XBOM:500108 Mahanagar Telephone Nigam Limited Annual Report 20-F Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 20-F
 
(Mark One)
 
¨
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 31, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
Date of event requiring this shell company report _____________________
 
 
For the transition period from ______ to _____
 
Commission file number 333-13944
 
Mahanagar Telephone Nigam Limited
(Exact name of Registrant as specified in its charter)
 
N/A
(Translation of Registrant’s name into English)
The Republic of India
(Jurisdiction of incorporation or organization)

12th Floor, Jeevan Bharati Building, Tower-1
124 Connaught Circus
New Delhi 110001
India
(Address of principal executive offices)
 
Smt Anita Soni, Director Finance, 91-11-2332-1095, dirfinco@bol.net.in
Jeevan Bharati Building, Tower-I, 124 Connaught Circus, New Delhi 110001, India
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contract Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
American Depositary Shares, each representing two equity shares.
Equity Shares (Not for trading, but only in connection with the registration of the American Depositary Shares)
 
New York Stock Exchange
 

 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 
None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 630,000,000 Equity Shares
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  o     NO  ý
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  YES  o   NO ý
 
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  ý     NO  o
 
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  ý     NO    o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
Accelerated filer
 
ý
Non-accelerated filer
 
¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP
ý
International Financial Reporting Standards as issued
by the International Accounting Standards Board
¨
Other
¨


If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
Item 17 o      Item 18 o
 
If this report is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES    o     NO    ý
 
 
 

 
 
Page

 
CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS
iii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
iii
INTRODUCTION
iv
PART I
   
1
Item 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
1
Item 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
1
Item 3.
KEY INFORMATION
1
 
A.
SELECTED FINANCIAL DATA
1
   
Selected Financial And Operating Data
1
   
Exchange Rates
3
 
B.
CAPITALIZATION AND INDEBTEDNESS
4
 
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
4
 
D.
RISK FACTORS
4
Item 4.
INFORMATION ON THE COMPANY
16
 
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
16
 
B.
BUSINESS OVERVIEW
28
   
Legal Proceedings
43
 
C.
ORGANIZATIONAL STRUCTURE
47
 
D.
PROPERTY, PLANTS AND EQUIPMENT
48
   
Telecommunications Regulation In India
52
Item 4A.
UNRESOLVED STAFF COMMENTS
56
Item 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
57
 
A.
OPERATING RESULTS
57
 
B.
LIQUIDITY AND CAPITAL RESOURCES
71
 
C.
RESEARCH AND DEVELOPMENT
72
 
D.
TREND INFORMATION
72
 
E.
OFF-BALANCE SHEET ARRANGEMENTS
72
 
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
72
 
G.
SAFE HARBOR
73
Item 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
73
 
A.
DIRECTORS AND SENIOR MANAGEMENT
73
 
B.
COMPENSATION
77
 
C.
BOARD PRACTICES
78
 
D.
EMPLOYEES
78
 
E.
SHARE OWNERSHIP
81
Item 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
81
 
A.
MAJOR SHAREHOLDERS
81
 
B.
RELATED PARTY TRANSACTIONS
82
 
C.
INTERESTS OF EXPERTS AND COUNSEL
84
Item 8.
FINANCIAL INFORMATION
84
 
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
84
 
B.
SIGNIFICANT CHANGES
85
Item 9.
THE OFFER AND LISTING
85
 
A.
OFFER AND LISTING DETAILS
85
   
Market Price Information
85
 
 
i

 
 
 
B.
PLAN OF DISTRIBUTION
86
 
C.
MARKETS
87
   
The Indian Securities Market
87
 
D.
SELLING SHAREHOLDERS
93
 
E.
DILUTION
93
 
F.
EXPENSES OF THE ISSUE
93
Item 10.
ADDITIONAL INFORMATION
93
 
A.
SHARE CAPITAL
93
 
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
93
 
C.
MATERIAL CONTRACTS
99
 
D.
EXCHANGE CONTROLS
100
   
Indian Foreign Exchange Controls and Securities Regulations
100
 
E.
TAXATION
103
 
F.
DIVIDENDS AND PAYING AGENTS
108
 
G.
STATEMENT BY EXPERTS
108
 
H.
DOCUMENTS ON DISPLAY
108
 
I.
SUBSIDIARY INFORMATION
109
Item 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
109
Item 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
110
 
A.
DEBT SECURITIES
110
 
B.
WARRANTS AND RIGHTS
110
 
C.
OTHER SECURITIES
110
 
D.
AMERICAN DEPOSITARY SHARES 
110
PART II
   
112
Item 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
112
Item 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
 
 
PROCEEDS
112
Item 15.
CONTROLS AND PROCEDURES
112
Item 16.
[RESERVED]
118
Item 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
118
Item 16B.
CODE OF ETHICS
118
Item 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
118
Item 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
119
Item 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
 
 
PURCHASERS
119
Item 16F.    
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
119
Item 16G.    
CORPORATE GOVERNANCE
119
Item 16H.    
MINE SAFETY DISCLOSURE  121
PART III
   
122
Item 17.
FINANCIAL STATEMENTS
122
Item 18.
FINANCIAL STATEMENTS
122
Item 19.
EXHIBITS
122
SIGNATURES
123
       
EXHIBIT INDEX
124
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
125
 
CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS.
 
In this Annual Report on Form 20-F, references to "U.S." or "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 “Rs.” or "Indian rupees" are to the legal currency of India. The financial information in this report has been prepared in accordance with US GAAP with respect to our consolidated statements of operations, shareholders’ equity and cash flow for the fiscal years ended March 31, 2010, 2011 and 2012, and our balance sheets as of March 31, 2011 and 2012.  Our fiscal year ends on March 31 of each year, so all references to a particular fiscal year are to the year ended March 31 of that year.  The consolidated financial statements, including the notes to those financial statements, are set forth at the end of this report.
 
For purposes of this report, “we,” “us,” “our,”  “MTNL” or the “Company” refers to Mahanagar Telephone Nigam Limited.
 
Although we have translated in this report certain Indian rupee amounts into U.S. dollars for convenience, this does not mean that the rupee amounts referred could have been, or could be, converted into dollars at any particular rate, the rates stated below, or at all.  All translations from Indian rupees to U.S.dollars with respect to financial data as of March 31, 2012 are based on the noon buying rate in the City of New York for cable transfers in Indian rupees on such date.  The Federal Reserve Bank of New York certifies this rate for customs purposes on each date the rate is given.  The noon buying rate on March 31, 2012 was 50.89 per U.S.$1.00.Any discrepancy in any table between totals and sums of the amounts listed may be due to rounding. For more information regarding rates of exchange between the Indian rupee and the U.S. dollar, see Item 3. “Key Information-Selected Financial Information-Exchange Rates” in this report.

Information contained in our website, www.mtnl.net.in, is not a part of this annual report, and no portion of such information is incorporated herein.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking statements”, as defined in Section 27A of the U.S.  Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, that are based on our current expectations, assumptions, estimates and projections about our Company, our industry, economic conditions in the markets in which we operate, and certain other matters.  The forward-looking statements are subject to various known and unknown risks and uncertainties.  Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “will likely result,” “believe,” “expect,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “project,” “should,” and similar expressions or variations of these expressions.  We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect.  Actual events or results may differ materially.  The risks and uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed elsewhere in this report.  See Item 3D. “Key Information—Risk Factors” and Item 5. “Operating and Financial Review and Prospects” in this report.  In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements.  Other than required by law, we do not undertake to release the results of any revisions of these forward-looking statements to reflect new information or future events or circumstances. Readers should carefully review the information in this report and in filings we may make in the future with the U.S. Securities and Exchange Commission.
 
 
INTRODUCTION
 
Mahanagar Telephone Nigam Limited was established by the government of India in 1986 to provide fixed-line and other basic telecommunications services in Delhi and Mumbai.  Delhi and Mumbai are two of the largest, most densely populated and wealthiest metropolitan areas in India.  Since then we have taken actions to become a leading telecommunications company in India.  As of March 31, 2012, our fixed-line telecommunications networks in Delhi and Mumbai had an aggregate of approximately 3.46 million fixed lines in service.  In February 2001, we launched our cellular services using global system for mobile communications or GSM technology in Delhi and Mumbai and, as of March 31, 2012, we had approximately 5.59 million subscribers.  We launched CDMA-based services in 1997 based on limited mobility, and as of March 31, 2012, we had approximately 247,000 limited mobile subscribers in Mumbai and Delhi.  CDMA is a digital wireless technology that increases network capacity by allowing more than one user to simultaneously occupy a single radio frequency band with reduced interference.  We launched broadband services in 2004 and as of March 31, 2012, we had approximately one million broadband subscribers in Mumbai and Delhi.  We began providing Internet service in both Delhi and Mumbai in February 1999 and had approximately 8.99 million Internet access subscribers as of March 31, 2012. In December 2008, we were the first operator to inaugurate the 3G services in India, with commercial launch in February 2009 in Delhi and in May 2009 in Mumbai.  We also entered into MoU with different enterprises in order to broaden our telecommunication network such as Delhi police, income tax department etc. We are also seeking to monetize some fixed assets by renting out our vacant buildings and land to third party entities. See Item 4. “Information on the Company” in this report.
 
The government of India owns approximately 56.25% of our equity shares and the Life Insurance Company of India owns approximately 18.81% of equity shares, with the balance of the shares publicly traded on the major stock exchanges in India and as American Depositary Shares on the New York Stock Exchange.  See Item 7A. “Major Shareholders and Related Party Transactions-Major Shareholders” and Item 9C.“The Offer and Listing-Markets” in this report.
 
 
PART I
 
 
Item 1.
Identity of Directors, Senior Management and Advisers
 
Not applicable.
 
 
Item 2.
Offer Statistics and Expected Timetable
 
Not applicable.
 
 
Item 3.
Key Information
 
 
3A.  Selected Financial Data
 
SELECTED FINANCIAL AND OPERATING DATA
 
The following selected financial and operating data should be read in conjunction with our consolidated financial statements and the related notes, and Item 5 “Operating and Financial Review and Prospects” and the other financial information included elsewhere in this report and our other reports filed with the SEC.
 
Our selected financial and operating data included in this report are presented in Indian rupees and are derived from our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP), along with notes thereto, for the fiscal years ended March 31, 2008, 2009, 2010, 2011 and 2012.
 
The selected statement of operations data and cash flow data for the three years ended March 31, 2012, and the selected balance sheet data as of March 31, 2011and 2012 under US GAAP have been extracted or derived from our consolidated audited US GAAP financial statements which are included elsewhere in this report. The selected statement of operations data and cash flow data for the years ended March 31, 2008 and 2009, and the selected balance sheet data as of March 31, 2008, 2009 and 2010 under US GAAP are derived from our consolidated audited US GAAP financial statements not included in this report.  Our historical results do not necessarily indicate our results expected for any future period.
 
Consolidated financial statements for the year ended March 31, 2012 have been translated for convenience into U.S. dollars (although we have translated certain rupee amounts in this report into U.S. dollars for convenience, this does not mean that the rupee amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate, the rates stated below, or at all).  All translations from Indian rupees to dollars with respect to financial data as of March 31, 2012 are based on the noon buying rate in New York City for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York on such date.  The noon buying rate on March 31, 2012 was Rs.50.89 per U.S.$1.00.
 
 
Under US GAAP

Statement of Income Data:
 
Fiscal Years Ended March 31,
       
   
2008
   
2009 (Restated)
   
2010
   
2011
   
2012
   
2012
 
   
(Rs. in millions except per share data)
   
Convenience translation into million of U.S.$ (Unaudited)
 
Revenues (Rs.)
    44,705       41,837       35,513       36,778       33,870       666  
Total Cost and expense
    (47,027 )     (51,981 )     (79,983 )     (65,348 )     (67,808 )     (1,332 )
Liability for post retirement medical benefits written back
    -       -       -       -       -       -  
Operating Income
    (2,323 )     (10,144 )     (44,471 )     (28,570 )     (33,938 )     (667 )
Other Income/(expense), net
    4,661       9,962       7,105       4,935       (7,745 )     (152 )
Income before Income taxes
    2,338       (182 )     (37,365 )     (23,635 )     (41,683 )     (819 )
Income taxes
    121       (1,241 )     11,806       (9,276 )     (3 )     (0 )
Equity in (losses) of affiliates
    (1 )     (8 )     5       15       16       0  
Net income (Loss) (Rs.)
    2,458       (1,431 )     (25,554 )     (32,896 )     (41,670 )     (819 )
Weighted average equity shares outstanding
    630       630       630       630       630       12  
EPS - Basic & Diluted
    3.90       (2.27 )     (40.56 )     (52.22 )     (66.14 )     (1 )
Basic and diluted earnings per GDR/ADS
 
Rs.7.80
   
Rs.(4.54)
   
Rs.(81.12)
      (110 )     (139 )     (3 )
Dividends paid per equity share
 
Rs.4.68
   
Rs.1.17
      -       -       -       -  
Dividends paid per equity share
    $0.12       $0.02       -       -       -       -  
Dividends paid per GDR/ADS
 
Rs.9.37
   
Rs.2.34
      -       -       -       -  
Dividends paid per GDR/ADS
    $0.23       $0.05       -       -       -       -  

Balance Sheet Data:
 
As at March 31,
       
   
2008
   
2009 (Restated)
   
2010
   
2011
   
2012
   
2012
 
   
(Rs. in millions except per share data)
   
Convenience translation into million of U.S. $ (Unaudited)
 
Cash and Cash equivalents (Rs.)
    1,346       1,419       1,056       1,276       908       18  
Investment in bank deposits
    32,444       46,725       47,835       459       486       10  
Due from Related Parties
    25,713       35,435       39,053       44,848       50,864       999  
Total Assets
    193,547       343,732       313,707       245,049       239,609       4,708  
Due to Related Parties
    8,118       122,301       124,861       19,837       23,140       455  
Long Term Debt     -       -       -       55,340        70,000        1,376  
Total Liabilities
    105,160       257,512       253,040       217,277       253,507       4,981  
Total Shareholder Equity
    88,387       86,220       60,667       27,772       (13,898 )     (273 )
Capital Stock *
    12,949       12,949       12,949       12,949       12,949       254  
 
*Includes capital stock and additional paid-in capital
 
 
Cash Flow Data:
 
Fiscal Years Ended March 31,
       
   
2008
   
2009 (Restated)
   
2010
   
2011
   
2012
   
2012
 
   
(Rs. in millions except per share data)
   
Convenience translation into million of U.S.$ (Unaudited)
 
Net Cash from Operating activities
    27,640       130,849       13,158       (112,260 )     (14,506 )     (285 )
Net Cash used in investing activities
    (25,006 )     (130,037 )     (13,521 )     37,924       (7,786 )     (153 )
Net Cash from financing activities
    (2,948 )     (737 )     -       74,557       21,923       431  
 
EXCHANGE RATES
 
Fluctuations in the exchange rate between the Indian rupee and the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee price of our equity shares on the Indian Stock Exchanges and, as a result, will likely affect the market price of our American Depository Shares, or ADSs, in the United States, and vice versa. Such fluctuations will also affect the U.S. dollar conversion by the depositary of any cash dividends paid in Indian rupees on our equity shares represented by the ADSs.
 
The following table sets forth, for the fiscal years indicated, information concerning the number of Indian rupees for which one U.S. dollar would be exchanged based on the noon buying rate in the City of New York for cable transfers of Indian rupees, as certified for customs purposes by the Federal Reserve Bank of New York.
 
Fiscal Year Ended March 31,
 
At end of
period
   
Average
rate (1)
   
High
   
Low
 
                         
2008
    40.02       40.13       43.05       39.48  
2009
    50.87       46.32       51.96       39.73  
2010
    44.95       47.18       50.48       44.94  
2011
    44.54       45.49       47.49       43.90  
2012
    53.01       46.86       53.71       44.00  
2013 (through July 27, 2012)
    55.39       54.32       57.13       50.64  
 
(1)       The average rate is the average of the exchange rates on the last business day of each month during the period
 
The following table sets forth the high and low exchange rates for the previous six months and is based on the noon buying rate in the City of New York during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York:
 
Month
 
High
   
Low
 
January 2012
    53.11       49.39  
February 2012
    49.48       48.65  
March 2012
    51.38       49.14  
April 2012
    52.65       50.64  
May 2012
    56.38       52.50  
June 2012
    57.13       54.91  
July 2012 (through July 27)
    56.22       54.30  
 
On July 27, 2012, the noon buying rate was Rs.55.39= U.S.$1.00.
 
 
3B.  Capitalization and Indebtedness

Not applicable.
 
 
3C.  Reasons for the Offer and Use of Proceeds

Not applicable.
 
3D.  Risk Factors

You should carefully consider all the information contained in this report and the following risk factors that affect us and our industry in evaluating us and our business.  The risks below are not the only ones we face.  Additional risks not currently known to us or that we presently deem immaterial may also affect our business.  This report also contains forward-looking statements that involve risks and uncertainties.  Should any of these risks or uncertainties occur, our business, financial condition and results of operations could suffer and the market price of our equity shares or ADSs could decline.
 
Risks Relating to Our Business
 
We expect to continue to encounter increased competition in each of our markets.
 
The Indian government is rapidly liberalizing the telecommunications industry in India.  The Department of Telecommunications (DoT) may license, at its discretion, multiple additional service providers in any service area, with respect to both basic telecommunications services and cellular services.  In November 2003, the DoT issued guidelines for Unified Access Licenses, which cover both basic and cellular services within a service area.  In the Indian context, “basic telecommunications services” or “basic services” include basic fixed-line access service and a number of other telecommunications services, other than long distance services, cellular service and Internet access.  Basic services also include CDMA-based fixed wireless and mobile services (without roaming) and broadband internet access (DSL).
 
The market for our basic services is limited to Mumbai and Delhi.  Tata Teleservices Limited, Reliance Communication Limited, Bharti Airtel Limited, Idea Cellular and Vodafone Essar are currently competing with us in those markets for basic services.  All of these companies already have significant telecommunications infrastructure in Delhi and Mumbai, including, with respect to Tata Teleservices and Reliance Infocomm, low-cost CDMA mobile and fixed wireless technology.  The teledensity (the number of telephone connections per capita) in Delhi and Mumbai has crossed more than 100%  at the fiscal year ended March 31, 2012  which indicates the restricted growth for the companies having  telecom operations in these cities. The Telecom Regulatory Authority of India (TRAI) issued “Telecommunication Mobile Number Portability Regulations (MNP), 2009” which was implemented in January 2011 in our license areas and make migration between service providers easier, thus increasing competition between the service providers and adding pressure on service providers to retain customers. We are particularly vulnerable to losing market share if these or other operators aggressively target our largest subscribers.  Some of our largest customers have already migrated to other basic service operators. For more details please refer to Item 4B.“Business Overview – Mobile Number Portability” in this report.
 
 
Income from basic services are the main component of our revenue which was approximately 80% of total revenue. The Indian telecom industry is witnessing the migration of subscribers from basic services to mobile services where we hold a smaller share in the total market for mobile services.
 
We experience significant and growing competition in the market for GSM cellular and Internet services.  Many of these service providers enjoy significant penetration in these markets, have established brand names and have more experience operating a cellular network than we have.  Cellular operators also face competition from rapidly growing CDMA-based mobile services, which are priced considerably lower than GSM cellular services.
 
Amid stiff competition from private operators, in the year 2009, we shifted the billing pattern from per minute to per second basis. Morever, Telecom Regulatory Authority of India or TRAI has made it mandatory for service providers to provide at least one plan in their postpaid and prepaid offerings with "per second" billing. To make this compulsory, on April 20, 2012,the TRAI has made amendments in the Telecommunication Tariff Order. After this amendment it has become mandatory for us to offer in each service area at least one tariff plan each for both postpaid and prepaid subscriber with a uniform pulse rate of 'one second'. This may significantly impact our revenues.

 
Increased competition has kept and is likely to continue to keep downward pressure on prices and has required and is likely to continue to require us to increase our capital investment to improve and expand our services and to keep current with technological changes. Further, the restriction on our ability to provide basic services outside Mumbai and Delhi inhibit us in competing with companies with a Pan-India presence. These developments, in turn, have had and may continue to have a negative impact on our financial results.  See Item 4B. “Business Overview -Competition.”
 
Our business is subject to substantial regulation by the Government.
 
The Indian government regulates our business through licensing of services and service areas, and through price tariffs on our services.  The license for fixed-line services is valid until March 31, 2013 and for cellular services is valid until October 2017.  The DoT retains the right to revoke our licenses after giving one month’s notice to us.  The DoT also retains the right, after giving notice to us, to modify the terms and conditions of our licenses at any time including the related tariffs and fees, and to permit additional licenses or bidding, if it believes it is necessary or expedient to do so in the interest of the general public or for the proper operation of the telecommunications sector.  A revocation of any license or a change in significant terms of any license, such as its duration, the amount of license fee payable, the range of services permitted and the scope of exclusivity could limit our ability to operate particular lines of our business or result in increased costs in the form of increased license fees or costs associated with applying for new licenses, or contesting limitations on our licenses and would have a material adverse effect on the Company’s business, financial condition and results of operations.
 
Reductions in telecommunications tariffs in India 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.  The decline in tariffs and the phase out of Access Deficit Charges (ADCs), while resulting in a traffic volume growth spurt, has materially and adversely affected our revenues and net income.  Accordingly, our historical revenue is not indicative of future revenue based on comparable traffic volumes.  As the prices for our communications services decrease, then unless we are able to increase volume or offer additional services from which we can derive additional revenue or otherwise reduce our operating expenses, our operating results will decline and our business and financial results will suffer.
 
