Tata Motors 20-F 2005
Documents found in this filing:
As filed with the Securities and Exchange Commission on September 27, 2005
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended March 31, 2005
For the transition period from to
Date of event requiring this shell company report
Commission file number: 001-32294
TATA MOTORS LIMITED
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:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
361,751,751 Ordinary Shares, including 33,247,862 Ordinary Shares represented by 33,247,862 American Depositary Receipts were outstanding as of March 31, 2005.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 x
If this 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 ¨ No ¨
In this annual report
Special Note Regarding Forward-looking Statements
All statements contained in this annual report that are not statements of historical fact constitute forward-looking statements. Generally, these statements can be identified by the use of forward-looking terms such as anticipate, believe, can, could, estimate, expect, intend, may, plan, will and would or similar words. However, these words are not the exclusive means of identifying forward-looking statements. All statements regarding our expected financial condition and results of operations, business, plans and prospects are forward-looking statements. These forward-looking statements include statements as to our business strategy, our revenue and profitability, planned projects and other matters discussed in this annual report regarding matters that are not historical fact. These forward-looking statements and any other projections contained in this annual report (whether made by us or any third party) involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements or other projections. Although we are a reporting company and will have ongoing disclosure obligations under U.S. federal securities laws, we are not undertaking to publicly update or revise any statements in this annual report, whether as a result of new information, future events or otherwise.
The risks and factors that could cause our actual results, performances and achievements to be materially different from the forward-looking statements set out in Item 3.D and elsewhere in this annual report include, among others:
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TABLE OF CONTENTS
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The following table sets forth selected financial data including selected historical financial information as of and for each of the fiscal years ended March 31, 2002, 2003, 2004 and 2005 in accordance with accounting principles generally accepted in the United States or under US GAAP.
The selected US GAAP consolidated financial data as of March 31, 2004 and 2005 and for each of the fiscal years ended March 31, 2003, 2004 and 2005 are derived from our audited US GAAP consolidated financial statements included in this annual report together with the report of Deloitte Haskins & Sells, independent auditors, who have reported that they carried out their audit in accordance with standards of the Public Company Accounting Oversight Board (United States). The selected US GAAP consolidated financial data as of March 31, 2002 and 2003 and for the fiscal year ended March 31, 2002 are derived from our audited US GAAP consolidated financial statements not included in this annual report. Selected US GAAP financial data as of and for the year ended March 31, 2001 has not been included in this annual report, because US GAAP financial statements for such period have not previously been prepared and could not be without unreasonable effort or expense.
You should read our selected financial data in conjunction with Item 5 - Operating and Financial Review and Prospects.
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Selected Financial Data Prepared in Accordance with US GAAP
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Exchange Rate Information
For convenience, some of the financial amounts presented in this annual report have been translated from rupee amounts into dollar amounts at the rate of Rs.43.62 = US$1.00, based on the noon buying rate for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York as on March 31, 2005, the date of our most recent balance sheet included in this annual report. However, such translations do not imply that the rupee amounts have been, could have been or could be converted into dollars at that or any other rate.
The following table sets forth, for the periods indicated, information with respect to the exchange rate between the rupee and the dollar (in rupees per dollar) based on the average of the cable transfer buying and selling rupee / dollar exchange rates quoted by the Federal Reserve Bank of New York.
The following table sets forth, the high and low exchange rates for previous six months and is based on the noon buying rate for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York.
Source: Federal Reserve Bank of New York
As of September 26, 2005, the rupee / dollar noon buying rate quoted by Federal Reserve Bank of New York was Rs.43.86 per US$1.00.
This section describes the risks that we currently believe may materially affect our business. The factors below should be considered in connection with any forward-looking statements in this annual report and the cautionary statements on page 2. The risks below are not the only ones we face some risks may be unknown to us, and some risks that we do not currently believe to be material could later turn out to be material. One or more of a combination of these risks could materially impact our business, revenues, sales, net assets, results of operations liquidity and capital resources.
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Risks Associated with Our Business
General economic conditions could significantly adversely affect our sales and results of operations.
The Indian automotive industry is substantially affected by general economic conditions in India. In 1999, the automotive industry witnessed a recovery in demand after declining trends for two years. Demand for four-wheel vehicles again declined in the period from 2000 to late 2001, driven by poor economic conditions in India. Though there has been a significant increase in demand since early 2002, primarily due to significant growth of the gross domestic product, or GDP, the construction of improved roadways in India, and substantial lowering of interest rates there can be no assurance that the Indian economy will not experience a downturn which may, in turn, significantly adversely affect our sales and results of operations.
One driver of demand is the level of market interest rates, which impacts the cost of financing for purchasers of our products. While interest rates declined steadily during fiscals 2003 and 2004, they increased marginally in fiscal 2005. No significant increase in interest rates is expected in the short term, but trends in interest rates need to be monitored closely. A significant increase in market interest rates could have an adverse effect on demand for our products. Interest rates in the United States and some other countries have recently been increasing and this may lead to interest rate increases in India and other countries. On the other hand, decreases in market interest rates may lead to higher levels of prepayments of our loans receivable from customers, as they may seek to refinance their loans elsewhere. Although we have not experienced significant prepayments during past periods of declining interest rates, and while prepayments have not had any material adverse impact on our results of operations in the past, there can be no assurance that prepayments during periods of declining interest rates will not have a material adverse impact on our results of operations in the future as we seek to expand our customer financing business.
If we are unable to implement our growth strategies in a timely manner, our business and results of operations could be adversely affected.
We have adopted certain growth strategies, including the expansion of our automotive business through upgrading of our existing products, the introduction of new products and an increase in international business. All these new projects involve risks and difficulties and, accordingly, there can be no assurance that we will be able to complete our plans on schedule or within budget. If market conditions change, operations do not generate sufficient funds or for any other reason, we may decide to delay, modify or forego some aspects of our growth strategies. Our future results of operations may be materially adversely affected if we are unable to implement our growth strategies.
Increased competition in the Indian automotive industry may adversely affect our results of operations.
We face strong competition in India across our product lines from other Indian and foreign automotive manufacturers. Competition is expected to intensify as Indian automotive manufacturers obtain greater access to debt and equity financing in the international capital markets or gain access to more advanced technology through alliances. Foreign automotive manufacturers have increased and are expected to further increase their participation in the Indian automotive market through technology transfers, joint ventures and direct investments.
The Indian automotive industry has historically been protected against competition from imported goods through a number of import restrictions, taxes and duties on automotive and related products. Many of those restrictions, however, have recently been lifted or relaxed. In 2001, all quantitative restrictions on the import of automobiles into India were removed. Additionally, in recent years, the Government of India has permitted automatic approvals for foreign equity ownership of up to 100% in entities manufacturing vehicles and components in India. These changes have led to dramatically increased competition from product offerings by major international manufacturers, on imported vehicles, second hand or pre-owned vehicles. Though there remains relatively high tariffs on imports of vehicles and components, we expect tariffs on the import of components and cars in completely built units, or CBUs, and/or completely knocked down units, or CKDs, to be reduced in the future in line with Indias obligations under its World Trade Organization agreement. There can be no assurance that there will not be further reductions in import duties on automotive products or a relaxation or removal of import restrictions, which may in turn adversely affect our results of operations.
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Increases in diesel fuel prices or increased demand for gasoline fuel-powered vehicles could adversely affect the demand for our products.
A significant proportion of our products are powered by diesel fuel engines. Retail prices for diesel fuel in India have historically been significantly lower than retail prices for gasoline. However, due to the elimination of some fuel price controls in India and global movements in market prices of crude oil, the gap between retail prices of diesel fuel and gasoline in India has been narrowing. A sudden shift in demand away from diesel fuel-powered vehicles in India, which may occur if the price differential between diesel fuel and gasoline continued to decline significantly or if there is a substantial increase in diesel prices, could adversely affect our sales and results of operations.
Delays in construction of improved roadways in India and increased competition form railways and other modes of transport could adversely affect the demand for our existing and future products.
Our medium and long term business plans are based on the assumption that new large roadway projects in India undertaken by the Government of India will proceed according to announced plans. If these roadways are not constructed according to these plans, the demand for our current and new products may not achieve the levels we anticipate and accordingly may lead to lower sales and profits.
Additionally, the Government of Indias proposal to increase the coverage and efficiency of the railway network and efficiency, aggressive pricing by railways and expansion of oil pipelines in the country could also adversely impact the demand for commercial vehicles.
Compliance with increasingly stringent safety or emissions standards relating to our products or our manufacturing facilities, or other environmental regulations, may adversely affect our business and results of operations.
In the last few years, the Government of India has introduced several regulations regarding emission levels, noise and safety of automotive products, as well as levels of pollutants generated by the plants that produce automotive vehicles. These regulations are likely to become more stringent and the cost of complying with these regulations may be significant. To comply with the requirements of environmental regulation, we may have to incur substantial capital and product development expenditure and research and development costs to upgrade our products and our manufacturing facilities, which may increase our cost of production and thereby adversely affect our results of operations. If we are unable to comply with these standards within the time frame provided to us, our production and sales may be adversely affected.
Taxes and other levies imposed by the central or state governments in India on the acquisition and ownership of automotive vehicles, or regulations applying to us may have a material adverse effect on the demand for our products.
Taxes and other levies imposed by the central or state governments in India that affect our industry include customs duties on imports of capital goods, raw materials and components, excise duty on the manufacture of automotive vehicles, service tax, central and state sales tax, octroi duties, value added tax, road and registration tax.
These taxes and levies affect the cost of production and prices of our products and therefore the demand for our products. In addition, restrictions or levies imposed by the government on the use of automotive vehicles, such as a congestion charge or other traffic control measures, or on diesel vehicles in particular, could affect the demand for our automotive vehicles in the future. An increase in any of these taxes or levies, or the imposition of new taxes or levies in the future, may have a material adverse impact on our business, results of operations and financial condition.
We are dependent on a limited number of vendors for the supply of critical components, consumables and raw materials used in the manufacture of our products.
We depend on external suppliers for the supply of raw materials, components and some spare parts for our products. We currently have an aggregate of approximately 1,100 vendors of components in India. We collaborate closely with our vendors in order to secure a reliable supply of components that meet our requirements and to generate economies of scale. Additionally, we have equity interests through shareholders agreements with some of our vendors. As a result of this approach, for some raw materials and several inputs in our manufacturing process for aggregates, such as engines, and fuel pumps, we rely on a only a limited number of vendors. The failure by a vendor to adhere to our technical specifications, quality requirements and production and delivery schedules could temporarily disrupt our manufacturing process. In addition, a vendor on whom we are dependent may raise its prices, may experience a delay in its ability to produce or deliver products, or a dispute may arise between us and the vendor. If we are dependent on a sole vendor or a limited number of vendors for a critical input, we may find it difficult to replace a vendor on a timely basis and at reasonable cost, and our business and results of operations may be adversely affected.
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We are subject to risks associated with product warranty, recall and product liability costs due to defects in our products or related after-sales services, which could generate adverse publicity and adversely affect our business, results of operations and financial condition.
Defects, if any, in our products could require us to undertake service actions or vehicle recalls. These actions could require us to expend considerable resources in correcting these problems and could adversely affect demand for our products. Defects in our products that arise from defective components or spare parts supplied by our vendors may be covered under warranties provided by our vendors. Although we obtain product liability insurance for the automotive vehicles we sell in some international markets, we are not covered by insurance for product liability claims for products sold in India. An unusual number or amount of warranty claims against a vendor could affect us adversely because we depend on a limited number of vendors for the supply of raw materials and components, including some of our affiliates. Repeated warranty claims may result in a rise in our cost of obtaining insurance. In addition, these claims could have an impact on our consolidated results of operations and financial condition as some of our vendors are our subsidiaries and affiliates. Further, if a vendor fails to meet quality standards, it could be exposed to warranty and other product liability costs, and expose us to the risk of product liability claims. Any defects in our products or after-sales services provided by us, authorized dealers or third parties could also result in customer claims for damages. In defending these claims, we could incur substantial costs and receive adverse publicity. Management resources could be diverted away from our business towards defending these claims. As a result, our business, results of operations and financial condition could suffer. We cannot assure that the limitations of liability set forth in our contracts with vendors will be enforceable in all instances or will otherwise protect us from liability for damages.
Increases in the cost of raw materials and automobile components may have a material adverse impact on our results of operations.
In fiscal 2005 and 2004, consumption of raw materials and components formed approximately 81.2% and 77.6%, respectively, of our cost of sales. If costs of raw materials and components rise, and if we are not able to recover these costs through cost saving measures elsewhere or are unable to increase the selling prices of our vehicles due to competitive pressure, our margins and results of operations would be adversely affected. For example, steel prices have significantly increased in recent periods and we have not been able to fully recover these increase through increases in selling prices for our vehicles.
Potential delays in the launch of new models in the market and lower than anticipated market acceptance of new or existing models can cause us to lose market share and adversely affect our results of operations.
In a highly competitive environment where the Indian automotive industry currently has excess capacity, competitors can gain a significant advantage by introducing a new model in a particular category before we do. In addition, the launch of a new model requires substantial capital investment and product development expenditure and generally higher initial production costs. The capital investments in plant and machinery, in addition to product development costs, associated with the launch of a new model may result in higher levels of depreciation and amortization. Our loss in fiscal 2002 was partially attributable to these factors and similar investments by us in the future may have an adverse impact on our profitability. Therefore, if market acceptance of any of our new models is lower than anticipated, we may be unable to gain the intended economic benefits of our investments and higher cost of production, and our results of operations may be adversely affected.
We have made and may continue to make capital commitments to our subsidiaries and affiliates and if the business and operations of subsidiaries and affiliates to whom we make capital commitments deteriorate, we may be required to write down or write off our investments in these subsidiaries or affiliates in the future.
We have made and continue to make capital investments, loans, advances and other commitments to support our subsidiaries and affiliates. These investments and commitments have included capital contributions to enhance the financial condition or liquidity position of our subsidiaries and affiliates. If the business and operations of these subsidiaries and affiliates deteriorate, we may suffer losses and our investments may be required to be written down or written off. Additionally, our loans or advances may not be repaid or may need to be restructured or we may be required to outlay capital under our commitments to support these companies.
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Fluctuations in exchange rates could result in foreign exchange losses.
Devaluations or depreciation of the value of the rupee can influence the cost of our borrowings denominated in currencies other than rupees and increase the cost of our imports, while an appreciation of the value of the rupee, which has occurred against the dollar since early 2003, can adversely impact our exports. As of March 31, 2005, approximately 83.8% of our borrowings were denominated in dollars and other non-rupee currencies. Further, in fiscal 2004 and 2005, 4.6% and 5.7%, respectively, of our total raw material costs were incurred in dollars and other non-rupee currencies, and in fiscal 2004 and 2005, 7.9 % and 13.9%, respectively, of our total revenues were derived from international markets. Any significant fluctuation to our disadvantage in exchange rates may have an adverse effect on our financial condition. Although we engage in some currency hedging in order to decrease our foreign exchange exposure, a weakening of the rupee against the dollar and other major foreign currencies may have an adverse effect on our cost of borrowing and consequently may increase the cost of financing our expenditure. In addition, we have experienced and can be expected to continue to experience foreign exchange losses and gains on obligations denominated in foreign currencies in respect of our borrowings and foreign currency assets and liabilities. Although the fluctuations in the value of the rupee against the dollar has not had a material adverse effect on our financial condition and results of operations in recent periods, the depreciation in the value of the rupee against the dollar in recent months may lead to adverse effects on our financial condition and results of operations during the current fiscal year and in future periods, partly due to increase in dollar-denominated debt.
We need to successfully integrate and manage our mergers or acquisitions to maintain profitability.
During fiscal 2005, we acquired a 21% equity stake in Hispano Carrocera, S.A., (Hispano), a leading bus body building company in Spain, and in fiscal 2004, we acquired Daewoo Commercial Vehicle Co. Ltd. (now named Tata Daewoo Commercial Vehicle Co. Ltd. or TDCV) in South Korea. During the first quarter of fiscal 2006, Tata Finance Limited, in which we had held 12.08% of its equity, merged with us. In addition, our subsidiary, Tata Technologies, USA (TT US) has made a cash offer of 220 pence per share (Rs.169.40 per share) in the first week of September 2005 for 100% of the equity shareholding of INCAT International Plc. (INCAT), a UK-based company listed on the Alternative Investment Market (AIM) of the London Stock Exchange.
We also continue to evaluate other merger and acquisition opportunities and plan to make additional mergers or acquisitions in the future if suitable opportunities arise. These may dilute our earnings per share as a result of the specific scope of the business or condition of the operations being merged with or acquired. Merger and acquisition involve risks, including:
If we are unable to successfully integrate and manage our pending acquisition, as well as any future mergers or acquisitions that we might pursue, our growth plans may not be met and our profitability may decline.
We may be adversely affected by labor unrest
All of our regular employees and those of our consolidated subsidiaries in India, other than management, are members of labor unions and are covered by our wage agreements with those labor unions which have different terms (typically three years) at different locations. Our wage agreements for Pune (excluding the car plant), the Pune car plant, Jamshedpur, Mumbai and Lucknow are valid until August 31, 2006, March 31, 2007, March 31, 2007, December 31, 2006 and March 31, 2008, respectively. In general, we consider our labor relations with all of our employees to be good. Though we have not experienced any other labor unrest since 2000, we may in the future be subject to labor unrest, which may delay or disrupt our operations in the affected regions, including the acquisition of raw materials and parts, the manufacture, sales and distribution of products and the provision of services. If such work stoppages or lock-outs at our facilities or at the facilities of our major vendors occur or continue for a long period of time, our business, financial condition or results of operations may be adversely affected.
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Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new Securities and Exchange Commission (SEC) regulations, Securities and Exchange Board of India rules, New York Stock Exchange (NYSE) listing rules and Indian stock market listing regulations have created uncertainty for us. 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 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 independent accountants audit of that assessment requires the commitment of significant financial and managerial resources. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted, and are likely to continue to result, in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Risks Associated with Investments in an Indian Company
Political instability or changes in the Government in India could delay the further liberalization of the Indian economy and adversely affect economic conditions in India generally and our business in particular.
Substantially, our manufacturing and sales and distribution facilities are located in India, and in fiscal 2003, 2004 and 2005, approximately 95%, 92% and 86%, respectively, of our revenues were derived from sales within India. Our business, and the market price and liquidity of our ADSs and shares, may be affected by foreign exchange rates and controls, interest rates, changes in government policy, taxation, social and civil unrest and other political, economic or other developments in or affecting India.
Since 1991, successive Indian Governments have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. Nevertheless, the roles of the Indian central and state governments in the Indian economy as producers, consumers and regulators have remained significant. Consequent to an election in April and May, 2004, there was a change in government. Although the new government has announced its intention to continue with economic reforms implemented by its predecessor, these reforms can be implemented with agreement of the coalition partners of the government. The coalition consists of political parties with different agendas, which could result in political instability, and may effect economic reform, and specific laws and policies affecting automotive companies, foreign investment, currency exchange and investment regulations governing Indias capital markets. Uncertainty regarding possible policy changes immediately after elections has in the past resulted in significant volatility in price and trading volumes of securities of Indian companies. A significant change in Indias economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally, and our business in particular, if new restrictions on the private sector are introduced or if existing restrictions are increased.
Regional conflicts in Asia and other export markets could adversely affect the Indian economy and cause our business to suffer.
The Asian region has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including between India and Pakistan. Since May 1999, military confrontations between India and Pakistan have occurred in Indian State of Jammu & Kashmir. Also, since early 2003, there have been military hostilities and civil unrest in Afghanistan and Iraq. Events of this nature in the future, as well as social and civil unrest within other countries in Asia, could influence the Indian economy and could have a material adverse effect on the market for securities of Indian companies, including our ADSs and shares, and on the market for our vehicles.
Rights of shareholders under Indian law may be more limited than under the laws of other jurisdictions.
Our Articles of Association, which include regulations applicable to our Board of Directors, and Indian law govern our corporate affairs. Legal principles relating to these matters and the validity of corporate procedures, directors fiduciary duties and liabilities, and shareholders rights may differ from those that would apply to a company in another jurisdiction. Shareholders rights under Indian law may not be as extensive as shareholders rights under the laws of other countries or jurisdictions, including the United States. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in another jurisdiction.
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Investors may have difficulty enforcing judgments against us or our management.
We are a limited liability company incorporated under the laws of India. Almost all of our directors and executive officers named in this annual report are residents of India. Further, almost most of our assets and the assets of these directors and executive officers are located in India. As a result, investors may find it difficult to (i) effect service of process upon us or these directors and executive officers in jurisdictions outside India, (ii) enforce court judgments obtained outside India, including those based upon the civil liability provisions of the U.S. federal securities laws, against us or these directors and executive officers (iii) enforce, in an Indian court, court judgments obtained outside India, including those based upon the civil liability provisions of the U.S. federal securities laws, against us or these directors and executive officers, and (iv) obtain expeditious adjudication of an original action in an Indian court to enforce liabilities, including those based upon the U.S. federal securities laws, against us or these directors and executive officers.
