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Mahanagar Telephone Nigam 20-F 2008 SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C.
FORM
20-F
(Mark
One)
OR
OR
OR
Commission
file number 1-15252
Mahanagar
Telephone Nigam Limited
(Exact
name of Registrant as specified in its charter)
12th
Floor, Jeevan Bharati Tower-1
124
Connaught Circus
New
Delhi 110001
India
(Address
of principal executive offices)
Smt Anita
Soni, Director Finance, 91-11-2332-109,
dirfinco@bol.net.in
Jeevan
Bharati Building, Tower I, 124 Connaught Circus, New Delhi 110001,
India
(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contract
Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
630,000,000
Equity Shares
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of 1933, or the Securities
Act. YES o
NO x
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
YES o
NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
If “Other” has been checked in response
to the previous question, indicate by check mark which financial statement item
the registrant has elected to follow:
Item 17
o Item
18 o
If this
report is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act) YES o
NO x
TABLE OF CONTENTS
Page
PRESENTATION OF FINANCIAL INFORMATION
The
financial information in this report has been prepared in accordance with US
GAAP with respect to our consolidated statements of operations, shareholders’
equity and cash flow for the fiscal years ended March 31, 2006, 2007 and 2008,
and our balance sheets as of March 31, 2007 and 2008. Our fiscal year
ends on March 31 of each year, so all references to a particular fiscal year are
to the year ended March 31 of that year. The consolidated financial
statements, including the notes to those financial statements, are set forth at
the end of this report.
Although
we have translated in this report certain rupee amounts into dollars for
convenience, this does not mean that the rupee amounts referred could have been,
or could be, converted into dollars at any particular rate, the rates stated
below, or at all. All translations from rupees to dollars with
respect to financial data as of March 31, 2008 are based on the noon buying rate
in the City of New York for cable transfers in rupees on such
date. The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given. The noon buying rate
on March 31, 2008 was Rs. 40.02 per US$1.00.
Information
contained in our website, www.mtnl.net.in, is
not part of this annual report, and no portion of such information is
incorporated herein.
Reference
to “we,” “us,” “our,” “MTNL,” and the “Company” refer to Mahanagar
Telephone Nigam Limited.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This
report contains “forward-looking statements”, as defined in Section 27A of the
U.S. Securities Act of 1933, as amended, and Section 21E of the
U.S. Securities Exchange Act of 1934, as amended, that are based on
our current expectations, assumptions, estimates and projections about our
company and our industry. The forward-looking statements are subject
to various risks and uncertainties. Generally, these forward-looking
statements can be identified by the use of forward-looking terminology such as
“may,” “will,” “will likely result,” “believe,” “expect,” “will continue,”
“anticipate,” “estimate,” “intend,” “plan,” “contemplate,” “seek to,” “future,”
“objective,” “goal,” “project,” “should,” and similar expressions or variations
of these expressions. We caution you that reliance on any
forward-looking statement involves risks and uncertainties, and that although we
believe that the assumptions on which our forward-looking statements are based
are reasonable, any of those assumptions could prove to be inaccurate, and, as a
result, the forward-looking statements based on those assumptions could be
incorrect. The uncertainties in this regard include, but are not
limited to, those identified in the risk factors discussed elsewhere in this
report. See Item 3D. “Key Information—Risk Factors” and Item 5
“Operating and Financial Review and Prospects.” In light of these and
other uncertainties, you should not conclude that we will necessarily achieve
any plans and objectives or projected financial results referred to in any of
the forward-looking statements. We do not undertake to release the
results of any revisions of these forward-looking statements to reflect future
events or circumstances.
PART I
Not
applicable.
Not
applicable.
SELECTED FINANCIAL AND OPERATING DATA
You
should read the following selected financial and operating data in conjunction
with our consolidated financial statements and the related notes, and Item 5
“Operating and Financial Review and Prospects” and the other financial
information included elsewhere in this report and our other reports filed with
the SEC.
Our
selected financial and operating data included in this report are presented in
Indian rupees and are derived from our consolidated financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America (US GAAP) for the fiscal years ended March 31, 2004,
2005, 2006, 2007 and 2008.
The
selected statement of operations data and cash flow data for the three years
ended March 31, 2008, and the selected balance sheet data as of March 31, 2007
and 2008 under US GAAP have been extracted or derived from our consolidated
audited US GAAP financial statements which are included elsewhere in this
report. The selected statement of operations data and cash flow data for the
years ended March 31, 2004 and 2005, and the selected balance sheet data as of
March 31, 2004, 2005 and 2006 under US GAAP are derived from our consolidated
audited US GAAP financial statements not included in this report. Our
historical results do not necessarily indicate our results expected for any
future period. You should read the following information in
conjunction with “Item 5. Operating and Financial Review and
Prospects,” and our consolidated financial statements included elsewhere in this
report.
Consolidated
financial statements for the year ended March 31, 2008 have been translated for
convenience into US dollars (although we have translated certain rupee amounts
in this report into US dollars for convenience, this does not mean that the
rupee amounts referred to could have been, or could be, converted into US
dollars at any particular rate, the rates stated below, or at
all). All translations from rupees to dollars with respect to
financial data as of March 31, 2008 are based on the noon buying rate in the
City of New York for cable transfers in rupees on such date. The
Federal Reserve Bank of New York certifies this rate for customs purposes on
each date the rate is given. The noon buying rate on March 31, 2008
was Rs. 40.02 per US$1.00.
Under
US GAAP
1 Includes capital stock and additional paid-in capital. EXCHANGE RATES
Fluctuations
in the exchange rate between the Indian rupee and the U.S. dollar will affect
the U.S. dollar equivalent of the Indian rupee price of our equity shares on the
Indian Stock Exchanges and, as a result, will likely affect the market price of
the American Depository Shares, or ADSs, in the United States, and vice versa.
Such fluctuations will also affect the U.S. dollar conversion by the depositary
of any cash dividends paid in Indian rupees on our equity shares represented by
the ADSs.
The
following table sets forth, for the fiscal years indicated, information
concerning the number of Indian rupees for which one US dollar would be
exchanged based on the noon buying rate in the City of New York for cable
transfers of Indian rupees, as certified for customs purposes by the Federal
Reserve Bank of New York.
(1) The average rate is the
average of the exchange rates on the last business day of each month during the
period.
The
following table sets forth the high and low exchange rates for the previous six
months and is based on the noon buying rate in the City of New York during the
period for cable transfers in Indian rupees as certified for customs purposes by
the Federal Reserve Bank of New York:
On
September 22, 2008, the noon buying rate was Rs. 45.30 = US$1.00.
Not
applicable.
Not
applicable.
You
should carefully consider all the information contained in this report and the
following risk factors that affect us and our industry in evaluating us and our
business. The risks below are not the only ones we
face. Additional risks not currently known to us or that we
presently deem immaterial may also affect our business. This report
also contains forward-looking statements that involve risks and
uncertainties. The market price of our equity shares or ADSs could
decline due to any of these risks or uncertainties.
Risks
Relating to Our Business
We
expect to continue to encounter increased competition in each of our markets,
which could reduce our revenues.
The
Indian government is rapidly liberalizing the telecommunications industry in
India. The Department of Telecommunications (DOT) may license, at its
discretion, multiple additional service providers in any service area, with
respect to both basic telecommunications services and cellular
services. In November 2003, the Department issued guidelines for
Unified Access Licenses, which cover both basic and cellular services within a
service area. In the Indian context, “basic telecommunications
services” or “basic services” include basic fixed-line access service and a
number of other telecommunications services, other than long distance services,
cellular service and Internet access. Basic services also include
CDMA-based fixed wireless and mobile services (without roaming). Tata
Teleservices Limited and Reliance Infocomm Limited are currently competing with
us in the market for basic services in both Mumbai and Delhi, and Bharti
Tele-Ventures Limited is also competing with us in the basic services market in
Delhi and Mumbai. All of these companies already have significant
telecommunications infrastructure in Delhi and Mumbai, including, with respect
to Tata Teleservices and Reliance Infocom, low-cost CDMA mobile and fixed
wireless technology. With approximately 56.08% of our call units
having come from approximately 12.86% of our access lines in service, we are
particularly vulnerable to losing market share if these or other new operators
aggressively target our largest subscribers. Some of our largest
customers have already migrated to other basic service operators.
We
experience significant and growing competition in the market for GSM cellular
and Internet services. Many of these service providers enjoy
significant penetration in these markets, have established brand names and have
more experience operating a cellular network than we do. Cellular
operators also face competition from rapidly growing CDMA-based mobile services,
which are priced considerably lower than GSM cellular services.
Increased
competition has kept and will likely continue to keep downward pressure on
prices and has required and will likely continue to require us to increase our
capital investment to improve and expand our services. These
developments, in turn, have had and may continue to have a negative impact on
our profitability.
Our
business is subject to substantial regulation by the Government.
The DOT
retains the right to revoke our licenses after giving one month’s notice to
us. The DOT also retains the right, after giving notice to us, to
modify the terms and conditions of our licenses at any time if in their opinion
it is necessary or expedient to do so in the interest of the general public or
for the proper operation of the telecommunications sector. A
revocation of any license or a change in significant terms of any license, such
as its duration, the amount of license fee payable, the range of services
permitted and the scope of exclusivity could limit our ability to operate
particular lines of our business or result in increased costs in the form of
increased license fees or costs associated with applying for new licenses, or
contesting limitations on our licenses.
Regulations
applicable to public sector enterprises in India governing certain personnel
matters, procurement, capital expenditure and the issuance of securities may
affect our ability to compete effectively.
As long
as the Indian government’s shareholding in us equals or exceeds 51%, we are
deemed to be an Indian government company. As such, we are subject to
laws and regulations generally applicable to public sector enterprises in
India. These laws and regulations govern, among other things,
personnel matters, procurement, budgeting and capital expenditures and the
generation of funds through the issuance of securities.
Under our
articles of association, the President of India, on behalf of the Indian
government, may also issue directives with respect to the conduct of our
business and affairs, and certain matters with respect to our business,
including the appointment and remuneration of our Chairman and Managing Director
and the declaration of dividends. None of our shareholders,
management or board of directors may take action in respect of any matter
reserved for the President of India without his approval. If the
President of India does not allow us to make capital expenditures
pursuant to our business plan, we may be unable to compete effectively or
maintain profitability. Government formalities, including
requirements that many of our purchases be made through a competitive bidding
process, often cause delays in our equipment and product procurement; these
delays can place us at a disadvantage relative to private sector
competitors.
The
Indian government, our controlling shareholder, when considering matters
pertaining to us, often also considers the interests of the largest
government-owned telecommunications company, Bharat Sanchar Nigam Limited
(BSNL). The Indian government is evaluating the possibility of a
merger of us with BSNL.
The
Indian government, through the DOT, holds 56.25% of our outstanding equity
shares and 100% of BSNL’s equity shares. Consequently, the DOT
controls both of us. The DOT has the power to determine the outcome
of most actions requiring approval of our board of directors or shareholders,
including proposed expansion of our basic and cellular services into new areas
in which we may compete with BSNL, transactions with BSNL or the assertion of
claims against BSNL. When considering many of these matters, the DOT
may also take into account the interests of BSNL. Failure by the DOT
to resolve conflicts involving us and BSNL in an equitable manner could have a
material adverse effect on our business prospects.
India’s
Ministry of Communications has appointed private sector banks to act as
consultants to advise on restructuring BSNL and us. We understand
that these consultants have submitted their reports. There have been
media reports about consideration of a merger of our companies or the transfer
by the DOT of their shares in us to BSNL or to a holding company that would
control both us and BSNL. There are no further announcements on
this. We cannot assess the likelihood of such a transaction, or the
impact of such a transaction on our business or the value of our shares or
ADSs.
We
have significant related party transactions.
The
Indian Government is our controlling shareholder and hence we are deemed to be
an Indian government company. As such, we are subject to laws and regulations
generally applicable to public sector enterprises in India. These laws and
regulations govern, among other things, personnel matters, procurement,
budgeting and capital expenditures and the generation of funds through the
issuance of securities. We have extensive commercial and regulatory
relationships with the DOT and BSNL, most of which were established at the time
when there was no corporate separation between the DOT, BSNL and
us. Also the Indian Government when considering matters pertaining to
us, often also considers the interests of the largest government-owned
telecommunications company, Bharat Sanchar Nigam Limited (BSNL). We
have significant amounts due from related party and our inability to collect
them or change in the terms of our arrangements with our related parties could
adversely affect our revenues and profitability. See Notes 3, 4, 19
and 25 to our consolidated financial statements and Item 7B. Related Party
Transactions in this report.
We
do not have title to property, and we cannot sell our properties without payment
of stamp duties and registering properties in our name.
In 1987,
the assets and properties of the DOT located in Delhi and Mumbai were
transferred to us by an order of the Government of India (the “Government”) and
a deed of sale was executed by the Government in our favor representing an
irrevocable transfer. Indian law generally requires that to perfect
the transfer or lease of real property, the transfer should be evidenced by a
formal, duly stamped deed of transfer and registered with the Central Land
Registrar within a specified period after the execution of the deed of transfer
or lease. A formal transfer deed for real property of the DOT, transferred by
the Government to us has been executed but has not been registered with the
appropriate municipal authorities. The formal transfer deed and
physical delivery of possession of the DOT’s non-real estate assets has resulted
in the transfer of such non-real estate assets of the DOT to us in Delhi and
Mumbai.
Indian
law also requires payment of stamp duty (at rates which vary among states) on
instruments, which effect transfer of title to real estate or in respect of
leases of real estate. We have not paid stamp duty in respect of any
of the acquired or leased properties. Accordingly, we may be liable
for stamp duty and penalties thereon if a deed is registered by us in the future
(other than with respect to the DOT properties acquired from the Government as
at March 30, 1987). All liabilities for stamp duties in respect of the DOT
properties acquired by us from the Government as at March 30, 1987 are to be
borne by the Government. We have been advised by our counsel that
although we have valid possession including the risks and rewards of ownership
and title to all of our property to enable us to perfect and thereby acquire
marketable title to real property in our possession, we would need to have
relevant documents relating to transfer or lease of real property duly
registered and stamped. Accordingly, we cannot sell our properties
without payment of stamp duties and registering the properties in our
name.
Compliance
with new and changing corporate governance and public disclosure requirements
adds uncertainty to our compliance policies and increases our costs of
compliance. In certain areas management had concluded there were
material weaknesses in our internal controls.
We are
incorporated in India and investors should be aware that there are
differences in the governance standards and shareholder rights for a U.S.
company and those applicable to a foreign isser as us. Changing laws,
regulations and standards relating to accounting, corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new U.S. Securities
and Exchange Commission, or SEC, regulations, the NYSE, rules, Securities and
Exchange Board of India, or SEBI, rules, and Indian stock market listing
regulations are creating uncertainty for companies like ours. These new or
changed laws, regulations and standards may lack specificity and are subject to
varying interpretations. Their application in practice may evolve over time, as
new guidance is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher costs of
compliance as a result of ongoing revisions to such corporate governance
standards.
In
particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding our required assessment of our
internal controls over financial reporting and our external auditors’ audit of
that assessment requires the commitment of significant financial and managerial
resources. We consistently assess the adequacy of our internal controls over
financial reporting, remediate any control deficiencies that may be identified,
and validate through testing that our controls are functioning as
documented.
As of
March 31, 2008, management had concluded that our internal controls over
periodical reporting were not effective by reason of certain material
weaknesses, particularly as to updating of our fixed assets register,
reconciliation of subscriber deposits, accounting for related party transactions
and information technology controls. These deficiencies could result
in misstatements in reporting in those areas. We had undertaken
certain initiatives and remedial action in those areas during the 2008 fiscal
year and have undertaken additional remedial action and expect to complete the
remedial action in the 2009 fiscal year. See Item 15. Controls and
Procedures.
We
have received a demand to pay sales tax in respect of certain historical
telecommunications revenues, mainly telephone rental charges. We are
not yet able to estimate our potential aggregate liability, but it could be
large and have a material adverse effect on our results of operations, financial
condition and cash flow.
We have
received a demand from the state government of Maharashtra, of which Mumbai is a
part, for payment of Rs.1.9 billion in sales tax for fiscal 1989-2000 on certain
telecommunications revenues, mainly telephone rental charges.
We have
challenged the demands raised before the respective high courts and we have been
granted interim stays against enforcement of the demands. However this stay
order is subject to the outcome of the Supreme Court judgment on the
issue. During the year ended March 31, 2006, the Supreme Court of
India has concluded in the BSNL Vs Union of India case that rendering basic
services does not amount to a “transfer of right to use the telephone
system”. Hence the imposition of the sales tax on any facility of the
telecommunication services is untenable in law. Based on opinion
received from legal counsel and drawing reference to the judgment of the Supreme
Court of India in the abovementioned case, management believes that the sales
tax departments would have to withdraw their demands of sales tax on basic
telephony and that an adverse outcome in respect of the above is
remote. The legal case filed in the Sales Tax Tribunal Maharashtra
has been remanded to the Commissioner to reconsider the issue in light of the
above Supreme Court judgment.
If we
were required to pay sales tax in respect of certain historical revenues,
including telephone rentals, such payments could have a material adverse effect
upon our results of operations, financial condition and cash flow. At
this time, we cannot estimate potential aggregate actual liability
associated with sales tax.
We
have and may continue to implement Voluntary Retirement Schemes that will
affect our profitability.
We have
and continue to offer voluntary retirement to certain of our employees with a
view to reducing our workforce. While we believe the long-term effect
to our financial performance will be beneficial, the cost of such programs will
affect our profitability over the next few years.
Risks
Relating to Investments in Indian Companies
There
are risks of political uncertainty in India that could affect our
business.
During
the past decade, the government of India has pursued policies of economic
liberalization, including significantly relaxing restrictions on the private
sector. Nevertheless, the role of the Indian central and state governments in
the Indian economy as producers, consumers and regulators has remained
significant. A coalition government is in power. We cannot assure that these
liberalization policies will continue in the future. The rate of economic
liberalization could change, and specific laws and policies affecting foreign
investment, currency exchange rates and other matters affecting investment in
our securities could change as well. A significant change in India’s economic
liberalization and deregulation policies could disrupt business and economic
conditions in India generally and could adversely affect the telecommunications
licensing and regulatory framework in which we operate our
business.
