Videsh Sanchar Nigam 20-F 2007
As filed with the Securities and Exchange Commission on October 1, 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended March 31, 2007
For the Transition period from to
Commission File Number 001-15118
VIDESH SANCHAR NIGAM LIMITED
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
The Republic of India
(Jurisdiction of incorporation or organization)
Videsh Sanchar Bhavan, Mahatma Gandhi Road, Mumbai 400 001 +91-22-66578765
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
(Title of class)
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: 285,000,000 Equity Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
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 x
TABLE OF CONTENTS
CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS
In this Form 20-F, references to U.S. or the United States are to the United States of America, its territories and its possessions. References to India are to the Republic of India. Reference to $ or Dollars or US Dollars are to the legal currency of the United States and references to Rs. or Rupees or Indian Rupees are to the legal currency of India. Our financial statements are presented in Indian Rupees and are prepared in accordance with United States generally accepted accounting principles or US GAAP. In this Form 20-F, any discrepancies in any table between totals and the sums of the amounts listed are due to rounding. For the convenience of the reader, this Form 20-F contains translations of certain Indian Rupee amounts into US Dollars, which should not be construed as a representation that such Indian Rupee or US Dollar amounts referred to herein could have been, or could be, converted to US Dollars or Indian Rupees, as the case may be, at any particular rate, the rates stated, or at all. References to Indian GAAP are to Indian generally accepted accounting principles. References to a particular fiscal year are to the Companys fiscal year ended March 31 of such year. References to years not specified as being fiscal years are to calendar years.
Unless the context otherwise requires, references herein to we, us, our, the Company and VSNL are to Videsh Sanchar Nigam Limited and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to Videsh Sanchar Nigam Limited. The VSNL and Teleglobe logos and VSNL and Teleglobe are registered service marks of Videsh Sanchar Nigam Limited and/or its subsidiaries in the United States and/or other countries. All rights are reserved. This Form 20-F refers to trade names and trademarks of other companies. The mention of these trade names and trademarks in this Form 20-F is made with due recognition of the rights of these companies and without any intent to misappropriate those names or marks. All other trade names and trademarks appearing in this Form 20-F are the property of their respective owners.
The noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York was Rs.43.10 per $1.00 on March 30, 2007 for the conversion of Rupees into US Dollars. Unless otherwise specified herein, financial information has been converted into US Dollars at this rate. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. For more information regarding rates of exchange between Indian Rupees and US Dollars, see Item 3. Key InformationSelected Financial DataExchange Rates.
(CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995)
This Form 20-F contains forward-looking statements (as the phrase is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934) and information as amended, that are based on our managements current expectations, assumptions, estimates and projections about our Company and our industry and information currently available to us. These forward looking statements are identified by their use of terms and phrases such as anticipate, believe, could, estimate, expect, intend, may, plan, objectives, outlook, probably, project, will, seek, target and similar terms and phrases and reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from those described in this document. These forward-looking statements include, among others, statements concerning:
These forward-looking statements are subject to risks and uncertainties, including financial, regulatory, environmental, industry growth and trend projections, that could cause actual events or results to differ materially from those expressed or implied by the statements. The most important factors that could prevent us from achieving our stated goals include, but are not limited to, our failure to:
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Further disclosures that we make on related subjects in our additional filings with the Securities and Exchange Commission (SEC) should be considered. For further information regarding the risks and uncertainties that may affect our future results, please review the information set forth below under Item 3. Key informationRisk Factors.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements perception and analysis only as of the date of this Form 20-F. In addition, readers should carefully review the other information in this Form 20-F and in the Companys periodic reports and other documents filed with the SEC from time to time.
Selected Financial Data
The following table sets forth our selected consolidated financial data. The consolidated financial data have been derived from, and should be read in conjunction with, our consolidated financial statements prepared in accordance with US GAAP, along with the notes thereto. Our selected income statement data for the fiscal years ended March 31, 2005, 2006 and 2007 and the selected balance sheet data as of March 31, 2006 and 2007 are derived from our audited financial statements and related notes included in this Form 20-F, together with the report of Deloitte Haskins & Sells, an independent registered public accounting firm. Our selected income statement data for the fiscal year ended March 31, 2003 and 2004 and our selected balance sheet data as of March 31, 2003, 2004 and 2005 are derived from our audited US GAAP financial statements not included in this annual report. Our selected financial data and our financial statements are presented in Indian rupees. Financial data as of and for the fiscal year ended March 31, 2007 have been translated into US dollars for your convenience.
Fluctuations in the exchange rate between the Indian Rupee and the US Dollar will affect the US Dollar equivalent of the Indian Rupee price of the Companys equity shares (Equity Shares) on the Indian stock exchanges and, as a result, will likely affect the market price of the Companys American Depository Receipts (ADS) that are listed on the New York Stock Exchange, and vice versa. Such fluctuations will also affect the US Dollar conversion by the Depository of any cash dividends paid in Indian Rupees on the Equity Shares represented by the ADS.
The following table sets forth, for the fiscal years indicated, information concerning the number of Indian Rupees for which one US Dollar could be exchanged based on the average of the Noon Buying Rate in the City of New York on the last business day of each month during the period for cable transfers in Indian Rupees as certified for customs purchases by the Federal Reserve Bank of New York. The column titled Average in the table below is the average of the daily Noon Buying Rate on the last business day of each month during the year.
The following table sets forth the high and low exchange rates for the previous six months and are based on the average of the noon buying rate in the City of New York during the period for cable transfers in Indian Rupees as certified for customs purposes by the Federal Reserve Bank of New York.
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
This Form 20-F contains forward-looking statements that involve risks and uncertainties. The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Form 20-F.
We, or our representatives, from time to time may make or may have made certain forward-looking statements, whether orally or in writing, including without limitation statements made or to be made in this Form 20-F, information contained in other filings with the SEC, press releases and other public documents or statements. In addition, our representatives, from time to time, participate in speeches and calls with market analysts, conferences with investors or potential investors in our securities and other meetings and conferences. Some of the information presented at these speeches, calls, meetings and conferences may include forward-looking statements. We use words like expects, anticipates or believes to identify forward-looking statements. We wish to ensure that all forward-looking statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, all forward-looking statements are qualified in their entirety by reference to, and are accompanied by, the following discussion of certain important factors that could cause actual results to differ materially from those projected in such forward-looking statements. We caution the reader that this list of important factors may not be exhaustive. We operate in rapidly changing businesses, and new risk factors emerge from time to time. We cannot predict every risk factor, nor can we assess the impact, if any, of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Further, we undertake no obligation to update forward-looking statements after the date they are made to conform the statements to actual results or changes in our expectations.
RISK RELATED TO OUR COMPANY AND OUR INDUSTRY
Reductions in telecommunications tariffs in India and in the prices that we charge for our communication services have had and are expected to continue to have an adverse effect on our results of operations and financial condition
Telecommunications tariffs in India have declined significantly in recent years, peak international call tariffs have declined from Rs. 48 per minute in 2002 to Rs.12 per minute as of 2007 as a result of deregulation of tariffs and increased competition. The Department of Telecom (DoT) also relaxed the license conditions for international long distance (ILD) and national long distance (NLD) services and reduced the entry fee for these businesses from Rs. 250 million and Rs. 1 billion respectively to Rs.25 million, effective January 1, 2006. Furthermore, the Telecom Regulatory Authority of India (TRAI) has reduced the access deficit charge (ADC) on incoming ILD calls from Rs.1.60 per minute in fiscal 2006 to Rs.1.00 per minute in fiscal 2007 and removed the per minute ADC of Rs.0.80 on outgoing ILD calls. In addition, it also continues to impose a requirement for telecom operators to pay to it ADC as a percentage revenue share which currently is 0.75% of the operator's adjusted gross revenue (AGR).
Wholesale voice revenues constituted 61.70% in 2007 of the Companys total revenues. The decline in tariffs and the reduction of ADCs, while resulting in a traffic volume growth spurt, has materially and adversely affected the Companys revenues and net income.
In addition, we expect to continue to experience decreasing prices for our communications services:
Accordingly, our historical revenue is not indicative of future revenue based on comparable traffic volumes. As the prices for our communications services decrease for whatever reason, then unless volume increases or we are able to offer additional services from which we can derive additional revenue or otherwise reduce our operating expenses, our operating results will decline and our business and financial results will suffer.
Increased industry capacity and other factors could lead to lower prices for our services
Additional network capacity available from our competitors may cause significant decreases in the prices for the services that we offer. Prices may also decline due to capacity increases resulting from technological advances and strategic acquisitions. Increased competition has already led to a decline in rates charged for various telecommunications services.
There is an increase in the number of players offering various forms of data products and this sector is witnessing increased competition and reduced tariffs. Although, the Company has been a market leader in offering data products in India, there can be no assurance that the Company will be able to retain its market leader position and reduced tariffs will cause significant reduction in its revenues and thereby profits.
As a result of delays in the implementation of the new Carrier Access Code regime in India, we continue to depend on other telecommunications providers for access to end customers
All international calls we carry that either originate or terminate in India must pass through access telephone networks, which we do not own or control. Demand for our international outgoing telephony services will depend, to a significant degree, on the rates charged to end users in India, access to whom is controlled by competitors such as Bharat Sanchar Nigam Limited (BSNL), Mahanagar Telephone Nigam Limited (MTNL), Bharti and Reliance.
The Government of Indias proposed Carrier Access Code (CAC) regime offers end customers the right to choose their NLD or ILD carrier, based on rates and quality, rather than such choice being made by the access provider. Implementation of the CAC regime has been delayed due to technical and other issues. BSNL and MTNL currently control access to a majority of the end customers. Because of their Most Favoured Customer arrangement with the Company, they used the Company as their preferred ILD carrier until February 2004. Since February 2004, we have been dependent on the implementation of the CAC regime to develop our own customer base for the outgoing international telephony market. There can be no assurances that the CAC will be implemented in the near future or that even if the CAC is implemented, end customers will choose the Company as their preferred ILD carrier.
The Companys revenues from BSNL and MTNL, two of our larger customers, have declined significantly in recent years and may continue to do so. This is primarily the result of changes in government regulation which have increased competition in our businesses. Gross voice revenues from BSNL and MTNL collectively in fiscal 2007 was Rs. 3,846 million compared to Rs.4,500 million during fiscal 2005. After the termination of its ILD services monopoly and its Most Favoured Customer status in 2002 and February 2004 respectively, the Company has been competing with other ILD operators for BSNL and MTNLs traffic. In the event BSNL and/or MTNL cease to route or reduce the volume of their international traffic through the Company or seek to further renegotiate rates, the amount of call traffic carried by the Company and the Companys revenues and margins could be further adversely affected.
Furthermore, BSNL has been granted operating licenses for international telephony services by the Government of India and has started ILD operations. In March 2004, the Company and BSNL signed an agreement pursuant to which BSNL may use our infrastructure to route its ILD traffic. BSNL commenced utilizing our infrastructure under this arrangement during fiscal 2005. During fiscal 2007, BSNL also started exchanging traffic with international carriers directly on its submarine cable (Bharat Lanka Cable) through Colombo. There can be no assurance that BSNL will continue to route its ILD traffic through the Company in sufficient volumes or that the terms of the agreement will not be modified to the Companys detriment. During fiscal 2005, our infrastructure sharing agreement with BSNL was renegotiated and renewed until March 2007 resulting in lower revenues for the Company. This agreement was further negotiated during this fiscal year resulting in lower margins for the Company.
We must obtain and maintain permits and rights-of-way to operate our network
If we are unable, on acceptable terms and on a timely basis, to obtain and maintain the franchises, permits and rights needed to expand and operate our network, our business could be materially adversely affected. In addition, the cancellation or non-renewal of the franchises, permits or rights that are obtained could materially adversely affect us.
Competition in the Indian telecommunications sector is expected to intensify, further affecting our business adversely
The Indian telecommunications sector continues to be intensely competitive and we face competition in each of our lines of business. We expect further competition as the existing and new operators expand their operations and services, there is more industry consolidation and we enter new businesses. Our competitors in the ILD business have resorted to steep rate cuts that we have had to match to remain competitive affecting our traffic minutes, revenues and market share adversely. All fixed line, cellular and NLD operators in India have experienced increased competition in recent years. Faced with downward pressures on tariffs and revenues in their core businesses, these operators have demanded rate cuts from their ILD providers. BSNL, has already begun offering its own ILD services and other fixed line operators such as MTNL have said that they may start offering such services shortly. Some of the other telecom operators who offer fixed and wireless including mobile services are also NLD and ILD operators and carry not only their own traffic but also bid for traffic from other operators including BSNL and MTNL. In addition, with the government of India announcing relaxation of the licensing conditions and reduction of Entry Fees for International and Domestic Long Distance services from January 2006, more operators have started applying for licences and are likely to start operations and intensify competition further. Further, the Regulatory regime in India also permits negotiated rates for carriage of NLD calls. Many of the existing access providers are likely to acquire/have acquired NLD and / or ILD licences. This is likely to affect the addressable market of the Company resulting in drop in traffic volumes and revenues from NLD and ILD business. In some lines of our international businesses such as private leased circuits, end users are customers of foreign carriers and in case the foreign carriers decide to choose our competitors over us, we may lose revenues in those lines of business.
Further, the Government of India permitted the provision of Internet telephony by Internet Service Providers (ISP) in India with effect from April 1, 2002. Furthermore, an increasing number of international calls to and from India are being made through the Internet, and this number is likely to increase substantially. While the effect of Internet telephony has been minimal due to the low rates prevailing in the ILD market and the limited penetration of computers in India, competition from this sector could adversely affect the Companys telephony revenues in the future.
We need to continue to increase the volume of traffic on our network or we will not generate profits
We must continue to increase the volume of Internet, data, voice and video transmissions on our network in order to realize the anticipated cash flow, operating efficiencies and cost benefits of our network. This is particularly because since 2002, our revenue mix has changed significantly from a voice centric to a more diverse model in terms of both products and geographic reach. If we do not maintain our relationships with current customers and develop new large-volume customers, we may not be able to substantially increase traffic on our network, which would adversely affect our ability to become profitable. Further certain costs including costs related to repairs and maintenance can be of fixed nature and in the absence of revenues shall continue to adversely impact our profitability.
Illegal international telephony operators have adversely affected our call volumes
Our call volumes have been adversely affected by the international telephony services offered by illegal operators in India. These operators offer cheaper services since they do not pay Interconnect Usage Charges (IUCs) or ADCs or other regulatory payments including license fees and taxes. According to various market estimates these operators have captured around 20 percent of the incoming ILD traffic into India. The Company has suggested to the TRAI that the reduction of IUCs by phasing out or reducing the ADCs will ensure that illegal operators have no competitive advantage or arbitrage opportunities. While the ADCs have been reduced for international traffic terminating in India, there still exists an arbitrage of about Rs.1.00 per minute (being the current applicable ADC) for the illegal operators. Until the TRAI phases out the ADC component in the IUC and the Government of India implements strict measures to effectively prevent illegal telephony services, we expect our business to be adversely affected by illegal operators.
Telecommunications carriers that we do business with could suffer decreasing margins and financial distress, which may negatively impact our business
As an international telecommunications service provider, the Company does significant business with foreign carriers all over the world. Several telecommunications carriers have in the recent past suffered reduced profit margins as well as significant financial pressures. Some of these companies have been acquired by other U.S. or European companies and are undergoing restructuring of their businesses. If any of the major carriers that we do business with encounters financial difficulties or files for bankruptcy, we may be unable to recover amounts owed to us. There can be no assurance that all the Companys receivables can be collected or that the Company will not be adversely affected by the financial difficulties of other carriers.
International voice telecommunications services continue to see market price erosion and a decrease/slow growth in traffic volume from our traditional customer base, which may negatively impact our business
Market pricing for international wholesale voice telecommunications services continues to see annual declines between 5-10 percent. As pricing approaches the cost of transmission and far-end termination, the Company may experience lower per unit net revenue, which will adversely impact the net income earned from the international voice business.
In addition, while overall international voice traffic volumes are expected to continue to grow over the next 5 years, traffic growth will be driven by emerging wholesale customer segments. The Companys traditional strength and market share in international voice telecommunications has been driven by traditional, incumbent carrier relationships (a segment that is expected to experience a decline in volumes). It is possible for the Company to maintain or marginally grow our current market share in each of the primary customer segments (Carrier, Mobile, ISP/Broadband/Web Telephony) but still experience overall market share decline because our growth rate could be slower than that of our competitors. Inability to meet industry growth estimates from each customer segment will adversely impact the net revenue and income of the international wholesale voice business.
Our Mobile Global Roaming business may decline due to changing technologies
Our wireless Mobile Global Roaming business provides roaming services for GSM, Integrated Dispatch Enhanced Network, or iDen, Universal Mobile Telecommunications System, or UMTS, and Enhanced Specialized Mobile Radio, or ESMR, networks around the world. However, it may be more difficult for us to provide roaming between other network standards, including networks based on third generation, or 3G, standards, because our service may not be able to work with such other standards to identify mobile subscribers locations and profiles. Within the last several years, some roaming providers have begun to use protocol gateways that translate data from disparate networks into a single common language that permits the provision of roaming service to a variety of network types. As roaming services independent of the core GSM/UTMS network specifications become more prevalent, demand for our services may reduce which would have a material adverse effect on our gross margins and financial performance.
Our international operations and investments expose us to risks that could materially adversely affect the business
We have operations and investments outside of India and the United States, as well as rights to undersea cable capacity extending to other countries that expose us to risks inherent in international operations. These include:
Failure to complete development, testing and introduction of new services, including managed services, could affect our ability to compete in the industry
We continuously develop, test and introduce new communications services that are delivered over our network. These new services are intended to allow us to address new segments of the communications marketplace and to compete for additional customers. In certain instances, the introduction of new services requires the successful development of new technology. To the extent that upgrades of existing technology are required for the introduction of new services, the success of these upgrades may be dependent on the conclusion of contract negotiations with vendors, and vendors meeting their obligations in a timely manner. In addition, our new service offerings, including new managed services, may not be widely accepted by our customers. If our new service offerings are not widely accepted by our customers, we may terminate those service offerings and be required to impair any assets or information technology used to develop or offer those services. If we are not able to successfully complete the development and introduction of new services, including new managed services, in a timely manner, our business could be materially adversely affected.
Any serious damage to the undersea telecommunications cable systems utilized by the Company might adversely affect the Companys traffic and thereby its revenues
A major part of the Companys international traffic is routed through undersea cable systems landing in India and other parts of the world as well as through cable systems between different countries. These cables are prone to damage including cable cuts. Although such damage is normally not serious in nature and traffic can often be routed through the other remaining cable systems and satellites, serious damage could occur. Any serious damage to major cables could seriously disrupt traffic, leading to losses in revenue.
Our growth may depend upon our successful integration of acquired businesses
The integration of acquired businesses, including those referenced immediately below, involves a number of risks, including, but not limited to:
If we cannot successfully integrate acquired businesses or operations, we may experience material adverse consequences to our business, financial condition or results of operations. Successful integration of these acquired businesses or operations will depend on our ability to manage these operations, realize opportunities for revenue growth presented by strengthened service offerings and expanded geographic market coverage and, to some degree, to eliminate redundant and excess costs. Because of difficulties in combining geographically distant operations, we may not be able to achieve the benefits that we hope to achieve as a result of the acquisition.
Recent acquisitions include:
We have also entered into a joint venture to provide telecommunications services in South Africa, which would require the Company to make significant investments. We may make further acquisitions or enter into other strategic partnerships to expand our access to customers, acquire new service offerings and/or enhance our technical capabilities.
Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide our services
If technology that is necessary for us to provide our services is held under patent by another person, we would have to negotiate a license for the use of that technology. We may not be able to negotiate such a license at a price that is acceptable. The existence of such patents, or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using the technology and offering products and services incorporating the technology.
To the extent that we are subject to litigation regarding the ownership of our intellectual property, this litigation could:
Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties, which may not be available at a reasonable cost, if at all. The defense of any lawsuit could result in time-consuming and expensive litigation, regardless of the merits of such claims, and could also result in damages, license fees, royalty payments and restrictions on our ability to provide our services, any of which could harm our business.
Impairment of our intellectual property rights could harm our business
Our efforts to protect our intellectual property rights through patent, copyright, trademark and trade secret laws in various jurisdictions worldwide may not prevent misappropriation, and our failure to protect our proprietary rights could materially adversely affect our business, financial condition and operating results.
A third party could, without authorization, copy or otherwise appropriate our proprietary network information. Our agreements with employees and others who participate in development activities could be breached, we may not have adequate remedies for any breach, and our trade secrets may otherwise become known or independently developed by competitors.
We may be unable to hire and retain sufficient qualified personnel; the loss of any of our key executive officers could adversely affect our business
We believe that our success in the future will depend to a large extent on our ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial, professional and technical personnel. We expect to experience significant competition in attracting and retaining personnel who possess the skills that we are seeking. Our business is managed by a team of key executive officers and their immediate teams. Loss of any of these key executives could have a material adverse effect on our business. We have started to implement a major restructuring plan in the international operations to achieve synergies and to improve the financial performance of these operations. In the event these plans are not successfully implemented due to internal or external reasons, it could have a material adverse effect on our business and financial performance.
Our profitability may be adversely affected if we become the victim of fraud or theft of services
The industry in which we operate has incurred losses in the last several years due to fraud. Unauthorized transactions or theft of our services could reduce our profitability substantially. Although we have implemented various measures in order to control losses relating to fraudulent practices, we may not succeed in effectively controlling fraud when operating in the international or domestic Indian telecommunications markets. We endeavor to manage these theft and fraud risks through our internal controls and our monitoring systems. We believe that our risk management practices will be adequate but there is no guarantee that we may succeed in effectively controlling fraud.
Our business may be adversely affected if we cannot fulfill our commitments on significant contracts
We have undertaken a number of complex and large contracts with certain of our wholesale voice and enterprise and carrier data customers. If we fail to execute these contracts on time, it may result in reduction in our future revenues and in turn our profitability. Further, failure to meet our commitments under these contracts would result in damage to our reputation. Our five largest customers collectively accounted for 20 percent of our revenues in fiscal 2007.
We operate in an industry which is largely dependent on the decision and actions of our customers and there are various factors outside our control which may lead to termination of contracts. If due to any reason, we lose any of our major customers or they terminate the agreement entered into with the Company, it could negatively impact our revenues as well as our profitability and cash generation ability.
Regulatory/Contingent Liabilities Risks
Our profitability may be adversely affected if the decisions in respect of revenue share disputes are upheld against the Company
The Company, in accordance with the terms of its license, has to pay a certain percentage of its AGR to the telecom licensor in India. The Company has disputed the definition of AGR and the matters are at various stages of dispute as per the dispute resolution process prevailing in the Indian telecom regulatory environment. In the event these matters are upheld against us, the Companys profitability may be materially impacted, which may lead to significant cash outflow towards such revenue share payments to the telecom licensor in addition to punitive action as per license terms.
If certain tax claims by the Indian tax authorities are upheld, our financial condition would be adversely impacted
The Company is subject to the following major tax claims in India:
We may not receive additional compensation from the Government of India for the early termination of our monopoly in international telephony services
The Government of India allowed private operators to start offering ILD services from April 1, 2002, thereby terminating the Companys exclusivity in offering such services two years ahead of schedule, and compensated the Company with a package of benefits. The Government of India had given assurance prior to the disinvestment of the Company that it would consider additional compensation if found necessary following a detailed review, when undertaken. However, prior to disinvestment of the Company in February 2002, the Government granted a dispensation as full and final settlement of every sort of claim against the early termination of the Companys ILD monopoly. The Company has been pursuing the Government of India to consider providing it with additional compensation. Since legalities warranted the filing of a complaint with the High Court within the stipulated time to ensure that the claim is not barred by limitation, VSNL has filed a claim in the High Court for such additional compensation. There can be no assurance that the claim will be successful and the Company will receive compensation from the Government of India, or if the Company does receive compensation, as to the amount, nature or timing of such compensation.
We are subject to extensive regulation and supervision by the Government of India, which could adversely affect the operation of our business and prevent us from entering into transactions that are in the best interests of our shareholders
The Company and its businesses are subject to extensive regulation and supervision by the Government of India and its departments, including the DoT, which issues and implements the telecommunications licenses under the Indian Telegraph Act and the TRAI which, among other things, sets the terms and conditions which telecommunications operators are required to follow in their activities. The Company operates substantially all of the ILD services it provides in India, including basic international telephony services to and from India, pursuant to a new license agreement with the Government of India that is valid until March 31, 2022. The Company also holds an NLD license and an ISP license. The DoT retains the right to modify the terms and conditions of the Companys licenses at any time if in its opinion it is necessary or expedient to do so in the interest of the general public or for the proper operation of the telecommunication sector. A change in certain significant terms of any of the licenses, such as their duration, the range of services permitted or the scope of exclusivity, if any, could have a material adverse effect on the Companys business and prospects. The DoT as the licensor is empowered to revoke the license granted by it for any breach of the license conditions. The Company must also annually obtain various radio spectrum operating license from the Wireless Planning and Co-ordination Wing of the Ministry of Communications (WPC). Although it expects to obtain such renewals, the non-renewal or modification of these or any of its licenses, or punitive action by the Government of India for continuing these services without renewal of the license, could adversely affect the Company and result in lost revenues.
TRAIs clearance is required for all the Companys new initiatives on issues of pricing or the launch of new products. Failure to follow the TRAI directives may lead to the imposition of fines and other punitive actions. Any disputes between the Company and the Government of India (as the licensor) regarding the terms of the Companys telecommunications licenses, as well as any dispute between the Company and the other service providers in India, is required to be adjudicated by the Telecom Disputes Settlement Appellate Tribunal (TDSAT). Failure to follow the TRAI directives or TDSAT orders may lead to the imposition of fines and/or other punitive actions. Accordingly, Government regulation and supervision could require us to enter into transactions or conduct our business in a manner that is not in the best interests of our shareholders.
Regulatory decisions and changes in the regulatory environment in the jurisdictions in which we do business could adversely affect our business
The Company has interests in a large number of geographic areas across the world and must comply with an extensive range of requirements that are meant to regulate and supervise the licensing, construction and operation of telecommunications networks and services. These requirements are likely to increase with the Companys increased overseas expansion. In particular, there are agencies which regulate and supervise the allocation of frequency spectrum and which monitor and enforce regulation and competition laws which apply to the telecommunications industry. Decisions by regulators in various geographic areas regarding the granting, amendment or renewal of licenses, to the Company or to third parties, could adversely affect the Companys future operations in these geographic areas. The Company cannot provide any assurances that governments in the countries in which it intends to operate will issue the required telecommunications licenses. Additionally, decisions by regulators could further adversely affect the pricing for services the Company offers or intends to offer.
Further, as a multinational enterprise, we are subject to varying degrees of regulation by state, federal and foreign regulators. Some of the jurisdictions where we provide services have little, if any, written regulations regarding our operations. In addition, the written regulations and guidelines that do exist in a jurisdiction may not specifically address our operations. If our interpretation of these regulations and guidelines is incorrect, we may incur additional expenses to comply with additional regulations applicable to our operations. It is possible that one or more governmental agencies will disagree with our interpretation of existing laws or regulations and assert that our operations are not in compliance with those laws or regulations. In that event, it is possible that the governmental agency might initiate an enforcement action or impose restrictions on our operations which could have a material adverse effect on our operations.
We have incurred substantial debt which could adversely affect us.
The Company incurred substantial debt in fiscal 2007 primarily to finance its acquisitions. As of March 31, 2007, the outstanding principal amount of our indebtedness was approximately Rs. 24,082 million (US$558.75 million). We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, subject to certain restrictions under our existing indebtedness, which would increase our total debt.
The significant negative consequences on our financial condition and results of operations that could result from our substantial debt include:
Termination of relationships with key suppliers could cause delay and costs
We are dependent on key third-party suppliers for fiber, computers, software, optronics, transmission electronics and related components that are integrated into our network. We are also dependent on key suppliers who maintain our extensive cable assets (not restricted to undersea cable assets) for repairs and maintenance of these various forms of cable systems. If any of these relationships is terminated or a key supplier fails to provide reliable services or equipment, we might be unable to reach suitable alternative arrangements quickly and consequently could experience significant additional costs. If that happens, it could have a material adverse effect on our financial condition and operation.
We have made, and in the future might make, substantial capital investments in new telecommunications projects which may be subject to liquidity and execution risk and, if not offset by additional revenue, might adversely affect our financial condition and operating results
We have made, and might in the future make, substantial additional investments in new telecommunications projects, including in connection with technology upgrades and geographic expansion. These investments could require significant capital expenditures. The Company expended approximately Rs.10,091 million (US$234.13 million) towards capital expenditure in fiscal 2007 and we expect our capital expenditure in fiscal 2008 to be approximately Rs. 39,870 million (US$925.06 million) If this capital is not available when needed or if it is available on terms that are not attractive, our business will be adversely affected. In particular, recent uncertainty in the international credit markets, including developments related to concerns about the United States sub-prime mortgage market, may adversely affect our ability to obtain financing.
Increasing competition, offering new services such as our proposed cable projects, improving the capabilities or reducing the maintenance costs of our equipment or cost overruns or delays in our projects may cause our capital expenditures to increase in the future. Furthermore, telecommunications technology evolves rapidly and there can be no assurance that any investments in new technology will have a positive impact on the Companys financial results nor that the Companys capital expenditures in such projects will be offset by adequate additional revenue or margins.
Litigation could be harmful and costly to our business
We are defending material litigation described in Item 8 Legal Proceedings. Regardless of the outcome, we will incur substantial legal costs. In addition, this type of litigation may strain our resources and divert management attention, causing our business to suffer. Further, any adverse outcomes in such lawsuits could materially adversely affect our financial condition or operating results.
Absence of a robust Business Continuity Plan could affect our business adversely
The Companys operations are dependent on various information technology (IT) systems and applications which may not be adequately supported by a robust business continuity plan. Absence of a robust Business Continuity Plan can seriously impact our business in the event of a disaster of any nature.
We may not be able to continue to comply with corporate governance regulations applicable to us as a public company, including the Sarbanes Oxley Act, 2002 and we could also be adversely impacted due to higher costs of compliance
We are subject to various accounting, corporate governance and public disclosure regulations as a public company in the United States and India. We may not always be able to meet such requirements, and we also face increasing costs related to such compliance. Among other factors, because we have made significant acquisitions and because of changes in our services and business as a result of technological, regulatory and competitive changes and delays in implementation of new information technology systems, we may face difficulties and increased costs in sustaining such compliance.
In particular, our efforts to comply with the requirements of Section 404 of the Sarbanes Oxley Act, 2002 relating to the evaluation of our internal control over financial reporting, have resulted in increased compliance costs. As set forth elsewhere in this Annual Report on Form 20-F, our management has concluded that our internal control over financial reporting was effective as of March 31, 2007. Our auditors will be required to deliver an attestation concerning our report on internal control over financial reporting commencing with our Annual Report on Form 20-F for the fiscal year ending March 31, 2008. There is no assurance that our management, or our auditors, will conclude our financial reporting is effective in any future period.
In connection with the audit of the statutory financial statements in India, our independent auditors of our Indian GAAP financial statements in an annexure to their report thereon, noted that our internal controls for rendering of certain enterprise data services needed to be strengthened. We are in the process of implementing remedial actions towards strengthening such internal controls. The auditors report on our Indian GAAP financial statements including the annexure thereto forms part of our Indian annual report which is available on our website www.vsnl.com.
Any failure to maintain effective control over financial reporting could result in adverse consequences such as errors or misstatements in our financial reporting or fraud. A failure to comply with the requirements of Section 404 of the Sarbanes Oxley, 2002, or of other corporate governance or similar regulations could result in investigations or sanctions by regulatory authorities, among other things. Any such consequences could have a material adverse effect on our financial condition, results of operations and on the trading price of our securities.
The Companys business may be adversely affected by any slowdown in economic growth in India, the United States or other countries where the Company does business or by a slowdown in the growth of the IT sector
The growth of telecommunications traffic is related to general economic growth and slowdowns in the Indian economy could result in slower growth rates in telecommunications traffic in India. A significant part of the Companys revenues are derived from calls
originating in India and the United States. During the year ended March 2007, approximately 27.70 percent and 21.77 percent of the Companys operating revenues were from India and the United States, respectively. Slowdowns in the US economy, as well as in other countries where the Company does significant business, may negatively affect our business. The IT sector is a major contributor to the telephony and leased channel revenues of the Company and therefore the Companys revenues might be adversely affected by slowdowns in the IT sector.
A substantial portion of Companys assets are located in India and the outstanding shares are listed on the Indian stock exchanges. Accordingly, the Companys performance, the market price and liquidity of the shares and of the ADS may be affected by changes in exchange rates and controls, interest rates, government policy and taxation and other political, economic or social developments in or affecting India
Since 1991, successive governments in India have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. Nevertheless, the role of the Indian central and state governments in the Indian economy as producers, consumers and regulators remains significant in ways that affect all Indian companies, including the Company.
India held elections for a new Government in April-May 2004 and the Government changed for the sixth time since 1996. Since no party won a majority of the seats in the Lok Sabha (the lower house of Parliament) in the elections, the present Government is made up of a multiparty coalition. There can be no assurance that the Government, which is presently supported by other political allies, will continue to receive such support. The next general elections are due to be held in 2009. Political instability could delay the reforms of the Indian economy and could have a material adverse effect on the market for securities of Indian companies, including our shares and ADS.