 
We have sustained recent financial losses and expect to continue to sustain losses in the near future.
 
We sustained net losses of Rs.41,670 million for the 2012 fiscal year and Rs.32,895 million for the 2011 fiscal year. These losses are attributable to large staff costs due to provision of actuarial valued based pension benefits to absorbed employees pending finalization of modalities of payment by the Government as assured in the 2002 fiscal year, and increases in the cost of revenues and selling, general and administrative expenses in case of cellular services, amortization of 3G & BWA spectrum and interest cost from recent incurrence of indebtedness during those fiscal periods as well as increased employee benefits due to pay revisions.  See Item 5A. “Operating Results” in this report.
 
We do not plan to pay any dividend for fiscal year 2012
 
By reason of financial losses sustained for the 2012 fiscal year and continuing losses for the first quarter of the 2013 fiscal year, our Board has recommended that we do not pay any dividend for the 2012 fiscal year.  Although we did not pay any dividends for the prior three fiscal years, previously we had paid dividends at the rate of Rs.1 per equity share for the 2009 fiscal year and of Rs.4 per equity share for the three fiscal years prior thereto.  There is no assurance that we will resume payment of dividends on our equity shares in the near future.
 
We need to continue to increase the volume of traffic on our network to generate profits.
 
We must continue to increase the volume of Internet, data, voice and video transmissions on our network in order to realize the anticipated cash flow, operating efficiencies and cost benefits of our network.  If we do not maintain our relationships with current customers and develop new large-volume customers, we may not be able to substantially increase traffic on our network, which may adversely affect our ability to become profitable.  With increased competition from new licensees together with price reductions in many portions of our offering services, we also need to leverage our existing infrastructure to realize better utilization of network, operating efficiencies and cost benefits.  Further, certain costs, including costs related to repairs and maintenance, can be of a fixed nature and, in the absence of revenues shall continue to adversely impact our profitability. No assurance can be given that we will achieve the revenue increases and expense reductions to reach profitability in the future.
 
Regulations applicable to public sector enterprises in India may affect our ability to compete effectively.
 
As long as the Indian government’s shareholding in us equals or exceeds 51%, we are deemed to be an Indian government company subject to laws and regulations applicable to public sector enterprises in India.  These laws and regulations govern, among other things, personnel matters, procurement, budgeting and capital expenditures and the generation of funds through the issuance of securities.
 
Under our articles of association, the President of India, on behalf of the Indian government, may also issue directives with respect to the conduct of our business and affairs, and certain matters with respect to our business, including the appointment and remuneration of our Chairman-and-Managing Director and the declaration of dividends.  None of our shareholders, management or board of directors may take action in respect of any matter reserved for the President of India without his approval.  If the President of India does not allow us to make capital expenditures pursuant to our business plan, we may be unable to compete effectively or maintain profitability.  Government formalities, including requirements that many of our purchases be made through a competitive bidding process, often cause delays in our equipment and product procurement; these delays can place us at a disadvantage relative to private sector competitors.
 
 
The Indian government, our controlling shareholder, also controls and considers the interests of the largest government-owned telecommunications company, Bharat Sanchar Nigam Limited (BSNL), resulting in significant related party transactions.  The Indian government has been evaluating the possibility of a restructuring involving BSNL and us.
 
The Indian government, through the DoT, controls both BSNL and us, holding 56.25% of our outstanding equity shares and 100% of BSNL’s equity shares.  The DoT appoints all of our directors.  The DoT has the power to determine the outcome of most actions requiring approval of our board of directors or shareholders, including proposed expansion of our basic and cellular services into new areas in which we may compete with BSNL, transactions with BSNL or the assertion of claims against BSNL.  When considering many of these matters, the DoT may also take into account the interests of BSNL, the largest government-owned telecommunications company.  Failure by the DoT to resolve conflicts involving BSNL and us in an equitable manner could have a material adverse effect on our business prospects.
 
We have significant amounts due from related parties and our inability to collect them or change the terms of our arrangements with our related parties could adversely affect our revenues and profitability.  See Notes 4 and 20 to our consolidated financial statements and Item 7B. “Related Party Transactions” and Item 4B. “Business Overview - Legal Proceedings” in this report.
 
Since we and BSNL have been incurring heavy losses for past couple of years,  the DoT is attempting to synergize our operations  with BSNL without a merger. The DoT has set up a committee under the chairmanship of DoT Secretary R. Chandraskehar to oversee the required policy decisions and institutional framework for an alliance. However, the merger with BSNL, which was long overdue by DoT,  has been put on hold now by DoT because of various issues. The synergy would allow us to cut costs. It would also allow subscribers of both the companies to roam freely on each other's network, with the exception of interconnect charges.  DoT is also exploring the synergy among other firms including ITI, CDOT and TCIL with BSNL and MTNL.  We cannot assess the likelihood of such a transaction, or the impact of such a transaction on our business or the value of our shares or ADSs.
 
We do not have title to property, and we cannot sell our properties without payment of stamp duties and registering properties in our name.
 
In 1987, the assets and properties of the DoT located in Delhi and Mumbai were transferred to us by an order of the government of India (the Government) and a deed of sale was executed by the Government in our favor representing an irrevocable transfer.  Indian law generally requires that to perfect the transfer or lease of real property, the transfer should be evidenced by a formal, duly stamped deed of transfer and registered with the Central Land Registrar within a specified period after the execution of the deed of transfer or lease. A formal transfer deed for real property of the DoT, transferred by the Government to us has been executed but has not been registered with the appropriate municipal authorities.  The formal transfer deed and physical delivery of possession of the DoT’s non-real estate assets has resulted in the transfer of such non-real estate assets of the DoT to us in Delhi and Mumbai.  See Item 4D. “Property, Plants and Equipment-Properties” in this report.
 
Indian law also requires payment of stamp duty (at rates which vary among states) on instruments, which effect transfer of title to real estate or in respect of leases of real estate.  We may be liable for stamp duty, if any, upon registration (other than with respect to the DoT properties acquired from the Government as of March 30, 1987). All liabilities for stamp duties in respect of the DoT properties acquired by us from the Government as of March 30, 1987 are to be borne by the Government.  We have been advised by our counsel that, although we have valid possession (including the risks and rewards of ownership) and title to all of our property, we need to have certain documents relating to transfer or lease of real property duly registered and stamped to enable us to perfect and thereby acquire marketable title to real property in our possession.  Accordingly, we cannot sell our properties without payment of stamp duties and registering the properties in our name.  In preparing these consolidated financial statements, we have capitalized provision for stamp duty based on its best estimate amounting to Rs.63 million and Rs.89 million as of March 31, 2011 and 2012, respectively. We do not intend to sell any of these properties. In terms of our Articles of Association, we must obtain prior approval from the President of India in respect of any sale or disposal of any land or building costing more than Rs.1 million.
 
 
Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance.  In certain areas management concluded that there were material weaknesses in our internal controls.
 
We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.  If we fail to comply with new or changed laws or regulations and standards differ, our business and reputation may be harmed.
 
As we are incorporated in India, U.S. investors should be aware that there are differences in the governance standards and shareholder rights for a company incorporated in the United States and those applicable to a foreign issuer such as us.  Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), Sarbanes-Oxley Act of 2002, U.S. Securities and Exchange Commission (SEC) or New York Stock Exchange (NYSE) rules or regulations, Securities and Exchange Board of India (SEBI) rules, and Indian stock market listing regulations create uncertainty for companies like ours. These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time, as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such corporate governance standards.  See Item 16G. “Corporate Governance” in this report.
 
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment requires the commitment of significant financial and managerial resources and external auditor’s independent assessment of the internal controls over financial reporting. We consistently assess the adequacy of our internal controls over financial reporting, remediate any control deficiencies that may be identified, and validate through testing that our controls are functioning as documented. The Dodd-Frank Act has imposed additional corporate governance standards on companies, like us, whose securities are listed in the United States under the rules of the SEC and the New York Stock Exchange.
 
It is also possible that laws in India may be made more stringent with respect to standards of accounting, auditing, public disclosure and corporate governance. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
 
As of March 31, 2012, management had concluded that our internal controls over periodic reporting were not effective by reason of certain material weaknesses, particularly as to reconciliation of subscriber deposits, accounting for related party transactions, Broadband operations and information technology controls.  These deficiencies could result in misstatements in reporting in those areas.  We had undertaken and completed certain initiatives and remedial action in those areas during the 2012 fiscal year and are continuing such remedial action.  See Item 15. “Controls and Procedures” in this report.
 
 
Risk relating to high interest cost
 
During the current fiscal year, we have raised the long term loans and working capital loan to retire the short term loan obligations and to meet the other liabilities for current operations (see Notes 21 and 22 of the notes to our consolidated financial statements in this report). We are also in process of raising additional debt in the near future which may result in severe interest obligations. Our interest rates on long term debt are floating in nature which are determined by lending banks at base rate plus spread. Any upward movement in base rate by the lending bank, in order to check the buoyant inflation trend in Indian economy, may increase our borrowing cost and may hurt our financial results.
 
Re-farming of the spectrum on the basis of recommendation by TRAI may have huge cost to us
 
The TRAI in its recommendation on “Spectrum Management and Licensing  Framework” dated May 11, 2010, had recommended that all future  licences should be Unified Licences and that spectrum be delinked from  the licence. Presently in India, there is a service specific licensing regime in  the sense that apart from access service licence, there are separate  licences for different telecom services viz NLD, ILD, VSAT, IP-1, ISP,  GMPCS, PMRTS etc. For each type of telecom services the  service providers are required to obtain separate licences. There shall be three levels of Unified Licence: National level, Service area level and District level. The Applicant Company can  apply either for National level Unified Licence or Service area level  Unified Licence or District level Unified Licence. Only Service level Unified Licence will be given for Metro areas of Delhi, Mumbai and Kolkata. One time non refundable Entry Fee for Unified Licence  shall be (a) Rs.15 crore for  National level Unified Licence; (b) Rs.1 crore for each Service area level Unified Licence except for Jammu & Kashmir and North East Service areas where Entry fee will be Rs.50 lakh each, and (c) Rs.10 lakh for each District level Unified Licence. Upon the Unified Licence coming into effect, all the existing licences issued under Section 4 of the Indian Telegraph Act 1885 shall stand  automatically converted to the Unified Licence with same validity period and with no extra cost. After delinking the licence from spectrum, a company has to go for re-farming of the spectrum by an auction process. The re-farming is likely to impact our financial results owing to an increase in network operating expenditure. It would lead to significant cash outflow due to amount payable for the spectrum at auction discovered price and cost of additional capex and opex for re-alignment of spectrum.

 
Abolishment of roaming charges by the Government of India in New Telecom Policy 2012 may decrease our revenues in future.

The Government of India has approved New Telecom Policy, 2012 on May 31, 2012 which aims to do away with roaming charges. The customer will use the services without paying any extra charges while in domestic roaming. In India, roaming charges account for nearly 10 per cent of the companies’ revenues. Abolishment of roaming charges may impact the companies’ revenues to a large extent in future. However, we believe that in the long run, as usage will increase with no roaming charges, it might offset the revenue loss caused to us from the loss of roaming revenues.
 
 
Risks Relating to Investments in Indian Companies
 
There are risks of political uncertainty in India that could affect our business.
 
During the past decade, the government of India has pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. Nevertheless, the role of the Indian central and state governments in the Indian economy as producers, consumers and regulators has remained significant. A coalition government is in power. We cannot assure that these liberalization policies will continue in the future. The rate of economic liberalization could change, and specific laws and policies affecting foreign investment, currency exchange rates and other matters affecting investment in our securities could change as well, and also could result in increases in wages. A significant change in India’s economic liberalization and deregulation policies could disrupt business and economic conditions in India generally and could adversely affect the telecommunications licensing and regulatory framework in which we operate our business.
 
A slowdown in economic growth in India may adversely affect our business and results of operations.
 
Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy.  The Indian economy has grown significantly over the past few years.  Any future slowdown in the Indian economy, as well as in other countries where we do significant business, could harm our customers and other contractual counterparties, and thus negatively impact us.  In addition, the Indian economy is in a state of transition.  The share of the services sector of the economy is rising while that of the industrial, manufacturing and agricultural sector is declining.  It is difficult to gauge the impact of these fundamental economic changes on our business, however, our revenues would be adversely affected by slowdowns in the IT sector.
 
BlackBerry services in India might be banned which could affect our customers and us.
 
The government of India raised concerns about BlackBerry services in India relating to the security of e-mails and messaging transmitted or received on BlackBerry devices.  Indian security agencies are unable to intercept and monitor BlackBerry services because of encryption mode of communication and non-availability of BlackBerry servers in India.  We are among the nine operators providing BlackBerry services to users in India.  Although discussions have been held to deal with the Government’s concerns, any action taken by the Government in the interest of security of India could affect the BlackBerry users and providers, including us, such as our incurring additional costs or sustaining loss of revenues.
 
Recent introduction of Direct Tax Code (DTC), Goods and Services Tax Act (GST) and Point of Taxation Rules(POTR)  by the Government might affect our future net income or cash inflows.
 
In 2010, major tax changes were made to the Indian tax codes upon introduction of Direct Tax Code 2010 (DTC) by Government of India, replacing much of the current income tax laws.  Although, the Government has not yet notified the date of its implementation, however, upon coming into effect, the Government would be able to withdraw tax benefits, reduce incentives, change tax rates, impose additional taxes and otherwise revise the tax structure.  The DTC could result in additional tax liabilities and costs, thereby affect our future net income. The Goods and Services Tax (GST) will impose a new indirect tax regime upon coming into operation.  The GST is like a value-added tax on goods and services levied at each point of sale or provision of service, in which at the time of sale of goods or provision of service the seller or service provider may claim the input credit of tax which it has paid while purchasing the goods or procuring the services.  The GST will replace the sales tax and similar taxes.  The implementation of the GST could result in additional costs to us and also could adversely impact our future revenues.
 
 
During the 2011 fiscal year, the central government issued new indirect tax rules relating to service tax which are called Point of Taxation Rules, 2011(POTR). Under Point of Taxation (PoT) Rules 2011 ‘Telecommunication services’ provided by telecom operators to subscribers have been specifically notified to be taxed as ‘continuous supply of services’ i.e. on periodic billing as per the contract (assuming the billing is done within 14 days of decided milestone) or collection, whichever is earlier. The POTR have preponed the liability to deposit Service tax in case of post-paid connection (for landline, mobile phone, broadband connections) from the month of collection to the month of billing. On an average the impact may be of a month. We shall be liable to pay the service Tax immediately after issuing bills. If payments are not received, we will have to incur the cash loss due to this change. Further loss of interest on the service tax paid for the interim period from payment of service tax till the date of collection. The government of India has introduced the concept of ‘Negative list’ in the union budget 2012 wherein all services shall come under the ambit of service tax except those which have been listed in the ‘Negative list’. As a result, the cost of the services shall become more costly due to expansion of service tax net coupled with enhancement of service tax rate from 10% to 12% from April 1, 2012.
 
Withholding of income tax deductions claimed by us and demands raised by Income Tax department can adversely impact our financial condition.

We have made various tax refunds claims in view of the tax holidays available under section 80IA of Income Tax Act, 1961. We have received claims to the extent of 75% of our claims, however, 25% of the claims are still pending with Honorable High Court. The Income tax department has also raised various demands on us and our subsidiaries in respect of customers deposits etc. The payment of demands and refusal of our claims may adversely affect our financial condition. For information about legal disputes, see Item 4-“Business Overview - Legal Proceedings”.

 
Financial instability in other countries, particularly emerging market countries in Asia, could adversely affect the Indian economy and cause our business and the market for our equity shares and ADSs to suffer.
 
The recent global economic and credit conditions in the United States, Europe and Asia have affected the Indian economy in varying degrees.  Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India.  A loss of investor confidence in the financial systems of other emerging markets may cause increased volatility in Indian financial markets and, indirectly, in the Indian economy in general.  Any worldwide financial instability could influence the Indian economy and could have a material adverse effect on the market for securities of Indian companies, including our equity shares and ADSs, and upon the exchange rates for the Indian rupee.
 
Regional conflicts in South Asia, social conflict, terrorism and related military activity may adversely affect the Indian economy or world economic activity, either of which could adversely affect our business and the prices of our equity shares and ADSs.
 
Terrorist attacks, such as the attacks in July 2011, November 2008 and July 2006 in Mumbai, and other acts of violence or war in India and surrounding area have the potential to have a direct impact on our business, as the majority of our revenues are derived from customers located in Delhi and Mumbai.  Furthermore, such terrorist attacks, threats or war in India could cause a disruption in the delivery of our services to our customers, and could have a negative impact on our business, personnel, assets and results of operations, and could cause our customers or potential customers to delay or postpone the purchase or use of our services, as well as create a greater perception that investments in Indian companies involve higher degrees of risk. This, in turn, could have an adverse impact on the market for securities of Indian companies, including our equity shares and our ADSs.
 
 
The markets in which we operate are subject to the risk of earthquakes, floods and other natural disasters.
 
Some of the regions that we operate in are prone to earthquakes, flooding and other natural disasters.  In the event that any of our business centers are affected by any such disasters, we may sustain damage to our operations and properties and suffer significant financial losses.  Further, in the event of a natural disaster, we may also incur costs in redeploying personnel and property.  In addition if there is a major earthquake, flood or other natural disaster in any of the locations in which a substantial number of our customers are located, we face the risk that our customers may incur sustained business interruption which may materially impair our ability to service such customers.
 
Risks Relating to the ADSs and Equity Shares
 
Ability to withdraw equity shares from the depositary facility is uncertain and may be subject to delays.
 
Government restrictions on foreign ownership of Indian companies limit the number of shares that may be owned by foreign investors and generally require government approval for foreign ownership.  Foreign ownership is permitted up to 74% with FDI beyond 49% requiring government approval under the sectoral caps currently provided for by the government of India and the Reserve Bank of India. Investors who withdraw equity shares from the depositary facility will be subject to Indian regulatory restrictions on foreign ownership of equity shares upon withdrawal.  It is possible that this withdrawal process may be subject to delays.  See Item 10D. “Additional Information - Indian Foreign Exchange Controls and Securities Regulation” in this report.
 
Ability to sell in India any equity shares withdrawn from the depositary facility may be subject to delays.
 
Persons seeking to sell in India any equity shares withdrawn upon surrender of an ADS will require Reserve Bank of India approval for each such transaction. Because of possible delays in obtaining necessary approvals, holders of equity shares may be prevented from realizing gains during periods of price increases or limiting losses during periods of price declines.
 
Ability to withdraw and redeposit shares in the depositary facility is limited, which may cause our equity shares to trade at a discount or premium to the market price of our ADSs.
 
Because of Indian legal restrictions, despite recent relaxations, the supply of ADSs may be limited.  Under procedures recently adopted by the Reserve Bank of India, the depositary is permitted to accept deposits of our outstanding equity shares and deliver ADSs representing the deposited equity shares to the extent, and limited to the number, of ADSs that have previously been converted into underlying equity shares.  Under these new procedures, if you elect to surrender your ADSs and receive equity shares, you may be unable to re-deposit those outstanding equity shares with our depositary and receive ADSs because the number of new ADSs that can be issued cannot, at any time, exceed the number of ADSs converted into underlying equity shares or result in foreign equity in us exceeding 49%.  This may restrict your ability to re-convert the equity shares obtained by you to ADSs.  Also, investors who exchange ADSs for the underlying equity shares and are not holders of record will be required to declare to us details of the holder of record.  Any investor who fails to comply may be liable for a fine of up to Rs.1,000 for each day such failure continues.  See Item 10D. “Additional Information—Indian Foreign Exchange Controls and Securities Regulations” in this report.
 
The restrictions described above may cause our equity shares to trade at a discount or premium to our ADSs.
 
 
Conditions in the Indian securities market may affect the price or liquidity of the equity shares and the ADSs.
 
The Indian securities markets are generally smaller in terms of trading volume and more volatile than securities markets in the world’s major financial centers.  Indian stock exchanges have also experienced problems that have affected the market price and liquidity of the securities of Indian companies.  These problems have included temporary exchange closures, the suspension of stock exchange administration, broker defaults, settlement delays and strikes by brokers.  In addition, the governing bodies of the Indian stock exchanges have from time to time imposed restrictions on trading in certain securities, limitations on price movements and margin requirements.  Further, from time to time, disputes have occurred between listed companies and stock exchanges and other regulatory bodies, which, in some cases, may have had a negative effect on market sentiment.  Similar problems could happen in the future and, if they do, they could affect the market price and liquidity of our equity shares and our ADSs.
 
Because there may be less company information available in Indian securities markets than securities markets in more developed countries, the price of our equity shares could fluctuate unexpectedly.
 
There is a difference between the level of regulation and monitoring of the Indian securities market and the activities of investors, brokers and other participants and that of markets in the United States and other developed economies.  The Securities and Exchange Board of India is responsible for improving disclosure and other regulatory standards for the Indian securities markets.  The Securities and Exchange Board of India has issued regulations and guidelines on disclosure requirements, insider trading and other matters.  There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed economies.  As a result, shareholders could act on incomplete information and cause the price of our equity shares to fluctuate unexpectedly.
 
ADS holders may be unable to exercise preemptive rights available to shareholders and therefore may suffer future dilution of their ownership position.
 
