASDAQ in July 1998. The Company has invested a sum of Rs.5,471 million
(US$150 million) in ICO.
ICO filed a voluntary petition for re-organization under Chapter 11 of
the United States Bankruptcy Code on August 27, 1999 in the United States
Bankruptcy Court in the district of Delaware as the additional financial
resources required to complete the system and begin commercial operations
could not be raised as per schedule.
F-17
In May 2000, the court confirmed the plans of re-organization of ICO,
which became effective on May 17, 2000. By virtue of the re-organization,
the Company received 180,053 shares of class A common stock of US$ 0.01,
amounting to Rs.0.06 million and 975,398 warrants, with an option to
purchase shares of class A common stock exercisable in New ICO by May 15,
2006. The Company recognized a charge of Rs.5,416 million and Rs.54 million
as permanent impairments in the years ended March 31, 1999 and 2000,
respectively.
TELSTRA VISHESH COMMUNICATIONS LIMITED ("TVCL")
TVCL is a joint venture between the Company, Telstra-Australia and
Infrastructure Leasing & Financial Services Ltd. , with an investment
equity in the ratio of 40:40:20. Currently, the Company holds Rs.92 million
out of the total paid up capital of Rs.314 million. TVCL has invested in a
hybrid VSAT project and has diversified into consulting, facility
management services and turnkey VSAT projects for large organizations. The
shares of TVCL are recorded at face value and consequently the Company has
applied the provision for diminution in value of investments and written
off these investments to their current face value in the previous year.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment by asset category is as follows:
AS OF MARCH 31,
----------------------------------------------------------
2000 2001 2001
----------------- --------------- -----------------
(IN MILLIONS)
Land Rs.143 Rs.754 US$16
Buildings 1,780 2,062 44
Plant and machinery 20,658 23,349 499
Computers 431 574 12
Motor vehicles 14 16 -
Furniture and fixtures 339 366 8
----------------- --------------- -----------------
Property, plant and equipment, at cost 23,365 27,121 579
Less: Accumulated depreciation (7,445) (9,044) (193)
----------------- --------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, NET Rs.15,920 Rs.18,077 US$386
================= =============== =================
Depreciation expense for the years ended March 31, 1999, 2000 and 2001
was Rs.1,266 million, Rs.1,534 million and Rs.1,729 million, respectively.
During the year 1998-99 the Company had spent Rs.496 million towards
gateway equipment for Iridium India Telecom Limited ("IITL"), Pune, which
was capitalized and was being depreciated. IITL stopped operational
activities in April 2000 and since then these assets have not been used by
IITL. An allowance for impairment has been made of Rs.356 million in the
year ended March 31, 2000 to reflect their estimated realizable value.
Property, plant and equipment includes assets held for disposal of
Rs.1 million as of March 31, 2000 and 2001, respectively, which represents
their estimated realizable value.
Property, plant and equipment include Rs.851 million and Rs.1,672
million for indefeasible rights of use as of March 31, 2000 and 2001,
respectively.
F-18
8. CAPITAL WORK-IN-PROGRESS
Capital work-in-progress includes the following:
AS OF MARCH 31,
--------------------------------------------
2000 2001 2001
---------- ------------ -----------
(IN MILLIONS)
Buildings Rs.313 Rs.382 US$8
Plant & Machinery 1,173 1,912 41
Other assets 496 34 1
---------- ------------ ---------
TOTAL Rs.1,982 Rs.2,328 US$50
========== ============ =========
9. OTHER ASSETS
Other assets includes the following:
AS OF MARCH 31,
------------------------------------------------
2000 2001 2001
------------ ------------- --------------
(IN MILLIONS)
Advance tax (net) Rs.5,858 Rs.7,463 US$160
Advance paid for
capital goods 348 63 1
Prepaid expenses 140 235 5
Inventories 31 17 -
------------ ------------- -------------
------------ ------------- -------------
TOTAL Rs.6,377 Rs.7,778 US$166
============ ============= =============
10. TRADE PAYABLES
Trade payables include the following:
AS OF MARCH 31,
-------------------------------------------------------------
2000 2001 2001
-------------------- --------------- -----------------
(IN MILLIONS)
Accounts payable-trade:
Amounts due to foreign administrations Rs.1,151 Rs.2,585 US$56
Amounts due to DoT net of amounts due from
DoT for traffic settlement 12,384 8,724 186
-------------------- --------------- -----------------
TOTAL Rs.13,535 Rs.11,309 US$242
==================== =============== =================
F-19
11. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include the following:
AS OF MARCH 31,
-------------------------------------------------------
2000 2001 2001
---------------- ---------------- ----------------
(IN MILLIONS)
Bank overdraft Rs.46 Rs.- US$-
Unearned income 1,605 2,235 48
Deferred taxation 1,155 3,183 68
Other payables and accrued expenses 3,559 5,313 113
---------------- ---------------- ----------------
TOTAL Rs.6,365 Rs.10,731 US$229
================ ================ ================
Bank overdraft of Rs. 46 million and Rs.Nil million as of March 31,
2000 and 2001, respectively, represent book overdrafts.