A
slowdown in economic growth in India may adversely affect our business and
results of operations.
Our
performance and the quality and growth of our business are necessarily dependent
on the health of the overall Indian economy. The Indian economy has
grown significantly over the past few years. Any future slowdown in
the Indian economy could harm us, our customers and other contractual
counterparties. In addition, the Indian economy is in a state of
transition. The share of the services sector of the economy is rising
while that of the industrial, manufacturing and agricultural sector is
declining. It is difficult to gauge the impact of these fundamental
economic changes on our business.
Financial
instability in other countries, particularly emerging market countries in Asia,
could adversely affect the Indian economy and cause our business and the market
for our equity shares and ADSs to suffer.
Financial
turmoil in Asia, Russia and elsewhere in the world in the late 1990s affected
different sectors of the Indian economy in varying degrees. Although
economic conditions are different in each country, investors’ reactions to
developments in one country can have adverse effects on the securities of
companies in other countries, including India. A loss of investor
confidence in the financial systems of other emerging markets may cause
increased volatility in Indian financial markets and, indirectly, in the Indian
economy in general. Any worldwide financial instability could
influence the Indian economy and could have a material adverse effect on the
market for securities of Indian companies, including our equity shares and
ADSs.
Social
conflict, terrorism and related military activity may adversely affect the
Indian economy or world economic activity, either of which could adversely
affect our business and the prices of our equity shares and ADSs.
India and
other parts of the world have recently experienced significant social conflict
and/or terrorist acts. In India, social conflict, including religious
and regional/separatist conflicts, has been an ongoing problem, which
occasionally includes significant acts of terrorism. To the extent
that the Indian economy is adversely affected by such conflict, terrorism or
military activity, our business may also be adversely affected, resulting in a
decline in revenue, and the prices of our equity shares and ADSs may
decline.
Risks
Relating to the ADSs and Equity Shares
Ability
to withdraw equity shares from the depositary facility is uncertain and may be
subject to delays.
India’s
restrictions on foreign ownership of Indian companies limit the number of shares
that may be owned by foreign investors and generally require government approval
for foreign ownership. The maximum foreign ownership permitted in us
without prior governmental approval is 49% under the sectoral caps currently
provided for by the government of India and the Reserve Bank of
India. Investors who withdraw equity shares from the depositary
facility will be subject to Indian regulatory restrictions on foreign ownership
of equity shares upon withdrawal. It is possible that this withdrawal
process may be subject to delays.
Ability
to sell in India any equity shares withdrawn from the depositary facility may be
subject to delays.
Persons
seeking to sell in India any equity shares withdrawn upon surrender of an ADS
will require Reserve Bank of India approval for each such
transaction. Because of possible delays in obtaining necessary
approvals, holders of equity shares may be prevented from realizing gains during
periods of price increases or limiting losses during periods of price
declines.
Ability
to withdraw and redeposit shares in the depositary facility is limited, which
may cause our equity shares to trade at a discount or premium to the market
price of our ADSs.
Because
of Indian legal restrictions, despite recent relaxations, the supply of ADSs may
be limited. Under procedures recently adopted by the Reserve Bank of
India, the depositary will be permitted to accept deposits of our outstanding
equity shares and deliver ADSs representing the deposited equity shares to the
extent, and limited to the number, of ADSs that have previously been converted
into underlying equity shares. Under these new procedures, if you
elect to surrender your ADSs and receive equity shares, you may be unable
to re-deposit those outstanding equity shares with our depositary and
receive ADSs because the number of new ADSs that can be issued cannot, at any
time, exceed the number of ADSs converted into underlying equity shares or
result in foreign equity in us exceeding 49%. This may restrict your
ability to re-convert the equity shares obtained by you to
ADSs. Also, investors who exchange ADSs for the underlying equity
shares and are not holders of record will be required to declare to us details
of the holder of record. Any investor who fails to comply may be
liable for a fine of up to Rs.1,000 for each day such failure
continues. See Item 10. “Additional Information—Indian Foreign
Exchange Controls and Securities Regulations.”
The
restrictions described above may cause our equity shares to trade at a discount
or premium to our ADSs.
Conditions
in the Indian securities market may affect the price or liquidity of the equity
shares and the ADSs.
The
Indian securities markets are generally smaller and more volatile than
securities markets in the world’s major financial centers. Indian
stock exchanges have also experienced problems that have affected the market
price and liquidity of the securities of Indian companies. These
problems have included temporary exchange closures, the suspension of stock
exchange administration, broker defaults, settlement delays and strikes by
brokers. In addition, the governing bodies of the Indian stock
exchanges have from time to time imposed restrictions on trading in certain
securities, limitations on price movements and margin
requirements. Further, from time to time, disputes have occurred
between listed companies and stock exchanges and other regulatory bodies, which,
in some cases, may have had a negative effect on market
sentiment. Similar problems could happen in the future and, if they
do, they could affect the market price and liquidity of our equity shares and
our ADSs.
Because
there may be less company information available in Indian securities markets
than securities markets in more developed countries, the price of our equity
shares could fluctuate unexpectedly.
There is
a difference between the level of regulation and monitoring of the Indian
securities market and the activities of investors, brokers and other
participants and that of markets in the United States and other
developed
economies. The
Securities and Exchange Board of India is responsible for improving disclosure
and other regulatory standards for the Indian securities markets. The
Securities and Exchange Board of India has issued regulations and guidelines on
disclosure requirements, insider trading and other matters. There
may, however, be less publicly available information about Indian companies than
is regularly made available by public companies in developed
economies. As a result, shareholders could act on incomplete
information and cause the price of our equity shares to fluctuate
unexpectedly.
ADS
holders may be unable to exercise preemptive rights available to shareholders
and therefore may suffer future dilution of their ownership
position.
A company
incorporated in India must offer its holders of equity shares preemptive rights
to subscribe and pay for a proportionate number of shares to maintain their
existing ownership percentages prior to the issuance of any new equity shares,
unless these rights have been waived by at least 75% of the company’s
shareholders present and voting at a shareholders’ general
meeting. Holders of our ADSs as well as our shareholders located in
the United States may be unable to exercise preemptive rights for our equity
shares underlying our ADSs unless a registration statement under the Securities
Act is effective with respect to those rights or an exemption from the
registration requirements of the Securities Act
is available. Our decision to file a registration statement will
depend on the costs and potential liabilities associated with any such
registration statement, as well as the perceived benefits of enabling investors
in our ADSs to exercise their preemptive rights and any other factors we
consider appropriate at the time. We do not commit that we would file
a registration statement under these circumstances. If we issue any
such rights in the future, the rights would be issued to the depositary, which
may sell the rights in the securities markets in India for the benefit of the
holders of our ADSs. There can be no assurance as to the value, if
any, the depositary would receive upon the sale of the rights. To the
extent that holders of our ADSs as well as our shareholders located in the
United States are unable to exercise preemptive rights, their proportional
interests in us would be reduced.
ADS
holders may be subject to potential losses arising out of exchange rate risk on
the Indian rupee and risks associated with the conversion of rupee proceeds into
foreign currency.
Holders
of ADSs as well as our shareholders located outside India will be subject to
currency fluctuation risks and convertibility risks, since our equity shares are
quoted in rupees on the Indian stock exchanges on which they are
listed. Dividends on our equity shares will also be paid in rupees,
and then converted into US dollars for distribution to ADS
holders. Holders that seek to convert the rupee proceeds of a sale of
equity shares withdrawn upon surrender of ADSs into foreign currency and export
the foreign currency will need to obtain the approval of the Reserve Bank of
India for each transaction. In addition, holders that seek to sell
equity shares withdrawn from the depositary facility will have to obtain
approval from the Reserve Bank of India, unless the sale is made on a stock
exchange or in connection with an offer made under the regulations regarding
takeovers. Holders of rupees in India may also generally not purchase
foreign currency without general or special approval from the Reserve Bank of
India.
ADS
holders may be subject to Indian taxes arising out of capital
gains.
Generally,
capital gains, whether short-term or long-term, arising on the sale of the
underlying equity shares in India are subject to Indian capital gains
tax. For the purpose of computing the amount of capital gains subject
to tax, Indian law specifies that the cost of acquisition of the equity shares
will be deemed to be the share price prevailing on The Stock Exchange, Mumbai or
the National Stock Exchange on the date the depositary advises the custodian to
deliver equity shares upon surrender of ADSs. The period of holding
of equity shares, for determining whether the gain is long-term or short-term,
commences on the date of the giving of such notice by the depositary to the
custodian.
Investors
are advised to consult their own tax advisers and to consider carefully the
potential tax consequences of an investment in our ADSs.
ADS
holders may not be able to enforce a judgment of a foreign court against
us.
We are a
limited liability company incorporated under the laws of India. All
our directors and executive officers are residents of India and almost all of
our assets and the assets of such persons are located in India. India
is not a party to any international treaty in relation to the recognition or
enforcement of foreign judgments. We have been advised by counsel
that recognition and enforcement of foreign judgments is provided for on a
statutory basis and that foreign judgments shall be conclusive regarding any
matter directly adjudicated upon except where:
It may
not be possible for holders of our ADSs or our shareholders to effect service of
process upon us or our directors and executive officers and experts named in the
report that are residents of India outside India or to enforce judgments
obtained against us or them in foreign courts predicated upon the liability
provisions of foreign countries, including the civil liability provisions of the
federal securities laws of the United States.
Moreover,
it is unlikely that a court in India would award damages on the same basis as a
foreign court if an action is brought in India. Furthermore, it is
unlikely that an Indian court would enforce foreign judgments if it viewed the
amount of damages as excessive or inconsistent with Indian
practice. An Indian court may not enforce a foreign judgment
involving more than actual and quantifiable damages.
Although
announced policy indicates there is no intention to do so, possible sales of our
equity shares by the government of India could affect the value of our
ADSs.
The
government of India holds approximately 56.25% of our outstanding equity
shares. There have been no indications that the current
government of India plans to further reduce its shareholding in us through a
sale of equity. As a result, this ownership affects the voting by
shareholders and the ability to influence any third party transactions, such as
mergers or other business combinations.
Any
future disposal of equity shares by the Indian government could adversely affect
the trading price of our equity shares and ADSs.
HISTORY
AND DEVELOPMENT OF THE INDIAN TELECOMMUNICATIONS INDUSTRY
Until the
mid-1980s, the telecommunications sector in India was a monopoly controlled by
the government of India through the Department of Posts and Telegraphs of the
Ministry of Communications, providing all telecommunications services, both
domestic and international. The Indian Telegraph Act of 1885
established the government of India’s monopoly in the sector and, together
with the Indian Wireless Telegraphy Act of 1933, provided the legal framework
for the regulation of the Indian telecommunications industry.
Development
of the telecommunications sector historically was seen as a relatively low
priority and received limited budgetary support from the government of
India. As a result, the telecommunications infrastructure in India
grew relatively slowly. In the mid-1980s, faced with rapidly
increasing demand for telecommunications
services
and equipment, the government of India commenced a reorganization of the sector
designed to facilitate the rapid introduction of new technology, stimulate the
growth of the telecommunications industry and tap the resources of the private
sector in facilitating such technological innovation and
growth. The reorganization included the division of the Department of
Posts and Telegraphs into the DOT and the Department of Posts.
As part
of the reorganization, we were incorporated on February 28, 1986 under the
Companies Act as a wholly-owned government of India company and, on April 1,
1986, assumed responsibility for the control, management and operation of the
telecommunications networks in Delhi and Mumbai, two of the largest metropolitan
areas in India. Videsh Sanchar Nigam Limited (VSNL) (now Tata
Communications Ltd) was established at the same time to provide international
telecommunications services and the DOT retained responsibility for providing
all other telecommunications services throughout India. The DOT also
assumed regulatory authority over the Indian telecommunications
industry. Simultaneously, the Telecom Commission was established in
1986 as an executive body under the Ministry of Communications to make policy
decisions and to accelerate the development of all aspects of the
telecommunications sector and the implementation of new telecommunications
policies.
In
December 1991, with a view to fulfilling its objective of facilitating the rapid
introduction of new services and technology, the DOT invited bids from Indian
companies with a maximum of 49% foreign ownership for two non-exclusive GSM
cellular licenses in each of the cities of Kolkata (formerly called Calcutta),
Chennai (formerly called Madras), Delhi and Mumbai. The
private operators commenced cellular services in late 1995. In
October 1997 we were permitted to provide GSM cellular service in Mumbai and
Delhi. Beginning in 1995, the DOT also invited tenders and awarded
cellular licenses for the regional “circles” established for the purpose of
licensing cellular services in the rest of India. We believe that as
of May 31, 2008, there were approximately 278 million cellular subscribers in
India.
Since
1992, as part of its general policy of gradually reducing its holdings in public
sector enterprises, the Indian government sold a portion of its equity holdings
in us and VSNL (now Tata Communications Ltd) to certain mutual funds, banks and
financial institutions controlled by the government of India. In our
1997 global depositary receipt offering, the Indian government sold 40 million
of our equity shares represented by 20 million global depositary receipts,
constituting 6.3% of our then outstanding equity
shares. Additionally, in 1997 and 1999, the Indian government sold
additional equity shares of VSNL in the form of global depositary receipts,
thereby reducing its equity interest in the company to 51%. In
February 2002, the government of India divested an additional 25% interest in
VSNL to the Tata Group through a competitive bidding process.
In May
1994, the government of India announced its National Telecom Policy, which was
aimed at achieving accelerated telecommunications growth and network
expansion. The broad objectives of this policy were higher national
telephone penetration, reduction of waiting lists, improvement in the quality of
networks, improved rural access to telecommunications services, introduction of
value-added services and private sector participation in the provision of basic
and cellular services.
In order
to achieve these objectives, the Indian government decided to permit private
sector involvement in basic telecommunications services, which, in the Indian
context, includes basic fixed-line access service and a number of other
telecommunications services (including CDMA-based fixed wireless and mobile
services (without roaming)), other than long distance services, cellular service
and Internet access. Accordingly, in September 1994 the Indian
government announced its “Guidelines for Private Sector Entry into Basic Telecom
Services,” and beginning in 1995 began to invite tenders from companies with no
more than 49% foreign ownership for basic service licenses for the regional
“circles” established for licensing basic telecommunications
services. After a period of consolidation, the most prominent
private-sector providers of basic telecommunications services currently include
Bharti Tele-Ventures Limited, Tata Teleservices and Reliance Infocomm, each of
which operates in multiple circles. Tata Teleservices and Reliance
Infocomm both operate in the circles that include Mumbai and Delhi, and hence
now compete with us in those areas. Bharti Tele-Ventures Limited also
provides basic services in Delhi.
In
February 1997, a multilateral agreement on basic telecommunications services was
agreed to among member governments of the World Trade
Organization. As part of this agreement, the Indian government has
reaffirmed its commitment to further liberalize the Indian telecommunications
sector through the licensing of new basic and cellular service
providers.
In March
1997, the government established the Telecom Regulatory Authority of India
(TRAI), an independent regulatory authority with broad regulatory powers over
the telecommunications industry in India, including the power to set rates on
domestic and international telecommunications services and determine the terms
and conditions of interconnect arrangements between service
providers. These regulatory powers had previously been vested in the
DOT, which controls us and is part of the Ministry of
Communications. However, the power to grant, renew or revoke licenses
remains with the DOT.
In
November 1998, the government of India announced its Internet policy, which aims
to increase Internet usage by, among other things, allowing up to 49% foreign
ownership of Internet service providers (ISPs) and declaring a license fee
moratorium for five years. (Currently the foreign ownership limit for ISPs is up
to 74% in most cases.)
In March
1999, the government of India announced its New Telecom Policy 1999 which sets
forth as one of its central goals the fostering of increased competition in the
Indian telecommunications industry and the liberalization of government
telecommunications regulation.
Additionally,
effective May 1, 1999, the TRAI implemented the 1999 tariff order pursuant to
which the TRAI seeks to align tariffs charged by service providers with the
corresponding costs associated with such services so as to limit
cross-subsidization of services by a provider while allowing providers to set
tariffs at any level below certain maximum levels. The TRAI has since
adjusted tariffs several times under the tariff order.
In
October 1999, the DOT, which had both performed the role of licensor and policy
maker for the Ministry of Communications and operated as India’s domestic long
distance service provider and basic service provider (except for the areas of
Delhi and Mumbai, which are covered by us), was bifurcated into two
departments. The DOT/Telecom Commission, or the DOT, now
performs the role of licensor and policy maker, and the Department of Telecom
Services, functions as the government of India’s local and long distance network
service provider. In October 2000, the Department of Telecom
Services’ local and long distance business was corporatized into a new company
named BSNL. The Indian government has also recently established an
independent Information Technology Department within the Ministry of
Communications (now formally known as the Ministry of Communications and
Information Technology). The IT department will, among other things,
promote the Internet, e-commerce and knowledge based
industries. Internet licensing functions will remain with the
DOT. The DOT controls the equity shares in us that are held by the
Indian government and appoints all of the directors on our 12-seat
board. Two of our board seats are for DOT officers.
ILD
and NLD Licenses Simplified
The
Government has constantly endeavored to usher in policy decisions that could
facilitate affordable public telecom facilities, in accordance with the New
Telecom Policy, 1999. In line with this strategy, in December 2005,
the Government made a major decision to remove various to further liberalise the
NLD (national long distance) and ILD (international long distance) licenses in
order to facilitate the growth of the IT and IT-enabled services in
India. Some of the changes brought about by such decisions are as
follows:
Prior
experience in telecom sector is no longer a prerequisite for being granted
telecom service licenses.
Access
service provider can provide Internet telephony, Internet services and Broadband
services. If required, access service provider can use the network of
NLD/ILD service licensee.
Approximate
number of licenses for providing telecom services issued as of March 31, 2008
are:
The table
clearly indicates that the competition among the telecom service providers has
increased many folds in recent years are we are making efforts to keep the pace
with the industry.
