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As filed with the Securities and Exchange Commission on August 15, 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended March 31, 2012
For the Transition period from to
Commission File Number 001-15118
(FORMERLY KNOWN AS VIDESH SANCHAR NIGAM LIMITED)
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
(Jurisdiction of incorporation or organization)
(Name, telephone, facsimile number and address of company contact person)
VSB, Mahatma Gandhi Road, Fort, Mumbai400001, INDIA
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 basis of accounting the registrant has used to prepare the financial statements included in this filing
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
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. References to $ or Dollars or U.S. Dollars are to the legal currency of the United States and references to 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 U.S. 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 U.S. Dollars, which should not be construed as a representation that such Indian Rupee or U.S. Dollar amounts referred to herein could have been, or could be, converted to U.S. 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, our Company and Tata Communications are to Tata Communications Limited and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to Tata Communications Limited.
Tata and Tata Communications are trademarks of Tata Sons Limited in certain countries. Certain other trademarks mentioned in this Form 20-F are trademarks of Tata Communications (Bermuda) Limited in certain countries. All rights are reserved. This Form 20-F may refer 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.
All conversion from Indian rupees to U.S. Dollars are based on the noon buying rate in New York City for cable transfers in foreign currencies as certified by the Federal Reserve Bank of New York for custom purposes which was 50.89 per $1.00 on March 31, 2012. Unless otherwise specified herein, financial information has been converted into U.S. Dollars at this rate. For more information regarding rates of exchange between Indian Rupees and U.S. Dollars, see Item 3. Key InformationExchange 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, as amended) and information that is 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 has 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, 2010, 2011 and 2012 and the selected balance sheet data as of March 31, 2011 and 2012 are derived from the audited financial statements included in this Form 20-F.
Our selected income statement data for the fiscal years ended March 31, 2008 and 2009 and our selected balance sheet data as of March 31, 2008, 2009 and 2010 are derived from our audited 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, 2012 has been translated into U.S. Dollars for your convenience.
Fiscal Year ended March 31,
As at March 31,
Fluctuations in the exchange rate between the Indian Rupee and the U.S. Dollar will affect the U.S. Dollar equivalent of the Indian Rupee price of the Companys equity shares (Shares) on the Indian stock exchanges and, as a result, will likely affect the market price of the Companys American Depositary Shares (ADS) that are listed on the New York Stock Exchange, and vice versa. Such fluctuations will also affect the U.S. Dollar conversion by Bank of New York Mellon, as depository for the ADSs (the Depository) of any cash dividends paid in Indian Rupees on the 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 foreign exchange rates certified by the Federal Reserve Bank of New York for customs purposes. The column titled Average in the table below is the average of the certified foreign exchange rates 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 is based on the foreign exchange rates certified by Federal Reserve Bank of New York on each business day during the period:
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
In addition to the other information set forth in this document, including the matters contained under the caption Forward-Looking Statements you should carefully read the matters set forth below. The Company believes that each of these matters could materially affect our business. We recognize that most of these factors are beyond our ability to control, and therefore, also to predict an outcome. You should carefully consider the following risk factors as well as the other information contained in this report in evaluating us and our business.
Reductions in prices for communications services in India and worldwide 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 as a result of increased competition. Average international call tariffs have declined from approximately 48 (US$ 0.94) per minute in 2002, prior to the termination of our monopoly on the provision of international long distance (ILD) services, to approximately 5 (US$ 0.10) per minute in 2011. The pricing war among service providers in India was carried over to the international calling market with carriers dropping call prices to international markets to as low as 2 (US$ 0.04) per minute in 2012. Market pricing for ILD telecommunications services are expected to decline therefore the prices for our communications services in India and worldwide will be impacted. We expect that the prices for our communications services in India and worldwide will continue to decrease:
Even though the decline in tariffs has resulted in traffic volume growth, they have, and are expected to continue to, materially and adversely affect our revenues. Revenues from our ILD business and related products increased to 65,261 million (US$ 1,282 million) in fiscal 2012 from 61,282 million in fiscal 2011.
Intensifying competition in the Indian telecommunications sector may continue to adversely affect our business.
We have faced a number of new competitors to our ILD business, particularly since the Government of India (GoI) relaxed the licensing conditions and reduced the entry fees for ILD and national long distance (NLD) services in January 2006 (from 250 million and 1 billion, respectively, to 25 million and 25 million, respectively).
There are also an increasing number of players offering various forms of data products, a business in which we have historically been a market leader.
As a result of a recall of the Carrier Access Code (CAC) and Carrier Pre-selection (CPS) implementation in India by the Telecom Regulatory Authority of India (TRAI), many of our end customers do not have the right to choose to use our services, even if we offer the most competitive rates and best quality.
Until 2002, we had a monopoly on the provision of ILD services, and, until 2004, we were the exclusive provider of ILD services for Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL), but since then we have had to compete for business from the access providers in the open market. Currently, access providers (including competitors such as BSNL, MTNL, Bharti, Vodafone and Reliance), which own or control the access telephone networks in India (through which all international calls that we carry that either originate or terminate in India must pass) may choose not to use our ILD or NLD services.
A customer choice regime that was expected to be completed by December 2003 was not implemented due to technical and other reasons. In an order in 2009, the TRAI recalled the directive requiring all service providers to implement CAC/CPS; instead the TRAI recommended the use of calling cards as the customer choice mechanism, which the Department of Telecommunications (DoT) has accepted. Now long distance operators can sell directly to end-customers calling cards for domestic and ILD services. However, there is still uncertainty around the interconnection terms and conditions. We must continue to increase the volume of voice, Internet, data and video transmissions on our network both in India and worldwide in order to realize the anticipated cash flow, operating efficiencies and cost benefits of our network, particularly since certain elements of our costs (such as repair and maintenance costs) are fixed.
Illegal international telephony operators have adversely affected our call volumes.
Illegal operators in India offer cheaper services since they do not pay license fees, taxes or Interconnection Usage Charges (IUC) or any other regulatory fees. These illegal operators have captured a part of the incoming ILD traffic into India.
Telecommunications carriers that we do business with could suffer from decreasing margins and financial distress, which may negatively impact our business.
Several telecommunications carriers that we do business with have in the recent past, suffered from reduced profit margins and other significant financial pressures. Some of these companies have been acquired and are undergoing restructurings of their businesses. There is no assurance that we will continue to derive business from these carriers. Further, 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.
Our mobile global roaming business may be adversely affected by changing technologies.
Our wireless mobile global roaming business provides roaming services for Global Systems for Mobile (GSM), Integrated Dispatch Enhanced Network (iDEN), Universal Mobile Telecommunications System (UMTS, 3G) and Enhanced Specialized Mobile Radio (ESMR) networks around the world. With increasing pressure on roaming margins, regulatory caps on inter-operator tariffs (IOTs) in some geographies and increased competition, we expect strong price pressure in our international signaling transport and conversion businesses. Though this price erosion will be partially offset by the continued volume growth in emerging markets, a shift towards more sophisticated signaling and roaming outsourcing solutions targeted at Tier-1 mobile operators and groups will be an imperative to sustain revenues and margins. We are also engaging new segments like hub providers and Application-to-Person (A2P) service providers as both customers and channel partners to drive additional revenue growth.
The advent of next generation Long Term Evolution (LTE) standards also presents new opportunities for signaling and roaming connectivity and interoperability. We have already embarked on network modernization to collaborate with early-adopters on LTE/DIAMETER signaling interconnectivity and service enablement.
Our international operations and investments expose us to risks that could materially and adversely affect our 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 the introduction of new services, including managed services, could affect our ability to compete in the industry.
We continuously develop, test and introduce new services so that we can compete for new customers and in new segments of the communications business. Sometimes the introduction of new services requires the successful upgrade or development of new technology, which 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 may not be widely accepted by our customers. 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 and adversely affected.
Our technical infrastructure is vulnerable to damage, interruptions or failures which may result in reduced traffic, reduced revenues and harm to our reputation.
Our technical infrastructure is vulnerable to damage or interruptions caused by earthquakes, floods, storms, fires, power outages, war, riots, intentional misdeeds and other similar events. In particular, a major part of our international traffic is routed through undersea cable systems as well as through cable systems between different countries. These cables are prone to damage, including cable cuts. Any serious damage to major cables or simultaneous multiple cable failures could seriously disrupt traffic, which might lead to losses in revenue and adversely affect our reputation.
In addition, natural information technology system failures (hardware or software), human error or computer viruses may affect the quality of our services and cause temporary service interruptions. More rarely, software problems are hidden in vendors equipment, undetectable through regular commissioning testing, but appear when specific traffic loading conditions are reached on the network which can severely impact several pieces of equipment simultaneously. These types of events could result in customer dissatisfaction and reduced traffic and revenues.
Our infrastructure may also be vulnerable to cybersecurity risks, which may result in service interruptions, gaining of unauthorized access, loss, theft or corruption of data, and theft of intellectual property or sensitive information, any of which could disrupt or have a material adverse effect on the Companys business. Such negative consequences could include remedial costs, increased cybersecurity costs, lost revenues, litigation, reputational damage and regulatory penalties.
Our growth may depend upon our successful integration of acquired businesses.
We have made significant acquisitions and investments in recent years, such as an increased equity stake in Neotel, and will continue to explore the possibility of future acquisitions and investments as our business needs require. The integration of acquired businesses involves a number of risks, including:
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. 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.
Our business may be adversely affected if we cannot fulfill our commitments under significant contracts.
We have entered into a number of significant contracts with certain of our Global Voice Solutions (GVS) and Global Data and Managed Services (GDMS) customers. Failure to meet our commitments under these contracts could result in financial losses and damage our reputation. Our five largest customers collectively accounted for 16% of our revenues in fiscal 2012 and if, due to any reason, we lose any of our major customers or they terminate their respective agreements with our Company, it could negatively impact our revenues as well as our profitability and cash generation ability.
Our profitability may be adversely affected if certain revenue share disputes are decided against our Company.
We are required to pay a certain percentage of our adjusted gross revenue (AGR) to the telecom licensor in India under the terms of our license. We are involved with the licensor in a dispute resolution process under Indian telecom regulations about the definition of AGR. If the matters in dispute are decided against us, we will be required to pay a substantially higher amount than we presently do under the license. See Item 4-License Fees and Tariffs.
If certain tax claims made by the Indian tax authorities against us are upheld, our financial condition would be adversely impacted.
Over past fiscal years, the Company has made certain tax holiday and expense claims based on our understanding of the tax laws as reinforced by legal precedent and legal advice received from external tax counsel. The Indian Tax Authority has not accepted our claims and in a few instances has levied penalties against the Company. We have challenged the position taken by the Indian Tax Authority, which are at various stages of adjudication. If all of these disputes are decided against us, it could have an adverse financial implication of 23,755 million. For significant disputes see Item 8-Legal Proceedings.
We may not receive additional compensation from the GoI for the early termination of our monopoly on international telephony services.
On April 1, 2002, the GoI allowed private operators to start offering ILD services, thereby terminating our monopoly on offering such services two years ahead of schedule. The GoI compensated us with a package of benefits. The GoI had given an assurance prior to the termination of our monopoly that it would consider additional compensation if it found this necessary following a detailed review. However, prior to the termination of our monopoly, the GoI announced that it viewed the package of benefits that it gave to us as the full and final settlement of all claims arising out of the early termination of our ILD monopoly. We have been pursuing the GoI to consider providing us with additional compensation and in 2005 the Company filed a suit for additional compensation in the Honorable Bombay High Court. On July 7, 2010, the Honorable Bombay High Court ruled that it did not have jurisdiction to entertain this suit in view of the provisions of the TRAI Act, 1997. The Company filed an appeal in the Honorable Bombay High Court in October 2010. This appeal is still pending. There can be no assurance that our claim will be successful or that we will receive any additional compensation from the GoI, or if we do receive compensation, as to the amount, nature or timing of such compensation.
We are subject to extensive regulation and supervision by the GoI, 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.
We must obtain telecommunications licenses from DoT to provide some of our services. DoT retains the right to modify the terms and conditions of our 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. DoT is also empowered to revoke a license granted by it for any breach of the license conditions. 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 or revocation of our licenses could have a material adverse effect on our business and prospects.
In May 2011, DoT amended the license conditions to address security related concerns and making it the Companys responsibility to maintain the security of our networks. It has also required the Company to take certain security measures prescribed in the revised license conditions.
The Company has implemented a number of security measures to comply with the amended DoT license conditions. Some of these measures include use of a security incident and event monitoring tool to detect and monitor intrusions in the core network, as well as access logging to core network devices. The Company periodically engages a CERT-IN empanelled auditor to carry out an audit of the India Core Network, and where applicable complies with equipment induction standards such as Common Criteria.
If the Company breaches the newly amended conditions, it could be liable for a maximum penalty of 500 million, and could be subject to criminal charges. Despite having taken various steps to comply with the amended license conditions, the Company could still be penalized for non-compliance, which could adversely affect the revenues and profitability of the Company.
We must also annually obtain various radio spectrum operating licenses from the Wireless Planning and Co-ordination Wing of the Ministry of Communications (WPC). The non-renewal or modification of these licenses, or punitive action by the GoI for continuing these services without renewal of the licenses, could adversely affect us.
In addition, approval of the TRAI is required for all our new pricing initiatives and product launches.
Any disputes between us and the GoI regarding the terms of our telecommunications licenses, as well as any dispute between us and the other service providers in India, is required to be adjudicated by the Telecom Disputes Settlement Appellate Tribunal (TDSAT). Failure to follow TDSAT orders may lead to the imposition of fines and other punitive actions.
Regulatory decisions and changes in the regulatory environment in the jurisdictions in which we do business could adversely affect us.
We have interests in a large number of geographic areas throughout 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 our 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 that apply to the telecommunications industry. We cannot provide any assurances that governments in the countries in which we intend to operate will issue or renew licenses we need on acceptable terms or at all.
Furthermore, some of the jurisdictions where we provide services have little, if any, written regulations governing our operations. The written regulations and guidelines that do exist in a jurisdiction may not specifically address 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 debt, which to a certain extent could restrict our growth and place us at a competitive disadvantage.
We incurred additional debt in fiscal 2012 primarily to finance our capital expenditures and investments. As of March 31, 2012, the outstanding principal amount of our indebtedness was 115,447 million (US$ 2,269 million) as opposed to 68,827 million as on March 31, 2011. If need arises in the future, we may also obtain additional long-term debt and working capital lines of credit to meet future financing needs.
We have floating interest rate loans which are exposed to market interest rate fluctuations. While a portion of our floating rate loans are hedged by interest rate swaps, an increase in the benchmark interest rates could increase the interest cost of the our floating interest rate loans. Our inability to manage the interest cost effectively could have an adverse impact on cash flow and profits.
The consequences on our financial condition and results of operations that could result from our debt include:
A termination of relationships with key suppliers could cause delays and costs.
We are dependent on key third-party suppliers for fiber, computers, software, optronics, transmission electronics and related components of our network. We are also dependent on key suppliers to repair and maintain our extensive undersea and other cable assets. If any of these relationships is terminated or a key supplier fails to provide reliable services or equipment, we might be unable to obtain suitable alternative arrangements quickly and consequently could experience significant delays and additional costs.
Similarly, vendors bringing equipment to end-of-life status and cutting support on such equipment without proper notification can cause risks to our network. Changes in a large network can take more time than the notification time given. The same can be caused by vendors going out of business or being bought with the new owner not supporting all types of equipment from the acquired company.
If our vendors fail to obtain the approval of the Telecom Engineering Center (TEC) for the switching equipment that they provide to us, the growth of our interconnection capacities with domestic voice carriers may be limited.
In India, we are required to install TEC type approved switching equipment in the network for interconnection with domestic voice operators. Vendors are required to obtain approval from the TEC of the switching equipment and then regularly renew. Failure to renew the approval by a vendor in a timely manner could restrict us from further augmenting the interconnection capacities with domestic voice carriers. This could lead to reduced service quality to our customers, customer dissatisfaction and hence reduced traffic and revenues.
Our dependence on third party Passive Infrastructure Providers for the collocation of wireless equipment might impact service levels and cause additional costs.
We are dependent on third party passive infrastructure providers for collocating our wireless equipment. Any inability of the passive infrastructure providers to comply with service level agreements that provide for site access and uptime might adversely affect our service levels to our customers. We might be unable to obtain suitable alternative arrangements quickly and consequently could experience significant delays and additional costs.
Changes in Royalty charges and license fees for spectrum allocated to the Company by DoT might increase the cost of deployment of wireless access in licensed bands.
The Company is currently using spectrum licensed by DoT for operating wireless access for its customers. Any increase in the royalty charges and license fees by DoT will increase the cost of operation which will have an adverse impact on the cost of providing wireless access to our customers.
We have made, and in the future might make, substantial capital investments in new telecommunications projects which may expose us to liquidity and execution risks.
We have made substantial additional investments in new telecommunications projects, including in connection with technology upgrades and our continuing geographic expansion. We spent approximately 18,894 million (US$ 371.27 million) on capital expenditures in fiscal 2012 and we expect our capital expenditures in fiscal 2013 to be approximately 23,131 million (US$ 454.53 million). Our capital expenditures may increase in the future because of cost overruns or delays in our projects or as we strive to offer new services, improve our capabilities and remain competitive. Uncertainty in the international financial markets may adversely affect our ability to obtain capital when needed or on terms that are attractive. Although there is less uncertainty in the international financial markets, market sentiments have not reverted to pre-crisis levels. Even if we are able to make all of our planned capital expenditures, telecommunications technology evolves rapidly so there can be no assurance that any of our investments in new technology will have a positive impact on our financial results.
The absence of a robust business continuity plan could affect our business adversely.
Our operations are dependent on various information technology systems and applications which may not be adequately supported by a robust business continuity plan, which could seriously impact our business in the event of a disaster of any nature.
It is increasingly costly for us to comply with new and changing corporate governance and public disclosure requirements.
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, NYSE rules, Securities and Exchange Board of India (SEBI) rules and regulations and Indian stock exchange listing regulations are creating uncertainty for companies like ours because they sometimes lack specificity and may be subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such governance standards.
Our efforts to comply with evolving corporate governance and public disclosure laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of managements time and attention from revenue-generating activities to compliance activities. In addition, the new laws, regulations and standards regarding corporate governance may make it more difficult for us to obtain director and officer liability insurance. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties.
Our business may be adversely affected by any slowdown in economic growth in India, the United States or other countries where we conduct 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 economy could result in slower growth rates in telecommunications traffic. Economic slowdowns in India and the U.S. pose the greatest risk for us because approximately 24.84% and 13.89% of our operating revenues were from India and the United States, respectively, during fiscal 2012. Commencing in 2007 and continuing into 2012, the U.S. and European securities markets have experienced significant deterioration and volatility and the liquidity of U.S. and European credit markets have substantially tightened, which has had negative repercussions on the global economy. These developments could continue to present risks for an extended period of time for us, including a potential slowdown in our sales to customers in the financial sector. Slowdowns in the IT sector might adversely affect our revenues as well, because the IT sector is a major contributor to our telephony and leased channel revenues.
A substantial portion of our assets are located in India and our equity is listed on the Indian stock exchanges. Accordingly, our performance and the market price and liquidity of our equity may be affected by changes in exchange rates and controls, interest rates, government policy, 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 GoI and state governments in the Indian economy as producers, consumers and regulators remains significant in ways that affect all Indian companies, including us.