India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments. Recognition and enforcement of foreign judgments is provided under Section 13 of the Code of Civil Procedure, 1908, or the Civil Code. Section 13 and Section 44A of the Civil Code provide that a foreign judgment shall be conclusive as to any matter thereby directly adjudicated upon except (i) where it has not been pronounced by a court of competent jurisdiction, (ii) where it has not been given on the merits of the case, (iii) where it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognize the law of India in cases where Indian law is applicable, (iv) where the proceedings in which the judgment was obtained were opposed to natural justice, (v) where it has been obtained by fraud or (vi) where it sustains a claim founded on a breach of any law in force in India.
Section 44A of the Civil Code provides that where a foreign judgment has been rendered by a superior court in any country or territory outside India which the Government has by notification declared to be a reciprocating territory, it may be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court in India. However, Section 44A of the Civil Code is applicable only to monetary decrees not being in the nature of any amounts payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty.
The United States has not been declared by the Government of India to be a reciprocating territory for the purpose of Section 44A of the Civil Code. Accordingly, a judgment of a court in the United States may be enforced only by a suit upon the judgment and not by proceedings in execution. The suit must be brought in India within three years from the date of the judgment in the same manner as any other suit filed to enforce a civil liability in India. It is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages awarded as excessive or inconsistent with Indian practice. A party seeking to enforce a foreign judgment in India is required to obtain approval from the Reserve Bank of India (RBI) to execute such a judgment or to repatriate outside India any amount recovered.
Risks Relating to our Shares and ADSs
Fluctuations in the exchange rate between the rupee and the dollar may have a material adverse effect on the value of the ADSs and the Shares, independent of our operating results.
The price of our ADSs is quoted in dollars. Our shares are quoted in rupees on the Bombay Stock Exchange, or BSE, the National Stock Exchange of India, or NSE, and two other stock exchanges in India. Our application for delisting is pending for confirmation with these two other stock exchanges in India. Any dividends in respect of our shares will be paid in rupees and subsequently converted into dollars for distribution to ADS holders. Market prices for our ADSs may fall if the value of the rupee declines against the dollar. In addition, the dollar equivalents of any cash dividends or other cash payments to holders of our ADSs would decline if the value of the rupee declines against the dollar. ADS holders who seek to sell in India any shares represented by ADSs or any shares withdrawn upon surrender of any ADSs, and to convert the rupee proceeds of their sale into foreign currency and remit the foreign currency from India, will require the approval of the RBI for each of these transactions unless these shares are sold on a stock exchange in India on which these shares are listed. A delay in obtaining approval of the RBI might adversely affect the rate of exchange available for conversion of such rupee proceeds into foreign currencies.
The exchange rate between the rupee and the dollar has changed substantially in the last two decades and may substantially fluctuate in the future. On an annual average basis, the rupee declined against the dollar from 1980 to 2002. The rupee lost approximately 15% of its value relative to the dollar in the three year period ended March 31, 2002, depreciating from a rate of Rs.42.50 = US$1.00 on March 31, 1999, to a rate of Rs.48.83 = US$1.00 on March 29, 2002, the last business day of our fiscal year ended March 31, 2002. During fiscal 2003 and fiscal 2004 the rupee generally appreciated in value against the dollar, from an exchange rate of Rs.48.83 = US$1.00 on March 29, 2002 to an exchange rate of Rs.43.40 = US$1.00 as of March 31, 2004. The Rupee however depreciated in value during the fiscal 2005 and ended at an exchange rate of Rs.43.62 = US$1.00 on March 31, 2005. The rupee depreciated in value against the dollar to reach Rs.43.86 = US$1.00 as of September 26, 2005.
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The market value of your investment may fluctuate due to the volatility of the Indian securities market.
The Indian stock exchanges have, in the past, experienced substantial fluctuations in the prices of their listed securities. The Indian stock exchanges, including the BSE, have experienced problems that, if they continue or recur, could affect the market price and liquidity of the securities of Indian companies, including our shares. These problems have included temporary exchange closures, 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. Furthermore, 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.
There is a lower level of regulation and monitoring of the Indian securities markets and the activities of investors, brokers and other participants than in the United States. The Securities and Exchange Board of India, or SEBI, received statutory powers in 1992 to assist it in carrying out its responsibility for improving disclosure and other regulatory standards for the Indian securities markets. Subsequently, SEBI has prescribed regulations and guidelines in relation to disclosure requirements, insider dealing and other matters relevant to the Indian securities market. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in the United States.
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.
Although holders of ADSs have a right to receive any dividends declared in respect of Shares underlying the ADSs, they cannot exercise voting or other direct rights as a shareholder with respect to the Shares underlying the ADSs evidenced by ADRs. Citibank, N.A., as depositary is the registered shareholder of the deposited shares underlying our ADSs, and therefore only Citibank, N.A. can exercise the rights of shareholders in connection with the deposited shares. Only if requested by us, the depositary will notify holders of ADSs of upcoming votes and arrange to deliver our voting materials to holders of ADSs. The depositary will try, insofar as practicable, subject to Indian laws and the provisions of our Articles of Association, to vote or have its agents vote the deposited securities as instructed by the holders of ADSs. If the depositary timely receives voting instructions from a holder of ADSs which fail to specify the manner in which the depositary is to vote the shares underlying such holders ADSs, such holder will be deemed to have instructed the depositary to vote in favor of the items set forth in such voting instructions. If the depositary has not received timely instructions from a holder of ADSs, the holder shall be deemed to have instructed the depositary to give a discretionary proxy to a person designated by us, subject to the conditions set forth in the deposit agreement. If requested by us, the depositary is required to represent all shares underlying ADSs, regardless whether timely instructions have been received from the holders of such ADSs, for the sole purpose of establishing a quorum at a meeting of shareholders. Additionally, in your capacity as an ADS holder, you will not be able to bring a derivative action, examine our accounting books and records, or exercise appraisal rights. Registered holders of our shares withdrawn from the depositary arrangements will be entitled to vote and exercise other direct shareholder rights in accordance with Indian law. However, a holder may not know about a meeting sufficiently in advance to withdraw the underlying shares in time. Furthermore, a holder of ADSs may not receive voting materials, if we do not instruct the depositary to distribute such materials, or may not receive such voting materials in time to instruct the depositary to vote.
See Item 10. Additional Information B. Memorandum and Articles of Association Voting Rights for a more detailed discussion of the manner in which a holder of ADSs can exercise its voting rights and Item 12 Description of Securities other than Equity Securities for a discussion on the rights and limitations applicable to holders of ADSs in respect of dividends and distributions made in respect of Shares underlying the ADSs.
We were incorporated on September 1, 1945 as a public limited liability company under the Indian Companies Act VII of 1913 as Tata Locomotive and Engineering Company Limited. Our name was changed to Tata Engineering and Locomotive Company Limited on September 24, 1960 and to Tata Motors Limited on July 29, 2003. We commenced operations as a steam locomotive manufacturer. This business was discontinued in 1971. Since 1954 we have been manufacturing automotive vehicles. This business commenced with the manufacture of commercial vehicles under financial and technical collaboration with Daimler-Benz AG (now DaimlerChrysler AG) of Germany. This agreement ended in 1969. Since then, we have been developing and manufacturing all our automotive vehicles in-house.
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We have continuously been expanding and upgrading our automotive product portfolio and have added a wide range of vehicles. Our most significant achievement in this field has been the design and development of Indias first and, currently, only fully indigenous contemporary compact car, the Indica. The launch of the Indica in 1998 and its upgraded V2 version in fiscal 2001 has been followed by a second offering, the Indigo, in the mid-size segment. Since its launch in December 2002, the Indigo has been the highest selling model in the mid-size segment in India. We also launched the Indigo Marina an estate variant of the Indigo in September 2004, which has shown strong performance in the market.
We currently manufacture commercial vehicles ranging from a GVW of sub 1 ton to 40 metric tonnes, the Indica and Indigo passenger cars and the Sumo and Safari range of utility vehicles. We manufactured our one-millionth vehicle in fiscal 1991 and our two-millionth vehicle in fiscal 1998. In 2003, we achieved the milestone of having manufactured our three millionth vehicle since entering the automotive vehicle business in 1954, including our 500,000th passenger vehicle. In March 2004, we acquired 100% of Daewoo Commercial Vehicle Co. Ltd. of South Korea (now named Tata Daewoo Commercial Vehicle Co. Ltd., or TDCV). During the fiscal year ended March 31, 2005, we also acquired a significant interest in Hispano Carrocera, S.A., a well-known Spanish bus body building company, providing an opportunity to develop high class transport solutions for intra-city and inter-city transportation in the Indian as well as international markets. During the first quarter of fiscal 2006, Tata Finance Limited, in which we had held a 12.08% equity interest, was merged with us.
We believe we have established a position of technological leadership among Indian automotive manufacturers through our in-house research and development activities, with assistance from foreign research consultants from time to time. Our Engineering Research Centre, or ERC, has enabled us to successfully design, develop and produce our own range of vehicles. In addition, we have designed and manufactured a significant portion of our production facilities, assembly lines and machinery.
Our subsidiary, Tata Technologies, USA has recently made a cash offer at 220 pence per share (Rs.169.40 per share) for 100% of the equity shareholding of INCAT International Plc., a UK-based company listed on the Alternative Investment Market (AIM) of the London Stock Exchange. The value of the total offer is GBP53.40 million (approximately Rs.4,133 million), for 100% of INCATs equity shares. Both TTUS and INCAT provide engineering and design services and PLM (product lifecycle management) products and services, primarily to manufacturers and their suppliers in the international automotive, aerospace and engineering markets.
Our ERC continues to focus on products at the forefront of safety, comfort and emission norms in India. See Item 4. B. Research and Development.
As of March 31, 2005, our operations included 13 consolidated subsidiaries and 5 material equity method affiliates, in respect of which we exercise significant influence.
Tata Incorporated serves as our authorized United States representative. The address of Tata Incorporated is 3 Park Avenue, 27th Floor, New York, NY 10016, United States of America.
Our Registered Office is located at Bombay House, 24, Homi Mody Street, Mumbai 400 001, India and our telephone number is +91-22-5665-8282 and our website address is www.tatamotors.com. Our website does not constitute a part of this annual report.
We are the leading automotive vehicle manufacturing company in India in terms of revenues and one of the largest private sector companies in India in terms of revenues and assets. We are the largest company in terms of revenues in the Tata Group, which is one of the leading business groups in India.
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Our business segments are (i) automotive operations and (ii) all other operations. Our automotive operations business segment includes the design, manufacture, assembly and sale of trucks (including pick-ups) and buses having a GVW ranging from sub 1 tonne to 40 metric tonnes, passenger cars, utility vehicles and related parts and accessories, and financing business for our vehicles. Our other operations business segment includes information technology related business, construction equipment manufacturing, automotive vehicle components and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, automotive retailing and service operations, and real estate and investment businesses.
We are the largest commercial vehicle manufacturer, and the second largest manufacturer of cars and utility vehicles in India in terms of fiscal 2005 units sold. According to 2003 report of Verband der Automobilindustrie (VDA), we are also the fifth largest medium and heavy commercial vehicle manufacturer and second largest manufacturer of buses in the above 8-ton category, in the world .
In fiscal 2004 and 2005, we had total unit sales volume of vehicles manufactured in India of 314,259 and 399,566 vehicles, respectively, of which 292,213 and 369,069 vehicles were sold in India. In addition, TDCV sold 4,540 vehicles in fiscal 2005.
Overall four-wheel and above automotive vehicle market share, as classified by the Society of Indian Automobile Manufacturers, or SIAM, to include cars, utility vehicles and commercial vehicles (trucks, pick-ups and buses), in India in fiscal 2004 and 2005 was 25.2% and 26.8% respectively. We had a market share in medium and heavy commercial vehicles, or M&HCVs, in India of approximately 63.9% and 65.1% for fiscal 2004 and 2005, respectively, and have a significant presence in the compact and mid-size car market. For further details about our market shares, please see Competition below.
The bus segment is transitioning and growing rapidly in the Indian market and represents a significant volume of business in international markets. Domestic customers now increasingly prefer to buy fully built buses, since it saves time and provides other benefits such as design quality, reliability and service support.
In line with our product strategy of transitioning from providing truck derived bus chassis into providing fully built bus platforms, we launched a fleet of 19 bus models under TATA Globus & Starbus brands in March 2005. Tata branded buses and coaches, available in diesel and CNG variants, with seating capacity ranging from 12 to 67 passengers are targeted for luxury, executive, low floor, school and city bus segments. A network of bus body builders was selected and developed in various parts of the country, to manufacture these buses as per our design and quality specifications.
Going forward, to offer improved bus platforms similar to those currently prevalent in Europe, we seek to shorten development time using our association with Hispano, Spain and also to develop further a strong network of bus body builders to deliver buses with superior design and comfort to meet their growing demand in India and abroad.
In India, we distribute our automotive products through 29 regional sales centers and a domestic network of over 500 independent dealer outlets. We have also established a nation-wide network of authorized after sales service centers. We distribute vehicles in South Korea through Daewoo Motor Sales Corporation, and the international sales of TDCV are through Daewoo International, Daewoo Construction and through our international vehicle distribution channel.
We operate four principal automotive manufacturing facilities that are located at Jamshedpur in eastern India, at Pune in western India, at Lucknow in northern India, and at Gunsan in South Korea. Our Indian vehicles are manufactured almost entirely from components made in India, many of which, including engines, transmissions and axles, are produced by us or our subsidiaries and affiliates with others being sourced from third party suppliers. We import only a limited number of specialized parts and components for our vehicles and specialized grades of steel. The vehicles made in South Korea are assembled primarily from Korea-manufactured aggregates and components, although some of the major aggregates are sourced from U.S. and European component suppliers. We had approximately 29,500 permanent employees, including approximately 7,000 permanent employees at our consolidated subsidiaries, as of March 31, 2005.
The Indian Economy
Real GDP at factor cost grew by 6.9% in fiscal 2005 compared to 8.5% growth in fiscal 2004 according to the Center for Monitoring Indian Economy or CMIE (Monthly Review of Indian Economy July 2005). The decline in the growth rate was mainly due to the relatively low growth rate of 1.1% registered in the agricultural sector as a result of sporadic monsoons experienced during fiscal 2005. The industrial sector and services sectors, however, grew by 7.7% and 8.9%, respectively, during fiscal 2005, compared to 6.6% and 9.1% in fiscal 2004. Industrial growth was mainly driven by the manufacturing sector, which registered 9.2% growth during fiscal 2005 as against 6.9% growth registered in fiscal 2004.
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On a quarterly basis, the Indian economy grew 7.6% in the first quarter, 6.7% in second quarter, 6.4% in third quarter and 7% in the last quarter of fiscal 2005 according to CMIE.
The inflation rate for fiscal 2005 was 6.4%, compared to 5.5% during the previous fiscal year. An increase in international prices of crude oil and approximately a month-long strike by truck operators in the country were the key reasons for rise in the inflation rate in the economy.
In fiscal 2005 interest rates rose marginally consequent to global increases in interest rates. However, with sufficient liquidity in the monetary system and changes in the structure of financing packages we offered for vehicle purchases, there was marginal impact on the operating cost per vehicle.
Progress of Golden Quadrilateral (GQ), which is a part of the Road Development Programme in India, slowed down in the beginning of the fiscal year due to a change in the Central Government, but progressed at reasonable pace during the later part of fiscal 2005 with almost 100 kms being added per month between September 2004 and March 2005. This has resulted in 80% completion of the GQ during fiscal 2005. In addition to Phases I, II and III of the National Highway Development Programme (NHDP), the incumbent government has announced Phase IV of NHDP, which includes two-laning of 41,000 kilometers of highways not covered under the first three plans. The project execution is expected to begin during fiscal 2006 and is targeted to be completed by fiscal 2015.
Value Added Tax (VAT) was implemented throughout India, with the exception of a few states, on April 1, 2005. VAT enables set-off of sales tax paid on the inputs by traders and manufacturers against the sales tax collected by them on behalf of the government, thereby eliminating the cascading effect of taxation. Two main brackets of 4% and 12.5%, along with special brackets of 0%, 1% and 20% have been announced for various categories of goods and commodities sold in the country. Central Sales Tax, however, continues to exist, although it is proposed to be abolished in a phased manner. We expect VAT implementation to have a positive impact on us.
Effective April 1, 2005, emission standards have been upgraded to Bharat Stage III (equivalent to Euro III norms) in 11 major cities and to Bharat Stage II (equivalent to Euro II norms) in the rest of the country, with the exception of seven northern states. Implementation in these states had been postponed to October 1, 2005 due to a lack of Bharat Stage II compliant fuel. These seven states are Rajasthan, Western UP, Uttaranchal, Himachal Pradesh, Punjab, Jammu & Kashmir and Madhya Pradesh. However, the state of Rajasthan upgraded its emission standards to Bharat Stage II in the month of June 2005
The Indian Automotive Market
The Indian auto industry is one of the largest industrial sectors in India, with a turnover that contributes to roughly 4% of Indias GDP. More importantly, it directly employs over two million people and provides indirect employment to another ten million. The auto industry is important for national policy in that it contributes 19% of indirect taxes.
Until a decade ago, the auto sector in India had been a relatively protected industry with limits on the entry of foreign companies through import tariffs. Today, as part of a broader move to liberalize its economy, India has opened up the sector to foreign direct investments, and has since, progressively relaxed trade barriers. Today almost all of the major global companies are present in India producing two-wheelers and passenger cars in almost all market segments.
The liberalization of the Indian economy has created significant opportunities for growth in the Indian automotive industry. Vehicle demand in India is generally affected by:
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These factors can cause demand to vary substantially from year to year for individual categories of automotive vehicles in India.
Fiscal 2005 saw a growth of 18% in the total automotive vehicle sales in India against 29.3% growth registered in fiscal 2004. The total number of vehicles sold were 1,379,681. Tata Motors achieved a market share of 26.8% of all four-wheel vehicles sold in India in fiscal 2005.
The Indian automotive industry is in the process of integrating itself with the rest of the world and, in recent years, has been affected by government regulation aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of vehicle production.
Liberalization in the Indian automotive sector has led to increased competition as foreign global automotive industry leaders have continued to increase their presence in India. In fiscal 2002, the Indian Government released its proposed Auto Policy. This policy outlines a vision to establish a globally competitive automobile industry in India, and to double its contribution to the Indian economy by 2010. It also aims to promote integrated, phased, enduring and self-sustaining growth of the Indian automotive industry. The objectives of the policy are to:
We believe that we have the resources, infrastructures, strategies and technologies in place to compete effectively in the industry despite the increasing competitive pressures. In addition, we believe that our research and development initiatives, particularly the development of environmentally friendly new vehicle technologies at affordable levels for consumers, provide us with a strategic advantage as an international competitor, particularly in the developing countries of the world.
Our ability to compete internationally will partly depend on the successful implementation of our business strategy. This is subject to a number of factors, some of which are not in our control. For details on these factors, please see Item 3D Risk Factors.
In this dynamic and competitive environment, our objective is to enhance our position and emerge as Indias leading automotive manufacturer in all product categories in which we operate, as well as increasing our international reach. We intend to achieve this objective by leveraging our existing strengths and developing expertise to enable improve our performance and quality levels while maintaining the low cost advantage in vehicle manufacturing. We also plan to increase our overseas sales by developing products that will be successful in international markets as well as through acquisitions in key regions.
We believe that our strong position in the Indian automotive industry has resulted from the following factors:
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Our goal is to continue to be a market leader in the Indian automotive industry and grow to become a global automotive player. The key elements of our strategy are as follows:
Leveraging our Broad Product Range. We consider ourselves well positioned to compete across a broad range of products in the Indian automotive market due to strong brand recognition in India, our strong in-house engineering and manufacturing capabilities, extensive distribution network and understanding of local consumer preferences. We believe our acquisition of TDCV has provided us with a complementary range of heavy vehicles which will help us accelerate our strategy of building global products. We believe our stake in Hispano Carrocera, S.A. will also give us an access to bus body building technology.
We also believe that growth opportunities exist in a number of sectors of the Indian automotive market. We plan to introduce new products including a low cost car and a new global truck, upgrades and variants of our existing products and increase production of fully-built commercial vehicles while also capitalizing on the success of our recently introduced products.
Increasing the scale of operations. We intend to further strengthen our competitive advantage, build up economies of scale for us and our key vendors and diversify our revenue profile by pursuing different markets. Increasing vehicle sales volumes substantially will be the key to this strategy. We aim to increase our domestic market share through continuously upgrading and widening our current product range as well as expanding our distribution network, and supplement this with initiatives in the international markets.
Mitigating Cyclicality. We plan to expand and strengthen our operations in the light commercial vehicle and bus segments of the commercial vehicle market to seek to mitigate the impact of cyclicality faced by the medium and heavy trucks on our earnings from overall commercial vehicles.
Also, we believe that expansion into other geographic areas will help us in reducing the impact of cyclicity on our earnings.
Inorganic Growth. We acquired the truck division of Daewoo Motor Company in South Korea in fiscal 2004 and also acquired a 21% equity stake in Hispano Carrocera, S.A. We recently made an offer for acquisition of INCAT International PLC in London. We believe these acquisitions represent a major step in our corporate history and have given us complementary products and access to technology. We will continue to look for other acquisitions with a view towards achieving our goal of becoming a global automotive company.
