No.7-2/2005-06/IR/SEC
Dated: 23rd June 2005
Mr. Larry Spirgel,
Assistant Director,
Division of Corporate Finance,
Securities & Exchange Commission,
Washington, D.C. 20549 (USA)
Dear Sir,
Sub: RESPONSE OF MTNL TO COMMENT LETTER ON FORM 20-F FOR FISCAL YEAR 2003-04
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This is with regard to the letter of comment received from your end in which
MTNL was asked to provide appropriate written responses. We appreciate &
understand that the purpose of your review process is to assist us in compliance
with the applicable disclosure requirements& to enhance overall disclosure in
our filings. The point-wise response to the comments are stated below:
LEGAL PROCEEDINGS, PAGE 31
1. We note in seventh paragraph that you have not accrued for the income
tax charge, interest and penalty of approximately Rs. 33 billion on the
disallowable license fees. Please tell us in detail in your response letter
how you met the requirements of paragraph 8 of SFAS no.5. Please refer to
FASB Interpretation no.14 which provides for additional guidance on SFAS
no. 5.
RESPONSE
We have not accrued for the income tax charge, interest and penalty of
approximately Rs. 33 billion on the disallowable license fees as we do not
believe that this is a probable loss contingency which needs to be accrued
in accordance with the conditions of paragraph 8 of SFAS no.5 as
interpreted by FIN 14. We believe that the claims would eventually be
decided in our favor based on the following.
i) We have received advise supporting the our position from our tax
advisors;
ii) We have also obtained a legal opinion from a Senior Lawyer (practicing
before the Supreme Court of India) indicating that the disallowance of
License fee by the Income Tax department is not tenable under Indian law.
iii) Further the Income Tax Appellate Tribunal (ITAT), the highest
appellate authority in the Income Tax Department in India has issued a
decision against the tax authorities for the disallowance of license fees
against another fixed line telecom operator in India on a similar issue.
iv) We have also received a favorable decision from ITAT during the year
2003-04 with regard to the disallowance of license fees pertaining to tax
year 1997-98.
Item 5: Operating and Financial Review and Prospects
Critical Accounting Policies and Estimates, page 43
2. We believe that your disclosures, with respect to critical accounting
policies, do not provide investors with an understanding of those estimates
and assumptions that are both important to the portrayal of your financial
conditions and results of operations and require your most difficult,
subjective or complex judgments. For the most part, the current disclosure
is identical to the disclosure presented in Note 2 - Summary of significant
accounting policies, appearing in the notes to the financial statements.
Please revise.
RESPONSE
The Company will make the requested revisions in its FY 2005 Form 20-F and
in future filings.
3. None of the critical accounting estimates that you include in your
current disclosures includes a sensitivity analysis or other quantitative
information. Revise your disclosure to include a sensitivity analysis and
other quantitative information when it is reasonably available. You should
address the questions that arise once the critical accounting estimate or
assumption has been identified by analyzing, to the extent material, such
factors as how they arrive at the estimate, how accurate the
estimate/assumption has been in the past, how much the estimate/assumption
has changed in the past, and whether the estimate/assumption is reasonably
likely to change in the future. For example, you should expand the
disclosure of your accounting for pension and other retirement benefits and
legal contingencies to provide more specific disclosures.
For additional guidance, refer to Item 5 of Form 20-F as well as section V
of SEC Release No. 33-8350 ( December 19, 2003), Commission Guidance
Regarding Management's Discussion and Analysis of Financial Condition and
Result of Operations, which is located on our website at
http://www.sec.gov/rules/interp/33-8350.htm.
RESPONSE
The Company will make the requested revisions in its FY 2005 Form 20-F and
in future filings.
Results of operations, page 48
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4. Your present discussion of the costs of revenues and selling, general
and administrative expenses on the pages 48 and 49 does not address changes
in each material component of these line items. Please revise your present
disclosure to discuss the changes in each material line presented on page
F-4. In circumstances where there is more than one business reason for the
change, you should attempt to quantify the incremental impact of each
individual business reason discussed on the overall change in the line
items. Please comply with Item 5 of Form 20-F. Also, refer to SEC Release
No. 33- 8350.
RESPONSE
The Company will make the requested revisions in its FY 2005 Form 20-F and
in future filings.
Item 15. Control and procedures, page 79
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5. We note your disclosure that "our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act." Please confirm in your
response letter, if true, that your officers concluded that your disclosure
controls and procedures are also effective in ensuring that information
required to be disclosed in the reports that you file or submit under the
Exchange Act is accumulated and communicated to your management, including
your principal executive officer and chief financial officer, to allow
timely decisions regarding required disclosure. See Rule 13(a) - 15(c) of
the Securities Exchange Act. Additionally, please comply with this comment
in the future filings.
RESPONSE
As requested, we confirm that our officers have concluded that our
disclosure controls and procedures are also effective in ensuring that
information required to be disclosed in the reports we file or submit under
the Exchange Act is accumulated and communicated to our management,
including our principal executive financial officers, to allow timely
decisions regarding required disclosure.". Disclosure will be added in the
FY 2005 Form 20-F and in future filings.