While the Government of India has pledged to go ahead with its reforms, given the dynamics of coalition politics, there can be no assurance that all the previous Governments reform policies will be carried forward. Although we believe that economic liberalization will continue in the future, there is no assurance that this will be so.
Terrorist attacks and other acts of violence or war involving India, the United States and other countries could adversely affect the financial markets and the Companys business
Terrorist attacks, such as the ones that occurred in U.S. and India in 2001 and in Mumbai, India in 2003 and 2006 and other acts of violence or war may negatively affect the Indian markets where the Companys Equity Shares trade and also adversely affect the world-wide financial markets. These acts may also result in a loss of business confidence, make travel and other services more difficult and ultimately adversely affect the Companys business. There can be no assurance that there will not be any further terrorist attacks against India, the United States or any other country.
Also as a result of such events, India, the United States or certain other countries where the Company has or may have major business interests may enter into armed conflict with other countries. The consequences of any potential armed conflicts are unpredictable. In addition, India has from time to time experienced unrest relating to religious and political differences within Indias population, as well as with its neighboring country Pakistan.
Any increase in regional or international hostilities, terrorist attacks or other acts of violence or war could have a significant adverse impact on international and/or Indian financial markets or economic conditions or on Indian Government policy, thereby disrupting communications and making travel more difficult. Such political tensions could create a greater perception that investment in Indian companies involves a higher degree of risk and could have an adverse impact on the Companys business, or the market price for the Companys Equity Shares and the ADSs.
Conditions in the Indian securities market may affect the price or liquidity of the shares and the ADSs
The Indian securities markets are smaller in terms of trading volume and more volatile than the securities markets in the United States and certain European and other countries. The Indian stock exchanges have in the past experienced substantial fluctuations in the prices of listed securities. It is generally perceived that there is a lower level of regulation and monitoring of the Indian securities markets and the activities of investors, brokers and other participants than in securities markets in the United States and certain European and other countries.
The Indian stock exchanges have experienced trading interruptions in the past on account of regulatory interventions as well as operational issues. If these interruptions were to recur, it could affect the market price and liquidity of the securities of Indian companies, including the Equity Shares and ADSs, in both domestic and international markets. In addition, the governing bodies of the Indian stock exchanges have from time to time imposed restrictions on trading in certain securities, limitations on price movements and margin requirements. Similar problems could occur in the future and, if they do, it could affect the market price and liquidity of the Shares and the ADSs.
The Company and you may be subject to potential losses arising out of exchange rate risk on the Indian rupee and risks associated with the conversion rates between the Indian rupee and foreign currencies
Fluctuations in the exchange rate between the Rupee and the Dollar will affect, among other things, the Dollar equivalents of the price of the Equity Shares in Rupees as quoted on the Indian stock exchanges and, as a result, may affect the market price of the ADSs. Such fluctuations will also affect the Dollar equivalent of any cash dividends in Rupees received on the Shares represented by the ADSs and the Dollar equivalent of the proceeds in Rupees of a sale of Equity Shares in India.
Fluctuations in the exchange rate between the Rupee, the SDR (or Special Drawing Rights, which are based on a basket of key international currencies and are frequently used in foreign currency payment settlements) and other currencies also affect the Rupee amount of foreign currency settlement payments received by the Company from, and paid by the Company to, foreign telecommunications administrations and therefore the revenue and operating costs of the Company. The Company may as a result be exposed to the risk of fluctuations in the exchange rate between the Rupee and foreign currencies, which effectively may increase the cost in Rupee terms of foreign exchange payments required to be made by the Company, including payments to foreign telecommunications administrations and payments for imported equipment and technology. To reduce the effect of exchange rate fluctuation on our operating result, the Company uses derivative instruments such as forward contracts to cover a portion of outstanding accounts receivables; however, there can be no assurance that the Company will be able to avoid the adverse affects of exchange rate fluctuations.
You may not be able to enforce a judgment of a foreign court against the Company
The Company is a limited liability company organized under the laws of India. All of the directors and officers of the Company and certain other persons named herein are residents of India, and all or a significant portion of the assets of all of the directors and officers and a substantial portion of the assets of the Company are located in India. As a result, it may be difficult for investors to effect service of process upon the Company or such directors or officers outside India or to enforce against them judgments obtained from courts outside India, including judgments predicated on the civil liability provisions of the United States federal securities laws. The statutory basis for determining conclusiveness of foreign judgments in India is provided in Section 13 of the Code of Civil Procedure 1908 (the Code) of India, which provides that a foreign judgment shall be conclusive as to any matter thereby directly adjudicated upon except (1) where the judgment has not been pronounced by a court of competent jurisdiction, (2) where the judgment has not been given on the merits of the case, (3) where the judgment appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognize the law of India in cases where such law is applicable, (4) where the proceedings in which the judgment was obtained were opposed to natural justice, (5) where the judgment has been obtained by fraud
and (6) where the judgment sustains a claim founded on a breach of any law in force in India. Section 44A of the Code, which deals with the enforcement and execution of foreign judgments, provides that where a foreign judgment has been rendered by a court in any country or territory outside India which the Government of India has by notification declared to be a reciprocating territory, it may be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court in India. The United Kingdom, but not the United States, has been declared by the Government of India to be a reciprocating territory for the purposes of Section 44A. Accordingly, a judgment of a court in the United States may be enforced only by way of a suit instituted upon the judgment in accordance with the Code and not by proceedings in execution. Furthermore, it is uncertain 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 under the Foreign Exchange Management Act, 1999, to execute such a judgment or to repatriate any amount recovered.
Dealings with telecom service providers in countries designated by the U.S. Department of State as state sponsors of terrorism may lead some potential customers and/or investor(s) in the U.S. and/or other countries to circumvent doing business with us
The United States, and from time to time other countries, have laws that may prohibit or restrict their citizens from engaging in business in certain countries, or that otherwise impose economic sanctions on such countries. International bodies such as the United Nations may also impose sanctions on certain countries from time to time. The United States currently has laws that prohibit or restrict its citizens from doing business in Cuba, Iran, the Sudan and Syria.
As a major provider of international telecommunications services to customers in India, the Company enters into interconnection agreements with communications providers around the world. The Company has entered into agreements with providers located in certain of such countries, and entered into arrangements to facilitate the carrying of telecommunications traffic to and from such countries, and it may do so in the future. The Company does not believe that its business activities in or other contacts with Cuba, Iran, the Sudan or Syria are material in quantitative terms. The Company also believes that the business activities are qualitatively immaterial in terms of the factors that a reasonable investor would deem important in making an investment decision, including factors that would affect the Companys reputation or share value. Specifically, the Company believes that such activities are immaterial because they represent the ordinary arrangements that any global provider of telecommunications services would have with providers all over the world. Indeed, as the exclusive provider of ILD traffic until 2002, unless so ordered to do so by law, it would have been inappropriate for the Company to refuse to accept traffic from particular countries, or refuse to carry traffic to particular countries. The Company believes the loss of its monopoly status does not affect the fact that it should continue to provide services globally.
It is possible that in the future sanctions of this type imposed by the United States or others could adversely affect our ability to do business or the ability of investors to hold our securities.
The Company is substantially owned by some of the Tata companies and the Government of India, who have significant rights in relation to the election of the Companys board of directors (Board of Directors) and may have interests which conflict with those of our other shareholders including holders of our ADSs.
As of March 31, 2007, Panatone Finvest Limited, a company wholly owned by some of the Tata companies, owns approximately 40.70 percent, and the Government of India owns approximately 26.12 percent, of our total outstanding equity. Two other Tata companies own approximately 9.41 percent of our total outstanding equity. Panatone Finvest Limited and the Government are parties to a Shareholders Agreement pursuant to which they have agreed on certain matters with respect to the governance and operation of the Company, including the composition and election of the board of directors. As of September 15, 2007, our Board of Directors consisted of twelve members, six of whom were nominated by Panatone Finvest Limited and two of whom were nominated by the Government of India. There were four independent directors on the board as per the provisions of the Shareholders Agreement. As a result of their equity holdings and the Shareholders Agreement, Panatone Finvest Limited and the Government of India together have significant control over the matters coming up for consideration at the meetings of the Board and of the shareholders of the Company and they acting together at the meetings have the power to elect the directors and control all matters submitted to shareholders. There can be no assurance that the interests of Panatone Finvest Limited and/or the Government of India would be the same and their respective interests could differ from the interests of our other shareholders, including the holders of ADSs.
The Company may face potential conflicts of interest relating to its principal shareholder, the Tata companies
The Tata companies have diverse business activities and interests, and some of its affiliates could engage in activities, or seek opportunities, that are or could be in competition with the activities or interests of the Company. The Tata companies have interests in other companies in the telecommunications sector, such as Tata Teleservices Limited. The Tata companies and Panatone Finvest Limited have agreed in a Shareholders Agreement to act in the best interests of the Company in the event that they become engaged in activities in competition with the Company. However, any conflicts of interest between these Tata companies and/or Panatone Finvest Limited and the Company could adversely affect the Companys business. Furthermore, the Company may loose significant amount of business which it is generating from Tata Teleservices Limited, a major contributor to the Companys NLD business.
Disagreements between the Tata companies and the Government of India concerning activities of the Company could result in a deadlock, which could adversely affect the Companys business.
Panatone Finvest Limited and the Government of India have agreed in the Shareholders Agreement that the Company shall not undertake certain corporate actions unless at least one director nominated by each of them (in the case of a Board meeting) or at least one authorized representative nominated by each of them (in the case of a shareholder meeting) consents to such action. These actions include any change in the Memorandum of Association and Articles of Association, the granting of any security or incurring of indebtedness in excess of the net worth of the Company, winding-up the Company, the making of loans in excess of Rs.500 million other than in the ordinary course of business, the sale or lease of any fixed assets acquired prior to privatization and the entering into of an amalgamation, merger, or consolidation. Panatone Finvest Limited and the Government of India have also agreed not to transfer their shares in the Company without giving the other certain rights of first refusal and tag along rights. In the event that Panatone Finvest Limited and the Government of India fail to agree on any such matter, their disagreement could result in the Company not taking action or not taking advantage of a potential opportunity, which could in turn adversely affect the Companys business or the value of the Companys ADSs or Equity Shares.
The demerger of surplus land held by the Company may not be completed on satisfactory terms.
Under the terms of the Shareholders Agreement, Panatone Finvest Limited agreed that the Company would demerge certain lands that the Company owns in Pune, Kolkata, New Delhi and Chennai, India into a separate company. No time period was specified in the agreement for such demerger. The Company, Panatone Finvest Limited and the Government are currently discussing various options in connection with the demerger or sale of the land. Until such time as the demerger takes place, the lands are under the possession and upkeep of the Company.
The Company cannot predict if the demerger will take place or the expenditure that the Company might have to incur for the security, upkeep and maintenance of the surplus land. The Company may have to bear significant costs, including taxes and duties, relating to the demerger, and the Company cannot predict what effect, if any, the demerger and the legal and valuation process relating to the demerger will have on the Companys financial condition.
Risk related to the ADSs
Sales of our Equity Shares may adversely affect the prices of our equity shares and ADSs
Sales of substantial amounts of our Equity Shares or the perception that such sales may occur could adversely affect the prevailing market price of our Equity Shares or the ADSs or our ability to raise capital through an offering of our securities. In the future, we may also sponsor the sale of shares currently held by some of our shareholders, or issue new shares. We can make no prediction as to the timing of any such sales or the issue or the effect, if any, that future sales of our equity shares or the availability of our Equity Shares for future sales, will have on the market price of our equity shares or ADSs prevailing from time to time.
Holders of ADSs have no voting rights
Investors in ADSs have no voting rights unlike holders of the Equity Shares who have voting rights. It is contemplated that the Depositary will exercise its right to vote on the Equity Shares represented by the ADSs as directed by the Companys Board of Directors. Investors may withdraw the Equity Shares underlying the ADSs and seek to vote the Equity Shares obtained from the withdrawal. However, for foreign investors, this withdrawal process may be subject to delays.
There is a limited market for the ADSs
Even though the ADSs are listed on the New York Stock Exchange, there is no assurance that any trading market for the ADSs will be sustained. Subsequent to the open/ tender offer by Panatone Finvest Limited, the number of shares represented by ADSs declined from approximately 60 million (21 percent of our issued and outstanding Equity Shares) as of March 31, 2002 to approximately 17 million (6 percent of our issued and outstanding Equity Shares) as of March 31, 2007. This may affect the liquidity of the market for the Companys ADSs and the price at which they trade.
Indian law imposes foreign investment restrictions that limit a holders ability to convert equity shares into ADSs, which may cause the Companys Equity Shares to trade at a discount or premium relative to the market price of its ADSs
Until recently, under Indian law it was not permitted for a depositary to accept deposits of outstanding equity shares and issue ADSs evidencing such shares. Thus, an investor in ADSs who surrendered an ADS and withdrew equity shares would not be permitted to redeposit those equity shares to obtain ADSs, nor would an investor who purchased equity shares on the Indian market be permitted to deposit them in the ADS program. The Government of India has recently permitted two-way fungibility of ADSs. However, this is still subject to sectoral caps and certain conditions, including compliance with the provisions of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme 1993 and the periodic guidelines issued by the Government and also registration requirements in the United States. Such restrictions on foreign ownership of the underlying equity shares may cause the Companys Equity Shares to trade at a discount or premium to its ADSs.
An investor in our ADSs may not be able to exercise preemptive rights for additional shares and may thereby suffer dilution of his or her equity interest in us
Under the Companies Act, 1956, or the Indian Companies Act, a company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentage prior to the issuance of any new equity shares, unless such preemptive rights have been waived by three-fourth of the shares voting on the resolution to waive such rights. Holders of ADSs may be unable to exercise preemptive rights for equity shares underlying ADSs unless a registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirements of the Securities Act is available. We are not obliged to prepare and file such a registration statement and our decision on whether to do so will depend on the costs and potential benefits of enabling the holders of ADSs to exercise their preemptive rights, and any other factors we consider appropriate at the time. No assurance can be given that we would file a registration statement under these circumstances. If we issue any such securities in the future, such securities may be issued to the depositary, which may sell such securities for the benefit of the holders of the ADSs.
There can be no assurance as to the value, if any, that the Depositary would receive upon the sale of such securities. To the extent that holders of ADSs are unable to exercise preemptive rights granted in respect of the equity shares represented by their ADSs, their proportional interests in us would be reduced.
History and Development of the Company
Videsh Sanchar Nigam Limited was incorporated on March 19, 1986 as a limited liability company under the Indian Companies Act. On April 1, 1986, the Company assumed control and management of all of the assets, employees and operations of the Overseas Communications Service, a department of the Ministry of Communications of the Government of India. The Company was wholly owned by the Government of India until 1992. During 1997 and 1999, the Government sold some of its equity holdings in the Company through the issuance of global depositary receipts (GDRs). These GDRs were converted into ADRs upon the Companys listing on the New York Stock Exchange on August 15, 2000.
Following a competitive bidding process, in February 2002 the Government of India selected Panatone Finvest Limited, a company owned by the Tata companies, as the strategic partner for the sale of the Government of indias 71,250,000 equity shares representing 25 percent of the outstanding voting capital of the Company. As a result, a shareholders agreement was entered into between the Government of India, Panatone Finvest Limited, Tata Sons Limited, Tata Power Company Limited, Tata Iron and Steel Company Limited and Tata Industries Limited (Shareholders Agreement). The Government of India also simultaneously divested approximately 1.85 percent of the outstanding shares of the Company to its employees. A share purchase agreement giving effect to the above arrangement was entered into between the Government of India and Panatone Finvest Limited on February 6, 2002 (the Share Purchase Agreement). In connection with the purchase of the shares from the Government of India, Panatone Finvest Limited was required by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and subsequent amendments thereto to launch a tender/open offer for an additional 20 percent of the equity shares from other shareholders of the Company. Other Tata companies have since made open market purchases and sales of the Companys Equity Shares, and the consolidated shareholding of the Tata companies in the Company as of March 31, 2007, was approximately 50.11 percent and the Government of Indias shareholding was approximately 26.12 percent.
Pursuant to a notice of early termination by the Government of India, the Company, which had been the exclusive provider of public international telecommunications services in India, had its monopoly terminated on March 31, 2002. With effect from April 2002, the Government of India licensed new operators to provide international telephone services, who now compete with the Company, in India.
In March 2004, the Company acquired the narrowband and broadband businesses of Dishnets ISP division for a consideration of Rs.2,700 million, in a bid to strengthen and consolidate its presence in the Internet and Broadband business in India. The acquisition gave the Company access to a sizable number of customers in both dial-up and broadband services and presence across 38 cities and 200 towns within India.
In February 2005, the South African government selected the Company as a strategic investor in the countrys proposed second national telecommunications operator (Neotel). The Company through a wholly owned special purpose vehicle incorporated in
Singapore owns 43.16 percent as on March 31, 2007 in SEPCO (Proprietary) Limited (SEPCO), a company incorporated in South Africa and SEPCO in turn owns 51 percent in Neotel. The other equity partners are the state-owned Eskom Holdings Limited and Transnet Limited (15 percent each), Nexus (19 percent) and two private consortia. This new venture launched the Neotel brand on August 31, 2006 and started Neotels first telecommunications services to the wholesale telecommunications market. Neotel has also launched its IP transit services essentially wholesale international Internet connectivity for local ISPs.
On July 1, 2005, the Company completed its acquisition of TGNs approximately 65,000 km undersea cable network across North America, Europe and Asia including a number of TGNs employees, customers and commercial contracts for a cash consideration of Rs.5,359 million plus acquisition costs of Rs.785 million. TGN consists mainly of an undersea fiber optic telecommunications network that connects northern Asia, America and Europe. The TGN net assets and entities were transferred into direct and indirect wholly-owned subsidiaries of the Company on the date of acquisition.
On October 31, 2005, the Company completed its acquisition of VSNL Broadband Limited (VBL) (formerly known as Tata Power Broadband Limited), a 100 percent subsidiary of Tata Power Company Limited (TPC), for a total consideration of Rs.2,021 million. VBL has approximately 650 km of fiber running through Mumbai, India and approximately 150 km of fiber running through Pune, India.
On February 13, 2006, the Company completed its acquisition of Teleglobe for a cash consideration of Rs.7,924 million plus acquisition cost of Rs.316 million. Teleglobe provides international voice, data, and value-added services comprised mainly of mobile global roaming and signaling services. Teleglobe operates global telecommunication networks, has ownership interests in subsea and terrestrial cable systems and enables Internet connectivity through the use of satellites.
On February 28, 2006, the Company purchased the ISP business of Seven Star Dot Com Pvt. Ltd. (Seven Star) for a consideration of Rs. 159 million which includes a cash consideration of Rs. 158 million plus acquisition costs of Rs. 1 million. The purpose of the acquisition was to strengthen the last mile access for the Companys Internet Broadband services.
On May 8, 2006, the Company signed a share purchase agreement to acquire DIL and its wholly-owned subsidiary, Primus Telecommunications India Limited now known as VSNL Internet Services Limited for a total consideration of Rs. 945 million. The acquisition was completed on June 23, 2006.
The Companys Internet website address is http://www.vsnl.com. Information on the Companys website is not incorporated into this document. The Companys registered office is at Mahatma Gandhi Road, Mumbai 400 001, India (and its telephone number is +91-22-6657 8765). The process agent for the Companys ADR facility is State Bank of India, New York office, 460 Park Avenue, New York, New York 10022.
The Company, through itself and its operating subsidiaries, is primarily engaged in the communications solutions business globally. The Company is a facilities based provider of a broad range of integrated communications services categorized by the following lines of business: Wholesale Voice, Enterprise and Carrier Data and Others.
The Company currently operates four international switching and transmission facilities for voice as well as integrated services digital network (ISDN) services at four gateways in Mumbai, Delhi, Chennai and Ernakulam, which route international traffic to and from the domestic telecommunications network using a combination of satellite and undersea cable links.
The Company continues to derive a substantial portion of its revenue from telecommunications carriers including for the delivery of international calls to over 240 countries (greater than 1,000 destinations), including India. The Company shares these revenues with respective carriers / access providers in the destination country. The sharing of such revenues is pursuant to the terms of interconnect agreements and commercial terms agreed from time to time with the relevant carriers / access providers. The following is a breakdown of the Companys revenues in terms of the location:
Today, however, the Company is a leading global communications company offering voice, data and value-added services to leading enterprises, carriers and retail consumers. The Company is one of the worlds largest providers of wholesale international voice services and operates one of the largest global submarine cable networks. The Companys customer base includes approximately 1,500 global carriers, 450 mobile operators, 10,000 enterprises, 500,000 broadband and internet subscribers and 300 Wi-Fi public hotspots. The Companys global transmission network of over 200,000 route kilometers and its IP core with 200 points of presence, enable a range of services that include voice, private leased circuits, IP VPN, Internet access, global Ethernet, data centre, co-location, managed network, hosting, managed storage, mobile signaling and other IP services.
The following is a break-down of the Companys revenues in terms of its major lines of business i.e. Wholesale Voice, Enterprise and Carrier Data and Others:
The Companys objectives are to be a leader in all its focus markets, deliver sales growth and improve profitability. Towards these objectives, the Company plans to enhance its customer experience through world-class processes and systems, diversifying its products and offering specialized, managed services to enterprise customers, take advantage of emerging new technologies, and exploring further growth opportunities, both organic and inorganic, in India.
The Company intends to implement this strategy as follows:
Enhancing Customer Experience
The Company intends to enhance its processes and systems in order to provide its customers a superior and differentiated experience. The Company is working on benchmarking its service levels to global standards, and continues to upgrade its internal processes, including its IT systems for customer relationship management, billing and integrated network management. This is being achieved through both the implementation of new systems and processes as well as training and staff enhancement for relevant employees.
Ownership in submarine cables
The Company intends to strengthen its ability to deliver international connectivity, as required by the majority of its product set, via submarine cables. The Company has made and intends to make direct investments in submarine cable projects on all major routes. By building upon its current cable network the Company will be able offer its carrier and enterprise customers increased connectivity capabilities and additional service diversity, and maintain the Companys position as a leader in the field of designing, implementing and operating submarine cable systems.
Diversifying its range of data service offerings
The Company intends to strengthen its position in the market for data and value added services, by offering new services such as Managed Hosting and Storage, Managed Messaging and Direct Global Ethernet and enhancing its position in network services such as Internet leased lines, MPLS Virtual Private Networks and co-location. The Company has already introduced new products and services catering to the needs of corporate customers such as corporate Internet telephony, bandwidth on demand and hosted contact center.
Growing its retail offerings in India
The Company has integrated its retail consumer offerings under a single package, offering services such as Internet access, net telephony and broadband to its customers. The Company offers pre-paid and post-paid DSL and Ethernet-based Broadband connections and has invested in public Internet access through its Wi-Fi hotspots and cybercafés. The Company also offers a wide range of content and application services to its subscribers. The Company has recently commenced its roll-out of Wireless Broadband Access network which should help overcome the last mile access problems. Triple-play Broadband with an integrated offering of voice, data and content services is a major thrust area and the Company intends to have a significant and large-volume presence in this segment.
Maintaining leadership and profitability in wholesale voice services
The Company continues to modify its Wholesale Voice Business to maximize competitiveness in light of industry changes. The international wholesale voice industry is in a major transition as voice traffic is shifting from traditional carriers (fixed-line operators) to Mobile, Web Telephony and ISP/broadband operators. The shift in ownership of end-user subscribers is coincident with a technology shift from a minutes-based unit model to a multi-media session (with interactive devices such as Smartphones). In the traditional voice transport market, there is an increased emphasis on automation of processes to improve overall productivity and reduce total cost of ownership. As the industry continues to consolidate, wholesale traffic is expected to grow with a renewed focus on customer support and quality of service since customers are either streamlining their number of interconnects (in the case of carriers) or are somewhat new to international voice traffic routing (such as through Mobile, Web Telephony and ISP/Broadband operators). The Company is focused on continued automation of much of its transactional systems and processes to better support the wholesale business, developing services that meet requirements from newly emerging retail segments, and re-structuring the organization to better penetrate those segments expected to experience the highest growth rate in the next five years (Mobile, Web Telephony, ISP/Broadband operators).
Leveraging its expertise through overseas expansion, greenfield ventures and acquisitions
The Company believes that geographic diversification is important to achieve improved revenues and profits. As discussed elsewhere in this Form 20-F, the Company has entered the South African market as a strategic partner to Neotel, South Africas second national operator, through a joint venture. The Company continues to evaluate markets, both developed and emerging, where it can enhance its presence, through green-field ventures, partnerships and acquisitions.
Achieving synergies with other Tata companies
The Company believes that its strengths complement those of other Tata companies. Achieving synergies with other Tata companies would enable the Company to access the formers existing subscriber bases and have the opportunity to share their infrastructure. The Companys investment in Tata Teleservices (TTSL) to provide the Company with access to TTSLs end customers long distance traffic is a step towards achieving such synergies. The Company also created a common marketing platform, called the Tata Indicom Enterprise Business Unit (TIEBU) with other Tata telecommunications companies. TIEBU provides sales and marketing coverage to nearly 1,000 large corporate accounts based on the needs of their respective industries, and offers integrated voice and data solutions. The Company also partners with Tata Consultancy Services , a leading IT services company, to provide customers (both enterprise and carriers) a broad range of end-to-end IT and telecom solutions.
Implementation of Best Practices Business Models and Quality Systems
The Tata Business Excellence Model (TBEM) framework lays down best practices for Tata companies aims to nurture the core values and concepts embodied in various focal areas such as leadership, strategic planning and customer service, and translate these into business excellence. The Company uses and intends to continue to use the TBEM as a framework to match industry and global best-practice benchmarks in these areas. Today, the Company has deployed this initiative throughout its Indian operations, and is in the process of rolling out the same in North America and other parts of the world.
Implementation of Enterprise-wide Risk Management Framework
In the previous financial year, the Company initiated an exercise of establishing an Enterprise-wide Risk Management Framework to take advantage of opportunities and optimally manage risks as well as to comply with Clause 49 of the Listing Agreement entered into with the Indian Stock Exchanges. In line with the Companys commitment to deliver sustainable value, this Risk Management Framework aims to provide an integrated and organized approach for evaluating and managing risks. During the current financial year, risk identification process for the Companys Indian operations was completed. Due to change in the business environment, globalization and integration of processes within the Company, a similar exercise is planned for the Companys operations outside of India. Once this is completed, an integrated Enterprise-wide risk management framework will be implemented within the Company.
Wholesale Voice Business
The Companys acquisition of Teleglobe has made it the leading wholesale voice provider in the world, with 11 percent market share (according to independent reports). The Company now owns and operates one of the largest international networks with coverage to more than 240 countries and territories, as well as maintaining over 415 direct and bilateral relationships with leading international voice telecommunication providers. Traffic into and out of India continues to represent a significant portion of the Companys Wholesale Voice Business and the Company maintains market leadership in terms of the volume of inbound termination of calls to India. In 2006-07, the Company carried 16 billion minutes of international wholesale voice traffic on an annualized basis. In addition to the Companys leadership position in wholesale voice termination, the Company is the worldwide leader in wholesale inbound services (toll-free, Home Country Direct (HCD) and local number services) as well as being a leading provider for other value-added services worldwide, such as ISDN, Audiotext, Operator and Managed Calling Cards solution.
Our portfolio of Wholesale Voice services is comprised of several product lines:
See the discussion below under the heading Enterprise Data Business for a description of the Companys retail voice business. While the Companys Wholesale Voice team provides voice termination services to enterprise customers, this service is incorporated into front-end service applications and features that are managed by the Companys Enterprise Data team.
Enterprise and Carrier Data Business
The Company is one of the worlds largest providers of data services, primarily focusing on International Private Leased Circuit (IPLC) services and IP Transit services. The Company supplies some of the worlds largest international telecom companies with transmission backbone services across the Atlantic, the Pacific, and into and out of India. As a Tier 1 ISP, the Company also operates one of the largest IP networks in the world with points of presence around the globe.
Carrier Data Business
The Companys portfolio of carrier data services is comprised of the following main product lines: Connectivity Services, IP Transit Services, Mobility Services, Broadband Services and Broadcast Services.
The Company offers a range of protected and unptrotected SDH-based services (traditional IPLC services), ranging from fractional speeds (into India) to STM-64 speeds on our major high-capacity routes. In addition, as an operator of three key wholly-owned submarine cable systems, the Company is able to offer 10G wave services between Guam, Japan and the U.S., between most major European cities to the East Coast of the U.S. , as well as between India and Singapore using the Companys TIC cable system. The Company is the leading provider of international connectivity in the wholesale segment into and out of India and across the Pacific Ocean.
IP Transit Services
The Companys core network is fully Multi-Protocol Label Switching (MPLS) enabled, which allows information to traverse the network more quickly, reducing latency and the amount of accompanying required but non-revenue producing data and creating additional capacity to carry more traffic. The Companys global IP network is capable of supporting both IPv4 and IPv6, offering a dual stack solution to its customers. The Company offers IP transit with a service level agreement that guarantees set levels for round-trip delays, packet loss, reachability and mean time to repair. IP transit via its Internet backbone is available from virtually any region in the world with bandwidths ranging from 64K to 10 Gbps. The Company offers a choice of usage-based or fixed rate billing.
The Companys Mobility Services are tailored to the specific needs of the mobile network operators, providing them with the ability to seamlessly interconnect to other mobile networks as well as to leverage the Companys suite of innovative roaming and messaging offerings offered in Application Service provider mode.
Enterprise Data Business
The Company offers customised, end to end voice and data solutions to enterprise customers worldwide, and provides the following services to corporate customers:
In addition to the Wholesale Voice, Carrier Data and Enterprise Data services described above, the Company offers a number of other retail services. A brief description of some of these services is set forth below:
Payments to and from Foreign Administrations or Carriers
The Company has international services telecommunication agreements with more than 230 foreign telecommunications administrations or carriers that govern the rates of payment by the Company to the foreign administrations or carriers for use of their facilities in connecting international calls, and by the foreign administrations or carriers to the Company for the use of its facilities (and the domestic Indian networks) in connecting international calls billed abroad.
The practice among carriers for settlement of traffic is generally in accordance with International Telecommunication Union (ITU) recommendations. Based on the accounting rate negotiated with each foreign telecommunications administration or carrier, the Company makes payments to the administration or carrier for outgoing traffic and receives payments from such administration or carrier for incoming traffic. Settlements between the Company and the major carriers are made monthly, although settlements for long-term reciprocal traffic exchange relationships (otherwise referred to as bilaterals) are made quarterly, if not annually. Settlements are made on a net basis at the applicable settlement rate.
Revenue Sharing Arrangements
Although the Company provides international gateway access out of and into India, all calls that either originate or terminate in India must pass through the domestic networks of MTNL, BSNL or other private fixed line or cellular network operators. The Company has in place interconnect agreements with BSNL, MTNL, and other basic and cellular operators in India.
The commercial terms of the Companys agreements are based on the IUC announced by the TRAI from time to time. Effective from April 1, 2007, the Company is required to pay a reduced termination charges in the range of Rs.1.30 to Rs.1.95 per minute for international incoming traffic to India. This includes an ADC of Rs. 1.00 per minute payable to BSNL for all international incoming traffic. The rates for outgoing international traffic are not regulated and are determined by competition.
The Company is also liable to pay a revenue share of 0.75 percent of the AGR to BSNL as ADC. AGR for the purpose of revenue share is defined to be the same as that for payment of the Companys licence fee to the DOT and is payable to BSNL in addition to payment of the DOT License fee, from April 1, 2007.
License Fees for VSNL India
Under its ILD license agreement with DoT, the Company pays a license fee based on a percentage of its AGR. The percentage is currently 6 percent. The Company has been in a dispute with DoT concerning the computation of AGR, and in particular whether certain items of revenue and certain items of costs should be excluded. The Company believes that income from non-licensed and financial activities (such as interest on investible surplus, interest on income tax refunds, dividends, profit on sale of investments, rental income and income from TV uplinking services which includes transponder lease to TV broadcasters), as well as charges passed on to other service providers for voice and data services (such as charges for use of network elements such as domestic bandwidth, space segments and port charges) should be excluded. The Company filed a petition with the TDSAT seeking clarification of the definition, and TDSAT stayed the DoTs order pending a hearing on the matter. TDSAT has asked the TRAI to re-examine the definition.
The Company accrued on its financial statements the full amount of license fees payable without taking into account such exclusions as discussed in the preceding paragraph. The Company has paid license fees from the first quarter of fiscal 2005 onwards, in accordance with a legal opinion received by the Company which upholds its stand. The amounts accrued and paid in fiscal years 2003, 2004, 2005, 2006 and 2007 under ILD and NLD licenses were as follows:
The TDSAT has rendered its final verdict on the matter which finds that the following are excluded or not part of AGR:
The Company is in the course of evaluating the implications of the TDSAT verdict on its operations.