Political instability could result in changes in policy, delay reforms of the Indian economy and could have a material adverse effect on the market for securities of Indian companies, including our shares, and consequently our ADSs.
Terrorist attacks and other acts of violence or war involving India, the United States and other countries could adversely affect the financial markets and our business.
Terrorist attacks and other acts of violence or war may negatively affect the Indian markets where the Shares trade and adversely affect the worldwide financial markets. These acts may also result in a loss of business confidence and make travel more difficult.
Also, as a result of such events, India, the United States or certain other countries where our 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 Indian financial markets or economic conditions or on the GoIs policy, thereby disrupting communications. 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 our business, or the market price of our shares and ADSs.
Conditions in the Indian securities markets may affect the price or liquidity of our shares and 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 market 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 because of regulatory interventions and operational issues. If these interruptions were to recur, it could affect the market price and liquidity of the securities of Indian companies, including our shares and ADSs. 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 our shares and ADSs.
We and you may be subject to potential losses arising out of risks associated with the conversion rates between the functional currency of the Company and other foreign currencies.
Fluctuations in the exchange rate between the Indian Rupee and the U.S. Dollar will affect the U.S. Dollar equivalent of the Indian Rupee price of equity shares on the Indian stock exchanges and, as a result, the price of our ADSs in the United States, as well as the U.S. Dollar value of the proceeds a holder would receive upon the sale in India of any equity shares withdrawn from the Depository under the Depository Agreement will be impacted. Such fluctuations will also affect the Dollar equivalent of any cash dividends in Rupees received on the shares represented by our ADSs and the Dollar equivalent of the proceeds in Rupees of a sale of the Shares in India.
Fluctuations in the exchange rates affect the respective functional currency amount of foreign currency settlements received by the Company from and paid by the Company to foreign telecommunication administrations, other service providers, and payments to vendors for imported equipment and technology and due to foreign currency borrowings.
You may not be able to enforce a judgment of a foreign court against us.
We are organized under the laws of India. All of the Companys directors and many of its officers are Indian nationals and all or a significant portion of the assets of all of the directors and officers and a substantial portion of our assets are located in India. As a result, it may be difficult for investors to effect service of process on us or such directors or officers outside India or to enforce judgments against them obtained from courts outside India, including judgments predicated on the civil liability provisions of the United States federal securities laws.
Dealings with telecommunication service providers in countries designated by the U.S. Department of State as state sponsors of terrorism may lead some potential customers and investors in the U.S. and other countries to avoid 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 certain business activities 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 administers economic sanctions and embargoes that target geographic regions and governments. Comprehensive sanctions programs include Burma (Myanmar), Cuba, Iran, Sudan and Syria. Other non-comprehensive programs include the Western Balkans, Belarus, Cote dIvoire, Democratic Republic of the Congo, Iraq, Liberia (Former Regime of Charles Taylor), persons undermining the sovereignty of Lebanon or its democratic processes and institutions, Libya, North Korea, Somalia and Zimbabwe as well as other programs targeting individuals and entities located around the world.
As a major provider of international telecommunications services to customers in India, where lawful the Company enters into interconnection agreements with communications providers around the world including agreements with providers located in certain of such countries to facilitate the carrying of telecommunications traffic to and from such countries, and we may do so in the future.
We are substantially owned by some of the Tata group companies and the GoI who have significant rights in relation to the election of our board of directors and may have interests which conflict with those of our other shareholders, including holders of our ADSs.
As of March 31, 2012, 50.03% of our outstanding equity was held by Panatone Finvest Limited and other Tata group companies, and 26.12% was held by the GoI. Panatone Finvest Limited, certain other Tata group companies and the GoI are parties to a Shareholders Agreement (the SHA) pursuant to which they have agreed on certain matters with respect to our governance and operation, including the composition and election of our board of directors. As a result of their equity holdings and the SHA, Panatone Finvest Limited and the GoI together control all matters submitted to shareholders, including the election of directors. They also have significant control over the matters that come up for consideration at the meetings of our board of directors. There can be no assurance that the interests of Panatone Finvest Limited and the GoI will not differ from the interests of our other shareholders, including the holders of ADSs.
Future sales by the GoI of our shares may adversely affect our share price.
As of March 31, 2012, the GoIs stake in our Company was 26.12%. If or when the GoI decides to reduce its stake in our Company, the manner in which the GoI decides to reduce its stake and the selection of the buyer of such stake, may have an adverse impact on the price of our shares.
We may face potential conflicts of interest relating to our principal shareholder.
Our principal shareholder is part of the Tata group of companies which has diverse business activities and interests. The Tata group or their affiliates could engage in activities, or seek opportunities, that are or could be in competition with our activities or interests. In particular, the Tata group has interests in other companies in the telecommunications sector, such as Tata Teleservices Limited. Tata Teleservices Limited (in which the Company has an equity stake) and its subsidiary Tata Teleservices (Maharashtra) Limited. (together called TTL) hold access licenses in almost all of the telecom markets in India. The Company and TTL have been working together to leverage each others strengths. However, these efforts may not provide the desired results.
Disagreements between the Tata group of companies and the GoI concerning our activities could result in a deadlock, which could adversely affect our business.
Panatone Finvest Limited, certain other Tata group companies and the GoI have agreed in the SHA that we will 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. Panatone Finvest Limited, the other Tata group companies and the GoI have also agreed not to transfer their shares in our Company without giving the other certain rights of first refusal and tag-along rights. In the event that Panatone Finvest Limited, the other Tata group companies and the GoI fail to agree on any such matter, their disagreement could result in us not taking advantage of a potential opportunity. Further, any disagreement in relation to raising funds through non-debt sources could result in an inability to implement our capital expenditure plans efficiently.
Our operations and profitability may be adversely affected if the funding required for our plans is delayed.
The Company is dependent on its promoter shareholders, i.e., Panatone Finvest Limited and the GoI, agreeing to the proposals for raising non-debt funds such as subscription to the new shares or monetization of certain assets. This dependency arises in view of the provisions of the SHA and the provisions of the Articles of Association of the Company. If the promoter shareholders do not agree to such proposals for any reason, the Company may not be able to implement its capital expenditure plans efficiently and, as a result, its operations and profitability may be adversely affected.
The demerger of surplus land held by us may not be completed on satisfactory terms.
Under the terms of the SHA, Panatone Finvest Limited agreed to cause us to demerge certain land that we own but were not actively using into a separate company. No time period was specified in the agreement for such demerger. The Company, Panatone Finvest Limited and the GoI are currently discussing various options in connection with the demerger. Until such time as the demerger takes place, the lands are under our possession and upkeep. We cannot predict if the demerger will take place or the extent to which expenditure that we might have to incur for the security, upkeep and maintenance of the surplus land will continue. Further, we may have to bear significant costs, including taxes and duties, relating to the demerger, and we cannot predict what effect, if any, the demerger and the legal and valuation process relating to the demerger will have on our financial condition.
Holders of ADSs have no voting rights.
Investors in ADSs have no voting rights, unlike holders of Shares. It is contemplated that the Depository will exercise its right to vote the shares represented by our ADSs as directed by our board of directors. Investors may withdraw the shares underlying our ADSs and seek to vote the shares obtained from the withdrawal. However, for foreign investors, this withdrawal process may be subject to delays.
There is a limited market for our 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 (representing 21% of the issued and outstanding shares) as of March 31, 2002 to approximately 17.56 million (representing 6.16% of our issued and outstanding shares) as of March 31, 2012. This may affect the liquidity of the market for the 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 Shares to trade at a discount or premium relative to the market price of the ADSs.
Although the GoI permits two-way fungibility of ADSs, this is still subject to sectoral caps under regulations governing foreign direct investment (FDI) in India, compliance with the provisions of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme 1993, periodic guidelines issued by the GoI and registration requirements in the United States. Such restrictions on foreign ownership of the underlying equity shares may cause our shares to trade at a discount or premium to our ADSs.
An investor in the 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.
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-fourths of the shares voting on the resolution. 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 Depository, 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 Depository 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 shares represented by their ADSs, their proportional interests in us would be reduced.
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 have a material adverse effect on 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.
As a global company we are exposed to currency and exchange rate fluctuations which may affect our results of operations.
The functional currency of Tata Communications Limited and its Indian subsidiaries is the Indian Rupee, the functional currency of Tata Communications International Pte Limited (TCIPL) and its subsidiaries and VSNL SNOSPV Pte Ltd. (VSNL SNOSPV) is the U.S. Dollar, the functional currency of SEPCO Communications Pty. Ltd (SEPCO) and its subsidiaries is the ZAR and that of all other subsidiaries is the currency in the country of incorporation. We incur network and other expenses and sell our products/services in various countries outside India. Moreover, we have outstanding foreign currency denominated debt and credit facilities in a few jurisdictions. Hence, we are sensitive to fluctuations in foreign currency exchange rates. Adverse changes in exchange rates may have a material adverse effect on our revenues, other income and cost of services sold, gross margin and net income, and hence may have an impact on our business, operating results and financial condition.
Also we expect that a majority of our transactions, both revenue and a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be in foreign currencies, including the U.S. Dollar, the British Pound, the ZAR, the Euro and the Canadian Dollar, for the foreseeable future. Therefore, we expect to continue to experience foreign exchange losses and gains on transactions denominated in foreign currencies in respect of our foreign currency assets and liabilities due to currency fluctuations in the future as well.
We use derivative financial instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in foreign exchange rates on accounts receivable and payables and loans to subsidiaries denominated in foreign currencies. These derivative financial instruments may not be able to offset in full the foreign exchange losses, if any.
Additionally, our hedging activities may also result in losses due to volatility in foreign currency markets and the timing of hedging activity. These fluctuations may have an impact on our business, operating results and financial condition.
The uncertainty in the global financial markets primarily caused by the debt crisis in Europe and the volatility of the U.S. markets continue to have negative repercussions on the global economy and, as a result, could present new challenges for our business.
Commencing in 2007 and trickling into 2012, certain adverse financial developments have impacted the European, U.S. and global financial markets. These developments include a general slowing of economic growth both in the U.S. and globally, substantial volatility in equity securities markets, volatility and tightening of liquidity in credit markets and the fear of debt defaults led by Greece. While it is difficult to predict how long these conditions will exist and which markets and businesses of our Company may be affected, these developments could continue to present risks for an extended period of time for our company, including a potential slowdown in our sales to customers in the financial sector. Moreover, the potential debt crisis in Europe could adversely impact our business in the region.
The global economy may slow down further and as a result our profitability may be adversely impacted by an increase in bad debts.
The Company sells to a large number of customers, across many countries, ranging from government backed agencies and large wholesalers to enterprises. An economic slowdown may impact the ability of some of these customers to continue to trade, which in turn may result in losses from writing these debts off. Although risk management processes are in place to manage this risk, and provisions are established for debts that may not be recoverable we cannot be certain that there will not be further losses above those already provided for.
Our operations and profitability may be adversely affected by decisions taken by revenue authorities in various jurisdictions in which we operate which are beyond our control.
The integrated nature of our worldwide operations can produce conflicting claims from revenue authorities as to the profits to be taxed in individual territories. The resolution of these disputes can result in a reallocation of profits between jurisdictions and an increase or decrease in related tax costs, and has the potential to affect our cash flows and earnings per share. Claims, regardless of their merits or their outcome, are costly, divert management attention, and may adversely affect our reputation.
The majority of the jurisdictions in which we operate have double tax treaties with other foreign jurisdictions, which enable us to ensure that our revenues and capital gains do not incur a double tax charge. If any of these double tax treaties should be withdrawn or amended, especially in a territory where a member of the Company is involved in a taxation dispute with a tax authority in relation to cross-border transactions, such withdrawal or amendment could have a materially adverse effect on our financial condition and results of operations, as could a negative outcome of a tax dispute or failure of tax authorities to agree through competent authority proceedings.
Emerging markets are an important part of our business plans. As we continue to develop our business in emerging markets, we may face challenges unique to emerging markets that could adversely impact our operations and / or profitability.
The development of our business in emerging markets such as South Africa may be a critical factor in determining our future ability to sustain or increase the level of our global revenues. Challenges that arise in relation to the development of the business in emerging markets include, but are not limited to, more volatile economic conditions, competition from companies that are already present in the market, the need to identify correctly and leverage appropriate opportunities for sales and marketing, poor protection of intellectual property, inadequate protection against crime (including counterfeiting, corruption and fraud), inadvertent breaches of local law/regulation and not being able to recruit sufficient personnel with appropriate skills and experience. The failure to exploit potential opportunities appropriately in emerging markets may have a materially adverse effect on our financial condition and results of operations.
Acquisitions and strategic alliances formed as part of our externalization strategy may be unsuccessful.
We seek acquisitions of complementary businesses, technology licensing arrangements, strategic alliances and collaborations to expand our product portfolio and geographical presence as part of our business strategy. Examples of such recent strategic acquisitions, arrangements, collaborations and alliances include:
We may not complete these types of transactions or collaborative projects in a timely manner, on a cost-effective basis, or at all, and may not realize the expected benefits of any acquisition, licensing arrangement or strategic alliance. Other companies may also compete with us for these opportunities. The success of such current and future arrangements is largely dependent on the technology and other intellectual property we acquire and the resources, efforts and skills of our partners. Disputes and difficulties in such relationships may arise, often due to conflicting priorities or conflicts of interest which may erode or eliminate the benefits of these alliances if, for example, the agreements are terminated; sufficient financial or other resources are not made available to the alliances; intellectual property is negatively impacted; obligations are not performed as expected; controls and commercial limitations are imposed on the marketing and promotion of products to be co-developed; or challenges in achieving the commercial success of the product are encountered during the development process. Also, under many of our strategic alliances, we make milestone payments well in advance of commissioning a cable system, with no assurance that we will ever recoup those payments. If these types of transactions are unsuccessful, this may have an adverse effect on our financial condition and results of operations.
In addition, integration of an acquired business could involve incurring significant debt and unknown or contingent liabilities, as well as have a negative effect on our reported results of operations from acquisition-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. These effects, individually or in combination, could cause a deterioration of our credit rating, increased borrowing costs and interest expenses.
Our increasing reliance on outsourced personnel to develop and maintain our internal IT infrastructure could, if not properly managed, result in a disruption of critical internal services and, as a result, adversely affect our operations.
We are dependent on effective information technology (IT) systems. These systems support key business functions such as our R&D and billing capabilities, and are an important means of internal communication and communication with customers and suppliers. Any significant disruption of these IT systems or the failure of new IT systems to integrate with existing IT systems could materially and adversely affect our operations. We also have a number of outsourcing arrangements in respect of critical processes, services and the support of our IT infrastructure and our increasing dependency on these outsource providers could impact our ability to deliver on business targets and to maintain our compliance status and reputation. Risk associated with outsource providers is mitigated by our contracting approach which enables us to monitor closely any degradation in services and enact staged remedies.
The Company is engaged in continuous productivity initiatives aimed at making the Company more profitable and its operations more efficient. Failure of one or all of these initiatives or mismanagement could have a material adverse effect on our operations and/or profitability.
We are implementing various productivity initiatives and restructuring programs, with the aim of enhancing the long-term efficiency of the business. However, the anticipated cost savings and other benefits are based on preliminary estimates and the actual savings may vary significantly. In particular, these cost reduction measures are based on current conditions and do not take into account any future changes to the communications industry or our operations, including new business developments, wage and price increases and other factors. If inappropriately managed the expected value of the initiative could be lost through low employee morale and hence productivity, increased absence levels and industrial action. Our failure to implement successfully these planned cost reduction measures, either through the successful conclusion of employee relations processes (including consultation and engagement, talent management and recruitment and retention), or the possibility that these efforts do not generate the level of cost savings we anticipate, could have a materially adverse effect on our financial condition, results of operations and reputation.
Our operations and/or profitability could be adversely affected by the increase in environmental legislation worldwide which may result in an increase in our cost of compliance.
We integrate core values of environmental protection into our business strategy to add value to the business, manage risk and enhance our reputation. We are subject to laws and regulations concerning the environment, safety matters and regulation of product safety in the countries where we sell our products and/or services or otherwise operate our business. These requirements include regulation of the handling, transportation, use and disposal of materials used in our business, including the discharge of pollutants into the environment. In the normal course of our business, we are exposed to risks relating to (i) possible releases of hazardous substances (such as fuel from our storage tanks or acid from battery accumulators) into the environment which could cause environmental or property damage or personal injuries, and which could require remediation of contaminated soil and groundwater and (ii) possible damage due to the removal of certain decommissioned submarine fiber optic cables which could require remediation and/or rectification. Under certain laws, we may be required to remediate contamination at third party sites, or at certain of our properties regardless of whether the contamination was caused by us, or by previous occupants of the property.
An increasing amount of intangible assets, goodwill and other long lived assets on our books may lead to significant impairment charges in the future.
The amount of goodwill, IRU and other intangible assets on our consolidated balance sheet amounted to approximately 21% of the Companys total assets as of March 31, 2012. Although no significant impairments are currently anticipated, any future diminution in the enterprise value of the reporting business unit may lead to material impairment charges. We regularly review our long-lived intangible and tangible assets, including identifiable intangible assets, investments in associated companies and goodwill, for impairment. Goodwill is subject to impairment review at least annually. Other long-lived assets are reviewed for impairment at least annually or when there is an indication that impairment may have occurred. Any significant impairment charges could have a material adverse effect on our results of operations. For a detailed discussion of how we determine whether an impairment has occurred, what factors could result in an impairment and the increasing impact of impairment charges on our results of operations, see Item 5 Operating and Financial Review and ProspectsCritical Accounting PoliciesImpairment of Long-Lived Assets and Valuation of Goodwill and Item 18 Financial Statements.
Tata Communications Limited, formerly known as Videsh Sanchar Nigam Limited (VSNL), is a leading global provider of a new world of communications. With a leadership position in emerging markets, the Company leverages its advanced solutions capabilities and domain expertise across its global and pan-India network to deliver managed solutions to multi-national enterprises, service providers and Indian consumers.
The Tata Communications global network includes one of the most advanced and largest submarine cable networks, a Tier-1 IP network, with connectivity to more than 240 countries and territories across 400 points of presence (PoPs), and nearly 1 million square feet of data center and collocation space worldwide. Incorporated in 1986, the Company has quickly become a significant global player in the highly competitive telecommunications industry. Over the past several years, the Company has restructured itself from a pure long distance service provider in India to one of the leading integrated communications solutions providers globally. The Company has transformed itself into a global player through a series of organic as well as inorganic growth strategies, while maintaining its focus on ILD voice services.
Today, the Company is one of the worlds largest providers of ILD voice services and operates the worlds first wholly owned cable network ring around the world. The Companys customer base includes approximately 1,600 global carriers and service providers, 700 mobile operators, over 49,000 business customer relationships (enterprises and small and medium enterprises (SMEs)), 140,000 broadband and Internet subscribers and 365 Wi-Fi public hotspots. The Companys global transmission network of over 210,000 route kilometers and its IP core with over 400 PoPs, enables a range of services that include traditional TDM voice, VoIP, private leased circuits, IP VPN, Internet access, global Ethernet, data centers, co-location, managed network, managed services, managed hosting, managed storage, mobile signaling and other IP-related services. The Companys depth and breadth of reach in emerging markets includes leadership in Indian enterprise data services, leadership in global international voice, majority ownership in Neotel, an enterprise telecommunications company in South Africa, and strategic investments in operators in Sri Lanka (Tata Communications Lanka Limited) and Nepal (United Telecom Limited).