The
following chart illustrates the current operational and regulatory structure of
India’s telecommunications services industry:
 In
November 2003, the DOT issued guidelines for Unified Access License which cover
within a service area both basic telecommunications services and cellular
services. In the Indian context, “basic telecommunications services”
or “basic services” include basic fixed-lined access service and a number of
other telecommunications services, other than long distance services, cellular
service and Internet access. Basic services also include CDMA-based
fixed wireless and mobile services (without roaming). We have
submitted a request to the DOT to migrate to UAS Licenses for our service
area under mobile licenses for Delhi and Mumbai to be able to provide services
at par with other operators in these areas. In September 2006, our
request for migration of our CMTS Licenses to UAS Licenses as our operating
cellular service in the licensed area was not accepted by the DOT. In
October 2006, we sought reconsideration and grant of permission for migration to
UAS Licenses.
In April
2008, we received in-principal approval to use CDMA technology under the
existing Cellular Mobile Telephone Service (CMTS) License for Delhi and Mumbai
service areas. We will use CDMA technology (in addition to GSM
technology being used by us) under the existing Cellular Mobile Telephone
Service (CMTS) License for Delhi and Mumbai service areas.
On
November 22, 2006, the DOT issued the instructions that “The licensee shall
ensure adequate verification of each and every customer before enrolling him as
a subscriber. Instructions issued by the licensor in this regard from
time to time shall be scrupulously followed.”
For
ensuring that the complete subscriber information is available with all the
service providers and the same is duly verified, the DOT also decided that each
licensee shall take up re-verification of the existing subscribers on priority
and ensure that the re-verification of the existing subscribers is completed by
March 31, 2007. By re-verification, it is meant that there shall be
100% check of CAF/SAF documentary proof of identity and documentary proof of
address and it would be ensured that the subscriber information available
in service provider’s database matches with that in CAF/SAF and associated
documents. Further the licensee company would cross-verify the
information from the actual user by calling the respective
subscriber. There shall not be any connection working after March 31,
2007 in licensee’s network without having the subscriber information duly
verified.
After
March 31, 2007, if any subscriber number is found working without proper
verification, a minimum penalty of Rs. 1000 per violation of subscriber number
verification would be levied on the licensee apart from immediate disconnection
of the subscriber number by the licensee.
In
response of the above DOT instructions, our GSM subscriber base reduced from
approximately 2.7 million to 2.5 million during the period March 2007 to April
2007. As of May 31, 2008, our GSM subscriber base grew to 3.35
million.
We have
implemented the procedure for ‘Do not call’ for Telecom Unsolicited Commercial
Communication in the service areas of Delhi and Mumbai, in accordance with a
March 2008 amendment by Telecom Regulatory Authority of India, the Telecom
Unsolicited Commercial Communications Regulations, 2007 (4 of
2007).
Mahanagar
Telephone Nigam Limited
Mahanagar
Telephone Nigam Limited is the principal provider of fixed-line and other basic
telecommunications services in Delhi and Mumbai. Delhi and Mumbai are
two of the largest, most densely populated and wealthiest metropolitan areas in
India. At the end of fiscal 2008 our fixed-line telecommunications
networks in Delhi and Mumbai had an aggregate of approximately 3.81 million
fixed lines in service. In February 2001, we launched our cellular
services using global system for mobile communications, or GSM, technology in
Delhi and Mumbai and had approximately 3.24 million subscribers as of March 31,
2008. GSM is the European and Asian standard for digital mobile
telephone networks. We launched CDMA-based services in 1997, and at
the end of fiscal 2008 had approximately 1.61 lakh limited mobile subscribers in
Mumbai and Delhi. CDMA is a digital wireless technology that
increases network capacity by allowing more than one user to simultaneously
occupy a single radio frequency band with reduced interference. We
began providing Internet service in both Delhi and Mumbai in February 1999 and
had approximately 1.36 million Internet access subscribers at the end of fiscal
2008.
We
obtained a national long distance license in May 2006 and began to carry our own
traffic between Mumbai and Delhi.
We
believe that the size of the markets in Delhi and Mumbai, the economic
environment, the Indian government’s ongoing liberalization of the
telecommunications industry and the still low level of penetration of
fixed-line, mobile and cellular services in these two areas and the low level of
penetration of Internet services in India provide opportunities for future
industry growth.
The
number of our access lines in service grew at a compound annual growth rate of
7.55% from March 31, 2000 to March 31, 2008. In fiscal 2008, these
lines increased by 8.14%, due to cellular services. In fiscal 2008,
our network had approximately 3.18 million access lines in service in Delhi and
approximately 4.03 million access lines in service in Mumbai. In
addition, our access lines in service per employee increased from 66 at March
31, 2000 to 151 at March 31, 2008.
We derive
our revenue primarily from local, domestic long distance and international calls
that originate from our network. In fiscal 2008, approximately 27% of
our revenue was derived from call charges, 57% from rentals of telephones,
access lines and other telecommunications equipment and use of our value-added
services and 8% from public call offices. Interconnect revenue, which
is revenue derived from other telecommunications service providers for calls
made into our network, accounted for 8% of our revenues in fiscal
2008. Local calls are carried on our network, unless the termination
point is in the network of one of the cellular operators or one
of the new private-sector basic service providers in the
locality. We have been carrying our own traffic between Delhi and
Mumbai since May 2006. Other domestic long distance calls continue to be passed
from our network to the domestic telecommunications network operated by BSNL,
although we have entered into interconnect agreements with the new
private-sector domestic long distance service providers and intend to pass such
domestic long distance calls also through such other providers. In
addition, currently all international outgoing calls continue to be passed from
our network to international gateways operated by VSNL, India’s former
government-controlled international long distance carrier, although we have
entered into interconnect agreements with other private-sector international
long distance carriers and have plans for joint development with BSNL of
submarine cable to connect the east and west coasts of India with Malaysia and
the Middle East (and ultimately Europe and the USA).
We expect
competition to continue to increase in all major sectors of the Indian
telecommunications industry, as both government and private-sector companies
continue to invest in capacity expansion and seize opportunities to enter new
geographical areas and lines of business. See “— Business
Overview—Competition” below.
Our
principal executive office is located at 12th floor,
Jeevan Bharati Tower—1, 124 Connaught Circus, New Delhi—110001, India,
and our telephone number is +91-11-2374-2212.
Licenses/License
Areas
We
provide all of our telecommunications services, other than Internet, under a
single, general, non-exclusive license. The license initially granted
to us in 1986 was effective for a five-year period that ended on March 31,
1991. The term of the license has been extended for a 25-year
period ending March 31, 2013 for basic services.
In
October 1997, our license was amended to explicitly include cellular services
and radio paging, and our license for such additional services currently extends
to October 2017. The license is not specific as to the type of
cellular technology that we may use. The license covers areas within
the territorial jurisdiction of the State of Delhi and the areas covered by the
municipalities of Mumbai, Navi Mumbai and Thane. The DOT has extended
the scope of our license to allow us to provide cellular services in certain
surrounding areas of Delhi and Mumbai covered by other cellular operators in
those cities. The license specifies that we may provide local,
domestic long distance access (through interconnection with domestic long
distance operators) and international long distance access (through
interconnection with networks of international long distance operators), as well
as telex and leased line services. Specifically, our license permits
us to originate, terminate and transit domestic and international long distance
calls. However, we believe that our license would need to be amended
if we wanted to enter the market for
domestic
long distance utilizing our network. We expect to be licensed to
provide for full international long distance service in the near
future.
The DOT
retains the right to revoke our license after giving one month’s notice to
us. The DOT also retains the right, after giving notice to us, to
modify the terms and conditions of our license at any time if in their opinion
it is necessary or expedient to do so in the interest of the general public or
for the proper operation of the telecommunications sector. A
revocation of the license or a change in significant terms of the license, such
as its duration, the amount of license fee payable, the range of services
permitted and the scope of exclusivity could limit our ability to operate
particular lines of our business or result in increased costs in the form of
increased license fees or costs associated with applying for new licenses, or
contesting limitations on our licenses.
We
provide our Internet services in Delhi and Mumbai under separate non-exclusive
license agreements. These licenses were granted in November 1998, and
currently extend to September 7, 2017. In addition, our wholly owned
subsidiary, Millennium Telecom Limited, provides Internet access services
throughout India under a license granted in 2000 for an initial period of 15
years.
Delhi. According to the
government of India’s provisional 2001 population census data, Delhi had a total
population of approximately 12.8 million. In addition to being
India’s political capital, Delhi has the highest per capita income of all the
states in India. Delhi has a high concentration of service and
manufacturing industries and houses the central government, the head offices for
many major public sector enterprises, embassies, high commissions and various
government missions and development agencies.
Mumbai. The city
of Mumbai, the financial capital of India and the capital of the State of
Maharashtra, is India’s most populous city, with a population of approximately
16.4 million according to the 2001 census data. Mumbai accounted for
36% of India’s income tax contributions in fiscal 2000.
Strategy
Key
elements of our strategy include the following:
Services
Our
primary business is providing basic telecommunications services in Delhi and
Mumbai, which include:
Our CDMA
mobile service offers only limited mobility within Delhi and Mumbai, and
currently we are not permitted to offer roaming facilities on this
service. If we obtain the newly-available Unified Access License we
will be able to offer full mobility.
CDMA
fixed wireless is a substitute for fixed-line access. Fixed wireless
allows us to enhance basic service penetration, provide quicker installation and
cover areas where the installation of cable would not be
economical. Our CDMA mobile service is marketed under the brand name
Garuda.
We also
enable our customers to access the Internet without having to subscribe for
Internet service. They can access the service and later be billed on
the basis of calling line identification usage. The number of
customers who use this service is much higher than the number of Internet
subscribers we have.
Recently
Introduced Services
Services
Under Development
Telecommunications
Services in Other Countries
We are
selectively targeting expansion opportunities outside India where we can
leverage our expertise and relationships. We are keen in expanding
our overseas operations, currently we are in the process of exploring the
potential in a few Asian and African countries. United Telecom
Limited, a joint venture involving us (26.68%), Telecommunications Consultants
India Limited (26.66%), VSNL (26.66%) and Nepal Ventures Private Limited (20%),
commenced wireless in local loop services as the first private-sector
telecommunications operator in Nepal. We have also been awarded
licenses to provide basic and international long distance service as well as
mobile services in Mauritius. Through a Mauritius subsidiary, we have
begun to offer ILD services and fixed wireless services. We intend to
begin the build out of our network there to provide additional
services.
Tariffs
and Other Customer Charges
Fixed-Line
Services. Tariffs, or usage charges, consist of charges for local,
domestic long distance and international calls. Usage is measured by
pulses, which are time-based units of measure, metered at the relevant
exchanges. Pulses vary, depending on one or more
factors. Local call pulse duration depends upon the type of network
on which the call is terminating (i.e., fixed, GSM cellular or CDMA mobile) and
the subscriber plan chosen, while domestic long distance call pulse duration
depends upon the call distance, type of network on which the call is terminating
and whether the call is within a regional circle or between two
circles. International call pulse duration varies depending upon the
country of destination. For operator assisted domestic and
international calls, a slab system of tariffs applies which differs depending
upon the speed at which the call is completed. The subscriber is
billed at a fixed price per pulse that depends upon the subscriber plan chosen
and usage volume (low usage customers are offered a lower price per
pulse). We currently offer several fixed-line plans, tailored to meet
the needs of different user profiles.
For
fixed-line services, customers also pay access charges consisting of a one-time
refundable security deposit, installation charges and monthly
subscription/rental charges.
We have
adopted a policy not to reduce our basic tariffs and related charges unless in a
response to tariff reductions by competitors. However, since the 1999
tariff order, the TRAI has in several stages significantly reduced tariffs on
domestic and international long distance calls. Effective July 20,
2002, international long distance call rates were reduced by about 40% and
effective October 2, 2004 national long distance call rates were
reduced varying up to 60% for various designations Because
we retain the remainder of prices of domestic and international long distance
calls originating on our network, net of interconnect charges, by lowering long
distance rates the tariff reductions have reduced the revenue we receive per
call. While these rate reductions have been part of a “rebalancing”
effort aimed at reducing cross-subsidization between long distance (historically
priced at a premium) and local calls (historically subsidized) by at the same
time phasing out subsidization of local calls, the negative impact of the long
distance rate reductions have to date outweighed any positive impact of other
aspects of the tariff rebalancing effort. Also effective May 1, 2003,
as part of its effort to reduce subsidies, the TRAI changed the standard plan
that we must offer all customers by increasing monthly rentals for basic
services by 12% from Rs. 250 to Rs.280, reduced the local call pulse duration
(for calls made to fixed and fixed wireless lines) from three minutes to two
minutes and the number of free monthly call pulses.
GSM
Cellular Services. We offer our GSM cellular subscribers in Delhi and
Mumbai a choice of several plans, tailored to meet the needs of different user
profiles. One of the plans is the standard plan, which, under TRAI
regulations, we are required to offer all customers and the terms of which the
authority establishes. Generally, in addition to call charges for
local and long distance calls, our plans include the following types of charges:
refundable, non-interest bearing security deposit; installation charges;
monthly rental charges; and airtime charges. Effective February 1,
2004, with the adoption by the TRAI of the interconnection usage charge
regulation and the “calling party pays” principle, charges for incoming cellular
calls (other than any roaming charges) have been eliminated. In
addition, we provide the following value-added services free to all our GSM
cellular subscribers:
However,
airtime charges on use apply to these services. In addition, we offer
our GSM cellular subscribers value-added services like SMS, voice mail, WAP,
CRBT, call conference, GPRS/MMS, missed call alert and content-based SMS for a
fee.
In fiscal
2002, we introduced pre-paid GSM cellular services under the brand name “Trump”
in Delhi and Mumbai. This market is also highly competitive, with
rates changing with market conditions.
Broadband
Service: We started offering Broadband service in January 2005 to
subscribers in Delhi and Mumbai with choice of several plans, tailored to meet
the needs of different user profiles. Generally, in addition to usage
charges for usage and data download, our plans include the following types of
charges: non-interest bearing security deposit; installation &
testing charges; monthly DSL usage charges, monthly rental for modem, if
provided by us.
Internet
Protocol Television (IPTV): We started offering IPTV service in
October 2006 to subscribers in Mumbai and in November 2006 to subscribers in
Delhi.
Voice
over Internet Protocol (VOIP): We started offering Prepaid VOIP
service in August 2007 to subscribers in Delhi and Mumbai.
Video
Phone Services: We launched Video Phone Services on promotional basis
for the period April 4, 2008 to July 7, 2008 for the service areas Delhi and
Mumbai.
In May
2005, we implemented leased line tariff at par with BSNL under revised tariff
ceilings prescribed by the TRAI.
CDMA
Services. For CDMA mobile services, including the use of a CDMA
handset, our subscribers are charged a refundable security deposit, a monthly
charge and a monthly handset rental, in addition to airtime
charges. We have not charged users for incoming calls. We
offer our CDMA mobile subscribers a choice of several plans, tailored to meet
the needs of different user profiles. Following commissioning in July
2006 of CDMA 20001X system in Mumbai, which has mobility between Mumbai and Navi
Mumbai, we provide the following value added services free to all our CDMA
subscribers:
We
started new Garuda (CDMA) mobile connection by giving RUIM cards for
postpaid/prepaid Garuda connections since April 2007 to subscribers in Delhi and
since December 2007 to subscribers in Mumbai.
We offer
different tariff plans and value added services to cater to and fulfill the need
of the various segments of customers.
Reduced
ILD tariff for Basic & Mobile service
We have
reduced the ILD tariffs for Basic and Mobile services effective May 1, 2007 for
the service area of Delhi and Mumbai. The details are as
follows:
1. BASIC
2. WLL
(M/F) POSTPAID, DOLPHIN (POSTPAID) & TRUMP (PREPAID)
Reduced
tariff for Basic and Mobile service
We have
reduced the STD tariff for MTNL Delhi and Mumbai effective May
2008. The details are as follows:
Other
Services
For
access to narrow-band ISDN services, we charge our subscribers a monthly rental
and no registration fee. Subscribers can also have primary rate
access for an initial fee. Usage charges for local, domestic long
distance and international calls are the same as for the basic fixed-line
telephone.
Tariffs
charged by public telephone operators for telephone usage are at a fixed rate
of Rs.1.00 per
pulse, of 60 seconds for local calls and long distance pulse durations varying
depending upon the distance.
We do not
charge any registration fees for our Internet access services. Our
Internet access fees have been falling considerably in response to competitive
pressures. Internet users do not have to subscribe for Internet
services. They can access the service and later be billed on the
basis of calling line identification usage.
Subscribers
for point-to-point leased line services are charged an annual fee based on the
type of service offered, the distance between the points and the duration of the
lease entered into by the subscriber.
License
Fees and Network Utilization/Interconnection Arrangements
License
Fees and Network Utilization Charges. Under our previous arrangement
with the DOT, the license fees for providing basic services was fixed at Rs.900
per access line in service. This arrangement expired on March 31,
2000. In the absence of any new arrangement with the DOT, we
continued to pay license fees during fiscal 2001 on the same terms as our
previous arrangement. On April 9, 2001, the DOT communicated that the
annual license fees will be revised and shall be payable at 12% of adjusted
gross revenue from basic telephone service effective from August 1, 1999, as
applicable to private operators from that date. On September 5, 2001,
the DOT amended its position and indicated that the date from which the revised
license fees will be payable will be notified later. However, in the
absence of an agreement for payment of license fees and any clarification from
DOT to date, we have paid license fees on the revised basis communicated by DOT
for fiscal 2002 and 2003. Further subsequent to the year ended March
31, 2004, in a meeting held between DOT, BSNL and the Company to resolve the
ambiguity with respect to license fees and networking charges it was agreed that
the license fees were payable at 12% of AGR and networking charges as per TRAI
regulations with effect from August 1, 1999. Also, the revenue sharing
percentages earlier agreed to between us and BSNL, other than those governed by
TRAI regulations, were revised with retrospective effect. This
resulted in an incremental charge of Rs. 3,520 million in the consolidated
statements of income on account of license fee and a benefit of Rs 1,515 million
on account of networking charges during the year ended March 31, 2004, in
respect of periods up to March 31, 2003. Further license fee has been
revised at 10% of Adjusted Gross Revenue with effect from April 1, 2004. The
license fee for the NLD (national long distance) and ILD (international long
distance) service license which we have obtained is 6% of AGR. A license fee
on internet services of 6% of AGR has been in effect since January 1,
2006.