License fee under ISP with Internet Telephony (restricted) license
DoT has, vide amendment dated 3 March 2006 to the ISP with Internet Telephony (restricted) license, levied a license fee at 6% of AGR under such license with effect from January 2006. AGR has been defined as Gross Revenue inclusive of internet access service, internet content service, internet telephony service, installation charges, late fees, sale proceeds of terminal equipments, revenue on account of interest, dividend, value added services, supplementary services, revenue from permissible sharing of infrastructure and any other miscellaneous revenue, without any set-off of related item of expense, etc less charges from internet access, internet content and internet access related installation charges less service tax on provision of service and sales tax actually paid to the government if gross revenue had included component of sales tax and service tax. Accordingly, the Company has paid revenue share of around Rs. 30 million for fiscal 2006 and 2007 at 6% of AGR excluding income from non-licensed and financial activities, consistent with the stand taken by the company on applicability of revenue share on revenues earned from such non-licensed and financial activities, and has made a provision of around Rs 20 million. Some of the operators had challenged the decision of licensor to amend the terms of license with regard to levy of License fee under ISP with net telephony (restricted) license. TDSAT has rejected the petition of the service providers upholding licensors directive to levy license fee. However, we understand that TDSATs finding on inapplicability of license fee on income from non-licensed and financial activity would also apply in this case.
Ceilings fixed for International Private Leased Circuit (Half Circuits) tariff.
In its tariff order effective November 29, 2005, TRAI has fixed a ceiling tariff in respect of E-1 (2MBPS line), DS-3 (45 MBPS) and STM-1 (155 MBPS) capacities at Rs 1.3 million, Rs 10.4 million and Rs 29.9 million per annum respectively. These ceiling tariffs result in a reduction of 29 percent, 64 percent and 59 percent in list price tariffs respectively for the various capacity lines.
DoT is planning to introduce Resellers for IPLC services. A policy in this regard is under consideration within DoT. The introduction of Resellers may result in further competiton in SME segment leading to reduction of IPLC prices.
In June 2007, TRAI directed owners of cable landing stations to allow eligible indian international telecommunication entity to access international submarine cable capacity on any submarine cable system. This will result in full capacity landing by eligible Indian international telecommunication entities which may result in reduction in prices of IPLC services.
Ceilings fixed for Domestic Leased Circuit tariff.
TRAI had fixed a ceiling tariff in respect of E-1 (2MBPS line), DS-3 (45 MBPS) and STM-1 (155 MBPS) capacities at Rs 0.85 million, Rs 6.16 million and Rs 16.5 million per annum respectively. These ceiling tariffs have resulted in a reduction of 3 per cent, 67 per cent and 70 per cent in tariffs respectively for the various capacity lines, as compared to the estimated market rate for these capacity lines calculated by TRAI.
ILD and NLD license terms amended by DoT to include additional penal provisions
In April 2005, DoT amended the terms of ILD and NLD license agreements to include a clause pertaining to imposition of financial penalty not exceeding Rs 500 million for violation of ILD and NLD licence terms and conditions. Previously, NLD and ILD licencees were not subject to any such penalty.
Government Liberalized ILD and NLD licences
The license fees payable for NLD and ILD licenses have been reduced to Rs. 25 million from Rs. 1,000 million earlier and that for international long distance license to Rs. 25 million from Rs. 250 million. Companies wanting to offer NLD services must have a net worth and paid-up capital of Rs.25 million. ILD telephony companies are required to have a net worth and paid-up capital of Rs. 25 million. Mandatory roll out obligations for new and existing NLD licences have been done away with. NLD service providers can access the subscribers directly for provision of leased circuits/closed user groups i.e. they can provide last mile connectivity. ILD service providers can access the subscriber directly only for provision of leased circuits/closed user groups.
No prior experience in the telecom sector is required for the grant of telecom service licences. Annual licence fee for ILD and NLD licences has been reduced from 15% to 6% of AGR with effect from January 1, 2006.
NLD License fee refund:
The Government of India, as the licensor, had agreed to reimburse a sum equivalent to the revenue share paid by the Company under the NLD license, net of taxes, for a period of five years i.e. up to 31 March 2006, as a part of the compensation package for pre-mature termination of the Companys exclusivity in ILD services. This was also included in the NLD license agreement. The Company has been remitting the license fee in the form of revenue share at the rate 10 percent plus Universal Service Obligation (USO) levy at the rate 5 percent of AGR under the NLD license (revenue share at the rate 1 percent plus USO levy at the rate 5 percent with effect from January 2006). The Company has made a claim with the DoT for refund of Rs. 802.8 million to date, for the revenue share paid in terms of the NLD license agreement. The claim is being pursued with DoT.
Sales and Marketing
Wholesale Voice Business
The Companys Wholesale Voice Business unit is focused on international wholesale voice services, which are provided to operator customers as well as internal customers such as the Enterprise Data team.
The Wholesale Voice sales team is the primary interface with telecommunication operator customers throughout the worldthe team is responsible for building relationships with the wholesale operator customers in order to sell the wholesale voice products and services as well as secure supply capacity in support of the wholesale voice products and services. The team is comprised of a global organization, maintaining local presence throughout the world as well as a India Wholesale Sales National team, which is responsible for building and maintaining working relationships with Indian telecommunications operators such as BSNL, MTNL, Airtel, Hutch, TTSL, TTML, etc.
The Wholesale Voice marketing team is engaged in new product development as well as managing the existing product operations to meet customer and market requirements. Presently, the Company has over 1400 operator customers and over 1500 operator suppliers the majority of which purchase from, and sell to, the Company the equivalent of the wholesale VTS service.
Enterprise and Carrier Data Business
For Carrier Connectivity Services, the Company operates a focused sales force predominantly targeting its largest global international carrier customers. For key global customers, the teams are organized under a single global account manager who is based near the customers headquarters, and who in turn has support account managers based in regions where the customer also does business. There is a dedicated team in India that supports all global carrier requirements in this market.
The Companys Enterprise Data Business unit provides managed connectivity solutions and managed infrastructure services to enterprises worldwide. A global product management organization is responsible for the enterprise services in all markets, through all channels teams.
The responsible enterprise sales unit in India is TIEBU, which is structured to service differentiated segments via different pan-India sales groups. The top approximately 750 large corporate and government customers are addressed by one direct sales unit, which also sells other Tata companies communications services to these same accounts, such as TTML, TTSL and TataNet. A second group sells the Companys enterprise services to mid-market accounts. A channel sales group manages approximately 150 channel partners to sell the Companys services to a different group of mid-market and SME accounts.
Outside of India, enterprise sales are through the VSNL International sales organizations for the Americas, Europe, Middle East and Africa (EMEA), and Asia. These sales teams primarily cater to the top 1,000 multinational corporations.
The Retail Business unit primarily caters to various types of dial-up and Broadband Internet products. The unit is entrusted with the task of serving retail customers which primarily consist of individuals, small/home offices and small and medium sized enterprises. The products of this unit are standardized for mass usage and are not specifically tailored services. The businesses marketed and sold by this unit include products and services such as dialup internet access, broadband internet access, internet telephony, helloworld, cybercafé and Wi-Fi services.
The products are usually mass distributed through indirect channels such as distributors, direct selling associates and retailers and through retail outlets such as walk-in counters. The unit lays specific emphasis on creating awareness and educating prospective customers about the Companys retail products. The Company has also tied up with cable distributors and local cable operators (LCOs) for the broadband network rollout. These cable distributors and LCOs are also involved in marketing the Companys products to their customers.
The Indian Domestic Telecommunications Network
The Indian domestic telecommunications network has grown rapidly since 2000. As of May 2007, the Indian telephone system comprised 218 million telephones in service consisting of 40.2 million of the fixed line subscribers and 177.8 million mobile subscribers. The monthly net subscriber additions for the month of May 2007 stood at 6.29 million. The cellular subscriber base has seen a rapid growth with 12.6 million subscribers being added during April 2007 to May 2007 against a reduction of 0.49 million fixed line subscribers in the same period. All subscribers have the option to select access to international telecommunication services.
The penetration of Indias domestic telephone network increased to 18.7 telephone subscribers per 100 inhabitants as of May 2007 from 14.4 telephone subscribers per 100 inhabitants in July 2006. While the fixed line subscriber base has been growing slowly, the compounded annual growth rate (CAGR) of mobile subscribers of 85 percent is being maintained since 1999.
Broadband connections have also continued to grow in 2007. At the end of May 2007, total Broadband connections in India touched 2.46 million as against 1.35 million in March 2006. However, the growth in Broadband connections has been relatively low due to limited availability of last mile access. The incumbent wireline operators dominate the Broadband market because they retain control over the fixed line copper network, in the absence of Local Loop Unbundling.
Interconnect Usage Charges Regime
With the ongoing liberalization of the telecom sector in India and the presence of multiple-operators and rate settlement arrangements, TRAI introduced a cost-based IUC regime in January 2003. It provided for an IUC that is payable by service providers to other service providers for usage of their networks for origination, transit or termination of calls. The regime also prices monthly rental and local call charges for fixed telephones (provided primarily by BSNL and MTNL) below cost in order to ensure that these remain affordable and attractive to customers and help attain the objective of higher teledensity in the country. This has been discussed in detail above, under the heading Revenue Sharing Arrangements, and under Item 3 Key Information Risk Factors.
The business of the Company and its subsidiaries is subject to comprehensive regulation by various governmental bodies around the world, including in India, U.S. and Europe.
The Ministry of Communications, Government of India, through the Telecom Commission and the DoT, is responsible for the telecom policy and licensing in India, pursuant to the provisions of the Indian Telegraph Act of 1885 (the Telegraph Act)
and the terms of the licenses issued by the DoT under which the Company operates. While the Telegraph Act sets the legal framework for regulation of the telecommunications sector, much of the supervision and regulation of the Company is implemented more informally through the general administrative powers of the DoT, and of other Government agencies.
Supervision. In March 1997, the Government of India first established the TRAI, an independent regulatory authority under the provisions of the TRAI Act, 1997. Pursuant to an amendment to the TRAI Act, two independent authorities were established: the TRAI and the TDSAT. The TRAI has the authority to levy fees and other charges for services and to perform such other functions entrusted to it by the Government. The TDSAT has jurisdiction to adjudicate any dispute between a licensor and a licensee, between two or more service providers, or between a service provider and a group of consumers. The TDSAT also has the jurisdiction to hear and dispose of appeals against any direction, decision or order of the TRAI.
The Communication Convergence Bill 2001, introduced in the Indian Parliament in August 2001, envisages the creation of the Communications Commission of India (CCI) which would be an all-encompassing umbrella body to look into licensing, spectrum management, dispute resolution and determination of regulation codes, technical standards, tariffs, rates for licensed services as well as determine the conditions for fair, equitable and non-discriminatory access to network facility and service. It would also have the powers of a civil court under the Code of Civil Procedure, 1908.
Licenses. Pursuant to the Telegraph Act, the provision of any telecommunication services in India requires a license from the DoT, and the Company operates substantially all its international telecommunications services under a license granted by the DoT. The ILD license identifies specific services that the Company is permitted to provide, which encompass almost all of the services currently provided by the Company other than Internet services and NLD services.
The DoT retains the right to modify the terms and conditions of the Companys licenses at any time if in its opinion it is necessary or expedient to do so in the public interest, and may also terminate the licenses before their scheduled expiration upon breach by the Company of any of its terms. In addition, the DoT retains certain rights under the licenses to receive telecommunication services on a priority or emergency basis.
Under the Telegraph Act, the Government of India and state governments also have the right to take possession and/or control of the Companys facilities and business in cases of public emergency or in the interest of public safety. The Government of India also has the power to intercept communications carried by the Company, subject to certain constitutional safeguards.
In the U.S., the Federal Communications Commission (FCC) exercises jurisdiction over the facilities and services that the Company uses to provide interstate and international telecommunications services. The FCC may promulgate new rules, revise old rules, or otherwise change regulatory requirements that affect the Company from time to time; such changes are often followed by judicial review. The Company is unable to predict future FCC rulings and the results of any subsequent judicial review or how these might affect our operations. State regulatory commissions generally have jurisdiction over intrastate telecommunications services and related facilities, but the Company does not currently provide intrastate services.
International Regulation. The Company has obtained the necessary authority under Section 214 of the Communications Act of 1934, as amended, and FCC regulations issued thereunder, to use, on a facilities and resale basis, various transmission media for the provision of international switched services and international private line services on a nondominant carrier basis, except that the Company is regulated as a dominant carrier on the U.S. India route. The Company also holds multiple FCC licenses granted under the Cable Landing License Act and FCC rules to own and operate undersea cables that land on U.S. shores. As a result of the Company not being U.S.-owned, the FCCs grant of these licenses to the Company was contingent upon compliance with the National Security Agreement entered into by VSNL America Inc., VSNL International (US) Inc., and the Company with the U.S. Department of Justice, including the Federal Bureau of Investigation, the U.S. Department of Defense, and the U.S. Department of Homeland Security on April 12, 2005, as amended on December 12, 2005. This National Security Agreement imposes obligations upon the Company concerning security, information storage, and reporting, many of which are requirements not imposed upon U.S.-owned carriers. The Company is also subject to the various reporting requirements and fees that apply to all companies providing international services under an FCC authorization, as well as the FCCs complaint jurisdiction.
Interstate Regulation. The Company is considered non-dominant for the provision of interstate services. As such, the Company is subject to the various reporting requirements and fees that apply to all companies providing interstate services under an FCC authorization.
Licenses Issued by the CRTC. The Canadian Radio-television and Telecommunications Commission (CRTC) is the regulatory authority in Canada that is charged under the Canadian Telecommunications Act with regulating companies that provide telecommunications services in Canada. The Company holds a Class A Basic International Telecommunications Service (BITS) license issued by the CRTC which authorizes the Company to operate telecommunications facilities used in transporting basic telecommunications service traffic between Canada and other countries. This BITS license has a five-year term.
In 1999, the CRTC found sufficient competition in the international services market to forbear from regulating international direct dial telephone service. The CRTC has retained sufficient powers to impose conditions on the Companys delivery of services; the Companys international operations remain subject to the conditions of its CRTC Class A BITS license, which address matters such as competitive conduct and consumer safeguards.
The Company also holds licenses required by the Canadian Telecommunications Act for its international submarine cables and associated works and facilities and by the Radiocommunications Act for its earth stations that provide telecommunications services by means of satellites. The submarine cable landing licenses are granted for periods of ten years and the radio licenses are renewable annually.
As a carrier that owns and operates only international submarine cables or earth stations that provide international telecommunications services by means of satellites, the Company is not subject to the Canadian ownership and control provisions of the Canadian Telecommunications Act. As long as these Canadian ownership and control requirements remain in place, the Company remains restricted with respect to its activities in Canada.
The Company provides international telecommunications services in several of the member states of the European Union (EU). In the EU, the regulation of the telecommunications industry is governed at a supranational level by the European Parliament, Council and Commission. Implementation of EU directives has not been uniform across the Member States. Even with harmonization, the national regulatory agencies continue to be responsible for issuing general authorizations and specific licenses. The Company is required to obtain and maintain a variety of telecommunications authorizations in the countries in which it operates. The Company must also comply with a variety of regulatory obligations, including obtaining permits to land its cables in the territories to which they are connected and payment of regulatory fees.
The Company is required to obtain and maintain a variety of telecommunications and other licenses and authorizations in the AsiaPacific jurisdictions in which it operates. The Company must also comply with a variety of regulatory obligations, including obtaining permits to land its cables in the territories to which they are connected and payment of regulatory and license fees. The Company holds all necessary telecommunications and other licenses that permit it to own and operate assets in key countries and regions, including Japan, Hong Kong and Singapore.
The Company is also subject to regulation in several other countries throughout the world in connection with its subsea cable, carrier services and other telecommunications service activities. In these jurisdictions, the Companys local operating entities hold non-exclusive licenses or operate pursuant to general authorization.
Certain of the Companys services, to include voice services, make use of the Internet and packet technology. In many jurisdictions, the regulatory treatment of such services is unsettled and some regulatory authorities are considering changing the level of regulation and/or fees applicable to the provision of services.
Rates and Tariffs in India
Prior to April 1, 2002, rates for the Companys international telecommunications services were set up by government regulatory authorities. With effect from April 1, 2002, for outgoing traffic, basic service operators were authorized to prescribe and introduce rates for their international telecommunication services with appropriate filing of tariffs with TRAI. In the face of competition, the ILD tariffs fell below the peak international call tariff of Rs.48 per minute during 2001-02 and tariffs for international calls were in the range of Rs.1.75 to Rs.12.00 per minute in 2007.
The rates for the Companys specialized services, such as leased lines, Inmarsat mobile services, Internet access services, electronic mail and facsimile forwarding services, services through which subscribers may exchange data with users of other data networks and video conferencing are prescribed by the Company, subject to filing with the TRAI.
The Company is partially owned by some of the Tata companies. The Tata Companies comprise 93 operating companies in seven business sectors: information systems and communications; engineering; materials; services; energy; consumer products; and chemicals. The Tata companies are one of Indias largest and most respected business conglomerates, with revenues of about $29 billion in fiscal 2007. Tata companies collectively employ approximately 250,000 people. The Tata companies have operations in more than 40 countries across six continents, and export products and services to 140 countries.
As of March 31 2007, Panatone Finvest Limited in conjunction with certain other Tata companies held approximately 50.11 percent of the outstanding equity of the Company, and the Government of India held approximately 26.12 percent. Panatone Finvest Limited is in turn affiliated with the Tata companies and its shares are held by Tata Sons, Tata Power, Tata Steel and Tata Industries. Panatone Finvest Limited, in which the current shareholding of Tata Sons and Tata Power is 60.010 percent and 39.983 percent, respectively, with Tata Steel and Tata Industries holding the remainder equally, acquired 45% stake as a result of the Government of Indias decision to sell to a strategic partner through a competitive bidding process. See above under the heading History and Development of the Company.
List of Companys significant subsidiaries
VSNL International Pte. Limited
VSNL International Pte. Limited (VIPL) (formerly known as VSNL Singapore Pte. Limited) is a wholly owned subsidiary that manages the Companys operations outside of India. It is the holding company for the Companys acquisitions of TGN and Teleglobe, among other assets. It also manages and maintains the Singapore landing station for the Tata Indicom Cable and acquires and sells other cable capacity throughout the Asia Pacific region. Information about VIPL is also available on the web at http://www.vsnlinternational.com/, but such information does not constitute a part of this Form 20-F
VSNL Global Services Limited
In October 2006, the Company incorporated a wholly owned Indian subsidiary, VSNL Global Services Limited under the Indian Companies Act, to provide a global Centre of Excellence in the areas of network operations & engineering, for the Companys worldwide business, and also to provide an end-to-end provider of all off-shoring needs to carriers and enterprises worldwide.
VSNL Broadband Limited
On October 31, 2005, the Company completed its acquisition of VSNL Broadband Limited (VBL) (formerly Tata Power Broadband Ltd.) by purchasing 100% of the common shares of VBL from Tata Power Ltd. VBL is engaged in business of providing services under its IP-I, IP-II and the ISP licenses issued by DoT and has fiber optic network in Mumbai and Pune.
VSNL SNO SPV Pte LTD.
The Company has formed this wholly owned special purpose vehicle incorporated in Singapore for its South African venture. Investments in South Africa shall be made through this entity. Until March 2006 the investments in South Africa were not material.
Proposed Transfer of the Companys Retail Business Undertaking to VSNL Internet Services Limited and Amalgamation of Direct Internet Limited with VSNL Internet Services Limited
In March 2007, the Board of Directors approved a Composite Scheme of Arrangement (the Scheme) between the Company, DIL and VSNL Internet Services Limited (VISL) (formerly Primus Telecommunications India Limited) and their respective shareholders for the transfer of the Companys Retail Business Unit (RBU) to VISL, and the merger of DIL with VISL with effect from 1 March, 2007 pursuant to the provisions of the Indian Companies Act, subject to the requisite approval of the shareholders, creditors, the sanction of the High Courts of Judicature at Bombay and Delhi, the Bombay Stock Exchange Limited and National Stock Exchange, and such other authorities whose approval may be required under the Indian Companies Act.
The Bombay Stock Exchange Limited and National Stock Exchange have indicated they have no objection to the Scheme and requisite petitions have been filed with the High Courts of Judicature at Bombay and Delhi. The Scheme is currently under consideration by the High Courts of Judicature at Bombay and Delhi.
PROPERTY, PLANTS AND EQUIPMENT
The Companys operations are conducted from owned and leased properties in the various locations in which the Company does business. The major services provided by the Company are based on its bandwidth capacity in various undersea cable and land cable systems and satellites. These assets are briefly described below.
To date, the Company has seven satellite earth stations operational. Out of these seven, two are used for ILD services at Pune and Ernakulam, four are used for TV uplinking at Kolkata, Chennai, New Delhi, and Mumbai and one is used to provide Inmarsat Services at Pune. As of March 31, 2007, the Company operated a total of 2940 Switched TDM voice circuits on the above satellite, resulting into consumption of 900 nos of 64 K equivalent bandwidth on satellite media. The Company also operated data circuits also on these satellite consuming 45 nos of 64 K bandwidth. (1 E1 having 31 nos of 64K equivalent). Satellite capacity is obtained from the International Telecommunications Satellite Organization (Intelsat).
The Company has ownership interests and access to capacity in various undersea cables as described below interconnecting the South Asia region, as well as those linking that region with Europe, North America and the AsiaPacific.
The Company has purchased capacity equivalent to 10168 clear channel circuits in the Fiber Optic Link Around the Globe (FLAG-Europe Asia) cable system, a high capacity fiber optic cable with 19 landings in 13 countries linking Asia and Europe, carrying the Companys voice, data and Internet traffic between the two continents.
The Company has ownership in the South East Asia-Middle East-Western Europe 3 (SEA-ME-WE 3) consortium cable, a high capacity undersea optical fiber cable extending from Germany to Japan and Australia that lands in a total of 33 countries and which carries the Companys voice, data and Internet traffic between those countries.
The Company has also invested in the South African Telephony-S/West-African Submarine Cable/South Asia Far East (SAT-3/WASC/SAFE) undersea cable linking Malaysia in the Far East to Portugal in the West. The total length of this link is 27,850 km with a design life of 25 years. The Company operates voice, data and Internet circuits on this undersea cable.
The Company also has ownership in SEA-ME-WE4, an undersea cable system between France and Singapore which lands in 14 countries in South East Asia, the Middle East and Europe.
The Company wholly owns the Tata Indicom Chennai-Singapore Submarine Cables system (TICSCS) which is a 3,100 km submarine cable system between Chennai and Singapore.
In order to meet fast growing bandwidth requirement in India, the Company has taken initiative to plan yet another submarine cable system between India and Europe linking Mumbai, India to Marseille, France. As of September 24, 2007, 13 parties from Europe, Middle East and India have already signed a memorandum of understanding to participate in the system. This cable system is expected to be commissioned by the first quarter of 2009.
As a result of the acquisition of TGN, the Company owns and operates TGN-Pacific, an eight-fiber pair ring cable system between Japan and the West Coast of the U.S. which is the largest cable system across the Pacific in terms of lit and ultimate capacity design. The Company also owns and operates TGN-Atlantic which is a four-fiber pair ring cable system between the East Coast of the U.S. and the UK.
The Company also has ownership interests in various undersea consortium cables that do not land in India, but which provide connections between various locations served by the Company, which includes the Trans-Atlantic 12/13 Cable (connecting the UK, France and the U.S.), the Trans-Pacific Cable-5 (connecting the U.S., Canada and Japan), Trans Atlantic-14 cable (connecting the UK, France, Germany and the U.S.), Japan-US Cable (connecting the U.S. and Japan), the Asia Pacific Cable Network (connecting Singapore and Japan) and the Columbus-2/Americas-1 Cable (connecting Italy and the U.S.). In addition to its direct ownership interests in such undersea cables, the Company has purchased IRUs guaranteeing access to other undersea cables in the Atlantic and Pacific Oceans.
In March 2007, the Company has commenced construction of an intra Asia cable system between Singapore and Japan (TGN-Intra Asia). The total project cost is estimated at US$ 235 million and the project is financed through a combination of capacity presales, non-recourse funding, the Companys own equity and equity participation by other telecom companies for select routes / capacities. The Company has incurred costs of approximately US$ 32 million towards this project.
With the Companys ownership of TICSCS and TGN-Pacific (as discussed above), the Company now owns cable capacity from India through Asia to the U.S., which is one of the key routes for the Companys products and services. This project is scheduled to be completed by August 2008.
In addition to the planned new TGN-Intra Asia cable system, the Company has participated in the consortium cable APCN-2 upgrade which is expected to deliver an extra 40Gbps bandwidth to the Company in March 2008 to meet bandwidth demands.
The Company is also reviewing plans for a further upgrade of TGN-Pacific by an additional 320 to 480 Gbps to meet increased demands.
International Points of Presence
The Company has equipped nodes in the Americas, Europe, Middle East and Africa and Asia Pacific to provide and support the Companys suite of products and services internationally.
International Property and Plants
In addition to the cables and switches described above, the Companys infrastructure includes owned and leased property made up of cable station, collocation, rack and cabinet space in collocation centers in 20 countries with those material properties detailed below:
The Company operates international switching facilities in eleven locations known as gateways, of which four are in India Mumbai, Delhi, Chennai and Ernakulam. In addition, the Company operates two VoIP aggregation international gateways in Frankfurt and Hong Kong as well as remotely managing over 200 customer premise VoIP connectivity points. The India gateways route international traffic to and from the domestic telecommunications network using a combination of satellite and undersea cable links.
The Company plans to deploy and commission NGN Voice network to cater the voice traffic of the NLD business. The infrastructure would consist of soft switches (Mumbai, Delhi and Chennai) and media gateways at Mumbai, Delhi, Ahmedabad, Hyderabad, Jallandhar, Kolkata, and Bangalore. The network was commissioned in July 2007, and the process of migrating live customers has commenced. The current infrastructure is expected to cater for traffic projections until the second quarter of 2008 at the earliest, post which, augmentation of the network elements capacity is anticipated.
India Domestic Bandwidth Media, Access Network & Data Centers
Since receiving the NLD license in September 2002, the Company has deployed NLD connectivity in 367 major cities with 4672 segment wise STM-1 equivalent bandwidth as of 31 March, 2007. It is forecasted that customer bandwidth in NLD will grow by 116% in 2007 2008. NLD augmentations are currently in progress to meet the forecasted growth and the project is scheduled to be completed by November 2007.
The Company plans to deploy wireless access network across India to address the last mile access requirements of large enterprise, SMEs and retail businesses. The Companys wireless access network is based on the state of the art Wimax technology in 3.3 -3.4 GHz band.
For the year April 2007 March 2008, the Companys deployment plan covers 93 major cities for enterprise coverage and 3 metro cities for Retail Broadband coverage with a total of 1500 B stations in these cities. With this deployment the Company will have extensive wireless coverage which will provide tremendous reach to its customers in these markets.
The Company currently has deployed 70,000 sqft on its own properties in the cities of Mumbai, Delhi, Hyderabad, Bangalore and Chennai in India for commercial data centers and has additionally leased properties/space elsewhere for the same purpose as follows:
The services offered in these Data Centers include pure co-location services; hosting suite of services including server hosting, storage, backup and archival; and application services such as messaging and collaboration services.
During the course of the current year, the Company plans to expand its commercial Data Center capacity in India by 90,000 sq ft of which 50,000 sq ft will be in the existing buildings in the cities of Mumbai, Chennai and Hyderabad and another 40,000 sq ft in buildings under construction on land owned by the Company in the cities of Mumbai, Bangalore and New Delhi. The planned expenditure for expanding the facilities as above is US$44 million. In addition, the Company plans to expand its capacity in the UK by 16,000 sq ft in the cities of Highbridge and Peterborough in buildings the Company currently occupies. The planned expenditure for this expansion is US$16 million. The expansion is planned to meet the projected requirement of commercial service.
Non-India Domestic Bandwidth Media carrying Voice, Data and IP Circuits
As of March 31, 2007, the Company operated total 52,380 International Switched TDM Voice circuits, which resulted in consumption of 37,500 nos of 64 K equivalent circuits on submarine or satellite cable media. Out of this capacity, 900 circuits were on satellite media and 36,600 circuits were on submarine cable media.
The Company operated 4,64,779 nos of 64 K equivalent data circuits of which 120 were satellite circuits and 4,64,659 were cable circuits.
The Company also operated 2,15,140 nos of 64K equivalent Internet circuits out of which all circuits were on cable. (The Companys data and Internet circuits are in terms of 64 KB equivalent, 1 E1 capacity is considered to be carrying 31 nos of 64 K equivalent).
In addition to the circuits and switches described above, the Companys infrastructure includes various facilities used primarily for its various specialized and value-added Enterprise and Internet services. As of March 31, 2007, the Company owned a high capacity underground fiber optic cable between Mumbai and Arvi via Pune, approximately 8 earth stations, terrestrial communication links connecting the Companys international switches at four of its locations with its earth stations & cable stations and a variety of hardware used in more than 100 cities in India for the Companys 121 Internet access nodes. As of March 31, 2007, the Company has a high capacity underground fiber optic cable national network of about 36,000 route kilometres.
Demerger of Surplus Land
Under the terms of the Share Purchase Agreement and the Shareholders Agreement, Panatone Finvest Limited has agreed to cause the Company to hive off or demerge certain land the Company owns (the Surplus Land) into a separate company (the Resulting Company) pursuant to a scheme of arrangement. The Surplus Land consists of properties, which the Company was not actively using for any business purpose at the time of the Government divestment to Panatone Finvest Limited. The Surplus Land consists of the following:
Pursuant to a scheme of arrangement, shares of the Resulting Company would be distributed pro rata to the existing shareholders of the Company. Such a scheme would have to be approved by three-fourths in value of the creditors and of the shareholders of the Company present and voting at a meeting of the creditors and members, respectively. In addition, the scheme of arrangement would have to be approved by the relevant court. Indian counsel has advised that it generally takes about 4-6 months from the time such a scheme of arrangement is filed before the High Court until the time that a decree of demerger passed by the High Court is filed with the Registrar of Companies to render the scheme effective.
Under the Share Purchase Agreement and the Shareholders Agreement, as part of the consideration for its purchase of a portion of the Governments shares in the Company, Panatone Finvest Limited agreed to transfer to the Government of India, without further consideration, a portion of the shares of the Resulting Company that it receives, such portion to be proportionate to the number of shares of the Company purchased by Panatone Finvest Limited from the Government of India. In the event that the demerger does not occur or the Company sells or develops the Surplus Land, Panatone has agreed to pay to the Government a pro rata portion of any benefit accruing to the Company as a result of such sale or development, as determined by an appraiser. In its tender/open offer, Panatone Finvest Limited made similar undertakings to the persons who tendered their shares of the Company and whose shares were accepted for payment.
It is possible that the Company may have to pay significant capital gains taxes and the Resulting Company may have to pay applicable stamp taxes if the proposed demerger is found by the Indian courts not to fit within the statutory definition of demerger under the Income Tax Act, 1961. The Company believes these taxes could be substantial.
No time period is specified in the Shareholders Agreement or the Share Purchase Agreement for the demerger of the Surplus Land. However, the agreements state that if for any reason the Company cannot hive off or demerge the land into a separate entity, alternative courses as stipulated therein would be explored. The Company presented a draft scheme for the demerger before the Board of Directors on April 11, 2005, and the legality and feasibility of implementing the demerger is currently being examined by the parties. The Company cannot predict if the demerger will take place. Until such time as the demerger takes place, the lands are under the possession and upkeep of the Company.
32.5 acres of the Surplus Land in Padianallur (near Chennai) is subject to orders of the Delhi High Court dated 17 May 2007 and 18 July 2007 pursuant to a petition filed by VSNL Employees' Co-operative Housing Society (the Society). These orders direct the Company to transfer 32.5 acres of the Surplus Land at Padianallur to the Society at the price prevalent in 1998 including simple interest calculated at 9 percent per annum from that year. The Company has initiated the process of seeking necessary corporate approvals to be able to comply with these orders of the Delhi High Court.
The Society has filed a petition in the Delhi High Court alleging contempt of the Courts orders since the stipulated time limit for transfer of land as per the court orders has expired. The Government of India has advised the Company that they have filed an appeal against the court orders, and Panatone has written to the Government of India seeking an amendment to the Shareholders Agreement to reflect the reduced total area of the Surplus Land at 740.63 acres instead of 773.13 acres if the 32.5 acres of land is to be transferred to the Society.
On 14 September 2007, a public interest litigation petition was filed against the Company and other respondents in the Bombay High Court by petitioners who represent the farmers of villages in which some of the Surplus Land is located. The petitioners are seeking an order directing the respondents to take immediate steps to restore to the petitioners certain of the Surplus Land which are not being used by the Company. These lands have been acquired by the Company starting in 1924. As of the date of this filing, this public interest litigation petition is pending admission before the Bombay High Court, Appellate Side.
See Item 3. Key InformationRisk FactorsThe demerger of surplus land held by the Company may not be completed on satisfactory terms.
The following discussion of the results of operations for the fiscal years ended 2005, 2006 and 2007 and financial condition of the Company as at March 31, 2006 and 2007 should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto included elsewhere herein prepared in accordance with US GAAP. The Companys fiscal year ends on March 31 of each year, and therefore all references to a particular fiscal year are to the twelve months ended March 31 of such year.