The Companys Internet website address is http://www.tatacommunications.com. Information on the Companys website is not incorporated into and should not be considered a part of this document. The Companys registered office is at VSB, Mahatma Gandhi Road, Fort, 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, 10022.
History and Development of the Company
The Company was incorporated on March 19, 1986 as a limited liability company under the Indian Companies Act, 1956. On April 1, 1986, the Company assumed control and management of all of the assets, liabilities, employees and operations of the Overseas Communications Service, a department of the Ministry of Communications of the GOI. The Company was wholly owned by the GOI until 1992 at which time the GOI sold 12 million shares it owned in the Company to various financial institutions in India. During 1997 and 1999, the Government also sold some of its equity holdings in the Company through the issuance of global depositary receipts (GDRs).These GDRs were converted into ADRs (also referred to as American Depository Shares or ADS) upon the Companys listing on the New York Stock Exchange on August 15, 2000.
In February 2002, through a competitive bidding process, the GOI selected Panatone Finvest Ltd., a Tata company, as the strategic partner for the sale and purchase of 25% of the then outstanding voting capital of the Company from the GOI. By virtue of this transaction, the GOIs holdings in the Company were reduced to 27.97% and the Company ceased to be a GOI enterprise. Other Tata companies have since made open market purchases of the Companys equity shares, and the consolidated shareholding of the Tata companies in the Company as of March 31, 2012 was 50.03% and that of the GOI was 26.12%.
On March 31, 2002, the Companys monopoly in ILD in India terminated pursuant to a notice of early termination issued by the GOI. With effect from April 2002, the GOI began to license new operators to provide international telephone services, who now compete with the Company in India.
In recent years, the Company has made a number of acquisitions. They include:
During fiscal 2008, the Company changed its name from VSNL to Tata Communications Limited. In fiscal 2008, the Company also signed a Brand Equity and Business Promotion Agreement (the BEBP Agreement) with Tata Sons Limited, the owners of the intellectual property rights for the brand and corporate name Tata. On February 13, 2008, the Company launched its new identity and brand name worldwide, integrating the former VSNL, VSNL International, Teleglobe and CIPRIS brands. In February 2010, 33 subsidiaries of the Company also entered into the BEBP Agreement with Tata Sons Limited. The Company and its various wholly-owned subsidiaries worldwide operate under the single unified brand name of Tata Communications.
The Companys vision is to deliver a new world of communications to advance the reach and leadership of its customers. Its strategy is to build leading-edge IP-leveraged solutions advanced by its unmatched global infrastructure and leadership position in India and other markets where it competes. To this end, the Company provides a differentiated choice to service provider, enterprise and SME customers. That differentiated choice offers a growing range of services utilizing Internet protocol and other leading edge technologies and world class managed service offerings in established, emerging and underserved markets.
In the coming years, the Company will continue to focus on its strategy of providing communication solutions and IT infrastructure services to service providers and enterprise customers, in India and globally, with a focus on developing differentiated capabilities in emerging new markets. It is expected that the demand for the Companys services will remain strong, but will continue to face increased competition and pressure on pricing and margins. The Company will have to manage a two-pronged strategy of driving revenue growth from new markets and services, while continuing to improve the cost structure of its operations. It is expected that the Company will show improving financial performance, based on the strength of demand for communication services in our globally connected world and based on the ability to leverage the investments made over the past several years.
Adapting Business Model to a Changing Environment
The ILD voice industry is in a major transition as voice traffic is shifting from traditional carriers (i.e., fixed-line operators) to emerging mobile, over-the-top players (OTTs) and cable 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. As the industry continues to consolidate, ILD voice traffic is expected to grow with a renewed focus on customer support and quality of service. The Company is therefore focused on developing solutions and technology to cater to new age communication requirements with continued automation of much of its transactional systems and processes to better support the wholesale business, and restructuring the organization to better penetrate those segments expected to experience the highest growth rate in the coming years (mobile, OTTs, cable operators).
In June 2009, the Company through its wholly-owned indirect U.K. subsidiary, Tata Communications (UK) Ltd., entered into a major global voice strategic agreement with British Telecom Plc. (BT). The five-year agreement allows the Company and BT to mutually benefit from shared resources as part of a global supply arrangement. In fiscal 2011, the Company signed a number of other strategic sourcing agreements with various operators such as Videotron, a cable operator and broadband service provider in Canada. Under this agreement, Videotron will route 100% of its international voice traffic through the Companys network and Videotron will continue to be one of the Companys key suppliers of telecommunication services in Canada. Subsequently, Company has signed several solution customers across various geographic locations.
In May 2011, Singapores Economic Development Board granted Official International Headquarter status to the Companys TCIPL subsidiary in Singapore. In May 2011, the Company reinforced its commitment to the emerging markets by becoming a 61.5% shareholder in Neotel, South Africas second network operator. In February 2012, the Company through its wholly-owned indirect U.K. subsidiary, Tata Communications (UK) Ltd., signed a multi-year technology service and marketing agreement with Formula One Management. Under the agreement, the company will deliver connectivity to all 20 Formula 1 race locations over its global network. It will also provide hosting and content delivery services to www.Formula1.com.
Continuing Leadership in India
Currently, the Company has leading market shares in voice and data transmission in India. In ILD voice, the Company commands approximately 24% market share in the ILD inbound business. In enterprise data services, the Company is a market leader with over 22.5% of the market and has won the Enterprise Data Service Provider of the Year award from a leading telecom and technology research firm.
The Company is now specifically addressing the needs of the SME segment in India with solutions that give access agnostic Internet services along with a variety of Internet enabled content applications and managed services.
Differentiated Enterprise Offerings
The Company intends to strengthen its position in network services and continuously develops and introduces new products and services catering to the needs of corporate customers, such as corporate Internet telephony, bandwidth-on-demand and hosted contact centers. Additionally, the Company offers new services, such as Telepresence virtual meeting rooms, content delivery networks, cloud computing or Infrastructure as a Service (IaaS), managed hosting and storage, managed messaging, managed security and other managed products and services.
Growth in Managed Services
The Company has introduced a number of managed services as part of its offerings to enterprise customers on a global basis. Revenue from managed services has grown 26% in fiscal 2012 as against fiscal 2011. These services include:
The Companys network is truly global, extending from developed markets to the worlds fastest growing emerging economies. During fiscal 2012, the Company continued investment into its global infrastructure with the launch of its Tata Global Network-Gulf (TGN-Gulf) subsea cable system connecting the Gulf to Mumbai, India. It was closely followed by the completion of the worlds first round-the-world fiber optic cable network with the official launch of its Tata Global NetworkEurasia (TGN-Eurasia) cable. The complete cable ring connects Europe to India, through Egypt, bringing increased capacity, resilience and enhanced communications links to not only the Middle East, but onward to the rest of the world via the Tata Global Network (TGN). The Company also enhanced bandwidth and flexibility to carriers and enterprises around the world with the deployment of 40G coherent optical technology on its Tata Global Network-Atlantic (TGN-Atlantic) cable linking New York to London. These new development of expansions and upgrades to the TGN makes Tata Communications the only provider to offer a truly global network through its world-wide cable network. The cable network boasts significant depth in key emerging markets, including China, India, South Africa and the Gulf region and currently covers nearly 20% of the worlds Internet routes, reaching over 240 countries and territories.
Products and services
In September 2011, the Company became one of the few global carriers to extend its Global IP / VPN service offerings into Pakistan, which resulted in Tata Communications becoming one of the largest global Ethernet providers in the world. In the same month, the
Company launched its network-agnostic Distributed Denial of Service (DDoS) protection, globally. Delivered over a cloud-based infrastructure, DDoS Detection and Mitigation services are available to any enterprise that depends on its Internet availability to serve customers, suppliers, partners and other stake-holders regardless of which service provider supplies it with Internet connectivity.
In December 2011, Tata Communications launched its IPX+ mobile broadband enablement framework which is designed to help capitalize on technology innovations in the mobile broadband space via better inter-provider mobile service delivery and management. Mobile operators have signed up for the new network and have consolidated access to mobile data roaming and transport options. Looking forward, the IPX+ framework will also include Long term Evolution (LTE) Roaming, Voice over LTE (VoLTE), and application enablement solutions for real-time rich media applications. LTE roaming trials are currently underway with multiple service providers.
In January 2012, the Company, together with nine global service providers, announced the launch of the Global Meeting Alliance, an open ecosystem of leading telecom providers that have aligned to interconnect their respective business video communities. The launch represents one of the largest functioning global collaborations between service providers in business video services.
Strategic overseas expansion, greenfield ventures and acquisitions
The Company believes that its leading Indian market position, growing service offerings and deployment of leading-edge technologies together give it competitive advantages in emerging and underserved markets. With our global legacy-free infrastructure and on-the-ground presence in key markets, the Company aims to leverage its advanced solutions capabilities and domain expertise across its global and pan-India network to deliver managed solutions to multi-national enterprises, service providers and SMEs.
The following is a breakdown of the Companys revenues by geography:
In 2008, the Company entered the South African market as a strategic partner to Neotel. In January 2009, the Company through VSNL SNOSPV acquired an additional 27% stake directly in Neotel. The Company increased its effective holding in Neotel from 49% to 61.5% with effect from May 2011 and further to 64.10% in March. Consequently, Neotel has become a subsidiary of the Company. The Company also holds Indefeasible Rights of Use (IRUs) capacity on the privately owned SEA (South & East Africa)cable system (SEACOM), which has landing sites in South Africa, Mozambique, Tanzania and Kenya in Africa, in Mumbai, India, and in Marseille, France. The Company, through its wholly owned subsidiary Tata Communications Transformation Services Limited, also manages the network administration, operations and maintenance functions of this SEACOM cable system. The Company is also actively pursuing joint provisioning agreements in key African countries. In September 2009, the Company announced a joint provisioning agreement with AccessKenya to enable the launch of a Tier 1 Internet Point of Presence in Kenya. Similarly in May 2010, the Company announced a joint provisioning agreement with Infinity Africa to expand further into East Africa and thus reinforce its commitment to emerging markets. It has also announced joint provisioning agreements in Morocco (with INWI), Kenya (with KDN), Nigeria (with Netcom Nigeria) and Ghana (with Vodafone Ghana) to extend MPLS and Ethernet services to these countries. In January 2011, the Company in collaboration with Safaricom, a leading provider of converged communications solutions, enabled the launch of East Africas first public Telepresence suite at the Serena Hotels in Kenya and Uganda. International connectivity and management of the Telepresence rooms will be led by Tata Communications, linking Kenya and Uganda to public and private rooms throughout the Companys network and other collaborative partner networks. The public room network spans 41 locations across five continents.
On August 18, 2009, the Company announced the completed installation, testing and commissioning of the TGN-Intra Asia (TGN-IA) Cable System, a 6700 kilometer undersea cable system connecting Singapore, Hong Kong, Tokyo, Vietnam and the Philippines. The Company also has network and commercial network alliances with carriers in Thailand, Nepal, the Philippines, South Korea, Vietnam, Singapore, Indonesia and Malaysia. In September 2010, the Company opened its TCX data center in Singapore with 66,000 square
feet of data center to provide increased capacity for both domestic and international firms. In March 2011, the Company launched its IaaS offeringInstaComputeTM in Singapore, covering neighboring countries: Malaysia, Hong Kong, Thailand, Indonesia, Vietnam and the Philippines. InstaComputeTM will bring scalable cloud computing services to the regions large and medium enterprises, the gaming industry, as well as global businesses with an Asia Pacific customer base. Singapores Economic Development Board granted official International Headquarter Status to the Companys TCIPL subsidiary in Singapore. The Company plans to increase its local Singapore workforce by 60% and invest SGD $110 million per year over the next four years to focus on innovation and supporting its customers and the Singapore market. In April 2011, the Company inaugurated its second international gateway in Sri Lanka. Strengthening its seven year presence in the country, the new facility will further strengthen the reliability and stability of the Companys services to operators and enterprise customers. In March 2012, the Company launched the TGN-Eurasia system, connecting Europe, India, the Gulf and the Middle East with the rest of the world. This cable system completes the Companys wholly owned round-the-world fiber optic cable network ring. Over the past four years, the Company has also extended its MPLS and Ethernet networks to South Korea (in collaboration with Samsung Networks), Taiwan and the Philippines (in collaboration with PLDT), Vietnam (in collaboration with EVN), Thailand (in collaboration with True Internet), Malaysia (in collaboration with VADS), Indonesia (in collaboration with Indosat and XL.Com), Bangladesh (in collaboration with ADSNL), and New Zealand.
Middle East and North Africa
In the Middle East, the Company is a major investor in the South East Asia-Middle East-Western Europe 3 (SEA-ME-WE 3) and South East Asia-Middle East-Western Europe 4 (SEA-ME-WE 4) cable systems that serve the region and the landing party for those systems in India. As part of its expansion in the Middle East, the Company completed construction of the TGN-Gulf and TGN-Eurasia cable systems in collaboration with several major telecommunications operators in the Middle East. These cable systems connect the Middle East to both India and Europe. Furthermore, the Company has expanded its reach into the Middle East and North African enterprise market with strategic alliances for network and managed services. The TGN-Gulf subsea cable system that will act as a gateway to the TGN network connecting the region with high speed bandwidth. In collaboration with Nawras of Oman, Etisalat of UAE, Qtel of Qatar, Bahrain Internet Exchange of Bahrain, and Mobily of Saudi Arabia, the TGN cable system is the first TGN cable to serve the Gulf region and will offer network access to UAE, Oman, Qatar, Bahrain and Saudi Arabia, providing carriers and businesses with a direct route into the emerging markets of the Gulf region.
On March 2, 2009, the Company announced that it will begin offering enterprise network services in the United Arab Emirates (UAE) through a joint provisioning agreement with Etisalat to extend its reach by offering Layer-2 Global Ethernet services into and out of the UAE. Furthermore, on June 8, 2009, the Company announced a strategic alliance with Qtel that will strengthen both companies network reach in the region and internationally, and late in 2009 the Company added connectivity to Saudi Arabia in alliance with Mobily. The Company also has other commercial network joint provisioning agreements in Pakistan, Bahrain, Kuwait, Oman, Saudi Arabia, Egypt, Morocco and Turkey for the provision of telecommunication services. In March 2011, the Company introduced the True MidEast plan for its trueroots® customers across the US, UK and Canada. With the True MidEast plan, customers can now call Saudi Arabia, UAE, Kuwait, Bahrain, Qatar, and Oman at competitive rates, using local access numbers.
Achieving synergies with other Tata companies
Achieving synergies with other Tata companies enables the Company to access the formers existing customer bases and have the opportunity to share infrastructure costs. Accordingly, the Company has and continues to identify synergies and potential opportunities with other Tata companies. In particular, the Company has collaborated with Tata Consultancy Services (TCS), a leading IT services company, on several occasions to jointly provide TCS customers a broad range of end-to-end IT and telecom solutions.
Implementation of the Enterprise-wide Risk Management (ERM) Framework
The Company has established an ERM framework to optimally identify and manage risks, as well as to comply with Clause 49 of the Securities and Exchange Board of India Listing Agreement. The risk assessments performed under the ERM exercise and for compliance with Section 404 of the Sarbanes-Oxley Act (SOX) form key inputs for the annual audit plans for each business and functional unit. This approach also ensures optimal synergies between our internal audit and the SOX compliance processes.
Discussion on Climate Change
It is now generally accepted that the use of fossil energy sources and the related greenhouse gas (GHG) emissions lead to an increase of carbon dioxide (CO2) in the atmosphere and related adverse effects on the global climate. The Companys commitment to environmental sustainability draws from the rich heritage of the Tata group and its involvement and concern for the environment and society, embodied in the Tata Code of Conduct. The Companys environmental impacts result from our business operations globally and the products and solutions that we provide to our customers. To that end, Tata Communications has initiatives and programs that reduce the energy waste in our data centers and facilities through operational practices, use of energy efficient systems and use of renewable /alternative energy, such as wind power to reduce the carbon footprint from use of energy in our facilities. Tata Communications offers products like Telepresence that reduce business travel and therefore help our customers to improve their environmental performance towards their sustainability objectives.
We have also established a Health, Safety and Environment (HSE) Council to review the health, safety and environmental issues in our workplace. HSE performance data will be collected, validated and consolidated using a uniform tool. HSE auditing is an integral part of the corporate control process, assuring the Company of adequate systems to ensure legal compliance, consistent HSE standards, and suitable and effective measures for maintaining a high level of health, safety and environmental protection.
The HSE Council is governed by two committeesthe Steering Committee and the Coordination Committee. The Steering Committee fulfills the advisory function on matters such as corporate HSE policy, strategy, guidelines and audit programs, while the Coordination Committee coordinates implementation of corporate HSE guidelines, audit programs, training, statutory requirements and program improvements.
The Company is a leading global communications company offering a broad range of integrated communications services in the following three segments: GVS, GDMS and South Africa Operations.
Set out below is a break-down of the Companys revenues by segment:
Global Voice Solutions
The Company derives a substantial portion of its revenue from GVS which it provides primarily to telecommunications carriers for the delivery of international calls to over 240 countries and territories.
The Company is one of the leading global voice solutions providers in the world, with an estimated 18 % global market share of ILD voice traffic. It fully owns and operates one of the largest international voice networks with coverage in more than 240 countries and territories. It maintains direct and bilateral relationships with leading international voice telecommunication providers. Transporting more than 46.7 billion minutes annually of ILD and more than 8.5 billion minutes of NLD, the Company has a wide range of customers that can be divided into three main categories: mobile, broadband and carriers. In addition, the Company is the worldwide leader in international access voice services (toll-free, home country direct (HCD) and local number services) as well as a leading provider for other value-added services worldwide, such as ISDN, mobile video telephony, audiotext, operator, managed calling cards solutions, voice peering and voice over IPX (IP eXchange) services.
The Companys portfolio of global voice solutions is comprised of the following:
Global Data and Managed Services (GDMS)
The Company is one of the worlds largest providers of data services, primarily focusing on international and national private leased circuit enterprise networking (private IP and WAN Ethernet) services and IP transit services. The Company supplies some of the worlds largest international telecommunications providers with transmission backbone services across the Atlantic, the Pacific, Middle East, Africa, Intra-Asia and into and out of India. As a Tier 1 ISP, the Company operates one of the largest IP networks in the world with PoPs around the globe. The Company offers a full range of customized managed and connectivity solutions to cater to the business needs of the top global multinational corporations across the world. In addition to international and national private leased circuits, the Company offers virtual private networks and associated managed services, Ethernet services, Internet access, managed hosting, cloud-based services and Internet telephony. The Company also provides other value-added offerings such as collaboration and conferencing services, managed security services, and other professional services.