Cellular
License Fees and Spectrum Allocation Charges. Each Indian cellular
service provider operating in top-tier circles, including us, currently pays a
cellular license fee of 10% of adjusted gross revenues received from its
cellular services plus spectrum charges of 2% of adjusted gross revenues for up
to 4.4 MHz of spectrum allocation and 3% of adjusted gross revenues for spectrum
allocation of up to 6.2 MHz and 4% of Adjusted Gross Revenue for spectrum
allocation of up to 8 MHz. License fee has been revised from April 1,
2004 at 10% of adjusted gross revenue.
Unified
Access License. In November 2003, the DOT issued guidelines for
Unified Access Licenses which cover within a service area both basic
telecommunications services and cellular services. In the Indian
context, “basic telecommunications services” or “basic services” include basic
fixed-lined access service and a number of other telecommunications services,
other than long distance services, cellular service and Internet
access. Basic services also include CDMA-based fixed wireless and
mobile services (without roaming). We have submitted a request to the
DOT to migrate to UAS Licenses for our service area under mobile licenses
for Delhi and Mumbai to be able to provide services at par with other operators
in these areas. In September 2006, our request for migration of our
CMTS Licenses to UAS Licenses as our operating cellular service in the licensed
area was not accepted by the DOT. In October 2006, we sought
reconsideration and grant of permission for migration to UAS
Licenses. In April 2008, in-principal approval has been received to
use CDMA technology under the existing Cellular Mobile Telephone Service (CMTS)
License for Delhi and Mumbai Service Areas. We conveyed to DOT our
acceptance to use CDMA technology (in addition to GSM technology being used by
us) under the existing Cellular Mobile Telephone Service (CMTS) License for
Delhi and Mumbai Service Areas.
New
Interconnection Usage Charges Regulation. Effective May 1, 2003,
under the TRAI’s new interconnection usage charges regulation, and further
amended and implemented since February 1, 2004, interconnect charges have been
established for all major types of interconnection. Under this
regulation, we are entitled to specified interconnection revenues with respect
to incoming calls from operators that are linked to our network, and are
required to make specified payments in respect of outgoing calls from our
network into another operator’s network. For this reason, this
regulation is said to be based on the “calling party pays”
principle. As a result of this regulation, we are accruing
interconnect fees payable by BSNL in respect of the domestic long distance calls
that come into our network from that company’s network. In addition,
as a result of related tariff changes, we no longer charge cellular or
CDMA-based mobile users for incoming calls, as we are now entitled to
interconnect payments from the caller’s service provider. The terms
of all interconnect agreements are subject to the interconnect charges specified
in the regulation. The TRAI has issued IUC Regulation (1 of 2005)
dated January 6, 2005 and implemented from February 1, 2005. In this IUC
amendment, the authority emphasized lower tariffs and linked high sustained
subscriber growth. Plans for consistent decline in tariffs to give sustained
boost to subscriber growth and teledensity. The methodology of
imposing ADC per minute charge has kept unchanged. Only the Access Deficit
Charge has been changed, ADC on long distance calls and international calls has
been reduced. Further, in the amended IUC regulation, BSNL only, and
not the other fixed lines operators, will receive ADC on all incoming
international calls and outgoing calls from Mobile/WLL (M). The TRAI
has issued IUC Regulation (1 of 2006) dated February 28, 2006 and implemented
from March 1, 2006. In this IUC amendment, the methodology of
imposing ADC per minute charge changed with AGR (adjusted gross revenue) basis @
1.5%. ADC on international calls has been reduced on the basis of per
minute charge in addition to 1.5% of AGR.
The TRAI
has issued ADC Regulation (2 of 2007) dated March 21, 2007 and implemented from
April 1, 2007. In this amended regulation ADC on percentage revenue
share was reduced to 0.75% from existing 1.50% of AGR. ADC on
Outgoing international calls was reduced to zero from existing level of Rs. 0.80
per minute and on Incoming International Calls reduced to Rs. 1.00 per minute
from existing Rs. 1.60 per minute.
Telecommunication
Internconnection Usage Charges (IUC) Regulation 2008 (2 of 2008) issued by TRAI
on March 27, 2008 and implemented for the period from April 1, 2008 to September
30, 2008.
The
change in IUC regulation are as:
a) On
outgoing ILD calls, ADC reduced from Rs. 0.80 to Rs. Zero.
b) On
incoming ILD calls, ADC reduced from Rs. 1.60 to Rs. 1.00.
c) ADC
shall be paid at 0.75% reduced instead of at 1.5% of AGR to the
BSNL.
Since the
introduction of ADC regime, the TRAI had maintained that ADC is a depleting
regime and this will end effective October 1, 2008.
Network
Utilization—Bharat Sanchar Nigam Limited (BSNL). Under our previous
arrangement with BSNL, we paid network utilization charges to that company as a
fixed percentage of the amount of usage and other charges billed to our
customers for our services. Our network utilization arrangement with
BSNL expired on March 31, 2001. For fiscal 2002 the interconnection
charges on domestic long distance and international long distance calls were
accrued on the basis of the rates payable by other basic service operators in
the country.
Until the
end of fiscal 2002, all outgoing international long distance calls originating
from our network were subject to interconnection fees payable to BSNL, and we
received no revenue from incoming international long distance calls into our
network. We paid interconnect fees to BSNL in respect of outgoing
international long distance calls pursuant to the network utilization
arrangement with BSNL until March 31, 2001 and for fiscal 2002 on the basis of
the rates that were payable by other basic service operators in the
country. Beginning April 1, 2002, we recorded incoming and outgoing
international long distance traffic pursuant to interconnect agreements we have
signed with several international carriers, most importantly, VSNL (now Tata
Telecommunications Ltd). As a result of these agreements, we no
longer make payments to BSNL in respect of international long distance
traffic. In addition, our agreements with the international carriers
provide for income in respect of incoming calls, in addition to payments in
respect of outgoing calls originating from our networks.
For
fiscal 2003 the interconnection charges on domestic long distance calls were
again accrued on the basis of the rates payable by the other basic service
operators in the country. Since beginning of fiscal 2003, we have
been accruing international long distance calls on the basis of interconnect
agreements that we signed with VSNL (now Tata Telecommunications Ltd.) and
others. Since the beginning of fiscal 2004, the Telecommunication
Interconnect Usage Charges (IUC) Regulation (2 of 2003) 2003 covers arrangements
among Service Providers for Payment of Interconnection Usage Charges for
Telecommunication Services, Covering Basic Service which includes WLL(M)
Services, Cellular Mobile Service Providers and Long Distance Operators
throughout the territory of India. The IUC Regulation (1 of 2005)
effective from February 1, 2005 has only reduced the ADC on Domestic Long
Distance calls and International calls keeping all other components of IUC
unchanged. Further, the ADC on incoming terminating calls on fixed network from
mobiles and international long distance has also been made payable to BSNL
only.
We
finalized the charges for network utilization and domestic long distance
agreements with BSNL. Until October 30, 2006, NLD carriage charges
were paid as per TRAI IUC Regulation and effective November 2006 are at the
negotiable rates. These rates shall not be applicable to NLD for
traffic between Delhi and Mumbai, which is routed on leased bandwidth by
us.
We are
responsible for collecting payments for calls from our subscribers and bear the
risk of non-collection of these charges. Until the May 1, 2003
effectiveness of the interconnection usage charges regulation, we did not
receive any payments for calls coming into our network from BSNL’s
network. We have also signed interconnect agreements with several
private-sector domestic long distance service providers, but to date still rely
on BSNL for substantially all of our domestic long distance
interconnection. BSNL has also established its Trunk Automatic
Exchanges (TAXs) at Delhi and Mumbai. All the other private operators of
Delhi and Mumbai have established interconnection with these TAXs and
consequently we have stopped transiting their long distance calls to minimize
the risk of bad debts.
International Long Distance
Interconnect Arrangements. Although we have signed
interconnect agreements with several international long distance carriers, we
continue to rely on VSNL (now Tata Telecommunciations Ltd) for substantially all
of our outgoing international long distance traffic.
Interconnect Arrangements
with Other
Cellular, Basic Service Providers and Unified Access Service Providers in Mumbai
and Delhi. We
have entered into interconnect agreements with the other cellular, Unified
Access and basic service providers in Mumbai and Delhi to formalize our network
integration with them. In addition to usage-based interconnect
charges, each cellular/unified/basic service operator in Delhi and Mumbai
pays
us an
annual fee for lines leased from us to connect to our network. For the
establishment of interconnection between operators, a model Reference
Interconnect Offer (RIO) was circulated by the TRAI asking BSNL and us to frame
our own interconnect offer which was proposed to be signed with other operators
for establishing new interconnections. Several changes were desired
by the TRAI in the Interconnect Offer document of BSNL and us, and BSNL and we
challenged the proposed changes in TDSAT. As per directions of
TDSAT, several rounds of talks were held by the TRAI with BSNL and
most of the issues were resolved. TDSAT has now given judgment and accordingly
we have posted our interconnect offer on the website incorporating the changes
already agreed with the TRAI during discussions.
Interconnection
for Intelligent Network (IN) Service: TRAI issued Regulations, 2006
(13 of 2006) dated November 27, 2006, which had to be implemented till February
27, 2007.
We signed
the addenda to the interconnect agreement for IN service with M/s Idea,
Reliance, Tata Communications, Bharti (Airtel) and Vodafone, which enables the
subscribers to access the toll free services of the other operators and visa
versa.
Customers and Customer
Service. We classify our subscribers by use level and estimate
that in the last three months of fiscal 2008, approximately 12.86% of our access
lines in service accounted for 56.08% of our call units. The
following table sets forth certain information with respect to our subscribers
for the final three months of fiscal 2008:
Our
general marketing strategy is to stimulate demand for telephone services in
order to increase average usage and revenue per line in service. We
have identified high usage subscribers as “commercially important persons” and
are taking initiatives to strengthen our relationship with these
individuals. These initiatives include regular visits and conducting
surveys to obtain feedback and determine client-specific needs and introduce
value-added services tailored to commercially important
persons. Also, in certain areas we have constructed a digital local
loop network with better quality transmission dedicated for use by commercially
important persons. Some of the commercially important persons are
also being connected to our network via fiber-in-local-loop
technology. We also use print advertising to educate the general
public about our telephone services and other value-added services.
No single
subscriber accounted for more than 5% of our revenues in fiscal 2006, 2007 or
2008. Government of India entities in the aggregate constitute the
largest user of our services. We deal, however, with the various
departments and agencies of the government of India as separate subscribers and
the provision of services to any one department or agency does not
constitute a material part of our revenue.
Our
subscribers are billed by mail or courier once every billing
period. Subscribers with access to long distance service are billed
monthly; subscribers with access to local services only are billed
bi-monthly. We have introduced four billing cycles in respect of each
billing period which enables us to bill different subscribers at different times
in the billing period. Cycle billing reduces the burden on the
billing system at any particular time of the month and provides more
consistent cash flow.
Billing
is computerized and processing takes place at decentralized bill processing
facilities in Delhi and Mumbai for ease of operation and better handling of
customer complaints. A subscriber can inquire by an automated
telephone service or at one of our customer service centers to determine the
amount of his bill. Payment may be made by mail or at a collection
center such as a national bank or a customer service center. Payments
may also be made under our voluntary deposit scheme, where customers set up
an interest bearing deposit with us, or under our electronic clearance system,
where payment is directly debited from the subscriber’s bank
account. We have also introduced a program through which
subscribers can pay bills through the Internet or at any of our Tele-mart
centers. We allow subscribers to pay bills using a credit card and at
the post office, and plan to allow subscribers to pay bills at local merchants
and through other mechanisms to improve bill collection and
remittance. We have also launched a new web-based service email bill
alert for delivery of telephone bills on email.
We have
developed our billing system jointly with Tata Consultancy Services in Delhi and
Mumbai. This billing system is a part of a customized software
program known as a “customer service management system.” The billing system is
an integrated revenue billing system, which includes pre-connection and
post-connection services, accounting, billing collection and access to
subscriber records. Other benefits of this system are one point data
capture for all subscribers, increased efficiency and reduction of lead time to
process queries. This system enables our staff to handle, at a single
point of contact, various activities “on-line such as registration of a new
telephone connection, change of address and category, issuance of work orders,
issuance of duplicate bills, requests for transfer of telephone for domestic
long distance and international connectivity, collection of payments of bills,
status of outstanding bills, and monitoring of subscriber
complaints.
Payment
is due within 21 days from the date of issue of the bill. If the
charges are not paid on time, we generally give a reminder by telephone after
the due date, cut off all services after 35 days from the date of issue of the
bill. Subscribers with large amounts overdue may have their
telecommunications services terminated earlier. Subscribers are
charged a surcharge on amounts overdue after 21 days (with maximum surcharge
being Rs.4,000) and a reinstatement fee of Rs.100. This reinstatement
fee has been suspended in our Delhi unit for the one year ending September 1,
2007.
We
provide operator assisted services, including value-added products such as
wake-up calls, as well as operator connected and reverse charge calls to all of
our subscribers. In addition, we provide free operator assisted
directory services. Our strategy is to continue to enhance the level
of subscriber satisfaction by increasing access to operators and improving the
quality of subscriber interface, while also improving operational efficiency and
productivity. In March 1999, we published a Delhi directory, and we
published a Mumbai directory in February 2000. Both of these
directories are available free of charge on our website. We have
recently introduced directory information on CD-ROMs, which are available for
Rs.50 each, as well as an on-line directory inquiry service which is available
to telephone users with personal computers and communication
software.
In order
to address subscriber disputes more quickly, we regularly hold telephone
“adalats,” or courts. These adalats are presided over by our senior
management and, although their judgments are non-binding, we have resolved a
large number of disputes at these adalats. We also hold “open house”
sessions to obtain feedback from subscribers, enabling us to take steps to
improve customer service. Our service centers also provide various
types of services such as registration for new connections, shifting telephone
connections, billing information and collection of bill payments. We
have customer service centers in many locations in both Delhi and in
Mumbai. Generally, three to five employees provide these services in
each center.
Insurance
We
maintain comprehensive insurance for our assets under a single comprehensive
policy renewable annually. The policy is renewed in July of each
year. We do not anticipate having any difficulty in renewing our
insurance policies and believe our insurance coverage is reasonable and
consistent with industry standards in India.
Competition
One of
the primary objectives of the 1999 telecom policy is to encourage competition
within India’s telecommunications industry. Accordingly, we will
encounter increased competition in each of our markets as
existing
and additional service providers actively seek to penetrate these markets
through the introduction of high quality products and services.
The 1999
telecom policy allows the DOT to license, at its discretion, multiple additional
basic and cellular service providers in any service area. Under a
Unified Access Service License, such competitors as
Reliance Infocom, Bharti Airtel, Tata Teleservices
Limited, Idea Cellular Ltd. and Aircel Limited are currently competing with us
in the market for basic services in both Mumbai and Delhi. All of
these companies already have significant telecommunications infrastructure in
Delhi and Mumbai, including, with respect to Tata Teleservices and Reliance
Infocom, low-cost CDMA mobile and fixed wireless technology. With
approximately 56.08% of our call units having been derived from approximately
12.86% of our access lines in service (last three months of fiscal 2008), we are
particularly vulnerable to losing market share if these or other new operators
aggressively target our largest subscribers.
We
experience significant competition in the market for GSM cellular
services. As of March 2008, we had approximately 14.10% and 19.73% of
the mobile subscribers in Delhi and in Mumbai, respectively. Our
largest competitors in Delhi are Bharti AirTel, Idea Cellular and Hutchinson
Essar (Hutch)(now Vodafone). In Mumbai, Bharti (AirTel), Vodafone and
BPL Mobile have the largest share in the market. Cellular operators
also face significant competition from rapidly growing CDMA-based mobile
services, which are priced considerably lower than GSM cellular
services.
We
commenced providing our Internet services in Delhi and Mumbai in February
1999. The competition among Internet service providers throughout
India is intense with approximately 357 licenses for providing Internet services
issued as of February 29, 2008.
There has
been significant consolidation in the telecommunications industry in
India. For example, the Birla Group, the Tata Group and AT&T have
combined their interests in GSM cellular operators into one business, and the
Tata Group, which controls Tata Teleservices, acquired a controlling interest in
India’s dominant international long distance carrier, VSNL (now Tata
Telecommunications Ltd), and Tata Teleservices has acquired Hughes Tele.com, a
basic service provider in Delhi and Mumbai. We expect the trend
toward consolidation to continue, resulting in larger, more diversified
competitors in the Indian market. Vodafone Essar Mobile Services
Limited has acquired Hutchinson Essar Mobile Services Limited, another one of
the telecom operators in India.
Our
revenues from international calls are adversely affected by competition from
“call-back” services. Call-back services were officially declared
illegal by the Ministry of Communications in July 1995. Nevertheless,
the volume of international calls made from India through call-back services has
continued to grow.
In June
2008, we entered the international long distance business upon the licensor
issuing a license to us for that service.
Increased
competition has kept and will likely continue to keep downward pressure on
prices and has required and will likely continue to require us to increase our
capital investment to improve and expand our services. These
developments, in turn, have had and may continue to have a negative impact on
our profitability. In the tariff order, no minimum tariff levels are
specified and service providers have the flexibility to determine the tariff
below the maximum levels. Our board of directors has determined not
to reduce fixed line tariffs unless such a reduction is in response to a tariff
reduction by a competitor. However, the TRAI may prescribe minimum
tariffs or prohibit providers from reducing tariffs in response to
competition. Additionally, the tariff order prescribes tariffs based
on the estimated cost to provide particular services. These estimates
and corresponding tariffs may not accurately reflect our actual
costs.
In order
to compete with other basic and cellular operators and Internet service
providers, we are increasingly focused on the timely introduction of new and
improved products and services and pay increased attention to customer
service. An inability to compete effectively would also damage our
longer-term business prospects through loss of customers and market
share.
LEGAL PROCEEDINGS
Except as
described below and except with respect to regulatory proceedings described
elsewhere, we are not currently a party to any material legal or arbitration
proceedings or disputes.
Deductibility
of License Fees
The
Central Income Tax Authority of India (“CITA”) had historically disallowed the
license fee paid by us to DOT for the years ended March 31, 1994 through March
31, 2005 as a tax deductible expense and had raised a demand for payment of
taxes on increased taxable income relating to such expenses. We had
contested these demands. As part of the appeals process, we had paid
deposits under protest, amounting to Rs. 13,427 million as of March 31, 2005.