A company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any new equity shares, unless these rights have been waived by at least 75% of the company’s shareholders present and voting at a shareholders’ general meeting.  Holders of our ADSs as well as our shareholders located in the United States may be unable to exercise preemptive rights for our equity shares underlying our ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available.  Our decision to file a registration statement will depend on the costs and potential liabilities associated with any such registration statement, as well as the perceived benefits of enabling investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time.  We do not commit to filing a registration statement under these circumstances.  If we issue any such rights in the future, the rights would be issued to the depositary, which may sell the rights in the securities markets in India for the benefit of the holders of our ADSs.  There can be no assurance as to the value, if any, the depositary would receive upon the sale of the rights.  To the extent that holders of our ADSs as well as our shareholders located in the United States are unable to exercise preemptive rights, their proportional interests in us would be reduced.
 
 
ADS holders may be subject to potential losses arising out of exchange rate risk on the Indian rupee and risks associated with the conversion of rupee proceeds into foreign currency.
 
Holders of ADSs as well as our shareholders located outside India are subject to currency fluctuation risks and convertibility risks, as our equity shares are quoted in Indian rupees on the Indian stock exchanges on which they are listed.  These fluctuations will affect the dollar equivalent of the rupee price of our equity shares on the Indian Stock Exchanges and, as a result, the price of the ADSs in the United States.  Dividends on our equity shares will also be paid in Indian rupees, and then converted into U.S. dollars for distribution to ADS holders.  Holders that seek to convert the rupee proceeds of a sale of equity shares withdrawn upon surrender of ADSs into foreign currency and export the foreign currency will need to obtain the approval of the Reserve Bank of India for each transaction.  In addition, holders that seek to sell equity shares withdrawn from the depositary facility will have to obtain approval from the Reserve Bank of India, unless the sale is made on a stock exchange or in connection with an offer made under the regulations regarding takeovers.  Holders of Indian rupees in India may also generally not purchase foreign currency without general or special approval from the Reserve Bank of India.
 
ADS holders may be subject to Indian taxes arising out of capital gains.
 
Generally, capital gains, whether short-term or long-term, arising on the sale of the underlying equity shares in India are subject to Indian capital gains tax.  For the purpose of computing the amount of capital gains subject to tax, Indian law specifies that the cost of acquisition of the equity shares will be deemed to be the share price prevailing on the Stock Exchange, Mumbai or the National Stock Exchange on the date the depositary advises the custodian to deliver equity shares upon surrender of ADSs.  The period of holding of equity shares, for determining whether the gain is long-term or short-term, commences on the date of the giving of such notice by the depositary to the custodian. See Item 10E. “Taxation” in this report.
 
Investors are advised to consult their own tax advisers and to consider carefully the potential tax consequences of an investment in our ADSs.
 
ADS holders may not be able to enforce a judgment of a foreign court against us.
 
We are a limited liability company incorporated under the laws of India.  All our directors and executive officers are residents of India and almost all of our assets and the assets of such persons are located in India.  India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments.  We have been advised by counsel that recognition and enforcement of foreign judgments is provided for on a statutory basis and that foreign judgments shall be conclusive regarding any matter directly adjudicated upon except where:
 
 
·
the judgment has not been pronounced by a court of competent jurisdiction;
 
 
·
the judgment has not been given on the merits of the case;
 
 
·
it appears on the face of the proceedings that the judgment is founded on an incorrect view of international law or a refusal to recognize the law of India in cases in which Indian law is applicable;
 
 
·
the proceedings in which the judgment was obtained were opposed to natural justice;
 
 
·
the judgment has been obtained by fraud; or
 
 
·
the judgment sustains a claim founded on a breach of any law in force in India.
 
 
It may not be possible for holders of our ADSs or our shareholders to effect service of process outside of India upon us or our directors and executive officers and experts named in the report who are residents of India or to enforce judgments obtained against us or them in foreign courts predicated upon the liability provisions of foreign countries, including the civil liability provisions of the federal securities laws of the United States.
 
Moreover, it is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India.  Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages as excessive or inconsistent with Indian practice.  An Indian court may not enforce a foreign judgment involving more than actual and quantifiable damages.
 
An active or liquid trading market for our ADSs is not assured.
 
An active, liquid trading market for our ADSs may not be maintained in the long term.  We cannot predict the extent to which an active, liquid public trading market for our ADSs will continue.  If there is no longer any active trading market for our ADSs, or if we fail to meet eligibility requirements, we may be required to delist from the NYSE, which could adversely affect the price of our ADSs and, potentially, our equity shares. In January 2012, the NYSE advised us that the stock price of our ADSs fell below the NYSE continued listing criteria for minimum price of $1.00 per share over a 30 day period and that failure to cure would result in delisting. In March 2012, we cured the minimum price deficiency. However, in June 2012, the NYSE advised us of a new price deficiency. We are considering our options of delisting our ADSs from the NYSE and terminating our SEC reporting, subject to meeting one of the applicable standards. A delisting could reduce the liquidity for the ADSs.  A termination in SEC reporting  would reduce the information about us that we would thereafter file with SEC pursuant to an “information availability” exemption from SEC reporting, and thus available to US investors. Although holders of ADSs are entitled to withdraw the equity shares underlying our ADSs from our depositary at any time, there is no public market for our equity shares in the United States.
 
ADS holders may be restricted in their ability to exercise voting rights.
 
At our request, the depositary will mail to ADS holders any notice of shareholders’ meeting received from us along with information explaining how to instruct our depositary to exercise the voting rights of the securities represented by ADSs.  If the depositary receives voting instructions from ADS holders in time, relating to matters that have been forwarded to them, it will endeavor to vote the securities represented by those ADSs in accordance with such voting instructions.  However, the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit.  We cannot assure that all ADS holders will receive voting materials in time to enable them to return voting instructions to the depositary in a timely manner.  Securities for which no voting instructions have been received will not be voted.  There may be other communications, notices or offerings that we only make to holders of our equity shares, which will not be forwarded to holders of ADSs.  Accordingly, ADS holders may not be able to participate in all offerings, transactions or votes that are made available to direct holders of our equity shares.
 
Although announced policy indicates there is no intention to do so, possible sales of our equity shares by the government of India could affect the value of our ADSs.
 
The government of India holds approximately 56.25% of our outstanding equity shares.  There have been no indications that the current government of India plans to reduce its shareholding in us through a sale of equity.  As a result, this ownership and the right of the government of India to designate directors and officers affects the voting by shareholders and the ability to influence any third party transactions, such as mergers or other business combinations.
 
Any future disposal of equity shares by the Indian government could adversely affect the trading price of our equity shares and ADSs.
 
 
 
Item 4.
Information on the Company
 
 
4A.  History and Development of the Company

Mahanagar Telephone Nigam Limited was incorporated in New Delhi, India, on February 28, 1986 under the Indian Companies Act, 1956.  Our principal executive office is located at 12th floor, Jeevan Bharati Tower—1, 124 Connaught Circus, New Delhi—110001, India, and our telephone number is +91-11-2374-2212.
 
We were formed as a wholly-owned government of India Company and, on April 1, 1986, assumed responsibility for the control, management and operation of the telecommunications networks in Delhi and Mumbai, two of the largest metropolitan areas in India.  Videsh Sanchar Nigam Limited (VSNL) (now Tata Communications Limited) was established at the same time to provide international telecommunications services and the DoT retained responsibility for providing all other telecommunications services throughout India.  The DoT also assumed regulatory authority over the Indian telecommunications industry.  Simultaneously, the Telecom Commission was established in 1986 as an executive body under the Ministry of Communications to make policy decisions and to accelerate the development of all aspects of the telecommunications sector and the implementation of new telecommunications policies.
 
History and Development of the Indian Telecommunications Industry
 
Until the mid-1980s, the telecommunications sector in India was a monopoly controlled by the government of India through the Department of Posts and Telegraphs of the Ministry of Communications, providing all telecommunications services, both domestic and international.  The Indian Telegraph Act of 1885 established the government of India’s monopoly in the sector and, together with the Indian Wireless Telegraphy Act of 1933, provided the legal framework for the regulation of the Indian telecommunications industry.
 
Development of the telecommunications sector historically was seen as a relatively low priority and received limited budgetary support from the government of India.  As a result, the telecommunications infrastructure in India grew relatively slowly.  In the mid-1980s, faced with rapidly increasing demand for telecommunications services and equipment, the government of India commenced a reorganization of the sector designed to facilitate the rapid introduction of new technology, stimulate the growth of the telecommunications industry and tap the resources of the private sector in facilitating such technological innovation and growth.  The reorganization included the division of the Department of Posts and Telegraphs into the DoT and the Department of Posts.
 
In December 1991, with a view towards fulfilling its objective of facilitating the rapid introduction of new services and technology, the DoT invited bids from Indian companies with a maximum of 49% foreign ownership for two non-exclusive GSM cellular licenses in each of the cities of Kolkata (formerly called Calcutta), Chennai (formerly called Madras), Delhi and Mumbai.  The private operators commenced cellular services in late 1995.  Beginning in 1995, the DoT also invited tenders and awarded cellular licenses for the regional “circles” established for the purpose of licensing cellular services in the rest of India. In October 1997, we were permitted to provide GSM cellular service in Mumbai and Delhi. We believe that as of March 31, 2012, there were approximately 919 million wireless subscribers in India.
 
 
Since 1992, as part of its general policy of gradually reducing its holdings in public sector enterprises, the Indian government sold a portion of its equity holdings in us and VSNL (now Tata Communications Limited) to certain mutual funds, banks and financial institutions controlled by the government of India.  In our 1997 global depositary receipt offering, the Indian government sold 40 million of our equity shares represented by 20 million ADSs, constituting 6.3% of our then outstanding equity shares.  Additionally, in 1997 and 1999, the Indian government sold additional equity shares of VSNL in the form of global depositary receipts, thereby reducing its equity interest in that company to 51%.  In February 2002, the government of India divested an additional 25% interest in VSNL to the Tata Group through a competitive bidding process.
 
In May 1994, the government of India announced its National Telecom Policy, which was aimed at achieving accelerated telecommunications growth and network expansion.  The broad objectives of this policy were higher national telephone penetration, reduction of waiting lists, improvement in the quality of networks, improved rural access to telecommunications services, introduction of value-added services and private sector participation in the provision of basic and cellular services.
 
In order to achieve these objectives, the Indian government decided to permit private sector involvement in basic telecommunications services, which, in the Indian context, includes basic fixed-line access service and a number of other telecommunications services (including CDMA-based fixed wireless and mobile services (without roaming)), other than long distance services, cellular service and Internet access.  Accordingly, in September 1994, the Indian government announced its “Guidelines for Private Sector Entry into Basic Telecom Services,” and beginning in 1995, it began to invite tenders from companies with no more than 49% foreign ownership for basic service licenses for the regional “circles” established for licensing basic telecommunications services.  After a period of consolidation, the most prominent private-sector providers of basic telecommunications services currently include Bharti Airtel Limited, Tata Teleservices and Reliance Infocomm, each of which operates in multiple circles, which include Mumbai and Delhi, and hence now compete with us in those areas.
 
In February 1997, a multilateral agreement on basic telecommunications services was agreed to among member governments of the World Trade Organization.  As part of this agreement, the Indian government has reaffirmed its commitment to further liberalize the Indian telecommunications sector through the licensing of new basic and cellular service providers.
 
In March 1997, the Government established the Telecom Regulatory Authority of India (TRAI), an independent regulatory authority with broad regulatory powers over the telecommunications industry in India, including the power to set rates on domestic and international telecommunications services and determine the terms and conditions of interconnect arrangements between service providers.  These regulatory powers had previously been vested in the DoT, which controls us and is part of the Ministry of Communications.  However, the power to grant, renew or revoke licenses remains with the DoT.
 
In August 1995, Internet services were launched in India by VSNL (now Tata Communications Limited).  In November 1998, the government of India opened this sector permitting Internet service by private operators.  A liberal license regime was put in place with a view to increasing Internet penetration across the country.  Commencing in April 2002, the Government also permitted ISPs to process and carry voice signals (Restricted Internet Telephony).
 
In March 1999, the government of India announced its New Telecom Policy 1999 which sets forth as one of its central goals the fostering of increased competition in the Indian telecommunications industry and the liberalization of government telecommunications regulation.
 
Additionally, effective May 1, 1999, the TRAI implemented the 1999 tariff order pursuant to which the TRAI seeks to align tariffs charged by service providers with the corresponding costs associated with such services so as to limit cross-subsidization of services by a provider while allowing providers to set tariffs at any level below certain maximum levels.  The TRAI has since adjusted tariffs several times under the tariff order.
 
 
In October 1999, the DoT, which had both performed the role of licensor and policy maker for the Ministry of Communications and operated as India’s domestic long distance service provider and basic service provider (except for the areas of Delhi and Mumbai, which are covered by us), was bifurcated into two departments.  The DoT/Telecom Commission, or the DoT, now performs the role of licensor and policy maker, and the Department of Telecom Services, functions as the government of India’s local and long distance network service provider.
 
In October 2000, the Department of Telecom Services’ local and long distance business was corporatized into a new company named Bharat Sanchar Nigam Limited(BSNL). In Ministry of Communications the Indian government has established an independent Information Technology Department within the Ministry of Communications (now formally known as the Ministry of Communications and Information Technology).  The IT department will, among other things, promote the Internet, e-commerce and knowledge-based industries.  Internet licensing functions will remain with the DoT.  The DoT controls the equity shares in us that are held by the Indian government and appoints all of the directors on our board.  See Item 6A. “Directors and Senior Management” in this report.
 
The government of India passed the Information Technology Act, 2000 to facilitate the development of a secure environment for electronic commerce.  This Act established a regulatory authority for electronic commerce, provided legal validity to information in the form of electronic records and permitted, unless otherwise agreed, an acceptance of a contract to be expressed by electronic means of communication.  It also facilitated electronic intercourse in trade and commerce by providing the legal framework for authentication and origin of electronic record/communication through digital signature and eliminated uncertainties over writing and signature requirements.
 
In January 2001, the DoT issued guidelines for basic services, including provisions for wireless access systems limited with the local area.  In April 2001, the Indian government announced that all basic licensees, including us, may offer wireless-in-local loop services under their basic service licenses.
 
In November 2003, the DoT issued guidelines for Unified Access Service License (UASL) which cover within a service area both basic telecommunications services and cellular services.  In the Indian context, “basic telecommunications services” or “basic services” include basic fixed-lined access service and a number of other telecommunications services, other than long distance services, cellular service and Internet access.  Basic services also include CDMA-based fixed wireless and mobile services (without roaming).  In August 2005, the DoT clarified that fixed wireless service had the character of limited mobile service and, therefore, was categorized into limited mobile service within the scope of a basic service license.  Now basic service license is not being provided to new operators, only cellular service and UASL are being granted to new entrants.  UASL operators can provide basic services along with mobile services.  The National Broadband Policy, 2004 had the target of 20 million broadband connections by the end of year 2010; however, only approximately13.79 million connections were in effect by March 31, 2012.
 
In December 2005, the licenses of access providers were amended to provide broadband services, including triple play, i.e., voice, video and data.  ISPs can provide Internet Access/Internet content Services where Internet has been defined as a global information system that is logically linked by a globally unique address based on IP or its subsequent enhancement/up gradation.  ISPs cannot provide content services on a managed network (virtual/real) not derived from Internet. We also applied for  migration from ISP License Category ‘B’ to Category ‘A’ service Area All India.
 
 
The government of India has constantly endeavored to usher in policy decisions that could facilitate affordable public telecom facilities, in accordance with the New Telecom Policy, 1999.  In line with this strategy, in December 2005, the Government made a major decision to further liberalize the NLD (national long distance) and ILD (international long distance) licenses in order to facilitate the growth of the IT and IT-enabled services in India.  The Government decided to do away with IP II and IPVPN licenses.  Existing IP-II/IP-VPN licenses were allowed to migrate to NLD/ILD service licenses.
 
In November 2006, the DoT announced that all licensees shall ensure adequate verification of each customer before enrolling him as a subscriber.  In December 2008, the DOT issued regulations prescribing financial penalties for violations of the subscriber verification rules. For ensuring that the complete subscriber information is available with all the service providers and the same is duly verified, the DOT also decided that each licensee shall take up re-verification of the existing subscribers on priority and ensure that the re-verification of the existing subscribers is completed by March 31, 2007.  By re-verification, it is meant that there shall be 100% check of CAF/SAF documentary proof of identity and documentary proof of address and it would be ensured that the subscriber information available in service provider’s database matches with that in CAF/SAF and associated documents.  Further the licensee company would cross-verify the information from the actual user by calling the respective subscriber.  On April 20, 2010, the DoT announced the methodology for verification of telephone subscriber’s data requiring all service providers to submit the information about subscribers by state and license area each month to TERM cell and Economic Research Unit of the DOT.
 
Other Service Providers (OSPs) providing services like tele-banking, telemedicine, tele-trading, tele-education, e-commerce and call centers are required to be registered with the DoT.  OSPs allowed to operate by using infrastructure provided by various Access Service Providers.  Effective September 2007, the Government decentralized the registrations of call centers (domestic and international) under the “Other Service Providers” (OSP) category and the telemarketers under ‘Telemarketing’ category from the DoT (Headquarters) to the respective Vigilance Telecom Monitoring (VTM) Cells of 10 circles in the first phase.  The decentralization of registration has been successful and pendency came down.  Therefore, effective June 2008, registration under OSP/Telemarketing was further decentralized for all VTM Cells.
 
Under ISP guidelines, dated August 24, 2007, the Government decided to issue a single license permitting restricted Internet Telephony for the ISPs.  The new licenses are being issued in Category A and Category B, but not in Category C.  Category B service areas were modified into 23 service areas, as defined in the guidelines.  Existing ISPs which were granted licenses prior to August 24, 2007 were permitted to migrate to licenses under the guidelines, and without payment of any entry fee, however BG and FBG were to be deposited pursuant to the new license.  Category C ISPs were encouraged to migrate to either Category A or Category B.  The validity period of the new ISP license was extended from 15 years to 20 years.  In addition, licensees having a  net worth of at least Rs.100 crore were eligible to provide Internet Protocol Television (IPTV) service.
 
In August 2008, the government of India announced the guidelines for auction and allotment of spectrum for 3G telecom services.  Bidding was open to persons who held a UAS license or who fulfilled the eligibility requirements for obtaining a UAS license in accordance with the DoT guidelines, dated December 12, 2005, and had previous experience in running 3G telecom services.
 
In August 2008, 3G and BWA spectrum was allotted to both PSUs, i.e. us and BSNL, upon the condition that the PSUs pay one-time charges as decided through the auction process.  Pursuant to DoT requirements, we were to pay a one-time spectrum fee in an amount equal to the highest bid as determined for the Delhi and Mumbai circles.
 
 
The auction process for 3G spectrum was completed in September 2010.  The 3G auction price for Delhi was Rs.33,169 million and for Mumbai was Rs.32,471 million, resulting in us paying a total Rs.65,640 million for these two circles.  The BWA auction price for Delhi was Rs.22,410.2 million and for Mumbai was Rs.22,929.5 million, resulting in us paying a total of Rs.45,339.7 million for these two circles. In 2012,our management decided to surrender the BWA spectrum and requested the DOT to refund the  Rs.45,339.7 million along with interest.
 
In 2009, the DoT announced the guidelines for provisioning of Internet Protocol Television (IPTV) services.  Access providers having a license to provide triple play services and ISPs having a net worth exceeding Rs.100 crore and having permission from the licensor to provide IPTV were allowed to provide IPTV services.
 
In 2010, the DoT issued amendments to the license agreement for security clearance before placement of a purchase order for procuring telecom equipment/software.  All passive infrastructure equipment were exempted from this security clearance procedure.  Further, all equipment/software manufactured/developed by Indian owned/controlled manufacturers/developers were also exempted for the security clearance procedure.  The DoT also issued an amendment to the license agreement for security and security management related concerns for expansion of telecom services.  This amendment, among other things, stated that “the Licensee shall have well outlined organizational policy on security and security management of their networks and shall be completely and totally responsible for security of their networks. The Licensee shall also engage services of international accredited network audit and certification agencies in consultation with the Licensor to perform network forensics, network hardening, net penetration test, risk assessment, actions to fix problems and to prevent such problems from occurring…”
 
On August 10, 2010, the DoT permitted the launch of commercial service of Mobile Number Portability (MNP) only to those licensees which are MNP compliant.  On January 11, 2011, MNP services were launched across India, except for Haryana where such services had been launched on November 25, 2010.
 
In order to ensure the growth of broadband, on December 4, 2010, the TRAI submitted its recommendation to the DoT on “National Broadband Plan,” and clarified the recommendation on May 4, 2011.  The recommendation in principle was that an effective broadband network would be a combination of wireless and wireline/fixed line technologies at the access level.  This would provide for 75 million broadband connections (17 million Digital Subscriber Line, 30 million cable and 28 million wireless broadband) by the year 2012, and 160 million broadband connections (22 million Digital Subscriber Line, 78 million cable and 60 million wireless broadband) by the year 2014. The Government has not yet accepted the TRAI’s recommendation.
 
On May 31, 2012, the government of India has approved New Telecom Policy, 2012 which is a paradigm shift from all existing policies in India. The main features of NTP 2012 are as follows:

·
No timeline for one nation one roaming policy implementation
·
India to emerge as global manufacturing hub for mobile equipment/handsets
·
Liberalization of spectrum - any service in any spectrum is part of the new telecom policy
·
Unified licencing scheme is part of the new policy - de link, licence from spectrum
·
Taking advantage of cloud computing
·
Focus on  making India a global telecom hub
·
Convergence of networks, services and devices very important
 
 
·
Liberalization of spectrum in any service and any technology
·
Simplification of the licensing regime
·
National mobile number portability scheme
·
Re-farm spectrum and allot alternative frequency bands to current holders/service providers from time to time to make spectrum available for new technologies from time to time
 
The approximate number of licenses for providing telecom services issued as of March 31, 2012 were:
 
SUMMARY OF LICENSES
 
LICENSEES
 
NO. OF LICENSEES
 
Basic Licensees
    2  
CMTS Licensees
    37  
UAS Licensees
    240  
NLD Licensees
    33  
ILD Licensees
    27  
Total Licenses
    339  
 
The table indicates the increased nature of competition among the telecom service providers.  We are making efforts to keep the pace with the industry.
 