Enterprise Data Business
The Company offers customized, end-to-end voice and data solutions as well as managed services to enterprise customers worldwide, including:
Carrier Data Business
The Companys portfolio of carrier data services is comprised of the following main product lines:
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 in application service provider mode. The Companys mobility services include:
South Africa Operations
South Africa Operations are carried out by the Companys subsidiary Neotel, which offers wholesale international voice, and data transit, enterprise business solution services for the wholesale and corporate market, telephony and data services for retail customers in South Africa. Neotel operates South Africas first next generation network and the countrys first CDMA network and had approximately 2400 business customers and 100,000 retail customers. Neotels portfolio is comprised of the following products:
Payments to and from Foreign Administrations or Carriers
The Company has entered into telecommunication agreements with more than 480 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 based on commercial agreements reached between the carriers exchanging traffic. Based on the agreed upon 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 generally made monthly, although settlements for long-term reciprocal traffic exchange relationships (otherwise referred to as bi-laterals) can be made quarterly or annually. Settlements are made on a net basis at the applicable settlement rate. Exchange of network capacity for the transport of voice traffic with other telecommunications service providers are recorded as non-monetary transactions and measured at the carrying value of the capacities exchanged by the Company.
Revenue Sharing Arrangements in India
Although the Company provides international gateway access out of and into India, in accordance with Indian regulation, an ILD operator is not allowed to access an end user directly for voice calls. Therefore all voice calls that either originate or terminate in India must pass through the domestic networks of access providers (i.e., mobile and landline network operators). The Company has entered into interconnection agreements with BSNL, MTNL, and other fixed-line 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. The Company is required to pay termination charges of 0.40 per minute for international incoming traffic to India. The rates for outgoing international traffic are not regulated and are determined between the parties.
License Fees and Tariffs
ILD and NLD Licenses
Under the Companys ILD and NLD licenses, a license fee is payable annually in an amount equal to 6% of the adjusted gross revenues from the Companys ILD and NLD services.
In fiscal 2005, the Company filed a dispute with DoT because DoT was including certain income (e.g., investment and interest income, income from the sale of property, plant and equipment, foreign exchange gains and other non-operating income) and excluding certain deductible expenses (e.g., bandwidth and other network related costs) while calculating adjusted gross revenues for purposes of the license fees. DoT refused to consider the Companys arguments.
In fiscal 2005, the Company also filed a petition with the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) to obtain TDSATs clarification on whether or not the basis of DoTs determination of license fees payable by the Company was appropriate. In August 2007, the TDSAT concluded that license fees were not payable on certain income, such as income from investments, sales of immovable property, plant and equipment, foreign exchange gains and other non-operating income. Additionally, the TDSAT concluded that bandwidth and other similar network costs incurred should not be deducted from revenues in computing license fees.
The Company challenged the TDSAT conclusion in the Supreme Court of India, the outcome of which is currently pending. The Company, on the basis of external legal advice, expects the Supreme Court of India to overturn the TDSAT conclusion and permit deduction of bandwidth and other similar network costs from revenues retrospectively from fiscal 2003 in order to compute license fees.
In January 2008, DoT issued an additional license fee demand for fiscals 2003, 2004 and 2005 of 2,950 million for (a) additional payment of license fees (computed on the basis of the TDSAT conclusion) of 829 million, (b) compounded interest of 912 million on unpaid license fees, (c) a penalty of 772 million and interest on the penalty of 386 million (together referred to as penalty) totaling 1,158 million (all of (a)-(c) aggregating 2,899 million), and (d) an excess claim of 51 million by DoT which has since been adjusted against the demands in subsequent years.
In January 2008, the Company made payment of 2,950 million, which the Company recorded as license fees paid under protest. The additional license fees and interest totaling 1,741 million demanded by DoT have been accrued as liabilities by recognizing an expense. The accrued liability of 1,741 million has not been offset against the payment of 2,950 million pending outcome of the Companys challenge against the TDSAT conclusion in the Supreme Court of India, as the Company believes that its challenge is more likely to be successful in the Supreme Court of India and deduction of bandwidth and other network-related costs will be permitted for the purpose of computing license fees.
The Company has not recorded an expense and liability in respect of DoTs claim for a penalty and interest on the penalty totaling 1,158 million as the Company believes that DoTs claim will not be sustained. In accordance with the license agreement, a penalty and any interest on a penalty is payable to DoT only if the shortfall in license fees paid in any fiscal year is more than 10% of the license fees payable. DoT terminated the Companys exclusive right to provide ILD service in fiscal 2002 and granted a compensation of 793 million (as certified by the GOIs auditors) to the Company (the compensation was paid by DoT in April 2008). In accordance with the license agreement, the compensation receivable from DoT should have been offset against the license fees, as the agreement permits the deduction of any amounts due to the Company from DoT from any amounts payable by the Company to DoT. The penalty was computed by DoT without offsetting the compensation of 793 million (US$ 15.58 million). Had DoT offset the compensation due to the Company against the additional license fees claimed from the Company, consequent to the TDSATs conclusion, the license fees paid would have been short by less than 10% of the license fees payable in respect of those fiscal years.
The Company had also challenged the legality of the penalty provisions in the license agreement in TDSAT. TDSAT accepted the Companys position and ruled in favor of the Company striking the penalty provisions in the license agreement. Consequently, 1,158 million became refundable by DoT. The Company filed a petition in TDSAT seeking it to direct DoT to refund the penalty amounting to 1,158 million, along with interest thereon amounting to 940 million. The TDSAT accepted the Companys contention and accordingly, on July 13, 2011, ordered DoT to refund the penalty of 1,158 million along with interest thereon of 940 million. DoT has disputed the order of TDSAT and has filed an appeal against the order in the Supreme Court. However, the Supreme Court did not grant a stay against the TDSAT order.
Further the Company filed an execution-application in TDSAT for their order dated July 13, 2011 for refund of 1,158 million along with interest. In response to execution application, TDSAT in its order dated May 9, 2012, directed DoT to refund the amount within seven days time along with 9% interest from August 2011 till the date the date of payment. Accordingly, DoT has implemented the TDSAT order dated May 9, 2012 and refunded 1,969 million along with interest on June 7, 2012 to the Company. Out of the said refund, 1,158 million is the penalty and interest on penalty (paid by company to DoT in January 2008) and 811 million is the interest up to June 7, 2012.
In addition to refund stated in above paragraph, DoT refunded the excess interest paid by the Company of 273 million levied on completion of assessment for financial year 2004-05 along with interest of 22 million till June 7, 2012 to the Company.
In fiscal 2010, DoT completed its assessment for fiscal 2006 and raised a demand of 1,046 million. The Company challenged DoTs order in the TDSAT and TDSAT, in its order dated August 19, 2010, held: a) a license fee is not applicable on non-telecom income and other miscellaneous income; b) penalty and interest is not applicable on a shortfall of a license fee; c) a deduction in AGR for cost items is not allowed; d) a suo-moto inter-license adjustment by the licensee is not permitted. Therefore, the Companys liability was reduced to 46 million (including interest) up to July 2012.
DoT has filed an appeal in the Supreme Court against the above mentioned judgment of TDSAT dated August 19, 2010 and the same has been tagged with other similar appeals pending for the previous years.
License fees under the ISP with Internet Telephony (Restricted) License
The Company pays an annual license fee to DoT under its ISP with Internet Telephony (restricted) license in an amount of 6% of AGR. AGR has been defined as gross revenue including certain revenues and excluding certain charges. The Company paid license fees of approximately 80 million for fiscals 2010, 2011 and 2012, representing 6% of AGR, excluding income from non-licensed and financial activities, consistent with the Companys position that it should be permitted to exclude non-ISP related revenue. The Company, however, has made a provision of approximately 80 million in the event DoT and TDSAT decide against the Companys position.
Tariffs for IPLC (Half Circuits)
In 2006, TRAI fixed ceilings on tariffs in respect of E-1 (2 MBPS line), DS-3 (45 MBPS) and STM-1 (155 MBPS) capacities at 1.3 million, 10.4 million and 29.9 million per annum, respectively. Subsequently, DoT permitted the resale of IPLC services, although it is not clear if any resellers have begun operations. Further, in June 2007, the TRAI directed owners of cable landing stations to allow eligible Indian international telecommunication entities to access international submarine cable capacity on any submarine cable system. This resulted in full capacity landing by eligible Indian international telecommunication entities, which may also result in a reduction in prices of IPLC services.
Domestic Leased Circuit Tariffs
In 2005, TRAI fixed ceilings on tariffs in respect of E-1 (2MBPS line), DS-3 (45 MBPS) and STM-1 (155 MBPS) capacities at 0.85 million, 6.16 million and 16.5 million per annum, respectively.
Sales and Marketing
Global Voice Solutions
The Companys GVS business unit is focused on international and India long distance voice solutions, which are provided to mobile operators, OTTs, cable companies and carrier customers. The GVS sales team is the primary interface with telecommunication operator customers throughout the world. The team is responsible for building relationships with local/regional service provider customers in order for them to sell voice solutions to their end users. The GVS sales team is also responsible for securing supply capacity in support of voice termination services around the world. The team is comprised of a global organization, maintaining a local presence in key markets around the globe. The GVS product and business strategy team is engaged in new product development as well as managing existing product operations to meet customer and market requirements.
Global Data and Managed Services
The Companys Enterprise data business unit provides a suite of managed network and connectivity solutions, managed services (including managed infrastructure) and applications services to enterprises worldwide to meet their business needs and growth requirements with a focus on specializing in emerging markets. The business needs of enterprises are taken into consideration as our global product management organization develops launches and broadens enterprise services in all markets. Each region has a direct and an indirect (Channel Partner) strategy, and through well-defined strategies, the Company provides customized solutions that meet the needs of enterprise customers on a regional as well as global basis.
In India, the Enterprise business unit is structured to service differentiated segments via different pan-India sales groups. Large corporate and government customers are addressed by a direct sales team. In order to improve the focus on our target segments, in fiscal 2012, we moved our indirect and channel partner business which mainly served medium enterprises to our existing SME unit. This will help the Company serve clear sections of the market and benefit from combined synergies.
Internationally, the Enterprise Business Unit is managed in each region through the Companys direct and indirect teams located in the Americas, Europe and Africa, the Middle East and North Africa (MENA), and Asia. These teams are focused on providing network services and managed services to cater to the business needs of the top 2,000 global multinational corporations as well as the fast growing emerging enterprises in those regions. In addition, the Companys presence in these geographies is being expanded by leveraging the regional and global alliance partners (system integrators and IT partners) to serve some of the large corporations as well as mid-tier enterprises in these markets.
The SME unit primarily caters to SME business customers in India which primarily consist of small/home offices and small and medium sized enterprises. The large range of the products of this unit includes connectivity and collaboration solutions aimed at improving the productivity of small and medium businesses. The connectivity solutions include Internet leased line, broadband and Wi-Fi solutions, while the collaboration solutions include VoIP, hosted contact center, cloud based business application services and infrastructure as a service offerings. The products of this unit are standardized for mass usage as well as customized in the case of the medium enterprise customers. The channel sales business, with approximately 150 channel partners and serving medium enterprise customers, moved to the SME Unit this fiscal year from the Large Enterprise business.
For carrier connectivity services, the Company operates a focused sales force predominantly targeting its largest global and India-based 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 supports account managers based in regions where the customer also does business. A dedicated team in India supports India-based carriers as well as all global carrier requirements in this particular market.
South Africa Operations
Neotels long term strategy is based on three core pillars: leading in IP and converged services, becoming the partner of choice for managed services and occupying a strategic position in South Africa and the South Africa Development Community. Neotels positioning will be focused on delivering a superior experience for the customer along each stage of the customer life-cycle through:
Neotel has advanced in its process and service delivery model to the extent that it services a number of large enterprises in South Africa. This trend will continue as the organization matures its capabilities and consolidates its alliances to bring even greater service innovation to South Africa.
The business of the Company and its subsidiaries is subject to comprehensive regulation by various governmental bodies around the world, including in India, the U.S., Europe and South Africa.
The Ministry of Communications of the GoI, through the Telecom Commission and DoT, is responsible for telecom policy and licensing in India. TRAI is responsible for ensuring that the interests of consumers are protected and nurturing conditions for the growth of telecommunications, broadcasting and cable services in a manner and at a pace that will enable India to play a leading role in the emerging global information society. The Company has ILD, NLD, Internet Telephony Service Provider, TV uplinking and unified messaging service licenses in India.
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 and/or its services and facilities from time to time; if challenged, such changes may be subject to 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 regulated intrastate services.
The Company has obtained the necessary FCC authority under Section 214 of the Communications Act of 1934, to use on a facilities and resale basis, various transmission media to provide domestic and international switched and private line services on a non-dominant 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. In addition to maintaining the FCC licenses, the Company is subject to various requirements regarding private and common carrier operations, network security obligations, approvals for certain corporate transactions, and certain reports and fees.
The Canadian Radio-television and Telecommunications Commission (CRTC) is the regulatory authority in Canada that is charged with regulating companies that provide telecommunications services in Canada. Industry Canada is the federal ministry that regulates the use of wireless spectrum in Canada. The Company holds a Basic International Telecommunications Service license issued by the CRTC, which authorizes the Company to operate telecommunications facilities and services used in transporting basic telecommunications service traffic between Canada and other countries. The Company also holds International Submarine Cable licenses, also issued by the CRTC. The Company holds a number of earth station licenses issued by Industry Canada for its earth stations that provide telecommunications services by means of satellites.
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 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 holds necessary telecommunications and other licenses that permit it to own and operate assets in key countries and regions, including Taiwan, Japan, Hong Kong and Singapore.
The Ministry of Communications in South Africa is responsible for policy formulation on electronic communications. The Independent Communications Authority of South Africa (ICASA) is mandated for regulating the telecommunications, broadcasting and postal industries in the public interest and ensures affordable services of a high quality for all. ICASA issues licenses to
telecommunications and broadcasting service providers, enforces compliance with rules and regulations, and protects consumers from unfair business practices and poor quality service. ICASA also hears and decides on disputes and complaints brought against licensees and controls and manage effective use of radio frequency spectrum.
Neotel holds electronic communications service (ECS) and electronic communications network service (ECNS) licenses. Neotel additionally holds satellite hub ground station, satellite uplinking and various radio frequency spectrum licenses in South Africa. Neotel has access to a number of international submarine cable landing stations through its ECNS license issued by ICASA.
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.
The Company is partially owned by some of the Tata group of companies. The Tata Group is comprised of over 100 operating companies in seven business sectors: communications and information technology; engineering; materials; services; energy; consumer products; and chemicals. The Tata companies are part of Indias largest and most respected business conglomerates, with estimated revenues of approximately US$ 85 billion in fiscal 2011.
As of March 31, 2012, Panatone Finvest Limited, in conjunction with certain other Tata companies, held 50.03% of the outstanding equity of the Company, and the Government of India held 26.12%. See Item 4-History and Development of the Company.
As of July 31, 2012, the Company and its subsidiaries (including its joint ventures/Equity Method Investees but excluding stock held for investment purposes only) included the following legal entities:
Tata Communications Internet Services Limited (TCISL) filed a scheme of merger with the Honorable High Court of Bombay on May 4, 2011 for the merger of TCISL with the Company. On August 20, 2011, the Honorable High Court of Bombay sanctioned the merger of TCISL with the Company. The merger was effective from April 1, 2010.
Tata Communications International Pte Limited
TCIPL (formerly known as VSNL International Pte Limited), incorporated in Singapore, is a wholly owned direct subsidiary of the Company that serves as the Companys international holding company for the Companys operations outside of India, with the exception of the Companys activities in South Africa and Sri Lanka, which are undertaken by different entities. TCIPL also serves as an operating company with significant operations in Singapore, providing customers communications services into and out of Singapore.
Neotel (Pty) Ltd
Neotel was set up as South Africas Second National Operator in fiscal 2006. The Company was selected by the South African Government as a strategic partner to participate with a 26% effective stake and provides telecommunication solutions to South African businesses and consumers through the use of innovative technologies. Over the last three years, the Company has increased its effective stake in Neotel to 64.10% by acquiring shares from other partners in the joint venture, thereby assuming the position of majority shareholder in Neotel.
Neotel today employs almost 1,000 people and offers communication services to the wholesale, enterprise and consumer segments in South Africa. Neotel runs South Africas first next generation network and the countrys first CDMA network.
Property, Plants and Equipment
The Companys operations are conducted from owned and leased properties in the various locations in which the Company and its subsidiaries conduct business. The Companys property, plant and equipment which has a carrying amount of 15,671 million (US$ 308 million) are provided as security against the Companys non-convertible debentures to the extent of 8,500 million (US$ 167 million). ZAR denominated loans of Neotel are secured against the non-current assets and current assets pertaining to Neotel.
The major services provided by the Company and its subsidiaries for the last fiscal year are based on its bandwidth capacity in various undersea cable and land cable systems and satellites. These assets are briefly described below.
The Company has ownership interests and access to capacity in various undersea cables interconnecting the South Asia region, as well as linking that region with Europe, Africa, North America and Asia-Pacific.
The Company owns and operates eight specific fiber-optic cable systems: TGN-Eurasia, operating between Marseille and Mumbai, TGN-Gulf between Mumbai and Al Khobar in Saudi Arabia, with landings in Oman, UAE, Qatar and Bahrain; TGN-Pacific, an eight-fiber pair ring cable system between Japan and the West Coast of the U.S and a four-fiber pair linear submarine cable system from Japan to Guam; TGN-Atlantic, which is a four-fiber pair ring cable system between the East Coast of the U.S. and the UK; TGN-WER, which is a four-fiber pair ring cable system between Portugal, Spain and the UK; TGN-Northern Europe, which is a four-fiber pair linear system from the UK to the Netherlands; Tata Indicom Cable (TIC), which is a 3,100 kilometer eight fiber pair submarine cable system between Chennai, India and Singapore and TGN-Intra Asia, a wholly-owned four fiber pair linear submarine cable system connecting Singapore, Hong Kong, and Tokyo. The TGN-Intra Asia also directly connects to landing parties in Vietnam and in the Philippines through branching units.
In order to meet fast growing bandwidth and diversity requirements in India, the Company has invested in two new submarine cable systems between India and Europe linking Mumbai, India to Marseille, France. The first is a private system and is known as TGN-Eurasia. TGN-Eurasia has a minimum capacity of 1.28 Tbps and went into service in January 2012. The second is a shared system based upon the traditional consortium model and is known as IMEWE (India-Middle East-Western Europe), having a minimum design capacity of 3.84 Tbps and landing in eight countries. This cable went into service in December 2010.
The Company has also secured IRU capacity in the SEACOM. This system was built under a third party initiative and the main segment between South Africa and Mumbai, India was put into service in August 2009. The SEACOM system provides direct connectivity from South Africa and Eastern Africa to India, and will provide direct connectivity to Europe.
The Company also has ownership in the SEA-ME-WE 3 consortium cable, a medium 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 also has ownership in SEA-ME-WE4 a high capacity undersea cable system between France and Singapore which lands in 14 countries in Southeast Asia, the Middle East and Europe. Since going into service in 2005, this system has been upgraded twice and is currently undergoing a third upgrade.
The Company has ownership in the Asia Pacific Cable Network 2 (APCN2) consortium cable, a large capacity undersea optical fiber cable ring extending from Singapore to Japan via Hong Kong, the Philippines, South Korea, Taiwan and China which carries some of the Companys voice, data and Internet traffic between those countries.
The Company has also invested in the S3WS (SAT-3 /SAFE/WACS) undersea cable linking India and Malaysia in the East to Portugal in the West via South Africa. The total length of this link is 28,800 km with a design life of 25 years. The Company operates voice, data and Internet circuits on this undersea cable.