Reducing Costs and Breakeven Points. Since fiscal 2001, we have made significant reductions in our expense base, having achieved a cumulative reduction in fixed, variable and financial expenses. This has had a direct impact on our results of operations and contributed significantly to our return to profitability in fiscals 2003, 2004 and 2005. We have initiated the second phase of a cost reduction programme in fiscal 2006 which is expected to be completed over a period of three years. We continue to place emphasis on reduction of production costs, overhead and other general costs, including by means of value engineering and manufacturing cycle time reduction and more stringent working capital controls. We will continue to work with international and local operational and management consultants to achieve continued cost reductions and management efficiencies. We believe that productivity improvements and operational efficiencies will help lower our break-even levels and thus improve our results of operations.
Continuing Focus on High Quality and Enhancing Customer Orientation. Our commitment to quality and customer service has been a significant competitive strength, and one of our principal goals is to achieve international quality standards for our entire line of products and services. Our attention to quality has enabled us to offer industry-leading warranties in India and competitive warranties in our overseas markets. In addition, we have built an extensive sales and after-sales service network, which has enabled us to provide quality customer service. In an effort toward further improving our responsiveness to market and customer service needs, we have recently undertaken Customer Relationship Management, or CRM, initiative, which is an information technology support system to enable us to better understand and service our customer requirements. We have also recently introduced a new product introduction, or NPI, initiative and a quality function deployment, or QFD, initiative, which are programs aimed at facilitating increased channels of customer feedback in order to enhance compatibility between customer preferences and our products.
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Expanding our Distribution and Service Reach. Our automotive distribution network is one of the largest distribution networks in India. Our total distribution network in India is spread across the country with over 500 outlets and is expected to further increase in line with market expansion. In South Korea we have 49 service outlets. We plan to continue to expand the reach of our network to cater to the increasing demand for our products.
Expanding Our International Business. In order to counter-balance the cyclical nature of the domestic automotive industry, we intend to focus more of our efforts on overseas markets in the future, both through organic and inorganic growth. These initiatives include focusing on key markets products, joint ventures and mergers and acquisitions that will help us make inroads into markets with high barriers of entry resulting from regulatory regimes or advanced stages of market development.
Forming Alliances. We will consider entering into alliances that offer us opportunities for growth. While we design most of the parts for our products, these alliances may also extend to alternative sources for technology, upgraded aggregates and components for our products, if required.
Enhancement of Non-Vehicle Business Revenues. We seek to continue to increase our after-market revenue from sale of replacement parts and services and sale of engineering products such as engines for marine and industrial applications, castings, forgings, production aids and toolings and fixtures.
Customer Financing. With financing increasingly becoming a critical factor in vehicle purchases and the rising aspirations of the consumers in India, we intend to significantly expand our vehicle financing activities to give impetus to our vehicle sales. Following the successful operations of Tata Motors Finance, which markets vehicle financing products, Tata Finance Limited has been merged with us with the aim to facilitate deeper market penetration, provide a wide range of products and enable better operating efficiencies.
Leveraging Our Low-Cost Product Development Capability. We will continue to leverage our strength in low cost product development. The development of our Indica passenger car from green-field to launch for an annual capacity of 234,000 cars at an estimated cost of approximately Rs.17,500 million has set a benchmark in low cost automobile product development. Our engineering research centre, or ERC, has approximately 1,500 engineers who have access to CAD/CAM/CAE applications and other support such as a crash test facility, a state-of-the-art hemi-anechoic noise and vibration test chamber, emission testing facilities and modern test tracks. We believe these facilities will help us to upgrade the quality of our products and substantially reduce new product development costs.
Enhancing capabilities through adoption of the Tata Business Excellence Model, or TBEM. The Tata Group, of which we are a part, in recognition of their values of Leadership with Trust, has articulated a Group Purpose Statement that aims at improvement in the quality of life through leadership in various sectors of national economic significance. In pursuit of this goal, the Tata Group has decided to adopt and institutionalize an approach in order to enable it to drive performance and attain higher levels of efficiency both in its businesses and in discharging its social responsibility. Formulation and adoption of the TBEM is being used as a tool for this purpose. The model essentially aims to nurture the core values and concepts embodied in various focus areas such as leadership, strategic planning, customers, markets and human resources to be translated to operational performance. Our successful adoption and implementation of this model seeks to ensure that our business in the future can be conducted through a more systematic approach and sustainable processes. We believe this should facilitate robustness in our way of doing business, given the dynamic and demanding global business environment.
Environment Friendly and Safety Conscious. We are committed to develop products that meet existing and proposed environmental and safety regulations in India. Our vehicles are compliant with all mandated domestic regulations and also meet the more stringent emission and safety regulations in the overseas markets in which they are sold. We will continue to place a strong emphasis on the utilization of clean technologies in our manufacturing processes, so as to minimize waste products and environmental pollution. We have introduced versions of our vehicles that run using compressed natural gas, or CNG, as fuel to provide environment friendly solutions.
Continuing to Invest in Technology and Technical Skills. We believe we are one of the most technologically advanced indigenous vehicle manufacturers in India. Over the years, we have enhanced our technological strengths through co-operation with foreign research consultants as well as extensive internal research and development activities. These technical skills have given us a competitive advantage in product design, manufacturing and quality control. Our subsidiary, Tata Technologies, USA has recently announced its intention to make a cash offer at 220 pence per share (Rs.169.40 per share) for 100% of the equity shareholding of INCAT International Plc, a UK-based company listed on AIM of the London Stock Exchange. See Item 4. A. History and Development of the Company. We consider technological leadership to be a significant factor in continued success, and therefore intend to continue to devote significant resources to upgrade our technological base. See Item 4. B. Research and Development.
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Maintaining Financial Strength. We have generated strong cash flows since fiscal 2002 as a result of substantial volume growth, cost reduction and prudent working capital management. As a result, we currently maintain substantial investible surplus. We believe this will provide us with flexibility in case of short-term fluctuations of future cash flows. We have embarked on economic value added, or EVA, driven project evaluation and capital investments aiming to ensure that we may recover portions of our cost of capital in a downturn and earn higher than our cost of capital in the upside years.
Leveraging Unified TATA Brand Equity. We recognize the need for enhancing our brand recognition in highly competitive markets in which we compete with internationally recognized brands. We believe the TATA brand name is associated by Indian customers with reliability, trust and value. We will continue to promote the TATA brand in India, as well as overseas where we plan to substantially increase our presence.
Our revenues from automotive operations were Rs.128,167.1 million and Rs.182,763.4 million in fiscal 2004 and 2005, respectively.
We design, manufacture and market a full range of automotive vehicles, including trucks, pick-ups, buses, utility vehicles and passenger cars. We also manufacture automotive parts, components and accessories for our own use and for resale and provide finance to our customers for purchase of our vehicles.
Our principal product line comprises:
Our main market is the Indian market, which accounted for approximately 92% and 86% of our total revenues and 93% and 91% of our unit sales in fiscal 2004 and 2005, respectively.
The following tables set forth our domestic and International (including TDCV) sales of vehicles manufactured for the periods indicated together with their respective percentage shares of unit sales for those periods:
International business includes TDCV volumes for 2 days in fiscal 2004 and for the entire year in fiscal 2005.
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Our share of the Indian four-wheel automotive vehicle market in which our products compete was 25.2% and 26.8% in fiscal 2004 and 2005, respectively. Please see Competition for a breakdown of our market share by our line of products.
Our current product line in passenger cars consists of compact cars and mid-size cars, which includes sedans and station wagons.
Our compact hatchback car, Indica, was launched in 1998 and an upgraded version V2 was introduced in 2001. We launched an updated facelift of the Indica V2 in January 2005. Available in both diesel and gasoline engine options, it is the countrys largest selling diesel car and is the top selling compact car in the Rs.300,000 to Rs.400,000 range. It is also amongst the three leading compact car brands overall. In 25 months since launch in the market, we sold 100,000 Indicas and by March 2005, we had sold more than 400,000 units. The Indian compact car segment of the car market, in which the Indica competes with eight other models, is the largest in the industry with a share of nearly 47%. It is among the most competitive, with a high level of entrants and more entrants likely at the high end, preparing for future entry. The Indica has a 21.3% share of the compact car segment.
Based on the Indica platform, we introduced a mid-size sedan, the Indigo, in fiscal 2003. Since its launch, the Indigo has been one of the lowest priced entry-level sedans in the market in India and is the highest selling entry mid-size car in the Indian market. We sold approximately 75,000 units of the Indigo from its launch in December 2002 through March 31, 2005. We launched our first station wagon, the Marina in September 2004, and the vehicle has shown strong performance since its launch. The Indigo range of vehicles have 31% share in this market category among seven manufacturers offering 13 models.
In fiscal 2005 our domestic market share in passenger cars was 17.7%. All our vehicles in this category conform to the applicable emission standards in the country and are also available for international markets.
Our car plant achieved the landmark of rolling out its 500,000th car in February 2005. The expansion activities at the car plant are now complete and the facility has capacity to produce over 700 cars per day.
The main specifications of our principal passenger car models are shown below:
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The utility vehicle market is the third largest of the Indian car market, after the compact and the mini car segments. We and other car makers launched various premium SUVs in this category during the year, and it continues to be dominated by three major market players, including Tata Motors Limited. Our utility vehicles also recorded their best sales in the last six years in fiscal 2005, at 34,249 units, representing a growth of 8% compared to fiscal 2004. (Market share stood at 19.4%). Our Sumo utility vehicle, first introduced in 1994, is available in different seating options from 8 to 13 in different variants, including the Spacio, and for a variety of urban, semi-urban and rural applications. In July 2005, we launched the Sumo Victa, a facelift version of Sumo. The Safari continues to be the leader among Indian utility vehicles in the JD Power APEAL survey.
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All our vehicles in this category conform to Euro II and III emission norms and are also available for our international markets. The main specifications of our principal utility vehicle models are shown below:
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Our international business continues to be an important area of focus. During fiscal 2005, 10,899 passenger cars and utility vehicles were exported. While the export of CityRover to MG Rover was halted after MG Rover was placed under administrative proceedings, exports of Tata-branded vehicles grew by over 100% during fiscal 2005, compared to the previous year. Entry into other export markets has accelerated and several new export specific products have been launched in various overseas markets. Sales of products have commenced in South Africa, Algeria and Turkey. The Company also unveiled the Tata Xover at the 75th Geneva Auto Show.
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Light Commercial Vehicles (including pick-ups)
Under SIAM classifications, commercial vehicles with a GVW of up to 7.5 metric tonnes are classified as light commercial vehicles, or LCVs. We are the leading LCV manufacturer in India.
For fiscal 2005, our LCV sales accounted for approximately 50.7% of the domestic unit sales of LCVs by all Indian manufacturers.
Industry sales of LCVs reached an all time high in fiscal 2005, largely due to continuing strength in the pick-up segment. We achieved a market share of 38.1% in the pickup market segment in fiscal 2005. Customised pick-ups were also produced as a part of our endeavour to provide end-to-end transport solutions to specific customers.
During the fiscal year, we established additional manufacturing facilities with an annual capacity of 30,000 units of the new sub 1 ton payload mini truck Tata Ace. Tata Ace was launched in May 2005 and has received a positive response from media and the market. We also a launched a range of LCV buses under TATA Globus & Starbus brands in March 2005.
The following table sets forth details of our principal range of LCVs together with their principal specifications and typical uses:
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Medium and Heavy Commercial Vehicles
Under SIAM classifications, commercial vehicles with a GVW above 7.5 metric tonnes are classified as medium and heavy commercial vehicles, or M&HCVs. We are the leading M&HCV manufacturer in India.
In fiscal 2005, our M&HCVs achieved a market share of approximately 65.1% of the domestic unit sales of M&HCVs by all Indian manufacturers.
Our M&HCVs have a wide range of applications, in particular for long haul and container traffic movement and use on rough terrain, and are generally configured as trucks, tippers, buses, tankers, tractors or concrete mixers. We offer three engine options in this range - 697 (developed in-house), Cummins 6BT and CNG. All our M&HCV models comply with emission regulations as applicable in India or international markets in which they are sold.
We launched a fleet of fully built M&HCV coaches and buses under the TATA Globus & Starbus brands in March 2005. This launch was probably the largest in terms of range of products at one time by any commercial vehicle manufacturer of the world. These ultra modern fully built coaches and buses set new benchmarks in safety and comfort of road travel in India. We also launched new trucks in the twenty five tonne and nine tonne category with enhanced features.
The product range of TDCV includes cargo and dump trucks, mixers, tractor trailers and special purpose vehicles with engine power range from 215 HP to 400 HP. TDCV recently launched its new Novus line of M&HCVs featuring a high performance Euro III compliant electronic engine, a new-look cabin, other convenience and safety features.
The following table sets out details of our principal range of M&HCVs together with their principal specifications and typical uses:
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Engines, Spare Parts and Other Products
We manufacture spare parts for our vehicles. We also utilize our spare capacity for manufacturing engines for marine and industrial applications. During fiscal 2004 and 2005, we sold 5,025 and 5,623 units of these engines, respectively. Since 2001, Cummins Engine Company, USA has also used our engines for power generating and industrial applications through its Indian venture, Cummins India Ltd.
Our principal automotive production facilities are located in Pune in Western India, Jamshedpur in Eastern India, and Lucknow in Northern India, which we believe provides us with a good geographical spread to cater to every major region in the country. In the Pune plant we make all our products, the plant at Jamshedpur manufactures and assembles primarily M&HCVs, and at Lucknow we assemble commercial and utility vehicles. We also have a M&HCV assembly plant in Gunsan, South Korea.
We produced 311,542 and 400,941 vehicles in India in fiscal 2004 and 2005, respectively. In addition, TDCV produced 4,567 vehicles in fiscal 2005.
We have been implementing management and production reforms with the assistance of international consultants, with a view to creating a significant reduction in the through-put time for the various manufacturing activities performed within our plants. These techniques are intended to help in optimization of work flows and rationalization of work processes, thereby improving manufacturing system efficiency.
Sales and Distribution of Vehicles
Our automotive sales distribution network in India is comprised of our 29 regional offices, 36 sub-regional offices and over 500 dealer outlets. We have six company-owned dealerships, including those owned by consolidated subsidiaries, while the rest of the dealers are independent, most of whom are exclusive dealers for our vehicles. We believe that this is the largest distribution network for automobiles in India. We believe that our distribution network has been a key factor in our success in the domestic market. We deploy different sales channels for the distribution of our vehicles. In addition to the dealer outlets, we also have a strong after sales service network comprising over 650 authorized service centers.
A substantial number of our vehicles are sold directly to dealers from our regional sales offices. We provide cash incentives to better performing dealers. We sell government and military vehicles as well as a small number of other vehicles directly to customers.
End-user purchases of our vehicles from dealers are generally financed by third-party sources, including banks, development financial institutions and private finance companies. Although most end-user financing is provided by third parties, we also provide credit through financing channels to end-user purchasers through our dealers who act as our agents. For fiscal 2004 and 2005, approximately 8% and 9%, respectively, of our vehicle sales were made through hire purchase terms where we provided the credit. These credit sales are made on secured terms with a cash down payment of between 10% to 25% by the purchaser, followed by monthly installment payments for up to 36 months. Credit provided by us to end-user purchasers is extended on prevailing market terms which are at a margin over our marginal cost of borrowing and cost of operations. Until the final payment, we retain title to vehicles sold on a credit basis and are entitled to repossess them in case of default in payments. We actively pursue collection of overdue amounts, including through repossession where necessary. We have a contractual 15% recourse to the relevant dealer for any uncollected amounts. Total finance receivables outstanding as at March 31, 2004 and 2005 amounted to Rs.8,397.0 and Rs.20,054.8 million, respectively, of which Rs.120.7 million and Rs.129.6, respectively, were considered doubtful.
We have also started an information technology initiative designed to enable, distributors and us to share a common database of customers and sales and service information. This system has been already deployed across a few dealerships and service stations and its deployment at other locations nationwide is underway.
We have company-owned sales and service outlets in Bhubaneshwar, Delhi and Mumbai and our consolidated subsidiary, Concorde Motors (India) Ltd., runs dealership operations in Chennai, Hyderabad and Bangalore and the Union Territory of Pondicherry. These dealerships have been patterned to meet international benchmarks and are intended to serve as model dealerships for our other dealers. We have 24-hour service centers and have established a maintenance plan called Sampoorna Seva, meaning complete service, pursuant to which we enter into annual maintenance contracts with vehicle owners. We use a network of service centers on highways and a toll free Customer Assistance Centre for providing 24-hour on-road maintenance (including replacement of parts) to vehicle owners. We believe that the reach of our service and maintenance network provides us with a significant advantage over our competitors.
We face competition from domestic automotive manufacturers across our product lines. In addition, many foreign automotive manufacturers have increased or are expected to increase their participation in the Indian market through technology transfers, joint ventures or subsidiaries.
Our vehicles are designed specifically for the Indian market, catering to specific customer needs such as safety, driving comfort, fuel efficiency and durability. They are suited to general conditions of Indian roads, the local climate and overloading practices, and are environmentally friendly. We also offer a wide range of optional configurations to meet the needs of our customers. We intend to upgrade and widen our product range in order to meet the increasing customer expectation of world class products. We believe that our extensive research and development activities have been a major contributor to the success of our newer models. See Research and Development below.
We believe that our extensive distribution network and our wider product range provide us with a competitive advantage. We have been able to improve our market share in the product categories that we compete in from 23.4% in fiscal 2003 to 25.2% in fiscal 2004 and 26.8% in fiscal 2005.
The following table sets forth, for each of the periods indicated, our domestic market share for each of the categories presented, based on the classification used by and data provided by SIAM in its March 2004 and 2005 Flash Reports on Production and Sales:
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The following table sets forth the Indian automotive industry unit sales (including exports from India) of four-wheel vehicles for the periods indicated. Our market share data presented elsewhere in this document relates to domestic sales only:
Please note, our numbers do not include Sales of TDCV.
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Demand for our vehicles is subject to seasonal variations. The peak seasons are between January and March, although there is a dip in February just before release of the Indian Fiscal Budget, which usually recovers in March after the Budget is announced. Demand is usually lean from April to July and picks up again in September with a dip in December due to the change of the manufacturing year.
Substantially all of our manufacturing and sales and distribution facilities are located in India. In fiscal 2004 and 2005, approximately 92% and 86%, respectively, of our revenues were derived from the Indian market.
Over the years, we have received more than 50 awards from the Engineering Export Promotion Council, the Government of India and the State Government of Maharashtra for our export initiatives.
Our exports of vehicles manufactured in India increased by 38% in fiscal 2005 to 30,497 units, compared to an increase of 125% representing 22,046 units in fiscal 2004. Passenger car exports were marginally impacted during the fiscal year as a result of MG Rover being placed in administration proceedings. However, there was an over 100% increase in exports of passenger cars other than to MG Rovers during the fiscal year.
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The following table sets forth for the periods indicated, our principal export sales of vehicles manufactured in India by unit and the break-down, in percentages, of those sales:
In addition, TDCV sold 4,540 vehicles during fiscal 2005 and introduced vehicles in new markets like South Africa and the Middle East.
During fiscal 2005, 35.6% of our commercial vehicles were exported to South East and Central Asia, 26.9% to Africa and another 26.5% to West Asia. Europe and other countries accounted for the remaining 11.0% of the export unit sales of commercial vehicles. The growth in commercial vehicle exports was driven by our light commercial vehicles, which increased by approximately 109% during fiscal 2005 compared to fiscal 2004.
43.3% of our passenger vehicles were exported to Europe and another 43.1% to Africa during fiscal 2005. The remaining 13.6% of the passenger vehicles were exported to South East Asia, Central Asia, West Asia and other countries. While passenger car exports declined by 9% in export volumes, the utility vehicle exports increased by 27% during fiscal 2005.
As a part of our strategy to expand our global operations, we successfully launched vehicles in new markets like South Africa and strengthened our presence in existing markets like Turkey by introducing new products. We exported 5,770 vehicle units during fiscal 2005 to South Africa, out of which approximately 50% were passenger cars. Passenger cars were also launched in Turkey towards the end of fiscal 2005. We are exploring the possibility of entering new export markets such as Russia, Senegal, China and other markets.
We distribute vehicles in international markets through a network of distributors. These distributors in turn appoint local dealers who are familiar with the local market conditions in their respective countries.
We have also stationed overseas resident sales and service representatives in various countries to oversee our operations in their respective territories. The dealers appointed in various countries are responsible for the after-sales service needs of the local customers. We are working on initiatives to enhance the penetration and reach of our international business through expansion of our sales and service network in our international markets.
We distribute vehicles in South Korea through Daewoo Motor Sales Corporation, and the international sales of TDCV are through Daewoo International, Daewoo Construction and through our international vehicle distribution channel. We also have 49 service centers and distribute parts through 89 outlets in South Korea.
Integration of Tata Daewoo Commercial Vehicle Co. Ltd., Korea
Tata Daewoo Commercial Vehicle Company Limited, Korea (TDCV), which we acquired last year, doubled its export volumes to 874 vehicles and maintained its overall sales at 4,540 vehicles, despite a decline in the Korean commercial vehicle market due to a slowdown in the economy. TDCV increased its market share from 25.5% to 29.1% in the Korean market by improving product quality and customer satisfaction. During the year, TDCV successfully launched TATA Novus, a safe, reliable and environment friendly Euro III truck, in the Korean market, where it is competing well with established brands. TDCV also participated in the Gunsan International Auto Parts and Ancillary show in South Korea.