12. INCOME TAXES
The income tax expense comprises the following:
YEARS ENDED MARCH 31,
-------------------------------------------------------------------
1999 2000 2001 2001
-------------- --------------- -------------- ------------
(IN MILLIONS)
Current income tax expense Rs.5,894 Rs.6,375 Rs.7,887 US$168
Deferred income tax expense
(benefit) 404 (219) 1,759 38
-------------- --------------- -------------- ------------
INCOME TAX EXPENSE Rs.6,298 Rs.6,156 Rs.9,646 US$206
============== =============== ============== ============
The following is the reconciliation of estimated income taxes at the
Indian statutory income tax rate to income tax expense as reported:
YEARS ENDED MARCH 31,
---------------------------------------------------------------------
1999 2000 2001 2001
-------------- ---------------- ---------------- -----------
(IN MILLIONS)
Net income before taxes Rs.15,002 Rs.19,331 Rs.25,173 US$537
Effective statutory income tax rate
35.00% 38.50% 39.55% 39.55%
Expected income tax expense 5,251 7,442 9,956 212
Adjustments to reconcile expected income tax to actual tax expense:
Permanent differences:
Income exempt under tax holiday
(708) (899) (1,209) (26)
Provision for diminution in value
of investment not allowed for tax
1,896 21 153 3
Exchange gain on GDR deposits
treated as capital receipt for
income tax purposes
(248) (94) (60) (1)
Other, net 107 (451) 775 17
Effect of change in statutory
tax rate - 137 31 1
-------------- ---------------- ---------------- -----------
INCOME TAX EXPENSE Rs.6,298 Rs.6,156 Rs.9,646 US$206
============== ================ ================ ===========
F-20
The tax effects of significant temporary differences are as follows:
AS OF MARCH 31,
-----------------------------------------------------
2000 2001 2001
---------------- ---------------- -------------
TAX EFFECT OF: (IN MILLIONS)
DEDUCTIBLE TEMPORARY DIFFERENCES:
Allowances for trade receivables
Rs.482 Rs.387 US$8
Other 511 - -
---------------- ---------------- -------------
DEFERRED TAX ASSET Rs.993 Rs.387 US$8
---------------- ---------------- -------------
TAXABLE TEMPORARY DIFFERENCES:
Property, plant and equipment Rs.2,148 Rs.3,204 US$68
Investment income deferred for tax - 269 6
Other - 97 2
---------------- ---------------- -------------
DEFERRED TAX LIABILITY Rs.2,148 Rs.3,570 US$76
---------------- ---------------- -------------
NET DEFERRED TAX LIABILITY Rs.1,155 Rs.3,183 US$68
================ ================ =============
13. SHAREHOLDERS' EQUITY
On September 26, 2000, the shareholders of the Company approved a
stock dividend of equity shares in the ratio of two equity shares for every
one equity share held, which was distributed on November 24, 2000 to
shareholders on record as of November 16, 2001. In accordance with ARB No.
43, the Company has capitalized the legally required face value of the
equity shares issued.
During the year ended March 31, 2001, the authorized share capital of
the Company was increased from 100 million equity shares of Rs.10 each
aggregating Rs.1,000 million to 300 million equity shares of Rs.10 each
aggregating Rs.3,000 million.