Introduction and Overview
The Company is primarily engaged in the telecommunications business globally. The Company and its subsidiaries offer international and national voice and data transmission services, selling and leasing of bandwidth on undersea cable systems, retail internet services and other value-added services comprised mainly of mobile global roaming and signaling services, transponder lease, data centers, gateway packet switching services (GPSS) and up linking and contributory feed services to television channels in India.
As discussed elsewhere in this Form 20-F, the Company historically provided public international telecommunication services in India. However since 2002, as a result of regulatory changes, competitive factors and the Companys acquisitions of TGN and Teleglobe, the Companys revenue and product mix has changed from a voice centric model to a diverse model both in terms of products and geographic reach.
The Company is one of the worlds largest providers of wholesale international voice services and operates one of the largest global submarine cable networks. The Companys customer base includes 1,500 global carriers, 450 mobile operators, 10,000 enterprises, 500,000 Broadband and internet subscribers and 300 Wi-Fi public hotspots. The Companys global transmission network of over 200,000 route kilometers and its IP core with 200 points of presence, enable a range of services that include voice, private leased circuits, IP VPN, Internet access, global Ethernet, hosting, mobile signaling and other IP services.
The Companys services are categorized by the following lines of business: Wholesale Voice, Enterprise and Carrier Data, and Others.
The Company owns and operates international networks with coverage to more than 240 countries and territories, as well as maintaining over 415 direct and bilateral relationships with leading international voice telecommunication providers. In fiscal 2007, the Company carried 20 billion minutes of international wholesale voice traffic.
The Companys Wholesale Voice business derives its revenue from telecommunications administrations, private carriers and service providers for the delivery of international calls, originating and terminating throughout the world. The Company shares its revenues from these carriers and service providers on incoming international calls terminating the various access providers networks in accordance with the interconnect agreements it has with such access providers.
The major factors influencing voice revenue include traffic volume and its composition in terms of incoming and outgoing calls and country of origination and destination, the interconnection agreements with far-end access providers, settlement or termination rates negotiated with foreign administrations and international currency exchange rates. Over the past several years, the global voice market has experienced a significant increase in traffic volumes consequent to a significant growth in telephone density in developing countries and high growth rates in the number of cellular subscribers worldwide. Consistent with global trends, the Indian market has also experienced a significant decrease in tariffs/prices over the past several years, primarily driven by competition, regulatory pressures in India and abroad, and overcapacity. The Company expects both these trends to continue for the foreseeable future.
Enterprise and Carrier Data
The Company supplies some of the worlds largest international telecom companies with transmission backbone services across the Atlantic, the Pacific, and into and out of India. As a Tier 1 ISP, the Company also operates IP networks with points of presence around the globe.
The Companys Enterprise and Carrier Data business derives its revenues from telecom carriers, service providers and enterprises for services such as raw bandwidth, private leased circuits, internet leased lines, IP transit, virtual private networks and other value added services like hosting, managed roaming and voice over IP.
The major factors influencing data revenues include the number and capacity of circuits sold, the contracted period of use of the circuits, the mix of services provided and the pricing of these circuits. Over the past several years, the global data market has seen significant growth in bandwidth and connectivity demand, driven by increased Broadband penetration, outsourcing & off shoring trends, and globalization of large enterprises. However, overcapacity and increased competition in several markets has also resulted in tariffs / prices of basic connectivity products declining at very high rates. Recently, enterprises have begun to demand managed communications and IT services, beyond basic connectivity, representing a major growth opportunity for the Company.
India continues to be a significant market for enterprise data services for the Company and the Company enjoys leadership position in various product segments within India. The Company continues to face increased competition from operators like Bharti and Reliance as well as new entrants to the Indian market like AT&T and BT and other regional players in the Data segment and also faces regulatory pressures from the TRAI. The Company expects that pricing as well as regulatory pressures will continue to exist in the foreseeable future which could impact the Companys revenues and profits.
The Company also derives revenues from other services such as national long distance, retail internet services such as dial-up and Broadband services, transponder leasing and T.V. uplinking and other value added services such as Data Centres, Mobile signaling and roaming. The major factors influencing retail internet access services revenue include the number of new customers added, the terms and conditions of access to last mile connectivity, the availability of content and the amount and patterns of customer usage.
The Companys acquisition of Dishnets ISP business in fiscal 2004 and Seven Star in fiscal 2006 gave the Company a Broadband network, expertise and a new base of both corporate small and medium enterprises and retail customers. The Company sees Broadband services as an important growth opportunity. The Companys key areas of concern regarding Broadband growth are the lack of computer penetration and awareness of these services in non-metropolitan areas, and the lack of last mile connectivity to the customers premises.
The Company has continued to pursue its strategy of diversifying its business model and revenue streams across products and geographical areas. As part of its growth strategy, the Company has and will continue to significantly expand its non-voice businesses. Data and other value added services such as international and national private leased circuits, frame relay, internet leased lines, Inmarsat mobile services, Internet telephony, managed data network services and T.V. uplinking managed services represent potential large growth opportunities for the Company in India and abroad. In India the Data services growth has been significantly influenced by the growth of the information technology, business process outsourcing and financial services industries as well as expansion of the operations of global corporations in
India. Given the convergence between voice, data and video services, the expansion of Indian companies operations worldwide and the expansion of global multi-national corporations into India, many companies seek a provider that can serve them across products and geographies. The Company also continues to focus on expanding its data services within the international markets and leverage the relationship it has with global corporations operating within India.
Acquisitions have been an important element of the Companys growth strategy. As discussed elsewhere in this Form 20-F, the Company completed several acquisitions including that of TGN, Teleglobe, VBL, Seven Star and DIL. See History and Development of the Company in Item 4. The results of the acquisitions completed in fiscal 2006 and fiscal 2007 are included in the consolidated financial statements of the Company from the dates these acquisitions were completed. The Companys consolidated revenues include the revenues of these acquired entities and the composition and geographical mix of the consolidated revenues has been and will continue to be impacted by these acquisitions. In the future, the Company expects to generate a significant amount of revenues from its operations outside of India and these acquisitions can and will have a significant impact on the revenues and results of operations of the Company.
These acquisitions have given the Company assets and businesses on a global scale and this would enable the Company to offer its products and services to its customers across the globe.
The principal components of the Companys cost of operations are network and transmission costs and license fee paid to the DoT in India. Network and telecommunications costs primarily include interconnect charges paid or payable to other domestic and foreign carriers for the termination of voice and data traffic, costs related to satellite, terrestrial and sub sea leased circuits for the network backbone. Amounts received from or paid to foreign telecommunications administrations and Indian fixed line and cellular operators are generally covered by the same agreements. Because a significant portion of our business is conducted through bilateral arrangements, we generate a substantial amount of our cash flow by periodic netting or settlement. The fees payable to each party are declared, typically monthly or quarterly, and we either make payments to or receive payments from correspondent carriers based on the net volume and rate of inbound and outbound traffic. Fees are typically settled on a monthly or quarterly basis. Network and transmission costs also include the cost of leasing certain transmission facilities and the cost of satellite circuits leased from Intelsat and Inmarsat.
Network and transmission costs are dependent upon the volume of voice and data traffic, the effect of competition in reducing network costs, local access costs of interconnection (or last mile connectivity costs) and the number of points of presence for interconnection with customers and suppliers.
Other operating costs consist mainly of employee compensation and other related costs, outsourced manpower costs, depreciation and amortization costs, energy costs and other costs, including for repairs, maintenance, utilities, advertising and marketing, legal and professional fees, allowances for uncollectible accounts receivables and other current assets, travel, insurance and other administrative costs.
Critical Accounting Policies
US GAAP differs in certain material respects from accounting Indian GAAP which forms the basis of the Companys general purpose financial statements. Principal differences insofar as they relate to the Company include differences in the measurement basis for acquisitions accounted using the purchase method, valuation of investments, measurement and accounting for impairment loss of longlived assets, accounting for deferred income taxes, accounting for retirement benefits, compensated absences, foreign exchange differences, financial instruments, proposed dividends and taxes thereon and the presentation and format of the financial statements and related notes. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of these financial statements and the reported amounts of revenues and expenses for the years presented. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies apply to and affect significant judgments and estimates used in the preparation of its consolidated financial statements.
Useful lives of Property, Plant and Equipment (PP&E)_and Other Intangibles
We estimate the useful lives of property, plant and equipment and intangible assets in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. Such estimated life is based on historical experience with similar assets or the fair valuation done at the time of acquisition, as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods. Assets that do not meet the criteria to be classified as intangible assets are accounted as service contracts or operating leases. Any amounts paid in advance related to service contracts or operating leases are included in other non-current assets and amortized on a straight-line basis over the term of the arrangement.
Impairment of Long-Lived Assets
We review these types of assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable over the remaining life of the asset or asset group. In order to determine if the asset or asset group is recoverable, we determine if the expected future cash flows directly related to the asset or asset group are less than the carrying amount of the asset or asset group. If so, we then determine if the carrying amount of the asset or asset group exceeds its fair value. We determine fair value using estimated discounted cash flows. If impairment is indicated, the asset or asset group is written down to its fair value. Assets to be disposed are reported at the lower of the carrying value or the fair value less cost to sell. The discounted cash flows calculation uses various assumptions and estimates regarding future revenue, expenses and cash flows projections over the estimated remaining useful life of the asset or asset group. These forecasts are subject to changes
in external factors including adverse regulatory and legal rulings. If the asset is impaired, we recognize an impairment loss, as the difference between the carrying amount and the fair value of the asset. The adjusted carrying amount is the new-cost basis.
Valuation of Goodwill
We have made major acquisitions in recent years that resulted in the recognition of a significant amount of goodwill. Commencing January 1, 2002, goodwill is no longer amortized, but instead is assessed for impairment annually or more frequently as triggering events occur that indicate a decline in fair value below that of its carrying value. In making these assessments, we rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and market comparable data. There are inherent uncertainties related to these factors and our judgment, including the risk that the carrying value of our goodwill may be overstated or understated.
Legal claims against the Company
As discussed in Note 27 to the consolidated financial statements, legal proceedings covering a wide range of matters are pending or threatened against us. We have accrued amounts as appropriate that represent our estimate of the probable outcome of these matters. The judgments we make with regard to whether to establish a provision are based on an evaluation of all relevant factors by internal and external legal counsel, as well as subject matter experts and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Claims are continually monitored and revalued as new information is obtained. We may not establish our liability for a particular matter until long after the litigation is filed, once a liability becomes probable and estimable. The actual settlement of such matters could differ from the judgments made in determining how much, if any, to accrue. We do not believe these proceedings will have a material adverse effect on our consolidated financial results. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, our results of operations may be over or understated.
Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and probability of realization of deferred income taxes and the timing of income tax payments. Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We measure deferred tax assets and liabilities using enacted tax rates that, if changed, would result in either an increase or decrease in the provision for income taxes in the period of change. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. In assessing the likelihood of realization, management considers estimates of future taxable income, the character of income needed to realize future tax benefits, and all available evidence. Actual income taxes could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, our financial condition and results of operations in future periods, as well as final review of our tax returns by taxing authorities, which, as a matter of course, are regularly audited by federal, state and foreign tax authorities.
Asset retirement obligation
The Companys asset retirement obligations relate to the removal of cable systems when they will be retired. As required by SFAS No. 143, Accounting for Asset Retirement Obligations, the Company records a liability for the estimated current fair value of the costs associated with the removal obligations. The Company records a liability for the estimated current fair value of the costs associated with the removal obligations. The fair value of a liability for asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The liability for asset retirement cost is capitalized by increasing the carrying amount of the related long-lived asset and is depreciated over its useful life. The estimated removal liabilities are based on historical cost information, industry factors and technical estimates received from consortium members of the cable systems. The Company measures changes in liability for an asset retirement obligation due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The interest rate used to measure that change is the credit-adjusted risk-free rate that existed when the liability was initially measured. That amount is recognized as an increase in the carrying amount of the liability and as an expense classified as interest expense in the statement of operations. The Company reviews and revises its estimate to the extent there are material differences between the estimated and actual removal costs and the estimated and actual rates.
The following table sets forth certain data from our statement of operations in amounts and as a percentage of revenues for fiscal 2005, 2006 and 2007:
The following table sets forth information regarding the Companys operating revenue for the fiscal years ended March 31, 2005, 2006 and 2007:
ILD is the single largest revenue stream of the Company comprising 61.70 percent, 49.13 percent and 49.39 percent of revenues in fiscal years 2007, 2006 and 2005, respectively. The Company acquired Teleglobe on February 13, 2006. Teleglobe derives a substantial portion of its revenues from ILD services and as such has been the primary reason for the growth in the Companys ILD revenues in fiscal 2006 and fiscal 2007. The Companys ILD revenues for fiscal 2006 increased by 39.35 percent over fiscal 2005 consequent to Teleglobes revenues for 46 days being consolidated and by 137.54 percent in fiscal 2007 over fiscal 2006 pursuant to the full year consolidation of Teleglobes revenues. Growth in traffic volume was partially offset by lower prices which continue to be under pressure consequent to which the Company has witnessed much lower growth in terms of revenues. The incoming to outgoing ratio for the Companys India business was 3.10 in fiscal 2007 as against 2.76 in fiscal 2006.
NLD as a revenue stream is restricted to the Companys India operations. NLD volumes have increased by 82 percent in fiscal 2007 over fiscal 2006 as against an increase of 109 percent in fiscal 2006 over fiscal 2005. The Company continues to augment its domestic network in India which also sustains the Data business in India, The Company is able to carry increased volumes due to a larger network reach and increased points of interconnect with other access providers. Revenues declined by 11 percent in fiscal 2007 over fiscal 2006 as against a growth of 64 percent in fiscal 2006 over fiscal 2005 due to a decline in pricing. Net revenues per minute have decreased to Rs. 0.26 in fiscal 2007 as compared to Rs. 0.50 in fiscal 2006 and Rs. 0.85 in fiscal 2005. The decrease is due to reduction in ADC which was included as a component of revenues. With effect from March 1, 2006 ADC is payable at 1.5 percent of AGR.
Leased Circuits and IRU Revenue
Revenue from leased circuits (international and national) and IRUs increased by 16.38 percent during fiscal 2007 over fiscal 2006 and 31.21 percent in fiscal 2006 over fiscal 2005. Up to fiscal 2005 the Companys India operations provided the bulk of these revenues. In fiscal 2006 and fiscal 2007 the increase has been fuelled by the growth of IT, IT enabled services, financial markets and outsourcing services in India and due to consolidation of the revenues of TGN and Teleglobe from these services from their acquisition dates. Consequent to the acquisitions of TGN and Teleglobe, the Company now owns assets globally based on which the Company now delivers leased circuits in key business capitals across the globe.
These services contributed approximately 12.01 percent, 19.52 percent and 20.85 percent in fiscals 2007, 2006 and 2005 respectively, of the Companys total revenues. However, regulation by the Government of India in these services has adversely affected revenue growth in the current fiscal year since the regulator implemented tariff ceilings for certain capacities for these services in fiscal 2006. The Company also faces constraints in last mile connectivity due to its dependence on other service providers leading to order execution delays which result in lost revenues.
The Company continues to focus on the growth of these services globally. Pricing is expected to be under pressure though volumes are expected to rise. The Company also expects the product mix of these services to move from a fixed connectivity scenario to usage based revenue in select customer segments.
Frame Relay and MDNS Revenue
Revenue from these services has increased by 70.16 percent in fiscal 2007 over fiscal 2006 and 18.73 percent in fiscal 2006 over fiscal 2005. Growth in these services,
which are a data transmission technique using shared bandwidth, has been driven by higher volumes originating out of India. This growth may not be sustainable due to increased customer preference for dedicated leased circuits.
Internet leased lines revenue
These revenues increased by approximately 10.81 percent in fiscal 2007 over fiscal 2006 and 21.10 percent in fiscal 2006 over fiscal 2005 on account of increase in demand for high-speed dedicated internet access by enterprise customers. The growth in fiscal 2006 and 2007 is primarily driven by the Companys India operations. The Company expects the volume growth in these services to get offset to some extent due to pricing pressures going forward.
These revenues increased by 160.68 percent in fiscal 2007 over fiscal 2006 and 26.62 percent in fiscal 2006 over fiscal 2005. Internet revenues include revenues from retail dial up and Broadband services offered by the Company in India, services offered by VBL and DIL and corporate IP transit services offered by the Company across the globe.
Corporate IP transit services revenues increased to approximately Rs. 3,283 million in fiscal 2007 from Rs. 408 million in fiscal 2006 contributing 139.90 percent of the total 160.68 percent growth in fiscal 2007. These services were a part of the product and services portfolio of Teleglobe, the acquisition of which was consummated on February 13, 2006.
Broadband revenues have increased from Rs. 1,071 million in fiscal 2006 to Rs. 1,213 million in fiscal 2007 due to an increase in the subscriber base. The Company continues to focus on Broadband services across India and plans to strengthen its product, delivery and customer service in this domain. The tariffs in the Broadband business will continue to be under pressure due to increased competition in this space. The Companys Broadband plans are severely impacted due to lack of unbundled last mile and the high cost of access to customers. The Company is exploring alternate technologies like WiMax to overcome these issues in its large scale roll out of Broadband.
Other revenues increased by 125.12 percent in fiscal 2007 over fiscal 2006 and 132.86 percent in fiscal 2006 over fiscal 2005 primarily due to the increase in revenues of VPN and data centre services and inclusion of revenues from global roaming and other VAS services offered by Teleglobe post consummation of the acquisition on February 13, 2006. VPN revenues have grown to Rs. 832 million in fiscal 2007 from Rs. 400 million in fiscal 2006 and Rs. 63 million in fiscal 2005. IDC revenues have grown to Rs. 817 million in fiscal 2007 from Rs. 533 million in fiscal 2006 and Rs. 226 million in fiscal 2005. Global roaming services, acquired through Teleglobe contributed Rs. 1,948 million to other revenues in fiscal 2007 as against Rs. 231 million for the 46 days of fiscal 2006. Revenue from these services accounted for 8.18 percent of the Companys total revenues in fiscal 2007 as compared to 6.87 percent in fiscal 2006.
The following table sets forth certain information regarding the components of the Companys operating costs for the fiscal years ended March 31, 2005, 2006 and 2007.
Network and Transmission Cost: Network and transmission costs increased by 118.09 percent in fiscal 2007 over fiscal 2006 and 29.84 percent in fiscal 2006 over fiscal 2005. This being the first full year of the Companys operations since its acquisitions of TGN, Teleglobe, VBL, Seven Star and DIL, the results of fiscal 2007 may not be strictly comparable to the results of the earlier years. As a percentage of revenue, network and transmission costs increased from 51.89 percent in fiscal 2006 to 59.80 percent in fiscal 2007. The increases were primarily due to the inclusion of the results of Teleglobe and TGN from their respective acquisition dates, and in particular the voice traffic carried by Teleglobe and growth in the enterprise and corporate data business consequent to global assets now available with the Company pursuant to the TGN acquisition
Interconnect charges increased by 129.17 percent in fiscal 2007 and 39.94 percent in fiscal 2006. As a percentage of revenue, interconnect charges increased from approximately 47 percent in fiscal 2006 to approximately 57 percent in fiscal 2007. Increased voice and data traffic consequent to completion of the acquisition of TGN and Teleglobe was one of the key drivers for the increase. The Company now operates in global markets where the pricing of its products and services is extremely competitive impacting the cost to revenue ratio.
In fiscal 2007 rent of landlines has gone up by 16.55 percent consequent to the acquisition of DIL consummated on June 24, 2007. However, as a percentage of revenue, rent of landlines decreased from 0.6 percent in fiscal 2006 to 0.4 per cent in fiscal 2007. Rent of landlines decreased by 75.23 percent during fiscal 2006 due to surrender of costlier landlines rented from other suppliers and tariff revision with some key suppliers with retrospective effect. Also, the Company continues to build its own MAN and domestic network in India to rationalize these costs further.
Space Segment utilization charges: The Company continues to rationalize this cost by surrendering surplus capacity and utilizing its cable infrastructure for carrying voice and data traffic. The Space Segment utilization charges have decreased by 33.90 percent and 31.99 percent in fiscal 2007 and fiscal 2006, respectively. As a percentage of revenue, space segment utilization charges decreased from 1.9 percent in fiscal 2006 to 0.7 per cent in fiscal 2007 due to such cost rationalization.
Other Operating Costs: Other operating costs increased by 58.22 percent in fiscal 2007 over fiscal 2006 and 121.25 percent in fiscal 2006 over fiscal 2005 respectively. The increases were primarily due to the inclusion of the results of Teleglobe and TGN from their acquisition dates. Increased in certain of the components of other operating costs were as follows:
As a percentage of revenue, total other operating costs increased from 26.41 percent in fiscal 2005 to 41.7 percent in fiscal 2006 and have now decreased to 34.9 per cent in fiscal 2007. The increase in fiscal 2006 over fiscal 2005 was primarily due to the acquisitions completed in fiscal 2006. The decrease in fiscal 2007 over fiscal 2006 is due to the integration of TGN and Teleglobe with the Companys Indian operations which enabled the Company to realize the synergies from these acquisitions. The Company expects to achieve further synergies going forward.
License Fee: As per the Companys license agreement with the Government of India, the license fees payable to the DoT was 15 percent of AGR until January 2006 when the rate on the ILD license (which covers international voice and IPLC revenues) was lowered to 6 percent. The Government of India defines adjusted gross revenues (AGR) as gross call revenues less access charges actually paid to other carriers for carrying of calls less service and sales taxes paid to the Government of India. As explained under the section Revenue share and License fees above we have certain disputes with the Government of India over the calculation of AGR and therefore of license fees. The total amounts provided towards ILD and NLD license by VSNL India for fiscals 2007, 2006 and 2005 are Rs. 1,053 million, Rs.1,932 million and Rs. 2,811 million respectively and the amounts paid for the corresponding fiscal years are Rs. 1,622 million, Rs.1, 776 million and Rs. 847 million.
As part of the compensation to the Company for the early termination of its exclusivity in providing ILD services, the Government of India provided that the Company would be refunded license fees it paid towards NLD services to the extent of 10 percent. Accordingly, the Company has taken a net charge of 5 percent of the revenues from NLD services in its financial statements and recorded a receivable from the Government to the extent of 10 percent. The Company however has not received any refunds in this regard for the fiscal years 2003 to 2006.
The following table sets forth certain information regarding the Companys operating income for the fiscal years ended March 31, 2005, 2006 and 2007.
This being the first full year of the Companys operations since its acquisitions of TGN, Teleglobe, VBL, Seven Star and DIL, the results of fiscal 2007 may not be comparable to the results of the earlier years as discussed above. These acquisitions contribute in excess of Rs. 45,000 million in gross revenues and have a significant impact on the operating income of the Company.
The following table sets forth certain information regarding the components of the Companys investment and other income for the fiscal years ended March 31, 2005, 2006 and 2007.
The gain on sale of investments of Rs. 17 million and Rs. 77 million in fiscal 2007 and fiscal 2006 is primarily gain on sale of mutual fund investments.
In fiscal 2005, the Company sold its shareholding in Intelsat, Ltd., a company incorporated under the laws of Bermuda, in connection with Intelsats acquisition by a consortium of private equity investors. The sale of the Companys shares realized approximately US$169 million, representing a gain of US$ 110.82 million, or Rs. 4,834 million (exclusive of tax and license fees).
In fiscal 2005, the Company also sold its shareholding in New Skies Satellite N.V. (NSS), a Dutch corporation which had been incorporated by Intelsat, in connection with the acquisition of NSS by a consortium of private equity investors. The sale of the Companys shares realized approximately US$ 27 million, representing a gain of US$ 15.59 million, or Rs. 680 million (exclusive of tax and license fees).
The Company did not have any such major sale of investment in fiscal 2007 and fiscal 2006.
Net interest represents the net interest amount received or paid by the Company on its bank and other deposits and borrowings under its overdraft facilities. Interest income from banks and others has decreased from Rs. 529 million in fiscal 2005 to Rs. 315 million in fiscal 2006 and further to Rs. 63 million in fiscal 2007. The decrease is due to reduction in total bank deposits. In fiscals 2007 and 2006 the Company received interest of Rs.63 million and Rs. 564 million on income tax refunds on its India operations. During fiscal 2007, the Company had an interest expense of Rs. 1,380 million on short term and long term debt as against Rs. 382 million in fiscal 2006. The increase was consequent to the increase in the total debt of the Company due to the acquisition of TGN and Teleglobe.
The increase in dividend income year on year is primarily because of increase in interest rates. The majority of the Companys investments were kept in mutual funds in order to take advantage of tax benefits on mutual fund investments which contributed to higher yields.
In fiscal 2007 the Company wrote back liabilities no longer required to be settled of Rs. 578 million.
Other income of Rs 1,125 million (US$ 27 million) in fiscal 2007 includes profit on sale of fixed assets of Rs.427 million.
Income before income taxes
Consequent to the above, income before income taxes for fiscal 2007, 2006 and 2005 was, Rs. 4,522 million, Rs. 2,864 million and Rs. 9,345 million respectively. The reduction in income before income taxes in fiscal 2006 as compared to fiscal 2005 was due to a gain on sale of investment of Rs. 5,523 million earned in fiscal 2005.
Income Tax Expense
The Companys effective tax rate on a consolidated basis works out to 62.07 percent in fiscal 2007 as against 67.46 percent in fiscal 2006 and 27.55 percent in fiscal 2005. The statutory income tax rates were 33.66 percent, 33.66 percent and 36.59 percent for fiscal 2007, 2006 and 2005, respectively. The effective tax rate in fiscal 2007 and fiscal 2006 is higher than the statutory rate because the Companys operations outside of India have incurred losses which cannot be set off against the profits earned by the Companys operations within India, thereby causing the effective rate on a consolidated basis to rise substantially. During fiscal 2005, the primary reasons for variance between the applicable statutory income tax rate and the effective rate for the Company were that dividend income from investments in mutual funds were tax exempt and a lower tax rate of 20 percent was applicable to gains on sale of investment in Intelsat and New Skies Satellites N.V.
The Company is subject to significant claims by the revenue authorities in respect of income tax matters. These are described under Item 8 Legal Proceedings.
Share in Net Loss of Equity Method Investees
The Companys share in the net loss of equity method investees in fiscal 2007 was Rs.96 million (US$2 million) as compared to Rs.70 million in fiscal 2006. Effective fiscal 2006, there was a decrease in the share of loss because the Company is not required to account for its interest in TTSL using the equity method.
As at March 31, 2007 and March 31, 2006, the equity method investees are SEPCO Communications Pty. Ltd (SEPCO) and United Telecom Limited (UTL). As at March 31, 2007, the Company had an ownership interest of 43.16 percent in SEPCO, which was acquired during fiscal 2006. During fiscal 2007 and 2006, the Companys ownership interest in UTL was 26.6 percent.
Equity in net loss included loss of TTSL of Rs. 4,006 million in fiscal 2005. During fiscal 2005, the effective voting interest of the Company in TTSL declined from 19.9 percent to 16.1 percent as a result of an increase in the effective voting interest of Tata Sons Limited (Tata Sons) in TTSL to 57.8 percent as of April 1, 2004. During fiscal 2006, the voting interest further declined from 16.1 percent to 14.1 percent as a result of subsequent raising of capital by TTSL from other investors. The effective ownership and voting right in TTSL, as of date hereof, is 15.01 percent and 13.27 percent respectively.
The Company currently has no right to representation on the TTSL board of directors. Pursuant to a shareholders agreement among the Company, TTSL, Tata Sons and the other shareholders of TTSL, the power to recommend the appointment of directors of TTSL was previously allocated among the shareholders in proportion to their relative voting interests, and under such arrangement VSNL originally had the right to recommend the appointment of two of the twelve directors of TTSL. The Company agreed to give up this proportionate representation, and the other shareholders of TTSL also agreed to eliminate this proportionate representation, following the increase in the effective voting interest of Tata Sons which gave the latter majority control. The amendment to eliminate the proportional representation for all shareholders was signed on March 11, 2005.
The Company has not made any further investment in TTSL other than an investment of Rs. 1,755 million in August 2005 in connection with rights offering in order to maintain its proportionate interest. Since the other shareholders also made pro rata investments, the Companys equity percentage ownership did not change. The Company has no obligation to make any further investment to maintain (or increase) its interest. In view of the foregoing facts, the Company has ceased to account for its interest in TTSL using the equity method effective from April 1, 2005. The investments are carried at cost as equity shares of TTSL do not have readily determinable fair value.
As a result of the foregoing, net income was Rs.1,439 million in fiscal 2007 as compared to Rs.622 million in fiscal 2006 and Rs. 2,446 in fiscal 2005. This being the first full year of the Companys operations since its acquisitions of TGN, VBL, Teleglobe, Seven Star and DIL, the results of fiscal 2007 may not be strictly comparable to the results of the earlier years as discussed above. These acquisitions have a significant impact on the net income of the Company both in terms of costs and revenues.
The Board of Directors and the Managing Director of the Company together as a group constitute the Chief Operating Decision Makers (CODM) and allocate resources to and assess the performance of the segments of the Company.
During fiscal 2006, the Company carried out acquisitions of certain tangible and intangible assets identified as TGN and also completed the acquisition of 100 percent of the common shares of Teleglobe. Since these acquisitions were consummated near the fiscal year end, the Companys management was in the process of finalizing a formal integration plan of the business carried out by such entities with the business carried out by the Company in India. These acquisitions combined with the existing international businesses of the Company were organizationally considered as International Businesses and were reviewed as such. As a result, for fiscal 2006 the international business of the Company was viewed as a separate segment in order to allocate resources and assess performance. Hence, reportable segments for fiscal 2006 were determined as Wholesale Business, Enterprise Business, International Business and Others.
In fiscal 2007, the Company has completed the integration of the acquired businesses with the business of VSNL India. Consequently, the CODM now views and assesses the performance and allocates resources to segments as:
Accordingly the Company has changed its reportable segments for fiscal 2007, which are Wholesale Voice, Enterprise and Carrier Data and Others.
The composition of the reportable segments is as follows:
In fiscal 2007 the Company identified the following operating segments based on the organizational structure and for which discrete financial information including segment results is available:
International and national voice services are managed by the Global Voice business group, corporate data transmission services and other services are managed by the Global Data business group, retail internet services are managed by the Retail business group.
The Wholesale Voice reportable segment comprises segment information only for international voice as international and national voice services do not meet the aggregation criteria of FAS 131. Segment revenues and profits from international voice substantially comprise revenues and profits managed by the Global Voice business group.
The Enterprise and Carrier Data reportable segment comprises segment information only for corporate data transmission services, as these services and services included under other value added services do not meet the aggregation criteria of FAS 131. Segment revenues and profits from corporate data transmission services substantially comprise revenues and profits managed by the Global Data business group.
All other services including national voice, signaling and roaming services and retail internet have been reported under Others, as none of these operating segments meet the reportable quantitative thresholds. Revenues from Wholesale Voice and Enterprise and Carrier Data exceed seventy five per cent of the Companys consolidated revenues.
Summarized segment information based on the new segmentation basis for fiscals 2006 and 2007 is as follows:
Fiscal 2007 is the first full year of consolidation of Teleglobe revenues and consequently there has been a 137.54 percent increase in the revenues for this business. In volume terms, the Company has carried approximately 20 billion minutes of international voice traffic, driven by the acquisition of Teleglobe. The Indian business of the Company carried international traffic of approximately 5.3 billion minutes in fiscal 2007 and 3.9 billion minutes in fiscal 2006.
The segment results of Wholesale Voice has increased from Rs.4,056 million in fiscal 2006 to Rs. 7,234 million in fiscal 2007, a rise of over 78 percent. However, as a proportion of segment revenues, the segment results are lower. Segment results of Wholesale Voice are approximately 13.64 percent and 18.16 percent of segment revenues for fiscal 2007 and fiscal 2006 respectively. The retentions per minute are in line with the pricing prevailing in the highly competitive global voice markets in which the Company operates. Though on a blended basis the Company has been able to maintain its retentions, these are expected to decrease in the foreseeable future.
Enterprise and Carrier Data
Revenues from our Enterprise and Carrier Data have increased by over 33 percent in fiscal 2007 i.e. from Rs 14,641 million in fiscal 2006 to Rs. 19,550 million in fiscal 2007. The growth in this segment is driven by substantial volume growth in these services offered in India. In addition, effective fiscal 2007, the Company has
consolidated the first full year of global data revenues following its acquisition of the TGN undersea cable assets. Though the Company has witnessed substantial volume growth, tariff drops have been significant and the Company expects tariffs to be under pressure.
The segment result of Enterprise and Carrier Data has increased from Rs.11,550 million in fiscal 2006 to Rs. 16,936 million in fiscal 2007, a rise of 46.63 percent. Enterprise business margins have benefited from the significant growth in revenues as well as the cost rationalization. The segment results have been 78.89 percent and 86.63 percent for fiscal 2006 and fiscal 2007 respectively. However, these segment results are not indicative of the true margins of these segments as substantial costs of the Company cannot be allocated as discussed in the section on segment results in the consolidated financial statements of the Company, elsewhere in this Form 20-F.
Revenues from the Others segment has increased from Rs. 8,482 million in fiscal 2006 to Rs. 13,380 million in fiscal 2007 i.e. an increase of 57.75 percent. The segment results have increased from Rs. 4,539 million in fiscal 2006 to Rs. 9,400 million in fiscal 2007. This has been largely driven by the growth in Internet and other value added services. Volumes in the national long distance services have increased by approximately 82 percent though the retentions for this business continue to decline. Other value added services including mobile roaming and signaling, data centres, TV uplinking have all contributed to significant growth in the segment revenues. Some of these services such as Mobile roaming and signaling were acquired as part of the portfolio of products and services offered by Teleglobe and hence were not part of this segment in the earlier years.