Investment in Hispano Carrocera, S.A. Spain (Hispano)
Hispano is a leading manufacturer of bus and coach bodies. Hispano designs, develops and commercially produces bodies for buses and coaches in collaboration with the leading industrial vehicle manufacturers. The company has collaborated with Pininfarina, a leading Italian automobile engineering company to provide superior design and technology for their range of buses and coaches. Hispano manufactures City Buses and Intercity & touring coaches and enjoys a market share of 25% in the bus market in Spain.
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Hispano, with its design and development capabilities in manufacturing bodies for high end buses, we believe will complement our current range of light and medium commercial passenger carriers. We believe this investment will also help to increase our presence in the international bus market.
We have acquired a 21% equity stake in Hispano, with an option to acquire the remaining 79% over the next five years. To date, we have invested Euros 12 million in Hispano. We will also enjoy the brand rights of Hispano.
Research and Development
Our research and development activities segment focus on environmental technologies, vehicle safety, and product development. Through our Engineering Research Centre, or ERC, which is one of the few government recognized in-house automotive research and development centers in , we have been able to design, develop and manufacture our own range of vehicles. The most significant achievement of the ERC has been the design and development of our compact car, the Indica, which is Indias only indigenous compact car. The ERC also designed our mid-size car, the Indigo, which was introduced in December 2002 and has been the market leader in the mid-size market segment in India. We strengthened our position in the Indian commercial vehicle market through the introduction of an improved range of EX series of light, medium and heavy trucks and buses as well as a newly launched pick-up in fiscal 2003. We are currently working on designing a truck that will enable us to achieve our objective of selling trucks in global markets. Our acquisition of TDCV is expected to provide advantages in the development of this global truck. We are also working on the development of a low cost car for the Indian market. ERC is currently working on various new products to be introduced by Tata Motors in the future.
Some of the development facilities used by our ERC are unique to the Indian auto industry. We are the only automotive company in India, which has a modern crash test facility where new products are tested for passenger safety. Our ERC also has a hemi-anechoic chamber testing facility which lowers noise and vibration levels in vehicles and engine emission testing facilities to develop products which are able to meet international quality standards.
Our ERC functions in a state-of-the-art computer-aided design, or CAD, manufacturing environment. Engineers using CAD systems are able to develop new vehicle models and also bring about improvements in existing vehicles and components. New tools are also designed using our CAD systems, and all of these design functions are electronically linked to component and tooling facilities for cutting body panel dies and making other structural components. Our subsidiary, Tata Technologies Limited, has also developed software for various automotive and other applications, which is used for our own applications and is also sold to third parties such as IBM, General Motors and DaimlerChrysler.
ERC has approximately 1,500 employees. Over the years, we have devoted significant resources towards our research and development activities. Our total expenditure on research and development during fiscal years 2003, 2004 and 2005 was Rs.1,536.2 million, Rs.1,282 million and Rs.2,532.4 million respectively. Our recent acquisition and incorporation of a subsidiary is also aimed at strengthening our ERC capacities. See Item 4.A. History and Development of the Company.
We have 54 trademarks registered in India and approximately 137 trademark applications which are currently pending registration. In addition to this, our significant trademarks are registered, or are in the process of being registered, in nearly 116 countries. We currently hold approximately 777 of these registrations worldwide. The registrations mainly include trademarks for each of our vehicle models. Further, we also use the Tata brand, which has been licensed to us by Tata Sons Limited. See Item 4.C. The Tata Group. As part of our acquisition of Tata Daewoo Commercial Vehicle Co. Ltd., we have the perpetual and exclusive use of the Daewoo brand and trademarks in Korea and overseas markets for the product range of TDCV. TDCV holds South Korean trademark registrations for 14 utility models and five designs.
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India is a member of the World Trade Organization. In compliance with its obligations under the Agreement on Trade Related Aspects of Intellectual Property, or TRIPS, India grants statutory protection to various forms of intellectual property, including patents, copyrights, industrial designs and trademarks. The Trade Marks Act, 1999 and the Copyright Act, 1957, as amended, which are currently in force in India, are TRIPS compliant. The Patents Act, 1970, as amended, to the extent that it relates to our business and operations, provides adequate product and process patent protection in India in accordance with its obligations under TRIPS. The United States has placed India on its priority watch list under Section 301 of TRIPS for failing to provide adequate levels of protection for intellectual property rights. Although we have never experienced any material difficulties in protecting our brands and other intellectual property in India, the protection and enforcement of intellectual property rights in India has not been and may not be as effective as in the United States.
We currently own two patents and have 17 patent applications pending registration in India. These patents are mostly in relation to devices which enable efficient functioning, such as energy saving devices. Our most significant patent, which is currently in the process of being registered, is a portable device for measurement of head impact points in a vehicle. In addition, TDCV holds 9 patents in South Korea and 2 patent applications are currently pending registration.
In addition to the above we also have various copyright and Internet domain name registrations.
Other than the Tata Brand, we do not consider any one or group of our trademarks, brands or patents to be so important that their expiration or termination would materially affect our business.
In addition to automotive operations, we are involved in a number of other business activities. Net revenues from these activities totaled Rs.11,528.6 million and Rs.15,623.6 million in fiscal 2004 and 2005, respectively, representing approximately 8.3% and 7.9%, respectively, of our total revenues. The most significant of our other operations are information technology services, auto components and construction equipment.
Telco Construction Equipment Co. Ltd., an 80%-owned subsidiary is a joint venture with Hitachi Construction Machinery Co. Ltd., Japan, which holds the remaining 20%. It makes construction and related equipment such as cranes, hydraulic excavators, loaders and articulated dump trucks.
Information Technology Services
Tata Technologies Ltd., or TTL, our 94.6% owned subsidiary provides information technology services to several clients across India and overseas on its own, as well as through its wholly-owned subsidiary, Tata Technologies, USA. TTL has implemented the SAP Enterprise Resource Planning, or SAP ERP, system across Tata Motors and several other companies.
In the first week of September 2005, our subsidiary, Tata Technologies, USA made a cash offer at 220 pence per share (Rs.169.40 per share) for 100% of the equity shareholding of INCAT International PLC, a UK-based company listed on the Alternative Investment Market (AIM) of the London Stock Exchange. Both TTUS and INCAT provide engineering and design services and PLM (product lifecycle management) products and services, primarily to manufacturers and their suppliers in the international automotive, aerospace and engineering markets.
Our subsidiary, Tata AutoComp Systems Ltd., promotes auto component joint ventures with global component manufacturers. In addition, our wholly-owned subsidiaries, HV Axles Ltd., and HV Transmissions Ltd., manufacture heavy axles and heavy transmissions primarily for our own requirements.
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Components and Raw Materials
Our vehicles manufactured in India are manufactured almost entirely from components made in India, a large proportion of which are sourced from a well-established network of suppliers, many of whom provide advanced component technologies. We import only a limited number of specialized parts and components and specialized grades of steel. Our Korean-manufactured vehicles at TDCV are assembled primarily from Korea-manufactured aggregates and components, although some of the major aggregates are also imported from U.S. and European component suppliers.
We have recently undertaken an e-commerce initiative through the development of a business-to-business site with the assistance of our subsidiary, Tata Technologies Limited, for electronic interchange of data with our suppliers. This has enabled us to have real time information exchange/processing to manage our supply chain effectively. We use external agencies as third party logistic providers. This has resulted in space and cost saving by transferring a part of our inventory to a third party.
The principal raw materials and components required by us for use in our vehicles are steel sheets and plates, castings, forgings and items such as tires, batteries, electrical items and rubber and plastic parts. The raw materials, components and consumables that are domestically sourced include steel (sheet-metal, forgings and castings), tires and tubes, batteries, fuel injection systems, air-oil filters, consumables (paints, oils, thinner, welding consumables, chemicals, adhesives and sealants) and fuels. We also require aggregates like axles, engines, gear boxes and cabs for our vehicles, which are manufactured by our subsidiaries and affiliates.
As part of our strategy to become a low-cost vehicle manufacturer, we have undertaken various initiatives to reduce our fixed and variable costs including an e-sourcing initiative started in 2002 through which we procure some supplies through reverse auctions. We have established a procedure for ensuring quality control of outsourced components. Products purchased from approved sources undergo supplier quality improvement process. We also have a program for assisting vendors from whom we purchase raw materials or components to maintain quality. Each vendor is reviewed on a quarterly basis on parameters of quality, cost and delivery. Preference is given to vendors with QS-9000 certification. We also maintain a stringent quality assurance program that includes random testing of production samples, frequent re-calibration of production equipment and analysis of post-production vehicle performance and ongoing dialogue with workers to reduce production errors. Further, in April 2003, we established a Strategic Sourcing Group to consolidate, strategize and monitor our supply chain activities with respect to major items of purchase as well as major inputs of technology and services. The Strategic Sourcing Group is responsible for recommending for the approval of the Management Committee the long-term strategy and purchase decision for these items, negotiation and relationship with vendors with regard to these items, formulating and overseeing our purchasing policies, norms in respect of all items, evolving guidelines for vendor quality improvement, vendor rating and performance monitoring and undertaking company-wide initiatives such as e-sourcing and supply chain management/policies with respect to vehicle spare parts. We are also exploring opportunities for global sourcing of parts and components from lower cost countries, and have embarked on a vendor management program that includes vendor base rationalization, vendor quality improvement and vendor satisfaction surveys.
We have chosen to outsource manufacturing of many components. In these instances we have been actively involved in providing training to outside suppliers and we often design and manufacture the tooling and fixtures employed by those suppliers.
Tata AutoComp Systems Ltd. encourages the entry of internationally acclaimed auto component manufacturers into India by setting up joint ventures with them and also manufactures plastic components. Some of these joint ventures include: Tata Johnson Controls Limited for seats, Knorr Bremse Systems for Commercial Vehicles India Private Limited for commercial vehicle air brakes, Tata Yazaki Autocomp Limited for wiring harnesses, JBM Sungwoo Limited for pressed components and Tata Toyo Radiators Limited for radiator assemblies. These joint ventures act as our suppliers.
We import some components that are either not available in the domestic market or when equivalent domestically-available components do not meet our quality standards. Imported components include those that are required to be fitted on vehicles manufactured for export markets to meet foreign regulations, such as air intake valves, fog lamps and also for MPFI kits/catalytic converters to meet the emission norms. We also import products to take advantage of lower prices in foreign markets, such as special steels.
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The following table shows the imported and indigenous raw material and components consumed by us for the periods indicated:
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Capital and Product Development Expenditures
During fiscal 2005, our capital expenditure was Rs.9,162.5 million. This expenditure was incurred mainly towards investment in capacity expansion and new product development. Some investment was also made in capital improvements of manufacturing facilities. On a segmental basis, automotive operations accounted for Rs.8,351.9 million of this expenditure and other operations accounted for Rs.810.6 million. We also invested approximately Rs.680 million in fiscal 2005 towards our acquisition of a 21% stake in Hispano Carrocera, S.A., Spain.
We had planned to incur capital expenditures of approximately Rs.51,800 million between April 1, 2004 and March 31, 2007 primarily for capital improvements of manufacturing facilities, for new products and model changes and also for capacity expansion. Specifically, we currently intend to incur capital expenditures of approximately Rs.13,900 million on capacity expansion at our India-based automotive plants, and approximately Rs.19,000 million for investment in new vehicle models and upgrades. These expenditures are expected to be funded through a combination of internally generated cash, existing investible surplus available in the form of cash and cash equivalents, investment securities and other external financing sources.
Environmental Regulation and Initiatives
Our vehicles comply with the fuel emission regulations in India that came into effect in 1989. We are currently taking steps (including through the use of Cummins engines for our M&HCVs and the development of gasoline engines) that will enable our vehicles to comply with fuel emission regulations expected to be introduced in the future.
We are required to obtain certificates of compliance with various vehicle safety regulations relating to design and the manufacturing process for new vehicles manufactured by us. Fuel emission levels are also tested at this stage. Each of our plants has received government environmental clearances for our operations. It is our policy to consider and implement environmentally-friendly manufacturing processes, and waste water and other by-products from our plants are treated and recycled to the extent which we consider practicable.
With effect from April 1, 2005, emission standards have been upgraded to Bharat Stage III in 11 major cities and to Bharat Stage II in the rest of the country, except for seven northern states. Implementation in these states has been postponed to October 1, 2005 due to a lack of Bharat Stage II compliant fuel. These seven states are Rajasthan, Western UP, Uttaranchal, Himachal Pradesh, Punjab, Jammu & Kashmir and Madhya Pradesh.
We are fully committed to our role as a responsible corporate citizen with respect to reducing environmental pollution. We treat all effluents at our plants and have made significant investments in lowering the emissions from our products. We have led the Indian automotive industry in introducing greener engines, like the Cummins engines, for our commercial vehicles even before they were statutorily mandated. The entire range of our M&HCVs manufactured in India has been configured to run on Cummins engines or the upgraded version of our own engines that meet mandatory emission norms in India. Our LCVs are powered by our own engines that meet mandated norms. In addition, buses with lean-burn as well as stoichiometric compressed natural gas, or CNG, engines have been developed and supplied to Delhi Transport Corporation and private bus operators in Delhi so as to enable them to comply with the regulations there. Our utility vehicles and passenger cars being exported to Europe meet the Euro III norms prevalent in those markets. We have also launched Indica powered by CNG in Delhi and Mumbai, primarily for the taxi market.
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Tata Motors, in collaboration with Indian Oil Corporation, has launched, on a pilot basis, a fleet of 43 buses fitted with engines to run on Bio-diesel.
The vehicles made by TDCV comply with the emission regulatory requirements in that country. The Korea 2004 (equivalent to Euro III) emission regulatory requirements became effective on July 1, 2004 and since that date the vehicles made by TDCV have conformed to those regulations.
The Indian insurance industry is predominantly state-owned. Insurance tariffs are regulated by the Insurance Regulatory and Development Authority. We have insurance coverage which we consider reasonably sufficient to cover all normal risks associated with our operations and which we believe is in accordance with industry standards in India. We have obtained coverage for product liability for some of our vehicle models in several countries to which we export vehicles. We do not at present maintain business interruption insurance or product liability insurance in India.
TDCV has insurance coverage as is required and applicable to cover all normal risks in accordance with industry standards in South Korea, including product liability. We have also taken insurance coverage on directors and officers liability to minimize risks associated with product liability and international litigation.
We are involved in legal proceedings in various states in India, both as plaintiff and as defendant. In respect of claims against us below Rs.50 million, the majority of cases pertain to motor accident claims (involving vehicles that were damaged in accidents while being transferred from our manufacturing plants to regional sales offices) and consumer complaints. Some of these cases relate to replacement of parts of vehicles and/or compensation for deficiencies in the services by us or our dealers. We believe that none of these claims or actions individually or in the aggregate will have a material adverse effect on our business, financial condition or results of operations.
Certain claims that are above Rs.50 million in value are described in Note 20 to our consolidated financial statements included in this annual report.
We believe that none of the contingencies either individually or in the aggregate, would have a material adverse effect on our financial condition, results of operations or cash flows.
Indian Automotive Sector
Indias automotive industry was established in the 1950s through various co-operation arrangements with, and direct investments by, a number of American and European automotive manufacturers. Prior to that, vehicle kits were imported into and assembled in India. The commercial vehicle manufacturing sector achieved a high rate of growth during Indias economic expansion in the 1960s and 1970s. Rail transport bottlenecks led to higher demand for road transport and this sector was permitted to grow with the minimum intervention of the government. Major domestic commercial vehicle manufacturers invested in expanding production facilities and product development, which resulted in an efficient and relatively technologically advanced commercial vehicle industry, albeit with restrictions on capacity expansions due to the licensing regime in operation at that time.
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In the passenger car sector, two models produced by Hindustan Motors Limited and Premier Automobiles Limited, respectively, dominated the market until the mid 1980s. Passenger cars were deemed to be luxury products and were subject to very high multiple taxation and price controls. In addition, industrial licensing and exchange control regulations forced domestic car manufacturers to embark on low-volume, high-cost indigenous and in-house component production programs. Demand for passenger cars exceeded supply, but the domestic passenger car industry remained protected by the prohibition on car imports and remained technologically behind global standards. However, the establishment of Maruti Udyog Limited, or Maruti, a joint venture between the Suzuki Motor Company of Japan and the Government of India in the mid-1980s paved the way for expansion of the automobile sector in India in terms of increase in supply and improvement in product quality and design. Maruti has since become the leading player in the Indian passenger car market. It was not until the Indian Government deregulated and liberalized the automotive market in the early 1990s that the countrys passenger car market showed substantial growth. Nonetheless, India continues to have a substantially lower number of passenger vehicles per capita than most developed countries and a number of developing countries.
Restrictive automotive vehicle import policies and high import duties on vehicles assembled from kits as well as vehicle components have effectively protected domestic manufacturers from foreign competition. Although the Indian government has reduced import duties on vehicles and components in recent years, rates still remain relatively high. See Import Regulations and Duties below. Consequently, domestic manufacturers have historically dominated the automotive industry in India, although a number of domestic manufacturers have sought to improve product quality by entering into joint ventures, technology transfer agreements or licensing agreements with foreign vehicle and component manufacturers.
The industry has, historically, also been subject to high excise duty rates, and even today cars and UVs are subject to the highest excise rates. Fluctuations in these taxes directly impact retail sales prices and, consequently, the level of demand. Sales tax in various states has been recently rationalized. See Excise Duty and Sales Tax below.
Unlike more developed countries, the automotive industry in India until the late 1980s had not been subject to stringent emission or vehicle safety regulations, but this trend is changing with Bharat Stage III (equivalent to Euro III) emissions norms now in force in major Indian cities. See Government Regulations below.
Due to the absence of any laws regarding the age of vehicles (except in the National Capital Region, or NCR, of Delhi and the State of Maharashtra), automotive (both commercial as well as passenger) vehicles in India are typically kept in use much longer than in more developed countries. Commercial vehicles are also subject to overload abuse. This has resulted in the development of an extensive allied industry that is dedicated to providing automotive repair and maintenance services required for maintaining old and overloaded vehicles. Some manufacturers, including us, have also developed a network of service centers for their vehicles.
Since 1980, Indias automotive industry has experienced rapid structural transformation and growth. Progressive easing of import controls, reduction in governmental restrictions on product categories and the rationalization of excise duties (including the introduction of modified value added tax, or MODVAT, and central value added tax, or CENVAT, from Fiscal 2001 and Value Added Tax (VAT) in 21 states from April 1, 2005 ), together with increased foreign investment and technical assistance has helped create a wider range of products and greater competition. The passenger vehicle market has experienced significant growth over the last few years with almost all foreign direct investment in the automobile industry directed to this market.
According to SIAM, Indian automotive manufactures sold, in the domestic and export markets, approximately 106,000 vehicles (M&HCVs, LCVs, UVs and passenger cars) in 1980. This tripled to approximately 355,000 vehicles in the year ended March 31, 1991 and rose approximately fifteen fold to approximately 1,576,000 vehicles in the year ended March 31, 2005.
The global automotive industry has undergone radical change in recent times. There has been significant consolidation, both amongst vehicle manufacturers and component vendors with a view to achieving economies of scale, product synergies and strong brand presence. By contrast, there has been little or no consolidation in either vehicle or component manufacturing in India. The sizes of domestic automotive manufacturers, especially for passenger vehicles, are small compared to global standards. Consequently, economies of scale manufacturing have generally eluded Indian manufacturers of automotive vehicles and automotive components. The component industry, which until recently was to a large extent reserved for the small-scale sector, continues to be fragmented, with a number of enterprises with limited funds and technology, though this situation has improved in recent years. The Indian automotive industry has, therefore, differed from the global model, but as entry barriers in India are lowered, we believe that both vehicle and component manufacturers are likely to consolidate their operations to achieve the levels of competitiveness and scale economies closer to those in major international markets. Globally known branded products, supported by high levels of promotional spending, are likely to win a significant share of the domestic market for all vehicles, particularly passenger vehicles. Indian manufacturers will, therefore, need to either offer products and services that differentiate themselves in mass markets, or confine themselves to a niche market.
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The Indian automotive industry is poised to undergo substantial change and face new challenges, both from the opening of the domestic market to imports and the entry of international manufacturers. To meet the needs of these changing times, domestic automotive manufacturers will be forced to reduce costs, improve productivity, enhance quality, reliability and durability, increase market orientation and create a high level of customer loyalty. Consequently, we believe the reach and extent of dealership networks and the quality and cost of service are likely to assume importance in influencing customer preferences.
Driving conditions in India are generally rugged due to the poor quality of road infrastructure. This has hindered the expansion of the road transport sector and, consequently, the automotive industry. The government is taking steps to improve the road infrastructure in the country. The outlay of road and highway development is proceeding to currently established government plans and India is expected to have an improved road infrastructure with planned feeder routes in place by 2007, which may increase demand for automotive vehicles in India.