As part of its expansion in the Middle East, the Company, through a wholly owned subsidiary, constructed the TGN-Gulf cable system in alliance with several major telecommunications operators in the Middle East. Work began on the TGN-Gulf cable during October 2009 and was completed in January 2012. The TGN-Gulf cable acts as a gateway to the Tata Global Network connecting the region with reliable high speed bandwidth to many key global cities.
In order to further meet fast growing bandwidth and diversity requirements from Africa to Europe and the U.S., the Company has invested in a new submarine cable system between South Africa and Europe, linking Cape Town, South Africa to London, U.K. along with 12 intermediate landings on the west coast of Africa and Europe. The system is known as WACS (West Africa Cable System). The Company has secured IRU capacity in the PPC-1 (Pipe Pacific Cable 1) cable system that was completed and came in to service in late October 2009. The PPC-1 system provides direct connectivity from the Companys cable station facility in Guam to Sydney, Australia, and will address the growing needs of Australia for bandwidth and diversity.
The Company also has lesser ownership interests in various undersea consortium cables- the Trans Atlantic-14 cable (connecting the UK, France, Germany and the U.S.), the FLAG Europe-Asia Cable (connecting Europe and Asia), the Japan-US Cable (connecting the U.S. and Japan), the Americas-2 Cable (connecting Caribbean and Latin American countries), the Columbus-3 cable system (connecting Portugal and the U.S.) and a new Unity Cable between Japan and the U.S.
Points of Presence (PoPs)
The Company, either on its own or through collaborative arrangements with other carriers, has equipped nodes in the Americas, Europe, the Middle East, Africa and Asia Pacific to provide and support the Companys suite of products and services globally. Our VPN coverage extends to 70 countries with 177 Global VPN (GVPN) PoPs and Network to Network Interface (NNIs) and, through our VNO capability, the Company extends service to over 205 countries. The Company also has over 235 IP Transit PoPs strategically located in 29 countries and 3500 GB of IP backbone capacity that is spread over 5 continents. The Company is one of the top ten Global Tier 1 Providers and has one of the top ten Best Connected Networks with 3200 Petabits of Internet traffic carried every month.
Property and Plants
In addition to the cables and PoPs 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 (Note: Telepresence rooms and Partnerships sites are excluded)
The Company also has three large earth station teleports in Canada to operate in the Atlantic and Pacific Ocean regions and one small leased teleport in Denmark to operate in the Indian Ocean region. From these sites, it currently accesses more than 15 different satellites and can use approximately 50 satellite earth station antennas.
For NLD traffic in India, the Company operates nine TDM switches and an NGN Voice network. For the Companys ILD traffic, the Company operates 16 NGN Voice international switching facilities of which four are located in India, three in the U.S., two in each of Canada and South Africa (Johannesburg and Cape Town) and one in each of Madrid (Spain), London (U.K.), Frankfurt (Germany), Singapore and Sydney (Australia). All gateways route international traffic (including transit traffic) to and from the domestic telecommunications network using a combination of terrestrial fiber optic facilities, undersea cable links and satellite transmission facilities.
The Company has deployed and commissioned an NGN Voice network to cater to its NLD voice business. The infrastructure consists of soft-switches in Mumbai, Delhi and Chennai, India. The network was commissioned in July 2007 and its usage has now been extended to include international traffic.
Similarly, for its ILD traffic, the Company has deployed NGN Voice soft-switch components for international requirements in twelve locations (Los Angeles, Newark, New York, Montreal, Toronto, London, Madrid, Frankfurt, Sydney, Singapore, Johannesburg and Cape Town).
India Domestic Bandwidth Media, Access Network & Data Centers
Since 2002, the Company has deployed NLD connectivity with 216 points of presence on 64,538 segment wise STM-1 equivalent bandwidth. NLD augmentations have been implemented to meet the forecasted growth.
The Company has deployed a wireless access network across India to address the last-mile access requirements of large enterprise and SME businesses. The Companys wireless access network is based on the state of the art WiMAX technology in the licensed 3.3 -3.4 GHz band and 5.8 GHz UBR band. The Companys deployment covers 556 towns & cities with 1722 base stations. With this deployment, the Company now has an extensive wireless coverage providing tremendous reach to its customers in these markets.
Tata Communications is one of the largest players in the data center business in India, with 12 facilities covering all the major cities in the country. In addition it operates 30 facilities in key commercial centers around the world. During fiscal 2011, the Company launched the TCX data center in Singapore, which has 66,000 square feet of data center capacity to meet the growing IT outsourcing needs of enterprises in Asia Pacific. The Company also undertook expansion projects in India in the cities of Mumbai, Chennai (2 locations) and Delhi (2 locations) to meet market growth requirements and added 13,500 square feet of data center space in these cities.
In addition to increasing data center capacity during fiscal 2012, the Company made enhancements to its existing hosting and storage services including managed Database Administration, hosted LAN, and new releases of the services portfolio focused on usage based services. In late 2010, the Company expanded in the cloud space to deliver self-service, pay-as-you use data center infrastructure services, accessed through the Internet by launching the IaaS cloud computing offering, branded as InstaComputeTM in the India and Singapore markets. The InstaComputeTM service offers a flexible, scalable, highly available and secured hosted IT infrastructure solution that instantly provides the variable computing power required to meet changing business needs, exactly when needed.
Non-India Domestic Bandwidth Media Carrying Voice, Data and IP Circuits
As of March 31, 2012, the Company operated a total of 1,183,839 international circuits supporting the Companys voice and data services and products. Of the 1,183,839 international circuits, 1,058,743 circuits were used to support voice services and products. The remaining 125,096 circuits are a combination of backbone circuits connecting the Companys extensive global data networks to provide data and enterprise voice services.
In India, the Company has three satellite earth stations in operation. The Company operates a total of 946 Switched TDM voice circuits using one of these earth stations in India, resulting in a total of 195 equivalent 64 Kbps satellite channels. The Company also operates data circuits on these satellites for a total of 8 equivalent 64 Kbps satellite channels. The Company also has three large earth station teleports in Canada and one small leased teleport in Europe. From these sites, it accesses more than 8 different satellites but also has extra antennas that can operate on different satellites if required.
Neotel (Pty) Ltd
Neotel has its head office located at 144 Old Pretoria Road, Midrand, Johannesburg. This office is owned by the Company and is used by Neotel for administrative purposes. The rest of Neotels operations are conducted on leased premises situated throughout South Africa. In South Africa, Neotel operates two of the regions leading data centers, situated in the two main commercial centers, and offers colocation and managed hosting services for carriers and enterprises. The two data centers jointly offer potential expansion to a total of 86,000 square feet. With over 479 points of presence, the Companys IP core network enables a range of services which include traditional TDM voice, VoIP, private leased circuits, IP VPN, Internet access, global Ethernet, data centers, co-location, managed network, managed services, managed hosting, and other IP-related services. The Company has deployed and commissioned a NGN Voice network to cater to its NLD voice business (wholesale and retail). The NGN infrastructure consists of two soft-switches, one in Johannesburg and one in Cape Town, South Africa. For its ILD traffic, Neotel has integrated its NGN with Tata Communications international NGN and there are two integrations points, namely Johannesburg and Cape Town. Neotel has one satellite earth station in operation with 8 dishes operating in KU band and C band.
The Companys infrastructure includes various facilities used primarily for its various specialized and value-added Enterprise and Internet services. As of March 31, 2012, the Company owned a high capacity underground fiber optic cable across India, approximately six earth stations, and terrestrial communication links connecting the Companys National Domestic Switches. These terrestrial communication links include nine TDM Switches, nine NGN Media Gateways and three softswitches and the Companys international switches (four TDM Switches, nine NGN Media Gateways, three softswitches and one IN Switch) at four of its locations as well as earth stations, cable stations and a variety of hardware used in more than 160 cities in India for the Companys 124 Internet access nodes in India. As of March 31, 2012, the Company has a high capacity underground fiber optic cable national network of about 41,000 route kilometers.
Demerger of Surplus Land
Under the terms of the SHA signed between the GoI and Panatone Finvest Ltd. at the time of a disinvestment of erstwhile VSNL, it was agreed that certain identified lands would be demerged into a separate company. It was further provided that if, for any reason, the Company could not hive off or demerge the land into a separate entity, alternative courses as stipulated in the SHA would be explored. A draft scheme of demerger was presented to the board of the Company in April 2005, and the parties continue to examine the legality and feasibility of implementing the scheme. The land identified for demerger at different locations measured 773.13 acres.
The VSNL Employees Cooperative Housing Society, Chennai (Society) petitioned the Honorable Delhi High Court for a transfer of 32.5 acres of land situated at Padianallur, Chennai, which was part of the identified surplus land. According to the order of the Honorable High Court and the advice from the GoI, the process of transferring the said land to the Society was completed in July 2009. As a result, the surviving land now measures 740.63 acres having a book value of 1.63 million.
The Company offers services such as data, voice and managed services, including VoIP solutions, which are vulnerable to cyber security risks not found on the traditional voice network. These threats include identity theft, unauthorized access, DNS attacks, wireless network attacks, viruses and worms, advanced persistent threat (APT), application centric attacks, peer-to-peer attacks, phishing, backdoor trojans and distributed denial of service (DDoS) attacks. The Companys corporate network may also be vulnerable to such attacks.
The Company has implemented various measures to mitigate these cyber security risks, which are briefly described below:
The Company continuously monitors its core network devices for evidence of DDoS attacks, and mitigates them when detected. We have deployed firewalls and intrusion protection systems (IPSs) at the perimeter of our network to prevent malicious attacks from entering the network through vulnerable services. Our 24 x 7 Security Operations Center (SOC) analyzes perimeter defense logs to identify intrusion attempts, and our Security Incident Response Team (SIRT) responds to security incidents reported within the organization and notifies the relevant stakeholders.
Proxies deployed at our perimeter perform user validation and enable URL filtering to prevent users from accessing malicious websites, thereby helping to prevent phishing, malware and related threats. The Company uses two-factor authentication to secure outside access to its network though a VPN, and employs anti-virus software which regularly scans corporate computers for evidence of viruses and worms. We identify risks related to network and application level vulnerabilities by conducting vulnerability assessments and penetration testing, followed by a remediation process. The Company further carries out risk assessments based on the ISO 27001 standard across the globe to identify and mitigate process gaps.
The Company has deployed India-centric security controls to comply with DoT security regulations. These controls include intrusion monitoring for network level attacks using a Security Incident and Event Monitoring (SIEM) tool. We retain access logs for core network devices that contain details such as source and destination IP addresses, user name, and timestamp. The Company also uses standards such as Common Criteria when evaluating and introducing new products and equipment to the network.
The following discussion of the results of operations for the fiscal years ended 2010, 2011 and 2012 and the financial condition of the Company as at March 31, 2011 and 2012 should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto included in this Annual Report 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.
The Company is a facilities-based service provider of a broad range of integrated communications services. The Company generates revenue from three business segments: GVS, GDMS and South Africa Operations.
Global Voice Solutions
The Company is one of the worlds largest ILD voice players with an approximately 18% market share. The Company owns and operates international networks with coverage in more than 240 countries and territories and maintains 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 ILD Voice segment and the Company is a market leader in terms of the volume of inbound termination of calls to India. In fiscal 2012, the Company carried more than 46.7 billion minutes of ILD voice traffic and more than 8.5 billion minutes of NLD voice traffic.
Over the past several years, the global voice market has experienced an increase in traffic volumes as a result of significant growth in telephone density in developing countries and high growth rates in the number of cellular subscribers worldwide. However, during recent years the volume growth has stabilized around 4% to 5% due to alternative methods of communications used by consumers.
In India, where the Company is a significant player in ILD voice services, the telecom market is growing rapidly and is expected to be 92 billion minutes by fiscal year 2016 compared with 73 billion minutes in fiscal 2012. According to the latest figures from TRAI, as of March 31, 2012, Indias mobile subscriber base stood at 919.17 million having increased by 13% from 811.59 million as of March 31, 2011, while the fixed-line subscriber base declined by 7% from 34.73 million as of March 31, 2011, to 32.17 million as of March 31, 2012, and the broadband subscriber base reached 13.79 million as of March 31, 2012 having increased by 16% from 11.87 million as of March 31, 2011. In summary, the telecom landscape continues to evolve and operators such as our Company will have to constantly transform themselves to remain competitive by addressing new market segments.
The ILD and NLD voice markets continue to be businesses of scale, with constant pressure on prices and margins. The economic downturn has further increased the pressure on prices for international voice calls. Alternate services, OTTs such as Skype and Google, are growing in popularity and have added to this pressure. Mobile communications continues to grow in relation to fixed voice and there is an increasing use of Voice over Internet Protocol (VoIP) in providing new services evolving in the market.
Emerging technology trend and evolving user applications are the driving force of the companys new solutions and services to address the challenges and needs of retail service providers such as Mobile, Cable operators and OTTs. To address the new age of communications and challenges of target customers, company is focused in developing solution catering to specific customer segment.
The need for profitability in a largely commoditized market is making operators seek both scale and efficiency in their operations. Apart from driving consolidation, this could also create new business models based on greater collaboration between operators, which we believe the Company is well positioned to benefit from.
Global Data and Managed Services
The Indian GDMS segment has been growing at a very healthy rate. This growth is driven by two factors. Firstly, Indian businesses are increasingly adopting IT and networking technology to improve productivity and create competitive advantage. Secondly, since Indian business is growing globally and international companies are increasing their Indian presence, there is an associated need for greater connectivity to and within India. Banking and financial services, information technology and business process outsourcing/call centers are some examples of high growth sectors in the country.
Internationally, increasing costs of capital have resulted in the delay and cancellation of private data center facilities, driving more purchases of data center collocation and hosted computing services from external service providers. The Company is one of the largest players in the data center business in India. In September 2010, the Company announced the opening of its state-of-the-art Tata Communications Exchange (TCX) data center in Singapore, built to meet the growing IT outsourcing needs of enterprises in Asia Pacific. It has a total of 66,000 square feet of data center space and provides increased capacity for both domestic and international firms, bringing them cost and resource efficiencies as well as greater IT service availability and performance. The Companys global and India managed hosting services are aggressively supporting this direction. Along with managed hosting there is an increasing trend on global as well as Indian enterprises to outsource telecom services on a Managed basis. The Company has over the years developed other managed services like managed security services, Telepresence and Infrastructure as a Service which enables the Company to capitalize on these emerging trends in the enterprise space. These managed services also enable enterprises to reduce costs of in-house telecom teams and at the same time enable the Company to capture a higher portion of the overall telecom spend of enterprises.
The Company endeavors to continuously develop new products and services to enhance value for its customers. With this in mind, in fiscal 2011 the Company made certain investments in the cloud computing, media and entertainment spaces. In the media and entertainment space, in 2008, the Company entered into a strategic alliance with an award-winning content delivery network (CDN) company, BitGravity. In February 2011, the Company completed its acquisition of a majority interest in BitGravity. This acquisition complements the Companys global media and enterprise strategy and adds enhanced CDN and streaming capabilities to the growing line-up of value-added hosting, storage, and security services, all of which leverage the Companys global network. The addition of BitGravitys product portfolio and its employee skill set further accelerates the delivery of new features and services to the Companys customers. The Company has also made investments in the cloud computing space to deliver self-service, pay-as-you-use IT application and data center infrastructure services, accessed through the Internet with the launch in fiscal 2011 of its cloud offeringsInstaComputeTM in India and Singapore. InstaComputeTM is an IaaS offering that is secure, elastic and on-demand. Computing and storage resources are delivered to businesses over the Companys IP backbone and MPLS networks, as and when they need them. The Company plans to extend these offerings to Europe, the U.S. and South Africa. The Company has also combined its next generation managed security solutions with superior Internet leased line products, and launched its Internet Clean Pipe Solution for small and medium business segments. As part of the Global Media and Entertainment Services (GMES) portfolio, Tata Communications unveiled Video Connect and Mosaic. Video Connect is the worlds leading dedicated global video network designed to help broadcasters, studios and production houses deliver video content flexibly and cost effectively to media hotspots worldwide. Mosaic is the Companys media management platform with which its cloud based media management capability helps media customers improve cross enterprise collaboration for content creation management and multi-format delivery.
The global data market is undergoing rapid changes. With the growing need for bandwidth around the world, there continues to be growth in the demand for submarine cable capacity. During the past year, the Company upgraded capacity on all routes, by a cumulative 1333 Gigabits. The Company also announced the completion of two major cable projectsTGN-Eurasia, connecting India to Europe, and TGN-Gulf, connecting five Middle Eastern countries to the Companys global network. TGN-Eurasia also completes the Companys fully owned fiber ring around the world. Tata Communications is one of the worlds leading carriers of Internet traffic and is a global Tier 1 IP provider with an over four Terabit per second (Tbps) meshed network built on 10G backbones. Traffic on the IP-transit network grew by 33.3% over the past year. Availability of large capacity in line with market growth and diversity to provide continuity of services in the event of cable cuts due to acts of man or nature continues to be an important driver of this growth. The addition of these new cables presents both investment opportunities as well as downward price challenges.
The global enterprise market has seen growing demand for network services, data center services, and value-added services. While the global recession has caused delays in decision-making and deferred procurement by some customer segments, information and communications technology investments by enterprises broadly continues to grow. This is motivated by the need for better engagement and service levels with their own customers, the need for higher velocity and flexibility in business, and the growth of global supply chains and markets. Industry leaders are more sharply focused on increasing the ratio of IT budgets that are applied to competitive advantage and innovation versus basic services and compliance. Though the global enterprise market has slowly and steadily emerged from the economic recession, the focus of most CIOs still remains on cost saving IT and telecom solutions.
Also over the past four years the Company has focused on creating its competitive differentiator in emerging markets. Leveraging its strong base in one of the fastest growing emerging markets of India, the Company has further expanded its presence in other emerging markets like the Middle East, South Africa and parts of Asia. Increasing commerce between developed countries and emerging markets in the post slow down era has resulted in an increased need for telecom connectivity to and from emerging markets. The Company is thus in a competitive position to serve the needs of enterprises to and from emerging markets and going ahead the Company expects to continue investing in emerging markets to further strengthen its position. The Companys future commitments to its initiatives in emerging markets, including its interest in Neotel, are expected to have a positive impact on its financial results and condition going forward. The Company regularly monitors the additional funding requirements in all its markets, including emerging markets. The Company believes that it has the ability to meet all its expected requirements appropriately, duly complying with its debt covenants, as applicable.
In the SME unit business space, the Company offers connectivity, managed services, cloud services, messaging, Internet telephony and a wide variety of content services as a premier ISP. The Company has stepped up its focus on the rapidly growing SME segment and is approaching the market led by a portfolio of business applications which include highly customized Internet Leased Line services along with VoIP and Value Added Services like Security and Web hosting, Hosted Contact Center, Business Application solutions and Infrastructure as Service offerings.