Cost allocation parameters.
Revenues and interconnect charges are directly attributable to the segments. Space segment utilization charges, rent of landlines and other network and transmission costs are allocated based on utilization of satellite and landlines. License fee for international voice and corporate data transmission services have been allocated based on net revenues from these services. Depreciation and amortization, impairment loss on intangible assets and all other operating costs are unallocable.
Telecommunication services are provided utilizing the Companys assets which do not generally make a distinction between the types of service. As a result, assets and expenses relating to those assets are not allocated to segments.
Liquidity and Capital Resources
The cash flow statement in this Form 20-F is a consolidated cash flow and integrates the results of operations of the various acquisitions done by the Company. Furthermore this is the first full year where cash flows of the significant acquisitions of TGN and Teleglobe have been consolidated. As a result, cash flows for fiscal 2007 may not be strictly comparable with that of the previous years.
The Company generated Rs. 3,069 million, Rs. 9,635 million, and Rs. 6,062 million (US$ 141 million) as cash from operating activities for fiscal 2005, fiscal 2006 and fiscal 2007 respectively. The significant components in respect of cash flow from operations in addition to net income are depreciation and amortization, changes in working capital and taxes. Further, during fiscal 2005 cash flow from operations was adjusted for gain on sale of investment to the extent included in net income of Rs. 5,523 million, accordingly the cash flow from operations for fiscal 2005 was lower to this extent. The depreciation and amortization impact continues to be significant given the nature of the businesses in which the Company operates and capital expenditures incurred by the Company. Consequently, the depreciation and amortization impact to the cash flows has increased from Rs. 2,308 million in fiscal 2005 to Rs. 5,249 million in fiscal 2006 and further to Rs. 6,966 million in fiscal 2007 (US$ 162 million). The Company continues to expect this to increase in the coming fiscal years.
Cash flow from operations for fiscal 2005 was also impacted by a loss charged to net income of Rs. 4,156 million, primarily on account of equity accounting of the Companys investment in TTSL as discussed in other sections in this Form 20-F. The Company ceased to account for its investment in TTSL under equity accounting beginning April 1, 2005. During fiscal 2007 the net impact of working capital changes was an outflow of Rs. 2,163 million as compared to an inflow of Rs. 4,129 million in fiscal 2006 and an outflow of Rs. 903 in fiscal 2005. For fiscal 2005 the working capital changes were impacted due to an outflow impact towards taxes of Rs. 1,706 million. For fiscal 2007 there has been an increase in the receivables of the Company with cash out flow impact of Rs. 1,997 million. The cash flow position has also been adversely impacted by a decrease in the accounts payable in fiscal 2007 over fiscal 2006. The changes in working capital arise primarily from timing of receipts and payments related to our accounts receivable, other current assets, accounts payable and other current liabilities.
The Company used cash amounting to Rs. 1,010 million, Rs. 18,214 million, and Rs. 11,944 million (US$ 276 million) towards investing activities during fiscal 2005, fiscal 2006 and fiscal 2007, respectively. The Companys purchase of tangible and intangible assets net of sale of property, plant and equipment were Rs. 11,325 million, Rs. 10,155 million and Rs. 11,399 million (US$ 264 million) in fiscal 2005, fiscal 2006 and fiscal 2007, respectively. During fiscal 2005 the Company also invested Rs. 2,354 in equity method investee (TTSL) and had a net increase in short term bank deposits amounting to Rs. 3,627 million. During fiscal 2006 the Company completed acquisitions of TGN and Teleglobe along with VBL and Seven Star for a total cash consideration of Rs. 13,328 million. A sum of Rs. 13,563 was accordingly generated by liquidating short term bank deposits (net) during fiscal 2006. Further during fiscal 2006 the Company invested a sum of Rs. 1,755 million in TTSL in the rights issue of TTSL. In fiscal 2007, the Company acquired DIL for a cash consideration of Rs. 871 million. As part of its investing activities the Company generated / (used) Rs. 9,590 million, Rs. (6,539) and Rs. 242 million from purchase and sale of available for sale investments. These primarily pertain to investments by the Company in units of mutual funds in India.
The Company generated capital resources from its financing activities to the extent of Rs.12,612 in fiscal 2006 and Rs. 3,806 million in fiscal 2007 whereas in fiscal 2005 the Company used Rs. 1,913 towards financing activities primarily towards repayment of short term debt of Rs. 630 million and payment of dividend of Rs. 1,283 million. During fiscal 2006 the Company paid Rs. 13,328 million in fiscal 2006 for the acquisitions of TGN, Teleglobe, VBL and Seven Star. These acquisitions were primarily funded by long term and short term borrowings. During fiscal 2006, the Company obtained long term debt of Rs. 9,814 million primarily for the acquisition of Teleglobe. The Company also obtained short term debt of Rs. 8,030 million for the acquisition and working capital requirements of TGN. A senior loan of Rs. 4,461 million was redeemed at par on February 14, 2006 along with interest accrued up to that date and change in control premium of Rs. 45 million. Please refer to note 15 and note 17 of the consolidated financial statements elsewhere in this Form 20-F. During fiscal 2007 the Company has converted its short term borrowing to long term borrowings ranging for periods from six to seven years. The Company as on March 31, 2007, has total long term debt of Rs. 21,980 million (US$ 510 million) and cash
and cash equivalents of Rs. 2,041 million (US$ 47 million) as against Rs. 4,373 million as of March 31, 2006.
In addition, the Company borrows funds for short-term requirements from time to time in order to meet temporary working capital needs. While the Company anticipates significant liquidity requirements in the near future and expects to borrow additional funds, the Company believes, based on its current financial condition and market outlook, that its cash and cash equivalents and ability to borrow will be sufficient to meet such requirements.
Other than the normal business capital expenditures related to its existing businesses and related working capital requirements, the known and likely commitments of the Company towards new ventures and debt repayments are discussed below. The Company will have to explore options to raise financial resources either in the domestic or global markets or both to meet its likely commitments. The terms and conditions under which financing will be available cannot be determined and are subject to fluctuations and uncertainties. Any problems in obtaining favorable credit ratings and access to the financial markets can be detrimental to the Companys liquidity position and can cause delays and cost escalations in the Companys business plans.
The following factors are expected to impact the Companys liquidity and capital resources:
Board of directors approval for investments in South Africa
The Company owns 43.16 percent in SEPCO Telecommunication Pty. Ltd. (SEPCO). SEPCO in turn owns 51 percent in Neotel, the second national telecommunications operator in South Africa. The Board has approved an investment of up to US$226 million over a four year period in Neotel. The Company cannot predict the actual timing or the sources of financing of the investment.
Planned capital expenditure and cash requirements for each of the Companys operating segments
The Company has forecasted total capital expenditure of approximately Rs. 39,870 million (US$ 925.06 million) in its annual operating plan for fiscal 2008, for upgrading facilities and setting up new networks and facilities. This is over and above the investment commitment in Neotel.
Announcement of two new undersea cable systems
As discussed earlier in this Form 20-F, the Company plans to lay two new cable systems, the Intra-Asia cable system across Asia with a total project cost of approximately US$ 235 million and another cable connecting India with Europe. These cable systems would require substantial investments and the Company may borrow to fund these capital expenditures. A certain portion of the expenditure for the Intra-Asia cable is considered in the annual operating plan for fiscal 2008.
Fall in revenues due to tariff drops both in Voice and Data
The Company has gradually over the past couple of years announced tariff cuts for its IPLC services. Further, the entry into the India enterprise business of major international carriers who have capacities on international cables may cause prices of many of our enterprise products and services to decline. These factors could cause revenues and profits to decline in fiscal 2008 and future periods, which would adversely affect the working capital of the Company.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet financing arrangements.
Table of Aggregate Contractual Obligations
The Company had the following contractual and commercial commitments related to normal business activities as of March 31, 2007:
The Company is not involved in any trading activities.
The Company has forecasted total capital expenditure of approximately Rs.39,870 million (US$925.06 million) in its annual operating plan for fiscal 2008, for upgrading facilities and setting up new networks and facilities. This is over and above the investment commitment in Neotel.
The Company expects to incur capital expenditure on infrastructure development which is common to all the segments of the Company. In addition, in terms of the individual segment expenditures, the Company expects to incur limited capital expenditure in respect of its Wholesale Voice business. Certain other components of the capital expenditure would include expenditure on information technology assets, sustenance capital expenditure and enhancement of infrastructure. The bulk of the investments is towards enhancing the transmission capacities and last mile connectivity of the Company, both inland and offshore. This includes capital expenditures towards network resilience, capacity expansion, network reach, network optimization and new services, the majority of which would be towards capacity expansion. Resulting enhancements are primarily to be used by the data and internet product businesses offered by the Company. Accordingly the enterprise segment and certain
other internet products such as retail Broadband which have been classified under Other services would incur capital expenditure.
Research and Development, Patents and Licenses
The Company conducts its own internal research activity in order to achieve its strategic goals and to participate in current technological advancements. The Company plans to invest in internal research and development. The main focus of the Companys internal research and development activity is the exploration of suitable technologies that enable the Company to best serve its customers, gain competitive advantage in the telecommunications market and reduce its cost of operations. The research and development that the Company has focused, in recent years has been on access technologies, content delivery systems, tools for network optimization, graphic user interface applications for network inventory systems and internet applications.
In accordance with the accounting policy on research and development adopted by the Company in fiscal 2000, all costs incurred on research and development by the Company are charged to the income statement under the relevant line items.
The Company today operates in various markets globally, both in voice and data businesses. The Company expects tariffs and margins in these businesses may further decrease in these markets due to intense competitive pressures and technological changes. The Company expects that these pressures will continue to adversely affect its revenues and margins in fiscal 2008 and beyond.
While the Company generated approximately 49 percent of its revenues from Wholesale Voice segment which is primarily ILD business in fiscal 2006, in fiscal 2007 this increased to 61 percent as this was the first full year of consolidating the results of its acquisitions consummated in fiscal 2006. However tariffs in the voice business have been under intense pressure in the recent past. The Company is also focused on growing its Enterprise and Carrier Data business. Though the share of Enterprise and Carrier Data business has decreased from 32 percent in fiscal 2006 to 22 percent in fiscal 2007 consequent to growth in voice revenues contributed by the Teleglobe acquisition, the Enterprise and Carrier Data business is also expected to be a significant contributor to the Companys revenues in the future. The Company expects this to change significantly over the years to come, with the proportion of Wholesale Voice declining and Enterprise and Carrier Data rising.
The trends in Indian and global voice markets have been also discussed in item number 4 and the risk factors which could impact the future direction of these revenues.
The Companys success in the ILD and NLD business in India also depends on the ability to access retail customers who choose the Companys service. A key element in this process is the implementation of the Carrier Access Code system in India, which will enable customers to choose the ILD and NLD operators of their choice. The pace of implementation of the Carrier Access Code depends on Government policy, which is currently unclear. See Item 3-Risk Factors-As a result of delays in the implementation of the new Carrier Access Code regime, we continue to depend on other telecommunications providers for access to end customers.
The BPO and IT markets in India have been growing rapidly and the trend is expected to continue, which could result in significant growth in the Companys corporate data transmission business. However, the presence of new competitors with large amounts of bandwidth is reducing prices for these services. Many of the Companys competitors have acquired large amounts of bandwidth, and the Company is repositioning itself to compete effectively in bandwidth intensive businesses. The Company hopes that the introduction of innovative pricing, differentiated packages and diverse offerings will enable it to compete effectively in these businesses.
The Company is one of the largest Internet service providers in India. However, the internet services market in the future may move towards other bandwidth intensive applications, such as video on demand, gaming, interactive education, etc. The Company is planning a major Broadband initiative to offer integrated voice, data and video services and is laying down the infrastructure to support a range of information, entertainment and telecom services.
The Company has made significant investments in international businesses mainly through acquisitions. The acquired businesses are prone to uncertainties with respect to the revenues and profit margins. These acquisitions also involve a range of other risks like those related to execution and integration risks and regulatory issues. Further, these ventures could require the Company to incur or assume debt, or assume contingent liabilities.
Trends affecting liquidity and working capital are discussed above.
Financial and Management Accounting and Reporting Systems
The Company was subject to various laws and Government policies in respect of public sector enterprises and followed procedures appropriate for a public sector entity until its privatization in 2002. Consequently, the Company did not have the financial and management accounting and reporting systems that are typical of private comparable companies outside India. Although the Company initiated various steps to improve its processes and systems, the Company has to continue to invest in improving its processes and systems further in light of the dynamic conditions and changes within the industry in which it operates. In addition, the Company has grown quickly as a result of significant acquisitions in fiscal 2006. The integration of these acquisitions has created challenges, and the Company has made and will need to continue to make significant efforts to develop and maintain effective accounting and reporting systems.
Directors and Senior Management
The Company is managed by its Board of Directors. The Indian Companies Act, 1956 (Act) and the Companys Articles of Association (Articles) provide for a Board of not less than three Directors and not more than twelve Directors.
On February 13, 2002 the Government of India (GOI), Panatone Finvest Limited (Strategic Partner), Tata Sons Limited, Tata Power Company Limited, Tata Steel Limited and Tata Industries Limited (Principals) signed a Shareholders Agreement (SHA) as per the provisions of which the GOI transferred 7,12,50,000 Equity Shares owned by the Government, representing 25 percent of the aggregate number of the issued and outstanding Equity Shares of the Company which were sold to the Strategic Partner pursuant to the terms and subject to the conditions set forth in the Share Purchase Agreement (SPA). The Articles of Association of the Company were amended at our Annual General Meeting held on August 20, 2002, to conform to the provisions of the SHA and the SPA. The amended Articles prescribe the rights of Panatone Finvest Limited and Government of India, the two largest shareholder of the Company, to nominate Directors on the Board as described in Item 10. Additional InformationMemorandum and Articles of Association. As per the provisions of the SPA and SHA, the composition of the Board of Directors of the Company is determined as given below.
(a) On the closing the Board shall comprise 12 directors.
(b) So long as the Government holds at least 10 percent of the voting equity share capital of the Company the composition of the Board shall be as follows:
(i) Four out of twelve directors shall be permanent or non-retiring directors, of which the Government and Panatone Finvest Limited shall be entitled to appoint two directors each.
(ii) The remaining eight directors shall be liable to retire by rotation. Of the retiring directors, four directors shall be independent directors on the Board.
(iii) Of the four independent directors Panatone Finvest Limited and the Government shall be entitled to nominate and recommend names of two independent directors each.
(iv) The composition of the remaining four directors i.e. the retiring and non independent directors shall be determined by the following:
i. So long as Panatone Finvest Limited together with its Affiliates holds 25 percent of the voting equity share capital of the Company, two directors shall be nominated each by the Government and Panatone Finvest Limited.
ii. As soon as Panatone Finvest Limited acquires and holds more than 25 percent but less than 30 percent of the voting equity share capital of the Company, Panatone Finvest Limited shall have the right to appoint three directors on the Board and the Government shall have the right to appoint one Director on the Board.
iii. As soon as Panatone Finvest Limited acquires and holds more than 30 percent of the voting equity share capital of the Company, Panatone Finvest Limited shall have the right to appoint all the four directors.
(a) Notwithstanding anything to the contrary contained in the SPA and SHA (i) the Government shall have the right to appoint two non retiring Directors so long as the Government holds at least 10 percent of the voting equity share capital of the Company and (ii) the Government shall be entitled to appoint one non retiring director on the Board so long as the Government is a shareholder in the Company.
(b) Subject to the provisions of sub clauses (c) and (e) below, if a Person, other than a Party to the SHA (Party), to whom the Government, Panatone Finvest Limited or a party to the SHA (Shareholder) as the party to the SHA has transferred its Equity Shares (or any equity rights or interests therein) or renounced the Right pursuant to the SHA, requests the right to nominate one or more directors, and at the time of such request, such request complies with the requirements of the Act, the right to nominate one or more directors (depending on the percentage of the equity share holding in the Company held by the Shareholder who has transferred the Shares or renounced the Right, as the case may be) shall be taken from such Shareholder who has transferred the Shares or renounced the Right, as the case may be and not from the other Shareholders and such request shall not be fulfilled by increasing the total number of directors constituting the Board. For the purpose of clarity and removal of doubt, if at any time after the expiry of three years from the Closing, Panatone Finvest Limited, together with its Affiliates, holds less than 25 percent of the voting equity share capital of the Company, the composition of the Board shall be suitably changed in accordance with the provisions of the Act.
(c) Notwithstanding the foregoing, at least three-fourths of the total number of directors on the Board shall, at all times, be Indian nationals.
(d) For purposes of clarity and avoidance of doubt, the Government and Panatone Finvest Limited agree that if additional independent directors are required to be appointed to the Board to comply with any Laws or regulation or to comply with the provisions of any listing agreement, then, by mutual agreement between the Government and Panatone Finvest Limited, either the strength of the Board shall be increased to the extent required or the number of directors that each of the Government and Panatone Finvest Limited shall be entitled to appoint under paragraphs (a) and (b) above shall be proportionately reduced.
(e) The proportion of representation of the Parties to the SHA on any committees or sub-committees of the Board shall be the same as that of the Parties on the Board.
(f) In the event that the Board constitutes a share transfer committee for the purpose of effecting the transfer of the Shares, such share transfer committee shall include one nominee of Panatone Finvest Limited and the Government of India each.
(g) Panatone Finvest Limited, Principal(s) and the Government shall cause the Company to take all and any steps as may be required under the Act to effect the appointment of the directors. Each of the Government and Panatone Finvest Limited shall be entitled to remove and replace its nominees (except the independent directors) from time to time as provided in Article 5.3 of the SHA. Both the Government and Panatone Finvest Limited shall vote the Equity Shares held by them to elect the directors nominated/appointed in accordance with this Agreement. As long as Panatone Finvest Limited holds 25 percent of the then-outstanding Equity Shares, one of the directors nominated by Panatone Finvest Limited shall be the Managing Director of the Company.
(h) If any director is reasonably expected to be or is absent for a period of not less than three (3) calendar months from India where the registered office of the Company is located, the Board may, at a meeting of the Board or by circulation of a written resolution of the Board in accordance with applicable Law, appoint an alternate director. The alternate director shall be an individual nominated by the director in whose place such alternate director is being appointed, and the Shareholders shall cause their nominees on the Board to approve the appointment of such individual as an alternate director.
(i) Each Shareholder shall be entitled to remove any director appointed by it to the Board by Notice to such director and the other Parties. Any vacancy occurring on the Board by reason of retirement, death, disqualification, resignation, removal or the inability to act of any director for any reason whatsoever shall be filled only by another nominee of the party whose nominee was so affected so as to maintain a Board consisting of the number of nominees specified above. Retirement of any director shall also be subject to any applicable provisions in the Articles of Association.
On February 13, 2002 as per the provisions of the Share Purchase Agreement and Shareholders Agreement the Board was reconstituted. As of September 15, 2007, the Board of Directors of the Company consisted of twelve directors with four independent directors, two directors nominated by the Government of India as non-retiring directors and the remaining six being nominated by Panatone Finvest Limited.
The business address of each of the directors is the registered office of the Company. The current directors and their positions are as follows:
On 17 July 2006, Mr. Amal Ganguli, Independent Director, joined the Board of Directors.
On 2 February 2007, the Board of Directors of the Company has, subject to the approval of shareholders, appointed Mr. N. Srinath as Managing Director and Chief Executive Officer of the VSNL Group with effect from 2 February 2007 for a period of five years. The shareholders in the Annual General Meeting held on 2 August 2007 have approved the appointment.
Mr. Vinod Kumar joined the Board of Directors on 2 February 2007.
Mr. S. Ramadorai joined the Board of Directors on 28 June 2007. Mr. Ishaat Hussain resigned from the Board of Directors on 27 June 2007.
Mr. N. Parameswaran, who was the non-retiring nominee of the Government of India on the Board of Directors , resigned with effect from July 19, 2007. The Government of India nominated Mr. A K Srivastava as a non-retiring Government Director and he was appointed as director from July 31, 2007 in place of Mr. N. Parameswaran.
There are no exclusive directors service contracts providing for benefits upon termination of employment with the Company or any of its subsidiaries except those normal retiral benefits as applicable to the employees of the Company. However, as per the agreement between the Company and Mr. N. Srinath, the employment can be terminated by either party by giving six months notice or by the Company on paying six months basic salary in lieu thereof.
Global Management Committee
The Company has set up a Committee to take strategic decisions, namely, Global Management Committee (GMC). GMC comprises nine members- Mr. N Srinath, Managing Director, Mr. Vinod Kumar, President, Global Data and Mobility Solutions, Mr. Michel Guyot, Head of Global Voice business, Mr. John Hayduk, Chief Technology Officer, Mr. Rajiv Dhar Chief Financial Officer, VSNL (India), Mr. Srinivasa Addepalli, Senior Vice-president, Corporate Strategy, Mr. Sandeep Mathur, Head of Corporate Affairs, Mr. M R Madhusudhan, Chief Network Officer, Global Operations and Mr. Govind Sankaranarayanan, Chief Financial Officer (VSNL International). The Committee will formulate strategies, bring in consensus and increase transparency. It will also look into the issues pertaining to networks, expansion, entry into newer geographies and human resources.
Other Principal Officers
The following individuals are the principal executive officers of the Company in addition to those officers who are members of the Board of Directors:
Set forth below is selected biographical information for certain of the Companys directors and principal officers:
Mr. Subodh Bhargava
Born in Agra in 1942, Mr. Subodh Bhargava holds a degree in Mechanical Engineering from the University of Roorkee. He started his career with Balmer Lawrie & Co., Kolkata before joining the Eicher group of companies in Delhi in 1975. On March 31, 2000, he retired as the group chairman and chief executive and is now the chairman emeritus, Eicher group.
He is the past President of the Confederation of Indian Industry (CII) and the Association of Indian Automobile Manufacturers; and the Vice President of the Tractor Manufacturers Association. Over several years, he was therefore a key spokesperson for Indian industry, contributing to and influencing government policy while simultaneously working with industry to evolve new responses to the changing environment.
He was a member of the Insurance Tariff Advisory Committee, the Economic Development Board of the government of Rajasthan. He was also the chairman of the National Accreditation Board for Certifying Bodies (NABCB) under the aegis of the Quality Council of India (QCI).
Mr. Bhargava has been closely associated with technical and management education in India. He was the chairman of the Board of Apprenticeship Training and member of the Board of Governors of the University of Roorkee, the Entrepreneurship Development Institute of India, Ahmedabad.
He was also a member of the senior panel of the All India Council for Technical Education (AICTE) set up for a comprehensive evaluation of research in engineering and technology; and on the committee set up by the Ministry of Human Resource Department, Government of India for policy perspectives for management education in India.
He is currently on the board of the Centre for Policy Research and IIM, Indore; Member, Technology Development Board, Ministry of Science & Technology, Govt. of India; Director, Tata Steel Limited; Director, Power Finance Corporation, trustee, Bhartiya Yuva Shakti Trust; Executive Trustee, National Centre for Promoting Employment for Disabled Persons; chairman trustee Charity Aid Foundation. He is also on the boards of governors of other institutions for graduate engineering and bachelors and masters degree programmes in business management.
He has been conferred with the first IIT Roorkee Distinguished Alumnus Award in 2005 by Indian Institute of Technology, Roorkee.
Mr Bhargava is the Chairman of the Company and also Wartsila India Limited and director on the respective boards of several Indian corporates.
Mr. Srinath Narasimhan
Mr. N. Srinath was born on July 8, 1962. He received a degree in Mechanical Engineering from IIT (Chennai) and completed his Management Degree from IIM (Kolkata), specialising in marketing and systems.
Joining the Tata Administrative Services in 1986 as a probationer, Mr. Srinath has held positions in Project Management, Sales & Marketing, and Corporate functions in different Tata companies over the last 21 years. He has been responsible for setting up new projects in high technology areas like process automation and control, information technology and telecommunications. After his probation, he was a project executive in Tata Honeywell from 1987 to 1988, working on getting various approvals and the necessary project funding.
He then moved to Tata Industries as executive assistant to the chairman, an assignment he handled till mid 1992.
He was part of the team that set up Tata Information Systems (later Tata IBM). In June 1992 he moved into that company full-time for the next six years, during which period he handled a number of assignments in sales & marketing.
In March 1998, he returned to Tata Industries as general manager (projects) and worked with Tata Teleservices in this capacity for a year. In April 1999, he moved to Hyderabad as chief operating officer responsible for the operations of Tata Teleservices. In late 2000 he took over as chief executive officer of Tata Internet Services, a position he held till February 2002, when he moved to VSNL as Director (Operations). In February 2007 he has been appointed as Managing Director of VSNL & CEO of VSNL Group of companies.
Mr. Kishor A. Chaukar
Mr. Kishor A. Chaukar (59), currently the Managing Director of Tata Industries Limited (TIL), is a post-graduate in management from the Indian Institute of Management at Ahmedabad.
TIL is one of the two principal holding of Tata companies, acts as its diversification and new projects promotion arm, and spearheads its entry into the emerging high-technology and sunrise sectors of the economy.
In his capacity as Managing Director of TIL, Mr. Chaukar is responsible for enhancing the value and interest of TIL in TIL divisions and in companies where TIL has made investments. One of the tasks performed in the quest for this value enhancement is to provide strategic direction to these companies.
Mr. Chaukar is a member of the group Corporate Centre, which is engaged in strategy formulation at the House of Tata. He is on the Board of various companies like Tata Teleservices Limited, Videsh Sanchar Nigam Limited, Tata Autocomp Systems Limited, Tata Investment Corporation Limited, among others. He also oversees the functions of the Department of Economics and Statistics (DES) and the Tata Credit Card.
Mr. Chaukar is the chairman of Tata Council for Community Initiatives (TCCI) the nodal agency of the Group on all matters related to social development, environmental management, bio-diversity restoration and conservation of wild life.
Mr. Chaukar was previously the managing director of ICICI Securities & Finance Company Ltd. (July 1993 to October 1998), and a board member of ICICI Ltd. from February 9, 1995 to October 15, 1998. His other experiences include stints in Bhartiya Agro Industries Foundation, a public trust engaged in rural development on a no-profit no loss basis and based in Pune, Maharashtra, and Godrej Soaps Limited.
Mr. Pankaj Agrawala
Mr. Agrawala was born on October 16, 1955. Since May 2002, he has been the joint secretary to the GoI, Department of IT, Ministry of Communications and IT. Mr. Agrawala is in-charge of e-infrastructure in the Department of IT and in that capacity represents India in the Government Advisory Committee of Internet Corporation for Assigned Names & Numbers (ICANN). He is a vice chairman of GAC. Mr. Agrawala also serves on the Board of Telecom Infrastructure Manufacturing Company, ITI and National internet Exchange of India.
Mr Agrawala belongs to the 1978 batch of the IAS (Uttar Pradesh cadre). He holds a masters degrees in Public Administration, Development Economics and History and was a Mason Fellow at the Kennedy School of Government, Harvard University, USA.
Mr. Agrawala has held various important U.P government positions. He has worked on various field organizations in districts and divisions of Uttar Pradesh. He has been associated with rural development for nearly 12 years of his service.
He took over as director of the then Ministry of Urban Development, Government of India in August 1991, and as director, Housing Division, Ministry of Urban Affairs and Employment, Government of India in July 1994. He was a member of the Indian delegation to the Habitat II City Summit, Istanbul. He then worked in the Administrative Training Institute, Nainital in the Decentralised Training for Urban Development Project, an Indo-Dutch collaboration with the Institute for Housing and Urban Development, Rotterdam.
From July 1998 to May 2002, he was secretary to the U.P government, in various departments, including the Department of Planning; the Department of Banking and Private Capital Investments; the Department of Externally Aided Projects, where he was responsible for five World Bank projects; the department of IT and Electronics, when Indias first private-sector IT university was set up; and the department of Small Scale Industries and Export Promotion.
Dr. Mukund Rajan
Dr. Mukund Rajan was born in Chennai on April 5, 1968. He completed his B. Tech at the Indian Institute of Technology, Delhi in 1989, and served in his final year as general secretary of the Student Affairs Council. He received a Rhodes Scholarship to study at Oxford University, where he completed a Masters and Doctorate in International Relations. His doctoral dissertation was published by Oxford University Press, and is titled Global Environmental Politics India and the North-South Politics of Global Environmental Issues.
Dr. Mukund Rajan joined the Tata through the Tata Administrative Service (TAS) in January 1995. He was assigned to the office of Mr. Ratan Tata, chairman, Tata Sons Limited, in 1996. While he continues to support Mr. Tata as a member of his office, Mukund also serves on the Boards of several Tata companies, including the Groups telecom enterprises, Tata Teleservices Limited (TTSL), Videsh Sanchar Nigam Limited (VSNL) and VSNL International Pte. Limited (VIPL). Dr. Mukund Rajan recently completed serving a term as the president of the Association of Unified Telecom Service Providers of India (AUSPI).
Mr. P.V. Kalyana Sundaram
Mr. P.V. Kalyanasundaram was born on February 25, 1958. He received a Bachelor of Arts degree in history, from the New College, Chennai in 1977, followed by a Bachelor of Law degree from Madras Law College in 1982.
An advocate by profession, Mr. Kalyanasundaram is a legal advisor for Pallavan Transport Corporation, Chennai, a government of Tamil Nadu undertaking, as well as a legal advisor to the Chennai Metropolitan Water Supply and Sewerage Board. He is also a trustee of the Jawaharlal Nehru Port Trust, Mumbai, and a member of the Censor Board, Chennai as well as the Presidency Club, Chennai.
Mr. Kalyanasundaram has played a leading role in various public activities. As the managing trustee of the Green Peace World Charitable Trust, Chennai, he took an active part in the various welfare measures organized by the trust. These include organizing free eye camps to treat poor people.
Between 2000 and 2004, Mr. Kalyanasundaram was the chairman and trustee, Pachayappas Trust, Chennai. In that position, he managed several educational institutions, including seven colleges and six schools, and looked after immovable properties worth Rs. 10,000 million belonging to the trust. He was also instrumental in conducting several educational seminars and courses in various institutions.
Dr. V.R.S Sampath
Dr. V.R.S Sampath received a Bachelor of Arts degree in History from the Presidency College in 1976, followed by a Bachelor of Law degree from Madras Law College in 1980, a Master of Law degree in 1987 and a PH.D in 1997, all from the University of Madras. He also holds a Master of Arts degree in History from the Madurai Kamaraj University (1985).
Dr. Sampath also holds a Diploma in Tourism and has completed a large number of specialised training programmes and courses, notably in human rights and social work. He was awarded an honorary D. Litt for his contribution to global peace efforts by the World Peace Academy, Chicago, USA in 1994. He has published numerous research papers and traveled widely internationally, including on study tours. He has also published eight books on subjects such as travel, law and society.
Dr. Sampath is currently an empanelled advocate to both Canara Bank and Indian Overseas Bank, and a legal advisor to the Construction Industry Development Board of the Government of Malaysia. He started his career as a junior advocate for the Aiyer and Dalia law firm in 1981 and has since served as a legal advisor to the Tamil Nadu Industrial Development Corporation.
Dr. Sampath has served on various government committees including the advisory committees of the Central Board of Film Certification and the All India Radio, both of the government of India, Chennai. He is the chairman of various non-governmental organisations in Chennai including the Inter-University Cultural Service, the Madras Development Society, the India International Tourism Centre, the Indian Institute for Aids Prevention, the International Centre for Human Rights and the National Development Trust.
Mr. Amal Ganguli
Mr. Amal Ganguli, 66, is a fellow member of the Institute of Chartered Accountants of India and the Institute of Chartered Accountants of England and Wales and a member of the New Delhi chapter of the Institute of Internal Auditors, Florida, U.S.A. He was the Chairman and Senior Partner of Pricewaterhouse Coopers (PWC), India till his retirement on 31st March, 2003. Besides his qualifications in the area of accounting and auditing, Mr. Ganguli is a fellow of the British Institute of Management and alumnus of IMI, Geneva.
Mr. Ganguli, trained in the UK to become a Chartered Accountant. He was econded as a Partner to PWC, UK/USA for a year in 1972-73. During his career spanning over 40 years, Mr. Gangulis range of work included International Tax advice and planing, cross border investments, Corporate mergers and re-organisation, financial evaluation of projects, management, operational and statutory audit and consulting projects funded by International funding agencies. In the course of his professional career, he has dealt with a variety of clients including US AID, World Bank, ADB, NTPC, Alcatel, GE, Hindustan Lever, STC, Hewlett Packard and IBM.
Mr. Ganguli is a member of the Board of Directors of several Companies such as Hughes Escorts Communications Limited, Flextronics Software Systems Limited, Tube Investments of India Limited, Gillette India Limited, HCL Technologies Limited, Samtel Colour Limited, Samcor Glass Ltd., New Delhi Television Limited and Century Textiles and Industries Ltd. Mr. Ganguli is a member of Audit Committees of Hughes Escorts Communications Ltd., HCL Technologies Ltd., Gillette India Limited, Samtel Colour Limited, Samcor Glass Limited and Century Textiles and Industries Ltd. He is chairman of the Audit Committee of Flextronics Software Systems Limited and a member of Remuneration Committees of Tube Investments of India Limited and Gillette India Limited. He is also a member of Share Transfer and Shareholders/Investors Grievance Committee of Century Textiles and Industries Ltd.