F-21
14. REVENUES
Revenues comprise the following:
YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1999 2000 2001 2001
-------------- ------------- -------------- ------------
(IN MILLIONS)
Revenues from foreign Administrations
for incoming traffic:
Telephone Rs.43,834 Rs.45,161 Rs.46,674 US$996
Telex 186 128 112 2
Revenues from DoT for outgoing traffic:
Telephone 18,243 18,375 18,345 392
Telex 173 175 112 2
Leased circuits 2,499 2,986 3,140 67
Telegraph, television and others 2,246 2,815 3,533 76
-------------- ------------- -------------- ------------
TOTAL Rs.67,181 Rs.69,640 Rs.71,916 US$1,535
============== ============= ============== ============
15. NETWORK AND TRANSMISSION COSTS
Network and transmission costs comprise the following:
YEARS ENDED MARCH 31,
----------------------------------------------------------------------
1999 2000 2001 2001
-------------- ---------------- --------------- ------------
(IN MILLIONS)
Payment for traffic costs to:
DoT Rs.27,682 Rs.29,254 Rs.27,341 US$584
Foreign administrations 14,762 13,374 13,866 296
Rent of land lines 915 579 1,037 22
Other transmission facilities 1,780 2,414 2,906 62
-------------- ---------------- --------------- ------------
TOTAL Rs.45,139 Rs.45,621 Rs.45,150 US$964
============== ================ =============== ============
F-22
16. OTHER OPERATING COSTS
Other operating costs comprise the following:
YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1999 2000 2001 2001
------------- ------------- ------------- ------------
(IN MILLIONS)
Staff costs:
Salaries and wages Rs. 680 Rs. 866 Rs.1,400 US$30
Social security contributions 86 90 132 3
Energy costs 175 235 271 6
Advertising 102 113 116 2
Repairs, maintenance, marketing and other
costs 585 1,318 1,104 24
------------- ------------- ------------- ------------
TOTAL Rs.1,628 Rs.2,622 Rs.3,023 US$65
============= ============= ============= ============
17. NON-OPERATING INCOME
Non-operating income comprises the following:
YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1999 2000 2001 2001
------------- ------------- ------------- ------------
(IN MILLIONS)
Foreign exchange gains, net Rs.3,168 Rs.1,449 Rs.2,878 US$61
Profit (Loss) on sale of fixed assets 10 86 (5) -
Miscellaneous income 136 286 185 4
------------- ------------- ------------- ------------
TOTAL Rs.3,314 Rs.1,821 Rs.3,058 US$65
============= ============= ============= ============
F-23
18. RETIREMENT BENEFITS
GRATUITY
The following table sets out the funded status of the gratuity plan
and the amounts recognized in the Company's financial statements as of
March 31, 2000 and 2001.
AS OF MARCH 31,
--------------------------------------------
2000 2001 2001
-------------- ------------ -----------
(IN MILLIONS)
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation, beginning of the year Rs.151 Rs.153 US$4
Service cost 8 8 -
Interest cost 16 16 -
Actuarial loss/(gain) (21) 65 1
Benefits paid (1) (10) -
-------------- ------------ -----------
PROJECTED BENEFIT OBLIGATION, END OF THE YEAR 153 232 5
-------------- ------------ -----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of the year 56 95 2
Actual return on plan assets 7 10 -
Employer contributions 33 32 1
Benefits paid (1) (10) -
-------------- ------------ -----------
FAIR VALUE OF PLAN ASSETS, END OF THE YEAR 95 127 3
-------------- ------------ -----------
Excess of obligation over plan assets (58) (105) (2)
Unrecognized actuarial loss 2 68 1
Unrecognized transitional obligation 18 13 -
-------------- ------------ -----------
ACCRUED BENEFIT Rs.(38) Rs.(24) US$(1)
============== ============ ===========
Net gratuity cost for the years ended March 31, 1999, 2000 and 2001
comprises the following components:
YEARS ENDED MARCH 31,
----------------------------------------------------------------
1999 2000 2001 2001
-------------- ------------- -------------- -----------
(IN MILLIONS)
Service cost Rs.7 Rs. 8 Rs. 8 US$-
Interest cost 11 16 16 -
Amortization of unrecognized transitional
obligation 5 5 5 -
Actual investment return (4) (7) (10) -
-------------- ------------- -------------- -----------
NET GRATUITY COST Rs.19 Rs.22 Rs.19 US$-
============== ============= ============== ===========
F-24
The assumptions used in accounting for the gratuity plan for the years
ended March 31, 1999, 2000 and 2001 are set out below:
YEARS ENDED MARCH 31,
-----------------------------------
1999 2000 2001
--------- --------- ---------
(%)
Discount rate 10.5 10.5 10.5
Rate of increase in compensation levels of covered employees 6 6 6
Rate of return on plan assets 9.5 9.5 9.5
LEAVE ENCASHMENT
The Company provided Rs.11 million, Rs.26 million and Rs.28 million
for leave encashment for the years ended March 31, 1999, 2000 and 2001,
respectively.