Union Budget for Fiscal 2006
The Government of India presented its Union Budget for fiscal 2006 on February 28, 2005, which received the assent of the President of India on May 13, 2005. Some of the proposals that may have an impact on our operations include:
Excise Duty and Sales Tax
CENVAT is payable by vehicle manufacturers on the manufacture of vehicles or parts in India, and is paid at the time of clearance from the manufacturing facilities. CENVAT rates vary according to vehicle classification and for us are levied as a percentage of the net dealer price at the time of dispatch of the vehicle from the plant/depot. The CENVAT rates directly impact the retail sales price and the introduction of significant changes in rates overall or differential classifications of products can materially impact sales in general or sales of specific models that attract higher rates of excise. Under the CENVAT credit scheme, manufacturers receive a credit for CENVAT paid on input materials and services, including countervailing duties paid on imports included in the price paid for raw materials, parts or components obtained from outside sources or other plants and used in or in relation to manufacture of the finished product. Such a credit is offset against the CENVAT payable on the finished product. CENVAT credit is also available to manufacturers on purchase of plant and machinery.
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The following table sets forth the excise duty classifications and rates applicable to our vehicles. These rates became effective from July 9, 2004.
No excise duty is payable with respect to vehicles imported into India. However, sales tax is imposed on the resale of these vehicles and import duties (including countervailing duties) are also levied.
The sale of vehicles in India also attracts sales tax and other levies, a substantial portion of which is paid to the government of the State in which the sale occurs. With the adoption of the VAT system by a majority of the states, the sales tax rate applicable for vehicles in most of the states is now 12.5% (with facility to avail full set off on inputs against sales made from that State). However, in the States which have not migrated to VAT system, it continues to be 12% (with a partial set off facility on inputs). On inter state sales of vehicles, the rate of tax applicable is generally 4% against submission of specified declarations (but no set off of inputs is allowed in such cases).
Import Regulations and Duties
Automobiles and automotive components can, generally, be imported into India without a license from the Indian government. Automobile imports are subject to regulations requiring the importers to meet Indian standards and certification by designated testing agencies, and are also governed by other restrictions. However, all vehicles and components imported into India are subject to import duties, which significantly increase the cost of imported goods. While recent government liberalization policies have reduced import duties on vehicles and certain automotive parts and components, duty rates remain relatively high and protect the domestic industry.
The following table sets forth the currently applicable duty rates on fully built-up vehicles, which became effective on March 1, 2005:
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Prior to 1984, strict government industrial licensing controls restricted the types of vehicles that manufacturers could produce and sell. These restrictions were reflected in the industrys characteristic of low product differentiation, with few companies producing a wide range of vehicle types. In 1984, the Indian government eased these product category restrictions, thereby enabling us and other automotive manufacturers to produce any on-road vehicle having four or more wheels within each of these manufacturers licensed capacity and the normal flexibility allowed for expansion. In addition, as part of the Indian governments liberalization policies announced in 1991, industrial licensing has been replaced by the filing of an Industrial Entrepreneurs Memorandum (except under locational or environmental restrictions where industrial licensing continues to operate) and import duties on vehicle components have been substantially reduced. These measures have led to increased competition in the domestic market. With the removal of these controls, except in some situations as explained earlier, Indian automotive manufacturers are now free to manufacture and sell unrestricted numbers of any type of on-road vehicle with four or more wheels, including passenger cars.
Since 1989, emission standards have also been developing. The Ministry of Environment and Forests has mandated applicability of emission norms to the automotive industry. These extend from the Bharat Stage I norms (equivalent to Euro I norms) to the Bharat Stage III norms (equivalent to Euro III norms), which have already been mandated, to Euro IV equivalents for which notifications, based on industry recommendations proposed through SIAM, which are expected. During 2000, passenger vehicles and commercial vehicles were required to meet Bharat Stage I (Euro I equivalent norms). Bharat Stage II (Euro II equivalent norms) have been in force since 2001 in the four metros cities of Delhi, Mumbai, Chennai and Kolkata, are now applicable to seven other cities and are expected to be extended in phases to the rest of the country by October 2005. Based on SIAM recommendations and the R.A. Mashelkar Committee Report, these eleven cities have moved to Bharat Stage III emission norms (equivalent to Euro III norms) for all passenger and commercial vehicles from April 2005 and could move to Euro IV levels from April 2010, while the rest of India would move to Euro III norms by April 2010. The higher stage norms are more stringent as compared to lower stage norms.
The South Korean automotive market has adopted the Euro III equivalent emission levels from July 2004. South Korea is expected to migrate to Euro IV equivalent emission norms in October 2006 in respect of new products and in January 2008 in respect of existing products.
Prior to April 2002, the Indian Government used the Administered Price Mechanism, or APM, to fix prices of petroleum products, which resulted in the price of diesel being approximately two-thirds the price of gasoline. With the dismantling of the APM regime, prices of petroleum products have become market driven, which has narrowed the price gap between diesel and gasoline. Our M&HCVs and LCVs have diesel engines while our passenger cars and UVs are available in both diesel and gasoline versions.
Automotive design and safety regulations are evolving in India. Front and rear seat belts are now mandatory in new passenger vehicles, safety glass is required for all vehicle windows and windshields and standards for door intrusion are imposed for vehicle integrity. Legislation, in line with European standards, in respect of seats, head restraints, seat anchorage and electromagnetic interference is also expected to be progressively introduced. Legislation for provision of survival space, braking systems, and rear and side underrun protection devices for commercial vehicles became effective from May 1, 2003. Advance braking system legislation in conformity with European Economic Community standards is being considered for progressive implementation between 2004 and 2007.
In fiscal 2002, the Indian Government released its proposed Auto Policy for discussion and feedback. This policy outlines a vision to establish a globally competitive automobile industry in India, and to double its contribution to the economy by 2010. It also aims to promote integrated, phased, enduring and self-sustaining growth of the Indian automotive industry. For further details about the auto policy, please see Item 4.B. Business Overview Overview.
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The Tata Group
We are the largest company in the diversified Tata Group in terms of fiscal 2005 revenues, and we benefit from being identified with the Tata brand and the Tata Group of Companies.
The Tata Group is based substantially in India, and had combined revenues of approximately Rs.769.3 billion (US$17.6 billion) for the year ended March 31, 2005.
The Tata Group is highly diversified and the activities of the group are categorized under seven business sectors, namely engineering, materials, energy, chemicals, consumer products, services and communication and information systems. These companies do not technically constitute a group under Indian law.
The Tata Group has its origins in the trading business founded by Jamsetji Tata in 1874 that was developed and expanded in furtherance of his ideals by his two sons, Sir Dorabji Tata and Sir Ratan Tata, following their fathers death in 1904. The family interests subsequently vested largely in the Sir Ratan Tata Trust, the Sir Dorabji Tata Trust and other related trusts. These trusts were established for philanthropic and charitable purposes and together owned a substantially majority of the shares of Tata Sons Limited, the principal holding company of the Tata Group.
By 1970, the Tata Group had expanded from the trading company established in the nineteenth century to encompass a number of major industrial and commercial enterprises including The Indian Hotels Company Limited (1902), The Tata Iron and Steel Company Limited (Tata Steel) (1907), The Tata Power Company Limited (1910), Tata Chemicals Limited (1939), Tata Motors Limited (1945), Voltas Limited (1954), and Tata Tea Limited (1962). The Tata Group also promoted Indias first airline, Tata Airlines, which later became Air India (Indias national carrier), as well as Indias largest general insurance company, New India Assurance Company Limited, both of which were subsequently taken over by the Government as part of the Governments nationalization program. Tata Consultancy Services Limited, or TCS, is Asias leading software services provider and the first Indian software firm to exceed sales of US$1 billion. In recent times, the Tata Group has also invested in several telephony and telecommunication ventures, including acquiring a portion of the Indian Governments equity stake in the state owned Videsh Sanchar Nigam Limited, or VSNL.
Most of the Tata Group companies are leaders in their respective businesses. We are the leading automotive vehicle manufacturing company in India in terms of revenues. Tata Steel, another flagship company of the group, is the oldest and the largest private sector integrated steel plant in operation in the country. Tata Chemicals is one of the worlds largest producers of synthetic soda ash and Tata Tea is the largest integrated tea company in the country. Tata Power is the largest power generating supplier in the private sector. Indian Hotels runs the largest hotel chain in the country. Titan Watches, which is a relatively new entrant, has emerged as the leader in the domestic watch market and is currently the sixth largest brand manufactured in the world. VSNL is the leading international telecommunications service provider in India.
We have for many years been a licensed user of the Tata brand owned by Tata Sons Limited, and thus have both gained from the use of the Tata brand as well as helped to sustain its brand equity. Since 1991 many multinational corporations with well-established global brands have entered the Indian market. In response, the Tata Group decided to institute a new corporate identity program in order to re-position itself to compete in a global environment. The new corporate identity is licensed to Tata Group companies, including us, for use with their respective products and services. A substantial ongoing investment is planned to develop and promote a strong, well-recognized and common brand equity, which is intended to represent for the consumer a level of quality, service and reliability associated with products and services offered by Tata companies. To further protect and enhance the Tata brand equity, a code of conduct has been adopted by some of the Tata companies that have access to the larger resources and services of the Tata Group. To implement these plans, Tata Sons Limited has undertaken a program by which consenting Tata companies are required to pay a subscription fee to participate in and gain from the new Tata Group identity. We believe that we benefit from association with the new Tata Group identity and, accordingly, have agreed to pay an annual subscription fee to Tata Sons Limited from fiscal 1998 which is equal to 0.25% of our annual net income (defined as our net income exclusive of excise duties and other governmental taxes and non-operating income), provided that the subscription fee does not exceed 5% of our annual profit before tax (defined as our profit after interest and depreciation but before income tax). These calculations are made with reference to our non-consolidated Indian GAAP financial statements. Pursuant to our licensing agreement with Tata Sons Limited, we have also undertaken certain obligations for the promotion and protection of the new Tata Group identity licensed to us under the agreement. The agreement can be terminated by written agreement between the parties, by Tata Sons Limited upon our breach of the agreement and our failure to remedy the same, or by Tata Sons Limited upon providing six months notice for reasons to be recorded in writing. The agreement can also be terminated by Tata Sons Limited upon the occurrence of certain specified events, including liquidation. Because we are the largest company in the Tata Group in terms of fiscal 2005 revenues and further because we believe that our growing international reputation brings benefits to the Tata brand, we consider it very unlikely that we would ever be unable to use the Tata brand in relation to our products and services.
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The Tata Group companies have sought to continue to follow the ideals of ethics and integrity originally established by the founder of the Tata Group and his successors. These companies have endeavored to maintain high standards of management efficiency and to promote the commercial success of Indian enterprises. The Tata Group has made a significant contribution toward national causes through promotion of public institutions in the field of science, such as the Indian Institute of Science and the Tata Institute of Fundamental Research, and in the field of social services through the Tata Institute of Social Sciences, the Tata Memorial Hospital and the National Center of the Performing Arts. Tata trusts are among the largest charitable foundations in the country.
In addition, the Tata Group companies have sought to formulate and follow a coherent approach to various matters of importance in Indian business life. These include a refusal to adopt any particular political alignment, and espousal of causes that benefit society generally as well as the commercial interests of Tata Group companies.
A large number of the Tata Group companies hold shares in one another and a number of our directors hold directorships on the boards of other Tata Group companies, including Tata Sons Limited and Tata Steel. However, there are no voting agreements, material supply or purchase agreements or any other relationships or agreements that have the effect of tying us together with other Tata Group companies at management, financial or operational levels. Except as set forth in the tables below under the heading Subsidiaries and Affiliates and except for an approximately 9.9% stake in Tata Industries Limited, our shareholdings in other Tata Group Companies are generally insignificant as a percentage of their respective outstanding shares or in terms of the amount of our investment or the market value of our shares of those companies with publicly traded shares.
Subsidiaries and Affiliates
We have the following consolidated subsidiaries under US GAAP as of March 31, 2005:
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In addition, we have the following affiliates who are accounted for in accordance with the equity method of accounting under US GAAP:
D. Property, Plants and Equipment.
We currently operate four principal automotive manufacturing facilities. The first facility was established in 1945 at Jamshedpur in the State of Jharkhand (earlier a part of the State of Bihar) in eastern India. We set up a second facility in 1966 (with production commencing in 1976) at Pune, in the State of Maharashtra in western India, and a third in 1985 (with production commencing in 1992) at Lucknow, in the State of Uttar Pradesh in northern India. In 1998, we initiated the establishment of a fourth facility at Dharwad in the State of Karnataka in southern India. The Jamshedpur, Pune and Lucknow manufacturing facilities have been accredited with ISO-9000 certification.
In March 2004, with the acquisition of DWCV (now renamed TDCV), we also acquired DWCVs plant in Gunsan, South Korea.
Manufacturing facilities of Tata AutoComp Systems Ltd and its subsidiaries are located at various locations in and around the city of Pune, in the State of Mahahrashtra, India.
Manufacturing facilities of Telco Construction Equipment Co. Ltd. are located at Jamshedpur in the State of Jharkhand (earlier a part of the State of Bihar) in eastern India and at Dharwad in the State of Karnataka in Southern India.
Our total vehicle production capacity in India as of March 31, 2005 determined on the basis of two production shifts per day and including capacity for the manufacture of replacement parts, was 514,500 units annually. In addition, we also have vehicle production capacity of 20,000 units annually in South Korea.
The following table shows our installed capacity as at March 31, 2005, and production levels by plant and major product type in fiscal 2003, 2004 and 2005:
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We, along with our consolidated subsidiaries, produce vehicles and related components and carry out other businesses through various manufacturing facilities.
In addition to our manufacturing facilities, our properties include sales offices and other sales facilities in major cities, repair service facilities, and research and development facilities.
The following table sets forth information, with respect to our principal facilities, a substantial portion of which are owned by us or our consolidated subsidiaries as on March 31, 2005. The remaining facilities are on leased premises.
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Substantially all of our owned properties are subject to mortgages in favor of debenture trustees for the benefit of secured debenture holders and secured lenders. A significant portion of our property, plant and equipment is pledged as collateral securing indebtedness incurred by us. We believe that there are no material environmental issues that may affect our utilization of these assets.
We consider all our principal manufacturing facilities and other significant properties to be in good condition and adequate to meet the needs of our operations.
You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements prepared in conformity with US GAAP and information included in this annual report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those set forth in Item 3.D and elsewhere in this annual report.
In fiscal 2005, total revenues increased by 42% to Rs.198,387 million compared to Rs.139,695.7 million in fiscal 2004. We recorded net income of Rs.13,256.2 million in fiscal 2005, an increase of 48.9% over Rs.8,899.9 million recorded in fiscal 2004. The business of the Company comprises two broad segments:
Automotive operations are our most significant segment, accounting for 91.7% and 92.1%, respectively, of our total revenues and 83.2% and 83.1%, respectively, of our operating income for fiscal 2004 and 2005. India is the most significant market for us, accounting for 93% and 91.3% of vehicle unit sales for fiscal 2004 and 2005, respectively.
Our automotive operations business segment includes all activities relating to development, design, manufacture, assembly and sale of medium and heavy commercial vehicles, light commercial vehicles, passenger cars and utility vehicles as well as related parts and accessories. Financing of our products is also included in our automotive business segment as an inherent part of our sales strategy. The profitability of this activity is critically dependent upon interest rate movements in the economy, vehicle demand and collections. Declining interest rates and easy availability of credit in the economy have led to increased competition in this activity from banks (public and private) and non-banking finance companies.
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As a result of strong demand for our products, our capacity utilization in India increased from 74.2% in fiscal 2004 to 77.9% in fiscal 2005. However, the capacity utilisation of our total automotive operations, including TDCV operations, was 75.9% for fiscal 2005. TDCV, which we acquired in late March 2004, operated at around 23% capacity utilization during fiscal 2005.
Our vehicle sales (including TDCV) increased 28.6% to 404,106 units in fiscal 2005 compared to 314,288 units in fiscal 2004. In fiscal 2005, our market share in India of all four-wheel vehicles sold in India increased to 26.8% from 25.2% in fiscal 2004. In fiscal 2005, the unit sales growth rate of the Indian automotive industry was 18.5% and we outperformed it by 7.8%. Our overall sales in international markets (including TDCV sales) increased 58.7% to 35,037 units in fiscal 2005. This was driven by a focused entry in to new export markets and also strengthening of our presence in existing markets. Key export markets for our automotive operations were South Africa, West Asia, Europe and South East Asia.
Our revenues from automotive operations increased 42.6% to Rs.182,763.4 million in fiscal 2005 from Rs.128,167.1 million in fiscal 2004, representing 91.7% and 92.1% of total revenue in fiscal 2004 and 2005, respectively. Our focus on improving our international business has resulted in a 149% increase in revenues from international markets for fiscal 2005 to Rs.27,503.7 million from Rs.11,054.5 million. These revenues (primarily vehicles, but also including spare parts and other products) accounted for approximately 7.9% and 13.9% respectively, of our total revenue in fiscal 2004 and 2005. In addition to our automotive revenues, we also derive dividend and other income from strategic and available-for-sale investments which accounted for our residual income and from other operations.
The following table sets forth our revenues from external customers in our different geographical markets:
During fiscal 2005, we recorded a net income of Rs.13,256.2 million, which is 48.9% higher than the net income of Rs.8,899.9 million achieved in fiscal 2004. Economies of scale from increased production volumes, together with stringent cost controls and increased productivity through value engineering have contributed toward increased productivity.
Our gross margin in fiscal 2005 decreased to 20.9% from compared to 22.6% in fiscal 2004 due to significant increase in raw material costs, particularly steel, engineering plastics and rubber, which was partly offset by increase in our vehicle sale price.
Our revenues from other operations were Rs.15,623.6 million during fiscal 2005 compared to Rs.11,528.6 million for fiscal 2004, respectively, representing 8.3% and 7.9% of our total revenues in fiscal 2004 and 2005, respectively.
Our other operations business segment is primarily comprised of activities relating to production, designing and selling of automotive components, construction equipment, engineering solutions and software operations. The automotive component business, which is the major business component of our other operations business segment, pertains to both captive and non-captive markets. Our subsidiaries HV Axles Ltd. and HV Transmissions Ltd., which are in the truck aggregates business, derive their revenues primarily from our vehicle business. Our subsidiary Tata AutoComp Systems Ltd. promotes joint ventures that supply auto components to our vehicle business and others in the automotive market both in India and overseas through their joint venture partners.
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Significant Factors Influencing Our Results of Operations
Our results of operations are dependent on a number of factors, including:
Results of Operations
The Indian automotive industry is substantially driven by general economic conditions in India. Fiscal 2003 witnessed the revival of favorable economic conditions in India, a trend which continued in fiscal 2004. Despite the political uncertainty in the initial part of fiscal 2005 due to a change in the Indian government, economic conditions remained largely favorable in fiscal 2005. Also, despite a slight rise in fiscal 2005, interest rates remained low. Sales of automotive vehicles in India in fiscal 2005 were 1,379,728 units compared to 1,162,210 units sold in fiscal 2004.
Tata Motors sold 404,106 vehicles (including 4,540 units of TDCV sales) in fiscal 2005 compared to 314,288 units (including 29 units sold by TDCV representing two days of sale following our acquisition) in fiscal 2004, representing an increase of 28.6% during fiscal 2005 compared to fiscal 2004. Our domestic market share in India improved to 26.8% in fiscal 2005 compared to 25.2% in fiscal 2004. This growth is largely attributable to the launch of new models and intensive marketing efforts. We continued to enjoy market share gains across all of our product lines in fiscal 2005.
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Our strategy of consolidating our presence in existing markets and penetrating new markets with strong market potential has resulted in significant increase in vehicle unit sales in our international markets. As a result, sales outside India increased to 8.7% of our total unit sales in fiscal 2005 compared to 7.0% in fiscal 2004. We expect that with the availability of low-cost qualified engineering skills and a large domestic market, India has the potential to emerge as a global manufacturing base for niche automotive products. This trend is already visible in the increasing exports of auto components out of India. With a large product range, a significant market position and high engineering capabilities, we expect to benefit from this trend.
The company acquired a 21% equity stake in the Spanish bus body building company, Hispano Carrocera, S.A., on March 16, 2005. We expect this acquisition to enhance our design and development capabilities for manufacturing bus bodies and to provide greater access to international markets. We paid 12 million euros in equity, debt and technology rights that was financed through cash generated from operations.
The following table sets forth selected items from our consolidated statements of operations for the periods indicated and shows these items as a percentage of net revenues.
The following table sets forth selected data regarding our automotive operations for the periods indicated and the percentage change from period to period.
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The following table sets forth selected data regarding our other operations for the periods indicated and the percentage change from period to period.
Fiscal 2005 Compared to Fiscal 2004
Our total consolidated revenues increased to Rs.198,387.0 million in fiscal 2005 from Rs.139,695.7 million for fiscal 2004, an increase of Rs.58,691.3 million, or 42%. This increase principally reflects the impact of a 28.6% increase in vehicle unit sales from 314,288 units (including 29 vehicles sold by TDCV subsequent to our acquisition in late March 2004, representing two days of sales) to 404,106 (including TDCV units), increased financing revenue and improved operations of our consolidated subsidiaries, particularly Telco Construction Equipment Company Ltd., whose revenues grew 27.4% in fiscal 2005 over that in fiscal 2004.
Revenues for fiscal 2005 increased by 32.8% to Rs.170,883.3 million in India from Rs.128,641.2 million in fiscal 2004 and 148.8% to Rs.27,503.7 million in 2005 from Rs.11,054.5 million in all other markets, compared to fiscal 2004.
The following is a discussion of our revenues for each of our business segments.