Mr. Vinod Kumar
As president and managing director of VSNL International Pte. Ltd. (VSNL International), a subsidiary of the Company, Mr. Kumar is responsible for expanding VSNL Internationals roadmap and charter into the global communications market. Enhancing the
service capabilities and customer facing activities in strategic markets beyond the shores of India in a nut shell sums his mandate. Besides heading these strategic initiatives, Mr. Kumar is also responsible for the Wholesale Data, Global Mobile and International Enterprise lines of business and meeting the companys ambitious targets.
Mr. Kumar has a wide range of cross-functional experience in the telecommunications industry. He also has an impressive track record in developing business strategies and creating fast growth organizations.
He was previously Senior Vice-President of Asia Netcom and responsible for all aspects of generating top-line growth, including strategy formulation, product marketing and sales. He was actively involved in all aspects of the financial restructuring, and eventual asset sale of Asia Global Crossing to China Netcom, resulting in the formation of Asia Netcom.
In 1999, Mr. Kumar joined WorldCom Japan as Chief Executive Officer and prior to that, he held various senior positions in Global One in the United States and Asia where he has had major responsibilities in market management, sales, marketing, product management, multinational account management and operations.
Mr. Kumar holds a Masters in Business Administration from The American University. He also graduated with honors in Electrical and Electronic Engineering at the Birla Institute of Technology and Science in India.
Mr. S. Ramadorai
Mr. S. Ramadorai, 63, Chief Executive Officer and Managing Director of Tata Consultancy Services, has been associated with TCS for the past thirty five years. He took over as chief executive officer of TCS in 1996 and has been instrumental in building TCS to a $4.3 Billion global IT services, business solutions and outsourcing company, with a talent base of over 85,000 people, geographical reach of 39 countries and an enviable client list which includes six of the top ten Fortune companies. Mr. Ramadorai has now set his sights on ensuring that TCS is among the Global Top Ten Software companies. In October 2006, TCS was recognized by the Economic Times as the company of the Year, a fitting tribute to its increasing global presence.
Mr. Ramadorais contributions to the industry have been well recognized through the numerous awards he has received. In 2002, he was awarded with CNBC Asia Pacifics prestigious Asia Business Leader of the Year Award. He has been honoured with the position of IT Advisor to Qingdao City, Peoples Republic of China. In November 2006, Ernst & Young awarded Mr. Ramadorai the Entrepreneur Manager of the Year award. He has been recognized by Computer Business Review in July 2006 as the sixth most influential IT leader in the world. In recognition of Mr. Ramadorais commitment and dedication to the IT industry, he was awarded the Padma Bhushan by the Government of India in January 2006.
Mr. Ramadorai holds chairmanships and directorships of several Tata companies and is on the board of directors of Hindustan Unilever Limited and Nicholas Piramal India Limited. He is a member of the Corporate Advisory Board, Marshall School of Business (USC) as well as the Said Business School at Oxford. Among his other distinctions, Mr. Ramadorai is a Fellow of the Institute of Electrical and Electronics Engineers (IEEE), The Computer Society of India (CSI) and the Indian National Academy of Engineering.
Mr. Ramadorai holds a Bachelors degree in Physics from Delhi University, India, a Bachelor of Engineering degree in Electronics and Telecommunications from the Indian Institute of Science, Bangalore, India, and a Masters degree in Computer Science from the University of CaliforniaUCLA, USA.
Mr. A.K. Srivastava
Mr. A.K. Srivastava was born on July 20, 1951. Mr. Srivastava is a Bachelor of Science and has a Masters Degree in Science besides being a Graduate from the Institution of Electronics and Telecommunication Engineers (IETE).
Mr. Srivastava joined the Government of India service in 1973. Thereafter, Mr. Srivastava had worked in various departments of the Government of India and has a wide experience in the telecommunications industry. Mr. Srivastava is currently the Deputy Director General (Access Service), Department of Telecommunications, Government of India.
Mr. A R Gandhi
Arunkumar Ramanlal Gandhi became an Executive Director of Tata Sons Ltd in August 2003, and is a member of the Group Corporate Centre of the Tata companies. He is a fellow member of the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of India. He is an associate member of the Chartered Institute of Taxation, London.
Prior to joining Tata Sons, he was with M/s N. M. Raiji & Co., Chartered Accountants. He joined the firm as a partner in July 1969 and in 1993 became a senior partner. The firm has more than 60 years of professional standing.
As Executive Director of Tata Sons Ltd, Mr. Gandhi has been assisting the Tata companies in acquiring diverse assets and companies across the globe. This has enabled the Tata companies to acquire critical assets, resources and access to world class R&D facilities.
In the course of his professional career, Mr. Gandhi has worked on numerous mergers and acquisitions, both cross-border and domestic transactions.
Mr. Gandhi has been a member of various committees constituted by industry forums and regulatory bodies such as SEBIs Takeover Panel Exemption Committee and the Institute of Chartered Accountants of Indias Accounting Standards Board among various others.
Mr. Satish G. Ranade, Company Secretary and Chief Legal Officer, has been with the Company since 1987. Prior to joining the Company, Mr. Ranade was Deputy Secretary of Maharashtra Elektrosmelt Limited, Mumbai. He is a member of the institute of Company Secretaries of India. Mr. Ranade holds degrees in commerce and law from the University of Mumbai.
Mr. Sandeep Mathur, Head Corporate Affairs is an Electronics Engineer from the Indian Institute of Technology, Kanpur and a Gold Medalist from the Indian Institute of Management, Ahmedabad. He joined Philips India in 1973 and in 1978 he joined Tata Administrative Services from where he was deputed to Nelco as an Area Manager (North). He spent 17 years in Modi Xerox in two stints, with two years in between with the DCM Group. Thereafter he went to TVS Electronics and then to Tata Teleservices (AP Circle). On December 1, 2002 he joined the Tata Indicom Enterprise Business Unit (TIEBU) and subsequently when TIEBU was consolidated into the Company on April 1, 2004, he was designated as Head of the Enterprise Business Unit.
Mr. Mysore Madhusudhan, Chief Networks Officer is a Bachelor of Civil Engineering from University of Visweswarayya College of Engg., Bangalore, India. He has also undergone 6 weeks course in CSM-California (Lucent Deputation). He has worked with various companies like NDDB, BPL Mobile and Lucent Technologies before joining the Company in June 2004.
Mr. Rajiv Dhar, Chief Financial Officer is a Chartered Accountant and also holds a Bachelors Degree with Honors from Delhi University. His experience of more than 20 years includes more than 12 years is with various Tata Companies. He has successfully lead and managed teams within corporate finance, corporate strategy, M&A, accounting operations, cost management and taxation. He has worked in telecommunication, oil & gas, construction/real estate, and manufacturing industries. He joined the Company from Tata Industries Ltd in June 2005.
Mr. Govind Sankaranarayanan is head of Finance and Tax for the combined international organization. Prior to this he was Vice President Finance, for VSNL and held a number of finance and general management roles within the Tata companies. Mr. Sankaranarayanan began his career in the Tata Administrative Service in 1992 as the Executive Assistant to the Managing Director of Tata Tea Ltd. In 1995, he worked as part of an association between Tata Tea and Monsanto for the launch of branded sugar. Mr. Sankaranarayanan holds an Honours degree in Chemical Engineering from the Birla Institute of Technology and Science, Pilani, an MBA from the Indian Institute of Management, Bangalore and a Masters in Finance with Distinction from London Business School. In 1999, he was selected by the British Foreign and Commonwealth Office as one of 12 Indian managers who was awarded the Chevening Scholarship.
Mr. Srinivasa Addepalli, Sr. VP-Corporate Strategy is a Post-graduate in management from IIM, Ahmedabad and an Electronics Engineer. He worked with the Tata Strategic Management Group, focusing on the telecom and media industries. He was closely involved with the formulation of the Tata companies telecom strategy and business plans, including the acquisition of VSNL and expansion of Tata Teleservices. Later, he joined Tata Industries in the Group Chairmans Office, responsible for co-ordinating the various telecom activities within the Group. Srinivasa is on deputation to VSNL from Tata Industries.
Mr. John Hayduk is head of Network and Operations for the combined international organization. He has over 15 years Telecommunications experience with significant background in software development and building large systems. Prior to joining VSNL, he ran Telcordias IMS/Network business unit, and had overall product management responsibilities, including managing a P & L for three major product lines. Previously, he held other senior management positions. Mr. Hayduk has a B.Sc in Computer Science from Penn State University and an MS in Information Networking from Carnegie Mellon.
Mr. Michel Guyot is head of the Companys Voice Business. Prior to this he was Vice President International Markets (Europe, Middle East, Africa, Asia-Pacific) for Teleglobe and its predecessor Teleglobe Inc. Mr. Guyot also served as Teleglobe Inc.'s Executive Director - Marketing from September 2001 to May 2002 and as its Executive Director - Europe from 2000 to 2001. Mr. Guyot received a bachelors degree in commerce from LEcole des Hautes Etudes Commerciales, University of Montreal. He has over 25 years of international telecommunications experience. Since 2004, Mr. Guyot is also the Chairman of the Board of Directors for the Telecommunications Executive Management Institute of Canada.
Mr. R Nanda has joined as Sr VP Human Resources effective April 17, 2006. Mr. Nanda has a degree of Masters in Social Work (MSW) from Loyola College, Chennai University and has over 20 years of rich experience in Human Resources across a variety of business sectors like manufacturing, trading and retail. He started his career with the Murugappa Group in Chennai, where he spent nearly 15 years, in a variety of roles, both with HR and line responsibilities across a number of the Groups businesses and has also worked with the Amara Raja Group in Chennai. He has then spent some time in the middle-east with the OTE Group and the Landmark Group.
Mr. Sunil Joshi has joined the Company in June 2007 as President-EBU. Mr. Sunil completed his MBA( Marketing) in 1987 and has also completed his PG Diploma in Computer Applications in 1987 and has around 19 years of experience across four organizations. He started his career with HCL(Hewlett) in 1988. In 1994 he joined IBM Ltd. as Country Client Manager-BFSI ISU. In 1998 he joined IBM, New Zealand and thereafter IBM,Australia as X-Series Business Unit Executive. In New Zealand he has been associated with Azimuth Consulting Limited where he has been responsible for Telecommunications and Banking sector and also to develop strong and strategic relationships with key clients i.e. Telecom NZ etc.Prior to this between 2002-2006, he worked with Telstra and his last stint there was as Head of Business Markets accountable for the sales, service, solutions and product development & marketing of telecommunications solutions to Business customers. Sunil has had global exposure by virtue of being born in Cairo (Egypt), and has had the opportunity to work in countries like India, Africa , Guyana, The Caribbean (Trinidad), North America and New Zealand which has contributed tremendously to increase his understanding on cultural dynamics and diversity.
Mr. Shankar M Prasad, President Retail Business is a mechanical engineer from UVCE, Bangalore (85) and an MBA from XLRI, Jamshedpur (88). He started his career as an Engineer Trainee with Bharat Fritz Werner Ltd. in 1985. Post his MBA from XLRI, he worked with Blow Plast Ltd. as Area Sales Executive in the Leo Toys Division for 2 years. In 1990 he moved to Wiltech India, where he worked for over a year and left them as Sr. Area Sales Manager in Bangalore. Mr. Prasad moved as Group Leader, Toyota Division of Suhail and Saud Bahwan in 1991, based out of Muscat, Sultanate of Oman where he spent a little over 4 years. In 1996 he moved back to Bangalore with Pagepoint Services where he held several marketing / customer service and operations portfolios in his 4 year stint. He next moved as AGM Marketing with BPL Mobile in Mumbai where he spent a year. Since August 2001, Mr. Prasad was with Bharti Airtel Ltd., starting as GM Sales for Karnataka till March 2003. He took over as Vice President Customer Service Delivery, Karnataka a role he held till January 2004. Post this he moved as COO for the UP (East) circle. Mr. Prasad joined the Tata on August 8, 2007 as President for the Retail Business of VSNL, which is responsible for broadband, dial-up internet, out-of-home WiFi and content services.
Mr. Stephane Lamoureux is Chief Information Officer for VSNL globally. Prior to this, he was Vice President of IT for Teleglobe and VSNL International. Mr Lamoureux has served in senior and executive positions on a global basis with such Telecom leaders as Bell Canada and Alcatel along with banking industry leader like BNPParibas. Mr. Lamoureux received a Bachelor's degree in Information Management from Concordia of Montreal and is finalising a Master of Science degree presently. He has close to 20 years experience in the Telecommunication and Banking industry and is a prominent member of major IT leadership organisations from Governance to security.
No director or officer of the Company has any family relationship with any other officer or director of the Company.
Other than as described above, there are no arrangements or understandings among any director or any officer and any other person regarding their election to their post with the Company.
Compensation of Directors and Officers
The directors of the Company, other than the full-time directors of the Company received a sitting fee not exceeding Rs.10,000 (US$232.02) (Rs.5,000 until March 1, 2006) for attending each Board and Committee meeting. During fiscal 2007, Rs.13,70,000(US$31,786.54) were paid towards sitting fees. The directors are also reimbursed for travel and out-of-pocket expenses in connection with their attendance at Board and Committee meetings.
At the 20th Annual General Meeting of the shareholders of Company the shareholders approved payment of remuneration upto a sum not exceeding 1 percent per annum of the net profits of the Company (calculated in accordance with the provisions of Sections 198, 249 and 350 of the Indian Companies Act) to be distributed amongst the directors of the Company (other than the Whole-time Directors), in such amounts or proportions and in such manner and in all respects as may be decided by the Board of Directors for each year over a period of five years commencing 1 April 2005. Accordingly, for the financial year 2006-07, the Board of Directors approved payment of remuneration to the non-executive directors (NEDs) by way of commission at a rate not exceeding 1percent per annum of the profits of the Company (computed in accordance with Section 309(5) of the Companies Act). The commission to NEDs is distributed broadly on the basis of their attendance and contribution at the Board of Directors and certain Committee meetings as well as the time spent on operational matters other than at such meetings. After approval of annual accounts at the 21st Annual General Meeting of the Company held on 2 August 2007, the applicable commission has been paid to the NEDs.
The details of commission to be paid to the non-executive directors for the year 2006-07, are as follows:
For the fiscal year ended March 31, 2007, the aggregate amount of compensation paid by the Company to all directors and principal officers of the Company mentioned herein was approximately Rs.130.18 million (US$3.02million), and individual compensation of executive Director and principal officers was as follows:
For the fiscal year ended March 31, 2007, the aggregate amount set aside or accrued by the Company to provide pension, retirement or similar benefits for principal officers (except for Mr. Michel Guyot which is given below) and directors directly on the rolls of the Company was approximately Rs.7.96 million (US$0.18 million).
Pension benefits for Mr. Michel Guyot are accrued under the provisions of the Teleglobe Contributory employees pension plan (the Registered Plan) and the Supplementary Pension Agreement (the SPA). These plans are intended to provide a combined pension at normal retirement age of 65 that is equal to 2% of the highest average salary minus 0.7% of the final average Years Maximum Pensionable Earnings (YMPE of $43,700 in 2007) multiplied by the years of credited service, with a maximum of 35 years of credited service. The average salary is based on the annual basic salary in consecutive period of 6 years in which the salary was the highest. The pension is payable without reduction at age 60 or at age 55 if 30 years of service, including an additional temporary pension payable before age 65. As of March 31, 2007, Mr. Guyot has completed 30 years of credited service into these plans and is therefore entitled to an unreduced pension at age 55. At that age, based on current highest average salary and current average YMPE, these plans would provide Mr. Guyot an annual pension of $165,000 before age 65 and $155,000 thereafter based on 35 years of credited service.
A performance pay scheme is in place that is applicable to all employees including heads of the various business units and support functions in the Company. This performance pay is based on both the individuals performance and the Companys overall performance during the fiscal year under consideration. The individuals performance is assessed by his superior and is reviewed by the next level manager, after which the assessed ratings are normalized on a company-wide scale, as appropriate. The performance of the Company is evaluated against the previous years performance based on several pre-defined parameters. Differential weightages are given to these two components based on the responsibility level of the employees in the Company with a higher weightage to the Companys performance for senior level employees and higher weightage to individual performance at junior levels. The performance evaluation process for deputed employees is the same as that for the VSNL employees. Once the final normalized ratings are arrived at for the deputees, these are communicated to their respective parent companies, which are responsible for making the payment.
As of July 31, 2007, other than one member, none of the other members of the Board of Directors held any shares of the Company. Dr. Mukund Rajan, external director on the Board, held 15 equity shares of the Company. The executive officers of the Company either individually or as a group did not beneficially own more than one percent of the Companys issued and outstanding equity shares.
The audit committee consists of four members. Mr. Amal Ganguli, Independent Director, became the Chairman of the Audit Committee w.e.f. 19 October 2006. Mr. Ganguli who is Fellow of the Institute of Chartered Accountants in England and Wales, Fellow of Institute of Chartered Accountants of India, Fellow of British Institute of Management, Member of New Delhi Chapter of Institute of Internal Auditors, Florida, USA. Mr. Ganguli has necessary and sufficient financial and accounting background.
The other members of the committee are Mr. Pankaj Agrawala, Government Nominee Director, and Mr. P.V. Kalyanasundaram, Independent Director and Mr. Subodh Bhargava, Independent Director. Mr. Satish Ranade, Company Secretary and Chief Legal Officer is the audit committees Secretary.
The audit committees powers and terms of reference have been set in light of the requirement of the Companies Act, 1956 and clause 49 of the Companys listing agreement with the Indian stock exchanges as well as US securities laws. The broad powers and scope of the committee is as follows:
Powers of Audit Committee
Terms of Reference of the Audit Committee
Scope Of The Audit Committee under Sarbanes Oxley Act
Review of information by Audit Committee
The Audit Committee shall mandatorily review the following information:
The Remuneration Committee consists of two members. The members are Mr. Subodh Bhargava and Mr. Kishor Chaukar. Mr. Kishor Chaukar joined the Remuneration Committee on June 9, 2005. Mr. Satish Ranade, Company Secretary and Chief Legal Officer is the Remuneration Committees Convenor. Mr. N. Parameswaran was made the member of the Remuneration Committee at the Meeting of the Board of Directors held on 26 May 2007 who on his resignation as director, ceased to be the member of the Committee on 19 July 2007.
As of March 31, 2007, the Company had a total of 4,401 employees of which 3,201 employees were employed by the Company in India. Of the employees in India 2,661 were executive employees (technical employees and other employees with the rank of officer or higher, including fulltime directors of the Company) and 540 were non-executive employees. As of March 31, 2006, and March 31, 2005, the Company had 4,013 employees and 2,479 employees, respectively. Upon its establishment in 1986, the Company assumed responsibility for all the 3,148 employees of the Overseas Communications Service (690 executives and 2,458 non-executives). Since then, the Company has gradually rationalized its work force, both reducing the total number of employees and increasing the proportion of employees who are engineers or otherwise highly skilled. The Company seeks to improve employee productivity through continuing education and training and by emphasizing the importance of quality of service and customer satisfaction. The Company does have few employees who have been deputed from the Tata companies.
All non-executive employees of the Company are members of local unions organized at each Company site, which are affiliated as the Federation of the Videsh Sanchar Nigam Limited Employees Unions (the Federation). The Federation is a Company-wide union and is not affiliated with any larger industry-wide or national union. Officers of the Company meet with the Federation regularly to discuss and resolve issues or concerns of the employees. Employee concerns are resolved through regular meetings/ discussions with the Federation.
During the current fiscal year, the Company continued its focus on its internal communication and training activities. The Company has also introduced a new performance management system for all its employees. During the year, the Company focused on integrating different business units that folded into the Company through communication and confluence programs.
Compliance with NYSE Listing Standards on Corporate Governance
We are incorporated under the Indian Companies Act, 1956, and our equity shares are listed on the major stock exchanges in India. Our corporate governance framework is in compliance with the Indian Companies Act, 1956, the regulations and guidelines of the Securities and Exchange Board of India and the requirements of the listing agreements entered into with the Indian stock exchanges. We also have American Depositary Shares listed on the New York Stock Exchange.
On November 4, 2003, the SEC approved new rules proposed by the NYSE intended to strengthen corporate governance standards for listed companies. These new corporate governance listing standards supplement the corporate governance reforms already adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002.
Section 303A.11 of the NYSE Corporate Governance Standards requires listed companies that are foreign private issuers to disclose the significant ways in which their corporate governance practices differ from those followed by U.S. companies under the NYSE Corporate Governance Standards. The table below sets forth the differences between the rules applicable to U.S. companies under the NYSE Corporate Governance Standards and the Companys practice under Indian law. This table is also publicly available on the Companys website, www.vsnl.com (specific URL: http://www.vsnl.in/aboutvsnl/corp-governance.php ), along with other information about the Companys corporate governance practices.
Section 303.A.12 (c) of the NYSE Corporate Governance Standards states that each listed company must submit an executed Written Affirmation annually to the NYSE. The Company submitted its Foreign Private Issuer Section 303A Annual Written Affirmation in October 2006.
As of March 31, 2007, approximately 50.11 percent of the outstanding equity of the Company was held by Panatone Finvest Limited in conjunction with other Tata companies, and approximately 26.12 percent was held by the Government of India.
The following table sets forth certain information regarding the beneficial ownership of the Companys Equity Shares as of March 31, 2007, including the beneficial ownership of shares of each person or group known by the Company to own beneficially 5 percent or more of the outstanding shares, as reported by such persons.
The Companys ADSs are listed on the New York Stock Exchange. Each ADS represents two Equity Shares. As of March 31, 2007, approximately 17,608,384 Equity Shares (6.18 percent of the total Equity Shares outstanding as of such date) were held by the custodian, ICICI Bank Limited, for The Bank of New York, as depositary for the Companys ADSs. The Company is unable to estimate the percentage of ADSs or Equity Shares held in the United States or the number of record holders in the United States.
Under the Shareholders Agreement, excepting matters listed specifically in the SHA or such matters that require a special resolution under the provisions of the Companies Act, the Government of India or any other entity nominated by it is required to, at all shareholders meetings of the Company, exercise the voting rights attached to the equity shares of the Company held by the Government in the manner directed in writing by Panatone Finvest Limited.
Related Party Transactions
The Companys principal related parties consist of its principal shareholders, government departments of the Government of India, companies owned or controlled by the Government of India and subsidiaries/affiliates of the Company. The Company routinely enters into transactions with its related parties, such as for the provision of telecommunication services, paying license fees and the subletting of premises, etc.
Other related party transactions and balances are immaterial individually and in the aggregate.
The Company grants loans to employees for acquiring assets such as computers and vehicles and on two occasions, the Company had offered loans for purchase of equity shares of the Company offered to them by the Government of India from its holdings. The annual rate of interest at which the loans have been made to employees is 4 percent. The loans are secured by the assets acquired by the employees. As of March 31, 2006 and 2007, amounts receivable from employees aggregated to Rs.82 million and Rs.52 million, respectively, and are included in other current assets. Interest free short-term advances made to employees aggregated Rs.9 million and Rs.5 million as of March 31, 2006 and 2007, respectively.
The Company also grants an interest subsidy in excess of 4 percent of the interest rate for loans taken by the employees for the purchase of property for housing. The cost of the interest subsidy of Rs.29 million, Rs.19 million and Rs.17 million for the years ended March 31, 2005, 2006 and 2007, respectively, is included in staff costs.
Loans to executive officers include an advance to Mr. Satish Ranade of Rs.207,264 towards the purchase of shares of the Company in connection with an offer made by the Government of India to eligible Company employees as part of the disinvestment of its holding in the Company and a loan of Rs.37,000 towards the purchase of a vehicle. The loans were made in February 2002 and August 2001, respectively. On March 31, 2007, the amounts outstanding were Rs.80,847 and Rs.9,453 respectively. The interest rates on the loans is 4 percent.
We have elected to provide financial statements of the Company pursuant to Item 18 of this Form 20-F and the following are incorporated herein by reference:
There have not been any significant changes in the Companys financial condition, other than those stated in the consolidated financial statements attached to this Form 20-F and as otherwise described in this annual report, since the date of the attached annual consolidated financial statements.
The Company has been claiming the license fees paid by it to the DoT as a deductible expenditure. The Income Tax Department of the Government of India has disputed this claim of the Company from fiscal 1994 to fiscal 1998. The year-wise status of this issue is as follows:
Fiscal 1994: The Companys claim was disallowed. However, the Company received a favorable ruling from the Commissioner of Income Tax (Appeals) and also from the Income Tax Appellate Tribunal. Subsequently, the income tax department has moved this decision to the High Court of Judicature at Bombay (High Court) contesting the allowance of this expenditure.
Fiscal 1995: The Income Tax Appellate Tribunal passed an order in favor of the Company. The Income Tax Department appealed this decision to the Mumbai High Court. The Central Board of Direct Taxes then asked the Income Tax Department to withdraw the case when it came for hearing before the High Court.
Fiscal 1996,1997 and 1998: The Commissioner of Income Tax (Appeals) allowed this expenditure in favor of the Company.
We have not been advised by the Income Tax Appellate Tribunal of any appeal that may have been filed by the Income Tax Department. If the decision is given against the Company by the High Court, the negative impact on the Company would be approximately Rs1,400 million (US$ 32.48 million).
Tax Benefit Claim
The Indian tax authorities have taken the position that the Company is not entitled to certain tax benefits claimed by it in the fiscal years 1996 to 2004 with respect to a portion of its profits which the Company claims as having been generated by an enterprise engaged in telecommunications and therefore entitled to a tax holiday under certain regulations. The tax authorities have not accepted this claim of the Company and have disallowed it in their assessments. The year-wise tax imposed by the Income Tax Department (including interest but excluding penalties and measured as of March 31, 2007) is as follows:
The Company has paid all, but for a part of the amount pertaining to fiscal 2004 of the above amounts under protest but has not recognized the entire expense in its profit statements. The Company has disputed these claims for all the years. The Companys claim has been dismissed by the first appellate authorities in respect of fiscal 1996, 1997, 1998, 1999, 2000 to 2003, while claims in respect of fiscal 2004 is still pending before the appellate authority. The Company is now in appeal before the Income Tax Appellate Tribunal in respect of these years. ITAT rejected the claim made by the company for fiscal 1996 and the company is currently in the process of filing an appeal before the next jurisdictional authority i.e. The Bombay High Court. The order of ITAT is effective for fiscal 1996 and should be construed in isolation for that year having a total tax cost on account of the tax benefit of Rs. 105 Million (US$2.41 million), excluding interest.
If all the disputed claims are dismissed against the Company, the aggregate negative impact on the Company will be approximately Rs.5,374 million (US$123.40 million) including interest but excluding penalties and measured as of March 31, 2007.
Reimbursement of DoT Levy
The Indian tax authorities have taken the position that the Company has not offered for taxation certain reimbursements it had received from the Government during fiscal 1994. The tax authorities claim that the Company owes approximately Rs.3,302 million in respect of taxes due (including interest but excluding penalties measured as on March 31, 2007) in connection with such reimbursements. The Company has paid the entire amount under protest with respect to this claim. The Companys appeal has been dismissed by the first appellate authority. The Company is now in appeal before the Income Tax Appellate Tribunal. If the appeal is decided against the Company, the aggregate negative impact would be by this amount. The Company has not provided for this amount in its books.
ICO Global Loss Write-Off Issue
For fiscal year 2000 and 2001 the Indian tax authorities have disallowed Rs.5,128 million and Rs.52 million respectively towards the Companys write off in its books of accounts of its investment in the equity shares of ICO Global Communications Inc., which filed for bankruptcy protection in the United States in 2000. The tax and interest demanded in this regard amounts to Rs.2,000 million and Rs.21 million respectively which has already been paid under protest. The Company has also provided for in its books Rs.1,974 million and 20 million, respectively. The Companys appeal has been dismissed by the first appellate authority. The Company is now in appeal before the Income Tax Appellate Tribunal. If the appeal is decided against the Company, the aggregate negative impact would be approximately Rs.27 million.
Levy of penalty : On account of disallowances of various claims / expenses in fiscal 2000, 2001 and 2002, the penalty aggregating to Rs. 6,830 million ( US $156.83 million) has been levied by the tax authority and which has been contested by the company. If the decision does not come in favour of the company, there would be a negative impact on the company to the tune of Rs. 6,830 million ( US $156.83 million).
The aggregate negative impact stated in each of the above cases, which considers certain eventualities such as the impact of unfavorable decisions and appeals, is higher than the amounts stated as contingent liabilities in the Companys financial statements, which are based on tax demands raised by the Indian Income tax authorities and disputed by the Company.
Polargrid LLC, one of the initial bidders for TGN, brought suit against the Company in December, 2004 in the U.S. District Court for the Southern District of New York in connection with an alleged breach of contract between the parties, and subsequently amended its complaint to add additional claims. Polargrids complaint seeks in excess of $1.5 billion in damages arising from the Companys alleged breach and other alleged violations of the common law. The Company filed its answer to the complaint denying all liability and asserting its belief that the case is without merit, and has filed counterclaims seeking to be reimbursed for any and all money paid to Polargrid and its affiliates in connection with the potential transaction. Fact discovery is now closed in the matter, and expert discovery will begin shortly. Mediation process was conducted in August 2007 and now the matter will proceed for Jury trail on 28 January 2008.
FLAG Telecom Arbitration
In May 2006, Arbitration Tribunal of the International Chamber of Commerce (ICC) International Court of Arbitration issued an Award on the interpretation of certain provisions of the Construction and Maintenance Agreement (C&MA) governing the FLAG Europe Asia (FEA) cable system to which FLAG Telecom Group Limited (FLAG) and the Company, and various other parties, are signatories. By a majority, the Tribunal ordered the Company to grant FLAG access to the Mumbai cable landing station of the FEA cable system for the purposes of installation, inspection, testing, training and other functions so as to equip capacity of the FEA cable system to any level. The Company has complied fully with the Tribunals Award. In September 2006, the Company filed a Writ in The Netherlands courts to seek to set aside the first ICC Award.
In December 2006, the Tribunal issued a second Award as to the terms and conditions pursuant to the C&MA to enable the lease of assignable capacity in the FEA cable by FLAG to International Telecommunications Entities (ITEs). A further Award was pending from the Tribunal regarding the level of charges which the Company is entitled to recover from FLAG in respect of the access granted to FLAG to lease assignable capacity. The Company has filed a Writ seeking to set aside the Second Partial Award.
In February 2007, FLAG filed a claim seeking monetary relief of Rs. 17,681 million (US$ 406 million), plus interest, arising from the previous ICC Awards. On the defence submitted by the Company in May 2007 to the above claim, FLAG revised its claim to Rs. 16, 754 million (US$ 384.7 million) in its August 2007 reply. The Companys response to that claim is pending.
The Tribunal has now issued its Third Partial Award which decides the outstanding question of what reasonable terms and conditions the Company is entitled to under clause 8.3 of the C&MA in granting FLAG access to its Landing Stations. Being convinced that FLAGs case is without merit, the Company filed an appeal in Netherlands Court. Flag filed its response to the petition in March 07. On this response of FLAG, the Company has filed a reply in April 07 and further filings from the parties would be soon completed. Date has been fixed by the Netherlands Court for final hearing of Companys petition in February 2008.
On June 30, 2005, the Company acquired from Tyco Global Networks Ltd (TGN) all of the assets and liabilities relating to the Tyco Global Network. As part of this acquisition, the Company assumed the performance of a number of agreements, including several agreements previously entered into between TGN and C2C Pte Ltd (C2C) (hereafter the C2C Agreements). The C2C Agreements were entered into between Tyco and C2C in an attempt to settle an outstanding dispute between the parties in respect of Tycos construction of a cable system for C2C. One set of the C2C Agreements relates to C2Cs acquisition of the right to use up to 200G of capacity on TGNs Pacific Network. Another set of the C2C Agreements relates to Tycos (now the Companys) right to light and use a dark-fiber on the C2C Cable Network owned by C2C. Both C2C and Company delivered notices of default to each other alleging default by the other party of the C2C Agreements. The Companys management engaged in discussions with C2C in an attempt to amicably resolve any and all claims each party may have against the other under the C2C Agreements and on September 28, 2007 the Company and C2C reached a settlement agreement in respect thereof. Although the terms of the settlement are confidential, the parties agreed to terminate the C2C Agreements, waive any and all claims against each other in respect thereof and enter into a new set of agreements (the New Agreements) by which each party will provide various telecommunications services to the other. The parties are currently in the process of implementing the terms of the New Agreements.