PROVIDENT FUND
The Company contributed Rs.36 million, Rs.45 million and Rs.75 million
to the provident fund for the years ended March 31, 1999, 2000 and 2001,
respectively.
19. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, cash equivalents, short-term
investments, accounts receivable and accounts payable approximate their
fair values due to the short maturity of these instruments.
20. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies are as follows:
CAPITAL COMMITMENTS
Capital commitments represent expenditure, principally relating to the
construction of new buildings, submarine cables and expansion of
transmission equipment, which had been committed under contractual
arrangements and unpaid amounts on investments, with the majority of
payments due within a one year period. The amount of these commitments
totalled Rs.2,887 million as of March 31, 2001.
CONTINGENCIES
INCOME TAX MATTERS
For the assessment years 1988-89, 1994-95 and 1996-97 to 1998-99, the
income tax authorities have raised demands aggregating Rs.14,728 million,
including interest of Rs. 6,343 million on the disallowance of license fee
F-25
paid by the Company to DoT and other claims against which amounts
aggregating to Rs.10,625 million have been paid or adjusted. The claim for
license fee for assessment year 1995-96 has been allowed by the Income Tax
Appellate Tribunal. The Company has been advised by counsel that the
demands are not likely to be sustained and hence no provision is considered
necessary.
OTHER CONTINGENCIES
The Company is involved in lawsuits, claims, investigations and
proceedings, which arise in the normal course of business. There are no
such matters pending that the Company expects to be material in relation to
the business.
21. RELATED PARTY TRANSACTIONS
The Company's principal related parties consist of government
departments, government owned or controlled companies and affiliates of the
Company. The Company routinely enters into transactions with its related
parties, such as providing telecommunication services, sharing costs and
revenues and subletting premises. Transactions other than with the DoT are
at arm's length in accordance with law. Transactions with the DoT are
subject to the revenue sharing agreement discussed in Note 1d. The
Company's significant related party balances and transactions with DoT are
detailed in the Statement of Income and in Notes 5, 10, 14 and 15. Other
related party transactions and balances are immaterial individually and in
the aggregate.
22. SEGMENT INFORMATION
The Company has three operating segments, comprising telephony,
Internet and leased line services. Operating segments other than the
telephony segment do not meet the quantitative thresholds specified by SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, and do not qualify as reportable segments. Information about
these segments has been aggregated and reported in the "All other"
category.
The Company's chief operating decision maker utilizes revenue
information in assessing performance and making overall operating decisions
and resource allocation. Communication services are provided utilizing the
Company's assets, which generally do not make a distinction between the
types of services. As a result, the Company cannot, and does not, allocate
expenses relating to assets or asset costs by segment.