These deposits have been classified as part of restricted assets on our
consolidated balance sheets
During
the year ended March 31, 2005, we had obtained favorable decisions from the
Income Tax Appellate Tribunal (“ITAT”) with respect to the license fee
disallowed for the assessment years 1997-98 and 2001-2002. Further in
respect of assessment years 1995-96 and 1996-97, the Committee of Disputes
(“COD”), on the recommendations of the Ministry of Law, decided not to give
clearance to either the Central Board of Direct Taxes or us to file appeals in
the Hon’able High Court, making the decision of the ITAT binding on both the
parties. Subsequent to the COD’s decision, we applied to ITAT to restore the
appeal and decide in our favor.
During
the year ended March 31, 2006, based on the judgments passed in the previous
years, the ITAT has allowed deduction of license fees as a tax deductible item
for assessment years 1998-99 to 2000-01 and 2002-03. License fees have also been
allowed as a deduction by the CITA for assessment year 2004-05.
During
the year ended March 31, 2007, based on the judgments passed in the previous
years, the ITAT has allowed deduction of license fees as tax
deductible item for the assessment years 1995-96 and 1996-97
also. Management believes that the ITAT following its favorable
judgments of earlier years will eventually decide in favor of the Company for
the years in dispute and an adverse outcome in respect of the above is not
probable. Based on the above stated favorable orders, we have not
accrued the tax charge on the license fee in our financial
statements. We have received interest on deposits paid under protest
to the tax authorities and the refunds for the years decided in our favor,
i.e. 1995-96, 1996-97, 1998-99, 1999-00, 2000-01, 2002-03, and 2004-05 in the
year 2007-08. The refunds and the interest thereon have been
recognized in our statement of income for the year ended March 31,
2007.
During
the year ended March 31, 2008, we have received refunds for the years 2002-03
and 2004-05, together with interest, which has been accounted for in our
statement of income for the year ended March 31, 2008.
Deduction
of Claim of Benefit U/S 801A for New Undertakings.
As per
section 80IA of the Indian Income Tax Act, 1961 a Company, which starts to
operate telecommunication services at any time on or after April 1, 1995, but
before March 31, 2000, is entitled to a tax holiday for a period of 10 years
beginning with the year in which such services are started. As per the tax
holiday, 100% of the profits derived from such services are exempt from tax in
the first 5 years, and 30% of such profits are exempt from tax for the next five
years. On the basis of advice from our legal counsel, we have historically
claimed such benefit. Our claim have been rejected at the first appellate level
and the case has been referred to the Committee of Disputes, which is a body
formed by the Government to settle disputes between Government controlled
undertakings and the Government. The Committee has referred the case to the Tax
appellate authorities for reconsideration. During the year ended March 31, 2006,
the case has been set aside by the Income Tax Appellate Authority for the
assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and has referred the
matter back to the Assessing Officer for a fresh assessment after hearing the
case again. For the years ending up to and including March 31, 2006, considering
that the benefit claimed by us in the above years may not be ultimately allowed
by tax authorities, the provision for current taxes in these years had been
accounted in the basis of normal tax rates. During the year 2006-07 assessing
officer has made fresh assessment for calculation of deduction under section
80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to us. We have filed appeals
against that partial allowance to the higher authority. (Also refer note 22 (b)
(ii)).
During
the year ended on March 31, 2008, we received refunds from Income Tax Authority
in respect of penalty levied for the years 1995-96, 1996-97, 2001-01 and
2001-02. These penalties pertained to the claims we had made under
section 80IA of the Indian Income Tax Act. The penalty amount has
been refunded by the income tax department along with interest thereon which has
duly been accounted for in our statement of income for the year ended on March
31, 2008.
Sales
Tax
We had
received a demand to pay sales tax in respect of certain historical
telecommunications revenues, mainly telephone rental charges. We had
received a demand from the state government of Maharashtra, of which Mumbai is a
part, for payment of Rs. 3,200 million in sales tax for fiscal
1989-2000. Further, we have also received notice from the Delhi state
government seeking further information in aid of an investigation into whether a
similar demand should be made upon us. The amount of issue in Delhi
is significantly less.
The
department made these demands based on a case involving the Uttar Pradesh Trade
Tax Department (UPTTD) and the DOT, wherein the Supreme Court of India ruled
that a telephone connection along with a telephone set provided by a company
rendering basic services amounts to a "transfer of right to use the telephone
system" and the rentals collected by DOT towards this right to use should suffer
sales tax. Subsequent to the passing of this order, both the cellular
and basic operators filed a petition before the Supreme Court under Article 32
of the Constitution in respect of the above. The Hon’able
Supreme Court admitted the Petitions, in spite of its own judgment, and vide
orders dated September 25, 2003 referred the matter to a larger bench for
determination of dispute on merits and further directed that in future there
shall be no coercion for recovery of any dues. The Hon'able Supreme
Court further directed that the operators should file statutory appeals against
the assessment orders for assessments already completed as on September 25,
2003. Following the Supreme Court order in the UPTTD case
the sales tax departments across the country, have raised demands on
basic and cellular mobile operators.
We had
challenged the demands raised before the respective high courts and we have been
granted interim stays against enforcement of the demands. However this stay
order was subject to the outcome of the Supreme Court judgment on the
issue. During the year ended March 31, 2006, the Supreme Court of
India has concluded in the BSNL Vs Union of India case that rendering basic
services does not amount to a "transfer of right to use the telephone system".
Hence the imposition of the sales tax on any facility of the telecommunication
services is untenable in law. Based on opinion received from legal
counsel and drawing reference to the judgment of the Supreme Court of India in
the abovementioned case, management believed that the sales tax departments
would have to withdraw their demands of sales tax on basic telephony and that an
adverse outcome in respect of the above is remote.
During
the year ended March 31, 2007, the case relating to Delhi was
settled. The amount of demand pertaining to Mumbai outstanding is Rs.
1,900 million.
Disputes
with BSNL
In
accordance with the Inter Connect Usages Regulations, we had accounted for
networking charges payable to BSNL amounting to Rs.6,924 million and Rs. 3,627
million for the years ended March 31, 2004 and 2005,
respectively. However BSNL had raised a bill for the interconnection
charges for the calls originating from our network and terminating/transiting
at/from BSNL amounting to Rs.12,165 million and Rs. 8,030 million for the years
ended March 31, 2004 and 2005, respectively. Our contention was that
the claim was not adequately supported by BSNL and hence not accepted by
us.
In the
absence of an interconnection agreement, we had provided NLD/ILD access charges
for the period ended March 31, 2002 at the rates lower than those demanded by
BSNL. Subsequent to the year ended March 31, 2004, in a meeting held among the
DOT, BSNL and us, the rates for NLD calls for the year ended March 31, 2002 were
agreed, and accordingly we have accounted additional liability of Rs. 233
million during the year ended March 31, 2004. We may be required to
pay ILD access charges amounting to Rs. 195 million for the period April 1, 2001
to January 31, 2002 on the settlement of the dispute with BSNL in this
regard.
During
the year ended March 31, 2006, the DOT had constituted a three member committee
from its Telecommunications Department comprising the Member (Production),
Member (Finance), and Deputy Director General (Business Solution) to resolve the
issues relating to networking charges. Based on the recommendations of the
Committee in their minutes dated January 2006, the networking charges payable to
BSNL for the years March 31, 2004 and March 31, 2005 have been settled at
Rs.14,078 million as against Rs.10,551 million. Further, the
Committee has also settled networking charges for the years 2000 to 2003 in the
meeting held in January 2006. Accordingly, an amount of Rs. 3,809 million
(including the incremental charge of Rs. 3,527 million for the years 2004 and
2005) has been accounted as networking charges in the statement of operations
for the year ended March 31, 2006.
Subsequent
to the year end March 31, 2006, meetings have been held between BSNL and us
wherein BSNL has raised additional claims for the year up to March 31, 2005
aggregating Rs.2,678 million and claims amounting to Rs.5,256 million
for the year ended March 31, 2006 on account of networking and others
charges. As against these claim for the year ended March 31, 2006 we have
accounted Rs. 4,040 million for networking charges payable to BSNL.
Our
contention is that since all claims relating to networking and other charges for
the period up to March 31, 2005 have already been settled in accordance
with the minutes of the DOT committee held on January 2006 and the claims for
the year ended March 31, 2006, are not adequately supported by the
BSNL and hence not accepted by the us. Further, as we are
in the process of discussing/reconciling their claims for the year ended March
31, 2006 with BSNL and may be required to pay an additional amount based on the
final settlement, however such payments will not have a material adverse effect
upon our results of operations, financial condition and cash
flows. Management believes that an adverse outcome in respect of the
above is not probable.
During
the year ended March 31, 2006, we had raised claims against BSNL for duct
charges, TAX claims and reciprocal service claims amounting to Rs. 2,116
million, Rs. 2,482 million and Rs. 320 million, respectively. The
duct charges pertain to annual usage of infrastructure (ducts) for the period
October 1, 2000 to March 31, 2006, the TAX claims pertain to our Trunk Automatic
Exchange (“TAX”) used by BSNL for the period from February 1, 2004 to March 31,
2006 and the reciprocal service claims are on account of Reciprocal Service
Connections provided to BSNL employees for the period October 1, 2000 to March
31, 2006. Management has not recognized these claims as income in the
statement of operations considering the history of other disputed claims with
BSNL the fact that currently there is no separate agreement for these
services, and that BSNL has not accepted these claims. During the year ended
March 31, 2007, we had raised claims against BSNL for duct charges and TAX uses
charges amounting Rs. 478 million and Rs. 1,251 million,
respectively. We have not recognized these claims as income in the
statement of operations considering the history of other disputed claims with
BSNL, that currently there is no separate agreement for these services, and that
BSNL has not accepted these claims.
During
the year ended March 31, 2008, we had raised claims against BSNL for duct
charges and TAX usage charges amounting to Rs. 515 million and Rs. 546 million,
respectively. We have not recognized these claims as income in our
statement of operations considering the history of other disputed claims with
BSNL, that currently there is no separate agreement for these services and that
BSNL has not accepted these claims.
Disputes
with DOT
On the
formation of the Company, employees were deputed to us on deemed deputation
status from the DOT and we were required to contribute for the Leave Salary and
Pension Contribution (“LSPC”) as per the rates prescribed by the Government (11%
for leave salary and 14% for pension contribution). We had accrued
for these expenses amounting to Rs. 2,885 million for the period 1986 to
1998, and subsequently paid them to the DOT.
During
the year ended March 31, 2006, a Committee was set up to examine the amount of
LSPC contributions payable by us to the DOT. The Committee concluded that an
additional amount of Rs.656 million was payable on account of short payment of
the LSPC contribution and an amount of Rs.1,738 million is payable on account of
interest payable on delayed payment of the LSPC contributions. We
accepted the claim of the DOT for Rs.656 million and we had expensed it in
our statement of income for the year ended March 31, 2006. In respect
of Rs.1,738 million, we have contested the claim from the DOT on the contention
we had abided by the DOT’s decision at all stages and deposited substantial sums
as required. In this connection, the terms and conditions as
laid
down in
fundamental rules and service rules (FRSR) of the Government of India with
regard to prior intimation of calculation of contribution of the pension amount
has not been cummunicated to us, and management believes that an adverse outcome
in respect of the above is not probable.
Other
Disputes
In 1998,
M&N Publication made claims against us for Rs. 5,415
million. These claims arise out of contracts for the printing of
telephone directories for Delhi and Mumbai. Each of these claims includes claims
for loss of reputation and loss of business opportunities aggregating to Rs.
2,000 million. We had made claims of Rs. 4,169 million against
M&N Publications for failure to perform the contracts. These claims are
pending before a sole arbitrator. We believe that we have valid
defenses to these claims and based on opinion received from legal counsel,
management believes that an adverse outcome is not probable.
In the
year 2004-2005, Alcatel brought claims aggregating to Rs. 129.20 million
(including interest from 1996 till date on the claims made Rs 87.91 million)
(March 2006 Rs. 121.21 million) against us. These claims arise out of
contract for supply of digital local telephone exchange equipment. These claims
include claims for loss of reputation and loss of business opportunity
aggregating to Rs. 20 million. We believe we have a valid defense to
these claims and based on opinion received from legal counsel, management
believes that an adverse outcome is not probable.
We have
received claims aggregating Rs. 336.95 million (March 2006 Rs 308.60 million)
from various PRM service providers (World Phone, Voice Infotech and ITC). These
claims arise from the contract for PRM services, which were started in the year
1999-2000. We had not paid commission payable for these services to
these providers, as the amount was subsequently not recovered from the
subscribers. The claims include Rs. 119 million towards loss of profit and
wasteful expenditure incurred by the parties. We believe we have a
valid defense to these claims and based on opinion received from legal counsel,
management believes that an adverse outcome is not probable.
We have
received claims from CMC limited aggregating to Rs. 497.52 million (March 2006
Rs. 452.52 Million). These claims arise out of usage of leased
circuits for which we have charged them rental for CUG services as per the
revised tariff plan which is disputed by CMC Limited. These claims
include claims for loss of reputation, business opportunity and undue harassment
aggregating to Rs. 220 million. We believe we have a valid defense to
these claims and based on opinion received from legal counsel, management
believes that an adverse outcome is not probable.
Additionally,
we are also involved in law suits and claims amounting to Rs. 1,967.11 million
pending at various authorities which arise in the ordinary course of the
business. Management believes that we have a valid defense against these claims
and an adverse outcome is not probable. These would not have a material adverse
effect upon our results of operations, financial condition and cash
flows.
Dispute
with Other Operator
During
the year ended March 31, 2005, we noticed that a very large number of calls were
received from certain levels of another operator’s network. On
further investigation/analysis, it came to our notice that these were actually
ILD calls, which were being received on Local/NLD trunks and that the CLIs
(Caller line Identification) of these calls had been tampered by the other
operator. We raised a demand on the other operator based on the
relevant penal clauses of its agreement aggregating Rs.3,412 million for a
period of six months beginning April 2004. The other operator has disputed the
above claim and under repeated threats of disconnection, obtained a stay order
from High Court of Delhi. In the year ended March 31, 2005 during the course of
the hearings, the honorable High Court directed the other operator to pay
Rs.2,368 million to us. During the year ended March 31, 2006, the
other operator under directions from the honorable High Court has further
deposited Rs.1,040 million with us. During the year ended March 31,
2007, the petition filed by the other operator before the High Court has been
dismissed as withdrawn with the liberty to take such in accordance with
law. Management believes that it is a remote possibility that these
amounts will have to be refunded. However, these amounts have not
been recognized as income.
We are
controlled by the Indian government and are not part of any group.
We have
no subsidiaries which are considered “significant subsidiaries”.
Infrastructure
We
believe that we have created one of the most technologically advanced networks
in India. Our network capacity is growing rapidly, and as of March
31, 2008 we had a total capacity of 9.87 million lines.
We
operate entirely separate but similar networks in each of Delhi and
Mumbai. Each network comprises a switching and transmission network,
which we refer to as our “switching network” and a local loop
network. The local loop network principally consists of copper wire
based lines, connecting subscribers to the main exchanges or the remote line
units. A number of subscribers are connected to the switching network
via fiber-optic cable and wireless-in-local-loop technology. The
switching network includes the trunk automatic exchanges, which are used
for routing domestic long distance and international calls, the main switching
exchanges, through which all calls are routed, and remote line units, which are
connected to the main exchanges. The local loop network comprises
all connections between the main exchanges or the remote line units and the
subscriber. Subscribers are either connected directly to the main
exchanges or, depending upon the distance from the main exchanges, via remote
line units. All domestic long distance traffic, including traffic
between Delhi and Mumbai, is routed through BSNL’s network.
Overview
of Our Network
Switching
Equipment
All of
our exchanges are fully automated and our switching capacity is 100%
digital. Our switching network consisted of 342 nodes in Delhi and
210 nodes in Mumbai as of March 31, 2008. Each node has a capacity of
between 1,000 and 100,000 lines.
At March
31, 2008, there were 92 main exchanges and 250 remote line units in Delhi and 85
main exchanges and 125 remote line units in Mumbai. Because one or
more main exchanges in each node are connected to one or more main exchanges in
every other node, traffic is routed in a “mesh” configuration. We
have also installed high capacity tandem switches in Delhi and Mumbai to more
efficiently route traffic between exchanges. A majority of calls to
our main exchanges are now being routed through the tandem switch to another
node. This has resulted in a more integrated network and has reduced
the amount of capital expenditure required to install additional capacity in our
switching network.
Each node
is connected to each trunk automatic exchange. Interconnection to
basic service providers, private cellular operators and Internet service
providers is provided by dedicated access to the main exchanges or tandem
switches. Our entire switching network is connected by fiber optic
links.
Transmission
Our
transmission network consists largely of plesiochronous digital hierarchy, or
PDH, and synchronous digital hierarchy, or SDH, optical fiber. PDH
and SDH are transmission standards for digital signal
transmission. We plan to continue to deploy SDH optical fiber and
synchronous transfer mode terminals to improve network efficiency.
Access
Network
We
construct our access network with copper cable, which is extended to
distribution points to terminate connections. We have commenced
deploying five pair underground cable into subscribers’ premises where an
internal distribution point is installed. We believe this access
network will reduce the number of telephone poles and improve reliability of the
service.
We have
also implemented fiber-to-the-curb/building access and offer increased bandwidth
for business and high usage subscribers. Fiber-to-the-curb/building
is also intended to supplement existing copper wire with optic
fiber. We have provided digital loop carriers, or DLCs, for this
purpose. In fiscal 2008, we added 27 access terminals in our
network.
We have
installed wireless-in-local-loop services using CDMA technology where feasible
in Delhi and Mumbai as a substitute for fixed-line access to enhance basic
service penetration, provide quicker installation and cover areas where the
installation of cable would not be economical.
Quality
of Our Network
We are
conducting an ongoing program to improve the quality of services
offered. Our principal quality measures are call completion rate and
fault rate. The table below shows the quality improvements we have
made since our inception in 1986. We achieved this primarily by
focusing on improvements to our switching network. Part of our local
loop network is comprised of old paper core copper cables, which are a principal
cause of network faults. We are in the process of upgrading and
replacing copper access lines and believe that this will have a positive impact
on call completion rates and fault rates.