ITXC Corp. Non compliance of U.S. Foreign Corrupt Practices Act (FCPA)
In August, 2004, Teleglobe initiated investigations into potential instances of non compliance with the FCPA by ITXC Corp. (ITXC), which it had recently acquired. Those instances related to ITXCs operations in certain African countries prior to its acquisition by Teleglobe. Teleglobe also voluntarily notified the SEC and the U.S. Department of Justice (DOJ), of the matter. Teleglobes Audit Committee subsequently engaged an external law firm, Debevoise & Plimpton LLP (Debevoise) to assist with the investigation. Debevoises reports state that its investigation revealed that employees of ITXC did appear to have violated the FCPA and to have committed commercial bribery in connection with certain telecommunications contracts in Africa. As a result of the investigation (particularly with regard to ITXCs agency agreement), a number of individuals initially hired by ITXC were terminated by Teleglobe. Debevoises reports also concluded that commercial bribery appeared to have occurred with regard to two agents retained by Teleglobe (with whom Teleglobe no longer carried on business) relating to one telecommunications carrier in Asia that is a Teleglobe customer. As a result of the investigation, Teleglobes Regional Sales Managing Director, Asia/Pacific and sales representative responsible for that carrier were terminated and several other employees were reprimanded. The Debevoises final report made a number of recommendations aimed at improving Teleglobes compliance practices and procedures, which recommendations were implemented by Teleglobe.
In February 2005, ITXC was also made the subject of a formal order of investigation by the SEC in connection with possible violations of the FCPA and related violations of US securities laws. Resulting from complaints filed by the SEC and DOJ in the federal court in New Jersey, ITXCs former regional director for Africa was charged with and sentenced for both civil and criminal violations of the FCPA. On September 7, 2006, , the SEC filed a civil action in U.S. District Court in New Jersey against two former ITXC employees, charging them with FCPA bribery and books and records violations. Both these former employees pleaded guilty to the charges and are scheduled to be sentenced in late October 2007. The Company intends to continue to fully cooperate with the SEC and the DOJ concerning these matters. Based on Debevoises investigation into the actions of former ITXC employees and any additional factors arising from Debevoises final report, the Company cannot predict the extent to which the SEC, the DOJ or any other governmental authorities will pursue administrative, civil or criminal proceedings, the imposition of fines or penalties or other remedies or sanctions. The Company has not identified, and does not believe it is likely that, any material adjustment to its financial statements is or will be required in connection with the results of this investigation, although it is possible that a monetary penalty, if any, may be material to the Companys results of operations in the quarter in which it is imposed.
Disputes with the Licensor
The Company has pending disputes with the licensor with regard to AGR interpretation etc, Please refer discussions on Revenue share and License fees under Item 4.
In addition, the Company is involved in lawsuits, claims, investigations and proceedings, which arise in the normal course of its business. There are no such matters pending that the Company expects to be material to its business.
Although the amount varies, it is customary for public companies in India to pay cash dividends. Under Indian law, a corporation pays dividends upon a recommendation by the Board of Directors and approval by a majority of the shareholders attending the annual general meeting of shareholders, who have the right to decrease but not increase the amount of the dividend recommended by the Board of Directors. In addition, the Board of Directors is empowered to approve interim dividends. Under the Indian Companies Act, dividends may be paid out of profits of a company in the year in which the dividend is declared or out of the undistributed profits of previous fiscal years. Owners of ADRs are entitled to receive dividends payable in respect of the Equity Shares represented by their ADSs. The Equity Shares represented by ADSs rank pari passu with existing Equity Shares of the Company in respect of dividends. Cash dividends in respect of the Equity Shares represented by the ADSs will be paid to the Companys depositary for the ADSs, The Bank of New York (the Depositary) in Rupees and except as otherwise described in the Deposit Agreement will be converted by the Depositary into US Dollars and distributed, net of the Depositarys fees and expenses, to the holders of such ADRs.
With respect to Equity Shares issued by the Company during a particular fiscal year, dividends declared and paid for such fiscal year generally would be prorated from the date of issuance to the end of such fiscal year. Holders of ADRs would only receive dividends prorated from the date of issuance of the underlying Equity Shares to the end of the fiscal year for which such dividends are declared and paid.
The following table sets forth the annual dividends paid per Equity Share for each of the fiscal years indicated.
Although the Company has no current intention to discontinue dividend payments, there can be no assurance that any future dividends will be declared or paid or that the amount thereof will not be decreased.
The Companys shares are currently listed on the Bombay Sock Exchange Limited (BSE) and the National Stock Exchange of India Limited in India (NSE). The ordinary shares of the Company have been delisted from all other stock exchanges in India.
The Companys ADSs represented by ADRs are listed on the New York Stock Exchange (NYSE) and on September 28, 2007, the last reported sale price was US$ 21.92 per ADS on the New York Stock Exchange. Each ADS represents two shares. The ADSs were issued by The Bank of New York (the Depositary), pursuant to a Deposit Agreement.
The number of outstanding Shares of the Company as of March 31, 2007 was 285,000,000. As of March 31, 2007, there were 60,923 record holders of the Shares listed and traded on the Indian Stock Exchanges. As of March 31, 2007, there were approximately 8,804,192 of the Companys ADRs (equivalent to 17,608,384 Shares).
Principal Market for the Companys ADSs
The table below sets forth, for the periods indicated, the price history of the equity shares and ADSs on the BSE, NSE and NYSE.
On September 28, 2007, the closing price of the Companys ADSs on the New York Stock Exchange was US$ 21.92
The shares of the Company are compulsorily traded in dematerialised form on BSE and NSE.
Memorandum and Articles of Association
Set forth below is information relating to the share capital of the Company, including certain provisions of its Articles of Association and the Indian Companies Act. The Company is registered under the Indian Companies Act with the Registrar of Companies, Mumbai, India with Company Identity Number (CIN) L64200MH1986PLC039266. The following description of the Companys Memorandum and Articles of Association does not purport to be complete and are qualified in their entirety by the Companys Memorandum and Articles of Association that were filed on September 29, 2004 with the SEC as exhibits to the Companys annual report for fiscal 2004.
The Memorandum and Articles of Association of the Company were drafted and adopted by the Company in 1986 , and were designed to provide necessary authority to The President of India (the then majority shareholder) in terms of appointment of directors, powers of the Board of Directors and other operational aspects, subject to applicable statutory provisions. This was because the Company was formed as a wholly owned government company. Thereafter, the Memorandum and Articles of Association were amended several times to suit the changing business activities and structure of the Company as it evolved from a wholly owned government company as result of disinvestments by the Government of India from time to time. Between 1986 and 2002, while the shareholding of Government of India was reduced the Company continued to be a government company, and accordingly the restrictive provisions appropriate to a government company were implemented in its Memorandum and Articles of Association.
Since the Objects Clause contained in the Memorandum and the Articles of Association were framed in year 1986 and were largely based on the activities of the erstwhile Overseas Communications Service at the time of its conversion into a company, they needed to be suitably amended. The shareholders, by way of postal ballot approved the amendment to the Memorandum of Association of the Company and by way of a special resolution at their meetings held on August 20, 2002 and April 2, 2004 approved the amendments to the Articles of Association of the company. See Item 6. Directors, Senior Management and EmployeesDirectors and Officers of the Company.
The Indian Companies Act is the governing legislation of the Memorandum and Articles of Association of the Company and where any specific requirement is silent, the regulations as defined in the Indian Companies Act shall be construed to be applicable.
The main objects of the Company are set out in its Memorandum of Association, and include:
The Companys authorized share capital is Rs.3,000,000,000, divided into 300,000,000 shares (each a Share) with a face value of Rs.10 each. At the date hereof, 285,000,000 Shares were issued and fully paid. SEBI has allowed Indian companies to split the par value of their Equity Shares into denominations lower than Rs.10 per share.
The Shares are in registered form. The Shares are the only class of share capital of the Company currently in existence. There are no convertible debentures or warrants of the Company currently in existence.
Pursuant to the Shareholders Agreement, the Board of Directors shall consist of up to twelve directors. As long as the Government of India holds at least 10 percent of the voting Equity Share capital of the Company, the composition of the Board of Directors shall be as follows: (1) four directors shall be permanent and non-retiring directors, of which the Government of India and Panatone Finvest Limited are entitled to nominate two each; (2) Four of the directors shall be retiring and independent directors, of which the Government of India and Panatone Finvest Limited are entitled to recommend two each (3) Four of the directors shall be retiring and non-independent directors, of which the Government of India and Panatone Finvest Limited are entitled to nominate two each, unless Panatone Finvest Limited owns (a) more than 25 percent but less than 30 percent of the Shares, in which case Panatone Finvest Limited will be entitled to nominate three of the four directors and the Government of India will be entitled to nominate one of the four directors, or (b) more than 30 percent of the Shares, in which case Panatone Finvest Limited will be entitled to nominate all four directors. In addition, Panatone Finvest Limited has the right to designate one of the directors nominated by it as the managing director of the Company, so long as it owns at least 25 percent of the Shares.
The remaining directors of the Company are liable to retire by rotation, and one-third of such directors are elected by the shareholders each year at the Companys Annual General Meeting. The directors to retire in every year shall be those who have been longest in office since their last election, but as between persons who became directors on the same day shall be determined by lot unless they otherwise agree between themselves. The retiring directors shall be eligible for re-election.
Compensation. Fulltime directors are entitled to receive compensation for their services to the Company. External directors are entitled to receive remuneration by way of a fee for attending each meeting of the Board of Directors or a committee thereof, which may be determined by the Board of Directors from time to time but which must be within the maximum limit prescribed under the Indian Companies Act. Subject to any provisions of the Indian Companies Act, directors may be entitled to additional remuneration, if called upon to perform any extraordinary service in behalf of the Company. Non-executive directors are also eligible to receive compensation by way of commission, provided such commission is recommended by the Board of Directors and pre-approved by the shareholders. In addition, directors may be reimbursed for reasonable traveling and other related expenses in connection with attending any meetings of the Board of Directors or a committee thereof. Under the Indian Companies Act, an interested director shall not participate in any discussions on such matters and his presence shall not be counted for the purpose of forming a quorum for such matters. In absence of quorum such matters shall be decided by the shareholders at a general meeting.
Borrowing Powers. Subject to the provisions of the Indian Companies Act, the Board of Directors may pass a resolution at a meeting of the Board of Directors from time to time to borrow and/or secure the payment of any sum or sums of money for the purposes of the Company. The Board of Directors has the power, in its discretion, to determine the terms and conditions of such borrowing, including issuing bonds, debentures or any mortgage, charge or other security on the undertaking of any property of the Company.
Qualification; Retirement. A director need not hold any of the Companys Shares to qualify as a director. There is no age limit requirement for a directors retirement. However, with respect to a fulltime director who has attained the age of 70 years, his appointment/ continuation has to be approved either by the shareholders by a special resolution or by the Government of India.
Voting on Proposals. The Indian Companies Act specifies that a directors power to vote on a proposal, arrangement, or contract in which the director is materially interested should be through a disclosure to the Board of Directors by the concerned director of the nature of his concern or interest. Such disclosure can be made as a general notice to the Board of Directors, which notice of disclosure shall expire at the end of the financial year in which it is given.
Voting Rights attached to a Class of Shares. There are no voting rights to decide on the eligibility of a retiring director to offer himself for re election at staggered intervals. There is no concept of cumulative voting. The Indian Companies Act provides for two thirds of the total strength on the Board of Directors to be appointed as directors to retire by rotation. Out of these retiring directors, one third shall retire every year at the Annual General Meeting. Such retiring directors being eligible can offer themselves for re-election.
Rights to shares in the Companys profits. There are no provisions entitling a shareholder or directors for rights to share in the Companys profits. The shareholders are entitled to dividends (cash and/or stock) if recommended by the Board of Directors and approved by the shareholders.
Sinking Fund & Other Provisions. Subject to the Indian Companies Act, the Board of Directors may, before recommending any dividend, set apart out of the profits of the Company such sums as they think proper as a reserve fund to meet contingencies, or for equalising dividends, or for special dividends, or for repairing, improving and maintaining any of the property of the Company, and for amortisation of capital and for such other purposes as the Board of Directors shall, in their absolute discretion, think conducive to the interest of the Company, and further, the Board of Directors may invest the several sums so set aside upon such investments, (other than shares of the company) as they may think fit from time to time to, deal with and vary such investments dispose of all or any part thereof for the benefit of the Company and may divide the reserve funds into such special funds, as they think fit and employ the reserve funds or any part thereof in the business of the Company, and that without being bound to keep the same separate from the other assets of the Company.
Changing Rights of shareholders. New Shares shall be issued upon such terms and conditions and with such rights and privileges annexed thereto as the general meeting resolving upon the creation thereof shall direct and if no direction be given as the Board of Directors of the Company shall determine. Section 86 of the Indian Companies Act provides for issue of new shares with differential rights and privileges to voting, dividend or otherwise as the shareholders may decide at a general meeting. Therefore the Memorandum of Association of the Company needs to be amended accordingly for changing the composition of the share capital after which such class of Shares can be issued. The Articles of Association provide for variation of the rights attached to each class of Shares with the consent of three fourth majority of a general meeting of that class as provided in the Indian Companies Act (Section 106).
Preventing Change of Control. The Articles of Association Companys articles gives a right to the Board of Directors, subject to the provisions of the Indian Companies Act provisions, to refuse a transfer of shares and give a notice of refusal of such transfer within two months of date of receipt of request for transfer. However in the current scenario where the Shares are in dematerialized form, any change in ownership of the shares may not require the approval of the Board of Directors.
There are no provisions in the Memorandum or Articles of Association discriminating against any existing or prospective holder of such securities as a result of such shareholder owning a substantial number of Shares. However, such provisions are discussed later under Takeover Code.
The Companys shareholders may, at an Annual General Meeting declare a dividend upon the recommendation of the Board of Directors. The amount of the dividend, declared may not exceed the amount recommended by the Board of Directors although a lesser amount may be declared. Dividends are distributed and paid within 30 days of approval by the shareholders. The Board of Directors also is authorized under the Articles of Association to declare and pay interim dividends to shareholders. In India, the dividends are generally declared as a percentage of the par value of the Companys Equity Shares. It is customary in India to pay to the holders of shares issued in any fiscal year a pro rata portion of the annual dividend from the date of issuance to the end of the fiscal year, unless otherwise stated.
Under the Indian Companies Act, dividends are payable only in cash to registered shareholders, the shareholders order or the shareholders bankers order on a record date fixed prior to the relevant Annual General Meeting. The Indian Companies Act further provides that any dividends that remain unpaid or unclaimed after the 30-day period are to be transferred to a special bank account opened by the company at an approved bank. The Company transfers any dividends that remain unclaimed in the special bank account for seven years from the date of the transfer to an Investor Education and Protection fund established by the Government of India. Once transferred to this fund, such unclaimed dividends may not be claimed.
Dividends may be paid only out of profits of the Company for the relevant year after transfer to the reserves of the Company of a percentage of its profits for that year of not less than 2.5 percent if the dividend is in excess of 10 percent of the par value of its Equity Shares. The Indian Companies Act further provides that, in the event of inadequacy or absence of profits in any year, a dividend may be declared for such year out of the Companys accumulated profits, subject to certain limitations.
At any general meeting, voting is by show of hands (where each shareholder has one vote) unless a poll is demanded by at least ten percent of those entitled to vote on the resolution, or those holding Shares with a paid-up value of at least Rs.50,000. Upon a poll, every shareholder entitled to vote and present in person or by proxy has one vote for every Share held by the shareholder. The Chairman has a deciding vote in the case of any tie.
Any shareholder of the Company may appoint a proxy. The instrument appointing a proxy must be lodged with the Company at least 48 hours before the time of the meeting. A proxy is entitled to attend the meeting only in absence of the shareholder and the proxy is not entitled to vote on a poll. In addition, a proxy is not entitled to participate in the discussions at the general meetings. A corporate shareholder may appoint an authorized representative who may attend and participate in general meetings and vote in all respects as if a shareholder, both on a show of hands and upon a poll.
Ordinary resolutions may be passed by simple majority of those present and voting at any General Meeting for which the required period of notice has been given. However, certain resolutions, such as alteration or amendment of the Memorandum and Articles of Association, commencement of a new line of business, issuance of further Shares without preemptive rights and reduction of share capital, require that the votes cast in favor of the resolution (whether by show of hands or upon a poll) be not less than three times the number of votes, if any, cast against the resolution by the members present in person or proxy and voting at the meeting.
In addition to permitting dividends to be paid out of current or retained earnings, the Indian Companies Act permits a company to distribute an amount transferred from the general reserve or other permitted reserves, including surplus in the companys profit and loss account in the form of bonus Shares to shareholders (similar to a stock dividend). The Indian Companies Act also permits the issuance of bonus shares from a share premium account. Bonus shares are distributed to shareholders in the proportion recommended by the Board of Directors. Shareholders of record on a fixed record date are entitled to receive such bonus shares.
Preemptive Rights and Issue of Additional Shares
The Company may, by ordinary resolution, increase its share capital by the issue of new Shares or create a new class of shares. In addition, the rights attached to the shares of any class may be varied with the consent of shareholders holding not less than three-fourths of the issued shares of that class. The Companies Act gives shareholders the right to subscribe for new Shares in proportion to their existing shareholdings unless otherwise determined by special resolution to that effect adopted at an Annual General Meeting of shareholders. Under the Companies Act, in the event of an issuance of securities, subject to the limitations, the Company must first offer such Shares to existing shareholders by notice specifying (1) the number of Shares offered and the date within which the offer must be accepted, which may not be less than 15 days from the date of offer and (2) the right, exercisable by the shareholder, to renounce the shares offered in favor of any other person. The Board of Directors is entitled to distribute the shares in respect of which preemptive rights have not been exercised in the manner that it deems most beneficial to the Company in accordance with the Articles of Association.
General Meeting of Shareholders
The Company is required to convene an Annual General Meeting of its shareholders in every calendar year, or within 15 months of the previous Annual General Meeting. The Annual Accounts of the Company are required to be placed before the Annual General Meeting within six months from the end of the fiscal year. The Company may convene an Extraordinary General Meeting of
shareholders when necessary, or at the request of a shareholder or shareholders holding not less than ten percent of the paid-up capital of the Company on the date of the request. The Annual General Meeting of the shareholders is generally convened by the Company Secretary in accordance with a resolution of the Board of Directors. Written notice setting out the agenda of the a General Meeting must be given to the shareholders whose names are on the register at the record date at least 21 days (excluding the day of service) prior to the date of the General Meeting. Those shareholders who are registered as shareholders on the date of the General Meeting are entitled to attend or vote at such meeting.
The Annual General Meeting of shareholders must be held at the registered office of the Company or at such other place within the city in which the registered office is located; any Extraordinary General Meeting may, however, be held at any other place if so determined by the Board of Directors.
The Articles of Association provide that a quorum for a General Meeting is the presence of at least five shareholders, including a representative of the President of India and Panatone Finvest Limited.
In addition, the Articles of Association provides that the Board of Directors may, whenever they think fit and shall, on the requisition of the holders of not less than one tenth of the paid up-capital of the Company upon which all calls or other sums then due have been paid, as at the date carry the right of voting in regard to that matter forthwith proceed to convene an extraordinary meeting of the Company, and in the case of such requisition, the following provisions shall have effect:
If, after a requisition has been received, it is not possible for a sufficient number of directors to meet in time so as to form a quorum, any director may convene an extraordinary general meeting in the same manner as early as possible as that in which meetings may be convened by the Board of Directors.
Register of Shareholders; Record Dates; Transfer of Shares
The Companys share transfer agent maintains a register of shareholders of the Company. For the purpose of determining Shares entitled to annual dividends the register is closed for a specified period prior to the Annual General Meeting. The date on which this period begins is the record date. To determine which shareholders are entitled to specified shareholder rights, the Company may close the register of shareholders. The Indian Companies Act and the Companys listing agreement with the BSE (and the other Indian stock exchanges) permit the Company, pursuant to a resolution of the Board of Directors and upon at least 30 days advance notice to the BSE (and such other Indian stock exchanges), to set the record date and upon 7 days public notice to close the register of shareholders for not more than 30 days at a time, and not more than 45 days in a year, in order for the Company to determine which shareholders are entitled to certain rights pertaining to the Shares. Trading of Shares may, however, continue while the register of shareholders is closed.
Following introduction of the Depositories Act, 1996, and the repeal of Section 22A of the Securities Contracts (Regulation) Act, 1956, which enabled companies to refuse to register transfers of shares in certain circumstances, the shares of a company are freely transferable, subject only to the provisions of Section 111A of the Indian Companies Act. Pursuant to Section 111A, if the transfer of shares is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992, or the regulations issued thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985, or any other Indian laws, the Company Law Board (a statutory body which administers various laws affecting companies in India) may, on application made by an investor, SEBI or certain other parties, direct the rectification of the register of records. The Company Law Board may, in its discretion, issue an interim order suspending the voting rights attached to the relevant shares, before making or completing its inquiry into the alleged contravention. Pending such inquiry, the rights of a holder to transfer the shares would not be restricted, although the voting rights attached to the shares may remain suspended if the Company Law Board so orders.
Transfer of Shares of the Company is effected by an instrument of transfer in the form prescribed by the Indian Companies Act and the rules thereunder, together with delivery of the share certificates. The share transfer agent of the Company is M/s. Sharepro Services, located in Mumbai, India, which is duly licensed to carry on such business under the Securities & Exchange Board of India (Registrar & Share Transfer Agents) Rules.
The above procedure is not applicable where the Shares are dematerialized and transferred electronically. To encourage dematerialization of securities in India, SEBI has required certain types of securities of certain Indian companies to be traded and settled in book-entry form. The Shares of the Company have been designated as one of such securities. To effect transfer of Shares in book-entry form, the seller and purchaser must establish accounts with a depositary participant appointed by the National Securities Depositary Limited or Central Securities Depositary Limited, a depositary established pursuant to the Indian Depositories Act, 1996. Charges for opening an account with a Securities Depositary Limited participant, transaction charges for each trade and custodian charges for securities held in each account vary depending upon the business practice of each Securities Depositary Limited participant. Upon delivery, the Shares purchased will be registered in the name of the Securities Depositary Limited participant and held by such Securities Depositary Limited participant for the account of the purchaser. So long as the Shares are traded through the book-entry system of Securities Depositary Limited, ownership of beneficial interest in the Shares will be shown on, and transfer of such ownership will be effected only through, records maintained by Securities Depositary Limited participants.
The requirement for dematerialization of the Shares may apply to the ADR holders when the underlying Shares are withdrawn from the depositary facility upon surrender of the ADRs. In order to trade the underlying Shares in the Indian market, the withdrawing ADR holder will be required to hold such Shares in book-entry form and to comply with the Securities Depositary Limited procedures described above. If dematerialization of any underlying Shares is requested by an ADR holder, the cost incurred by the Depositary therefor will be borne by the withdrawing ADR holder. Transfer of Shares in book-entry form is not subject to any Indian transfer tax. See TaxationIndian Taxation.
Disclosure of Ownership Interest
Section 187C of the Indian Companies Act requires beneficial owners of shares of Indian companies who are not holders of record to declare to the company details of the beneficial owner. While it is unclear under Indian law whether Section 187C applies to holders of ADRs of a company, investors who exchange ADRs for shares are subject to Section 187C. Failure to comply with Section 187C would not affect the obligation of a company to register a transfer of shares or to pay any dividends to the registered holder of any shares in respect of which such declaration has not been made, but any person who fails to make the required declaration within 30 days may be liable for a fine of up to Rs.l,000 for each day such failure continues. Furthermore, any charge, promissory note or any other collateral agreement created, executed or entered into by the registered owner of any share in respect of which a declaration required under Section 187C has not been made is not enforceable by the beneficial owner or any person claiming through him.
Audit and Annual Report
The Company must circulate, at least 21 clear days before an Annual General Meeting of shareholders, a detailed version of the Companys audited balance sheet and profit and loss account and the reports of the Board of Directors and the auditors thereon. The Company also is required under the Indian Companies Act to make available, upon request of any shareholder, a complete balance sheet and profit and loss account of the Company in the case of circulation of abridged accounts.
Under the Indian Companies Act, the Company must file with the Indian Registrar of Companies, the balance sheet and annual profit and loss account presented to the shareholders within 30 days of the conclusion of an Annual General Meeting, and an annual return within 60 days of the conclusion of the same.
Rights of the Government of India Under the Shareholders Agreement to be Exercised Through its Nominee Directors on the Board of Directors
Approval of Matters
(a) The property, business and affairs of the Company shall be managed exclusively by and be under the direction of the Board of Directors. The Board of Directors may exercise all such powers of the Company and have such authority and do all such lawful acts and things as are permitted by applicable law and the Memorandum and Articles of Association. Subject to (b) below, all decisions, actions and resolutions of the Board of Directors shall be adopted by the affirmative vote of a simple majority of the members of Board.
(b) Notwithstanding any other provision of the Shareholders Agreement or otherwise permitted or provided under the Indian Companies Act, no obligation of the Company or any of its subsidiaries shall be entered into, no decision shall be made and no action shall be taken by or with respect to the Company or any of its subsidiaries in relation to the following matters unless such obligation, decision or action as the case may be, is approved if, at any meeting of the Companys shareholders, duly called for the purpose of considering such obligation, decision or action, by an affirmative vote of the one authorized representative of both the Government of India and Panatone Finvest Limited, and if at the meeting of the Board of Directors by an affirmative vote of, at least one nominee director of each of the Government of India and Panatone Finvest Limited:
(i) Any change in the Memorandum of Association and Articles of Association;
(ii) The granting of any security or the creation of any encumbrance on the assets of the Company or the incurrence of any indebtedness or guaranteeing of the debts of any person which in the aggregate at any time exceeds the net worth of the Company;
(iii) The taking of any steps to wind-up or terminate the corporate existence of the Company or any of its affiliates or entering into any arrangement with the creditors of the Company in relation to all or substantial part of the assets of the Company;
(iv) Any one or a series of transactions which causes a sale, lease, exchange or disposition of land and building of the Company or its subsidiary which are acquired by the Company at any time prior to the Closing (as defined in the Shareholders Agreement);
(v) Subject to (xv) hereunder, any sale, lease, exchange or disposition of any property, assets or equipments (other than land and building) of the Company or its subsidiary which are acquired by the Company at any time prior to the Closing;
(vi) The making, directly or indirectly, of loans or advances in excess of Rs.500 million to any person other than in the ordinary course of business of the Company;
(vii) The entering into of an amalgamation, merger or consolidation with any other company or body corporate;
(viii) Any change in the number of directors of the Company from that provided in the Shareholders Agreement;
(ix) Any agreement with or commitment to any shareholder or its principal(s) or their respective affiliates, except where, and to the extent, (a) such agreement or commitment between the Company or any of its affiliates on the one hand and the Government of India or any government authority on the other is required under applicable law or (b) such agreement is on an arms length basis and in good faith;
(x) Establishment of any subsidiary or associated company by Company;
(xi) Transfer of any rights or interest in affiliates of the Company including, without limitation, transfer of relevant interests in securities of such affiliates held by the Company;
(xii) Any agreement, license or permission in respect of the use of the name and/or logo of the Company (except where such agreement, license or permission is for the purpose of, or in connection with, advertising or promotional activities only by the Company);
(xiii) The delegation by the Board of Directors to any person of the Board of Directors authority to approve or authorize any matter described in this sub-paragraph (b);
(xiv) Change directly or indirectly in the use of land and building of the Company other than for the purposes of the main objects of the Company as defined in the Memorandum of Association;
(xv) Any one or a series of transactions, which causes a sale, lease, exchange or disposition of obsolete equipments or equipments not in use, of the Company or its subsidiary having an aggregate value exceeding 25 percent of the total value of the net fixed assets of the Company as specified in the Audited Financial Statement; or
(xvi) Any commitment or agreement to do any of the foregoing.
(c) Notwithstanding anything to the contrary contained in the Shareholders Agreement, in the event any of the aforesaid items of business mentioned in (b) above is not approved by the Board of Directors or shareholders at a meeting or otherwise then such non-approved items shall not be implemented by the Company, Panatone Finvest Limited and the Government of India shall not directly or indirectly take any steps to cause the Company to implement such items of business. The non-approval of the aforesaid items of business at a meeting or otherwise of the Board of Directors or the shareholders shall not be considered as subject matter of dispute, difference, disagreement or the like between the Government of India and Panatone Finvest Limited and the non approval of such item of business will not be referred to arbitration under Shareholders Agreement.
Acquisition by the Company of its Own Shares
Under the Indian Companies Act, approval of at least 75 percent of a companys shareholders voting on the matter and approval of the High Court or National Company Law Tribunal of the state in which the registered office of the company is situated is required to reduce a companys share capital. A company may, under some circumstances, acquire its own equity shares without seeking the approval of the High Court or National Company Law Tribunal. However, a company would have to extinguish the shares it has so acquired within the prescribed time period. A company is not permitted to acquire its own shares for treasury operations.
An acquisition by a company of its own shares that does not rely on an approval of the High Court/National Company Law Tribunal must comply with prescribed rules, regulations and conditions of the Indian Companies Act. In addition, public companies which are listed on a recognized stock exchange in India must comply with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998, or Buy-back Regulations.
ADR holders will not be eligible to participate in a buyback in case of tender offers, odd lots and open market purchases unless they surrender their ADSs and receive delivery of the underlying Shares. ADR holders should note that Shares withdrawn from the depositary facility may not be redeposited into such depositary facility.
There can be no assurance that the underlying Shares offered by the ADR holders in any buyback of Shares by the Company will be accepted by the Company. The regulations relating to the buyback of securities have only been introduced recently and there is very limited experience in the interpretation of such regulations. ADR holders are advised to consult their Indian legal advisers prior to participating in any buyback by the Company, including in relation to any tax issues relating to such buyback.
Foreign institutional investors should note that in the event of a buyback by the Company, the prescribed threshold limit for shareholdings by foreign institutional investors may be exceeded by default regardless of any participation or non-participation by them in the buyback. The treatment of the foreign institutional investors threshold limits in the buyback context is uncertain, and foreign institutional investors are advised to consult their Indian legal advisers in this regard.
Subject to the rights of creditors, employees and of the holders of any other shares entitled by their terms to preferential repayment over the Shares, if any, in the event of winding up of the Company, the holders of the Shares are entitled to be repaid the amounts of capital paid up or credited as paid up on such Shares. All surplus assets after payments due to the holders of any preference shares belong to the holders of the Shares in proportion to the amount paid up or credited as paid up on such Shares, respectively, at the commencement of the winding up.
Disclosure and mandatory bid obligations in respect of certain share acquisitions or consolidations under Indian law are governed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover Code), which prescribes certain thresholds or trigger points that give rise to these obligations. The Takeover Code is under constant review by SEBI and was recently amended in December 2004.
The most important features of the Takeover Code, as amended, are as follows:
With respect to takeovers (other than bail-out takeovers) of listed companies, the Takeover Code, as amended, provides for mandatory bid and open offer requirements, summarized below:
The Takeover Code sets out the contents of the required public announcements as well as the minimum offer price.
The Takeover Code, as amended, permits conditional offers as well as the acquisition and subsequent delisting of all shares of a company and provides specific guidelines for the gradual acquisition of shares or voting rights. Specific obligations of the acquirer and of the board of directors of the target company in the offer process have also been set out. Acquirers making a public offer will be required to deposit in an escrow account 25 percent of the total consideration or less up to and including Rs.1,000 million and 10 percent for the excess over Rs.1,000 million where the total consideration exceeds Rs.1,000 million, which amount will be forfeited in the event that the acquirer does not fulfill its obligations. In addition, the Takeover Code introduces the chain principle whereby the acquisition of a holding company will obligate the acquirer to make a public offer to the shareholders of each of the publicly listed companies acquired through the acquisition of the holding company.
The general requirements to make such a public announcement do not, however, apply entirely to bail-out takeovers when a promoter (i.e., person or persons in control of the company, persons named in any offer document as promoters and certain specified corporate bodies and individuals) is taking over a financially weak company (but not a sick industrial company) pursuant to a rehabilitation scheme approved by a public financial institution or a scheduled bank. A financially weak company is a company which has, at the end of the previous fiscal year, accumulated losses resulting in erosion of more than 50 percent (but less than 100 percent) of the total sum of its paid-up capital and free reserves at the end of the previous fiscal year. A sick industrial company is a company registered for more than five years and engaged in an industry listed in Schedule 1 of the Industries (Development & Regulation) Act, 1951 which has, at the end of any fiscal year, accumulated losses equal to or exceeding its entire net worth.
The Takeover Code does not apply to:
Provided that the transferor(s) as well as the transferee(s) have been holding shares in the target company for a period of at least three years prior to the proposed acquisition;
In addition, the Takeover Code does not apply to shares represented by ADSs so long as such shares remain in the ADR depositary facility.
The Company has entered into a listing agreement with each of the other Indian Stock Exchanges on which the Shares are listed. Clause 40A of the listing agreements provides that if an acquisition of a listed companys equity shares results in the acquirer and its associates holding 5 percent or more of the companys outstanding equity shares, the acquirer must report its holding to the company and the relevant stock exchange(s) where the companys shares are listed. When any person acquires or agrees to acquire equity shares exceeding 15 percent of the voting rights in any company or if any person who holds equity shares which in aggregate carries less than 15 percent of the voting rights of the company and seeks to acquire equity shares exceeding 15 percent of the voting rights, such person shall, in accordance with Clause 40B, not acquire any equity shares exceeding 15 percent of the voting rights of the company without making an offer on a uniform basis to all the remaining shareholders to acquire equity shares that have an additional 20 percent of the voting rights of the total outstanding shares at a prescribed price.
The acquisition of shares of a company listed on an Indian stock exchange beyond certain threshold amounts is subject to regulations governing takeovers of Indian companies. Clauses 40A and 40B and such regulations will not apply to shares so long as they are represented by ADRs.