6. We note your disclosure that "our chief executive officer and chief
financial officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on timely basis, information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act." We also note that your quarterly financial statement
furnished on Form 6-K include review reports that note possible
discrepancies from India GAAP. Please tell us in your response letter what
consideration your officer gave to these review report in their evaluation
of your disclosure controls and procedure and in reaching their conclusion
that your disclosure controls and procedures were effective. In this regard
we note the following reports;
o Annexure 1 to the review report for the financial statements for the
three months ended September 30, 2004, filed on Form 6-K filed December 1,
2004;
o Annexure 1 to the review report for the financial statements for the
three months ended June 30, 2004, filed on Form 6-K filed August 31, 2004;
o Annexure A to the review report for the financial statements for the
three months ended December 30, 2003, filed as Exhibit 99.5 to Form 6-K
filed February 27, 2004; and
o Annexure A to the review report for the financial statements for the
three months ended September 30, 2003, filed on Form 6-K filed December 3,
2003.
RESPONSE
The discrepancies noted in the Form 6K are related to our interim financial
statements prepared in accordance with Indian GAAP. Our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO) are aware of the
discrepancies included in the quarterly Indian GAAP review reports as the
financials are reviewed/cleared by them before the public release.
We are not required to file quarterly US GAAP financial statements. Our
primary financial statements in the 20-F are our consolidated financial
statements prepared in accordance with US GAAP and these discrepancies have
been appropriately accounted in our annual US GAAP financial statements Our
CEO and CFO have considered these discrepancies in their evaluation of our
disclosure controls and procedures and concluded that they were effective
as of the end of such period.
Independent Registered Public Accounting Firm, page F-2
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7. On PCAOB's listing of the registered firms as of February 3, 2005, we
note the auditors- Price Waterhouse, in New Delhi, India-are not a
registered member of PCAOB. Please advise us in writing of the status of
your auditors to practice before the Commission.
RESPONSE
The audit of Mahanager Telephone Nigam Limited (MTNL) for the year ended 31
March 2004 was carried out by M/s. PriceWaterhouse, Bangalore, Chartered
Accountants (The Institute of Chartered Accountants of India - Registration
No. FRN 007568) herein after referred to as PW, Bangalore or the Firm,
having head office at Bangalore and additional offices at New Delhi,
Mumbai, Kolkata, Hyderabad and Chennai in India.
PCAOB with its letter dated 4 June 2004 has confirmed the registration of
the Firm, which was approved by the PCAOB board on 2 June 2004.Please find
attached the PCAOB letter as appendix.1. .
Statements of Operations, page F-4
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8. We note that your presentation of cost of revenues excludes depreciation
and amortization for property and equipment that is directly attributable
to the generation of revenue . It is not appropriate to present gross
profit that excludes depreciation, which is prohibited by SAB 11-B. Please
revise your income statement presentation and other related financial
information in future filings to include depreciation expenses in the
calculation of gross margin.
RESPONSE
We will revise our income statement presentation and other related
financial information in the FY 2005 Form 20-F and in future filings.
Consolidated Statements of Cash flows, page F-6
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9. Please tell us in your response letter the nature of the line item
"Excess liabilities written back".
RESPONSE
The amount primarily includes excess accruals being reversed to income,
relating to unmatched excess cash received in respect of debtors in
previous years upto 1998 amounting to Rs 590 million (which as per The
Limitation Act, after a period of three years become time barred and become
property of the Company)
This line item also includes other time barred liabilities amounting to Rs
245 million outstanding for more than 3 years and other provisions
(including for unpaid bonuses, Rs 90 million) no longer required which have
been written back.
These are all non cash items and there is no impact on the cash flows for
the year 2004.
Contingent Liabilities-Sales Tax, page F-26
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10. We note that the financial statements do not include the accrual for
the sales tax. liabilities. Please tell us in your response letter how you
evaluated the requirements of paragraph 8 of SFAS no.5 with respect to the
sales tax liabilities. Also, refer to FASB Interpretation no.14 which
provides for additional guidance on SFAS no. 5.
RESPONSE
Management believes that, although an unfavorable outcome is reasonably
possible, it is not probable and hence no accrual has been made. This
assertion is based on the following:
i) We have obtained an opinion from a reputed legal firm in India
supporting the Company's position;
ii) The Company successfully challenged the demands raised in the high
court and obtained stay orders against payment of the claims;
iii) This is an industry wide issue and all the telecommunication carriers
in the industry in India have obtained stay orders against such claims;
iv) The Company, through the industry group Association of Operators, has
challenged the premise for the demands in the Supreme Court of India, which
has referred the matter to a larger bench.
We hope the above responses will provide the necessary information &
disclosures as required by you. We would welcome in case any further
information is needed.
Thanking You,
Yours Faithfully,
/s/ Anita Soni
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(Anita Soni)
Director (Finance)