 
The following chart illustrates the current operational and regulatory structure of India’s telecommunications services industry:
 
 

 
 
Mahanagar Telephone Nigam Limited
 
Mahanagar Telephone Nigam Limited was established by the government of India in 1986 to provide fixed-line and other basic telecommunications services in Delhi and Mumbai.  Delhi and Mumbai are two of the largest, most densely populated and wealthiest metropolitan areas in India.  As of March 31, 2012, our fixed-line telecommunications networks in Delhi and Mumbai had an aggregate of approximately 3.46 million fixed lines in service.  In February 2001, we launched our cellular services using global system for mobile communications or GSM technology in Delhi and Mumbai and, as of March 31, 2012 had approximately 5.59 million subscribers.  GSM is the European and Asian standard for digital mobile telephone networks. We launched CDMA-based services in 1997 based on limited mobility, and as of March 31, 2012, had approximately 0.25 million limited mobile subscribers in Mumbai and Delhi.  CDMA is a digital wireless technology that increases network capacity by allowing more than one user to simultaneously occupy a single radio frequency band with reduced interference.  We launched broadband services in 2004, and as of March 31, 2012, we had approximately 1.04 million subscribers for broadband in Mumbai and Delhi. We began providing Internet service in both Delhi and Mumbai in February 1999 and had approximately 8.99 million Internet access subscribers as of March 31, 2012. However with the increase in demand for higher bandwidth more and more subscribers are now switching to broadband. In December 2008, we were the first operator to inaugurate the 3G services in India, with commercial launch in February 2009 in Delhi and in May 2009 in Mumbai,.  All our mobile customers are 3G enabled and can avail broadband services by using 3G enabled devices.
 
We believe that the size of the markets in Delhi and Mumbai, the economic environment, the Indian government’s ongoing liberalization of the telecommunications industry and the still low level of penetration of Internet/broadband based services in these two cities provide opportunities for future industry growth.
 
The number of our access lines in service grew at a compound annual growth rate of 7.17% from March 31, 2001 to March 31, 2012  In fiscal year 2012, these lines increased by 3.88%, due to cellular services.  In fiscal year 2012, our network had approximately 4.45 million access lines in service in Delhi and 4.84 million access lines in service in Mumbai.  In addition, our access lines in service per employee increased from 65.98 as of March 31, 2000 to 220.80 as of March 31, 2012.
 
We derive our revenue primarily from local, domestic long distance and international calls that originate from our network.  In fiscal year 2011, approximately 22% of our revenues were derived from call charges, 52% from rentals of telephones, access lines and other telecommunications equipment and use of our value-added services and 5% from public call offices.  Interconnect revenue, which is revenue derived from other telecommunications service providers for calls made into our network, accounted for 9% of our revenues in fiscal year 2011.  Local calls are carried on our network, unless the termination point is in the network of one of the cellular operators or one of the new private-sector basic service providers in the locality.  We have been carrying our own traffic between Delhi and Mumbai since May 2006. Other domestic long distance calls continue to be passed from our network to the domestic telecommunications network operated by BSNL, although we have entered into interconnect agreements with the new private-sector domestic long distance service providers and intend to pass such domestic long distance calls also through such other providers.  In addition, currently all international outgoing calls continue to be passed from our network to international gateways operated by Tata Communications Limited (formerly VSNL), India’s former government-controlled international long distance carrier, although we have entered into interconnect agreements with other private-sector international long distance carriers and have plans for joint development with BSNL of submarine cable to connect the east and west coasts of India with Malaysia and the Middle East (and ultimately Europe and the USA).
 
We expect competition to continue to increase in all major sectors of the Indian telecommunications industry, as both government and private-sector companies continue to invest in capacity expansion and seize opportunities to enter new geographical areas and lines of business and also trend towards mobile services from basic services that could favor our competitors.  See “— Business Overview—Competition” below.
 
 
Licenses/License Areas
 
We provide all of our telecommunications services, other than Internet, under a single, general, non-exclusive license granted by the DoT.  The license initially granted to us in 1986 was effective for a five-year period that ended on March 31, 1991.  The term of the license has been extended for a 25-year period ending March 31, 2013 for basic services. Since we are owned by the government of India, we do not expect to encounter any obstacles in obtaining a license extension.
 
In October 1997, our license was amended to explicitly include cellular services and radio paging, and our license for such additional services currently extends to October 2017.  The license is not specific as to the type of cellular technology that we may use.  The license covers areas within the territorial jurisdiction of the State of Delhi and the areas covered by the municipalities of Mumbai, Navi Mumbai and Thane.  The DoT has extended the scope of our license to allow us to provide cellular services in certain surrounding areas of Delhi and Mumbai covered by other cellular operators in those cities.  The license specifies that we may provide local, domestic long distance access (through interconnection with domestic long distance operators) and international long distance access (through interconnection with networks of international long distance operators), as well as telex and leased line services. In October 2006, we acquired the National Long Distance (NLD) license for a period of 20 years. In June 2008, we were granted the ILD license for providing international long distance services.
 
The DoT retains the right to revoke our license after giving us one month’s notice.  The DOT also retains the right, after giving notice to us, to modify the terms and conditions of our license at any time if in their opinion it is necessary or expedient to do so in the interest of the general public or for the proper operation of the telecommunications sector.  A revocation of the license or a change in significant terms of the license, such as its duration, the amount of license fee payable, the range of services permitted and the scope of exclusivity could limit our ability to operate particular lines of our business or result in increased costs in the form of increased license fees or costs associated with applying for new licenses, or contesting limitations on our licenses.
 
In August 2008, we were earmarked frequencies in 2100 MHz band and allotted one carrier of 5MHz in each of Delhi and Mumbai for the deployment of 3G services.  In addition, we have been allotted 20 MHz spectrum in TDD mode for providing Broadband Wireless Access (BWA) service for a period of 20 years and 15 years, respectively.
 
We provide our Internet services in Delhi and Mumbai under separate non-exclusive license agreements.  These licenses were granted in November 1998, and currently extend to September 2017.  In addition, our wholly-owned subsidiary, Millennium Telecom Limited (MTL), provides Internet access services throughout India under a license granted in 2000 for an initial period of 15 years.  The government of India agreed in principle that BSNL have an equal equity participation in MTL, however no transaction has been effected.
 
Delhi.  According to the government of India’s provisional 2011 population census data, Delhi had a total population of approximately 16.7 million.  In addition to being India’s political capital, Delhi is one of the highest per capita income states in India.  Delhi has a high concentration of service and manufacturing industries and houses the central government, the head offices for many major public sector enterprises, embassies, high commissions and various government missions and development agencies.
 
 
Mumbai.  The city of Mumbai, the financial capital of India and the capital of the State of Maharashtra, is India’s most populous city, with a population of approximately 20 million according to the 2011 census data.
 
We are paying license fees to the DoT on Adjusted Gross Revenue (AGR) for providing telecommunication services. The percentage of license fees varies depending on type of license. Revenue earned from basic and mobile services entail 10% license fees whereas revenue earned from NLD, ILD & internet services are subject to 6% license fees. In addition to the license fees, we pay spectrum charges the DoT a percentage of AGR for a license to provide the GSM & CDMA services to customers. The spectrum charges are based on the AGR derived from the GSM & CDMA services and worked out on the basis of agreement with the DoT which varies according to quantity of radio waves or say spectrum by the operator. In February 2010, the DoT had issued orders hiking spectrum usage charges (ranging between 1-2%) for all mobile players (GSM and CDMA) as per the spectrum being held by them. The hike was made applicable from April 1, 2010. The new charges vary between 3-8% depending upon the quantum of airwaves held by the respective operators.
 
As per TD SAT Orders dated August 30, 2007, several incomes other than operational income need not be counted towards gross revenue for the calculation of License Fees and Revenue Sharing Expenditure may be accounted for on accrual basis instead of actual paid basis as insisted by the DoT.  This method was challenged in Hon’ble Supreme Court by the DoT. The Hon’ble Supreme Court in its subsequent order dated January 11, 2010 in appeal (civil) modified the stay order requiring the respondents to pay the existing rates as per TDSAT Judgment dated August 30, 2007 subject to filing an undertaking by them that deficiency if any, will be made good by them.  However, the stay continued based upon refunds of amounts already paid.  Being government of India Enterprises, both BSNL and MTNL are not party to it. Hence, applicability of the said judgment  to MTNL / was unascertainable.
 
Subsequently at that point of time, after repeated attempts, we once again  requested the DoT to allow us to calculate AGR as per the TDSAT Judgment to maintain a level playing field and also in consideration of our undertaking to make good any deficiency based on the final decision of the Hon’ble Supreme Court. The DoT was also reminded of our request via letters, dated October 5, 2010 and January 14, 2011. However, the DoT by letter, 17-37/2010/LF dated February 23, 2011, again rejected our plea for revision of License Fees calculation as per TDSAT Judgment. Since we were not an appellant to the TDSAT case, we decided that it is not appropriate to account for the TDSAT impact of license fee in the accounts. However, the case has been discussed with DGP&T, the highest audit authority for government telecom companies in India, to extend the benefit of TDSAT judgment to us as well. The financial implications to us resulting from disallowed income by the DoT for license fees calculation from 2001-02 to March 21, 2011 is approximately Rs.4,265 million. In October 2011, the Hon’ble Supreme Court withheld TDSAT judgment dated August 30, 2007 and allowed the DoT to collect license fee from the operators on revenues earned from non-telecom activities. The Hon’ble Supreme Court said that the DoT's decision on charging a license fee on the gross revenue earned by the companies cannot be questioned. However, the Supreme Court, by declaratory judgment in October 2011, referred to the TDSAT the issue in respect of other operators against whom demands were raised by the DoT to pay license fees “on other income” to consider the entire issue of AGR.  Since we are neither a party in the litigation nor are causing any default on this count, we continued to pay the license fees to the DoT “on other income” as well. In the event if the TDSAT or the Supreme Court take any further review of the subject in the pending cases, the result of the review would be applicable to us.
 
 
The TRAI, in its recommendation on “Spectrum Management and Licensing  Framework” dated May 11, 2010, had recommended that all future licenses should be Unified Licenses and that spectrum be delinked from  the licence. Presently in India, there is a service specific licensing regime in  the sense that apart from access service licence, there are separate  licenses for different telecom services viz NLD, ILD, VSAT, IP-1, ISP,  GMPCS, PMRTS etc. For each type of telecom services the  service providers are required to obtain separate licences. There shall be three levels of Unified License: National level, Service area level and District level. The Applicant Company can  apply either for National level Unified License or Service area level Unified License or District level Unified License. Only Service level Unified License will be given for Metro areas of Delhi, Mumbai and Kolkata. One time non refundable Entry Fee for Unified License  shall be (a) Rs.15 crore for  National level Unified License; (b) Rs.1 crore for each Service area level Unified License except for Jammu & Kashmir and North East Service areas where Entry fee will be Rs.50 lakh each, and (c) Rs.10 lakh for each District level Unified License. Upon coming into effect, the Unified License, all the existing licences issued under Section 4 of the Indian Telegraph Act 1885 shall stand  automatically converted to the Unified License with same validity period and with no extra cost. After delinking the licence from spectrum, a company has to go for re-farming of the spectrum by an auction process. The re-farming is likely to impact our financial results owing to an increase in network operating expenditure. It would lead to significant cash outflow due to amount payable for the spectrum at auction discovered price and cost of additional capex and opex for re-alignment of spectrum.
 
Strategy
 
Key elements of our strategy include the following:
 
 
·
Expand GSM Cellular (2G and 3G) Mobile Services in Delhi and Mumbai.  We launched our cellular services using GSM technology in Delhi and Mumbai in February 2001. We believe that current penetration rates in Mumbai and Delhi remain attractive for expansion of cellular mobile service in both Delhi and Mumbai with high speed internet and high quality video and new generation wireless.
 
 
·
3G Services.  Our 3G network is HSDPA (High Speed Downlink Access) with download speeds up to 3.6 Mbps.  We plan to upgrade our 3G network to supporting download speeds up to 21.1 Mbps.
 
 
·
3G Data Cards.  We have adopted two strategies to provide 3G data cards to our subscribers.  First, bundling of 3G data cards with our 3G services, which will allow suppliers to sell their 3G data cards bundled with our 3G services.  Before allowing such data cards with our 3G services, we will thoroughly test the data card for its performance in our 3G network.  Second, we are also procuring 3G data cards and are providing them to our customers.
 
 
·
Accelerate the pace of expansion of Data/Internet services with up-gradation of technology: We commenced our Internet service provider operations in February 1999 with an initial network capacity to support up to 5,000 subscribers in each of Delhi and Mumbai. We experienced significant demand for this service and have since expanded our Internet services capacity to support the growing demand in each of Delhi and Mumbai. As of March 31, 2012, we had approximately 8.99 million Internet access users. We introduced broadband technology based on ADSL2+, capable of providing triple play services (video, voice and data) in 2005. This service found huge acceptability with customers and the subscriber base grew rapidly. . We are further expanding our broadband network to provide bandwidth on demand by deployment of ADSL 2+ /  VDSL , MLDN / PON etc. As of March 31, 2012, we had approximately1.04 million broadband users.
 
 
·
Further Develop and Modernize our Network: We have always been pioneer in introducing latest technologies in the telecom field and intend to continue to invest in expanding and upgrading our network to improve our quality of service.  With the developments in the Telecom Sector MTNL has transformed itself from telecom voice service provider to a total telecom solution provider. Through expansion and modernization of our network, we seek to improve the capacity of our network, reduce network failure rates, improve call completion rates and decrease average waiting time for new lines as well as support our Broadband/Internet and value-added services.
 
 
 
·
Phasing out of old technology: Telecom is certainly the most active sector/business today. In the telecom sector which is driven by very stiff competition, fast changing technologies and falling prices of the telecom equipments, The investment today in a particular technology becomes outdated tomorrow with an introduction of more promising technology / services / Quality of services.  To survive in the market, every operator has to move with the market forces and to adopt advance technologies/services.  For this following strategy has been adopted:
 
 
·
SDH technology is becoming obsolete day by day. Therefore we intend to gradually phase out our TDM networks and to evolve an all IP based converged network(s). At present our access and aggregation network is primarily on SDH technology which is becoming obsolete day by day. Thus, we have decided not to procure STM -4 & 16 further.
 
 
·
We have planned to replace our TDM Fixed line switches with NGN / IMS switch in phased manner during 12th Five year plan. Introduction of NGN / IMS based services will not only help us in saving opex, space but also enable us to offer all data / video centric services which are currently enjoyed by Mobile subscribers to  our fixed line subscribers also ultimately leading to convergence of fixed and mobile services.
 
 
·
We are also expanding the reach of fiber network near to the customer premises.  Copper is being laid in Greenfield areas or at places where laying of fiber is financially not feasible keeping in view the demand is in the final stages.
 
 
·
Enhance Value-added Services: We provide our subscribers with value-added services such as call-waiting, call-forwarding, wake-up calls, absent subscriber service and caller identification at no charge or for a nominal fee.  Tie up has been done with various content providers to provide VAS on WAP, SMS, GPRS and voice portals, as well as news, weather, cricket, astrology, chat, monophonic ring tones, picture manage and logos, PNR alerts, job alerts, commodity and stock status on SMS and Premium SMS services. Polyphonic Ring tone, True tone sing tone, video ring tones, video clip download, video games, Bluetooth games, animated pictures, video download on non-video phones, booking of movies ticket, and e-mail access over GPRS service are also being provided.
 
 
·
We also provide our Intelligent Network services to subscribers, which include our calling card services, a toll-free calling service, a premium rate “0900” number service, universal access service and a televoting service.  We also provide high speed data transmission services using integrated services digital network technology, which allows simultaneous high speed transmission of voice, data and images.  We expect that our value-added service offerings will increase use of our network, enhance overall customer satisfaction and provide new sources of revenue.
 
 
·
Selectively Target International Opportunities: We plan to selectively target expansion opportunities outside India where we can leverage our expertise and relationships. Our Nepal joint venture, United Telecom Limited, in which we hold a 26.68% equity interest, has commenced wireless in local loop services and provides other services as the first private-sector telecommunications operator in that country.  It had a subscriber base of approximately 610,000 as of December 2011. We have also been awarded licenses to provide basic, mobile and international long distance service in Mauritius, where we operate through a 100%-owned subsidiary.  As of March 31, 2012, we had approximately 124,000 customers in Mauritius.  We are also examining other international opportunities.
 
 
 
·
Focus on Customer Service: In order to strengthen the loyalty of our customers, attract cellular subscribers and improve our competitive position, we have a program to improve customer service and become more responsive to the needs of our subscribers.  We have introduced improved bill collection and payment procedures (including bill payment over the Internet and via credit card), opened Tele-marts at which most subscriber services are available, introduced telephone directories on the Internet and on CD-ROM and implemented a customer service management system.  Our customer service management system enables our staff to provide customers with access to a range of “on-line” services, including registration for new telephone lines, changes of address and issuances of bills, and allows us to monitor complaints from a single point of contact.  We have identified high usage “commercially important persons” and are making all efforts to strengthen our relationship with these subscribers.  We also have strengthened the customer care help lines for all services and posted additional trained staff on these help lines as well as in Sanchar Haats to provide on the spot solutions to all the requirements of our customers.
 
 
·
Gainful Utilization of Assets : We are seeking to maximize revenues by gainful utilization of our assets by (i) sharing our passive as well as active infrastructure, such as towers and core capacity and (ii) sharing and developing our real estate.
 
 
·
We have significant assets in the form of land and buildings, and of late has been making efforts for renting out the spare space and have also been successful to some extent. With the advancement of technology the space occupied by the equipment is shrinking day by day and more and more space is becoming available for other uses. In a constant effort for generation of additional revenues, we have rented out the space available in different offices/exchange buildings across Delhi and Mumbai. In addition to, we have considerable assets of spare capacity available in the form of installed equipment which we intend to rent out to generate additional revenues .
 
4B.  Business Overview

Services
 
Our primary business is providing basic telecommunications services in Delhi and Mumbai, which include:
 
1.
Basic fixed-line access (including phone plus facilities) in Delhi and Mumbai:  We provide basic fixed-line access, which consists of installation and provision of basic voice telephony services.  Rental charges include maintenance of connections between a subscriber’s premises and our network, as well as the use of a basic handset (although subscribers may elect to buy their own handset and have their installation charges reduced accordingly).  Phone plus facilities in basic fixed-line include such services as abbreviated dialing, call transfer, hotline facility, three party conferencing, absentee facility, CLIP facility, call hunting, call alert and morning alarm.
 
2.
GSM cellular services (including value-added services) in Delhi and Mumbai: In February 2001, we launched our cellular mobile services using GSM technology (the European and Asian standard for digital cellular telephony) in Delhi and Mumbai under the brand name 'Dolphin'.  In 2002, we introduced our prepaid cellular services under the brand name 'Trump'.  As of March 31, 2012, we had approximately 5.5 million GSM cellular subscribers.  We provide national roaming facilities for our GSM cellular customers through the networks of BSNL outside Mumbai and Delhi and have established roaming facilities for our customers in approximately 200 countries.  As of March 31, 2012, we had installed a cellular network with a capacity of approximately 3.0  million lines each in Delhi and Mumbai.
 
 
 
·
Value-added services:  We offer value-added services on GSM such as call-waiting, call-forwarding, wake-up calls, absent subscriber service (informing callers that the subscriber is unavailable) and caller identification, friends & family, night talk, VMS call conference, WAP and voice mail.
 
 
·
3G cellular services:  In August 2008, we were earmarked frequencies in 2100 MHz band for deployment of 3G services in Delhi and Mumbai. We have been allotted one carrier of 5 MHz in each of Delhi and Mumbai for the deployment.
 
In December 2008, we inaugurated 3G mobile services in Delhi, which was the first launch of 3G services by any operator in India.  The 3G technology is the natural evolution of 2G services and will facilitate higher speed and data throughputs enabling the delivery of a wide range of multimedia services such as video streaming, movie downloads, mobile TV, M-commerce and other functions.
 
Presently, 750,000 lines of 3G capacity have been deployed in each of Delhi and Mumbai. As on March 31, 2012, 762  Nodes B in Delhi and 740 Nodes B in Mumbai were operational. We are now working on the expansion of our 3G network.
 
 
·
Partnering Conexus Mobile Alliance: We provide 2G, 2.5G GPRS/EDGE enabled GSM, 3G WCDMA, HSDPA and CDMA 2000 1X based mobile services. We also offer BlackBerry services to our customers. For GSM mobile services, we have international roaming arrangements in almost 200 countries.
 
We joined the Conexus Mobile Alliance of GSM Operators (the “Alliance”) in Asia Pacific region for the benefit of its mobile international roamers.  This Alliance is one of Asia's largest mobile alliances consisting of 11 mobile operators across 10 Asian countries serving more than 300 million customers. The Alliance was formed to develop and enhance international roaming and corporate mobile services for greater convenience and ease of use for its members' customers. The Alliance facilitates voice, video and data roaming via its members' GSM/GPRS, WCDMA and HSDPA networks aiming to create a Virtual Home Environment for its members' customers to experience seamless, convenient and quality mobile-related services at affordable price while roaming in member operators' networks.
 