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Automotive operations generate the largest portion of our revenues. Revenues from this segment increased by Rs.54,596.3 million, or 42.6%, to Rs.182,763.4 million in fiscal 2005 compared to fiscal 2004. This increase was primarily due to the:
Domestic sales were driven by road infrastructure development, a low interest rate environment, the introduction of new products and replacement demand. In addition to benefiting from these general market conditions, we also enjoyed market share gains across our product lines. International sales were boosted by consolidating our presence in key existing markets and by making successful entries into new international markets. An increase in automotive financing revenues resulted from our increased focus on this activity.
Revenues from our other operations increased by Rs.4,095.0 million, or 35.5%, to Rs.15,623.6 million in fiscal 2005 compared to fiscal 2004 on account of increases in revenues of certain significant subsidiaries. In fiscal 2005, revenues of Telco Construction Equipment Company Limited increased by 27.4%.
Cost of Sales and Operating Expenses
Cost of Sales and Operating expenses increased by Rs.54,490.7 million, or 43.6%, to Rs.179,595.5 million during fiscal 2005 compared to fiscal 2004.
Cost of sales increased by 45.1% to Rs.156,906.7 million in fiscal 2005, from Rs.108,159.6 million in fiscal 2004. The increase reflects primarily the combined impact of increased vehicle unit sales and an increase in input prices, particularly for steel, rubber and engineering plastics, partially offset by the impact of continued cost cutting efforts. Cost of sales as a percentage of total revenues increased to 79.1% in fiscal 2005 compared to 77.4% in fiscal 2004, resulting in a gross margin decrease from 22.6% in fiscal 2004 to 20.9% in fiscal 2005.
Selling, general and administrative expenses increased by Rs.4,868 million to Rs.20,144.9 million in fiscal 2005, compared to Rs.15,276.9 million in fiscal 2004. The main component of the increase was outward shipping expenses, which increased by Rs.1,440 million to Rs.4,192.7 million in fiscal 2005 as a result of the increase in unit sales. Selling, general and administrative expenses as a percentage of total revenues decreased to 10.2% during fiscal 2005 from 10.9% during fiscal 2004.
Research and development expenses increased by 97.5% during fiscal 2005 to Rs.2,532.4 million from Rs.1,282.0 million in fiscal 2004, as a result of design and development costs of new vehicle models. Research and development expenses as a percentage of total revenues increased to 1.3% in fiscal 2005 from 0.9% in fiscal 2004.
We incurred employee separation expenses of Rs.11.5 million, representing the amount paid to employees who, in fiscal 2005, opted for the Employee Separation Scheme introduced in fiscal 2004.
Our consolidated operating income increased by Rs.4,200.6 million to Rs.18,791.5 million in fiscal 2005 compared with operating income of Rs.14,590.9 million in fiscal 2004.
Operating income from our automotive operations increased by Rs.3,470.2 million to Rs.15,612.3 million in fiscal 2005 compared to operating income of Rs.12,142.1 million in fiscal 2004.
Operating income from our other operations increased by Rs.762.5 million to Rs.2,366.0 million in fiscal 2005 from Rs.1,603.5 million in fiscal 2004. This increase was primarily due to an improvement in the revenues and profitability of our subsidiaries engaged in manufacture and sale of construction equipment aided largely by the improved performance of the automotive industry in India and also growth in industrial and infrastructure activity in India.
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Other Income and Expenses
Total net non-operating expenses decreased by 27% from Rs.561.5 million in fiscal 2004 to Rs.410.1 million in fiscal 2005, primarily due to an increase in non-operating income and interest income, partially offset by a 11.5% increase in interest expense during fiscal 2005.
During fiscal 2005, interest income increased by 117.8% to Rs.761.6 million from Rs.349.6 million in fiscal 2004, due to a significant increase in deposits as a result of our issuance of Foreign Currency Convertible Notes.
Interest expense increased by 11.5% from Rs.2,684.3 million in fiscal 2004 to Rs.2,993.3 million in fiscal 2005, primarily due to an increase in long term debt. This increase was partially offset by a decline in our weighted average interest rate on short-term debt from 5.87% in fiscal 2004 to 3.62% in fiscal 2005 and on long-term debt from 7.35% in fiscal 2004 to 4.18% in fiscal 2005.
Non-operating revenue increased marginally by 2.7% from Rs.1,773.2 million in fiscal 2004 to Rs.1,821.6 million in fiscal 2005, primarily due to income from investment, decrease in premium incurred on prepayment of long term debt and a gain on sale of an investment in an affiliate, partially offset by foreign exchange losses.
Despite the increase in Income before income tax, income tax expense decreased to Rs.5,099.9 in fiscal 2005 from Rs.5,264.0 million in fiscal 2004 resulting in decrease in our effective tax rate from 37.5% in fiscal 2004 to 27.7% in fiscal 2005. This was primarily as a result of the permanent tax benefits accruing to us on account of research and development expenses, credit upon restructuring of a subsidiary, and a decrease in long term capital gains tax on investments in equity securities. We were required to pay a Minimum Alternate Tax on our book profits in fiscal 2004. However, we were not subject to the Minimum Alternate Tax during fiscal 2005.
Minority Interest in Consolidated Subsidiaries and Equity in Earnings of Affiliates
Share of minority interest in profits of consolidated subsidiaries was Rs.365.7 million in fiscal 2005, compared to Rs.228.9 million in fiscal 2004. This change was due to the significant improvement in the performance of our construction equipment subsidiary, Telco Construction Equipment Company Limited and subsidiaries of Tata AutoComp Systems Limited.
Equity in earnings of affiliates was Rs.340.4 million in fiscal 2005, compared to Rs.363.4 million in fiscal 2004 . This change was primarily due to decline in the profits of Tata Yazaki Autocomp Limited and Knorr Bremse Systems for Commercial Vehicles India Private Limited, affiliates of Tata AutoComp Systems Limited. This was partially offset by increase in profit of Tata Cummins Ltd.
Our consolidated net income for fiscal 2005 was Rs.13,256.2 million compared to Rs.8,899.9 million in fiscal 2004 . The increase was the result of:
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Fiscal, 2004 Compared to Fiscal 2003
Our total consolidated revenues increased to Rs.139,695.7 million for fiscal 2004, an increase of Rs.43,965.2 million, or 45.9%, compared to total consolidated revenues of Rs.95,730.5 for fiscal 2003. This increase principally reflects the impact of a 42.9% increase in vehicle unit sales from 219,859 units to 314,288 units (including 29 vehicles sold by TDCV subsequent to our acquisition on March 30, 2004), increased financing revenue and improved operations of our consolidated subsidiaries involved in the businesses of construction equipment and auto components.
Revenues for fiscal 2004 increased by 42.1% to Rs.128,641.2 million in India and 113% to Rs.11,054.5 million in all other markets, compared to fiscal 2003.
The following is a discussion of our revenues for each of our business segments.
Revenues from the automotive segment increased by Rs.38,493.2 million, or 42.9%, to Rs.128,167.1 million in fiscal 2004 compared to fiscal 2003. This increase was primarily due to the:
Domestic sales were driven by road infrastructure development, a low interest rate environment and replacement demand. In addition to benefiting from these general market conditions, we also enjoyed market share gains across our product line. International sales benefited from focused marketing efforts in our traditional international markets and entry into new markets. Increases in automotive financing revenues resulted from our increased focus on this activity.
Revenues from our other operations increased by Rs.5,472 million, or 90.3%, to Rs.11,528.6 million in fiscal 2004 compared to fiscal 2003. This increase resulted from the impact of increased revenue from all operations in this segment except that of TAL Manufacturing Solutions Ltd., which operates in the Indian capital goods industry and which is facing increasing competitive pressure from the reduction of import duties.
Cost of Sales and Operating Expenses
Cost of Sales and operating expenses increased by Rs.36,456.6 million, or 41.1%, to Rs.125,104.8 million during fiscal 2004 compared to fiscal 2003.
Cost of sales increased by 46.1% to Rs.108,159.6 million in fiscal 2004, from Rs.74,038.5 million in fiscal 2003. The increase reflects primarily the combined impact of increased vehicle unit sales and an increase in input prices, partially offset by the impact of continued cost cutting efforts. Cost of sales as a percentage of total revenues increased to 77.4% in fiscal 2004, compared to 77.3% in fiscal 2003, resulting in a gross margin decrease from 22.7% for fiscal 2003 to 22.6% in fiscal 2004.
Selling, general and administrative expenses increased by Rs.2,236 million to Rs.15,276.9 million in fiscal 2004, compared to Rs.13,040.9 million in fiscal 2003. The largest component of the increase was outward shipping expenses, which increased by Rs.821 million to Rs.2,752.7 million in fiscal 2004 as a result of the increase in unit sales. Selling, general and administrative expenses as a percentage of total revenues decreased to 10.9% during fiscal 2004 from 13.6% during fiscal 2003.
Research and development expenses decreased by 16.5% from Rs.1,536.2 million in fiscal 2003 to Rs.1,282 million in fiscal 2004. However this is not reflective of our research and development objectives and we continue to remain committed to a research and development program that will enable us achieve our strategy of becoming a global automotive player.
In fiscal 2004 an Employee Separation Scheme, or ESS, for the rationalization of our workforce was reintroduced. As a result, we incurred expense for lump-sum payments and pensions paid to 542 employees who submitted to the ESS, resulting in compensation expenses of Rs.386.3 million for fiscal 2004, compared to Rs.32.6 million in respect of 87 employees who submitted to the ESS for fiscal 2003.
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Our consolidated operating income increased by Rs.7,508.6 million to Rs.14,590.9 million in fiscal 2004 compared with operating income of Rs.7082.3 million in fiscal 2003.
Operating income from our automotive operations increased by Rs.6,306.5 million to Rs.12,142.1 million in fiscal 2004 compared to operating income of Rs.5,835.6 million in fiscal 2003.
Operating income from our other operations increased by Rs.858.1 million to Rs.1,603.5 million in fiscal 2004 from Rs.745.4 million in fiscal 2003. This increase was primarily due to general profitability improvements in the operations of our consolidated subsidiaries aided largely by the improved economic situation in India.
Other Income and Expenses
Total net non-operating expenses decreased by 77.1% from Rs.2,456 million in fiscal 2003 to Rs.561.5 million in fiscal 2004, primarily due to a significant decrease in interest expense and an increase in non-operating income.
Interest income declined by 15.2% to Rs.349.6 million in fiscal 2004 compared to Rs.412.4 million in fiscal 2003 due to decline in the interest rates on our term deposits in fiscal 2004 partially offset by an increase in term deposits in fiscal 2004.
Interest expense decreased by 34.4% from Rs.4,090.4 million in fiscal 2003 to Rs.2,684.3 million in fiscal 2004, primarily due to access to low-cost international debt, repayment of higher interest-bearing long-term loans as well as a general decline in interest rates. Our weighted average interest rate on short-term debt declined to 5.87% in fiscal 2004 from 9.76% in fiscal 2003. Similarly, our weighted average interest rate on long-term debt declined to 7.35% in fiscal 2004 from 11.16% in fiscal 2003.
Non-operating revenue increased by 45.1% from Rs.1,222 million in fiscal 2003 to Rs.1,773.2 million in fiscal 2004, primarily due to higher income from investments and higher exchange gains, partially offset by premium on prepayment of long term debt.
Income tax expense increased to Rs.5,264 million in fiscal 2004, compared to Rs.1,888.4 million in fiscal 2003. This change was primarily a result of the substantial increase in income before income taxes. The effective tax rate for fiscal 2004 decreased to 37.5% from 40.8% for fiscal 2003. As we were required to pay a Minimum Alternate Tax on our book profits, which cannot be carried forward and set- off against future tax liability, our effective tax rate was higher than the applicable marginal tax rate of 35.875% in fiscal 2004.
Minority Interest in Consolidated Subsidiaries and Equity in Earnings of Affiliates
Share of minority interest in profits of consolidated subsidiaries was Rs.228.9 million in fiscal 2004 compared to share in profits of Rs.14.7 million in fiscal 2003. This change was due to the improved performance of the majority of our consolidated subsidiaries.
Equity in earnings of affiliates amounted to Rs.363.4 million in fiscal 2004 compared with Rs.46.1 million in fiscal 2003. This change was primarily due to the improved performance of our affiliates Tata Cummins Ltd., Nita Co. Ltd. and Tata Holset Ltd.
Our consolidated net income was Rs.8,899.9 million in fiscal 2004, compared to a net income of Rs.2,769.3 million in fiscal 2003. The increase was the result of:
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Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate and reevaluate our estimates, which are based on historical experience, industry standards, economic conditions and various other assumptions that we believe are reasonable based on currently available information. The results of these evaluations and reevaluations form the basis for our judgments about the carrying values of our assets and liabilities and the reported amounts of our revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates, and these estimates could differ under different assumptions. We believe the following accounting policies are important to our financial condition and results and require the most significant management judgments and estimates.
Property, plant and equipment
Property, plant and equipment is stated at cost of acquisition or construction less accumulated depreciation. Cost includes the purchase price, taxes and duties, labor cost and direct overheads for self constructed assets, interest cost during the construction period and other direct costs incurred up to the date the asset is available for use.
Depreciation is charged on a straight line basis over the useful lives of the assets.
We review our estimated useful lives on an ongoing basis to ensure that they are appropriate. We test our long-lived assets for impairment using undiscounted cash flows whenever events or circumstances arise that may indicate impairment. If a long lived asset is impaired, it is written down to its estimated fair value. Any assets which relate to discontinued or obsolete vehicle models are written off.
Vehicle warranties are provided for a specified period of time. Our vehicle warranty obligations vary depending upon the type of the product, geographical location of its sale and other factors.
The estimated liability for vehicle warranties is recorded at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims and our estimates regarding possible future incidence based on actions on product failures.
Changes in warranty liability as a result of changes in estimated future warranty costs and any additional costs in excess of estimated costs can materially affect our net income. Determination of warranty liability is based on the estimated frequency and amount of future claims, which are inherently uncertain. Our policy is to continuously monitor warranty liabilities to determine the adequacy of our estimate of such liabilities. Actual claims incurred in the future may differ from our original estimates, which may materially affect warranty expense.
Employee benefit costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates and other factors.
While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our employee benefit costs and obligations.
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Finance Receivables, deferred origination costs and allowance for credit losses
We finance vehicle sales with hire purchase and loan financing provided to our customers. Finance receivables that we have the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported at their outstanding unpaid principal balance reduced by a valuation allowance and net of any deferred origination costs.
Origination fees and certain direct origination costs are deferred and amortized as an adjustment to the yield of the related finance receivable.
We recognize specific and unallocated allowance for credit losses for finance receivables, based on our best estimate of losses inherent in the finance receivable portfolio.
We finance our capital requirements by cash from operations, short and long-term debt, capital market borrowings and sale of investments. We believe that we have sufficient resources available to us to meet our planned capital requirements. However, our sources of funding could be adversely affected by an economic slowdown or other macro economic factors in India, which is beyond our control, and therefore a decrease in the demand for our products and services could lead to an inability to obtain funds from external sources on acceptable terms or in a timely manner, or at all.
Cash Flow Data
The following table sets forth selected items from our consolidated statements of cash flows for the periods indicated and shows the percentage change between periods.
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Net cash provided by operating activities was Rs.15,360.6 million, Rs.27,127.6 million and Rs.22,806.4 million in fiscal 2003, 2004 and 2005, respectively. An increase during fiscal 2005 on account of our automotive operations and increase in acceptances which was offset by increase in accounts receivable and inventories. Our accounts receivable declined by Rs.1,155.1 million and Rs.2,646.0 million in fiscal 2003 and 2004, respectively, and increased by Rs.1,720.1 million in fiscal 2005. Increased sales volumes and pressure due to a steel price increase resulted in a significant increase in inventory levels, although we have maintained our inventory at 34 days of gross sales in fiscal 2004 and 2005, respectively. Acceptances increased to Rs. 28,939.5 million in fiscal 2005 from Rs. 16,636.6 million in fiscal 2004.
Net cash used in investing activities was Rs.5,500.6 million, Rs.24,971.4 million and Rs.34,585.9 million in fiscal 2003, 2004 and 2005, respectively. The increase in investments during fiscal 2005 over fiscal 2004 was mainly on account of deployment of surplus cash in short term deposits, loans to affiliates and loans to Tata Finance Ltd, increase in capital expenditure, increase in finance receivables and partially offset by sale and purchase of available for sale investments. The increase during fiscal 2004 compared to fiscal 2003 was primarily due to increases in our investments, as we deployed excess cash in liquid investments and finance receivables. A cash surplus and higher returns on the vehicle loan portfolio as compared to returns on investments in marketable securities led to a decision to reduce resulted in lower securitization of the receivables portfolio during fiscal 2004.
Cash outflow on account of total capital expenditures for property, plant and equipment were Rs.2,874.4 million, Rs.2,643 million and Rs.7,736.5 million in fiscal 2003, 2004 and 2005, respectively. The increases resulted primarily from a capacity expansion of passenger car manufacturing facilities from 150,000 units in fiscal 2004 to 225,000 units during fiscal 2005.
While Rs.10,414.1 million was the net cash used in financing activities in fiscal 2003, there was a net cash inflow from financing activities of Rs.2,157.9 million and Rs.9,987.4 million during fiscals 2004 and 2005, respectively. For fiscal 2005, the net inflow from financing activities resulted primarily from proceeds of the Foreign Currency Convertible Notes issued in April 2004, partially offset by repayment of short term and long term debt.
Balance Sheet Data
Our total assets were Rs.113,875.4 million and Rs.159,149.7 million as of March 31, 2004 and 2005, respectively. The increase in fiscal 2005 was primarily due to increases in investments, finance receivables, short-term bank deposits and property, plant and equipment. Inventory and receivables also increased during fiscal 2005, due to higher sales volumes and an increase in raw material and component inventory levels resulting from steel price increases.
Our shareholders equity was Rs.37,377.6 million and Rs.56,409.2 million as of March 31, 2004 and 2005, respectively. The increase during fiscal 2005 was primarily due to the exercise of outstanding warrants and conversion of outstanding convertible debt securities, retained earnings and unrealized gain on available-for-sale investments of Rs.5,764.7 million, partially offset by dividends paid of Rs.1,619 million. Share capital increased from Rs.3,530 million to Rs.3,617.9 million and additional paid-in-capital increased from Rs.26,872.3 million to Rs.28,143.3 million.
As of March 31, 2005, we had cash and cash equivalents of Rs.4,873.3 million held primarily in Indian rupees, short-term bank deposits of Rs.15,731.2 million and investments available-for-sale of Rs.26,178.7 million. In comparison, as of March 31, 2004, we had cash and cash equivalents of Rs.6,511.1 million, short-term bank deposits of Rs.2,727.7 million and available-for-sale investments of Rs.24,150.3 million.
Gross accounts receivables increased 16.2% during fiscal 2005 by Rs.1,537.6 million to Rs.11,018.9 million as of March 31, 2005, primarily due to higher sales, partially offset by a reduction in collection time.
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Inventories increased during fiscal 2005 by Rs.6,209.9 million to Rs.21,353.6 million as of March 31, 2005, primarily reflecting the impact of increased unit production and sales volumes. Increase in the prices of steel, engineering plastics and rubber resulted in a significant increase in the raw material and component inventory levels. However, as a result of inventory management and controls, we maintained inventory at 34 days in fiscal 2005, unchanged from fiscal 2004.
Gross finance receivables (excluding non-current receivables) increased during fiscal 2005 by Rs.5041.2 million to Rs.8215.6 million as of March 31, 2005. This increase was primarily due to a significant increase in vehicle financing driven by increased unit sales.
Our investment portfolio increased by Rs.3,384.7 million during fiscal 2005 to Rs.30,437 million as of March 31, 2005. The increase was primarily due to investments in bonds, investment in preference shares of Tata Finance Limited and unrealized gain on our available-for-sale investments in equity shares partially offset by decrease in investments in mutual funds.
We have invested approximately Rs.14,400 million over the last three fiscal years to fund our planned capital expenditure and our program for the modernization of our production facilities. Capital expenditure aggregated to Rs.2,650.6 million, Rs.2,659.3 million and Rs.9,162.5 million in fiscals 2003, 2004 and 2005, respectively. Our capital expenditures during the past three years have related mostly to a capacity expansion of passenger cars facilities, the introduction of new products, quality and reliability improvements aimed at operating cost reductions.
We will continue to invest in our business units and research and development over the next several years, including committed capital expenditures for our ongoing projects, new projects, product development programs, mergers, acquisitions and strategic alliances. In particular, we have been implementing a program to build and expand our presence in the passenger vehicle market and to expand and enhance our leading position in the Indian commercial vehicle market, both by improving our existing product range and developing new products and platforms. As part of our future growth strategy, we have a capital expenditure plan as of March 31, 2005 aggregating approximately Rs.42,600 million for fiscal 2006 and 2007. Future capital expenditure is expected to focus on the introduction of new products, enhancement of plant capacity, modernization of existing plant, property and equipment, improvement of plant productivity, quality and reliability of our products. These expenditures are expected to be funded through cash generated from operations, existing investible surplus in the form of cash and cash equivalents, mutual funds and other external financing sources.