South Africa Operations
South Africa Operations are carried out by the Companys subsidiary Neotel, which offers wholesale international voice and data transit, and, enterprise business solution services for the wholesale and corporate market and telephony and data services for retail customers in South Africa. The South African fixed line telecom market is currently valued at US$ 6 billion and is projected to grow to US$ 8 billion by 2017, as per the market survey indicators provided by the BMI-T (Business Market Intelligence TechKnowledge) Group. Neotel was set up as South Africas Second National Operator in 2005-2006. The Company was selected by the South African Government as a strategic partner to participate in the South African telecom market with a 26% effective stake and provide best practice, cost effective telecommunication solutions to South African businesses and consumers through the use of innovative technologies. The Company has been increasing its stake in Neotel and held 64.10% as on March 31, 2012. Neotel is South Africas first converged, voice and data communications network operator. It provides a range of value-added voice and data services for businesses, wholesale network operators and providers and consumers using its pure-IP Next Generation Network, powered by Neotels high-performance fiber optic backbone. Neotel connects the major centers in South Africa to each other and to the world, directly linking the country to the Companys global Tier 1 network.
New Growth Opportunities
With the increasing need for reducing costs, several carriers around the world are looking to rationalize costs and relocate some of their business processes. They are also looking to improve operating efficiencies and network/infrastructure productivity. Leveraging its operating expertise across a wide variety of technology platforms as well as its global experience in different developed and emerging markets around the world, and its relationships with these carriers, the Company is seeking to cater to this need. This initiative is being implemented through Tata Communications Transformation Services Limited (TCTSL), a wholly-owned subsidiary in India. Through its world-class delivery centers in Pune and in Chennai, TCTSL provides business transformation, telecom BPO and consultancy services to telecommunications carriers around the world. TCTSL delivers solutions for all stages of the carrier processes and operations, such as network engineering, design, implementation and operations. TCTSL operations are totally independent, ensuring full confidentiality in managing the business processes of its customers. TCTSL employs approximately 1,202 people.
In order to capture emerging opportunities in the banking and financial services sectors, the Company formed Tata Communications Banking InfraSolutions Limited (TCBIL) in February 2008, as its wholly-owned subsidiary. With a highly experienced team of professionals from the banking and financial services industry, TCBIL commenced commercial operations in April 2009. TCBIL provides infrastructure solutions to the banking industry, including services relating to establishing and operating Automated Teller Machines (ATMs), Electronic Transaction Processing Solutions (ETPS), Check Truncation Services (CTS), and Core Banking Solutions (CBS). During fiscal 2012, TCBIL reached the milestone of managing over 10,000 ATMs, making it one of the largest players in this growing market in India. In August 2012, TCBIL signed a milestone contract to deploy and manage nearly 14000 ATMs for all public sector banks across various states in India.
In fiscal 2011, the Company completed its acquisition of a majority interest in BitGravity, an award-winning content delivery network (CDN) company. The acquisition, initially announced on January 11, 2011, complements the Companys global media and enterprise strategy. It adds enhanced CDN and streaming capabilities to the Companys growing line-up of value-added hosting, storage, and security services, and leverages the Companys global network. The addition of BitGravitys product portfolio and its employee skill set further accelerates the delivery of new features and services to the Companys customers.
As discussed above and elsewhere in this Form 20-F, the Company has completed several acquisitions. See History and Development of the Company in Item 4. The Company sees a growing proportion of its revenues from its international operations and these acquisitions can and will have a significant impact on this trend.
Fiscal Year 2012 Compared to Fiscal Year 2011
The following table sets forth information regarding the Companys net income for the fiscal years ended March 31, 2011 and 2012. In fiscal 2012, we have consolidated Neotel from May 30, 2011 in our financial statements, due to an increase in effective interest from 49% to 61.50% in May 30, 2011. This consolidation led to an increase in the revenue and costs, therefore the operating results discussed in this section for the year ended March 31, 2012 are not comparable with the previous year. Also, since Neotel was an equity method investee for fiscal 2011 and up to May 29, 2011 for fiscal 2012, our share in net loss of equity has also decreased significantly in fiscal 2012.
The following table sets forth information regarding the Companys revenues for the fiscal years ended March 31, 2011 and 2012:
ILD with related products constitutes the single largest revenue stream of the Company 46.65% and 53.83% of revenues in fiscal years 2012 and 2011, respectively. Globally, during fiscal 2012, there were further reductions in tariff and interconnect rates, increasing the downward pressure on margins and revenues. However, this downward pressure was counterbalanced by traffic volumes continuing to increase. Globally, the Company continues to focus on increasing volumes and thus revenues, while cutting costs to improve margins. During fiscal 2012, globally, Tata Communications carried over 46.7 billion minutes of international voice traffic, a growth of about 17% over the previous fiscal year. Traffic to and from India has grown from about 13 billion minutes in fiscal 2011 to about 17 billion minutes in fiscal 2012 and was a major contributor for the increase in revenues. Increasing competition is expected to shrink the Companys addressable market and hence affect this business adversely. Management believes that the Companys scale, global reach, innovative solutions, expertise and strong business relationships give it the capability to compete successfully in this space.
The Companys strategic solution offers enable providers to leverage the Companys scale and routing expertise while reducing their exposure in the low-margin, high-risk international voice termination business. Company has developed solutions to address specific needs of market segments, resulting in increased share of sticky voice traffic on yearly basis.
NLD is a revenue stream that is generated by the Companys India operations. NLD volumes decreased by 18% in fiscal 2012 over fiscal 2011. Revenues decreased by 29.62% in fiscal 2012 due to a decrease in net revenue per minute along with a reduction in volumes. New telecom licensees rolled out their services in fiscal 2011 resulting in the addressable market for the Company shrinking further. Gross revenues per minute decreased to 0.35 (US$ 0.007) in fiscal 2012 as compared to 0.41 in fiscal 2011 due to price erosion across the telecom industry.
Increased competition through the issue of new NLD licenses in past years, along with other regulatory initiatives, has reduced the gap between NLD and local tariffs. The Company has a strong network infrastructure and interconnect agreements with all basic and cellular mobile service operators in India to carry NLD traffic to and from their networks. However, Tata Communications is dependent on getting traffic from these access providers, many of whom have already acquired their own NLD licenses. While increased competition in the long distance space affects our business, it also opens up opportunities to share the Companys network infrastructure with new licensees. DoT permitted sharing of active infrastructure in fiscal 2011. DoT has yet to accept the TRAIs recommendation to introduce unrestricted Internet Telephony, particularly PSTN interconnection in India. This may provide new avenues for the Company in the NLD business area, although margins may remain low.
Corporate Data Transmission
Leased Circuits and IRUs Revenue
Revenue from leased circuits (international and national) and IRUs, which form a substantial part of the revenue generated by our GDMS segment, increased by 17.95% during fiscal 2012. The increase was predominantly due to growth in revenues from other service providers and the addition of new circuits. These services contributed approximately 9.30% and 9.69% in fiscals 2012 and 2011, respectively, of the Companys total revenues.
Frame Relay and MDNS Services Revenue
Revenue from frame relay and MDNS services were 379 million and 414 million (US$ 8 million) for fiscal 2011 and 2012, respectively. For fiscal 2012, we have seen an increase in revenues to the extent of 35 million (9.23%) over fiscal 2011 revenues due to higher revenues from existing customers.
Internet Leased Lines Revenue
Revenues from Internet leased lines increased by approximately 3.58% in fiscal 2012 as compared to fiscal 2011. The increase was predominantly due to growth in revenues from enterprise customers and the addition of new circuits.
Internet revenues decreased by 25.14% in fiscal 2012 as compared to fiscal 2011. Internet revenues include revenues from retail dial-up and broadband services offered by the Company in India and corporate IP transit services offered by the Company across the globe. Corporate IP transit services revenues increased to approximately 5,591 million (US$ 110 million) in fiscal 2012 from 5,273 million in fiscal 2011 due to an increase in usage and revenue from new customers.
Broadband revenues have decreased to 1312 million (US$ 26 million) in fiscal 2012 from 1,602 million in fiscal 2011 as there was more churn of broadband customers due to a focus on broadband services to small and medium businesses across India. The Company continues to focus on broadband services to small and medium businesses 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.
Internet Data Center
Internet data center revenues have grown to 3,503 million (US$ 69 million) in fiscal 2012 from 3,143 million in fiscal 2011 mainly due to an increase in the Companys data center capacity globally.
South Africa Operations
Our South Africa Operations revenue stream is generated by Neotel. It contributed 10.70% of the Companys total revenue in fiscal 2012. Neotel offers communication services to the wholesale, enterprise and consumer segments in South Africa and runs South Africas first next generation network and the countrys first CDMA network. Neotel had approximately 2,400 business customers and 100,000 retail customers at the end of fiscal 2012.
Other revenue increased by 39.56% in fiscal 2012 over fiscal 2011 mainly due to an increase in revenues of VPN, Global roaming, Ethernet, hosting and O&M services. VPN revenues have grown to 4,212 million (US$ 83 million) in fiscal 2012 from 3,502 million in fiscal 2011. Global roaming services contributed 4,194 million (US$ 82 million) in fiscal 2012 as against 3,686 million in fiscal 2011. Hosting, Ethernet, TV uplinking and O&M revenue contributed 6,389 million (US$ 126 million) in fiscal 2012 as against 5,437 million in fiscal 2011. Revenue from these services accounted for 19.79% of the Companys total revenue in fiscal 2012 as compared to 17.42% in fiscal 2011.
The following table sets forth information regarding the Companys operating costs for the fiscal years ended March 31, 2011 and 2012.
Network and Transmission Costs
Network and transmission cost increased by 14.44% in fiscal 2012 over fiscal 2011 primarily due to the consolidation of the South African Operations from May 2011 in fiscal 2012 and an increase in ILD traffic. As a percentage of revenue, network and transmission costs decreased to 54.99% in fiscal 2012 from 59.04% in fiscal 2011.
Interconnect charges increased by 13.91% in fiscal 2012 as against an increase of 10.13% in fiscal 2011. Consolidation of South Africa Operations contributed 6,938 million to the total of 74,018 million. As a percentage of revenue, interconnect charges decreased from approximately 57.08% in fiscal 2011 to 52.91% in fiscal 2012. The decrease as a percentage of revenue, in fiscal 2012 was due to reduced voice business and due to consolidation of the South African Operations. Revenues from Voice services (ILD and NLD) decreased from 57.55% of total revenues in fiscal 2011 to 48.78% in fiscal 2012 leading to reduction in interconnect charges.
In fiscal 2012, rent of landlines decreased by 22.16% as against a decrease of 11.06% in fiscal 2011. The decrease was due to reduction in off-net charges because of a decrease in average cost per E1 (2MBPS circuits) leased by the Company ( 4,966 per E1in fiscal 2012 as against 9,239 per E1 in fiscal 2011). As a percentage of revenue, rent of landlines decreased from 0.16% in fiscal 2011 to 0.10% in fiscal 2012.
The Company continues to rationalize its space segment utilization charges by surrendering surplus capacity and utilizing its fiber optic cable infrastructure for carrying voice and data traffic. The space segment utilization charges have decreased by 45.85% in fiscal 2012 as against a decrease of 19.92% in fiscal 2011. As a percentage of revenue, space segment utilization charges decreased from 0.18% in fiscal 2011 to 0.08% in fiscal 2012 due to such cost rationalization.
The license fee payable by the Company to DoT is 6% of adjusted gross revenues (AGR). The GoI defines AGR as gross call revenues less access charges actually paid to other carriers for carrying calls less service and sales taxes paid to the GoI. As explained in Item 4 above, we have certain disputes with the GoI over the calculation of AGR and therefore of license fees. The total amounts paid for ILD, NLD and ISP license fees for fiscals 2012 and 2011 were 928 million (US$ 18 million) and 684 million, respectively. However, from July 1, 2012, Licensor (DoT) increased the fees for ILD & NLD licenses from 6% to 7% and from April 1, 2013 to 8%. Further, from July 1, 2012, the fees for ISP (IT) licenses have increased from 6% to 7% and from April 1, 2013 to 8%, and the LF rates under ISP licenses have been fixed at 4% from July 1, 2012 and 8% from April 1, 2013. Therefore, our license fees will increase going forward.
As part of the compensation to the Company for the early termination of its exclusivity in providing ILD services, the GoI provided that the Company would be refunded 10% of the license fees it paid towards NLD services for first the five years (i.e., from fiscal 2002 to fiscal 2006). Accordingly, the Company has taken a net charge of 5% of the revenues from NLD services in its financial statements and recorded a receivable from the Government of 10% of the license fees for that period. Out of the total claim of 802.80 million, 793.10 million was reimbursed by DoT. The balance of the claim of 9.70 million is pending with DoT. The Company has requested that DoT refund the balance of the claim.
Other Operating Costs
Other operating costs increased by 32.71% in fiscal 2012 over fiscal 2011. The increase in other operating cost in fiscal 2012 was primarily due to consolidation of Neotel and due to our infrastructure roll-out and organizational growth. As a percentage of revenue, total other operating costs increased from 40.69% in fiscal 2011 to 43.95% in fiscal 2012. Details of some of the components of other operating costs were as follows:
Non-Operating Income /Expense
The following table sets forth information regarding the Companys non-operating income for the fiscal years ended March 31, 2011 and 2012:
Gain on Sale of Investments
The gain on sale of investments was 379 million (US$ 7 million) and 138 million in fiscal 2012 and 2011, respectively. In both the comparatives, the gain on sale of investments was primarily from the sale of mutual fund investments. Profit from the sale of mutual funds increased from 46 million during fiscal 2011 to 379 million (US$ 7 million) during fiscal 2012. The increase was due to a substantially higher level of investments in mutual funds in fiscal 2012 as compared to fiscal 2011. During fiscal 2011, there was also a gain of 92 million (US$ 2 million) on the sale of the Companys investments in Art Technology Group Inc. (ATG) shares.
Interest Income/Expense (Net)
Net interest represents the net interest accrued by the Company on its bank and other deposits and borrowings under its overdraft facilities. Interest income from banks and others decreased to 296 million (US$ 6 million) in fiscal 2012 from 762 million in fiscal 2011 due to loans made to SEPCO/Neotel in fiscal 2011. During fiscal 2012, the Company had interest expense of 7,591 million on short-term and long-term debt which includes 243 million of mark to market impact on swaps recycled to income statement from Other Comprehensive income pursuant to discontinuance of hedging relationship. During fiscal 2011, the Company had interest expense of 4,088 million on short-term and long-term debt. The increase is primarily due to consolidation of Neotel which contributed 3,396 million. In fiscal 2012 and 2011, the Company had interest income on income tax refunds of 101 million and 40 million related to its India operations, respectively.
Investments in mutual funds were in debt funds whose return was linked to interest rate movements. In fiscal 2012, the Companys investments in mutual funds were sold. As these investments were in growth schemes instead of dividend schemes, the impact of a dividend is realized at the time of the sale of the investment. Dividends from mutual funds reduced from 3 million in fiscal 2011 to Nil in fiscal 2012.
Liabilities not required to be settled written back
During fiscal 2012, the Company wrote back liabilities of 9 million (US$ 0.18 million) as against 625 million in fiscal 2011. The reason for liabilities written back in fiscal 2011 is due to the expiration of the statute of limitations period during which the liabilities were not claimed by the creditors.
Other Income (net)
Other income of 11,104 million (US$ 218 million) in fiscal 2012 primarily includes 11,047 million (US$ 217 million) due to remeasurement of interest held in Neotel to fair value prior to business combination as on May 30, 2011. Other income of 864 million in fiscal 2011 primarily included rental and space sharing income of 232 million, the recovery of bad debts, interest income from customers and scrap sales income of 183 million, a gain on the re-measurement of previously held interests in Bit Gravity on the acquisition date of 128 million and termination fee from China Enterprise Communication Limited (CEC) for terminating the joint venture agreement amounting to 90 million. In fiscals 2012 and 2011, other income included rental and space sharing income of 114 million (US$ 2 million) and 232 million, respectively.
Income Tax Expense
The statutory income tax rates in India were 32.445% for fiscal 2012 and 33.22% for fiscal 2011. For fiscal 2012, income tax expense was 5,138 million (US$ 101 million) as against an expense of 765 million for fiscal 2011. Income tax expense of 5,138 million in fiscal 2012 was comprised of 5,914 million tax expense (including 5,164 million tax expense relating to Neotel) and 776 million tax benefit relating to merger of the Companys wholly owned subsidiary, Tata Communications Internet Services Limited (TCISL) with the Company with effect from April 1, 2010.
As of March 31, 2012, the company evaluated the availability of future taxable income taking into consideration current available evidences including operating trends and recognized the valuation allowance in Neotel. Consequently, there is 5,164 million tax expense for the year.
An unfavorable outcome in the future on the tax disputes in respect of its tax holiday claim under Section 80-IA, reimbursement of DoT levy by the GoI, claim for capital loss on sale of ICO Global, transfer pricing dispute and penalties would negatively affect the Companys results of operations by 6,275 million, 5,530 million, 1,077 million, 2,228 million and 8,175 million, respectively. The details are described under Item 8Legal Proceedings.
Taxes and interest relating to these tax disputes (other than penalties) have been paid in full and classified as advance income taxes on the balance sheet. Penalties of 4,956 million (out of a total 8,175 million of penalties imposed by the tax authorities) have also been paid and classified as advance income taxes on the balance sheet, which may result in an additional future penalty payment of up to 3,209 million if the Company is unsuccessful in all of its significant tax disputes. The details are described under Item 8Legal Proceedings.
The Company continues to be subject to other significant claims by the revenue authorities in respect of income tax matters. These are described under Item 8Legal Proceedings.
Share in Net Loss of Equity Method Investees
During fiscal 2011 and fiscal 2012, the Companys equity ownership interest in United Telecom Limited (UTL) was 26.66%, in SEPCO was 43.16% and, until May 30, 2011, in Neotel was 27%. SEPCO is an investment company which owns 51% of the equity of Neotel. Therefore, the effective interest of the Company in Neotel was 49.01% in fiscal 2011 and up to May 30, 2011 in fiscal 2012 for purposes of determining the Companys share in net loss of equity method investees. On May 30, 2011, the Company acquired an additional equity ownership interest in SEPCO of 24.50% thus, the Companys equity ownership interest in SEPCO increased from 43.16% to 67.66% and its effective interest in Neotel increased from 49.01% to 61.50%. Further SEPCO Group made capital calls during fiscal 2012 from all of its shareholders and because certain of the minority shareholders did not subscribe to these capital calls, their holdings were diluted. As result of the dilution of the minority shareholders, the Companys effective equity ownership interest in Neotel increased from 61.50% on May 30, 2011 to 64.10% on March 30, 2012. Therefore, Neotel was considered an equity method investee for the period of April 1, 2011 to May 29, 2011 and was consolidated for the rest of fiscal 2012.
The Companys share in the net loss of equity method investees in fiscal 2012 was 944 million (US$ 19 million) for two months only as compared to 5,636 million in fiscal 2011. Neotel continues to be in its network and customer reach expansion phase which has resulted in the losses. As the business scale of Neotel increases, the Company expects the losses from Neotel to reduce.