Suppliers
In
carrying out our development program, we have used a core group of international
equipment suppliers to purchase key switching equipment in order to maintain
technological compatibility while simultaneously decreasing dependence on any
one vendor. We believe that we have developed stable relationships
with our suppliers.
Development
Activities
Development
activities are carried out by a planning group in each of the Delhi and Mumbai
operations, with overall planning activity coordinated at the corporate office
in Delhi. The main focus of each planning group is the expansion of
existing services, the development of new services and the introduction of new
technologies that are tested for their reliability, compliance with internal and
DOT technical specifications and compatibility with our network.
GSM
Cellular and CDMA Networks
We
launched our cellular services using GSM technology in Delhi and Mumbai in
February 2001, and currently have an installed capacity of 17.75 lakh lines
in Delhi and 13.25 lakh lines in Mumbai. We believe that current
penetration rates in Mumbai and Delhi remain attractive for continued high
growth in subscriber base. Last year MTNL had awarded a tender for
further adding 2 million lines of GSM based on 2G/3G each in Mumbai and Delhi in
phase-I PO for 750 K 2G lines each in Delhi and Mumbai had been
placed. The equipment has been commissioned in Delhi. In
Mumbai the installation of the core equipment is going
on. Procurement for the balance, 1250 K each for Delhi and Mumbai, is
under process in next phase taking into account the spectrum for 3G of 5
mhz in each city, already alotted to us.
In
addition, we have launched lower-cost CDMA-based limited mobility services each
in Mumbai and Delhi, and presently have a total of approximately 161,000
subscribers with an installed capacity of 1,098,230 most of which are based on
more advanced CDMA 2000 1X technology). We believe that this new
limited mobile service will enable us to target a wider customer base that is
more price sensitive than GSM customers and that does not require India-wide and
international roaming facilities. We intend to compete effectively in
these growing markets by providing high quality service at affordable
rates. Our CDMA mobile service offers only limited mobility within
Delhi and Mumbai, and currently we are not permitted to offer roaming facilities
on this service. If we obtain the newly-available Unified Access
License we will be able to offer full mobility. CDMA fixed wireless
is a substitute for fixed-line access. Fixed wireless allows us to
enhance basic service penetration, provide quicker
installation
and cover areas where the installation of cable would not be
economical. Our CDMA mobile service is marketed under the brand name
Garuda.
Network
Modernization
We have
historically planned our capital expenditures on five-year programs that are
subject to approval by the DOT and the Planning Commission of the Indian
government. The Eleventh MTNL Plan is the five-year investment plan
covering the period from April 1, 2007 to March 31, 2012. Generally,
five-year plan investment targets are much higher than actual investment
levels. Additionally, rapid changes in communications technology and
customer preferences render detailed investment planning for five years
impossible.
Our
current estimate for capital expenditures for fiscal 2009 is Rs 24,309.7
million; however, based on our experience in past years, we expect that the
actual amount of capital expenditures for the year will be less than our
estimate.
The
following table shows our network-related capital expenditures for the periods
indicated.
We have
funded our recent capital expenditures to the extent incurred, and intend to
fund the remaining capital expenditures, primarily from cash flow from
operations and existing cash balances. Our capital expenditures may
be higher as we introduce international long distance service, if demand for our
GSM cellular service or CDMA-based mobile service is higher than anticipated or
if we otherwise enter new markets or provide additional services.
Properties
Our
principal executive offices are located in Delhi and are leased from the Life
Insurance Corporation of India. We have interests in various
properties in Delhi and Mumbai that consist of land and buildings for offices,
administrative centers and technical facilities. We believe that all
of our owned and leased properties are well maintained and adequate for their
present use.
In 1987,
the assets and properties of the DOT located in Delhi and Mumbai were
transferred to us by an order of the government of India and a deed of
sale. Indian law generally requires that to perfect the transfer or
lease of real property, the transfer should be evidenced by a formal duly
stamped deed of transfer and registered with the Central Land Registrar within a
specified period after the execution of the deed of transfer or
lease. A formal transfer deed for real property of the DOT
transferred by the government of India to us has been executed but has not been
registered with the appropriate authorities. The formal transfer deed
and the physical delivery of possession of the DOT’s non-real estate assets has
resulted in the transfer of these non-real estate assets of the DOT to us in
Delhi and Mumbai. We believe that our use of these properties
is not affected by the fact that this deed has not been registered with the
appropriate authorities.
Indian
law requires payment of stamp duty (at rates which vary among states) on
instruments, which effect transfer of title to real estate or in respect of
leases of real estate. Applicable stamp duty has not been paid in
respect of any of the properties acquired or leased by
us. Accordingly, we may be liable for stamp duty and related
penalties if a deed is executed by us in the future under the applicable rates
of stamp duty and penalty payable in the state where the property is located
(other than with respect to the DOT properties acquired from the government of
India as at March 30, 1987). All liabilities for stamp duties in
respect of the DOT properties acquired by us from the government of India as at
March 30, 1987 are to be borne by the government of India. We have
been advised by our
counsel
that although we have valid possession to all of the property, including the
risks and rewards of ownership and title, to enable us to perfect and thereby
acquire marketable title to real property in our possession, we would need to
have relevant documents relating to transfer or lease of real property duly
stamped and registered. In preparing our financial statements, the
provision for this stamp duty has been made on a best estimate
basis.
TELECOMMUNICATIONS REGULATION IN INDIA
The
Telecom Regulatory Authority of India
In March
1997, the Indian government established the TRAI, an independent regulatory
authority under the provisions of the Telecom Regulatory Authority of India
Act. The TRAI is an autonomous body comprised of a chairperson and
not more than two full-time members and not more than two part-time members
appointed by the Central government, and has primary responsibility
for:
The TRAI
also has the authority to, from time to time, set the rates at which domestic
and international telecommunications services are provided in
India. The TRAI does not have authority to grant licenses to service
providers or renew licenses (those functions remain with the
DOT). The TRAI, however, has the power to:
Failure
to follow TRAI directives may lead to the imposition of fines.
The TRAI
had previously acted in both a regulatory and an adjudicatory
role. The Indian government has amended the provisions of the Telecom
Regulatory Authority of India Act providing a separate adjudicative
body
called
the Telecom Disputes Settlement and Appellate Tribunal, also known as the
Appellate Tribunal, to adjudicate disputes between
Additionally,
the government of India, any Indian state or local government or any person may
apply to the Appellate Tribunal for adjudication of any of the disputes listed
above or appeal any order of the TRAI to the Appellate Tribunal.
Unified
License
In July
2003, the TRAI issued a consultation paper on, among other things, introduction
of a unified telecommunications license, under which it would be possible for a
telecommunications service provider to provide both basic services and cellular
services. The consultation paper also addresses the possibility of
licensing the provision of international and national long distance services and
internet services under this one unified license.
On
October 27, 2003, the TRAI recommended that considering the vision of the
government of India through various policies (e.g., NTP94, NTP99, Convergence
Bill), technological development, market trends, international trends, the need
to accelerate growth of telephone density, public interest and for the proper
conduct of the Service/telegraphs, it is recommended that within six months
“Unified Licensing” regime should be initiated for all services covering all
geographical areas using any technology.
On
November 15, 2003, the TRAI’s recommendations on unified licensing were accepted
by the Government of India. They provide for implementing Unified
Licensing for all telecom services within a time bound manner, starting with
Unified Access Licensing. Based upon the TRAI’s recommendations, the
DOT has issued guidelines for Unified Access (Basic and Cellular) Service
License through their letter No.808-26/2003-VAS dated November 11,
2003.
New
Telecom Policy 1999 and Subsequent Developments
In March
1999, the Indian government introduced its 1999 telecom policy, which sets forth
a new policy framework for telecommunications regulation in
India. One of the stated goals of the 1999 telecom policy is to
foster greater competition in the telecommunications industry. To
that end, the 1999 telecom policy liberalizes the regulation of the industry by
allowing multiple basic service providers in any service area, with the number
of new entrants and their mode of service to be determined by the government of
India. The 1999 telecom policy allows direct interconnectivity and
sharing of infrastructure between a basic service provider and any other type of
service provider in its area of operations. Such service
providers must negotiate the terms of any interconnection.
In
addition, the 1999 telecom policy provides that either the DOT (now operating
through BSNL) or MTNL may be licensed as an additional cellular operator in any
service area it wishes to enter. Additional cellular service
operators may be licensed in the future, based on the recommendation of the
TRAI, following its ongoing review (to occur at a minimum of at least once every
two years) of frequency spectrum utilization by existing providers, the optimal
use of available spectrum and the requirements of the market, competition and
the public interest.
Further,
the 1999 telecom policy states that competition in the international long
distance market would be reviewed and VSNL (now Tata Telecommunications Ltd)
would no longer have monopoly in this field. The Indian government
opened this market for competition in April 2002. Licenses have been
granted to a few companies like the Reliance Infocomm Limited, Bharti
Tele-Ventures Limited, BSNL and us. After the change in the terms
and
conditions
to grant ILD licenses effective January 2006, many operators obtained an ILD
license for provision of international long distance services. A
total of 15 ILD licenses have been granted.
The 1999
telecom policy states that the Indian telecommunications industry must expand at
a significantly greater pace and the Indian government must liberalize
regulation commensurate with worldwide trends in order for the Indian
telecommunications industry to fully develop in terms of technology, services,
quality and market penetration. As the teledensity in India has
reached a level of over 28.33% as of June 2008, the industry has achieved a
major requirement of the country in terms of policy objectives.
The TRAI
has issued the IUC regulation 2 of 2003, dated October 29, 2003. The
IUC Regulation (2 of 2003) covers arrangements among service providers for
payment of Interconnection Usage Charges for Telecommunication Services,
covering Basic Service, which includes WLL (M) services, Cellular Mobile Service
Providers and Long Distance Operators throughout the territory of India &
ILD operators. The TRAI has issued IUC Regulation (1 of 2005) dated January 6,
2005 and implemented from February 1, 2005. In this IUC amendment, the
authority emphasized lower tariffs and linked high sustained subscriber growth,
plans or consistent decline in tariffs to give sustained boost to subscriber
growth and teledensity. The methodology of imposing ADC per minute
charge kept unchanged. Only the Access Deficit Charge has been changed, ADC on
long distance calls and international calls has been
reduced. Further, in the amended IUC regulation, BSNL only, and not
the other fixed lines operators, will receive ADC on all incoming international
calls and outgoing calls from Mobile/WLL(M). This regulation, however
also envisages that all the operators will continue to receive the same ADC as
per earlier regime but our receipts on account of ADC will reduce drastically
after the implementation of this amended regulation. Accordingly, we
had challenged the regulation in the TDSAT. The TDSAT did not grant
any stay and the regulation has been implemented from February 1,
2005. In July 2006, the TDSAT dismissed the same with no orders as to
costs. The TRAI has issued IUC Regulation (1 of 2006) dated February
28, 2006 which was implemented from March 1, 2006. In this IUC
amendment, the methodology of imposing ADC was changed from a ‘per minute basis’
charge to a ‘% of AGR basis’ charge. The ADC is now payable by us at the rate of
1.5% of the AGR for Mobile services only. In addition, the ADC on international
calls has also been reduced on a per minute basis. The TRAI has
issued ADC Regulation (2 of 2007) dated March 21, 2007 and implemented from
April 1, 2007. In this amended regulation ADC on percentage revenue
share was reduced to 0.75% from existing 1.50% of AGR. ADC on
outgoing international calls was reduced to zero from existing level of Rs. 0.80
per minute and on incoming international calls reduced to Rs. 1.00 per minute
from existing Rs. 1.60 per minute.
Telecommunication
Interconnection Usage Charges (IUC) Regulation 2008 (2 of 2008) issued by TRAI
on March 27, 2008, and implemented for the period from April 1, 2008 to
September 30, 2008. The changes in this IUC Regulation are
as:
a) On
outgoing ILD calls, ADC reduced from Rs. 0.80 to Rs. zero
b) On
incoming ILD calls, ADC reduced from Rs. 1.60 to Rs. 1.00
c) ADC
shall be paid at 0.75% reduced instead of at 1.5% of AGR to the
BSNL
Since the
introduction of the ADC regime, the TRAI had maintained that ADC is a depleting
regime and will end effective October 1, 2008.
The
recommendations of the 1999 telecom policy, and certain important subsequent
developments, are as follows:
Basic
Services, including CDMA-based Fixed Wireless and Mobile Services
The 1999
telecom policy permits direct interconnectivity between basic service providers
and any other type of service provider (including another basic service provider
or a cellular service provider) in their areas of operation and sharing of
infrastructure with any type of service provider. It allows the basic
service providers to directly interconnect with VSNL after the opening up of
national long distance service from January 1, 2000. The
basic
service providers have been permitted to utilize last mile linkages or
transmission links within its service area made available by other service
providers.
In
accordance with the 1999 telecom policy, the TRAI undertook a review of
interconnectivity between providers in different service areas. In
July 2002 the authority adopted a reference interconnect offer regulation which
includes the model reference interconnect offer/draft agreement and the
reference interconnect offer guidelines. Pursuant to this, service
providers are permitted to interconnect with other service providers on the
basis that they shall not discriminate as to the terms and conditions offered to
different service providers. Effective May 1, 2003, the authority
implemented a regulation providing a complete set of interconnect usage
charges. The regulation adopts a calling party pays principle, so
that the operator responsible for origination of a call bears liability for
payment of the interconnect fees for transmission and/or
termination.
In
January 2001, the DOT issued guidelines for basic services, including provisions
for wireless access systems limited within the local area. In April
2001, the Indian government announced that all basic licensees, including us,
may offer wireless-in-local loop services under their basic service
licenses. On August 26, 2005, the DOT clarified that fixed wireless
service has the character of limited mobile service and, therefore, is
categorized into limited mobile service within the scope of a basic service
license.
Cellular
Service
The 1999
telecom policy also provides for greater competition among cellular service
providers. The government of India proposes to review spectrum
utilization from time to time in view of emerging spectrum availability, optimal
use of spectrum, market requirements, competition and the public
interest. The TRAI will provide recommendations to the government of
India with respect to new licenses at least every two years.
The 1999
telecom policy permits direct interconnectivity between licensed cellular
service providers and any other type of service provider (including another
cellular service provider) in their area of operation including sharing of
infrastructure with any other type of service provider. The cellular
service providers have been allowed to directly interconnect with the VSNL after
opening of national long distance from January 1,
2000. Interconnectivity between service providers in different
service areas is now governed by the July 2002 reference interconnect offer
regulation and the May 2003 interconnection usage charges
regulation. With the interconnection usage charges regulation and
related tariff changes, the TRAI introduced the calling party pays principle,
resulting in the elimination of customer charges (other than roaming charges)
for incoming cellular calls.
In April
2008, we received in-principal approval to use CDMA technology under the
existing Cellular Mobile Telephone Service (CMTS) License for Delhi and Mumbai
service areas. We will use CDMA technology (in addition to GSM
technology being used by us) under the existing Cellular Mobile Telephone
Service (CMTS) License for Delhi and Mumbai service areas.
Unified
Access License
In
November 2003, the DOT issued guidelines for the Unified Access (Basic and
Cellular) Services License; which permit the provision of both basic and
cellular services (with mobility) within a service area. We have
submitted a request to the DOT to migrate to UAS Licenses for our service area
under mobile licenses for Delhi and Mumbai to be able to provide services at par
with other operators in these areas. In September 2006, our request
for migration of our CMTS Licenses to UAS Licenses as our operating cellular
service in the licensed area was not accepted by the DOT. In October
2006, we sought reconsideration and grant of permission for migration to UAS
Licenses.
The DOT
has accepted our request regarding migration to Unified Access Services Licenses
and Amendment to License Agreements regarding spectrum allocation using dual
technology for Delhi and Mumbai service areas. In July 2008, we
submitted requested information to the DOT.
Domestic
Long Distance
On August
13, 2000, the Indian government published guidelines for the liberalization of
the domestic long distance market subsequent to which applications were received
for domestic long distance licenses. The Bharti Group and Reliance
Group have been awarded domestic long distance licenses. These
guidelines do not restrict the number of new entrants into this market, but
entrants must satisfy a number of requirements.
In
addition, entrants into the domestic long distance market must pay a one time
entry fee of Rs.1 billion and provide bank guarantees of Rs.4 billion which will
be refunded upon completion of their network obligations.
Effective
January 1, 2006, the Government, with a view to promote growth of NLD service
and also to encourage competition, modified and simplified the terms and
conditions for NLD service as follows:
On May
10, 2006, we were awarded a license for providing national long distance (NLD)
service. Since then we have carried our own domestic long distance
service between Mumbai and Delhi on leased bandwidth.
International
Long Distance
The
Indian government has recently issued licenses to several private sector
companies for the provision of international long distance
services.
In
December 2005, the Government, with a view to promote growth of ILD service and
also to encourage competition, modified and simplified the terms and conditions
for ILD service as follows:
On June
18, 2008, we received a license to provide ILD service.
Other
Service Providers
New
Telecom Policy (NTP) 1999 for providing application like tele-banking,
telemedicine, tele-trading, tele-education, e-commerce and call
centres. Other Service Providers (OSPs) are allowed to operate by
using infrastructure provided by various Access Service
Providers. Such OSPs are required to be registered with the
DOT.
Effective
September 2007, the Government decentralized the registrations of call centres
(Domestic and International) under the ‘Other Service Provider’ (OSP) category
and the Telemarketers under ‘Telemarketing’ category from the Department of
Telecom (Headquarters) to the respective Vigilance Telecom Monitoring (VTM)
Cells of 10 circles in the first phase. The decentralization of
registration has been successful and pendency has come
down. Therefore, registration under OSP/Telemarketing was
decentralized further to all VTM Cells with effect from June 1,
2008.
Infrastructure
Providers
On June
28, 2007, we were awarded a license for providing Infrastructure Provider
Category-1 (IP-1). Companies registered as IP-1 can provide assets
such as Dark Fiber, Right of Way, Duct space and Tower.
Provision
of Internet telephony, Internet Services and Broadband services by Access
Providers
Internet
telephony had not been permitted in India. It has now been decided
that access service providers can provide Internet telephony, Internet services
and Broadband services. If required, access service providers can use
the network of NLD/ILD service licensee.