 
 
We have actively participated in the Alliance’s activities.  Various customer friendly schemes like SIM replacement program, BlackBerry replacement program, data roaming, flat rate data roaming, Conexus wide SMS etc. are recent new initiatives taken by the Alliance.
 
3.
Broadband and Internet services: We commenced our Internet service operations in February 1999 with initial equipment capacity to support up to 5,000 subscribers in each of Delhi and Mumbai.  We experienced significant demand for this service and have since expanded our Internet services capacity to support the growing demand in each of Delhi and Mumbai.  As of March 31, 2012, we had approximately 1.0 million subscribers in Delhi and Mumbai.
 
 
We also enable our customers to access the Internet without having to subscribe for Internet service.  They can access the service and later be billed on the basis of calling line identification usage.  The number of customers who use this service is much higher than our number of Internet subscribers.  In 2004, we launched our broadband services under the brand name “Triband” in Delhi and Mumbai simultaneously.  This service has found significant acceptability with customers and subscribers bases grown rapidly.
 
We expanded broadband services on a large scale based on the ADSL2+ technology in January 2005.  ADSL means asymmetric digital subscriber loop, a technology that allows combinations of services including voice, data technology and one-way full motion video to be compressed and delivered over existing copper cables.  These high speed data services are in strong demand from large corporate, financial, media, public service and education institutions.  Our broadband customer base grew to 1.04 million as on March 31, 2012 as compared to 940,000 as of March 31, 2011. The installed capacity of broadband ports as of March 31, 2012 was 1.63 million as compared to 1.62 million as of March 31, 2011.
 
4.
Mobile and fixed-wireless services based on CDMA technology:  In May 1997, we began implementing wireless-in-local-loop services using CDMA technology for fixed wireless and mobile operations on a commercially experimental basis with a single exchange in Delhi. Wireless-in-local-loop services use wireless links from a local exchange and capacity for 1,000 subscribers in place of conventional cables. Two types of service are provided.  One type employs a handset that is fixed to a subscriber’s premises for “fixed wireless” service, while the other employs a mobile telephone -or “mobile” or “limited mobility” services.  CDMA fixed wireless is a substitute for fixed-line access.  Fixed wireless allows us to enhance basic service penetration, provide quicker installation and cover areas where the installation of cable would not be economical.  Our CDMA mobile service is marketed under the brand name Garuda.
 
Our CDMA mobile service initially offered only limited mobility within Delhi and Mumbai. We have launched roaming facility in Garuda/CDMA in Delhi and Mumbai.  As of March 31, 2012, the capacity of WLL was approximately 550,000 and 540,000 for Delhi and Mumbai, respectively and we had approximately 250,000 CDMA mobile connections.
 
5.
Leased line service:  We provide point-to-point leased line services for local, domestic long distance and international connectivity.  Subscribers can use our leased lines to assemble their own private networks between offices within Delhi and Mumbai or together with BSNL, between Delhi and Mumbai and to other Indian cities.  Leased line services can be used for voice and data transmission at various bandwidths.  In addition, we earn revenues from leasing circuits to cellular operators in Delhi and Mumbai to interconnect their networks to our network.  As of March 31, 2012, we had approximately 52,000 leased line subscribers compared to approximately 55,000 subscribers as of March 31, 2011.
 
6.
ISDN services: We provide narrow-band ISDN services that allow subscribers to send high speed data make telephone calls with high quality voice transmission and hold desktop video conferences over a single line.  In the past, the development of independent networks for a variety of services (such as voice, telex, packet-switched data and leased lines) made each of them relatively expensive.  ISDN technology allows a wide range of data services to be made available to the subscriber through a single connection and at a reduced cost.  We believe these high speed data transmission products will help us attract high usage subscribers.  We introduced narrow-band ISDN services in August 1996, and we had approximately 24,500 subscribers to this service as of March 31, 2012.
 
7.
Public call offices:  Public call offices consist of both manned offices where people can make local, long distance and international calls, and coin operated telephone booths.  As of March 31, 2012, public call offices accounted for 4.60% of our total wire lines in service. The coin-operated public call offices offer only local call service, while the franchised public call offices offer local, domestic long distance and international call services.  We pay a commission to the franchisees amounting to 40% of the tariffs charged by the franchisee on local calls and 20-30% of the tariffs charged by the franchisee on domestic long distance depending on the number of calls per fortnight and international calls.  The franchisees charge the same tariffs we do for these services. With the increase in penetration of telephone services the utility of the PCOs are decreasing  and there is  a continuous decline in their numbers.
 
 
8.
Telex and Intelligent Network services: We have introduced Intelligent Network services over our entire network which at present includes:
 
·          calling card service
·          toll free calling service
·          premium rate “0900” number service
·          televoting service
 
9.
Data services:  We have set up two Data Centers in Mumbai in collaboration with IIT Bombay which are indigenously development by IIT Bombay. The data centers are located at Worli & CBD Belapur, with a capacity of 100 TB each. These centres currently offer the following services :

·          Dedicated Server Hosting
·          Collocation Services
·          Storage Services
·          Virtual Machines (VM Ware)
 
Interconnection with domestic international long distance carriers and with basic and cellular operators in Delhi and Mumbai:  We provide local telephone services in Delhi and Mumbai as well as domestic and international long distance through our connectivity with BSNL’s domestic long distance network and Tata Communications Limited’s international gateways.  Since May 2006, we have carried our own traffic between Delhi and Mumbai.  We derive revenues from tariffs we collect on local domestic long distance and international calls that originate on our network.  Tariffs, or usage charges, consist of charges for local, domestic long distance and international calls.  Usage is measured by pulses, which are time-based limits of measure, metered at the relevant exchanges.  A set of pulse durations is established for each category of calls (i.e., local, domestic long distance or international long distance), and within each category, pulse durations vary depending on one or more of the following factors:  call distance; time of day; type of network on which the call is terminating (i.e. fixed, GSM cellular or CDMA mobile); destination country (for international long distance only); subscriber plan (for local calls only); and whether the call is within a circle or between two different circles (for domestic long distance only).  We estimate that based upon recent sample data, local calls constituted approximately 72.3%, STD calls approximately 27.1% and ISD calls approximately 0.7% of our total customer calls.  We are focused on increasing call volumes by promoting use of our value-added services and the use of long distance services.  In June 2008, we received a license to enter the international long distance service market.
 
 
Interconnection.  We connect our network with BSNL and have entered into interconnect agreements with certain other licensed domestic long distance service carriers to provide our customers with domestic long distance service and intend to pass traffic to these other providers also (we have been carrying our own traffic between Delhi and Mumbai since May 2006).  We connect our network with Tata Communications Limited and have entered into interconnect agreements with certain other licensed international long distance carriers to provide our customers with international long distance service.  We connect our network with the other basic, cellular operators and Unified Access Service Providers in Mumbai and Delhi to offer our customers comprehensive access in our coverage areas.  The terms and conditions of our interconnect arrangements are governed by regulations of the TRAI and interconnect agreements that we have with many of these other operators.  The TRAI is also responsible for ensuring technical compatibility among operators.  Effective May 1, 2003, under the authority’s interconnection usage charges regulation, interconnect charges have been established for all major types of interconnection based on a “calling party pays” principle.  See “—License Fees and Network Utilization/Interconnection Arrangements” and “—Telecommunications Regulation in India” below.
 
Capacity Upgrades and Achievements/Recently Introduced Services
 
We have been focusing on the expansion of existing mobile and broadband services in both Delhi and Mumbai to provide high speed internet, high quality video and new generation wireless services.  Recent additions included:
 
 
·
In fiscal year 2008, we commissioned a state of art IP/MPLS core network in Delhi and Mumbai to provide a converged IP network for all services. To take advantage of this IP network and to improve the services we have worked on the expansion of this network in the 2012 fiscal year and deployed around 10 Core + 70 edge & aggregate routers in Delhi and 10 Core + 67 edge & aggregate routers in Mumbai leading to creation of around 50 POPs ( Point of presence) each in  Delhi and Mumbai.
 
 
·
To bring optical fiber near/to subscriber’s premises in order to meet the ever increasing bandwidth demand of customers we are adding optical fiber in the access network and are deploying FTTH based on GPON. This will enable us to provide access to this latest technology to our customers with very high bandwidth. We have already commercially launched the data services on FTTH. Voice services on FTTH should be launched soon.

 
·
The DoT has directed all Service Providers to migrate IPv4 to IPv6 enabled network latest by December 2011. IPv6 migration was a challenging task as we have many legacy networks and equipments for various Line of Business i.e. Broadband, Wireless, Leased Circuit etc. Accepting this challenge we took proactive steps and successfully achieved the objective.

Services Under Development

We plan to add one million lines in new switching capacity including capacity for WLL and GSM and 40,000 KMs of optical fiber in Delhi and Mumbai during the 2013 fiscal year.  Our other plans include:

3G Network Up gradation:  We are planning to upgrade our 3G network to HSPA+. At present our 3G network is HSDPA with download speeds up to 3.6 Mbps and uploads speed up to 384 Kbps. After up gradation download speed up to 21.1 Mbps and upload speed up to 5.76 Mbps will be supported by the network.

Expansion of GSM / 3G RF network for improvement of network coverage: For meeting immediate networks requirement, we plan to add around  580 Node-Bs & 300 BTSs in Delhi and 350 Nods-Bs & 200 BTSs in Mumbai along with requisite numbers of RNC, BSC and SGSN / GGSN up to 10 Gbps.
 
 
Augmentation / Expansion of M/W Backhaul of GSM / 3G Networks: For meeting the augmented Data carrying requirement of 3G network, the M/W backhaul of GSM / 3G networks will be augmented / expanded. The expansion involve deployment of new 100 / 200 Mbps and up gradation of existing 4E1 / 16E1 / SDH TDM M/W links to 100 Mbps Hybrid M/W links capable of up gradation up to 400 Mbps. The proposed up gradation will also enable us to share backhaul with other operators on commercial basis.

Femtocell deployment -For efficient utilization of spectrum and off loading it up to certain extent (as it is a scarce national resource), we plan to deploy Femtocell which is a small cellular base station specially designed for use in residential and small business environments. Femtocell connects to the service providers’ network via broadband (such as DSL or Cable) such that the 3G Wireless Network traffic is carried by Broadband network.
 
·
MTNL-STPI IT Services Limited: This is a 50:50 Joint Venture between Software Technology Parks of India (STPI) and us. This JV formed in 2006, combines STPI’s experience as an ISP and our track record to offer niche portal services to the Indian community. The JV aims to provide exclusive data center services, messaging services, business application services to the identified sectors of economic activity and thereby also popularizing the .in domain in the networked community across the world.  The JV has also decided to establish green data center of Tier-III standard at Delhi and Hyderabad. MSITS has floated RFP and identified consultant for establishing Green Data Center.
 
Telecommunications Services in Other Countries
 
We have been selectively targeting expansion opportunities outside India where we hope to leverage our expertise and relationships in an effort to expand our overseas operations.  Currently we are in the process of exploring the potential in a few Asian and African countries.  United Telecom Limited, a joint venture involving us (26.68%), Telecommunications Consultants India Limited (26.66%), VSNL (now Tata Communications Limited) (26.66%) and Nepal Ventures Private Limited (20%), provides wireless in local loop services as well as basic, mobile, NLD, ILD and data services, as the first private-sector telecommunications operator in Nepal.  As of April 2012, the customer base was approximately 610,000.  Through our Mauritius subsidiary, Mahanagar Telephone Mauritius Limited (MTML), we provide basic and international long distance service as well as mobile services in Mauritius and have begun to offer fixed wireless services, mobile services, international long distance services and Internet services and have approximately 124,000 customers as at March 31, 2012.  We intend to continue the build out of our network there to provide additional services and are seeking to expand the capacity of the core network.
 
Revenues
 
Fixed-Line Services.  Tariffs, or usage charges, consist of charges for local, domestic long distance and international calls.  Usage is measured by pulses, which are time-based units of measure, metered at the relevant exchanges.  Pulses vary, depending on one or more factors.  Local call pulse duration depends upon the type of network on which the call is terminating (i.e., fixed, GSM cellular or CDMA mobile) and the subscriber plan chosen, while domestic long distance call pulse duration depends upon the call distance, type of network on which the call is terminating and whether the call is within a regional circle or between two circles.  International call pulse duration varies depending upon the country of destination.  For operator assisted domestic and international calls, a slab system of tariffs applies which differs depending upon the speed at which the call is completed.  The subscriber is billed at a fixed price per pulse that depends upon the subscriber plan chosen and usage volume (low usage customers are offered a lower price per pulse).  We currently offer several fixed-line plans, tailored to meet the needs of different user profiles.
 
 
For fixed-line services, customers also pay access charges consisting of a one-time refundable security deposit, installation charges and monthly subscription/rental charges.
 
We have adopted a policy not to reduce our basic tariffs and related charges unless in a response to tariff reductions by competitors.  However, since the 1999 tariff order, the TRAI has in several stages significantly reduced tariffs on domestic and international long distance calls. Because we retain the remainder of prices of domestic and international long distance calls originating on our network, net of interconnect charges, by lowering long distance rates the tariff reductions have reduced the revenue we receive per call.  While these rate reductions have been part of a “rebalancing” effort aimed at reducing cross-subsidization between long distance (historically priced at a premium) and local calls (historically subsidized) and at the same time phasing out subsidization of local calls, the negative impact of the long distance rate reductions have to date outweighed any positive impact of other aspects of the tariff rebalancing effort In 2006, we substantially reduced the STD tariff.  We introduced local call charges between Delhi and Mumbai for Basic to WLL(M) of our network. In 2008, we reduced STD tariff as local tariff to MTNL Delhi for our GSM postpaid and prepaid subscribers of the Mumbai service area.  For other locations, the STD pulse rate was increased from 30 seconds to 60 seconds for fixed and CDMA networks and the STD rate for cellular service was reduced from Rs.1.30 to 0.40 and from Rs.1.25 to 0.60 per minute for Mumbai and Delhi.
 
Since October 2004, we have been continuously reducing ILD tariffs for customers.  We reduced the ILD tariff on a regular basis for our GSM postpaid and prepaid subscribers effective as of January 26, 2011 for Delhi and as of September 29, 2010 for Mumbai. During the 2012 fiscal year we have decided to increase our ILD tariff due to high rate of Carriage charge both for our Basic Subscribers and Mobile Subscribers.
 
GSM Cellular Services.  We offer our GSM cellular subscribers in Delhi and Mumbai a choice of several plans, tailored to meet the needs of different user profiles.  One of the plans is the standard plan, which, under TRAI regulations, we are required to offer all customers and the terms of which the authority establishes.  Generally, in addition to call charges for local and long distance calls, our plans include the following types of charges: refundable, non-interest bearing security deposit; installation charges; monthly rental charges; and airtime charges.  Effective February 1, 2004, with the adoption by the TRAI of the interconnection usage charge regulation and the “calling party pays” principle, charges for incoming cellular calls (other than any roaming charges) have been eliminated.  In addition, we provide the following value-added services free to all our GSM cellular subscribers: national roaming, call forwarding/divert, call hold, call waiting, caller identification, conference call facility and WAP rental.
 
However, airtime charges on use apply to these services.  In addition, we offer our GSM cellular subscribers value-added services like SMS, voice mail, WAP, CRBT, GPRS/MMS, missed call alert and content-based SMS for a fee.
 
In fiscal year 2002, we introduced pre-paid GSM cellular services under the brand name “Trump” in Delhi and Mumbai.  This market is also highly competitive, with rates changing with market conditions.
 
Dual Technology Permission under CMTS License.  In October 2007, the Government announced its policy to grant permission to use dual technology spectrum under the existing UAS/CMTS licenses.  We requested the DoT to allow us to use both GSM and CDMA technology under our existing CMTS license.  In April 2008, we received in-principle approval to used CDMA technology under our CMTS license for Delhi and Mumbai service areas, and conveyed to the DoT our acceptance for such use, in addition to GSM technology being used by us, under the existing CMTS license for such service areas.
 
 
In accepting our request, the DoT issued Amendment to License Agreements regarding spectrum allocation using dual technology for Delhi and Mumbai services areas.  We can now provide roaming services to CDMA subscribers.
 
Broadband Service.  We started offering Broadband service in January 2005 to subscribers in Delhi and Mumbai with choice of several plans, tailored to meet the needs of different user profiles.  Generally, in addition to usage charges for usage and data download, our plans include the following types of charges:  non-interest bearing security deposit; installation and testing charges; monthly DSL usage charges, monthly rental for modem, if provided by us.
 
NLD Service.  In May 2006, we were awarded a license for providing national long distance (NLD) service.  Since June 2006, we have been carrying traffic between Mumbai and Delhi on leased bandwidth on our own domestic long distance network.
 
Internet Protocol Television (IPTV).  We started offering IPTV service in October 2006 to subscribers in Mumbai and in November 2006 to subscribers in Delhi.
 
Voice over Internet Protocol (VoIP).  We started offering Prepaid VoIP service in August 2007 to subscribers in Delhi and Mumbai.
 
Infrastructure Providers.  In June 2007, we registered with the DOT for providing Infrastructure Provider Category-1 (IP-1).  Companies registered as IP-1 can provide products such as Dark Fiber, Right of Way, Duct space and Tower.
 
MPLS Services (Multi-Protocol Label Switching).  In July 2007, we launched MLPS Service.  MPLS is a backbone for our various IP based services.  Keeping with our policy to introduce modern and latest technologies at affordable rates to our customers, we utilize IP based MPLS technology to offer the most current IP-VPN (Virtual Private Network) services.  MPLS was developed to provide faster data packet movement than traditional IP routing.  This technology enables secure VPN to be built and allows scalability that will make it possible for us to offer assured growth to our customers without having to make significant investments.  We are now geared to provide bandwidth on demand, IPTV, video conferencing, VoIP and many other value added services that could significantly change the way a corporate business operates.
 
Video Phone Services.  We launched Video Phone Services on a regular basis in April 2008 for the Mumbai service area.
 
ILD Service.  In June 2008, we received a license to provide international long distance (ILD) service.ILD Service has to be launched within three years from the date of license.  However the DOT has granted extension of one  year to roll outs ILD service on our request.
 
3G Services.  By letter, dated August 8, 2008, the DoT earmarked spectrum and frequencies  for broadband wireless access on a trial basis.  We launched 3G services for the Delhi area in February 2009 and for the Mumbai service area in June 2009.  The salient features are as follows:
 
 
·
making video calls,
 
·
the HSDPA card on offer will support data download speeds up to 3.6 Mbps, data upload speeds up to 384 Kbps and SMS services and
 
·
it will be downward compatible, i.e. it will support 2.75 and 2.5G data services.
 
 
Pay per second” plans.  In December 2009, we introduced “pay per second” plans for GSM service in the Delhi and Mumbai service areas.  Competitive reasons and market conditions led us and other operators to offer these plans.
 
BlackBerry Services. Effective April 24, 2010, we introduced 2G and 3G BlackBerry unlimited data plan and reduced the cost of handset for Delhi.  We had previously introduced BlackBerry services on a promotional basis.  Our BlackBerry Service provides the user with wireless access to a full suite of business applications like email, phone, SMS, MMS, browser, organizer, instant messenger, social networking and more, on a single BlackBerry Smartphone.
 
Leaseline Services:  In May 2005, we implemented leased line tariff at par with BSNL under revised tariff ceilings prescribed by the TRAI.
 
 
CDMA Services.  For CDMA mobile services, including the use of a CDMA handset, our subscribers are charged a refundable security deposit, a monthly charge and a monthly handset rental, in addition to airtime charges.  We have not charged users for incoming calls.  We offer our CDMA mobile subscribers a choice of several plans, tailored to meet the needs of different user profiles.  Following commissioning in July 2006 of CDMA 20001X system in Mumbai, which has mobility between Mumbai and Navi Mumbai, we provide the following value added services free to all our CDMA subscribers: call hunting, call waiting, caller identification, STD/ISD dynamic lock, call forwarding, three-party conference, abbreviated dialing, voice mail service, Internet connectivity, data card for Internet connectivity, conference call and dynamic locking.
 
We started new Garuda (CDMA) mobile connection by giving RUIM cards for postpaid/prepaid Garuda connections since April 2007 to subscribers in Delhi and since December 2007 to subscribers in Mumbai.
 
We offer different tariff plans and value added services to cater to and fulfill the need of the various segments of customers.
 
Revenue from equity affiliates
 
On July 21, 2001, we entered into a joint venture arrangement with Telecommunications Consultants India Limited, VSNL and Nepal Venture Private Limited to form United Telecom Limited (UTL). UTL was formed to provide wireless in local loop (“WLL”) services in Nepal. As of March 31, 2003, we had invested Rs.200 million in UTL in proportion to our 26.7% holding. In 2004, we invested Rs.33 million in UTL in proportion to our 26.7% holding.  In the 2007 fiscal year, we further invested Rs.56 million and during the 2010 fiscal year, we invested Rs.69 million in proportion to our share. Our equity in the profit of the affiliate amounted to Rs.5 million for the 2009 fiscal year. Our equity in the loss of the affiliate amounted to Rs.6 million for the 2010 fiscal year; our equity in the profit of the affiliate amounted to Rs.15 million for the 2011 fiscal year and our equity in the profit of the affiliate amounted to Rs.16 million for the 2012 fiscal year. The carrying value of investment in UTL is Rs.221.86 million and Rs. 251.37 million as of March 31, 2011 and 2012, respectively.
 