Fiscal Year 2011 Compared to Fiscal Year 2010
The following table sets forth information regarding the Companys net income for the fiscal years ended March 31, 2010 and 2011:
The following table sets forth information regarding the Companys revenues for the fiscal years ended March 31, 2010 and 2011:
ILD with related products constitutes the single largest revenue stream of the Company53.83% and 53.86% of revenues in fiscal years 2011 and 2010, respectively. Globally, during fiscal 2011, there were further reductions in tariff and interconnect rates, increasing the downward pressure on margins and revenues. However, this downward pressure was counterbalanced by traffic volumes continuing to increase. Globally, the Company continues to focus on increasing volumes and thus revenues, while cutting costs to improve margins. During fiscal 2011, globally, the Company carried over 40 billion minutes of international voice traffic, a growth of about 26% over the previous fiscal year. Traffic to and from India has grown from about 9.76 billion minutes in fiscal 2010 to about 13 billion minutes in fiscal 2011. Increasing competition is expected to shrink the Companys addressable market and hence affect this business adversely. Management believes that the Companys scale, global reach, innovative solutions, expertise and strong business relationships give it the capability to compete successfully in this space. In fiscal 2010, the Company through its wholly-owned indirect subsidiary, Tata Communications (UK) Ltd., has fully deployed the solution for a major global voice strategic agreement with British Telecom Plc (BT). The 5-year agreement allows Tata Communications and BT to mutually benefit from shared resources as part of a global supply arrangement. The Company has leveraged this deal to sign more strategic sourcing agreements such as a full route outsource agreement with Videotron, one of the largest Canadian cable operators. Under this agreement, Videotron will route 100% of its international voice traffic through the Companys network and Videotron will continue to be one of the Companys key suppliers of telecommunication services in Canada. Through it, the Company will become Videotrons sole provider of international voice termination. By tapping into the Companys extensive and robust voice infrastructure, Videotron will be able to offer its customers higher quality international calls at competitive rates. The Companys advanced voice traffic management tools will also allow Videotron to effectively manage operational costs and increase focus on its core businesses and key growth areas.
The Companys strategic voice traffic outsourcing enables providers to leverage the Companys scale and routing expertise while reducing their exposure in the low-margin, high-risk international voice termination business.
NLD is a revenue stream that is generated by the Companys India operations. NLD volumes increased by 9% in fiscal 2011 over fiscal 2010. However, revenues decreased by 1.65% in fiscal 2011 due to a decrease in net revenue per minute. New telecom licensees rolled out their services in fiscal 2011. These operators did not have their own widespread network, resulting in an increase in NLD traffic. Gross revenues per minute decreased to 0.41 in fiscal 2011 as compared to 0.45 in fiscal 2010 due to price erosion across the telecom industry.
The Companys NLD traffic grew by over 9% from 9.51 billion minutes in fiscal 2010 to 10.4 billion minutes in fiscal 2011. Increased competition through the issue of new NLD licenses, along with other regulatory initiatives, has reduced the gap between NLD and local tariffs. Despite continued shrinkage in the Companys addressable market and falling tariffs, the Company has increased its market share. The Company has a strong network infrastructure and interconnect agreements with all basic and cellular mobile service operators in India to carry NLD traffic to and from their networks. However, the Company is dependent on getting traffic from these access providers, many of whom have acquired their own NLD licenses. While increased competition in the long distance space affects our business, it also opens up opportunities to share the Companys network infrastructure with new licensees. DoT has permitted sharing of active infrastructure. DoT has yet to accept TRAIs recommendation to introduce unrestricted Internet Telephony, particularly PSTN interconnection in India. This may provide new avenues for the Company in the NLD business area, although margins may remain low.
Corporate Data Transmission
Leased Circuits and IRUs Revenue
Revenue from leased circuits (international and national) and IRUs, which form a substantial part of the revenue generated by our GDMS segment, decreased by 15.54% during fiscal 2011. The decrease was predominantly due to price reductions. These services contributed approximately 9.69% and 12.32% in fiscals 2011 and 2010, respectively, of the Companys total revenues.
Frame Relay and MDNS Services Revenue
Revenue from frame relay and MDNS services were 348 million and 379 million for fiscal 2010 and 2011, respectively. For fiscal 2011, we have seen a slight increase in revenues to the extent of 31 million (8.91%) over fiscal 2010 revenues due to higher revenues from existing customers.
Internet Leased Lines Revenue
Revenues from Internet leased lines increased by approximately 28% in fiscal 2011 as compared to fiscal 2010. The increase was predominantly due to growth in revenues from enterprise customers and the addition of new circuits.
Internet revenues decreased by 12.80% in fiscal 2011 as compared to fiscal 2010. Internet revenues include revenues from retail dial-up and broadband services offered by the Company in India, services offered by TCISL and corporate IP transit services offered by the Company across the globe. Corporate IP transit services revenues decreased to approximately 5,273 million in fiscal 2011 from 6,201 million in fiscal 2010 due to higher price reductions for major customers.
Broadband revenues have decreased to 1,602 million in fiscal 2011 from 2,158 million in fiscal 2010 as there was more churn of broadband customers due to a focus on broadband services to small and medium businesses across India. The Company continues to focus on broadband services to small and medium businesses 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.
Other revenue increased by 32.56% in fiscal 2011 over fiscal 2010 mainly due to an increase in revenues of VPN, data center services, Global roaming, Ethernet, hosting and operations and maintenance (O&M) services. VPN revenues grew to 3,502 million in fiscal 2011 from 2,008 million in fiscal 2010. IDC revenues grew to 3,143 million in fiscal 2011 from 2,389 million in fiscal 2010. Global roaming services contributed 3,686 million in fiscal 2011 as against 3,184 million in fiscal 2010. Hosting, Ethernet, TV uplinking and O&M revenue contributed 5,437 million in fiscal 2011 as against 4,479 million in fiscal 2010. Revenue from these services accounted for 20.18% of the Companys total revenue in fiscal 2011 as compared to 16.34% in fiscal 2010.
The following table sets forth information regarding the Companys operating costs for the fiscal years ended March 31, 2010 and 2011.
Network and Transmission Costs
Network and transmission cost increased by 9.37% in fiscal 2011 over fiscal 2010. As a percentage of revenue, network and transmission costs increased to 59.04% in fiscal 2011 from 57.93% in fiscal 2010. The increase in fiscal 2011 was primarily because of increased ILD traffic and the addition of new services.
Interconnect charges increased by 10.13% in fiscal 2011 as against an increase of 20.68% in fiscal 2010. As a percentage of revenue, interconnect charges increased from approximately 55.62% in fiscal 2010 to 57.08% in fiscal 2011. The increase in fiscal 2011 was mainly due to the growth in ILD traffic. 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 2011, rent of landlines decreased by 11.06% as against a decrease of 26.76% in fiscal 2010. There has been an increase in off-net charges because of an increase in E1s (2MBPS circuits) leased by the Company (22,636 E1s in fiscal 2011 as against 19,799 E1s in fiscal 2010). As a percentage of revenue, rent of landlines decreased from 0.20% in fiscal 2010 to 0.16% in fiscal 2011. The decrease in the rent of landlines in spite of an increase in the number of E1s was due to a reduction in the price per E1.
The Company continues to rationalize its space segment utilization charges by surrendering surplus capacity and utilizing its fiber optic cable infrastructure for carrying voice and data traffic. The space segment utilization charges have decreased by 19.92% in fiscal 2011 as against a decrease of 19.50% in fiscal 2010. As a percentage of revenue, space segment utilization charges decreased from 0.24% in fiscal 2010 to 0.18% in fiscal 2011 due to such cost rationalization.
The license fee payable by the Company to DoT is 6% of AGR. The Government of India defines AGR as gross call revenues less access charges actually paid to other carriers for carrying calls less service and sales taxes paid to the GoI. As explained under Item 4 above, we have certain disputes with the GoI over the calculation of AGR and therefore of license fees. The total amounts provided towards ILD, NLD and ISP licenses for fiscals 2011 and 2010 were 684 million and 785 million, respectively.
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 10% of the license fees it paid towards NLD services for first five years, i.e. from fiscal 2002 to fiscal 2006. Accordingly, the Company took a net charge of 5% of the revenues from NLD services in its financial statements and recorded a receivable from the Government of 10% of the license fees for that period. Out of the total claim of 802.80 million, 793.10 million was reimbursed by DoT. The balance of the claim of 9.70 million is pending with DoT. The Company has requested that DoT refund the balance of the claim.
Other Operating Costs
Other operating costs increased by 2.05% in fiscal 2011 over fiscal 2010. The increase in other operating cost in fiscal 2011 was primarily due to our infrastructure roll-out and organizational growth. As a percentage of revenue, total other operating costs marginally decreased from 42.80% in fiscal 2010 to 40.69% in fiscal 2011. Details of some of the components of other operating costs were as follows:
Manpower costs constituted about 32.55% and 28.29% of other operating costs in fiscal 2011 and fiscal 2010, respectively. These costs increased by 17.40% in fiscal 2011 as against an increase of 13.90% in fiscal 2010. The increase in fiscal 2011 was primarily due to an increase in manpower and normal increments. During 2011, the Company incurred severance costs of 269 million. As of March 31, 2011, the Company had a total of 6,539 employees, of which 5,250 employees (80%) were based in India. Outsourced manpower costs decreased by 31.44% from 2,070 million in fiscal 2010 to 1,419 million in fiscal 2011. Outsourced manpower costs constituted about 3.06% and 4.56% of other operating costs in fiscal 2011 and fiscal 2010.
Non-Operating Income /Expense
The following table sets forth information regarding the Companys non-operating income for the fiscal years ended March 31, 2010 and 2011:
Gain on Sale of Investments
The gain on sale of investments was 138 million and 347 million in fiscals 2011 and 2010, respectively. In fiscal 2011, the gain on sale of investments included a gain on the sale of mutual fund investments and a sale of ATG shares. In fiscal 2010, the gain on sale of investments was primarily from the sale of mutual fund investments. Profit from the sale of mutual funds reduced from 343.60 million during fiscal 2010 to 46.23 million during fiscal 2011. The reduction was due to a substantially lower level of investments in mutual funds in fiscal 2011 as compared to fiscal 2010. During fiscal 2011, there was also a gain of 91.73 million on the sale of the Companys investments in ATG shares.
Interest Income/Expense (Net)
Net interest represents the net interest accrued by the Company on its bank and other deposits and borrowings under its overdraft facilities. Interest income from banks and others increased to 762 million in fiscal 2011 from 673 million in fiscal 2010 due to loans made to SEPCO Group. During fiscal 2011, the Company had interest expense of 4,088 million on short-term and long-term debt as against 4,188 million in fiscal 2010. The decrease is primarily due to higher capitalization of interest in fiscal 2011 compared to fiscal 2010. In fiscal 2011 and 2010, the Company had interest income on income tax refunds of 40 million and 2,183 million related to its India operations, respectively.
Investments in mutual funds were in debt funds whose return was linked to interest rate movements. In fiscal 2011, a majority of the Companys investments in mutual funds were sold. As these investments were in growth schemes instead of dividend schemes, the impact of a dividend is realized at the time of the sale of the investment. Dividends from mutual funds increased from 2 million in fiscal 2010 to 3 million in fiscal 2011 because of an increase in investible surplus in Tata Communications Transformation Services Limited.
Liabilities not required to be settled written back
During fiscal 2011, the Company wrote back liabilities of 625 million as against 304 million in fiscal 2010. The reason for liabilities written back was due to the expiration of the statute of limitations period during which the liabilities were not claimed by the creditors.
Other income of 864 million in fiscal 2011 primarily included rental and space sharing income of 232 million, the recovery of bad debts, interest income from customers and scrap sales income of 183 million, a gain on the re-measurement of previously held interests in BitGravity on the acquisition date of 128 million and a termination fee from CEC for terminating the joint venture agreement amounting to 90 million. In fiscals 2011 and 2010, other income included rental and space sharing income of 232 million and 246 million, respectively.
Income Tax Expense
The statutory income tax rates in India were 33.22% for fiscal 2011 and 33.99% for fiscal 2010. For fiscal 2011, income tax expense was 765 million as against an income of 969 million for fiscal 2010. The Company incurred tax expense of 765 million since the Companys operations outside India incurred losses which could not be set-off against the profits earned by the Companys operations within India.
Fiscal 2010s income tax benefit of 969 million was comprised of 1,831 million relating to tax expense and 2,800 million relating to excess tax provisions written back by the Company. The Company incurred tax expense of 1,831 million since the Companys operations outside of India incurred losses which could not be set-off against the profits earned by the Companys operations within India. The excess income tax provisions written back amounting to 2,800 million were attributable to the receipt of a favorable order by the Company from the Income Tax Appellate Tribunal (ITAT) pertaining to the reimbursement of DoT levy for fiscal 1994. After reviewing the records produced, the ITAT held that the relevant provisions of the law for reopening of the assessment were not followed by the Income Tax Department (ITD) and therefore quashed the reassessment order summarily. The ITD appealed to the High Court against the ITATs decision, but the High Court dismissed the appeal. The time limit allowing the ITD to appeal against the aforesaid Order of the High Court before the next higher judiciary, i.e. Supreme Court, has not yet expired.
In fiscal 2007, the Company commenced its analysis under Section 382 of the US Internal Revenue Code to ascertain the amount of operating loss in respect of a subsidiary of Teleglobe International Holdings Ltd (TIHL) that will be available for future utilization consequent to the acquisition of TIHL by the Company in fiscal 2006. In fiscal 2008, deferred tax assets and corresponding valuation allowances of 2,605 million were written-off as the Company concluded that these deferred tax assets were not available for future utilization. The above write-off did not have an impact on the income statement as there was an equal but opposite movement in valuation allowance.
An unfavorable outcome in the future on the tax disputes in respect of its tax holiday claim under Section 80-IA, claim for capital loss on sale of ICO Global, reimbursement of DoT levy by the GoI and penalties would negatively affect the Companys results of operations by 6,275 million, 1,077 million, 5,530 million and 8,185 million, respectively.
Taxes and interest relating to these tax disputes (other than penalties) were paid in full and classified as advance income taxes on the balance sheet. Penalties of 4,952 million (out of a total 8,185 million of penalties imposed by the tax authorities) were also paid and classified as advance income taxes on the balance sheet, which may result in an additional future penalty payment of up to 3,233 million if the Company is unsuccessful in all of its significant tax disputes.
The Company continues to be subject to other significant claims by the revenue authorities in respect of income tax matters. These are described under Item 8Legal Proceedings.
Share in Net Loss of Equity Method Investees
During fiscal 2010 and fiscal 2011, the Companys equity ownership interest in UTL was 26.66%, in SEPCO was 43.16% and in Neotel was 27%. SEPCO is an investment company which owns 51% of the equity of Neotel. Therefore, the effective interest of the Company in Neotel was 49.01% in fiscal 2010 and 2011 for purposes of determining the Companys share in net loss of equity method investees.
The Companys share in the net loss of equity method investees in fiscal 2011 was 5,636 million as compared to 3,192 million in fiscal 2010 because the Companys share in the net losses from Neotel and SEPCO increased from 3,197 million in fiscal 2010 to 5,534 million in fiscal 2011. Neotel is currently in its network and customer reach expansion phase which resulted in the losses.
Critical Accounting Policies
The Company prepares its statutory financial statements in accordance with Indian GAAP. U.S. GAAP differs in certain material respects from Indian GAAP. Principal differences insofar as they relate to the Company include differences in the measurement basis for acquisitions accounted for using the purchase method, determination of fair value of non-controlling interest and other assets and liabilities on acquisition, valuation of investments, measurement and accounting for impairment loss of longlived assets, accounting for deferred income taxes, accounting for retirement benefits, compensated absences, financial instruments, proposed dividends and taxes thereon and the presentation and format of the financial statements and related notes.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated 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. The Companys intangible assets include customer relationships, computer software, brand value and license costs. Customer relationships, computer software, license and spectrum are amortized using the straight-line method, over the estimated useful lives. The purchase of capacity on specified cables for a stated period of time which is substantially lower than the economic lives of the cables, are classified as an operating lease, and recognized as expense on a straight-line basis over the contracted period. Capacity purchase contracts which do not transfer the right to use any specific cable and do not identify capacity in a specific cable, and under which the service provider can meet its obligation by routing the Companys traffic utilizing capacity in any of its cables depending on availability are accounted for as service contracts. Capacity expense under service contracts are recognized on a straight-line basis over the contract period.
Impairment of Long-Lived Assets
The Company evaluates the carrying amount of its long-lived assets for impairment whenever events or circumstances indicate the carrying amount of such assets may not be recoverable. The Company subjects such assets to a test of recoverability based on the undiscounted cash flows from the use or disposition of such assets. If the carrying amount of the asset exceeds the undiscounted cash flows, the Company recognizes an impairment loss measured as the amount by which the carrying amount of the long-lived asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying value or the fair value less the cost to sell. The undiscounted 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
Goodwill is tested for potential impairment on an annual basis, which for the Company is performed on March 31 or in interim periods if events and circumstances indicate a potential impairment. As reporting units are determined after an acquisition or evolve with changes in business strategy, goodwill is assigned and it may no longer retain its association with a particular transaction. All revenue streams and related activities of a reporting unit, whether acquired or organic, are available to support the carrying amount of goodwill. The reporting units for impairment assessments are generally one level below the operating segment and have been identified as international voice (included under the GVS operating segment), broadband Internet through optical fiber, broadband and dial-up Internet, CDN (all included under the GDMS operating segment) and South Africa Operations.
Under the applicable accounting standard, goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step is performed. However, if the carrying amount of a reporting unit is zero or negative, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. The adjustments to measure the assets, liabilities and intangibles at fair value are only for the purpose of measuring the implied fair value of goodwill and these adjustments are not reflected in the consolidated balance sheet. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
Estimating the fair value of reporting units is a subjective process that requires significant estimates and assumptions, particularly related to cash flows and the appropriate discount rates. The fair values of the reporting units were determined using a valuation technique consistent with the income approach. For the purpose of the income approach, internal forecasts were used to estimate the future cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) after considering current economic conditions and trends, estimated future operating results and growth rates, anticipated future economic and regulatory conditions and the availability of necessary technology and network infrastructure. Due to the inherent uncertainty involved in making those estimates, actual results could differ from the estimates. The Company evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair values of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, for reasonableness.
Cash flows were discounted based on equity return rates. The Company believes that the discount rates used adequately reflect the inherent risk in the businesses of the reporting units, uncertainty in the economic environment and the risks associated with the internally developed forecasts. Expected rates of equity returns were estimated based on historical market returns for similar industries of the reporting units.
Legal claims against the Company
There are a number of legal proceedings covering a wide range of matters pending or threatened against us. We have accrued for loss contingencies that are probable and where the loss amount can be reasonably estimated. The judgments we make with regard to whether to establish an accrual are based on an evaluation of all relevant factors by internal and external legal counsel, as well as subject matter experts and are 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. In respect of loss contingencies where the reliable estimate of loss is a range, the amount accrued is the better estimate of the loss within the range and when no amount within the range is a better estimate than any other amount, the minimum amount in the range in accrued.
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. The Company measures 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 based on internal projections which are updated to reflect current operating trends the character of income needed to realize future tax benefits, and all available evidence. Income tax benefits from tax positions have been recognized only when it was more likely than not that the Company would be entitled to the economic benefits of the tax positions. The more-likely-than-not threshold has been determined based on the technical merits that the position will sustain upon examination. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are recognized. 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 the Indian and foreign tax authorities. Upon adoption of ASC 740-10-25, the variation due to review could be minimized but may not be altogether eliminated.
Accounting policy on uncertain tax positions
Uncertain tax positions are recognized using the more-likely-than-not threshold determined solely based on the technical merits that the tax positions sustain upon examination. Tax positions that met the recognition threshold are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to uncertain tax positions are classified as income tax expense in the statement of operations and reduced from advance income taxes which are presented in the balance sheet under non-current assets.