Liabilities and Sources of Financing
We fund our short-term working capital requirements with cash generated from operations, overdraft facilities with banks, short and medium term borrowings from lending institutions and issuance of medium term debentures. The maturities of these short and medium term borrowings and debentures are generally matched to particular cash flow requirements. We had short term borrowings (including the current portion of long-term debt) of Rs.7,758.9 million and Rs.2,866.5 million as of March 31, 2004 and 2005, respectively. We had unused short-term credit facilities of Rs.11,486.4 million and Rs.12,270 million as of March 31, 2004 and 2005, respectively.
In fiscal 2004, we had taken a loan of US$50 million from the International Finance Corporation, the repayment of which is required to be made in installments beginning April 2008 until April 2011.
We also repaid a loan of US$42.51 million from the State Bank of India in foreign currency denominated funds during fiscal 2005.
In July 2003, we raised US$100 million through an offering of 1% convertible notes, due in 2008. The notes are convertible into ordinary shares or global depositary shares at a price of Rs.250.745 (US$5.43) per ordinary share. The notes are subject to redemption at our option any time after July 31, 2006. US$10.56 million of these notes were outstanding as on March 31, 2005.
On April 27, 2004, we raised US$400 million through a two-tranche offering of zero coupon and 1% convertible notes due in 2009 and 2011, respectively. The US$100 million zero coupon notes, due in 2009, are convertible into ordinary shares or global depositary shares at a price of Rs.573.106 (US$13.069) per share, subject to adjustment, from and including June 7, 2004 and are subject to redemption at our option any time on or after April 27, 2005. The US$300 million 1% notes, due in 2011, are convertible into ordinary shares or depositary shares at a price of Rs.780.400 (US$17.797) per share, subject to adjustment, from and including June 7, 2004. We expect to use these and any other funds to be raised in the future to meet capital expenditure requirements for product development programs and for funding any mergers, acquisitions or strategic alliances, subject to applicable Indian laws.
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Our ability to incur additional debt in the future is subject to a variety of uncertainties including, among other things, the amount of capital that other Indian entities may seek to raise in the domestic and foreign capital markets, economic and other conditions in India that may affect investor demand for our securities and those of other Indian entities, the liquidity of Indian capital markets and our financial condition and results of operations.
The following table sets forth our short-term and long-term debt position:
During fiscal 2004 and 2005 the effective weighted average interest rate on our long-term debt was 7.35% and 4.18% per annum, respectively.
As of March 31, 2005, approximately 8.8% of our long-term debt was denominated in rupees and the balance was denominated in dollars and other non-rupee currencies. During fiscal 2005, we were able to significantly reduce our effective cost of borrowing by securing foreign currency loans at favorable rates. During fiscal 2005, we repaid Rs.5,508.8 million of our outstanding debts.
The following table sets forth a summary of the maturity profile for our outstanding long-term debt obligations as of March 31, 2005.
Some of the long-term debt agreements contain financial covenants that require us to satisfy and/or maintain financial tests and ratios on a non-consolidated basis under Indian GAAP, including minimum tangible net worth, restrictions on the ratio of total liability to tangible net worth and certain cash flow ratios, among others. The terms of certain of our long-term debt agreements require us to obtain prior consent for certain specified actions including amendment of our charter documents and for creation of any lien on our properties other than for specified purposes.
As a result of our increase in our long term debt during fiscal 2005 as compared to fiscal 2004, because of the issue of Foreign Currency Convertible Notes, the ratio of net debt to shareholders equity (total debt less cash and cash equivalents and liquid marketable securities divided by total shareholders equity) under US GAAP increased from (0.16) to (0.05) as of March 31, 2004 and 2005, respectively. Details of the calculation of this ratio are set forth in Exhibit 7.1 to this annual report.
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The following table sets forth our contingent liabilities as of the dates indicated.
On an ongoing basis, our legal department reviews pending cases, claims by third parties against us and other contingencies. For the purposes of financial reporting, we periodically classify these matters into gain contingencies and loss contingencies. Gain contingencies are not recognized until the contingency has been resolved and amounts are received or receivable. For loss contingencies that are considered probable, an estimated loss is recorded as an accrual in our accounts and, if the matter is material, the estimated loss is disclosed in our financial statements. We do not consider any of these matters to be individually sufficiently material to warrant disclosure in our financial statements. Loss contingencies that are considered reasonably possible are not provided for in our accounts, but if we consider such contingencies to be material, individually or in the aggregate, they are disclosed in our financial statements. Most loss contingencies are classified as reasonably possible unless clearly frivolous, in which case they are classified as remote and are monitored by our legal department on an ongoing basis for possible deterioration. We do not disclose remote matters in our financial statements. See note 20 of our audited consolidated financial statements for additional information regarding our material claims and contingencies.
Since fiscal 1997, we have benefited from participation in the Export Promotion Capital Goods Scheme, or the EPCG Scheme, which permits us to import capital equipment under a special license at a substantially reduced customs duty, subject to us fulfilling an obligation to export goods manufactured or produced by the use of capital equipment imported under the EPCG Scheme to the value of a multiple of the Cost Insurance and Freight value of these imports or Customs Duty saved, over a period of 8 or 12 years from the date of obtaining the special license. We currently hold eight licenses that require us to export our products of a value of approximately US$2.148 billion between 1997 and 2014, and we carefully monitor our progress in meeting our incremental milestones. Of this amount, we have already achieved exports of approximately US$1.14 billion as of March 31, 2005, which exceeded our export milestone at that stage by approximately US$489.5 million. This leaves us with a remaining obligation to export products of a value of approximately US$1.008 billion by September 2014. In the event that the export obligation under the EPCG Scheme is not fulfilled, we would have to pay the differential between the reduced and normal duty on the goods imported along with interest. In view of our past record of exceeding our export milestones, and our current plans with respect to our export markets, we do not currently foresee any impediments to meeting our export obligations in the required time frame.
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In fiscal 2004 and 2005, 8% and 9%, respectively, of our sales volumes were financed under hire-purchase/loan contracts to our customers. As of March 31, 2004 and 2005, our customer finance receivable portfolio was comprised of 60,676 contracts and 81,758 contracts, respectively, with gross stock-on-hire of approximately Rs.16,977 million and Rs.27,614 million, respectively. We follow specified internal procedures including quantitative guidelines for selection of our finance customers to assist in managing default and repayment risk in our portfolio, and take security against loans extended. We originate all the contracts through our authorized dealers with whom we have long-term agreements. All our marketing and sales activity is undertaken through dealers including our Bureau of Hire Purchase Credits and collections are carried out by our authorized dealers.
We securitize or sell most of our finance receivables on a regular basis to monetize these assets. We undertake a sale of the receivables in respect of finance agreements due from pools of purchasers. The constitution of these pools is based on criteria that are decided by credit rating agencies and/or based on the advice that we receive as to the marketability of a pool. We undertake these securitizations of our receivables in either or both of the following forms:
We act as collection agent on behalf of the investors, representatives, special purpose vehicles or banks in whose favor the receivables are to be assigned, for the purpose of collecting receivables from the purchasers on the terms and conditions contained in the applicable deeds of securitization in respect of which pass-through certificates are issued to investors. We also secure the payments to be made by the purchasers of amounts constituting the receivables under the hire-purchase agreements to the extent specified by rating agencies by any one or all of the following methods:
The following table sets forth details of the securitization undertaken by us as of the periods indicated:
Merger of Tata Finance Limited with the Company
In June 2005, Tata Finance Limited (TFL) was merged with us. TFL was established in 1981 as a finance company to conduct hire purchasing, leasing and other finance related activities. In line with international practice and with the objective of building an extensive captive financing arm to support the our vehicle sales business and to hedge the revenue stream risks associated with the cyclicality of the vehicle sales business, it was deemed prudent to merge TFL with us. The merger is expected to result in efficiencies for Tata Motors Financing Business through complementary customer sourcing models, access to low cost funds, flexibility to offer competitive products/services, the bundling of financing options with our other products/services and other operational benefits. The merger was approved by our shareholders and has since received the sanction of the Honble High Court of Judicature at Bombay on June 24, 2005. The merger will be accounted for under the purchase method from June 29, 2005, i.e. the date the transaction was approved by the regulatory agencies.
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Acquisition of INCAT International PLC
In the first week of September 2005, our subsidiary, Tata Technologies, USA (TTUS) made a cash offer at 220 pence per share (Rs.169.40 per share) for 100% of the equity shareholding of INCAT International PLC (INCAT), a UK-based company listed on the Alternative Investment Market (AIM) of the London Stock Exchange. Both TTUS and INCAT provide engineering and design services and PLM (product lifecycle management) products and services, primarily to manufacturers and their suppliers in the international automotive, aerospace and engineering markets.
In July 2005, our Executive Director (Commercial Vehicle Business Unit), Mr Ravi Kant, was appointed as our Managing Director and is now responsible for and oversees our day-to-day operations. Further, our Executive Director (Passenger Car Business Unit & Engineering Research Centre), Dr. V Sumantran, tendered his intention to resign from the Company in his capacity as an Executive Director and has since ceased to be Executive Director of the Company with effect from August 24, 2005.
Change in Indian GAAP Statutory Auditors
Our US GAAP financial statements are being audited by Deloitte Haskins & Sells (DHS), a firm registered with the Public Company Accounting Oversight Board (PCAOB) in the United States, an Indian Firm of Chartered Accountants registered with The Institute of Chartered Accountants of India. DHS has some partners who are also partners of M/s A. F. Ferguson & Co. (AFF) and M/s S. B. Billimoria & Co., (SBB), who had been our Indian GAAP statutory auditors, since inception upto the fiscal 2005. Our shareholders had approved the change in Indian GAAP statutory auditors, by the appointing DHS at our 60th Annual General Meeting held on July 11, 2005, based on the recommendations of our Audit Committee and our Board of Directors.
Please see Item 4.B of this annual report for the information required by this item.
Please see Item 5.A of this annual report for the information required by this item.
We use off-balance sheet arrangements where the economics and sound business principles warrant their use. Our principal use of off-balance sheet arrangements occurs in connection with the securitization and sale of finance receivables generated in the ordinary course of our business. The receivables securitized and sold consist primarily of retail loans secured by vehicles sold through our dealer network.
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Assets in off-balance sheet entities were as follows:
We have provided bank guarantees aggregating Rs.757 million relating to certain securitized receivables to certain special purpose entities (SPEs). Our liability would crystallize in the event customers fail to fulfill their obligations under the contract and the SPE serves a notice of shortfall in collections on us. The term of each guarantee depends upon the weighted average term of each pool of finance receivables securitized. In the event a guarantee is called, we have the right to repossess the financed vehicle and to auction the vehicle. The maximum potential amount of future payment that we would be required to make is Rs.757 million as at March 31, 2005. We have recognized a liability of Rs.186 million for these guarantees.
Board of Directors
Under our Articles of Association, the number of our Directors cannot be less than three nor more than 15. At present there are 11 Directors, including a nominee Director of Tata Steel and we have one Alternate Director. Our Board of Directors, or the Board, has the power to appoint Managing Directors and Executive Directors.
Our Articles of Association provide that the Board of Directors of The Tata Iron and Steel Company Limited, or Tata Steel, which, with its subsidiary, owns, as of March 31, 2005, 8.95% of our shares, has the right to nominate one Director (the Steel Director) to the Board. Dr. J.J. Irani is the current nominee Director of Tata Steel.
In addition, our Articles of Association provide that our debenture holders have the right to nominate one Director (the Debenture Director) if the trust deeds relating to outstanding debentures require the holders to nominate a Director. Currently, there is no Debenture Director. Also, the Articles provide that pursuant to the terms of loan agreements with Financial Institutions in India, those institutions have the right to nominate two Directors each, (the Financial Institutions Director) to the Board. We also have a representative from DaimlerChrysler AG on our Board. The current nominee is Mr. Helmut Petri.
The Directors may be appointed by the Board or by a General Meeting of the shareholders. The Board may appoint any person as an Additional Director, but such a Director must retire at the next Annual General Meeting unless re-elected by the shareholders after complying with the provisions of the Companies Act. A casual vacancy caused on the Board due to death or resignation of a sitting member can be filled by the Board; but such a person can remain in office only for the unexpired term of the person in whose place he was appointed and on the expiry of the term he will retire unless re-elected by the shareholders. The Board may appoint an Alternate Director in accordance with the provisions of the Companies Act to act for a Director during his absence, which period of absence shall not be less than three months.
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Two-thirds of the total numbers of Directors on the Board are subject to retirement by rotation and of these Directors, one third must retire every year. The Directors to retire are those who have been the longest in office. Our Directors are not required to hold any of our shares by way of qualification shares. We recently appointed Mr Ravi Kant as our Managing Director, who is responsible for and oversees our day-to-day operations. Mr P P Kadle our Executive Director heads the Corporate Affairs, Finance and Information Technology functions, appropriate powers have been delegated to them to perform their functions. The Executive Directors appointment is for a term of five years.
As of March 31, 2005, our Directors and Executive Officers, in their sole and joint names, beneficially held an aggregate of 141,697 shares (approximately 0.04% of our issued share capital). In addition, some of our Directors hold as trustees for various nonaffiliated trusts an aggregate of 354,976 shares (representing approximately 0.098% of our issued share capital).
The following table provides information about our current Directors and Executive Officers.
Set forth below is a short biography of each of our Directors and Executive Officers:
Mr. Ratan N. Tata (Chairman). Mr. Ratan N. Tata holds a B.Sc. (Architecture) degree from Cornell University, USA and has completed the Advanced Management Program at Harvard University, USA. He joined the Tata Group in 1962 and is the Chairman of the Tata group of companies and Tata Sons Limited, the holding company for the majority of the Tata group of companies. Mr. Tata has been on our Board since August 1981 and has spent more than 13 years in an executive capacity and is actively involved with product development and other business strategies pursued by us.
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Mr. N.A. Soonawala. Mr. N.A. Soonawala is an honors graduate in commerce from the University of Bombay and a Chartered Accountant from the Institute of Chartered Accountants of India. He has wide exposure in the field of finance, including having previously worked with ICICI, Washington. He joined Tata Sons Limited in 1968 and was a Finance director until June 2000. He is on the boards of various Tata group companies and committees as Director. Mr. Soonawala has been on our Board since May 1989.
Dr. J.J. Irani. Dr. Jamshed Irani obtained a B.Sc. degree from Science College, Nagpur in 1956 with a Gold Medal in Geology and a M.Sc. (Geology) degree from the Nagpur University in 1958, both with first class. He also obtained M.Met. and Ph.D. degrees from the University of Sheffield, UK, in 1960 and 1963 respectively, with a Gold Medal for the Ph.D. Thesis. In 1993, the University of Sheffield conferred upon him the Honorary Degree of Doctor of Metallurgy. Dr. Irani was conferred an honorary knighthood in 1997 by the Queen of England for his contribution towards strengthening the Indo-British Partnership. He is also on the boards of various Tata companies and has been on our Board as a Tata Steel Nominee since June 1993.
Mr. J.K. Setna. Mr. J.K. Setna obtained a B.Com degree from University of Bombay, and is a Chartered Accountant from the Institute of Chartered Accountants of India. After a long and distinguished career with Ingersoll-Rand (India) Limited, where he retired as President in 1988 and Chairman in 1993, he has been on our Board since September 1993.
Mr. V.R. Mehta . Mr. V.R. Mehta holds a B.E. (Honours) degree from the University of Rajasthan. Mr. Mehta has considerable financial and project evaluation expertise, both at national and international levels. Mr. Mehta worked as a senior expert for the Asian Development Bank and earlier held a senior level position with the Indian federal Ministries of Railways, Shipping and Transport. He played a key role in financial revamping and rationalization processes of major ports in India and has participated in important diplomatic missions and has represented India in International Conferences. Mr. Mehta is on the Board of other companies in his individual capacity or a nominee of financial institutions or foreign companies. Mr. Mehta joined our Board since June 1998 as a Financial Institutions nominee. In September 2005, Unit Trust of India, withdrew their nomination of Mr Mehta as Financial Institution Director, though he continues to be on the Board in his individual capacity.
Mr. R. Gopalakrishnan. Mr. R. Gopalakrishnan holds a Bachelors degree in Science and a B.Tech (Electronics) degree from the Indian Institute of Technology (IIT), Kharagpur. He is also an Executive Director of Tata Sons Limited and a member of the Group Executive Office of Tata Sons Limited, besides being on the Boards of various Tata companies. Prior to joining the Tata group in August 1998, he was the Vice-Chairman of Hindustan Lever Limited. With effect from January 2001, Mr. Gopalakrishnan has, together with the Chairman and Executive Director(s), the responsibility of overseeing our operations. Mr. Gopalakrishnan has been a Director on our Board since December 1998.
Mr. N.N. Wadia. Educated in the UK, Mr. N.N. Wadia is the Chairman of Bombay Dyeing & Manufacturing Company Limited and heads the Wadia Group. He is also the Chairman/Trustee of various charitable institutions and non-profit organizations. Mr. Wadia has been on our Board since December 1998.
Mr. Helmut Petri. Mr. Petri studied at Gummersbach Engineering School and is presently the Chairman and Member of Board of Management of DaimlerChrysler India Ltd. As the Deputy Board Member of Mercedes Benz AG., he was responsible for research and development of passenger cars. Mr. Petri has been the representative of DaimlerChrysler AG on our Board since March 2000.
Mr. S.A. Naik. Mr. S.A. Naik, a B.Sc. and LL.M., has a legal background. Prior to his retirement from the Industrial Development Bank of India, Mr. Naik was the Executive Director (Legal Advisor) in charge of its legal functions. He was also the Legal Advisor for SEBI when it was in its formation stage and is now an Advisor to India Law Services, Mumbai. Mr. Naik was on our Board as nominee of the Industrial Development Bank of India from 1988 to 2000. On his nomination being withdrawn, he was appointed on our Board in his individual capacity in July 2000.
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Mr. Ravi Kant. Mr. Kant holds a Bachelor of Technology degree from the IIT, Kharagpur and a Masters in Science in management techniques from Aston University, Birmingham, UK. Mr. Kant has wide and varied experience in the manufacturing and marketing field, particularly in the automobile industry. Prior to joining us, he was with Philips India Limited as Director of Consumers Electronics business and prior to that with LML Ltd. as Senior Executive Director (Marketing) and Titan Watches Limited as Vice President (Sales & Marketing). Mr. Kant was also employed with Kinetic Engineering Limited, Hindustan Aluminum Company Limited and Hawkins Cookers Limited. Mr. Kant had been an Executive Director since May 2000, responsible for manufacturing and marketing of commercial vehicles and manufacturing of utility vehicles and was appointed as our Managing Director on July 29, 2005. Mr Kant is the CEO of the Company.
Mr. P.P. Kadle. Mr. P.P. Kadle is an Honours Graduate in Commerce and Accountancy from Mumbai University. He is also a member of the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India. He has gathered wide experience with well known Indian companies in the fields of management, accountancy, law, finance and treasury. Prior to joining us as Vice-President (Finance), Mr. Kadle was with Tata-IBM Ltd as their Chief Financial Officer. In October 2001, Mr. Kadle was appointed as an Executive Director. He is responsible for Finance and Corporate Affairs and is the CFO of the Company.
Mr. P.K.M. Fietzek. Mr. Fietzek joined the technical and business training program of Daimler-Benz AG, now DaimlerChrysler AG, in 1957, and has held various positions with DaimlerChrysler AG since then, including exports. Mr. Fietzek has been on our Board as an Alternate Director to Mr. Petri since May 2000.
There is no family relationship between any of our Directors or Executive officers.
The following table provides the annual compensation paid to our Directors for the fiscal year ended March 31, 2005.
Our Executive Directors are entitled to six months salary as severance fees upon termination of their contracts by us.
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The Audit Committee is comprised of the following three independent directors: V.R. Mehta, Chairman, S.A. Naik and J.K. Setna. The scope of the Audit Committee includes:
The Remuneration Committee is empowered to review the remuneration of whole-time directors, retirement benefits to be paid to them and dealing with matters pertaining to Employees Stock Option Scheme.
We have not issued any stock options to our directors/employees. The Remuneration Committee is comprised of three independent and two non-executive directors, namely N.N. Wadia, Chairman, Ratan N. Tata, N.A. Soonawala, V.R. Mehta and S.A. Naik.
The Investor Grievance Committee oversees the redressing of investors complaints pertaining to securities transfers, interest/dividend payments, non-receipt of annual reports, issue of duplicate certificates and other miscellaneous complaints. Its scope also includes delegation of powers to the executives of us or the share transfer agents to process share transfers and other investor-related matters. The Investor Grievance Committee comprises of S.A. Naik, Chairman, R. Gopalakrishnan, Ravi Kant and P. P Kadle.
The Finance Committee deals with matters pertaining to finance and banking transactions, granting Power of Attorney, property matters and our other day-to-day financial operations. The Committee also makes appropriate recommendations to the Board on investments, restructuring initiatives and policy related matters. The Committee is comprised of Ratan N. Tata, Chairman, N.A. Soonawala, J.K. Setna, R. Gopalakrishnan, N N Wadia and P. P. Kadle.
The Committee of the Board reviews revenue and capital expenditure budgets, long-term business strategy and the organizational structure. The Committee is comprised of Ratan N. Tata, Chairman, N.A. Soonawala, J.J. Irani, R. Gopalakrishnan and N.N. Wadia.