On March 31, 2006, we established MTNL-STPI IT Services Ltd. (hereinafter referred to as “STPI”), a 50-50 joint venture with Software Technology Parks of India, a society registered under the Ministry of Information Technology. The main objective of STPI is to undertake all such activities that are required to make the domain “India in” popular. The STPI data centering Chennai (formerly Madras) will provide services like messaging, web-hosting, application hosting and web-farming application.  STPI is in the process of recruiting its own professional staff from software industry.  As of March 31, 2012, our total investment in STPI was Rs.18.24 million.
 
 
Other Services
 
For access to narrow-band ISDN services, we charge our subscribers a monthly rental and no registration fee.  Subscribers can also have primary rate access for an initial fee.  Usage charges for local, domestic long distance and international calls are the same as for the basic fixed-line telephone.
 
Tariffs charged by public telephone operators for telephone usage are at a fixed rate of Rs.1.00 per pulse, of 60 seconds for local calls and long distance pulse durations varying depending upon the distance.
 
We do not charge any registration fees for our Internet access services.  Our Internet access fees have been falling considerably in response to competitive pressures.  Internet users do not have to subscribe for Internet services.  They can access the service and later be billed on the basis of calling line identification usage.
 
Subscribers for point-to-point leased line services are charged an annual fee based on the type of service offered, the distance between the points and the duration of the lease entered into by the subscriber.
 
License Fees and Network Utilization/Interconnection Arrangements
 
License Fees and Network Utilization Charges.  The DoT periodically adjusts the license fees and network utilization charges.  The license fee had been revised at 10% of Adjusted Gross Revenue with effect from April 1, 2004. The license fee for the NLD (national long distance) and ILD (international long distance) service license which we have obtained is 6% of AGR. A license fee on Internet services of 6% of AGR has been in effect since January 2006.
 
Interconnection Usage Charges Regulation.  The TRAI established Interconnection Usage Charges (IUC) and Access Deficit Charges (ADC) regimes through “The Telecommunication Interconnection Usage Charges Regulation 2003” (1 of 2003) dated January 24, 2003. These regimes became effective in May 2003. The TRAI has modified these regimes through “The Telecommunication Interconnection Usage Charges Regulation, 2003” (4 of 2003), dated October 29, 2003, which became effective February 2004. The TRAI has subsequently modified these regulations by reason of its emphasis on consistent decline in tariffs to give sustained boost to subscriber growth and teledensity. As the teledensity in India has reached a level of more than 78.66% as of March 2012, the industry has achieved a major requirement of the country in terms of policy objectives.

Through the principal regulations and subsequent amendments a framework was established for initiation, continuance and phasing out of ADC through an elaborate consultative process.  The framework briefly described the ADC regime as a depleting regime that was phased out from October1, 2008 and, from the 2008 fiscal year, any further support required would be from the Universal Service Obligation Fund (USOF).

The latest amendment is IUC Regulation 2009 (2 of 2009) issued by the TRAI on March 9, 2009 and implemented effective from April 1, 2009.The salient features of this Regulation are as follows:
 
 
·
Termination charges for Local and NLD calls were reduced from Rs.0.30 to Rs.0.20 per minute.
 
 
·
Termination charges for incoming ILD calls were increased from Rs.0.30 to Rs.0.40 per minute.
 
 
·
TAX transit charges for intra circle calls are less than Rs.0.15 per minute instead of less than Rs.0.20 per minute.
 
 
·
Level II TAX transit charges for intra circle calls are Rs.0.15 per minute instead of less than Rs.0.20 per minute.
 
 
In April 2012, the TRAI issued a consultation paper on “Review of Interconnection Usage Charges (IUC)”, and likely will issue new IUC regulations.  Though IUC are not directly related to retail tariff, they play a major role in determining the level of retail tariffs offered by service providers.  A number of factors, like increasing competition, massive growth of subscribers, changes in retail tariff and in the cost of providing service, and adoption of new technologies by the service providers necessitate periodic review of the IUC regimen.
 
Port Charges Regulation: In fiscal year 2007, the TRAI issued the Regulation on Port Charges (1 of 2007) and applicable from April 1, 2007, considerably reducing port charges.
 
As Regulation 1 of 2007 of TRAI in relation to payment of port charges was believed contrary to the judgment of the Hon’ble TDSAT, BSNL has filed an appeal against these regulations.  We also impleaded into this case.  On May 28, 2010, the Honorable TDSAT decreed its final judgment in favor of BSNL, but provided that BSNL would not be entitled to claim any amount in terms of the judgment from private telecom operators during the appeal period.  This condition is also applicable to us because we had supported BSNL’s appeal.  We have filed an appeal in Supreme Court challenging the proviso of the TDSAT decision and claiming that we are entitled to the payment by the private telecom operators towards port charges at the agreed rates and in terms of the interconnect agreements between the parties for this entire period.
 
Network Utilization and Interconnection with Other Operators.  The 1999 telecom policy permits direct interconnectivity between licensed cellular service providers and any other type of service provider (including another cellular service provider) in their area of operation, including sharing of infrastructure with any other type of service provider.  The cellular service providers have been allowed to directly interconnect with VSNL (now Tata Communications Limited) after opening of national long distance in January 2000.  Interconnectivity between service providers in different service areas is now governed by the July 2002 reference interconnect offer regulation and the May 2003 interconnection usage charges regulation.  With the interconnection usage charges regulation and related tariff changes, the TRAI introduced the calling pays principle, resulting in the elimination of customer charges (other than roaming charges) for incoming cellular calls.  The operator responsible for origination of a call bears liability for payment of the interconnect fees for transmission and/or termination.
 
We finalized the charges for network utilization and domestic long distance agreements with BSNL.  Until October 30, 2006, NLD carriage charges were paid as per TRAI IUC Regulation and effective November 2006 are at the negotiable rates.  These rates are not applicable to NLD for traffic between Delhi and Mumbai, which is routed on our own leased bandwidth.
 
We are responsible for collecting payments for calls from our subscribers and bear the risk of non-collection of these charges.  Until effectiveness in 2003 of the interconnection usage charges regulation, we did not receive any payments for calls coming into our network from BSNL’s network.  BSNL has also established its Trunk Automatic Exchanges (TAXs) at Delhi and Mumbai. All the other private operators of Delhi and Mumbai have established interconnection with these TAXs and consequently we have stopped transiting their long distance calls to minimize the risk of bad debts.
 
Long Distance Interconnect Arrangements. We have signed interconnect agreements with several private-sector domestic long distance service providers. Until March 2010, we had relied on BSNL to route substantially of our domestic long distance calls.  Since April 2010, we have been routing our long distance traffic through private NLD operators also on the basis of bidding process.
 
 
International Long Distance Interconnect Arrangements.  Although we have signed interconnect agreements with several international long distance carriers, earlier we were routing all our international calls through VSNL (now Tata Communications Ltd).  In April 2009, on the basis of tender, or an open competitive bidding process, we allowed other private ILD operators to carry our outgoing international long distance traffic.  Now, international traffic is offered to ILD operators through a tender.
 
Interconnect Arrangements with Other Cellular, Basic Service Providers and Unified Access Service Providers in Mumbai and Delhi.  We have entered into interconnect agreements with the other cellular, Unified Access and basic service providers in Mumbai and Delhi to formalize our network integration with them.  In addition to usage-based interconnect charges, each cellular/unified/basic service operator in Delhi and Mumbai pays us an annual fee for lines leased from us to connect to our network.
 
Interconnection for Intelligent Network (IN) Service. The TRAI issued IN Regulations, 2006 (13 of 2006) dated November 27, 2006, which had to be implemented before February 27, 2007.
 
We signed the addenda to the interconnect agreement for IN service with Idea Cellular, Reliance Infocomm, Tata Teleservices, Bharti Airtel, Vodafone, Aircel, Unitech, Datacom (now Videocon Telecommunications Ltd) Etislat DB Telecom Private Limited, Sistema Shyam Teleservices Ltd., Quardrant Televentures Ltd (and for UAN services with Tata Teleservices), which enables the subscribers to access the toll free services of the other operators and vice versa.
 
However, IN agreements with a few private operators for bringing PAN-India calls, originated in their network, to our toll free numbers are yet to be signed as these operators are insisting on carriage charges for such types of calls in addition to the revenue share for IN calls to our toll free numbers.
 
The TRAI has taken a case regarding the payment of carrying charges in addition to the revenue share with private operators for bringing calls from their service areas outside Delhi and Mumbai.  We have conveyed to the TRAI that the payment of additional carriage charges to any operator is not acceptable to us.
 
Customers and Customer Service.  We classify our subscribers by use level and estimate that in the last three months of fiscal year 2012, approximately 5.30% of our access lines in service accounted for 40.31% of our call units.  The following table sets forth certain information with respect to our subscribers for the final three months of fiscal year 2012:
 
     
Average number of
   
Average call units
 
     
subscribers per segment as
   
per segment as a
 
Subscriber segments
   
a percentage of total
   
percentage of all
 
(use of pulses on a bi-monthly basis)
   
Subscribers
   
metered calls
 
0-100       49.95       4.15  
101-500       34.68       30.66  
501-1,000       10.06       24.88  
1,001-2,000       4.07       19.48  
2,001-5,000       1.06       10.60  
Greater than 5,000
      0.17       10.23  
 
Our general marketing strategy is to stimulate demand for telephone services in order to increase average usage and revenue per line in service.  We have identified high usage subscribers as “commercially important persons” and are taking initiatives to strengthen our relationship with these individuals.  These initiatives include regular visits and conducting surveys to obtain feedback and determine client-specific needs and introduce value-added services tailored to commercially important persons.  Also, in certain areas we have constructed a digital local loop network with better quality transmission dedicated for use by commercially important persons.  Some of the commercially important persons are also being connected to our network via fiber-in-local-loop technology.  We also use visual media and print advertising to educate the general public about our telephone services and other value-added services.
 
 
No single subscriber accounted for more than 5% of our revenues in fiscal year 2010, 2011 or 2012. Government of India entities in the aggregate constitute the largest user of our services.  We deal, however, with the various departments and agencies of the government of India as separate subscribers and the provision of services to any one department or agency does not constitute a material part of our revenue.
 
Our subscribers are billed by mail or courier once every billing period. Subscribers with access to long distance service are billed monthly; subscribers with access to local services only are billed bi-monthly. We have introduced four billing cycles in respect of each billing period which enables us to bill different subscribers at different times in the billing period. Cycle billing reduces the burden on the billing system at any particular time of the month and provides more consistent cash flow.
 
Billing is computerized and processing takes place at decentralized bill processing facilities with printing at conversion billing facilities in Delhi and Mumbai for ease of operation and better handling of customer complaints.  A subscriber can inquire by an automated telephone service or at one of our customer service centers to determine the amount of his bill.  Payment may be made by mail or at a collection center such as a national bank or a customer service center.  Payments may also be made under our voluntary deposit scheme, where customers set up an interest bearing deposit with us, or under our electronic clearance system, where payment is directly debited from the subscriber’s bank account.  We have also introduced a program through which subscribers can pay bills through the Internet or at any of our Tele-mart centers.  We allow subscribers to pay bills using a credit card and at the post office, and plan to allow subscribers to pay bills at local merchants and through other mechanisms to improve bill collection and remittance.  We have also launched a new web-based service email bill alert for delivery of telephone bills on email.
 
 We have developed our billing system jointly with Tata Consultancy Services in Delhi and Mumbai.  This billing system is a part of a customized software program known as a “customer service management system.” The billing system is an integrated revenue billing system, which includes pre-connection and post-connection services, accounting, billing collection and access to subscriber records.  Other benefits of this system are one point data capture for all subscribers, increased efficiency and reduction of lead time to process queries.  This system enables our staff to handle, at a single point of contact, various activities “on-line” such as registration of a new telephone connection, change of address and category, issuance of work orders, issuance of duplicate bills, requests for transfer of telephone for domestic long distance and international connectivity, collection of payments of bills, status of outstanding bills, and monitoring of subscriber complaints.
 
Payment is due within 21 days from the date of issue of the bill.  If the charges are not paid on time, we generally give a reminder by telephone after the due date, cut off all services after 35 days from the date of issue of the bill.  Subscribers with large amounts overdue may have their telecommunications services terminated earlier.  Subscribers are charged a surcharge on amounts overdue after 21 days (with maximum surcharge being Rs.2,000 and a reinstatement fee of Rs.100.The reinstatement fee was eliminated in Delhi as of October 1, 2006.
 
We provide operator assisted services, including value-added products such as wake-up calls, as well as operator connected and reverse charge calls to all of our subscribers.  In addition, we provide free operator assisted directory services.  Our strategy is to continue to enhance the level of subscriber satisfaction by increasing access to operators and improving the quality of subscriber interface, while also improving our operational efficiency and productivity.  We have also launched 3G, BlackBerry, Wi-Fi and Wi-max services during the year to sustain competition and provide better services to the customers.  We published a Delhi directory in March 1999 and a Mumbai directory in February 2000. Both of these directories are available free of charge on our website. We have introduced directory information on CD-ROMs, which are available for Rs.50 each, as well as an on-line directory inquiry service which is available to telephone users with personal computers and communication software.
 
 
Our service centers also provide various types of services such as registration for new connections, shifting telephone connections, billing information and collection of bill payments.  We have customer service centers in many locations in both Delhi and in Mumbai.  Generally, three to five employees provide these services in each center.
 
Insurance
 
We maintain comprehensive insurance for our assets under a single comprehensive policy renewable annually.  The policy is renewed every year.  We do not anticipate having any difficulty in renewing our insurance policies and believe our insurance coverage is reasonable and consistent with industry standards in India.
 
Competition
 
One of the primary objectives of the DoT1999 telecom policy was to encourage competition within India’s telecommunications industry.  Accordingly, we have been encountering increased competition in each of our markets as existing and additional service providers actively seek to penetrate these markets through the introduction of high quality products and services.
 
In October 2008, we made a request to the DoT to permit us to use dual technology (both GSM and CDMA) under the existing CMTS license for the service areas of Delhi and Mumbai instead of migrating to UASL from a CMTS license.
 
The 1999 telecom policy allows the DoT to license, at its discretion, multiple additional basic and cellular service providers in any service area.  Under a UAS License, such competitors as Loop Mobile (formerly BPL Mobile), Reliance Communication (formerly Reliance Infocomm),  Bharti Airtel, Tata Teleservices Limited, Idea Cellular Ltd., Aircel Limited, Unitech Wireless Limited, Etisalat DB Telecom and Sistema Shyam Teleservices Ltd. are currently competing with us for Basic and GSM services in both Mumbai and Delhi.  All of these companies already have significant telecommunications infrastructure in Delhi and Mumbai, including, with respect to Tata Teleservices, Reliance Communication and Sistema Shyam in low-cost CDMA mobile and fixed wireless technology.
 
We experience significant competition in the market for GSM cellular services.  As of March 2012, we had approximately 6.79% and 8.12% of the mobile subscribers in Delhi and in Mumbai, respectively.  Our largest competitors in Delhi are Bharti Airtel, Idea Cellular, Vodafone, Reliance, Tata, Aircel and Etisalat DB Telecom.  In Mumbai, our main competitors are Bharti Airtel, Vodafone, Loop Mobile, Idea Cellular, Aircel, Etisalat DB Telecom, Videocon and Uninor.  Cellular operators also face significant competition from rapidly growing CDMA-based mobile services, which are priced considerably lower than GSM cellular services.
 
In February 1999, we commenced providing our Internet services in Delhi and Mumbai.  The competition among Internet service providers throughout India is intense with approximately 175 licenses for providing Internet services issued as of March 31, 2012.
 
 
In June 2008, we entered the international long distance business. Our revenues from international calls are adversely affected by competition from “call-back” services.  Call-back services were officially declared illegal by the Ministry of Communications in July 1995.  Nevertheless, the volume of international calls made from India through call-back services has continued to grow.
 
Increased competition, as well as significant consolidation of the telecommunications industry in India, has kept and will likely continue to keep downward pressure on prices and has required and will likely continue to require us to increase our capital investment to improve and expand our services.  These developments, in turn, have had and may continue to have a negative impact on our operating results.  In the tariff order, no minimum tariff levels are specified and service providers have the flexibility to determine the tariff below the maximum levels.  Our board of directors has decided not to reduce fixed line tariffs unless such a reduction is in response to a tariff reduction by a competitor.  However, the TRAI may prescribe minimum tariffs or prohibit providers from reducing tariffs in response to competition.  Additionally, the tariff order prescribes tariffs based on the estimated cost to provide particular services.  These estimates and corresponding tariffs may not accurately reflect our actual costs.
 
In order to compete with other basic and cellular operators and Internet service providers, we are increasingly focused on the timely introduction of new and improved products and services and pay increased attention to customer service.  An inability to compete effectively would also damage our longer-term business prospects through loss of customers and market share.
 
If recommendations on Internet Telephony for permission to ISPs are approved by the government of India, then calls may become cheaper and with increased competition in the Indian telecommunications industry.  These recommendations permit ISPs to provide Internet telephone calls to PSTN/PLMN and vice-versa within India; interconnection with NLD operators for unrestricted internet telephony; and permit NLD operators to connect with ISPs through public Internet.  See “Telecommunications Regulation in India - Internet Policy” below.
 
Mobile Number Portability
 
On September 23, 2009, the TRAI issued “Telecommunication Mobile Number Portability Regulations (MNP), 2009” which allows subscribers to retain their existing mobile number when they move from one service provider to another service provider on payment of certain charges and on fulfilling certain other conditions.  Management believes that the movement of subscribers from one service provider to another service provider increases competition between the service providers and would act as a catalyst for the service providers to improve their quality of service. This could have a material effect both favorable and adverse on our business, financial condition and results of operations. At  March 31, 2012, the total number of porting request were approximately 1.75 million and 1.46 million in Delhi and Mumbai, respectively.
 
On November 20, 2009, the TRAI issued the Telecommunication Mobile Number Portability Per Port Transaction Charge and Dipping Charge Regulations, 2009 (9 of 2009). The salient features of the MNP under these regulations were as follows:
 
 
·
The Per Port Transaction charge is Rs.19/-.
 
 
·
The Dipping charge is left to mutual negotiation between the telecom service providers and the respective MNP service providers.
 
 
·
Porting charge, i.e. the amount to be paid by the subscriber, shall not be more than the per port transaction charge, i.e. Rs.19/-.  The operators are free to charge any amount less than or equal to this charge.
 
 
The Telecom Commercial Communications Customer Preference Regulations, 2010
 
On December 1, 2010, the TRAI issued The Telecom Commercial Communications Customer Preference Regulations, 2010, which provide a wide choice to the customer.  The customer may choose the “partially blocked” category among seven categories, i.e., banking/insurance/financial products/credit cards; real estate; education; health; consumer goods and automobiles; communications/broadcast/entertainment/IT; and tourism and leisure.  Telemarketers are required to scrub the data before sending the SMSs/making the calls through their service provider’s network.  In addition, service providers are required to filter the data.  This two-stage screening is designed to stop any unsolicited calls/SMS.  Any defaulting telemarketer will be liable to pay penalties, ranging from Rs.25,000 for the first offense to Rs.250,000 for the sixth offense.  If an access provider is found to have violated these Regulations, it would be liable to pay, by way of financial disincentive, an amount of rupees one lakh for the first violation, Rs.five lakh for the second violation and rupees ten lakh for the third and subsequent violations. The DoT has not yet allocated the numbering resources for telemarketers from fixed line network.  This new numbering system is required to be implemented by all access providers before allocation of resources to telemarketers.  The TRAI will announce the date of implementation once the DoT finalizes the number series for telemarketing resources from fixed line network.
 
LEGAL PROCEEDINGS
 
Except as described below and except with respect to regulatory proceedings described elsewhere, we are not currently a party to any material legal or arbitration proceedings or disputes.
 
Deduction of Claim of Benefit U/S 80IA for New Undertakings.
 
Pursuant to section 80IA of the Indian Income Tax Act, 1961, a company which starts to operate telecommunication services at any time on or after April 1, 1995, but before March 31, 2000, is entitled to a tax holiday for a period of 10 years beginning with the year in which such services are started. Pursuant to the tax holiday, 100% of the profits derived from such services are exempt from tax in the first five years, and 30% of such profits are exempt from tax for the next five years. On the basis of advice from our legal counsel, we have historically claimed such benefit. Our claim have been rejected at the first appellate level and the case has been referred to the Committee of Disputes, which is a body formed by the Government to settle disputes between Government controlled undertakings and the Government. The Committee has referred the case to the Tax appellate authorities for reconsideration. During the 2006 fiscal year, the case has been set aside by the Income Tax Appellate Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and has referred the matter back to the Assessing Officer for a fresh assessment after hearing the case again. For the years ending up to and including March 31, 2006, considering that the benefit claimed by us in the above years may not be ultimately allowed by tax authorities, the provision for current taxes in these years had been accounted in the basis of normal tax rates. During the 2007 fiscal year the assessing officer has made fresh assessment for calculation of deduction under section 80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to us. We have filed appeals against that partial allowance to the higher authority. Also refer to Note 25iii(b)(ii) to notes to the consolidated financial statements in this report.
 
During the 2008 fiscal year, we received refunds from Income Tax Authority in respect of penalty levied for the 1996, 1997, 2001 and 2002 fiscal years.  These penalties pertained to the claims we had made under section 80IA of the Indian Income Tax Act.  The income tax department refunded the penalty amount together with the interest thereon which we had accounted for in our statement of income for the 2008 fiscal year.
 
 
During the 2009 fiscal year, the Assessing Officer allowed partial refunds in respect of deductions under section 80IA for assessment years 2001-02 and 2003-04.
 