Asset retirement obligations
The Companys asset retirement obligations relate to the costs associated with the removal of long-lived assets when they will be retired. The Company records a liability at the estimated current fair value of the costs associated with the removal obligations. The fair value of a liability for an asset retirement obligation is recognized if a reasonable estimate of the fair value can be made. The liability for an 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 engineering estimates. The Company measures changes in a liability for an asset retirement obligation due to the 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 accretion 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.
Determination of non-controlling interest and other Assets and Liabilities on acquisition
Business combination transactions in which the Company obtains control over one or more businesses are accounted under the acquisition method. Identifiable assets acquired and liabilities assumed, and non-controlling interests are recognized at acquisition date fair values. Previously held interests in the acquire are remeasured to fair value at the acquisition date and any resulting gain or loss is recognized in earnings. Goodwill represents the excess of aggregate of the consideration transferred, fair value of the non-controlling interest and in a business combination achieved in stages, the acquisition-date fair value of the Companys previously held equity interest in the acquiree.
The fair value of property, plant and equipment was estimated using the depreciated replacement cost. Identifiable intangible assets consist mainly of customer relationships and brand. Fair values of customer relationships were determined using the excess earnings method and that of the brand using the royalty relief method.
The fair value of the non-controlling interest was estimated applying the income approach. The fair value measurement is based on forecast of revenues and earnings before interest, taxes, depreciation and amortization (referred to as EBITDA) which consists of significant inputs that are not observable in the market and thus represents a fair value measurement categorized within level 3 of the fair value hierarchy.
The Board of Directors and the Managing Director of the Company together as a group constitute the Chief Operating Decision Makers (CODM) which allocate resources to and assess the performance of the segments of the Company.
Consequent to the merger of TCISL and Tata Communications, the Company changed its operational and organizational structure and realigned the retail internet business to Global Data and managed services. Consequently, the management has the following operating segments:
GVS: includes International and National Long Distance Voice services
GDMS: includes corporate data transmission services data centers, virtual private network, signaling and roaming services, television and other network and managed services.
Effective May 30, 2011 the Company had a new operating segment called South African Operations (SAO) on acquisition of controlling interest in SEPCO Group. SEPCO group is separately assessed by the CODM to allocate resources and assess performance. Product includes wholesale international voice and data transit, enterprise business solution services for the wholesale and corporate market, telephony and data services for retail customers in South Africa
Previously the Company reported following operating segments:
Fiscal Year 2012 Compared to Fiscal Year 2011
The following is a summary of segment information for the fiscal years ended March 31, 2011 and March 31, 2012:
Global Voice Solutions
Revenues from our GVS segment increased by 4.16% in fiscal 2012, from 65,516 million in fiscal 2011 to 68,241 million (US$ 1,341 million) in fiscal 2012 primarily due to a continuous focus on increasing volumes. In fiscal 2012 and 2011, the Company carried over 46.7 billion minutes and over 40 billion minutes, respectively, of international voice traffic. The Indian business of the Company carried international traffic of approximately 17 billion minutes in fiscal 2012 and 13 billion minutes in fiscal 2011. However, volumes in NLD services have decreased by approximately 18% to 8.56 billion minutes in fiscal 2012 from 10.39 billion minutes in fiscal 2011 and gross revenue per minute for this business decreased significantly from 0.41 in fiscal 2011 to 0.35 (US$ 0.007) in fiscal 2012. The segment results of GVS increased from 10,015 million in fiscal 2011 to 11,631 million in fiscal 2012, an increase of 16.14% due to increasing volumes.
Segment results of GVS were approximately 17.04% and 15.29% of total GVS revenues for fiscal 2012 and fiscal 2011, 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.
Global Data and Managed Services
Revenues from our GDMS segment increased by 17.29% in fiscal 2012, from 48,324 million in fiscal 2011 to 56,677 million (US$ 1,114 million) in fiscal 2012. Though the Company witnessed volume growth, tariff drops were significant and the Company expects tariffs to continue to be under pressure. Also, other value-added services including mobile roaming and signaling, global roaming, data centers, TV uplinking, VPN and O&M, have all contributed to significant growth in segment revenues.
The segment result of GDMS increased from 35,948 million in fiscal 2011 to 41,544 million (US$ 816 million) in fiscal 2012, an increase of 15.57%. The GDMS segment results were 74.39% and 73.30% of GDMS segment revenue for fiscal 2011 and fiscal 2012, respectively.
South Africa Operations
Revenues from the South Africa Operations segment contributed 14,967 million (US$ 294 million) in fiscal 2012, with a segment results (loss) of (1,551) million (US$ (30) million). The segment is carried out by the Companys subsidiary Neotel which offers wholesale international voice and data transit, enterprise business solution services for the wholesale and corporate market, and telephony and data services for retail customers in South Africa.
Fiscal Year 2011 Compared to Fiscal Year 2010
The following is a summary of segment information for the fiscal years ended March 31, 2010 and March 31, 2011:
Global Voice Solutions
Revenues from our GVS segment increased by 6.64% in fiscal 2011, from 61,436 million in fiscal 2010 to 65,516 million in fiscal 2011 primarily because of a continuous focus on increasing volumes. In fiscal 2011 and 2010, the Company carried more than 40 billion minutes and 32.6 billion minutes, respectively, of international voice traffic. The Indian business of the Company carried international traffic of approximately 13 billion minutes in fiscal 2011 and 9.76 billion minutes in fiscal 2010. Similarly, volumes in NLD services have increased by approximately 9% to 10.39 billion minutes in fiscal 2011 from 9.51 billion minutes in fiscal 2010 and gross revenue per minute for this business decreased significantly from 0.45 in fiscal 2010 to 0.41 in fiscal 2011. The segment results of GVS decreased from 11,014 million in fiscal 2010 to 10,015 million in fiscal 2011, a decrease of 9.07% due to a decrease in margins.
Segment results of GVS were approximately 15.29% and 17.93% of total GVS revenues for fiscal 2011 and fiscal 2010, respectively.
Global Data and Managed Services
Revenues from our GDMS segment increased by 8.24% in fiscal 2011, from 44,644 million in fiscal 2010 to 48,324 million in fiscal 2011. Though the Company witnessed volume growth, tariff drops were significant and the Company expects tariffs to continue to be under pressure. Also, other value-added services including mobile roaming and signaling, global roaming, data centers, TV uplinking, VPN and O&M, have all contributed to significant growth in segment revenues.
The segment result of GDMS increased from 32,820 million in fiscal 2010 to 35,948 million in fiscal 2011, an increase of 9.53%. The GDMS segment results were 73.51% and 74.39% of GDMS segment revenue for fiscal 2010 and fiscal 2011, respectively.
Allocation of Costs Among Segments
Revenues and interconnect charges are directly attributable to each segment. Space segment utilization charges, rent of landlines and other network and transmission costs are allocated based on the utilization of satellite and landlines by the businesses included in each segment. License fees for international voice and corporate data transmission services are allocated based on net revenues generated from these services. Depreciation and certain other costs cannot be allocated to GVS and GDMS, are classified as unallocable costs.
Telecommunication services are provided utilizing the Companys property, plant and equipment 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
Cash Flows Provided by Operating Activities
The Company generated 14,413 million, 11,678 million and 8,169 million (US$ 161 million) as cash from operating activities for fiscal 2010, fiscal 2011 and fiscal 2012, respectively. During fiscal 2012, there is an increase in net operating profit and decrease in cash flows from operations.
During fiscal 2012, the net impact of working capital and other non-current assets and liabilities changes was an outflow of 3,263 million (US$ 65 million) as against an outflow of 228 million in fiscal 2011 and an outflow of 397 million in fiscal 2010. The outflow of net working capital and other non-current assets and liabilities changes increased due to a combination of a net change in accounts receivable, advance income taxes (net), prepaid expenses and other current assets, other non-current assets, accounts payable and other current and non-current liabilities in fiscal 2012 over fiscal 2011. The changes in working capital and other non-current assets and liabilities arise primarily from the timing of receipts and payments related to our accounts receivable, other current and non-current assets, accounts payable and other current and non-current liabilities.
Cash Flows Used in Investing Activities
The Company used cash amounting to 21,604 million, 15,024 million and 20,949 million (US$ 412 million) towards investing activities during fiscal 2010, fiscal 2011 and fiscal 2012, respectively. The Companys purchase of tangible and intangible assets net of sale proceeds was increased by 3,427 million in fiscal 2012 as against fiscal 2011. In fiscal 2011, the Company used net cash of 3,815 million during the year from sale of available for sale investments, net of purchases, which in 2012 was 1,291 million (US$ 26 million). The Company, during fiscal 2012, increased its stake in Neotel and provided loans to the extent of 3,445 million (US$ 68 million). The Company made additional investments in Bit Gravity of 308 million and provided loans of 4,028 million to Neotel in fiscal 2011. Also during fiscal 2011, the Company also received a refund which amounted to 748 million from CEC arising from dissolution of a joint venture. In fiscal 2010, a sum of 9.26 million was placed as interest bearing restricted deposits with banks due to statutory / legal requirements which matured in fiscal 2011 and had a value of 13 million. As of March 31, 2011, the Company had 76.25 million of interest bearing restricted deposits with banks due to statutory / legal requirements. As of March 31, 2012, the Company had 95.74 million of interest bearing restricted deposits with banks due to statutory / legal requirements.
Cash Flows Provided by (Used in) Financing Activities
The Company generated capital resources from its financing activities to the extent of 4,186 million in fiscal 2010, 7,847 million in fiscal 2011 and 8,063 million (US$ 158 million) in fiscal 2012. During fiscal 2012, the Companys proceeds from long-term borrowings net of repayment were 11,636 million, which the Company used for various capital expenditures and to augment growth plans. The Company repaid debt in an aggregate amount of 4,082 million (US$ 80 million) (net of fresh borrowings) in fiscal 2012 ranging from overnight overdrafts to short-term loans for a period up to one year. As of March 31, 2012, the Company had total long-term debt of 104,391 million (US$ 2,051 million) and cash and cash equivalents of 2,758 million (US$ 54 million) as against long-term debt of 55,164 million and cash and cash equivalents of 6,831 million as of March 31, 2011.
The cash flow activities from operating activities, used in investing and financing activities include impact of consolidation of Neotel from May 30, 2011 till March 31, 2012 in our financial statements.
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 for new and existing 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 extent to which financing is required in fiscal 2013 is discussed below. 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 could be detrimental to the Companys liquidity position and could cause delays and cost escalations in the Companys business plans. Management expects to honor all its likely commitments through existing surplus cash and liquid investments and any balance through financing.
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 71.76% in SEPCO. SEPCO in turn owns 51% in Neotel, the second national telecommunications operator in South Africa. In addition to the above, the Company directly owns 27.5% in Neotel. The Board has approved an investment limit of up to US$ 538 million in Neotel.
Planned Capital Expenditures and Cash Requirements
The Company has forecasted total capital expenditures of approximately 19,949 million (US$ 392 million) in its annual operating plan for fiscal 2013 for upgrading facilities and setting up new networks and facilities. This is over and above the planned capital expenditure of 3,182 million (US$ 62.53 million) by Neotel.
The capital expenditures include a planned investment in ongoing cable systems (West Africa Cable system) for approximately 712 million (US$ 14 million).
Fall in Revenues due to Tariff Drops both in Voice and Data
The Company has gradually over the past years witnessed pricing pressures on its products and services, both in the GVS and Other segments. 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 2013 and future periods, which would affect the working capital of the Company.
Unfavorable Resolution of Tax Disputes
An unfavorable outcome in the future in the tax disputes in respect of its tax holiday claim under Section 80-IA, reimbursement of DoT levy by the GoI, claim for capital loss on sale of ICO Global, and transfer pricing disputes and penalties would negatively affect the Companys results of operations by 6,275 million, 5,530 million, 1,077 million, 2,228 million and 8,175 million, respectively.
Taxes and interest relating to these tax disputes (other than penalties) have been paid in full and classified as advance income taxes on the balance sheet. Penalties of 4,956 million (out of total of 8,175 million of penalties imposed by tax authorities) have also been paid and classified as advance income taxes on the balance sheet, which may result in an additional future penalty payment of up to 3,209 million if the Company is unsuccessful in all of its significant tax disputes.
Details of Loan Facilities and Financing Requirements
In fiscal 2012 and fiscal 2011, the Companys outstanding loan balance increased by approximately 46,620 million and 7,231 million, respectively, consisting of an decrease in short-term borrowings of 6,610 million and an increase in short-term borrowing of 4,682 million in fiscal 2012 and 2011 respectively, an increase in long-term borrowings of 53,230 million and 2,549 million in fiscal 2012 and fiscal 2011, respectively. The increase in long-term borrowings in fiscal 2012 is mostly attributable to inclusion of borrowings of South African subsidiary Neotel with effect from fiscal 2012. The unsecured short-term borrowings carried a weighted average interest rate of approximately 2.57% per annum and 2.95% per annum in fiscal 2012 and fiscal 2011, respectively. The long-term borrowings consist of secured and unsecured term loans (mainly denominated in U.S. Dollar, ZAR and Rupee). U.S. Dollar denominated loans carried a fixed interest rate of 3.95% and 4% per annum and variable interest rates ranging from Libor plus 65 basis points to 470 basis points per annum, ZAR denominated loans carried a fixed interest rate of 12.73% per annum and variable interest rates ranging from Jibar plus 250 basis points to 675 basis points per annum, and Indian Rupee loans were at interest rates ranging between 5.95% to 11.70% per annum. The maturity dates of these loans range from April 2012 to September 2021. Please refer note 16 in the Companys consolidated financial statements for additional information. As of March 31, 2012, the Companys total interest bearing debt was 295% of total shareholders equity as compared to 176% on March 31, 2011.
The Company has unutilized lines of short-term credit facilities of 5,921 million (US$ 116 million) and 3,272 million as of March 31, 2012 and March 31, 2011, respectively and 539 million (US$ 11 million) and 484.40 million of long-term credit facilities as of March 31, 2012 and March 31, 2011, respectively.
In fiscal 2013 (excluding the South African subsidiary Neotel), the Company would not require any incremental debt financing as per the annual operating plan for fiscal 2013. Neotel would require an additional financing of approximately 3,420 million (US$ 67 million) to meet its likely commitments which are primarily capital expenditures. The additional financing for Neotel may be obtained by way of equity contributions from shareholders. These contributions will likely to be in ZAR. Further, the Company intends to refinance/repay 9,798 million (US$ 193 million) of short-term loans and 5,061 million (US$ 99 million) of long-term loans maturing in fiscal 2013. The repayment / refinance of the above referenced loans will be through internal accruals and/or loans from Indian and overseas banks / financial institutions. Though the Company has the option to raise financing in various currencies, these loans will likely to be denominated mainly in Indian Rupee, U.S. Dollar and ZAR. The Company may also obtain financing through one or more equity offerings which would be subject to shareholders approvals (including the GoI).
Details of Loan covenant restrictions applicable to long term U.S. Dollar denominated loans:
For fiscal 2012 and fiscal 2011, the financial loans covenants are applicable to long-term Dollar denominated loans of the company. The financial covenants are based on the annual consolidated financial statements of the Company prepared in accordance with Indian Accounting Standards (referred to as Indian GAAP). In accordance with the loan agreements, for the purpose of calculating our compliance with our covenants, we exclude the financial statements of VSNL SNOSPV, a subsidiary, SEPCO, and UTL, joint ventures and Neotel a subsidiary of SEPCO (referred to as Relevant Group).
A breach of any financial covenant will result in an event of default under the applicable loan agreement and will give the lenders the right to demand immediate loan repayments. The financial covenants that are applicable for fiscal 2011 and fiscal 2012 are set out in the table below. The terms defined in the loan agreements that are used in the financial covenants are detailed after the table.
Tangible Net Worth means, as at any particular time, shareholders funds less (but without double counting) any amount included in shareholders funds which is attributable to:
But ignoring any variation in the credit or debit balance on the Relevant Group consolidated profit and loss account since the date of the then-latest audited consolidated balance sheet of the Relevant Group except to the extent reflected in any later Relevant Group consolidated profit and loss statement.
Total Net Fixed Assets means at any time but without double counting:
In each case, of each member of the Relevant Group as determined from the financial statements of the Relevant Group.
It may be noted that in case of 23,510 million (US$ 462 million) loans last traded value of TTSL is taken at 100% and in case of 32,003 million (US$ 629 million) loan last traded value of TTSL is taken at 75%.
Net Debt means at any time, without double counting, the aggregate net amount of all borrowings of the Relevant Group:
EBITDA definition for 43,292 million (US$ 851 million) loans:
EBITDA means, in relation to any relevant fiscal year, the total consolidated profit of the Relevant Group for that relevant fiscal year:
EBITDA definition for 12,221 million (US$ 240 million) loans:
EBITDA means, in relation to any relevant fiscal year, the total consolidated profit of the Relevant Group for that relevant fiscal year:
For avoidance of doubt, EBITDA for any Relevant Period includes any extraordinary and exceptional gains including Tax and license fee refunds and any interest on such refunds in that Relevant Period.
Interest Expense definition for 43,292 million (US$ 851 million) loans:
Interest Expense means, in relation to any Relevant Period, the aggregate amount of interest and any other finance charges (whether or not paid, payable or capitalized) accrued by the Relevant Group in the relevant fiscal year in respect of borrowings including:
Interest Expense definition for 12,221 million (US$ 240 million) loans:
Interest Expense means, in relation to any Relevant Period, the amount of interest shown as interest expense in the profit and loss account of the Relevant Group in that Relevant Period in respect of borrowings
Net Interest Expense means Interest Expense less all income received by the Relevant Group in the relevant fiscal year in respect of any cash and/or cash equivalents and investments made in mutual funds, bank deposits and any other available means of surplus funds investment of the Relevant Group.
Based on the covenants levels as on March 31, 2012, the Company excluding the South African subsidiary Neotel could have raised additional debt of 18,110 million without breaching any of its debt covenants as of March 31, 2012. Accordingly, considering the Companys current financial position, and taking into account managements assessment of its business potential, the Company anticipates that it will continue to comply with the covenants described above.
Details of Loan covenant restrictions applicable to Long term ZAR denominated loans:
For fiscal 2012, the financial loans covenants are applicable to long-term ZAR denominated loans in Companys South African subsidiary Neotel.
A breach of any financial covenant, if not waived will result in an event of default under the applicable loan agreement and will give the lenders the right to demand immediate loan repayments. The financial covenants that are applicable for fiscal 2012 and beyond are set out below in table. The covenants No. 1 to 4 for fiscal 2012 were waived by lenders.
If Neotel (i) satisfies the undertakings set out in point 1 above (EBITDA) at any Quarter Date; and (ii) breaches any one or more of the undertakings set out in clauses 2, 3 and/or 4 above (the Breached Undertakings) Neotel shall be entitled to request the Agent (acting in its sole and absolute discretion) to waive the Breached Undertakings.
Historic Test Period means last four consecutive financial quarters.
Basis of Calculation
The calculation of ratios and other amounts shall be made by reference to the latest annual financial statements and/or quarterly management Accounts and/or latest updated financial model and other financial information of Neotel, or other period in relation to which the calculation is made.
Other material limitationsDebt and non-debt financing with respect to Tata Communications Limited:
Panatone Finvest Limited and the GoI agreed in the Shareholders Agreement that the Company would not undertake certain corporate actions unle