The Companys material contracts are entered into in the ordinary course of business and include rate sharing agreements and interconnect agreements with international and domestic telecommunication providers and agreements for the use of cable capacity to provide the Companys services.
Exchange Controls and Other Limitations Affecting Security Holders
Foreign investments in India are governed by the provisions of Section 6 of the Foreign Exchange Management Act (FEMA) 1999 and are subject to the regulations issued by the Reserve Bank of India (RBI) under FEMA 1999. The Foreign Direct Investment Scheme under the Reserve Banks Automatic Route enables Indian companies (other than those specifically excluded in the scheme) to issue shares to persons resident outside India without prior permission from the RBI, subject to certain conditions. General permission has been granted for the transfer of shares and convertible debentures by a person resident outside India as follows: (i) for transfers of shares or convertible debentures held by a person resident outside India other than Non Resident Indians (NRIs), to any person resident outside India, provided that the transferee has obtained permission of the Central Government and if that person had any previous venture or tie up in India through investment in any manner or a technical collaboration or trademark agreement in the
same field or allied field in which the Indian company whose shares are being transferred is engaged (ii) NRIs are permitted to transfer shares or convertible debentures of an Indian company to other NRIs, and (iii) a person resident outside India may gift securities of an Indian company to a person resident in India.
With effect from November 29, 2001, Overseas Corporate Bodies (OCBs) are not permitted to invest under the Portfolio Investment Scheme in India. Further, the OCBs which have already made investments under the Portfolio Investment Scheme, may continue to hold such shares / convertible debentures till such time these are sold on the stock exchange.
In all other cases, prior approval of the RBI is necessary. For transfer of existing shares or convertible debentures of an Indian company by a resident to a non resident by way of sale the transferor should obtain the approval of the Central Government and thereafter make an application to RBI for permission. In such cases the RBI may permit the transfer subject to such terms and conditions including the price at which the sale may be made.
Restrictions on Sale of the Equity Shares Underlying the Companys American Depositary Receipts and for Repatriation of Sale Proceeds
American Depositary Receipts issued by Indian companies to non-residents have free transferability outside India. Until recently, under Indian law it was not permitted for a depositary to accept deposits of outstanding equity shares and issue ADSs evidencing such shares. Thus, an investor in ADSs who surrendered an ADS and withdrew equity shares would not be permitted to redeposit those equity shares to obtain ADSs, nor would an investor who purchased equity shares on the Indian market have been permitted to deposit them in the ADS program. The Government of India has recently permitted two-way fungibility of ADRs. However, this is still subject to sectoral caps and certain conditions, including compliance with the provisions of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme 1993 and the periodic guidelines issued by the Government. Such restrictions on foreign ownership of the underlying equity shares may cause the Companys Equity Shares to trade at a discount or premium to its ADSs.
In February 2002, the RBI issued a circular stating that the terms of Regulations 4A of the Reserve Bank of India Notification FEMA 20/2000-RB dated May 3, 2000, as amended by Notification No. FEMA 41/2001-RB dated March 2, 2001, allow a registered broker to purchase shares of an Indian company on behalf of a person resident outside of India for the purpose of converting those shares into ADSs/GDSs. However, such conversion is subject to compliance with the provisions of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme 1993 and the periodic guidelines issued by the Central Government. This would mean that ADSs converted into Indian shares may be converted back into ADSs, subject to the limits of sectoral caps.
The Operative Guidelines for the limited two-way fungibility under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme 1993 has also been approved by the Government of India.
These guidelines provide that a re-issuance of ADSs/GDSs are permitted to the extent that ADSs/GDSs have been redeemed for underlying shares and sold in the domestic market. The re-issuance must be within specified limits. The conditions to be satisfied in this regard are: (i) the shares are purchased on a recognized stock exchange; (ii) the Indian company has issued ADS/GDS; (iii) the shares are purchased with the permission of the custodian of the ADSs/GDSs of the Indian company and are deposited with the custodian; and (iv) the number of shares so purchased shall not exceed the number of ADSs/GDSs converted into underlying shares.
The procedure for conversion of shares into ADSs/GDSs is as follows: (i) on request by the overseas investor for the acquisition of shares for re-issuance of ADSs/GDSs, the SEBI registered broker will purchase shares from a stock exchange after verifying with the custodian as to the availability of Head Room (i.e. the number of ADSs/GDSs originally issued minus the number of ADSs/GDSs outstanding further adjusted for ADSs/GDSs redeemed into underlying shares and registered in the name of the non-resident investor(s)); (ii) an Indian broker purchases the shares in the name of the overseas depositary; (iii) after the purchase, the Indian broker places the domestic shares with the Custodian; (iv) the Custodian advises the overseas depositary on the custody of domestic shares and to issue corresponding ADSs/GDSs to the investor; and (v) the overseas depositary issues ADSs/GDSs to the investor.
Holders who seek to sell in India any Equity Shares received upon surrender of any ADS, and to convert the Rupee proceeds of such sale into foreign currency and remit such foreign currency outside of India, will require the approval of the Reserve Bank of India for each such transaction. Although such approvals are generally forthcoming, there can be no assurance that any such approval can be obtained in a timely manner or at all.
In order to bring the ADR / GDR guidelines in alignment with SEBIs guidelines on domestic capital issues, Government of India has issued the following additional guidelines on ADRs / GDRs under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme:-
An Indian company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign Currency Convertible Bonds (FCCBs) and (ii) Ordinary Shares through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
Erstwhile Overseas Corporate Bodies (OCBs) who are not eligible to invest in India through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to (i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
The pricing of ADR / GDR / FCCB issues should be made at a price not less than the higher of the following two averages: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The relevant date means the date thirty days prior to the date on which the meeting of the general body of shareholders is held, in terms of section 81 (IA) of the Indian Companies Act, 1956, to consider the proposed issue.
Shares of Indian companies represented by ADSs may be approved for issuance to foreign investors by the Government of India under the Issue of Foreign Currency Convertible Bonds and Equity Shares (through Depositary Receipt Mechanism) Scheme, 1993 (the 1993 Regulation), as modified from time to time, promulgated by the Government. The 1993 Regulation is distinct from other policies or facilities, as described below, relating to investments in Indian companies by foreign investors. The issuance of ADSs pursuant to the 1993 Regulation also affords to holders of the ADSs the benefits of Section 115AC of the Indian Income Tax Act, 1961 for purposes of the application of Indian tax law.
Foreign Direct Investment (FDI)
FDI in India is allowed automatically and without prior approval route in almost all sectors except:
1. Proposals that require an industrial license and cases where foreign investment is more than 24% in the equity capital of units manufacturing items reserved for the small scale industries.
2. Proposals in which foreign collaborator has a previous venture/tie up in India.
3. Transfer of shares from resident to non-residents and vice versa have been liberalized in all sectors subject to FDI limits.
4. Proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted and/ or whenever any investor chooses to make an application to the Foreign Investment Promotion Board (FIPB) and not to avail of the automatic route.
The FIPB is the competent body to consider and recommend FDI which does not fall within the automatic route. The FIPB is under the Department of Economic Affairs, Ministry of Finance. With respect to the activities of the Company, approval from FIPB is required for any direct foreign investment that exceeds 51 percent of the total issued share capital of the Company.
In May 1994, the Government announced that purchases by foreign investors of ADSs as evidenced by ADRs and foreign currency convertible bonds of Indian companies would be treated as direct foreign investment in the equity issued by Indian companies for such offerings. Therefore, offerings that involve the issuance of equity that results in Foreign Direct Investors holding more than the stipulated percentage of direct foreign investments (which depends on the category of industry) would require approval from the FIPB. In addition, in connection with offerings of any such securities to foreign investors, approval of the FIPB is required for Indian companies whether or not the stipulated percentage limit would be reached, if the proceeds there from are to be used for investment in non-high priority industries.
FDI ceiling in the telecom sector varies from 49 percent to 74 percent depending on the nature of service being provided. The total composite foreign holding including but not limited to investment by FIIs, NRI/OCB, FCCB, ADRs, GDRs, convertible preference shares, proportionate foreign investment in Indian promoters/investment companies including their holding companies, should not exceed the allowable per cent.
FDI up to 100% permitted in respect of the following telecom services: -
The FDI limit in Telecom Sector was increased from 49% to 74 % in certain telecom services on 3rd November, 2005 vide Press Note No 5 of 2005 issued by the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India. The above notification of 3 November 2005 was superceded by Press Note No. 3 of 2007 dated 19 April 2007 by the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India. The FDI limit in Telecom Sector is increased subject to certain conditions a gist of which is as follows:
The above mentioned conditions have also been made applicable to those telecom companies which had the FDI cap of 49%
The above terms and conditions were included in the ILD/NLD license held by the Company vide amendments issued by the Department of Telecommunications on 5 July 2007.
The Company has made application to the Department of Telecommunication seeking permission for Remote Access of its network equipments. The Company has also submitted the Unconditional Compliance to the amended terms and conditions of license as per the requirement.
Investment by Non-Resident Indians, Persons of Indian Origin and Overseas Corporate Bodies
A variety of special facilities investing in shares of Indian companies in India are available to individuals of Indian nationality or origin residing outside India and persons of Indian origin.
These facilities permit Non-Resident Indians, Persons of Indian Origin to make portfolio investments in shares and other securities of Indian companies on a basis not generally available to other foreign investors. These facilities are different and distinct from investments by Foreign Direct Investors described above.
The Overseas corporate bodies OCBs at least 60 percent owned by Non-resident Indians or persons of Indian Origin have, been since September 16, 2003 derecognized as a class of investors in India. However, requests from such entities which are incorporated and not under the adverse notice of RBI / SEBI will be considered for undertaking fresh investments under FDI scheme with prior approval of Government if the investment is under Government route and with the prior approval of RBI if the investment is under automatic route.
Investment by Foreign Institutional Investors
In September 1992, the Government issued guidelines which enable Foreign Institutional Investors, including institutions such as pension funds, investment trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers, to invest in all the securities traded on the primary and secondary markets in India. Under the guidelines, Foreign Institutional Investors are required to obtain an initial registration from SEBI and a general permission from the Reserve Bank of India to engage in transactions regulated under the Foreign Exchange Management Act of 1999. Foreign Institutional Investors must also comply with the provisions of the SEBI Foreign Institutional Investors Regulations, 1995. When it receives the initial registration, Foreign Institutional Investors also obtain general permission from the Reserve Bank of India to engage in transactions regulated under the Foreign Exchange Management Act of 1999. Together, the initial registration and the Reserve Bank of Indias general permission enable registered Foreign Institutional Investors to buy (subject to the ownership restrictions discussed below) and sell freely securities issued by Indian companies, to realize capital gains on investments made through the initial amount invested in India, to subscribe or renounce rights offerings for shares, to appoint a domestic custodian for custody of investments held and to repatriate the capital, capital gains, dividends, and income received by way of interest and any compensation received towards sale or renunciation of rights offerings of shares.
SEBI and the Reserve Bank of India regulations restrict investments in Indian companies by Foreign Direct Investors. Under current SEBI regulations applicable to the Company, Foreign Direct Investors in aggregate may hold no more than 40 percent of the Companys Equity Shares, excluding the Equity Shares underlying the ADSs, and Non-Resident Indians in aggregate may hold no more than 10 percent of the Companys Equity Shares, excluding the Equity Shares underlying the ADSs. Furthermore, SEBI regulations provide that no single Foreign Institutional Investor may hold more than 10 percent of the Companys total Equity Shares and no single Non-Resident Indian may hold more than 5 percent of the Companys total Equity Shares.
Foreign Institutional Investors may only purchase securities of public Indian companies (other than ADSs) through a procedure known as a preferential allotment of shares, which is subject to certain restrictions. These restrictions will not apply to Equity Shares issued as stock dividends or in connection with rights offerings applicable to the Equity Shares underlying ADSs. There is uncertainty under Indian law about the tax regime applicable to Foreign Institutional Investors which hold and trade ADSs. Foreign Institutional Investors are urged to consult with their Indian legal and tax advisers about the relationship between the Foreign Institutional Investors guidelines and the ADSs and any Equity Shares withdrawn upon surrender of ADSs.
More detailed provisions relating to Foreign Institutional Investors investment have been introduced by the SEBI with the introduction of the SEBI Foreign Institutional Investors Regulations, 1995. These provisions relate to the registration of Foreign Institutional Investors, their general obligations and responsibilities, and certain investment conditions and restrictions. One such restriction is that the total investment in equity and equity-related instruments should not be less than 70 percent of the aggregate of all investments of the Foreign Institutional Investors in India.
SEBI registered FIIs have been permitted to purchase shares / convertible debentures of an Indian Company through offer/private placement. This is subject to investment ceilings prescribed under the Foreign Exchange Management Act. Indian companies are permitted to issue such shares provided that:
(i) in the case of public offer, the price of shares to be issued is not less than the price at which shares are issued to residents and (ii) in the case of issue by private placement, the price is not less than the price arrived at in terms of SEBI guidelines or guidelines issued by the erstwhile Controller of Capital Issues, as applicable. Purchases can also be made of PCDs / FCDs/ Right Renunciations / Warrants / Units of Domestic Mutual Fund Schemes.
FII shall not engage in short selling and shall take delivery of securities purchased and give delivery of securities sold. There shall be no squaring off of transactions during the no-delivery period of a security.
The SEBI registered FII shall restrict allocation of its total investment between equities and debt in the Indian capital market in the ratio of 70:30. The FII may form a 100% debt fund and get such fund registered with SEBI. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard.
Holders of the Companys ADSs will not be entitled to instruct the Depositary how to vote the Shares underlying the ADSs. Rather, each holder, by accepting an ADR, authorized and directed the Depositary to vote as set forth below.
The Depositary will vote the deposited Shares as instructed by the Companys Board of Directors or give a proxy or power of attorney to vote the deposited Shares to a person designated by the Board of Directors. However, the Depositary will only do this upon the Companys legal counsel issuing an opinion to the Depositary stating that it is legal for the Depositary to do so and that doing so will not expose the Depositary to legal liability. If the Company does not provide the legal opinion referred to above, the Depositary will not vote the deposited Shares or give a proxy or power of attorney to anyone else to vote the deposited Shares.
General. The following summary is based on the provisions of the Income Tax Act, 1961 (the Indian Tax Act), including the special tax regime contained in Section 115AC (the Section 115AC Regime) and the 1993 Regulation. The Indian Tax Act is amended every year by the Finance Act of the relevant year. Some or all of the tax consequences of the Section 115 AC Regime may be amended or changed by future amendments of the Indian Tax Act.
The summary set forth below is not intended to constitute a complete analysis of the individual tax consequences to non-resident holders under Indian law for the acquisition, ownership and sale of ADSs and Equity Shares by non-resident holders. Personal tax consequences of an investment may vary for investors in various circumstances and potential investors should therefore consult their own tax advisers on the tax consequences of such acquisition, ownership and sale, including specifically the tax consequences under the law of the jurisdiction of their residence and any tax treaty between India and their country of residence.
For purposes of the Indian Tax Act, an individual is considered to be a resident of India during any fiscal year if he or she is in India in that year for:
A company is resident in India if it is registered in India or the control and management of its affairs is situated wholly in India.
Taxation of Distributions
Pursuant to the Finance Act, 2004, withholding tax is not applicable on dividends. Henceforth, the Company has to pay a dividend distribution tax of approximately 16.995 percent on the amount of dividend declared.
Taxation on Surrender of ADSs
The acquisition by a non-resident holder of Shares upon surrender of ADSs does not constitute a taxable event for Indian income tax purposes. Such exchange will, however, give rise to stamp duty as described below under Stamp Duty and Transfer Tax.
Taxation of Capital Gains
Any gain realized on the sale of ADSs or Equity Shares by a non-resident holder to another non-resident holder outside India is not subject to Indian capital gains tax. However, as Rights are not expressly covered by the Indian Tax Act, it is unclear, as to whether capital gain derived from the sale of Rights by a non-resident holder (not entitled to an exemption under a tax treaty) to another non-resident holder outside India will be subject to Indian capital gains tax. If such Rights are deemed by the Indian tax authorities to be situated within India, the gains realized on the sale of such Rights will be subject to customary Indian taxation as discussed below.
Since the issuance of the ADSs has been approved by the Government of India under the Section 115AC Regime, Non-resident Holders of the ADSs will have the benefit of tax concessions available under the Section 115AC Regime. The Section 115AC Regime provides that if the Equity Shares are sold on an Indian Stock Exchange against payment in Indian rupees, they will no longer be eligible for such concessional tax treatment. However, the Section 115AC Regime is unclear, as to whether such tax treatment is available to a non-resident who acquires Equity Shares outside India from a non-resident holder of Equity Shares after receipt of the Equity Shares upon surrender of the ADSs. If concessional tax treatment is not available, gains realized on the sale of such Equity Shares will be subject to customary Indian taxations discussed below.
Subject to any relief provided pursuant to an applicable tax treaty, any gain realized on the sale of Equity Shares to an Indian resident or inside India generally will be subject to Indian capital gains tax. For the purpose of computing capital gains tax, the cost of acquisition of Equity Shares received in exchange for ADSs will be determined on the basis of the prevailing price of the shares on any of the Indian stock exchanges on the date that the Depositary instructs the custodian to deliver Equity Shares in exchange for ADSs. A non-resident holders holding period (for purpose of determining the applicable Indian capital gains tax rate) in respect of Equity Shares received in exchange for ADSs commences on the date of the notice of the redemption by the Depositary to the Custodian. The Indo-US Treaty does not provide an exemption from the imposition of Indian capital gains tax.
Taxable gain realized on Equity Shares (calculated in the manner set forth in the prior paragraph) held for more than 12 months (long-term gain) is subject to tax at the rate of 10 percent. Taxable gain realized on Equity Shares held for 12 months for less (short-term gain) is subject to tax at variable rates with a maximum rate of 42.23 percent. The actual rate of tax on short-term gain depends on a number of factors, including the legal status of the Non-resident and the type of income chargeable in India.
Stamp Duty and Transfer Tax
Upon issuance of the Equity Shares, the Company is required to pay a stamp duty of 0.1 percent per share of the issue price of the underlying Equity Shares. A transfer of ADSs is not subject to the Indian stamp duty. However, upon the acquisition of Equity Shares from the Depositary in exchange for ADSs, the holder will be liable for Indian stamp duty at the rate of 0.25 percent of the market value of the ADSs or Equity Shares exchanged. A sale of Equity Shares by a registered holder will also be subject to Indian stamp duty at the rate of 0.25 percent of the market value of the Equity Shares on the trade date, although customarily such tax is borne by the transferee. However, in case of Equity Shares held with the Depositary in electronic mode, there will not be any incidence of stamp duty.
ADSs held by non-resident holders and the underlying Equity Shares held by the Depositary and the transfer of ADSs between non-resident holders and the Depositary will be exempt from Indian wealth tax.
Under current Indian law, there is no estate duty applicable to a non-resident holder of ADSs or Equity Shares.
United States Federal Taxation
The following summary describes the material United States federal income and estate tax consequences of the ownership and disposition of Shares and ADSs as of the date hereof. The discussion set forth below is applicable to US Holders (as defined below). Except where noted, it deals only with Shares and ADSs held as capital assets and does not deal with special situations, such as those of dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, financial institutions, tax-exempt entities, life insurance companies, persons holding Shares or ADSs as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, corporations that accumulate earnings to avoid US federal income tax, persons owning 10 percent or more of the voting stock of the Company, persons subject to the alternative minimum tax or persons whose functional currency is not the United States dollar. Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the Code), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified, in each case, possibly with retroactive effect so as to result in United States federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the Depositary to the Company and assumes that the Deposit Agreement, and all other related agreements, will be performed in accordance with their terms. Persons considering the purchase, ownership or disposition of Shares or ADSs should consult their own tax advisors concerning the United States federal income tax consequences in light of their particular situations as well as any consequences arising under foreign, state or local tax laws.
As used herein, the term US Holder means a beneficial holder of a Share or ADS that is (1) a citizen or resident of the United States, (2) a corporation, or entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof, (3) an estate the income of which is subject to United States federal income taxation regardless of its source or (4) a trust (X) which is subject to the supervision of a court within the United States and is under the control of one or more United States persons as described in section 7701(a)(30) of the Code or (Y) that has a valid election in effect under applicable US Treasury regulations to be treated as a United States person.
If a partnership holds our Shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our Shares or ADSs, you should consult your tax advisor.
Ownership of ADSs
In general, for United States federal income tax purposes, US holders of ADSs will be treated as the owners of the underlying Shares that are represented by such ADSs. Deposits or withdrawal of Shares by US Holders for ADSs will not be subject to United States federal income tax. However, the United States Treasury has expressed concerns that parties to whom depositary shares are
pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of ADSs. Accordingly, the analysis of the creditability of Indian taxes paid with respect to the ADSs could be affected by future actions that may be taken by the United States Treasury.
Taxation of Dividends
To the extent that distributions paid by us with respect to our Shares or ADSs do not exceed our earnings and profits, as calculated for United States federal income tax purposes, such distributions will be taxed as dividends. If these dividends constitute qualified dividend income (QDI), individual U.S. holders of our Shares or ADSs will generally pay tax on such dividends received during taxable years before 2011 at a maximum rate of 15 percent, provided that certain holding period requirements are satisfied. Assuming we are not a passive foreign investment company (as discussed below) or a foreign investment company, dividends paid by us will be QDI if we are a qualified foreign corporation (QFC) at the time the dividends are paid. We believe that we are currently, and will continue to be, a QFC so as to allow all dividends paid by us to be QDI for United States federal income tax purposes. Corporate holders receiving dividends paid by us will not benefit from the reduced tax rate on dividends available to individual holders. In addition, dividends paid by us will not be eligible for the dividends-received deduction allowed to corporations under the Code.
The amount of any dividend paid in Indian Rupees will equal the United States dollar value of the Indian Rupees received calculated by reference to the exchange rate in effect on the date the dividend is received by the US Holder, in the case of Shares, or by the Depositary, in the case of ADSs, regardless of whether the Indian Rupees are converted into United States dollars. If the Indian Rupees received as a dividend are not converted into United States dollars on the date of receipt, a US Holder will have a basis in the Indian Rupees equal to their United States dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Indian Rupees will be treated as ordinary income or loss that is United States source.
For tax years beginning before January 1, 2007 dividends paid on the Shares or ADSs will be treated as income from sources outside the United States and will generally constitute passive income or, in the case of certain US Holders, financial services income and for tax years beginning after December 31, 2006, dividends will be treated as passive category income or general category income. Subject to certain limitations, a US Holder may be entitled to a credit or deduction against its United States federal income taxes for the amount of any Indian taxes that are withheld from dividend distributions made to such US Holder. The decision to claim either a credit or deduction must be made annually, and will apply to all foreign taxes paid by the US Holder to any foreign country or United States possession with respect to the applicable tax year. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules regarding the availability of foreign tax credits are complex and US Holders may be subject to various limitations on the amount of foreign tax credits that are available. US Holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
To the extent that the amount of any distribution by the Company exceeds the Companys current and accumulated earnings and profits as determined under United States federal income tax principles for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the Shares or ADSs (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by the US Holder on a subsequent disposition of the Shares or ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. Consequently, such distributions in excess of the Companys current and accumulated earnings and profits would not give rise to foreign source income.
Distributions of Shares or rights to subscribe for Shares that are received as part of a pro rata distribution to all shareholders of the Company in certain circumstances should not be subject to United States federal income tax. The basis of the new Shares or rights so received will be determined by allocating the US Holders basis in the old Shares between the old Shares and the new Shares or rights received, based on their relative fair market values on the date of distribution. However, the basis of the rights will be zero if (1) the fair market value of the rights is less than 15 percent of the fair market value of the old Shares at the time of distribution or (2) the rights are not exercised and thus expire.
Taxation of Capital Gains
For United States federal income tax purposes, a US Holder will recognize taxable gain or loss on the sale or exchange of a right, Share or ADS in an amount equal to the difference between the amount realized for the right, Share or ADS and the US Holders tax basis in the right, Share or ADS. Such gain or loss will be capital gain or loss and it will be long-term capital gain or loss if the holding period of the US Holder exceeds one year. Current law generally provides that long-term capital gains realized by individuals are subject to federal income tax at a maximum rate of 15 percent for taxable years beginning before January 1, 2011. Any gain or loss recognized by a US holder will generally be treated as United States source gain or loss. Certain limitations exist on the deductibility of capital losses for both corporate and individual taxpayers.
Under certain circumstances described under Indian TaxationTaxation of Capital Gains in this report, a US Holder may be subject to Indian tax upon the disposition of rights, Shares or ADSs. In such circumstances and subject to applicable limitations, such US Holder may elect to treat the gain as foreign source income and to credit the Indian tax against its United States federal income tax liability with respect to the gain. US Holders should consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
For cash-basis US Holders who receive foreign currency in connection with a sale or other taxable disposition of rights, equity shares or ADSs, the amount realized will be based upon the United States dollar value of the foreign currency received with respect to such rights, equity shares or ADSs as determined on the settlement date of such sale or other taxable disposition.
Accrual-basis US Holders may elect the same treatment required of cash-basis taxpayers with respect to a sale or other taxable disposition of rights, equity shares or ADSs, provided that the election is applied consistently from year to year. Such election cannot be changed without the consent of the IRS. Accrual-basis US Holders that do not elect to be treated as cash-basis taxpayers (pursuant to the Treasury Regulations applicable to foreign currency transactions) for this purpose may have a foreign currency gain or loss for United States federal income tax purposes because of differences between the United States dollar value of the foreign currency received prevailing on the date of such sale or other taxable disposition and the value prevailing on the date of payment. Any such currency gain or loss will generally be treated as ordinary income or loss that is United States source, in addition to the gain or loss, if any, recognized on the sale or other taxable disposition of rights, Equity Shares or ADSs.
An individual shareholder who is a citizen or resident of the United States for United States federal estate tax purposes will have the value of the equity Shares or ADSs owned by such holder included in his or her gross estate for United States federal estate tax purposes.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends in respect of the Shares or ADSs or the proceeds received on the sale, exchange, or redemption of the Shares or ADSs paid within the United States (and in certain cases, outside of the United States) to US Holders other than certain exempt recipients (such as corporations), and a 28 percent backup withholding rate may apply to such amounts if the US Holder fails to provide an accurate taxpayer identification number to the Company or its payment agent or to report interest and dividends required to be shown on its United States federal income tax returns. The amount of any backup withholding from a payment to a US Holder will generally be allowed as a credit against the US Holders United States federal income tax liability, provided that the required information is furnished to the IRS.
Passive Foreign Investment Company
A non-U.S. corporation will be classified as a passive foreign investment company for U.S. Federal income tax purposes if either:
The Company does not believe that it satisfies either of the tests for passive foreign investment company status for fiscal year 2007. The Company will be required to determine its status as a passive foreign investment company on an annual basis. No assurance can be given that the Company will not be considered a passive foreign investment company in future taxable years. If the Company were to be a passive foreign investment company for any taxable year, U.S. holders would be required to either:
If the Company is treated as a passive foreign investment company, the Company does not plan to provide information necessary for the qualified electing fund election.
Documents on Display
This report and other information filed or to be filed by the Company can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at:
100 F Street, N.E.,
Washington, D.C. 20549
Copies of these materials can also be obtained from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. The public may obtain information on the operation of the SECs Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. We intend to continue to make our future SEC filings available over the Internet.
Additionally, documents referred to in this Form 20-F may be inspected at our corporate offices which are located at Videsh Sanchar Bhavan, Mahatma Gandhi Road, Mumbai 400001, India. Information about VSNL is also available on the web at www.vsnl.com but it does not constitute a part of this annual report.
The company does not face material commodity price or equity price market risks. Our exposures to financial risks derives primarily from changes in interest rates and foreign exchange rates. To mitigate these risks, we utilize derivative financial instruments, including interest rate swaps and currency forwards and options, the application of which is primarily for hedging purposes and not for speculative purposes.
Interest Rate Risk
Our exposure to interest rate risks relates primarily to:
We are subject to market risk from exposure to changes in interest rates based on our investing and cash management activities. We enter into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. We have entered into Over the Counter (OTC) interest rate swap to reduce the interest rate risk related to these activities to the extent of USD 110 Million out of total long term debt of USD 490 Million.
The sensitivity to a change in interest rates of 1% on our unhedged floating rate long term loans as on March 31, 2007 is INR 165.49 million on an annual basis.
Foreign Exchange Risk
The company is exposed to market risk from changes in Foreign currency exchange rates because its costs and revenues are denominated in several currencies (primarily INR, USD, EUR, CAD and GBP). Fluctuations in the exchange rates between these currencies affect the Indian Rupee and US dollars (for International subsidiaries of VSNL) amount of foreign currency settlements received by the company from and paid by the company to foreign telecommunication administrations, other customers, the revenues and operating costs of the company and payments for imported equipments and technology. As of March 31 2007 the company had significant amount of foreign currency denominated receivables(INR 9,710 million or USD 225.29 million) and payables (INR 10,420 million or USD 241.77 million), which expose the company to foreign exchange risks. A 1% strengthening or weakening of the rupee against the foreign currencies would have had an aggregate beneficial or adverse impact of INR 7.10 million on financial statements for the fiscal year ended March 31, 2007.
We also have foreign currency debt exposure in our books to the extent of USD 533.55 million. This includes long term borrowing of USD 490 million and USD 43.55 million of short term borrowing in VSNL India. The 1% strengthening or weakening of the rupee against the Short term Foreign Currency borrowing would have had an aggregate adverse or beneficial impact of INR 18.97 Million on our income statement for the fiscal year ended March 31, 2007.
Based on their evaluation as of March 31, 2007, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that material information related to us and our consolidated subsidiaries is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision about required disclosures.
Changes in Internal Control over Financial Reporting
During the period covered by this Annual Report, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Companys principal executive and principal financial officers or persons performing similar functions and effected by the Companys board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that:
Due to inherent limitations including the possibility of human errors, the circumventive or overriding of controls, or fraud, internal control over financial reporting may not prevent or detect misstatement. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.
The Management of the Company has assessed the effectiveness of our internal control over financial reporting as on March 31, 2007. This assessment was based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, Companys management has concluded that our internal control over financial reporting was effective as of March 31, 2007.
This annual report does not include an attestation report of the Companys independent registered public accounting firm regarding internal control over financial reporting. Our independent registered public accounting firm was not required, as part of its audit of our consolidated financial statement under US GAAP included in this report on Form 20-F, to attest to and report on our managements assessment of internal control over financial reporting, pursuant to temporary rules of the Securities and Exchange Commission that permits the Company to provide only Managements Report in this Annual Report.
Mr. Amal Ganguli, one of the Company's independent directors, joined the Board of the Company on July 17, 2006 and was nominated as a member and elected Chairman of the Audit Committee on October 19, 2006. The Company's Board has determined Mr. Amal Ganguli as an audit committee financial expert. Mr. Ganguli's relevant experience is described under Item 6Directors and Senior Management above.
The Company has adopted the Tata Code of Conduct that is applicable to all Tata companies. This code of conduct is applicable to all employees of the Company including the executive directors, the Chief Financial Officer and all other key executive officers of the Company.
The Company undertakes to provide a copy of the code of ethics to any person without charge on request by writing to it at Videsh Sanchar Nigam Limited, Office of Company Secretary and Chief Legal Officer, Lokmanya Videsh Sanchar Bhavan, Opp. Kirti College, Kashinath Dhruv Marg, Prabhadevi, Mumbai-400028, India.
The following table sets forth for the fiscal years indicated the fees paid to our principal accountant and its associated entities for various services they provided us in these periods:
The above professional services are covered within the scope of audit and permitted non-audit services as defined by SEC regulations. All fees disclosed for the fiscal years ended March 31, 2006 and 2007, including the fees for tax services set forth above, have been approved by the Companys audit committee subject to the policy and procedures described below. The appointment of and services provided by our principal accountant for our subsidiaries were ratified by the Audit Committee of the Company. Any fees paid in currency other than Indian Rupees have been converted as per the average exchange rate for the year.
Audit Committee Pre-Approval Policy and Procedures
The audit committee will pre-approve following professional services provided to the Company and its subsidiaries by its external auditors:
The audit committee will:
1. Review and approve on an annual basis the specific financial/statutory audits for the fiscal year to be rendered by the external auditors. The approval will be prior to the engagement of the external auditors.
2. Approve specific categories of audit-related services annually up to a fee limit. Specific approval of the audit committee is required to exceed the pre-approved fee limit. All other audit-related services to be performed by the external auditors that are incremental to the annual pre-approved services list will be specifically approved by the audit committee prior to the engagement for the service.
3. Pre-approve annually permitted tax services to be rendered by the external auditors up to a fee limit. Specific approval of the audit committee is required to exceed the pre-approved fee limit. All other tax services to be performed by the external auditors that are incremental to the annual pre-approved services list will be specifically approved by the audit committee prior to the engagement for the service.
4. Pre-approve any other non-audit service by the external auditors not prohibited by Company policy or SEC regulations on a case by case basis.
The audit committee may delegate to one or more designated members of the audit committee the authority to grant pre-approvals required by the policy and procedures. The decisions of any audit committee member to whom authority is delegated to pre-approve a service shall be presented to the full audit committee at its next scheduled meeting.