The Ethics and Compliance Committee sets forth policies relating to the implementation of the Tata Code of Conduct for Prevention of Insider Trading, take on record the monthly reports and dealings in securities by the Specified Persons, and to decide penal action in respect of violations of the Tata Code of Conduct. The Ethics and Compliance Committee is comprised of S.A. Naik, Chairman and R Gopalakrishnan. P. P. Kadle, Executive Director, has been appointed as the Compliance Officer under the said Code.
Apart from the Committees described above, the Board of Directors also constitutes committee(s) of Directors with specific terms of reference as it may deem fit.
Summary Comparison of Corporate Governance Practices
The following is a summary comparison of significant differences between our corporate governance practices and those required by the NYSE for non-U.S. issuers.
Independent directors: one third of our board are independent directors, as defined under applicable Indian legal requirements. Under these requirements, directors are independent if they :
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We have not made a determination as to whether our directors would be considered independent under the NYSE rules. Though the judgment on independence must be made by our board, there is no requirement that our board affirmatively make such determination, as required by the NYSE rules.
Non-management directors meetings: There is no such requirement under applicable Indian legal requirements.
Board Governance and Remuneration Committee and the Audit Committee: The members of our Board Governance and Remuneration Committee are independent, as defined under applicable Indian legal requirements. All members of our Audit Committee are independent as defined under Rule 10A-3 under the Exchange Act. The constitution and main functions of these committees as approved by our board are described above and we believe comply with the spirit of the NYSE requirements for non U.S. issuers.
We consider our human capital as a critical factor to our success. The Tata Group and Tata Motors have drawn up a comprehensive human resource strategy that addresses key aspects of human resource development such as:
In line with the Human Resource strategy, we, in turn, have recently implemented various initiatives in order to build better organizational capability that we believe will enable us to sustain competitiveness in the global market place. Our human resources focus is to attract talent, retain the better and advance the best.
Some of the initiatives to meet this objective include:
Other initiatives include:
We employed approximately 28,300, 28,900 and 29,500 permanent employees as of March 31, 2003, 2004 and 2005, respectively.
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The following tables set forth a breakdown of persons employed by our business segments and by geographic location as of March 31, 2005.
Rationalization of Workforce
We have been attempting to rationalize our workforce through launching the Early Separation Schemes, or ESS. The ESS launched in fiscal 2002 resulted in a reduction of approximately 1,900 employees or approximately 6% of our workforce in fiscal 2002. Similar schemes launched in fiscal 2003 and 2004 resulted in a reduction of approximately 90 and 540 employees respectively. During Fiscal 2005, the substantial increase in sales volumes were addressed by largely the same workforce size through improvements in productivity using outsourcing, low cost automation and other means. Recruitment and internal redeployment have been effected to reinforce key areas such as research and development, sales and marketing areas and new product introduction.
Due to these initiatives along with natural attrition, our total work force, which was at a level of approximately 35,000 in 1997, has been reduced to approximately 29,500 at the end of fiscal 2005. We believe this should enable us to achieve higher productivity levels in the future.
Training and Development
We provide training to our managers on an ongoing basis. The recent emphasis on training has been in the areas of customer focus total quality management, six sigma, world class manufacturing and cost reduction initiatives. At Jamshedpur, Pune and Lucknow in India, we have also established training divisions that impart basic skills in various trades like milling, grinding and welding to our young apprentices, and the Management Development Training Institutes that enhance the management skills of our executives and officers.
High performing management cadre employees are sponsored for Fulbright fellowship. This year four of our employees have been selected through an all India selection and our currently undergoing the 10 weeks programme in Carnegie Mellon University.
In the year 2004-05 we had imparted average of 8 man days of training to high performers.
Union Wage Settlements
All our regular employees in India, other than management, are members of labor unions. In March 2000, we declared a lock-out in our Lucknow manufacturing facility, which was lifted in September 2000 upon the formation of a new union. Except for this single incident, we have generally enjoyed cordial relations with our employees at our factories and offices.
Employee wages are paid in accordance with wage agreements that have varying terms (typically three years) at different locations. The wage agreements for Pune (excluding the car plant), the Pune car plant, Jamshedpur, Mumbai and Lucknow are valid until August 31, 2006, March 31, 2007, March 31, 2007, December 31, 2006 and March 31, 2008, respectively. A cordial industrial relations environment prevailed in all the manufacturing units of the company. The new wage negotiation process at Lucknow has been initiated.
The performance rating system, introduced for the first time, for the bargainable category in Mumbai, has completed one full cycle and the feedback of the process received from all the quarters has been encouraging.
Returnability in wage settlements was built in by introducing quality linked payments based on a quality index as perceived by the customer that has been introduced.
There was support by operatives across all locations in outsourcing low value added activities and in implementation of other reforms.
During fiscal 2005, the average number of part-time employees at the end of each month was approximately 11,000.
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The information required by this item is set forth in Item 6.A of this annual report.
We are a widely held, listed company with approximately 213,000 shareholders of record.
To our knowledge, as of March 31, 2005, the following persons beneficially owned more than 5% of our 361,751,751 Ordinary Shares outstanding at that time:
Since March 31, 2001, our largest shareholder, Tata Sons Limited (together with its subsidiaries) has substantially increased its shareholding in us from 14.31% to 22.06%. Our second largest shareholder, The Tata Iron and Steel Co. Ltd. (together with its subsidiaries) has substantially increased its shareholdings, but its percentage shareholding has decreased slightly from 9.42% as of March 31, 2001 to 9.00% as of March 31, 2005, as a result of our new issuances of shares. Daimler Chrysler AG has kept its shareholdings steady, but its percentage shareholding has declined from 10.0% to 7.08% as a result of our new issuances of shares. Citibank N.A. as Depositary for our ADRs, has increased its shareholding from 7.47% to 9.19% because of the two-way fungibility of Depositary Receipts and the listing of 23,081,041 ADRs on the NYSE on September 27, 2004. Life Insurance Corporation of India has decreased its shareholding and has seen its shareholding percentage decline from 7.47% to 6.75% as a result of this decrease as well as our new issuances of shares.
According to our register of shareholders and register of beneficial shareholders, as of March 31, 2005, there were 264 record holders of our shares with addresses in the United States, whose shareholdings represented approximately 0.06% of our outstanding Ordinary Shares on that date, excluding any of our shares held by United States residents in the form of depositary shares. Because some of these shares were held by brokers or other nominees, the number of record holders with addresses in the United States may be fewer than the number of beneficial owners in the United States.
The total permitted holding of Foreign Institutional Investors, or FIIs, in the paid up share capital of the company has been increased to 35% by a resolution passed by the shareholders of the Company on January 22, 2004. The holding of FIIs in the Company as of March 31, 2005, was approximately 21.07%. See Item 10.D. - Exchange Controls for further details.
None of our shares of common stock entitles the holder to any preferential voting rights.
Under the Takeover Regulations of India, any person who acquires more than 5%, 10% or 14% of our shares or who is entitled to exercise voting rights with respect to more than 5%, 10% or 14% of our shares must file a report concerning the shareholding or the voting rights with us and the stock exchanges on which our ordinary shares are traded. Please see Item 9. The Offer and Listing - Markets for information with respect to these stock exchanges. Similar disclosures would be applicable under the Insider Trading Regulations of India with respect to any person who acquires more than 5% of our shares or voting rights with respect to the shares. Any increases or decreases by 2% or more in the shareholding by such persons must also be disclosed. Furthermore, under our listing agreement with the stock exchanges where our shares are listed, we are required to periodically disclose to such stock exchanges the name and percentage of shares held by persons or entities that hold more than 1% of our Ordinary Shares. For the purposes of the above, reporting and takeover requirements under our listing agreements, shares withdrawn from our ADS facility will be included as part of a persons shareholding in us.
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To our knowledge, we are not, directly or indirectly, owned or controlled by any other corporation or by any government or by any other natural or legal persons severally or jointly. We are not aware of any arrangements the operation of which may at a later time result in our change of control.
We purchase materials, supplies, assets and services from numerous suppliers throughout the world in the ordinary course of business, including from our affiliates and firms with which certain members of our board of directors are interested. We purchased materials, supplies, fixed assets and services from these entities in the amount of Rs.8,477.4 million Rs.10,599.6 million and Rs.13,700.5 million in fiscal 2003, 2004 and 2005, respectively. We also sell our products, assets and services to our affiliates and firms with which certain members of our board of directors are interested. We sold products and services to these entities in the amount of Rs.1,309.4 million, Rs.2,581.3 million and Rs.3,537.8 million in fiscal 2003, 2004 and 2005, respectively. We believe all of these purchase and sale transactions were arms-length transactions, none of which were material to our overall operations. See note 24 of our audited consolidated financial statements for additional information regarding our related party transactions with our affiliates and other related parties. The foregoing do not include transactions with and among our consolidated subsidiaries, the amounts of which are eliminated upon consolidation when preparing our financial statements.
We regularly have trade accounts and other receivables payable by, and accounts payable to, our affiliates and firms with which certain members of our board of directors are interested. We had outstanding trade accounts and other receivables payable by these entities in the amount of Rs. 437.3 million, Rs.907.9 million and Rs.375.7 million as of March 31, 2003, 2004 and 2005, respectively. We had accounts payable to these entities in the amount of Rs. 488.3 million, Rs.698.4 million and Rs.724.1 million as of March 31, 2003, 2004 and 2005, respectively.
From time to time, we provide short to medium-term loans to our subsidiaries and affiliates, as well as loans under a loan program established by us and our affiliates to assist executives and directors with the purchase of housing. We believe that each of these loans was entered into in the ordinary course of business. From time to time, we also provide security deposits to the lessors of residential properties that we lease for our employees, including our Executive Directors. No extension of credit has been made, arranged or renewed by us, directly or indirectly, in the form of a personal loan to or for any of our directors or executive officers, nor has there been any material modification to any term of any such extension of credit or any renewal of any such extension of credit on or after July 30, 2002.
The information required by this item is set forth beginning on page F-1 of this annual report.
Legal or Arbitration Proceedings
The information on legal or arbitration proceedings required by this item is set forth in Item 4.B of this annual report.
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Based on the net income available for appropriation, dividends are recommended by the Board of Directors for approval by the shareholders at our Annual General Meeting. Further, the Board of Directors may also pay an interim dividend at its discretion. Since fiscal year 1956, we have had an uninterrupted dividend distribution except for the fiscal years 2001 and 2002. We returned to dividend distribution in fiscal 2003. In view of our profitable performance in fiscal 2003, we declared dividends (net of tax) totaling Rs.1,279.1 million in fiscal 2003, which was paid on July 21, 2003 to our shareholders as of June 30, 2003. We also declared an interim dividend (net of tax) on January 22, 2004 of Rs.1,399.5 million which was paid on February 20, 2004.
At the Annual General Meeting held on July 8, 2004, our shareholders approved a further final dividend for fiscal 2004 of Rs.1,421.6 million (net of tax) which was paid on July 9, 2004. At the Annual General Meeting held on July 11, 2005, our shareholders approved the payment of a dividend of Rs.4,521.9 million (net of tax) which was paid on July 12, 2005.
Other than as set forth in this annual report, no significant change has occurred with respect to us since the date of our audited consolidated US GAAP financial statements included elsewhere in this annual report.
The details on our share and ADS price history is included in Item 9.C Markets below.
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Our ADSs are have been listed on the New York Stock Exchange or NYSE, since September 27, 2004. Each ADS represents one Ordinary Share. Our shares are listed on The Stock Exchange, Mumbai, which is also referred to as the Bombay Stock Exchange, Mumbai or the BSE, and the National Stock Exchange of India, or NSE, and are also listed and traded on two other stock exchanges in India. Our application for delisting our shares with respect to these two other stock exchanges is currently pending. The following table shows closing price and trading volume data for our ordinary shares on the NSE and BSE and for our ADSs on the NYSE:
On September 26, 2005, the reported closing price of our shares on the BSE was Rs.520.80 per share, on NSE was Rs.520.35 per share and the ADS closing price on NYSE was $12.00 per ADS.
Objects and Purposes
Our principal objects, as provided by Clause 3 of our Memorandum of Association, include:
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Under the Companies Act, as well as our Articles of Association, each of our Directors, who is in any way directly or indirectly concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into by or on our behalf is required to disclose the nature of his interest at a meeting of the first meeting of the Board held after the Director becomes concerned. Under the Companies Act, as well as the Articles of Association, an interested Director is not allowed to take part in the discussion of, or vote on, any contract, arrangement or proposal in which the Director is interested.
Under the Companies Act and our Articles of Association, we are restricted from making loans to Directors and the prior approval of the Central Government is required before we can make any loans, directly or indirectly, to any Director or provide, directly or indirectly, any guarantees or security in connection with any loan made by a third party to a Director.
Under our Articles of Association, a director is not required to hold any qualification shares. Our Articles of Association do not prescribe an age limit for the retirement of the Directors.
Under the Companies Act, unless the Board recommends the payment of a dividend, the shareholders at a general meeting have no power to declare any dividend. Under our Articles of Association, the shareholders at a general meeting may declare a lower, but not higher, dividend than that recommended by the Board. Dividends are generally declared as a percentage of the par value. The dividend recommended by the Board and approved by the shareholders at a general meeting is distributed and paid to shareholders in proportion to the paid-up value of their shares as on the record date for which such dividend is payable. In addition, the Board may declare and pay interim dividends. The shares to be issued upon the conversion of the ADSs will be fully paid-up when delivered as provided herein. Under the Companies Act, dividends can only be paid in cash to shareholders listed on the register of shareholders on the date which is specified as the record date or book closure date. No shareholder is entitled to a dividend while any lien in respect of unpaid calls on any of their shares is outstanding.
Shares issued upon conversion of ADSs will rank pari passu with our existing shares in all respects including entitlement of the dividend declared.
Dividends must be paid within 30 days from the date of the declaration and any dividend which remains unpaid or unclaimed after that period must be transferred within seven days to a special unpaid dividend account held at a scheduled bank. Any money which remains unpaid or unclaimed for seven years from the date of such transfer must be transferred by us to the Investor Education and Protection Fund established by the Government pursuant to which no claim shall lie against us or the said Fund.
Under the Companies Act, we may only pay a dividend in excess of 10% of paid-up capital in respect of any year out of the profits of that year after we have transferred to our reserves a percentage of our non consolidated Indian GAAP profits for that year ranging between 2.5% to 10% depending on the rate of dividend proposed to be declared in that year. The Companies Act further provides that if the profit for a year is insufficient, the dividend for that year may be declared out of the non consolidated Indian GAAP accumulated profits earned in previous years and transferred to reserves, subject to the following conditions: (i) the rate of dividend to be declared may not exceed the lesser of the average of the rates at which dividends were declared in the five years immediately preceding the year, or 10% of paid-up capital; (ii) the total amount to be drawn from the accumulated profits from previous years may not exceed an amount equivalent to 10% of paid-up capital and reserves and the amount so drawn is first to be used to set off the losses incurred in the financial year before any dividends in respect of preference or equity shares; and (iii) the balance of reserves after withdrawals must not be below 15% of paid-up capital.
Capitalization of Reserves and Issue of Bonus Shares
Our Articles of Association permit us by a resolution of our shareholders in a general meeting to resolve that amounts standing to the credit of reserves or securities premium can be capitalized by the issue of fully paid bonus shares (also referred to as a stock dividend) or by crediting shares not fully paid-up with the whole or part of any sum outstanding. Bonus shares must be issued pro rata to the amount of capital paid-up on existing shareholdings.
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Any issue of bonus shares would be subject to the guidelines issued by SEBI in this regard. The relevant SEBI guidelines prescribe that no company shall, pending conversion of convertible securities, issue any shares by way of bonus unless similar benefit is extended to the holders of those convertible securities, through reservation of shares in proportion to the conversion. Further, for the issuance of these bonus shares a company should not have defaulted in the payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption of these debentures. The declaration of bonus shares in lieu of dividend cannot be made. Further a company should have sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of employees, such as a contribution to a provident fund, gratuity or bonus. The issuance of bonus shares must be implemented within six months from the date of approval by the board of directors or the shareholders, whichever is later.
Calls on Shares, Pre-Emptive Rights and Alteration of Share Capital
Under the Companies Act, as well as our Articles of Association, the Board of Directors may from time to time make such calls as they think fit upon the members of the Company in respect of all moneys unpaid on the shares held by them respectively and each member is required to pay the amount of every call so made on him to the Company.
Subject to the provisions of the Companies Act, we may increase our share capital by issuing new shares on such terms and with such rights as we, by action of shareholders in a general meeting, determine. These new shares will be offered to existing shareholders listed on the members register on the record date in proportion to the amount paid-up on these shares at that date. The offer will be made by notice specifying the number of shares offered and the date (being not less than 15 days from the date of the offer) after which the offer, if not accepted, will be deemed to have been declined. After this date, the Board may dispose of the shares offered in respect of which no acceptance has been received, in such manner as the Board thinks most beneficial to us. The offer is deemed to include a right exercisable by the person concerned to renounce the shares offered to such person in favor of any other person provided that the person in whose favor these shares have been renounced is approved by the Board in their absolute discretion. We have issued convertible and non-convertible debentures (along with detachable warrants) on a rights basis to our shareholders. The shares to be allotted on exercise of these debentures and warrants will be allotted in accordance with the terms of these issues.
Under the Companies Act, new shares may be offered to any persons whether or not those persons include existing shareholders, if a special resolution to that effect is passed by the shareholders of the company in a general meeting. The issuance of shares upon conversion of our outstanding Convertible Notes has been duly approved by a special resolution of our shareholders and our shareholders have waived their pre-emptive rights with respect to these shares.
Our issued share capital may, among other things, be increased by the exercise of warrants attached to any security, or individually issued which entitles the holder to subscribe for shares or upon the conversion of convertible debentures issued. The issue of any convertible debentures or the taking of any convertible loans, other than from the Government and financial institutions, requires the approval by a special resolution of shareholders.
Our Articles of Association provide that, by a special resolution passed at the general meeting, we may consolidate or sub-divide our share capital, convert all or any of our fully paid-up shares into stock and re-convert that stock into fully paid-up shares or cancel shares which have not been taken up by any person.
We currently do not have any authorized preference share capital. Under the Companies Act, we may issue redeemable preference shares but (i) no such shares shall be redeemed except out of our profits which would otherwise be available for dividends or out of the proceeds of a fresh issue of shares made for the purposes of the redemption; (ii) no such shares shall be redeemed unless they are fully paid; (iii) the premium, if any, payable on redemption shall have been provided for out of the profits of us or out of our share premium account, before the shares are redeemed; (iv) where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividends, be transferred to a reserve fund, to be called the Capital Redemption Reserve Account, a sum equal to the nominal amount of the shares redeemed; and (v) the provisions of the Companies Act relating to the reduction of the share capital of a company shall apply as if such reserve account were the paid-up share capital of such company. Preference shares must be redeemable before the expiry of a period of twenty years from the date of their issue.
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Under the Companies Act, as well as our Articles of Association, if our share capital is divided into different classes of shares, all or any of the rights or privileges attached to each class of shares may be varied, modified or abrogated with the consent in writing of the holders of not less than three-fourths of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class. Our Articles of Association further provide that the rights conferred upon the holders of the shares of any class issued with preferential or other rights shall not, unless otherwise expressly prohibited by the terms of the issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu thereto.
General Meetings of Shareholders
We must hold our Annual General Meeting each year within 15 months of the previous Annual General Meeting and in any event not later than six months after the end of each accounting year, unless extended by the Registrar of Companies at our request for any special reason. Our Board of Directors may convene an Extraordinary General Meeting of shareholders when necessary or at the request of a shareholder or shareholders holding in the aggregate not less than 10% of our issued and paid-up capital. Written notices convening a meeting setting out the date, place and agenda of the meeting must be given to members at least 21 days prior to the date of the proposed meeting. A general meeting may be called after giving shorter notice if consent is received from all shareholders in the case of an Annual General Meeting, and from shareholders holding not less than 95% of our paid-up capital in the case of any other general meeting. Currently, we give written notices to all members and, in addition, give public notice of general meetings of shareholders in a daily newspaper of general circulation in Mumbai. General meetings are generally held at some place in Mumbai.
A company intending to pass a resolution relating to matters such as, but not limited to, amendment in the objects clause of the memorandum, buy back of shares under the Companies Act, giving loans or extending guarantee in excess of limits prescribed under the Companies Act, and guidelines issued thereunder, is required to obtain the resolution passed by means of a postal ballot instead of transacting the business in the general meeting of the company. A notice to all the shareholders shall be sent along with a draft resolution explaining the reasons therefor and requesting them to send their assent or dissent in writing on a postal ballot within a period of 30 days from the date of posting the letter. The quorum for a general meeting of the company is five shareholders personally present.
At a general meeting upon a show of hands, every member holding shares and entitled to vote and present in person has one vote. Upon a poll, the voting rights of each shareholder entitled to vote and present in person or by proxy is in the same proportion as the capital paid-up on each share held by such holder bears to the total paid-up capital. Voting is by show of hands, unless a poll is ordered by the Chairman of the meeting or demanded by shareholder or shareholders holding at least 10% of the voting rights in respect of the resolution or by those holding paid-up capital of at least Rs.50,000 (i.e. 5,000 shares of Rs.10 each). The Chairman of the meeting has a casting vote.