IP-II
and ISPs with IP-VPN Licenses
VSAT
commercial
Annual
License fee charged at 6% of AGR effective January 2006.
IPTV
Service
We have
launched the IPTV service to our customers of our available fixed line network
as Value Added Service in Mumbai on October 10, 2006 and in Delhi on November 1,
2006 under Basic Service License as Value Added Service.
MPLS
Services (Multi-Protocol Label Switching)
On July
23, 2007, we launched MPLS Service. MPLS is a backbone for our
various IP Based Services
Keeping
with our trend of introducing modern and latest technologies at affordable rates
to our customers, we utilize IP based MPLS Technology to offer world class
IP-VPN (Virtual Private Network) services. MPLS was developed to
provide faster data packet movement than traditional IP routing.
The
technology enables secure VPN to be built and allows scalability that will make
it possible for us to offer assured growth to our customers without having to
make significant investments. We are now geared to provide bandwidth
on demand, IPTV, Video Conferencing, Voice Over IP (VoIP) and a host of other
value added services that could significantly change the way a corporate
business works.
Internet
Telephony:> In August 2007, we started offering Prepaid
Internet Telephony service to subscribers in Delhi and Mumbai.
Internet
Policy
In
November 1998, the government of India announced a new Internet policy, to
increase the usage of the Internet.
Effective
April 1, 2002, the Indian government adopted guidelines under which Internet
service providers could provide Internet telephony services.
The
government of India passed the Information Technology Act, 2000 to facilitate
the development of a secure environment for electronic commerce. This
Act establishes a regulatory authority for electronic commerce, provides legal
validity to information in the form of electronic records and permits, unless
otherwise agreed, an acceptance of a contract to be expressed by electronic
means of communication. It facilitates electronic intercourse in
trade and commerce by providing the legal framework for authentication and
origin of electronic record/communication through digital signature and
eliminates uncertainties over writing and signature requirements.
We
believe that as of February 29, 2008 there were approximately 357 licenses for
providing Internet services issued in India.
The
Tariff Order
Effective
May 1, 1999, the TRAI implemented The Telecommunications Tariff Order
1999. The intention of the tariff order was to protect consumers by
aligning tariffs that telecommunications providers may charge for the service
provided while ensuring the commercial viability of the various service
providers and so encouraging the expansion of the Indian telecommunications
industry. This “rebalancing” of tariffs is to take place in
stages. The first stage of tariff rebalancing in May 1999 reduced the
charge per pulse from Rs. 1.40 to Rs. 1.20, decreased local call pulse durations
from five to three minutes (effectively increasing local call charges),
increased domestic and international call pulse durations (effectively reducing
domestic long distance and international call charges) and increased monthly
line rental rates for subscribers that generate more than 200 pulses per month
from Rs. 190 to Rs. 250. The second stage of tariff rebalance
further reduced domestic long distance and international call charges effective
October 1, 2000 and increased monthly line rental rates to Rs. 250 for all
subscribers effective February 1, 2001. Domestic long distance call
charges were further reduced significantly with effect from January 14, 2002,
March 7, 2003 and May 1, 2004, and international long distance call charges were
subject to further significant
reduction
with effect from July 20, 2002, October 21, 2003 and April 10,
2004. Effective May 1, 2003, as part of its effort to balance the
effects of prior tariff reductions, the TRAI changed the standard plan that we
must offer all customers by increasing monthly rentals for basic services from
Rs. 250 to Rs. 280, reduced the local call pulse duration (for calls made to
fixed and fixed wireless lines) from three minutes to two minutes and the number
of free monthly call pulses.
Since
October 2004, we reduced drastically the ISD tariff. We are offering
different STD rates for different locations. Calls from Mumbai to
Maharashtra, Goa and MTNL Delhi Network are at Rs. 1.65 per
minute. We increased the pulse rate between Delhi and Mumbai for
Basic to WLL(M) of our network from 30 sec. to 180 sec. uniform for all plans
excluding One India Plan. For all other places STD rate is flat Rs.
2.00 per minute from Fixed, WLL(M) and STD rate for Cellular service is Rs.
2.00/1.75 per minute for Mumbai/Delhi. ISD rates to outside India
are:
Uniform
pulse rates (per minute) across all Plans
Reduced
STD tariff for Basic and Mobile service
We have
reduced the STD tariffs for our Delhi and Mumbai service areas effective May
2008, as follows:
Roaming
Charges
Tariffs
for Roaming Services became effective from July 2008 at the following
rates:
--For
Prepaid & Postpaid Service
Notes>:
The TRAI
has issued the Telecommunication Tariff (28 amendments) (5 of 2003) dated July
5, 2003.
A tariff
plan once offered by an Access Provider shall be available to a subscriber for a
minimum period of six months from the date of enrollment of the subscriber to
that tariff plan.
Because
we retain the remainder of prices of domestic and international long distance
calls originating on our network, net of interconnect charges, by lowering long
distance rates the tariff reductions have reduced the revenue we receive per
call. We believe that, to date, the tariff order has not resulted in
significantly higher long distance usage and that, accordingly, the tariff order
has had a negative impact on our revenues and earnings as the lower charges have
not been offset by higher usage.
The
tariff order prescribes a reporting requirement such that a service provider
must report any change in tariff to the TRAI within seven days from
implementation.
The TRAI
has issued the Telecommunication Tariff (36 amendments) Order, 2005 (3 of 2005)
dated April 21, 2005, regarding revised ceiling tariff for different capacities
reduced by 3 to 70% - for higher capacities 70% less than existing market
rate.
Briefly,
the Authority has fixed revised ceiling tariff for the most commonly used
capacities/speed i.e. 64 kbps, 128 kbps, 256 kbps, E1 (speed of 2 Mega bits per
second), DS-3 (speed of 45 Mega bits per second) and STM-1 (speed of 155 Mega
bits per second). The revised ceiling tariffs (for distance slab
above 500 Km) in respect of DLC are summarized in the Table given
below:
Foreign
Direct Investment Controls.
Following
is the current Indian government policy on foreign direct investment (FDI) in
the telecom sector:
The above
would be subject to the following conditions:
Not
applicable.
You should read the following
discussion in conjunction with the “Selected Financial and Operating
Data” and our
consolidated financial statements and the related notes, which appear elsewhere in
this report. Our consolidated financial statements have
been prepared in
accordance with U.S. GAAP.
Overview
A number
of developments have significantly affected our results of
operations. These developments and a number of potential developments
may affect our results of operations, liquidity, capital resources and capital
expenditures in future periods. These developments
include:
Potential
future developments include:
Our
future results of operations are also likely to be affected by macroeconomic
trends such as the rate of growth of the Indian economy, particularly in Delhi
and Mumbai, and the introduction of new technologies and products by our
competitors and us. Many of these factors are beyond our
control.
Critical
Accounting Policies and Estimates
For
fiscal year 2008, we have prepared the consolidated financial statements in
accordance with US GAAP, and the financial statements for the years ended March
31, 2006 and March 31, 2007 are also so presented.
Our
accounting policies are described in Note 2 of the Notes to our consolidated
financial statements. Our consolidated financial statements which are part of
this Annual Report are prepared in conformity with US GAAP, which require us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates. We consider
the following policies to be most critical in understanding the judgments that
are involved in preparing our financial statements and the uncertainties that
could impact our results of operations, financial condition and cash
flows.
Recognition of Revenues. Revenues include
amounts invoiced for call revenue, fixed monthly rental charges, roaming
charges, activation fees, internet services, access and interconnection revenue
and fees for value added services (‘VAS’). Revenues for fixed line
and cellular telephonic services are recognized based upon metered call units
(MCU) of traffic processed. Rental revenues and leased circuits
rentals are recognized based upon contracted fees schedule. Revenues
from internet services are recognized based on usage by
subscribers. Revenues associated with access and interconnection for
usage of our telephone network by other operators for local, national long
distance and international long distance calls are recognized in accordance with
the Interconnect Usage Charges Regulation released by the TRAI. The
TRAI regulation specifies per minute rates for metered call units (MCU) of
traffic terminated on our network. Revenues are shown net of service
tax and applicable discounts and allowance. Unbilled receivables
represent revenues recognized in respect of services provided from the last bill
cycle date to the end of the year. These are billed in subsequent
periods as per the terms of the billing plans. Billings in advance
for services to be rendered and amounts charged for new connections are
classified in current liabilities under the heading “Deferred
income”. Amounts charged for new connections are recognized over the
average life of the customer relationship. A significant portion of
our revenue is derived from interconnect and access charges for calls
terminating at our network. The related rules and telecommunication
industry related policies are framed and determined by the Government of India
through its departments and regulatory authorities such as the DOT and the
TRAI. Since, interconnect and access charges are presently governed
by IUC regime, we have not entered into separate agreements with certain other
operators. Any subsequent amendment to the presently applicable
guidelines with retrospective effect relating to tariff and interconnect/ access
charges will impact our revenues significantly.
For the
year ended March 31, 2008, a 10% increase or decrease in the rates for call
revenue, including public call office revenue, would have increased or decreased
the total revenue by approximately Rs.1,762 million. A 2% increase or decrease
in metered call units in respect of fixed line call revenue, including public
call office revenue, would have increased or decreased the total revenue by
approximately Rs.352 million for the year ended March 31,
2008. Further, a 5% increase or decrease in rental charges would have
increased or decreased the total revenue by approximately Rs.589 million, as
applicable, while a 5% increase or decrease in rates for interconnection
services would have increased or decreased the total revenue by approximately
Rs.240 million.
License
Fees. We are paying license fee and spectrum charges to DOT in
accordance with conditions governing license fee for Basic Telephone Service and
Cellular Telephone Service prescribed by DOT under the Revenues Sharing Regime,
whereby license fee is computed at a specified percentage of adjusted
gross revenue. The license fee is expensed as incurred. In
view of the uncertain political environment and the fact that the license fee
is determined on the basis of guidelines prescribed by regulatory
authorities, the license fees is subject to change in the event any of these
guidelines are modified subsequently with retrospective effect. During the year
ended March 31, 2008, the applicable percentage of license fee was 10%. A change
in the specified percentage to 12% or 8% would have increased or decreased the
license fee charges by approximately Rs.889 million. Refer to the
discussion in the ‘Comparison of Year Ended March 31, 2008 with Year Ended March
31, 2007’ under analysis of Results of Operation below.
Network
Charges. Charges associated with access to and interconnection
to other operators’ network by us for local, national long distance and
international long distance calls are recognized in accordance with the
Interconnect Usage Charges Regulation released by the TRAI, where applicable,
and in accordance with the terms
of
agreements entered into with other operators. TRAI regulation
specifies per minute charges for metered call units (MCU) of traffic terminated
on the other operators’ network. In view of the uncertain political
environment and the fact that the network charges are determined on the basis of
guidelines prescribed by regulatory authorities, the network charges are
subject to change in the event any of these guidelines are modified subsequently
with retrospective effect. Refer to the discussion in
the ‘Comparison of Year Ended March 31, 2008 with Year Ended March
31, 2007’ under analysis of Results of Operation below.
Pension and Other Retirement
Benefits. We sponsor pension and other retirement plans in
various forms covering substantially all employees who meet eligibility
requirements. Several statistical and other factors, which attempt to anticipate
future events, are used in calculating the expense and liability related to the
plans. These factors include assumptions about the discount rate,
expected return on plan assets and rate of future compensation increases as
determined by us, within certain guidelines. In addition, we also use
subjective factors such as withdrawal and mortality rates to estimate these
factors. The actuarial assumptions used by us may differ materially
from actual results due to changing market and economic conditions, higher or
lower withdrawal rates or longer or shorter life spans of
participants. These differences and the fact we have not invested
pension and other retirement benefit funds to cover retirement liability may
result in a significant impact to the amount of pension and other retirement
benefit expense recorded by us. Holding all other factors constant, a
1% decrease or increase in the discount rate would increase or decrease the
projected pension and postretirement benefit obligations by approximately
Rs.3,480 million and Rs.3,150 million, respectively. During the year,
we made an adhoc arrangement of medical scheme for retirees with effect from
September 1, 2007. According to this adhoc arrangement the respective
units were allowed to settle such claims on case to case basis. This
scheme was also discontinued with effect from March 20, 2008; however, the
employees who are under treatment will continue to get the benefits till
discharge from the hospital. We are in the process to finalize an
alternate medical scheme.
Income
Taxes. In accordance with the provisions of SFAS 109,
Accounting for Income Taxes, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss
carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statements of income in the period such
changes are enacted. We assess the likelihood that our deferred tax
assets will be recovered from future taxable income and to the extent we believe
that recovery is not likely, we establish a valuation allowance. The
valuation allowance is based on our estimates of taxable income and the period
over which our deferred tax assets will be recoverable. Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. In the event that actual results differ from
these estimates or we adjust these estimates in future periods we may need to
establish an additional valuation allowance which could materially impact our
financial position and results of operations. The enacted tax rate
applicable to us was 33.99% during the year ended March 31, 2008. A
1% increase or decrease in the tax rate to 34.99% or 32.99% would have increased
or decreased the income tax expense for the year by Rs.128 million.
As per
section 80IA of the Indian Income Tax Act, 1961 a company, which starts to
operate telecommunication services at any time on or after April 1, 1995, but
before March 31, 2000, is entitled to a tax holiday for a period of 10 years
beginning with the year in which such services are started. As per the tax
holiday, 100% of the profits derived from such services are exempt from tax in
the first 5 years, and 30% of such profits are exempt from tax for the next 5
years. We, on the basis of advice from our legal counsel, have
historically claimed such benefit. Our claim had been rejected at the
first appellate level and the case has been referred to the Committee of
Disputes, which is a body formed by the Government to settle disputes between
Government controlled undertakings and the Government. The Committee has
referred the case to the Tax appellate authorities for reconsideration. During
the year ended March 31, 2006, the case has been set aside by the Income Tax
Appellate Authority for the assessment years 1998-99, 1999-00, 2000-01 and
2002-03 and has referred the matter back to the Assessing Officer for a fresh
assessment after hearing the case again. For the years ending up to and
including March 31, 2006, considering that the benefit claimed by us in the
above years may not be ultimately allowed by tax authorities, the provision for
current taxes in these years had been accounted in the basis of normal tax
rates. During the year 2006-07 the assessing officer made fresh assessment for
calculation of deduction u/s 80IA of the Indian Income Tax Act, 1961 and allowed
partial benefit to us. We have has filed
appeals against that partial allowance to
the
higher authority. (Also refer
to Note 22 (b) (ii) to the consolidated financial
statements). During the year ended March 31, 2008, we received
funds from Income Tax Authority in respect of penalty levied for the years
1995-96, 1996-97, 2000-01 and 2001-02. These penalty refunds pertain
to the claims made by us under 801A of the Indian Income Tax Act. The
penalty amount has been refunded by the income tax department along with
interest thereon which has duly been accounted for in the statement of
operations for the year ended March 31, 2008. An excess provision
amounting to Rs.6,050 million were adjusted to the tax expenses during the
year.
Legal
Contingencies. As discussed in Note 22 to the consolidated
financial statements, legal proceedings covering a wide range of matters are
pending or threatened against us. We have accrued amounts as
appropriate that represent our estimate of the probable outcome of these
matters. The judgments we make with regard to whether to establish a reserve are
based on an evaluation of all relevant factors by internal and external legal
counsel, as well as subject matter experts and is based upon an analysis of
potential results, assuming a combination of litigation and settlement
strategies. Claims are continually monitored and reevaluated as new
information is obtained. We may not establish a liability for a
particular matter until long after the litigation is filed, once a liability
becomes probable and estimable. The actual settlement of such matters could
differ from the judgments made in determining how much, if any, to
accrue. We do not believe these proceedings will have a material
adverse effect on our consolidated financial position. While we
believe that our accruals for these matters are adequate, if the actual loss
from a loss contingency is significantly different than the estimated
loss, our results of operations may be over or understated.
Recoverability of DOT
Receivables. We are a Government Company under the Indian
Companies Act. As of March 31, 2008, the Government owned 56.25% of
our issued share capital. Consequently, the Government, acting
through the DOT, continues to control us and will have the power to determine
the outcome of transactions with the DOT or the assertion of claims against the
DOT. We also provide and receive services to/from other Governmental
departments and other public sector organizations on normal commercial
terms. Refer to Notes 3, 19, 22 and 25 to the consolidated financial
statements for a further discussion on our related party transactions and
significant risks and uncertainties. The receivables from the DOT
constitute a significant portion of our assets and our assessment of the
recoverability of these assets involves critical accounting
estimates. The assessments reflect management’s best assumptions and
estimates. Significant management judgment is involved in estimating these
factors, and they include inherent uncertainties. Management
periodically evaluates and updates the estimates based on the conditions that
influence these factors. The variability of these factors depends on a number of
conditions, including uncertainty about future events, and thus our accounting
estimates may change from period to period. If other assumptions and estimates
had been used in the current period, the balances for these assets could have
been materially impacted. Furthermore, if management uses different
assumptions or if different conditions occur in future periods, future operating
results could be materially impacted.
Allowance for Accounts
Receivable. We estimate the amount of uncollectible
receivables each period and establish an allowance for uncollectible amounts.
The amount of the allowance is based on the age of unpaid amounts, information
about the creditworthiness of customers, and other relevant information.
Estimates of uncollectible amounts are revised each period, and changes are
recorded in the period they become known.
Estimated Useful Lives of
Property And Equipment. We estimate the useful lives of plant
and equipment in order to determine the amount of depreciation expense to be
recorded during any reporting period. If technological changes were
to occur more rapidly than anticipated or in a different form than anticipated,
the useful lives assigned to these assets may need to be shortened, resulting in
the recognition of increased depreciation expense in future periods. Likewise,
if the anticipated technological or other changes occur more slowly than
expected, the useful lives could be extended. This could result in a reduction
of depreciation expense in future periods. Further, property and
equipment are being depreciated over their useful lives which exceed the license
term since the Company believes that its licenses will be extended beyond their
current term. A one-year decrease or increase in the useful life of
these assets would have increased or decreased depreciation expense by
approximately Rs.846 million and Rs.713 million, respectively.