F-26
Summarized segment information for the years ended March 31, 1999,
2000 and 2001 is as follows:
YEARS ENDED MARCH 31,
(IN MILLIONS)
-----------------------------------------------------------------------------------------
1999 2000 2001
---------------------------- -------------------------- ---------------------------
BASIC BASIC BASIC
TELEPHONY ALL OTHER TELEPHONY ALL OTHER TELEPHONY ALL OTHER
------------ --------------- ----------- -------------- ------------ --------------
Traffic revenue Rs.62,077 Rs.5,104 Rs.63,535 Rs.6,105 Rs.65,019 Rs.6,897
Income from satellite consortia - 757 - 737 - 1,160
------------ --------------- ----------- -------------- ------------ --------------
OPERATING REVENUE 62,077 5,861 63,535 6,842 65,019 8,057
Network and transmission costs 42,976 2,163 43,004 2,617 41,861 3,289
License fee 4,157 - 4,712 - 5,022 -
------------ --------------- ----------- -------------- ------------ --------------
SEGMENT OPERATING PROFIT 14,944 3,698 15,819 4,225 18,136 4,768
============ =============== =========== ============== ============ ==============
TOTAL SEGMENT OPERATING PROFIT 18,642 20,044 22,904
Less: Unallocable operating 2,894 4,156 4,752
costs
------------ ----------- -----------
OPERATING PROFIT, AS REPORTED Rs.15,748 Rs.15,888 Rs.18,152
============ =========== ===========
Unallocable operating costs include staff cost, energy cost,
depreciation and other general administrative overheads, which are not
allocable segment-wise.
Revenues from major customers are as follows:
YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------
1999 2000 2001 2001
-------------- ----------------- --------------- -----------------
(IN MILLIONS)
DoT Rs.18,416 Rs.18,550 Rs.18,346 US$392
USA-MCI 7,749 11,071 10,916 233
USA-ATT 7,572 5,157 9,639 206
UAE 6,921 6,589 7,222 153
UK-BTI 4,501 4,276 2,213 47
Saudi Arabia 4,179 3,179 4,185 89
US Sprint 1,216 1,794 1,384 30
UK MCL 1,119 928 717 15
Singapore 1,067 1,719 1,384 30
Canada 1,232 1,199 702 15
-------------- ----------------- --------------- -----------------
TOTAL Rs.53,972 Rs.54,462 Rs.56,708 US$1,210
============== ================= =============== =================
Concentrations of credit risk exist when changes in economic, industry
or geographic factors similarly affect groups of counter parties whose
aggregate credit exposure is material in relation to the Company's total
credit exposure.
F-27
The balances due from major customers are as follows:
YEARS ENDING MARCH 31,
-------------------------------------------------------
CUSTOMER NAME 2000 2001 2001
---------------- ---------------- ----------------
(IN MILLIONS)
USA-MCI Rs.7,308 Rs.4,066 US$87
USA-ATT 1,616 2,585 55
UAE 4,197 2,419 51
UK-BTI 3,689 1,717 37
Saudi Arabia 1,534 2,057 44
Singapore 1,118 49 1
---------------- ---------------- ---------------
---------------- ---------------- ---------------
TOTAL Rs.19,462 Rs.12,893 US$275
================ ================ ===============
All revenues earned by the Company are from its operations in India.
Substantially all of the Company's fixed assets are located in India.
23. SUBSEQUENT EVENTS REVIEW
A. CONVERSION OF INTELSAT INTO A PRIVATE COMPANY
Intelsat, the world's largest commercial satellite communications
organisation, was privatised on July 18, 2001. The holding company is known
as Intelsat Ltd., incorporated in Bermuda. After conversion, the Company
holds 5.4% (27,045,940 shares of par value US$1 each) in Intelsat. The
Company is represented on the Board of Directors of Intelsat Ltd.
B. PROPOSED VOLUNTARY RETIREMENT SCHEME ("VRS")
On August 1, 2001, the Company announced a VRS with the primary
objective of improving the average mix of its employees as also to improve
the overall skill level. The scheme remains open from September 1, 2001 to
September 30, 2001. Employees who are at least 50 years of age and have
rendered a minimum of 10 years service in the Company are eligible to opt
for voluntary retirement. Apart from normal retirement benefits, employees
opting for voluntary retirement will be entitled to an ex-gratia payment of
60 days salary (basic and dearness allowance) for each completed year of
service or payment of salary for the remaining period of service left
before retirement, whichever is lower. As the scheme has not closed as of
September 24, 2001, the Company is unable to accurately predict the cost of
the scheme.
F-28