During the 2010 fiscal year, the Honorable ITAT allowed deduction under section 801A for six assessment years (1998-99, 1999-2000, 2000-01, 2001-02, 2002-03 and 2005-06) to exempt up to 75% of the income we earned from services.  The Income Tax Authorities have refunded the tax amount of Rs.2,819 million (including interest of Rs.1,361.84) for assessment year 1998-99, and the claims for the rest of the years were pending.
 
During the 2011 fiscal year, the Income Tax Authorities refunded the aggregate tax amount of Rs.13,766 million (including interest of Rs.7,310 million) for assessment years 1998-99, 1999-2000, 2000-01, 2001-02 and 2002-03.  We also filed a further appeal with the Honorable High Court of Delhi for a 100% claim under section 80IA, based upon the treatment of BSNL which is similarly situated.
 
During the 2012 fiscal year, the appeals for the claim under section 80IA for the 1998-99, 1999-2000, 2000-01, 2002-03 and 2005-06 assessment years have been admitted by the Hon’ble High Court.  Another appeal for the 2004-05 assessment year under section 80IA claim has been filed before Hon’ble High Court and also been admitted.  All above appeals/cases are now pending for regular hearing before Hon’ble High Court.  During the 2012 fiscal year, Income Tax authorities has refunded Rs.3,507.43 million on account of rectification of refund orders issued for the 1998-99 and 2001-02 assessment years.
 
Disputes with BSNL
 
In accordance with the Interconnect Usage Charges Regulations, we accounted for networking charges payable to BSNL amounting to Rs.6,924 million and Rs.3,627 million for the 2004 and 2005 fiscal years, respectively.  However BSNL had raised a bill for the interconnection charges for the calls originating from our network and terminating/transiting at/from BSNL amounting to Rs.12,165 million and Rs.8,030 million for the 2004 and 2005 fiscal years, respectively.  Our contention was that the claim was not adequately supported by BSNL and hence not accepted by us.
 
In the absence of an interconnection agreement, we had provided NLD/ILD access charges for the period ended March 31, 2002 at the rates lower than those demanded by BSNL. Subsequent to the 2004 fiscal year, in a meeting held among the DoT, BSNL and us, the rates for NLD calls for the 2002 fiscal year were agreed upon, and accordingly we have accounted additional liability of Rs.233 million during the 2004 fiscal year.  We may be required to pay ILD access charges amounting to Rs.195 million for the period April 1, 2001 to January 31, 2002 on the settlement of the dispute with BSNL.
 
During the 2006 fiscal year, the DoT constituted a three member committee from its Telecommunications Department comprising the Member (Production), Member (Finance), and Deputy Director General (Business Solution) to resolve the issues relating to networking charges. Based on the recommendations of the Committee in their minutes dated January 2006, the networking charges payable to BSNL for the years March 31, 2004 and March 31, 2005 have been settled at Rs.14,078 million as against Rs.10,551 million.  Further, the Committee has also settled networking charges for the 2000 to 2003 fiscal years in the meeting held in January 2006. Accordingly, an amount of Rs.3,809 million (including the incremental charge of Rs.3,527 million for the 2004 and 2005 fiscal years) has been accounted as networking charges in the statement of operations for the 2006 fiscal year.
 
Subsequent to the 2006 fiscal year, meetings have been held between BSNL and us wherein BSNL has raised additional claims for the year up to March 31, 2005 aggregating Rs.2,007 million and claims amounting to Rs.5,670 million for the 2006 fiscal year on account of networking and others charges. As against these claim for the 2006 fiscal year, we have accounted Rs.4,040 million for networking charges payable to BSNL.
 
 
Our contention is that since all claims relating to networking and other charges for the period up to March 31, 2005 have already been settled in accordance with the minutes of the DoT committee held on January 2006 and the claims for the 2006 fiscal year were not adequately supported by the BSNL, and hence not accepted by us.  Further, as we are in the process of discussing/reconciling with BSNL its claims for the 2006 fiscal year and may be required to pay an additional amount based on the final settlement, however such payments will not have a material adverse effect upon our results of operations, financial condition and cash flows. Management believes that an adverse outcome in respect of the above is unlikely.  Therefore, the difference amount of above claims of Rs.3,637 million has been shown as contingent liability.  In addition, the Delhi Unit has accounted for the expenditure on account of telephone bills of service connections raised by BSNL towards us for the period from October 1, 2000 to September 30, 2006 in the amount of Rs.98.01 million on the basis of actual reimbursement made for subsequent periods against the disputed claim of Rs.312.72 million, since no details/justifications have been received from BSNL in spite of repeated requests.  The balance amount of Rs.214.72 million is shown as a contingent liability.
 
During the 2008 fiscal year, we raised claims against BSNL for duct charges and TAX usage charges amounting to Rs.515 million and Rs.546 million, respectively.  We have not recognized these claims as income in our statement of operations considering the history of other disputed claims with BSNL, that currently there is no separate agreement for these services and that BSNL has not accepted these claims.
 
During the 2009 fiscal year, we raised claims against BSNL for duct charges and tax usage charges amounting to Rs.522.12 million and Rs.1,223.55 million, respectively.  We have not recognized these claims as income in our statement of operations as BSNL has rebutted such claims.
 
During the 2010 fiscal year, we raised charges on BSNL amounting to Rs.403.17 million for infrastructure and for electricity and other charges amounting to Rs.86.12 million, which BSNL has not rebutted.  Management believes that the income claimed will be recoverable from BSNL.  Accordingly, these amounts have been recognized as income in our statement of operations.  Further, during the 2010 fiscal year, we had raised claims against BSNL for tax usage charges amounting to Rs.700.83 million.  We have not recognized these claims as income in our statement of operations due to absence of any interconnect agreement with BSNL.
 
During the 2011 fiscal year, we increased infrastructure charges to BSNL amounting to Rs.586.65 million and Rs.184.91 million for electricity and other  charges, which have not been rebutted by BSNL. No tax usage charges has been billed to BSNL since BSNL has installed its own Trunk Automatic Exchange.
 
During the 2012 fiscal year, amounts of Rs.868.65 million and Rs.190.58 million have been accounted for as Infrastructure Usage charges for using our various office building and spaces and for property tax, electricity, water and fuel charges, respectively.
 
Disputes with the DOT
 
Upon our formation, employees were deputed to us on deemed deputation status from the DoT and we were required to contribute for the Leave Salary and Pension Contribution (“LSPC”) pursuant to the rates prescribed by the Government (11% for leave salary and 14% for pension contribution).  We had accrued for these expenses amounting to Rs.2,885 million for the period 1986 to 1998, and subsequently paid them to the DoT.
 
 
During the 2006 fiscal year, a Committee was set up to examine the amount of LSPC contributions payable by us to the DoT. The Committee concluded that an additional amount of Rs.656 million was payable on account of short payment of the LSPC contribution and an amount of Rs.1,738 million is payable on account of interest payable on delayed payment of the LSPC contributions.  We accepted the claim of the DoT for Rs.656 million and we had expensed it in our statement of income for the 2006 fiscal year.  In respect of Rs.1,738 million, we have contested the claim from the DoT on the contention we had abided by the DoT’s decision at all stages and deposited substantial sums as required.  During the 2009 fiscal year, the DoT had requested various information from us, which we supplied to the respective units of the DoT.  In connection with this, the terms and conditions as laid down in fundamental rules and service rules (FRSR) of the government of India with regard to prior intimation of calculation of contribution of the pension amount have not been communicated to us, and management believes that an adverse outcome in respect of the above is unlikely.
 
License fees payable to the DoT are calculated on the AGR accounted for on accrual basis in respect of both revenue and revenue sharing with all other operators.  As regards the directions of Supreme Court in respect of calculation of License Fees and AGR the matter has been referred back to TDSAT and is pending with regard to the AGR calculations, etc, in cases of other operators where demands had already been raised by the DoT.  However, we are  not a party to the dispute and the AGR is calculated as per License Agreement and in case of BSNL the same is done on netting of receivables and payables by us and the same issue of revenue sharing with BSNL the issue has been taken up with the DoT.  The impact of Rs.1,403.60 million on this account has been shown as contingent liability in the 2012 fiscal year, although there is no demand from the DoT at this stage in view of on-going assessment of license fees paid by us for the 2008 fiscal year and onward as a conservative approach by us.
 
Other Disputes
 
In 1998, M&N Publications(now GETIT Informediary Pvt. Ltd.) made claims against us for Rs.5,415 million.  These claims arose out of contracts for the printing of telephone directories for Delhi and Mumbai, and include claims for loss of reputation and loss of business opportunities.  We asserted counterclaims of Rs.4,169 million against M&N Publications for failure to perform the contracts. These claims are pending before a sole arbitrator.  The last hearing was held in March  2012 when the Arbitrator reserved the matter for award. We believe that we have valid defenses to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
 
In the 2005 fiscal year, Alcatel brought claims against us aggregating Rs.169.16 million (including interest from 1996 on the claims made of Rs.127.87 million) as of March 31, 2012.  These claims arose out of contracts for supply of digital local telephone exchange equipment, and include claims for loss of reputation and loss of business opportunity.  The claims are pending in arbitration.  The case is at the stage of examination of witnesses and last hearing was held in May 2012. We believe we have a valid defense to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
 
We have received claims aggregating Rs.481.82 million (including interest) as of March 31, 2012 from various PRM service providers (World Phone, Voice Infotech and ITC). These claims arose from the contracts for PRM services, which were started in the 2000 fiscal year.  We had not paid commission payable for these services to these providers, as the amount was subsequently not recovered from the subscribers. The claims include Rs.119 million towards loss of profit and wasteful expenditure incurred by the parties. An arbitration award of Rs.112.55 million, plus interest, was made in the World Phone claim, which both we and World Phone appealed to the Delhi High Court.  These appeals are pending. The matter in respect of World Phone case is now listed in the category of “Finals” and shall be taken up at its own turn. In case of M/s Voice Infotech no proceeding happened since March 2007 and also in case of M/s ITC no proceeding took place since July 2006. We believe we have a valid defense to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
 
 
We have received claims from CMC Limited aggregating Rs.741.07 million (including interest) as of March 31, 2012.  These claims arose out of the usage of leased circuits for which we have charged them rent for CUG services pursuant to the revised tariff plan which is disputed by CMC Limited.  These claims include claims for loss of reputation, business opportunity and undue harassment aggregating to Rs.220 million.  We believe we have a valid defense to these claims and, based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
 
We have received claims from M/s Haryana Telecom aggregating Rs.196 million (including interest) as of March 31, 2012 for a dispute in respect of reduction of notified rates for supply of PIJF cables to us against DOT T.E. No. 14-21/94-MMT(MMS), which claims also seeks interest at the rate of 24% per annum from June 1997 through the date of payment.  There have not been any proceedings in this case since 2009.  Pleadings in this case are complete and the matter is pending for final argument. We believe we have a valid defense to these claims and based on opinion from legal counsel, management believes that an adverse outcome is unlikely.
 
Additionally, as of March 31, 2012, we were also involved in other law suits and claims amounting to Rs.8,438 million pending with various authorities regarding service tax, sales tax, lease disputes and other matters which arose in the ordinary course of the business. Management believes that we have valid defenses against these claims and adverse outcomes are unlikely. These lawsuits and claims would not have a material adverse effect upon our results of operations, financial condition and cash flows.
 
Dispute with Other Operator
 
We have received a claim of Rs.3,921 million (including interest) from Reliance Infocom.  The case dates back to the 2005 fiscal year when we noticed that a very large number of calls had been received from certain levels of another operator’s network.  On further investigation and analysis, we concluded that these were actually ILD calls, which were being received on Local/NLD trunks and that the CLIs (Caller line Identification) of these calls had been tampered with by Reliance Infocom.  We raised a demand on Reliance Infocom based on the relevant penal clauses of its agreement aggregating Rs.3,412 million for a period of six months beginning April 2004.  Reliance Infocom disputed the above claim and under repeated threats of disconnection, obtained a stay order from High Court of Delhi.  After hearings, the High Court directed Reliance Infocom to pay Rs.2,368 million to us.  During the 2006 fiscal year, Reliance Infocom under direction from the High Court has further deposited Rs.1,040 million with us.  The petition filed by Reliance Infocom before the High Court was dismissed as withdrawn with a liberty for Reliance Infocom to take steps in accordance with the law.  The matter is presently pending with the Hon’ble Court/TDSAT.  We believe that we have strong defense and we will not have to repay amount received from Reliance Infocom.
 
Item 4C.  Organizational Structure
 
We are controlled by the Indian government and are not part of any group.
 
We have no subsidiaries which are considered “significant subsidiaries”.
 
 
Item 4D.  Property, Plants and Equipment
 
Infrastructure
 
We believe that we have created one of the most technologically advanced networks in India.  Our network capacity is growing rapidly, and as of March 31, 2012 we had a total capacity of approximately 12.46 million lines.
 
We operate entirely separate but similar networks in each of Delhi and Mumbai.  Each network comprises a switching and transmission network, which we refer to as our “switching network” and a local loop network.  The local loop network principally consists of copper wire based lines, connecting subscribers to the main exchanges or the remote line units.  A number of subscribers are connected to the switching network via fiber-optic cable and wireless-in-local-loop technology.  The switching network includes the trunk automatic exchanges, which are used for routing domestic long distance and international calls, the main switching exchanges, through which all calls are routed, and remote line units, which are connected to the main exchanges.  The local loop network comprises all connections between the main exchanges or the remote line units and the subscriber.  Subscribers are either connected directly to the main exchanges or, depending upon the distance from the main exchanges, via remote line units.  All domestic long distance traffic, including traffic between Delhi and Mumbai, is routed through BSNL’s network.
 
Overview of Our Network
 
   
As of March 31,
 
   
2008
   
2009
   
2010
   
2011
   
2012
 
Delhi
                             
Access lines in service (access lines in service) (thousands)
    3,181       3,586       3,942       4,190       4,449  
Equipped capacity (thousands) (1)
    5,135       5,135       5,847       6,347       6,347  
Number of exchanges:
                                       
TAXs (2)
    4       4       4       4       4  
Main exchanges and RLUs (3)
    342       344       342       352       368  
Digital lines (thousands) (1)
    5,135       5,135       5,847       6,347       6,347  
Digitalization rate (4)
    100 %     100 %     100 %     100 %     100 %
                                         
Mumbai
                                       
Access lines in service (access lines in service) (thousands)
    4,028       4,470       4,649       4,753       4,841  
Equipped capacity (thousands) (1)
    4,734       5,734       6,092       6,544       6,138  
Number of exchanges:
                                       
TAXs (2)
    4       4       4       4       4  
Main exchanges and RLUs (3)
    210       216       212       222       229  
Digital lines (in thousands) (1)
    4,734       5,734       6,092       6,544       6,138  
Digitalization rate (4)
    100 %     100 %     100 %     100 %     100 %
 
(1)
Represents lines that are connected to digital switches.
 
(2)
TAX means trunk automatic exchange, a switch that routes calls to BSNL’s domestic fixed-line network and VSNL’s international gateways.
 
(3)
RLU means remote line units, which are switches that connect a subscriber to the main exchange.
 
(4)
Percentage of total equipped capacity that consists of digital lines.
 
 
Switching Equipment
 
All of our exchanges are fully automated and our switching capacity is 100% digital.  As of March 31, 2012, our switching network consisted of 368 nodes in Delhi and 229 nodes in Mumbai.  Each node has a capacity of between 1,000 and 100,000 lines.
 
As of March 31, 2012, there were 93 main exchanges and 273 remote line units in Delhi and 70 main exchanges and 159 remote line units in Mumbai.  Because one or more main exchanges in each node are connected to one or more main exchanges in every other node, traffic is routed in a “mesh” configuration.  We have also installed high capacity tandem switches in Delhi and Mumbai to more efficiently route traffic between exchanges.  A majority of calls to our main exchanges are now being routed through the tandem switch to another node.  This has resulted in a more integrated network and has reduced the amount of capital expenditure required to install additional capacity in our switching network.
 
Each node is connected to each trunk automatic exchange.  Interconnection to basic service providers, private cellular operators and Internet service providers is provided by dedicated access to the main exchanges or tandem switches.  Our entire switching network is connected by fiber optic links.
 
Transmission
 
Our transmission network has considered largely of plesiochronous digital hierarchy, or PDH, and synchronous digital hierarchy, or SDH, optical fiber.  PDH and SDH are transmission standards for digital signal transmission.  However, in order to improve and upgrade our network efficiency, we are replacing our old PDH transmission network with SDH.
 
Access Network
 
We construct our access network with copper cable, which is extended to distribution points to terminate connections.  We have commenced deploying five pair underground cable into subscribers’ premises where an internal distribution point is installed.  We believe this access network will reduce the number of telephone poles and improve reliability of the service.
 
We have also implemented fiber-to-the-curb/building access and offer increased bandwidth for business and high usage subscribers.  Fiber-to-the-curb/building is also intended to supplement existing copper wire with optic fiber.  We have provided digital loop carriers, or DLCs, for this purpose.
 
We have installed wireless-in-local-loop services using CDMA technology where feasible in Delhi and Mumbai as a substitute for fixed-line access to enhance basic service penetration, provide quicker installation and cover areas where the installation of cable would not be economical.
 
Quality of Our Network
 
We are meeting most of the Quality of Service (QoS) parameters for PSTN, GSM, CDMA, Internet and Broadband services, which are prescribed by the TRAI. These are comparable with other telecom service providers based upon various QoS reports issued from time to time by the TRAI.

QoS improvement is a continuous process. For further improvement in QoS, we have undertaken the following steps:

 
·
Improving the legacy PSTN Network by change of cables, drop wires, punching of DPs / Pillars, replacement of old instruments, etc. as required.
 
·
Rehabilitating outdoor network to reduce fault rate and MTTR.
 
·
Introducing latest digital/new generation/optical technologies.
 
·
Planning to RSUs to reduce the last mile loop length wherever required.
 
·
Inspecting O/D network and indoor plants on regular basis for improvement of services.
 
·
In cellular network measures like BTS addition, capacity augmentation and upgrades, antenna tilting, optimization of network and drive test are undertaken on a continuous basis. Indoor building solutions using Micro BTSs/Boosters in buildings wherever the signals are required to be improved.
 
 
We conduct an ongoing program to improve the quality of services offered.  Our principal quality measures are call completion rate and fault rate.  The table below shows the quality improvements over the past five years.  We achieved this primarily by focusing on improvements to our switching network.  Part of our local loop network is comprised of old paper core copper cables, which are a principal cause of network faults.  We are in the process of upgrading and replacing copper access lines and believe that this has had a positive impact on call completion rates and fault rates.
 
   
Year Ended March 31,
 
   
2008
   
2009
   
2010
   
2011
   
2012
 
                               
Fault rate/100 (1)
Telephones/month:
                             
Delhi
    6.5       6.7       7.7       6.4       6.9  
Mumbai
    9.3       9.1       7.3       8.5       7.0  
Call completion rate (2)
                                       
Delhi
                                       
Local calls
    52.8       50.5       53.0       61.4       60.4  
Domestic long distance calls
    43.5       48.4       48.7       51.1       52.7  
Mumbai
                                       
Local calls
    54.4       53.2       53.9       58.7       59.8  
Domestic long distance calls
    45.6       48.9       50.7       49.8       53.1  
 
(1)
The fault rate is calculated by dividing the total number of verified customer complaints of malfunctioning telephone equipment and services by the total number of access lines in service and multiplying the result by 100.
 
(2)
The call completion rate was measured on the basis of actual calls completed.  Call completion rates measured on this basis are lower than if measured on a free-to-free test basis since calls that are not answered because the recipient’s line is engaged or where the network cannot complete the call because of congestion are deemed incomplete.  Call completion rates measured on different bases are not comparable.
 
Suppliers
 
In carrying out our development program, we have used a core group of international equipment suppliers to purchase key switching equipment in order to maintain technological compatibility while simultaneously decreasing dependence on any one vendor.  We believe that we have developed stable relationships with our suppliers.
 
Development Activities
 
Development activities are carried out by a planning group in each of the Delhi and Mumbai operations, with overall planning activity coordinated at the corporate office in Delhi.  The main focus of each planning group is the expansion of existing services, the development of new services and the introduction of new technologies that are tested for their reliability, compliance with internal and DoT technical specifications and compatibility with our network.
 
 
Network Modernization
 
We have historically planned our capital expenditures on five-year programs that are subject to approval by the DoT and the Planning Commission of the Indian government.  The Eleventh five-year plan covering the period from April 1, 2007 to March 31, 2012 has recently been completed. In drafting the  12th Five Year Plan, we have put a major emphasis on expansion and technology up gradation.  Generally, five-year plan investment targets are much higher than actual investment levels.  Additionally, rapid changes in communications technology and customer preferences render detailed investment planning for five years impossible.
 
Our current estimate for capital expenditures for fiscal year 2013 is Rs.2,004 million; however, based on our experience in past years, we expect that the actual amount of capital expenditures for the year will be less than our estimate.
 
The following table shows our network-related capital expenditures for the periods indicated:
 
   
(Rs. in million)
Year Ended March 31,
 
   
2008
   
2009
   
2010
   
2011
   
2012
 
Local switching and access lines (including CDMA)/
                             
Transmission/network modernization/expansion abroad
    5,107       5,098       4,955       8,959       775  
Information technology
    52       817       281       87       137  
Land, buildings and vehicles
    926       790       889       1,672       363  
Build-out of GSM cellular networks
    3,239       2,006       5,955       1,853       460  
3G and BWA license fees
    -       -       110,980       -       -  
Total
    9,324       8,711       123,060       12,571       1,735  
 
We have funded our recent capital expenditures to the extent incurred, and intend to fund the remaining capital expenditures, primarily from cash flow from operations and existing cash balances.  Our capital expenditures may be higher as we introduce international long distance service, if demand for our GSM cellular service or CDMA-based mobile service is higher than anticipated or if we otherwise enter new markets or provide additional services.
 