Impairment of Long-Lived
Assets. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” we review these types of assets for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable over the
remaining life of the asset or asset group. In order to determine if the asset
or asset group is recoverable, we determine if the expected future undiscounted
cash flows directly related to the asset or asset group are less than
the
carrying
amount of the asset or asset group. If so, we then determine if the
carrying amount of the asset or asset group exceeds its fair value. We
determine fair value using estimated discounted cash flows. If
impairment is indicated, the asset or asset group is written down to its fair
value. Assets to be disposed are reported at the lower of the carrying value or
the fair value less cost to sell. The discounted cash flows
calculation uses various assumptions and estimates regarding future revenue -
which is a factor of the future subscriber base and the average revenue per
subscriber, expenses, terminal values of the assets and the cash flows
projections over the estimated remaining useful life of the asset or asset
group. These forecasts are subject to changes in external factors including
adverse regulatory and legal rulings. We carried out an impairment
review of our long lived assets in 2008. Based on our review, the
expected future cash flows directly associated with the asset groups exceed
their carrying amount and hence there is no impairment of long lived assets in
2008.
Impairment of Held
to Maturity
Securities. We have invested Rs. 1,000 million in 8.75%
cumulative preference shares of ITI Limited (“ITI”) and Rs.2,500 million in
bonds issued by Maharashtra Krishna Valley Development Corporation (“MKVDC”), a
wholly owned subsidiary of Government of Maharashtra.
The ITI
share purchase agreement includes a provision for a letter of comfort from
Department of Telecommunication (Government of India) to us endorsing the
investment and also provides us a right to set off amounts receivable in respect
of principal outstanding from the dues payable to ITI, in connection with our
purchase of exchanges and cable supplies.
As of
September 30, 2005, ITI had not redeemed the first tranche amounting to Rs. 200
million as per the repayment schedule and ITI had requested an extension on the
redemption dates. However, we have not accepted ITI’s request and
have looked to the DOT’s letter of comfort and requested settlement of the first
repayment tranche of Rs. 200 million.
As of
September 30, 2006, ITI has not redeemed both the first and second tranches
amounting to Rs. 200 million each as per the original repayment
schedule.
As of
September 30, 2007, ITI had not yet redeemed the first, second and third
tranches amounting to Rs. 200 million each pursuant to the original repayment
schedule.
As of
September 30, 2008, another tranche of Rs. 200 million will become due from
ITI.
Management
has evaluated the investment in ITI for impairment, on the basis that the first,
second and third tranches for repayment have not been settled by
ITI. Management has evaluated the financial condition and business
outlook of ITI including the new purchase orders received by ITI for supply of
GSM equipment from BSNL and us. We currently have accounts payable to
ITI of Rs.706 million as at March 31, 2007 which, pursuant to the share
agreement, we can legally settle against the repayments owing under the
cumulative preference shares. In addition, we have the intent and
ability to retain the debt security for a period of time sufficient to allow for
anticipated recovery in value.
Based on
this evaluation and specifically considering that the share purchase agreement
includes a provision for a letter of comfort from Department of
Telecommunication (Government of India) to us endorsing the investment and also
provides us a right to set off amounts receivable in respect of principal
outstanding from the dues payable to ITI. However, out of the total
investment of Rs. 1,000 million, Rs. 800 million has been charged as an
impairment during the 2008 fiscal year.
The MKVDC
bonds have a coupon rate of 11.5% per annum and are redeemable at the end of the
10th year from the date of allotment (May 31, 2002). The repayment of
these bonds is guaranteed by the Government of Mahrashtra. Based on
our assessment of carrying value of investment in MKVDC bonds we believe that
there is no impairment of investments as of March 31, 2008.
Revenue
We derive
a substantial portion of our revenue from local, domestic long distance and
international calls that originate on our network and from telephone
rentals. We realize revenue in the form of installation charges,
ongoing subscription/rental charges and usage charges. We also derive
revenues from providing Internet and broadband services, our Intelligent Network
services, public call office or public payphone services, interconnection with
basic service, long distance service and cellular operators, narrow-band ISDN
services, leased-line services, telex services, trunk services, VOIP, IPTV,
GSM cellular services in Delhi and Mumbai, those value-added services for
which we charge a fee and, since December 2001, CDMA-based mobile and fixed
wireless services in Delhi and in Mumbai.
We only
began receiving interconnect payments in respect of incoming international long
distance calls since April 1, 2002, when several interconnect agreements,
including our agreement with VSNL, took effect. In fiscal 2003, revenue sharing
with BSNL and other operators for incoming and outgoing domestic long distance
or subscriber trunk dialing calls was done on the basis of the TRAI’s
Interconnect Usage Charges Regulation 2003 (1 of 2003) implemented from May 1,
2003 and modified by Interconnect Usage Charges Regulation 2003 (2 of 2003)
effective February 1, 2004. For April 2003, these charges were
accounted per the earlier arrangement. Call revenue is generally a function of
the number of access lines in service, the volume of traffic carried and the
level of call charges. Telephone and other rental revenue is a
function of the number of access lines in service and the rental tariffs we
charge. Public call office revenue is driven by the number of our
public call offices, the volume of traffic carried and the level of call
charges. Interconnect revenue is a function of the contractual and
legal/regulatory rates prescribed for interconnection and the level of call
volumes originating from sources that pay interconnect fees. For the
year ended March 31, 2008, there has been a decrease in the number of fixed
lines that, coupled with a decrease in the related tariffs, has resulted in
decreased revenues for these services. However, there has been an increase in
revenue due to increased GSM lines and broadband connections, despite a drastic
decrease in related tariffs.
The May
1999 tariff order provided for a “rebalancing” of tariffs in stages to reduce
subsidization of local calls by long distance users. The first stage
of tariff rebalancing in May 1999 reduced the charge per pulse from Rs.1.40 to
Rs.1.20, decreased local call pulse durations from five to three minutes
(effectively increasing local call charges), increased domestic and
international call pulse durations (effectively reducing domestic long distance
and international call charges) and increased monthly line rental rates for
subscribers that generate more than 200 pulses per month from Rs.190 to
Rs.250. The second stage of tariff rebalancing further reduced
domestic long distance and international call charges effective October 1, 2000
and increased monthly line rental rates to Rs.250 for all subscribers effective
February 1, 2001. Domestic long distance call charges were further
reduced significantly with effect from January 14, 2002, March 7, 2003, May 1,
2004, and October 2, 2004, and international long distance call charges were
subject to further significant reduction with effect from July 20, 2002, October
21, 2003 and April 10, 2004. Primarily as a result of these tariff
reductions, excluding termination revenues, our average revenue per access line
in service has been declining. Any further tariff rebalancing may
result in lower call charges, particularly for domestic long distance and
international calls, which might be offset by an increase in rental
tariffs. We are not able to assess at this time the full long-term
impact that the tariff order will have on subscriber calling patterns or on
revenues. As competition intensifies, we expect call charges will
likely decline and, to the extent that call volumes do not increase as a result
of lower call charges, excluding termination revenues, our revenue per access
line in service may continue to decline.
We expect
that call revenue and revenue from public call offices may decline as a
percentage of total revenue as demand for our other products and services,
particularly our GSM cellular services, increases.
Cost
of Revenues
Our
operating costs include staff costs, license fees and network utilization
charges, depreciation expenses, maintenance costs and commissions paid to public
call office franchise operators.
Staff
costs. In general, employees receive a base salary and
salary-related housing and other allowances, productivity-based incentive
payments and certain benefits, including a pension/gratuity plan and medical
benefits for themselves and certain members of their immediate
families. The decrease in our staff costs was primarily
due
to VRS in
previous years and also a decrease in retirement benefit charges on account of
an increase in the discount rate used to value our post retirement obligations
to employees. This is in line with the general increase in interest
rates in the economy over the same period.
In fiscal
2000, substantially all of our non-executive employees originally employed by
the DOT decided to terminate their services with the DOT and accept employment
with us effective November 1998. Under the option given to them for
pension benefits, most of our absorbed employees have opted for retaining
pension benefits in accordance with the Central government pension rules. Some
other employees have opted for retirement rules, which are applicable to our
directly recruited employees, and opted to draw pro rata pension until their
absorption. Accordingly, with effect from November 1, 1998 we started
accruing for pension and gratuity for these employees. In
August/September 2002, the DOT indicated that the government would pay for the
pension benefits of the government employees absorbed by us who opted for either
the Central government scheme of pension or for the pro rata pension scheme for
the period served with the DOT. However, the terms of such payments
are in the process of finalization. Once these terms are finalized
and the payments are made to the DOT for the period of employment of these
employees with us, we expect that our liability for post retirement obligations
would be limited to contributions on the basis of the rules to be prescribed by
the government of India. Presently, in the absence of any further
movement from the Government, we are discharging all such
liabilities.
Approximately
98% of our executive employees have accepted absorption into our company and are
now our direct employees. These employees are entitled to certain
pension and gratuity benefits from the government of India.
We have
finalized a new compensation structure for our senior executive
employees. The new structure provides for higher salaries and
benefits for our senior executive employees upon exercise of their option for
MTNL absorption.
As a
public sector enterprise, we abide by general DOT and Department of Public
Sector Enterprises personnel policies that, among other things, limit our
ability to reduce employment levels and control the amount of salaries and other
remuneration that we may pay to our employees. Our employee
productivity measured by access lines in service per employee has been
increasing steadily but remains significantly lower than the Asian and global
averages. During the year ended March 31, 2005, MTNL implemented a
Voluntary Retirement Scheme (VRS) for executive as well as non-executive
employees. Under the scheme, the eligible employees were given an
option to voluntarily take retirement from service and make their choice within
the specified period of time. The scheme provided for ex gratia
payments to eligible employees opting for voluntary retirement based on the
respective employee’s salary and term of employment. As of March 31,
2007, a total of 3,947 employees retired under this scheme.
License fees and network
utilization charges. Under our previous arrangement with the
DOT, the license fee for providing basic services was fixed at Rs.900 per access
line in service. This arrangement expired on March 31,
2000. In the absence of any new arrangement with the DOT, we
continued to pay license fees during fiscal 2001 on the same terms as our
previous arrangement. On April 9, 2001, the DOT communicated that the
annual license fee will be revised and shall be payable at 12% of adjusted gross
revenue from basic telephone service effective from August 1, 1999, as
applicable to private operators from that date. On September 5, 2001,
the DOT amended its position and indicated that the date from which the revised
license fees will be payable will be notified later. Accordingly, the
Company paid license fees based on the earlier arrangement up to the
year ended March 31, 2001 and on the revised basis from April 1, 2001 onwards.
Subsequent to the year ended March 31, 2004 in a meeting with DOT it
has been agreed that the license fee is payable at 12% of the adjusted gross
revenue with effect from August 1, 1999 and the charges for the same have been
accrued in the year ended March 31, 2004. Further, license fee has
been revised at 10% of Adjusted Gross Revenue with effect from April 1,
2004. Under our previous arrangement with BSNL, we paid network utilization
charges to BSNL as a fixed percentage of the amount of usage and other charges
billed to our customers for our services. Our network utilization
arrangement with BSNL expired on March 31, 2001. To date no agreement
for networking charges has been entered into which determines the basis of
revenue sharing for incoming or outgoing domestic long distance or subscriber
trunk dialing calls through interconnection with BSNL’s network. In
absence of the same, for fiscal 2003, the interconnection charges on domestic
long distance calls have been accrued on the basis of the rates that were
payable by other basic service operators in the country. We are
in the process of finalizing a new agreement with BSNL.
In fiscal
2004, revenue sharing with BSNL and other operators for incoming and outgoing
domestic long distance or subscriber trunk dialing calls was done on the basis
of TRAI’s Interconnect Usage Charges Regulation 2003 (1 of 2003)
implemented from May 1, 2003 and modified by Interconnect Usage Charges
Regulation 2003 (2 of 2003) effective February 1, 2004. For April
2003, these charges were accounted per the earlier arrangement.
In fiscal
2005, TRAI’s IUC regulation (1 of 2003) as modified by IUC regulation 2003 (1 of
2004) was applicable till January 2005, for February and March 2005, regulation
as modified by amendment (1 of 2005) was applicable.
In fiscal
2006, TRAI’s IUC Regulation (1 of 2006) dated February 28, 2006 was applicable
through March 31, 2007.
In fiscal
2007, TRAI has issued ADC Regulation (2 of 2007) dated March 21, 2007 and
implemented from April 1, 2007. In this amended regulation ADC on
percentage revenue share was reduced to 0.75% from existing 1.50% of
AGR. ADC on outgoing international calls has been reduced to zero
from an existing level of Rs. 0.80 per minute and on incoming international
calls reduced to Rs. 1.00 per minute from existing Rs. 1.60 per
minute.
In fiscal
2007, TRAI issued the Telecommunication Tariff (Forty fourth amendment) Order,
2007 regarding National Roaming Charges and applicable from February 15,
2007. The salient features are as follows:
In fiscal
2007, TRAI issued the Telecommunication Tariff (Forty fifth amendment) Order,
2007 regarding unsolicited commercial communication and applicable from June 5,
2007. The salient features are as follows:
In fiscal
2007, TRAI issued the Regulation on Port Charges (1 of 2007) and applicable from
April 1, 2007. The salient features are as under:
Coverage
Charges for ‘Ports’ (other than the Port Charges for Internet, which are
specified in Schedule VI of the Telecommunications Tariff Order
1999)
‘Port’
Charges covering all switches
Note - N
refers to the number of ‘Ports’ within the capacity ranges under the column ‘No.
of Ports’.”
Since
Regulation 1 of 2007 of TRAI in relation to payment of port charges is contrary
to the judgment of the Hon’ble TDSAT, dated April 27, 2005 and March 3, 2005,
BSNL has filed Appeal no. 4/2007 against these Regulations before the Hon’ble
TDSAT. MTNL has also impleaded into this case.
Until the
end of fiscal 2002, all outgoing international long distance calls originating
from our network were subject to interconnection fees payable to BSNL, and we
received no revenue from incoming international long distance calls into our
network. We paid interconnect fees to BSNL in respect of outgoing
international long distance calls pursuant to the network utilization
arrangement with BSNL until March 31, 2001 and for fiscal 2002 on the basis of
the rates that were payable by other basic service operators in the
country. Beginning April 1, 2002, we recorded incoming and outgoing
international long distance traffic pursuant to interconnect agreements we have
signed with several international carriers, most importantly,
VSNL. As a result of these agreements, we no longer make payments to
BSNL in respect of international long distance traffic. In addition,
our agreements with the international carriers provide for income in respect of
incoming calls, in addition to payments in respect of outgoing calls originating
from our networks.
For more
information on license fees and network utilization charges, please see
“Information on the Company—Business Overview.”
Inflation
Inflation
in India, as measured by the Indian consumer price index, was 4.6% in 2006, 6.7%
in 2007 and 7.8% in 2008. Energy price spikes may affect this in the
current year. We do not believe that inflation in India has had a
material impact on our results of operations in recent
years. However, the TRAI has been granted the authority to determine
tariffs, and we are therefore restricted in our ability to increase tariffs to
compensate for inflation. As a result, inflation could adversely
affect our results of operations. See “Information on the
Company—Business Overview—Tariffs and Other Charges.”
Effect
of New Accounting Pronouncements
There are
a number of new accounting standards that have been issued that will affect our
information presented in accordance with US GAAP. For a description
of these recent pronouncements, please see Note 2 to our consolidated financial
statements included elsewhere in this report.
Other
Matters
See
“Information on the Company—Business Overview—Legal Proceedings” and Note 22 to
our consolidated financial statements for information on our contingent
liabilities.
We are
selectively targeting expansion opportunities outside India where we can
leverage our expertise and relationships. We have investments in
Nepal and Mauritius and are currently examining several other
opportunities. We invested Rs.233.45 million up to fiscal 2004 and
Rs.56.70 million in fiscal 2007 on the Nepal venture, and in respect of the
Mauritius operations, Rs.425.03 million up to fiscal 2006, Rs.170.09 million in
fiscal 2007 and Rs. 142.46 million in fiscal 2008.
In June
2008, we obtained a license from the Department of Telecommunication to provide
international long distance service and we intend to deploy these
services. We cannot determine at this time what impact entry into
these markets will have on our revenues and results of operations.
Segment
Information
We have
identified basic and cellular as the two operating segments of
MTNL. Basic services segment consists of voice, data through local
calls, domestic long distance and international long distance calls on fixed
line services in the cities of Delhi and Mumbai in India. Further, it includes
revenues from Code Division Multiple Access, or CDMA, based cellular services
and internet access services. Cellular consists of providing cellular
services in cities of Delhi and Mumbai using Global System for Mobile
communications, or GSM, technology.
During
the year ended March 31, 2005, we had not considered cellular services to be a
reportable segment since it did not meet the thresholds of
significance. However as the cellular services have met the
thresholds of significance during the years ended March 31, 2006, 2007 and 2008,
we have disclosed the segment information for the year ended March 31, 2008 as
well as for the prior years.
During
the previous year we started operations in Mauritius. However, as the
operations are insignificant as compared to our overall business, the same have
not been considered for separate segment disclosure.
During
the years ended March 31, 2007 and 2008, no single customer has contributed for
revenue in excess of 10% of total revenue.
The
amounts reviewed by the CODM are based on internal accounting policies of the
Company which are different from US GAAP.
Results
of Operations
The
following table sets forth selected income statement data expressed as a
percentage of revenue for the period indicated, derived from financial
statements that are prepared in accordance with US GAAP, included on pages F-1
to F-40 of this annual report.
Comparison
of Year Ended March 31, 2008 with Year Ended March 31, 2007
Call
revenue has gone down despite increase in the average number of connections from
approximately 3,723,000 connections during the year ended March 31, 2007 to
approximately 3,944,000 connections during the year ended March 31, 2008. There
was also a net decrease of 3,660 million units in billed Metered Call Units
(“MCU”), from 25,105 million units during the year ended March 31, 2007 to
21,445 million units during the year ended March 31, 2008. Further, the call
tariff rates were reduced during the current year due to increased competition
in the market, resulting in a fall in average revenue per connection per month
from Rs.770 during the year ended March 31, 2007 to Rs.679 during the current
year, a decrease of Rs. 91 per connection per month.
As
regards license fees payable as a percentage of the Adjusted Gross Revenues
(“AGR”), the increase is basically due to a 12.95% increase in cellular revenue
as compared to the previous year.
Selling, General and Administrative
Expenses (SG&A)
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