Properties
 
Our principal executive offices are located in Delhi and are leased from the Life Insurance Corporation of India.  We have interests in various properties in Delhi and Mumbai that consist of land and buildings for offices, administrative centers and technical facilities.  We believe that all of our owned and leased properties are well maintained and adequate for their present use.
 
In 1987, the assets and properties of the DoT located in Delhi and Mumbai were transferred to us by an order of the government of India and a deed of sale with a consideration of Rs.9,000 million paid by us.  Indian law generally requires that to perfect the transfer or lease of real property, the transfer should be evidenced by a formal duly stamped deed of transfer and registered with the Central Land Registrar within a specified period after the execution of the deed of transfer or lease.  A formal transfer deed for real property of the DoT transferred by the government of India to us has been executed but has not been registered with the appropriate authorities.  The formal transfer deed and the physical delivery of possession of the DoT’s non-real estate assets have resulted in the transfer of these non-real estate assets of the DoT to us in Delhi and Mumbai.  We believe that our use of these properties is not affected by the fact that this deed has not been registered with the appropriate authorities.
 
 
Indian law requires payment of stamp duty (at rates which vary among states) on instruments, which effect transfer of title to real estate or in respect of leases of real estate.  Applicable stamp duty has not been paid in respect of any of the properties acquired or leased by us.  Accordingly, we may be liable for stamp duty and related penalties if a deed is executed by us in the future under the applicable rates of stamp duty and penalty payable in the state where the property is located (other than with respect to the DoT properties acquired from the government of India as of March 30, 1987).  All liabilities for stamp duties in respect of the DoT properties acquired by us from the government of India as of March 30, 1987 are to be borne by the government of India.  We have been advised by our counsel that, although we have valid possession (including the risks and rewards of ownership) and title to all of our property, we need to have certain documents relating to transfer or lease of real property duly registered and stamped to enable us to perfect and thereby acquire marketable title to real property in our possession.  In preparing our financial statements, the provision for this stamp duty has been made on a best estimate basis. We have capitalized provision for stamp duty based on our best estimate amounting to Rs.63 million and Rs.89 million as of March 31, 2011 and 2012, respectively.  We do not intend to sell any of these properties but as excess capacity develops we have been searching to rent out the unused space. In terms of our Articles of Association, we must obtain prior approval of the President of India in respect of any sale or disposal of any land or building costing more than Rs.1 million.
 
Intellectual Property
 
Intellectual property rights are not important to our operations.
 
TELECOMMUNICATIONS REGULATION IN INDIA
 
The Telecom Regulatory Authority of India
 
In March 1997, the Indian government established the TRAI, an independent regulatory authority under the provisions of the Telecom Regulatory Authority of India Act.  The TRAI is an autonomous body comprised of a chairperson and not more than two full-time members and not more than two part-time members appointed by the Central government, and has primary responsibility for making non-binding recommendations to the DoT, either at the request of the DoT or on its own, as to:
 
 
·
need for and the timing of the introduction of new service providers;
 
 
·
terms and conditions of licenses to new or existing service providers;
 
 
·
revocation of existing licenses for non-compliance
 
 
·
measures to facilitate competition and promote efficiency to facilitate growth in the industry;
 
 
·
technology and equipment improvements in providers’ infrastructures and in the industry generally;
 
 
 
·
ensuring compliance of providers with license terms;
 
 
·
ensuring technical compatibility between providers;
 
 
·
regulating revenue sharing between providers;
 
 
·
establishing quality standards and ensuring compliance through periodic reviews of providers; and
 
 
·
determining time schedules pursuant to which providers will establish inter-connection between their networks.
 
The TRAI also has the authority to, from time to time, set the rates at which domestic and international telecommunications services are provided in India.  The TRAI does not have authority to grant licenses to service providers or renew licenses (those functions remain with the DoT).  The TRAI, however, has the power to:
 
 
·
call upon service providers to furnish information relating to their operations;
 
 
·
appoint persons to make official inquiries;
 
 
·
inspect books; and
 
 
·
issue directions to service providers to ensure their proper functioning.
 
The TRAI had previously acted in both a regulatory and an adjudicatory role.  Failure to follow TRAI directives may lead to the imposition of fines.  The Indian government has amended the provisions of the Telecom Regulatory Authority of India Act providing a separate adjudicative body called the Telecom Disputes Settlement and Appellate Tribunal, also known as the Appellate Tribunal, to adjudicate disputes between
 
 
·
a licensor (i.e., the DoT) and a licensee;
 
 
·
regulator and service providers;
 
 
·
two or more service providers; and
 
 
·
between a service provider and consumer advocacy groups.
 
Additionally, the government of India, any Indian state or local government or any person may apply to the Appellate Tribunal for adjudication of any of the disputes listed above or appeal any order of the TRAI to the Appellate Tribunal.
 
Standards of Quality of Service Regulations.  In fiscal year 2009, the TRAI issued the Telecommunication the Standards of Quality of Service of Basic Telephone Service (wireline) and Cellular Mobile Telephone Service Regulations, 2009, dated March 20, 2009, and revised the benchmarks for various QOS parameters for these services.  These regulations became effective as of July 1, 2009.
 
 
Mobile Number Portability.  In May 2009, the DoT issued instructions regarding requirements to provide Mobile Number Portability (MNP).In September 2009, the TRAI issued “Telecommunication Mobile Number Portability Regulations (MNP), 2009” which allows subscribers to retain their existing mobile number when they move from one service provider to another service provider on payment of certain charges and on fulfilling certain other conditions.  In November 2009, the TRAI issued the Telecommunication Mobile Number Portability Per Port Transaction Charge and Dipping Charge Regulations 2009(9 of 2009).  The DoT decided to implement MNP by January 1, 2011.  We have adhered to the deadline and MNP has been successfully implemented on our network.
 
Spectrum Allocation Charges.  In addition to the license fee, each Indian mobile service provider, including us, pays spectrum charges of 2% of adjusted gross revenues for up to 4.4 MHz of spectrum allocation and 3% of adjusted gross revenues for spectrum allocation of up to 6.2 MHz and 4% of adjusted gross revenue for spectrum allocation of up to 8 MHz.
 
Revised Spectrum Charges for CDMA and GSM. On February 25, 2010, the DoT revised the Spectrum  Charges for CDMA and GSM Access network of Telecom Service as follows:
 
Amount of  GSM spectrum
Amount of  CDMA spectrum
Spectrum charges as a percentage(%) of Adjusted Gross Revenue
Upto   2 x 4.4   MHz
Upto   2 x 5.0    MHz
3%
Upto  2 x 6.2    MHz
Upto   2 x 6.25  MHz
4%
Upto  2 x 8.2    MHz
Upto   2 x 7.5    MHz
5%
Upto  2 x 10.2  MHz
Upto   2 x 10.0  MHz
6%
Upto  2 x 12.2  MHz
Upto   2 x 12.5  MHz
7%
Upto  2 x 15.2  MHz
Upto   2 x 15.0  MHz
8%
 
Private telecom operators have challenged this order of the DoT in the Honorable TDSAT and obtained stay orders.  The stay is applicable to the operators which approached the tribunal.  We have also requested the DOT to allow us to pay the spectrum charges in accordance with the earlier rates to maintain a level playing field, and are awaiting a response from the DoT.
 
The TRAI, in its recommendation on Spectrum Management and Licensing Framework, dated May 11, 2010, observed that BSNL and MTNL hold spectrum of 2X12.4 MHz in most service areas. Going by the subscriber figures of both these service providers, it was apparent that the spectrum was being underutilized and as such the TRAI would like the Government to withdraw the spectrum of 2X2.4 MHz from both these providers. However, the DoT responded that the matter is sub-judice.  Stay order has been passed by the Hon’ble Supreme Court consequent to appeal against TDSAT judgment on Petition No. 286 of 2007 and notice to BSNL/ MTNL to surrender excess spectrum by BSNL/ MTNL.

For regulating the telemarketing activities, on December 1, 2010, the TRAI has issued “The Telecom Commercial Communications Customer Preference Regulations, 2010 expressing that all access providers have to allocate telecom resources to registered telemarketers from a specified numbering series for making voice calls.  It was also emphasized that every access provider would ensure that such telecom resources provided to telemarketers for making voice calls do not have the facility for receiving incoming calls and sending SMSs.

Numbering series allocated to us for different service areas for telemarketing (for Basic Service customers) are as under:-

S.No
Name of the license company
Service area
Type of license
Series allocated
1
MTNL
Delhi
CMTS & Basic
140963
2
MTNL
Mumbai
CMTS & Basic
140962
 
 
The Tariff Order
 
Effective May 1, 1999, the TRAI implemented The Telecommunications Tariff Order 1999.  The intention of the tariff order was to protect consumers by aligning tariffs that telecommunications providers may charge for the service provided while ensuring the commercial viability of the various service providers and so encouraging the expansion of the Indian telecommunications industry.  This “rebalancing” of tariffs took place in stages.
 
To bring more transparency in tariff, the TRAI has issued direction No. 301-26/2003-Eco, dated  May 2, 2005, specifying the formats for publication/ advertisement of tariff for postpaid and prepaid subscribers and has also directed that the website of Telecom service providers shall contain complete details of the tariff plans as well as financial implications for various usage slabs in the specified format and the details shall be included in the tariff brouchers available at retail outlets.  In  exercise of its powers, the TRAI directed all telecom service providers to publish service wise within fifteen days of issue of this direction, all tariff plans for postpaid and prepaid subscribers in the prescribed format at the Customer Care Centres, the point of sale, retail outlets and on the website of telecom access service providers.

Service providers must ensure that the tariff plan published in the prescribed format is updated on the website and the customers care centre of the service providers every time there is any change in any of the  tariff plans and make available in the prescribed format  by 7th day of January April July and October at the points of sale and retail outlets.

 
Pursuant to tariff orders, tariff plans initiated by an access provider are to be available to a subscriber for a minimum period of six months from the date of enrollment of the subscriber to that tariff plan. The tariff order also prescribes a reporting requirement that a service provider must report any change in tariff to the TRAI within seven days from implementation.
 
Because we retain the remainder of prices of domestic and international long distance calls originating on our network, net of interconnect charges, by lowering long distance rates the tariff reductions have reduced the revenue we receive per call.  We believe that, to date, the tariff order has not resulted in significantly higher long distance usage and that, accordingly, the tariff order has had a negative impact on our revenues and earnings as the lower charges have not been offset by higher usage.
 
The tariff order prescribes a reporting requirement such that a service provider must report any change in tariff to the TRAI within seven days from implementation.
 
The TRAI has fixed revised ceiling tariff for the most commonly used capacities/speed i.e. 64 kbps, 128 kbps, 256 kbps, E1 (speed of 2 Mbps), DS-3 (speed of 45 Mbps) and STM-1 (speed of 155 Mbps).  The revised ceiling tariffs (for distance slab above 500 Km) in respect of DLC are summarized in the table below:
 
Capacity / Speed
Ceiling Tariff
(Rs. in lakhs)
64 Kbps
0.44
128 Kbps
0.79
256 Kbps
1.36
E1 (2 bps)
8.50
DS-3 (45 Mbps)
62
STM-1 (155 Mbps)
165
 
 
By amending the Telecommunication Tariff Order in April 2012, the TRAI ordered that every service provider must offer and make available to the consumer at least one top up voucher, of denomination of Rs.10;  also decided to increase the ceiling on processing fee on Top up vouchers to Rs.3 from Rs.2 in respect of Top up vouchers having maximum retail price of Rs.20 and above and to continue with the existing ceiling of Rs.2 in respect of Top up vouchers having maximum retail price of less than Rs.20.

Foreign Direct Investment Controls.
 
The current Indian government policy on foreign direct investment (FDI) in the telecom sector is summarized as follows:
 
 
·
For basic Cellular, Value Added Services and Global Mobile Personal Communications by Satellite, FDI is permitted up to 74% with FDI beyond 49% requiring government approval, subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which the investment is being made) to the license conditions for foreign equity cap and lock-in period for transfer and addition of equity and other license provisions.
 
 
·
For ISPs with gateways, radio paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI beyond 49% requiring Government approval.  These services would be subject to licensing and security requirements.
 
 
·
No equity cap is applicable to manufacturing activities.
 
 
·
FDI up to 100% is allowed for the following activities in the telecom sector: ISPs not providing gateways (both for satellite and submarine cables);Infrastructure Providers providing dark fiber (IP Category I); Electronic Mail; and Voice Mail.
 
The above policy guidelines are subject to the following conditions: FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world; the above services would be subject to licensing and security requirements, wherever required; and proposal for FDI beyond 49% shall be considered by FIPB on case to case basis.
 
Item 4A.                      Unresolved Staff Comments
 
Not applicable.
 
 
 
Item 5.
Operating and Financial Review and Prospects
 
You should read the following discussion in conjunction with the Item 3A. “Selected Financial and Operating Data, Item 3D. “Risk Factors” and our consolidated financial statements and the related notes, which appear elsewhere in this report.  Our consolidated financial statements have been prepared in accordance with US GAAP. Our fiscal year ends March 31 of each year, and therefore all references to a particular fiscal year are to the twelve months ended March 31 of that year.
 
5A.  Operating Results

Overview
 
A number of developments have significantly affected our operating results.  These developments and a number of potential developments may affect our results of operations, liquidity, capital resources and capital expenditures in future periods.  These developments include:
 
 
·
adoption of the comprehensive interconnection usage charges regulation based on the calling party pays principle, effective since May 1, 2003 and further revised from time to time;
 
 
·
our expansion into new businesses such as providing cellular/3G service and CDMA-based fixed wireless and mobile services and the rapid introduction by several other operators of low-cost CDMA-based technologies that can be used for both fixed wireless and mobile services;
 
 
·
growing competition;
 
 
·
our expansion into foreign markets - to date, Nepal and Mauritius;
 
 
·
new interconnect arrangements with international long distance carriers, including revenue sharing on incoming calls;
 
 
·
industry consolidation; and
 
 
·
our investment programs to expand and modernize our network.
 
Potential future developments include:
 
 
·
increased competition from basic and cellular operators, including the continued rapid introduction by several operators of low-cost CDMA-based technologies that can be used for both fixed wireless and mobile services;
 
 
·
continued consolidation in the industry;
 
 
·
further rate reductions as a result of intensifying competition or tariff reductions;
 
 
·
new interconnect agreements with private operators;
 
 
·
license fee revisions, including revisions that may be applied retrospectively;
 
 
·
one time charges towards 3G spectrum and BWA spectrum amounting to Rs.110,980 million paid during the 2011 fiscal year;
 
 
·
further expansion and penetration of broadband;
 
 
 
·
benefits of our new International Long Distance License obtained in July 2008;
 
 
·
possible direct or reverse merger with BSNL;
 
 
·
the implementation of voluntary retirement schemes for our employees; and
 
 
·
further regulatory changes.
 
Our future results of operations are also likely to be affected by macroeconomic trends such as the rate of growth of the Indian economy, particularly in Delhi and Mumbai, and the introduction of new technologies and products by our competitors and us.  Many of these factors are beyond our control.  See Item 3D. “Risk Factors” in this report.
 
Critical Accounting Policies and Estimates
 
We have prepared the consolidated financial statements for the three fiscal years ended March 31, 2012 in accordance with US GAAP.
 
Our accounting policies are described in Note 2 of the notes to our consolidated financial statements. Our consolidated financial statements which are part of this report are prepared in conformity with US GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal year. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.
 
Recognition of Revenues.  Revenues include amounts invoiced for call revenue, fixed monthly rental charges, roaming charges, activation fees, internet services, access and interconnection revenue and fees for value added services (VAS).  Revenues for fixed line and cellular telephonic services are recognized based upon metered call units (MCU) of traffic processed.  Rental revenues and leased circuits rentals are recognized based upon contracted fees schedule.  Revenues from internet services are recognized based on usage by subscribers.  Revenues associated with access and interconnection for usage of our telephone network by other operators for local, national long distance and international long distance calls are recognized in accordance with the Interconnect Usage Charges Regulation released by the TRAI.  The TRAI regulation specifies per minute rates for metered call units (MCU) of traffic terminated on our network.  Revenues are shown net of service tax and applicable discounts and allowance.  Unbilled receivables represent revenues recognized in respect of services provided from the last bill cycle date to the end of the year.  These are billed in subsequent periods as per the terms of the billing plans.  Billings in advance for services to be rendered and amounts charged for new connections are classified in current liabilities under the heading “Deferred income”.  Amounts charged for new connections are recognized over the average life of the customer relationship.  A significant portion of our revenue is derived from interconnect and access charges for calls terminating at our network.  The related rules and telecommunication industry related policies are framed and determined by the government of India through its departments and regulatory authorities such as the DoT and the TRAI.  Since interconnect and access charges are presently governed by IUC regime, we have not entered into separate agreements with certain other operators.  Any subsequent amendment to the presently applicable guidelines with retrospective effect relating to tariff and interconnect/access charges will impact our revenues significantly.
 
 
For the 2012 fiscal year, a 10% increase or decrease in the rates for call revenue for Basic services, including public call office revenue, would have increased or decreased the total revenue by approximately Rs.554 million. A 2% increase or decrease in metered call units in respect of fixed line call revenue, including public call office revenue, would have increased or decreased the total revenue by approximately Rs.149.42  million for the 2012 fiscal year.  Further, a 5% increase or decrease in rental charges would have increased or decreased the total revenue by approximately Rs.372.15 million, as applicable, while a 5% increase or decrease in rates for interconnection services would have increased or decreased the total revenue by approximately Rs.161.68 million for the 2012 fiscal year.
 
License Fees.  We are paying license fee and spectrum charges to the DoT in accordance with conditions governing license fee for Basic Telephone Service and Cellular Telephone Service prescribed by the DoT under the Revenues Sharing Regime, whereby the license fee is computed as a specified percentage of adjusted gross revenue.  The license fee is expensed as incurred.  In view of the uncertain political environment and the fact that the license fee is determined on the basis of guidelines prescribed by regulatory authorities, the license fees is subject to change in the event any of these guidelines are modified subsequently with retrospective effect. During the 2011 fiscal year, the applicable percentage of license fee was 10%. A change in the specified percentage to 12% or 8% would have increased or decreased the license fee charges by approximately Rs.477.22 million.  Refer to the discussion in the “Comparison of Year Ended March 31, 2012 with Year Ended March 31, 2011” below.
 
Network Charges.  Charges associated with access to and interconnection to other operators’ network by us for local, national long distance and international long distance calls are recognized in accordance with the Interconnect Usage Charges Regulation released by the TRAI, where applicable, and in accordance with the terms of agreements entered into with other operators.  TRAI regulation specifies per minute charges for metered call units (MCU) of traffic terminated on the other operators’ network.  In view of the uncertain political environment and the fact that the network charges are determined on the basis of guidelines prescribed by regulatory authorities, the network charges are subject to change in the event any of these guidelines are modified subsequently with retrospective effect.  Refer to the discussion in the  “Comparison of Year Ended March 31, 2012 with Year Ended March 31, 2011” below.
 
Pension and Other Retirement Benefits.  We sponsor pension and other retirement plans in various forms covering substantially all employees who meet eligibility requirements. Several statistical and other factors, which attempt to forecast future events, are used in calculating the expense and liability related to the plans.  These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by us, within certain guidelines.  In addition, we also use subjective factors such as withdrawal and mortality rates to estimate these factors.  The actuarial assumptions we used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants.  These differences and the fact we have not invested pension and other retirement benefit funds to cover retirement liability may result in a significant impact on the amount of pension and other retirement benefit expense recorded by us.  During the 2008 fiscal year, we made an adhoc arrangement of medical scheme for retirees with effect from September 1, 2007.  According to this ad hoc arrangement the respective units were allowed to settle such claims on case to case basis.  This scheme was discontinued with effect from March 20, 2008; however, the employees who are under treatment will continue to get the benefits till discharge from the hospital.  Effective October 2008, we implemented a Retired Employee Contribution Group Health Insurance scheme for a one year period, which has been extended till September 30, 2010.
 
 
Income Taxes.  In accordance with the provisions of SFAS 109, Accounting for Income Taxes, income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period in which such changes are enacted.  We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance.  The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.  In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.  The enacted tax rate applicable to us was 30.90% during the 2012 fiscal year.  A 1% increase or decrease in the tax rate to 31.90% or 29.90% would have increased or decreased the income tax expense for the year by Rs.NIL, since there was no taxable income.
 
As per section 80IA of the Indian Income Tax Act, 1961, a company which starts to operate telecommunication services at any time on or after April 1, 1995, but before March 31, 2000, is entitled to a tax holiday for a period of 10 years beginning with the year in which such services are started. As per the tax holiday, 100% of the profits derived from such services are exempt from tax in the first five years, and 30% of such profits are exempt from tax for the next five years.  We, on the basis of advice from our legal counsel, have historically claimed such benefit.  Our claim had been rejected at the first appellate level and the case has been referred to the Committee of Disputes, which is a body formed by the Government to settle disputes between Government controlled undertakings and the Government. The Committee has referred the case to the Tax appellate authorities for reconsideration. For the years ending up to and including the 2006 fiscal year, considering that the benefit claimed by us in the above years may not be ultimately allowed by tax authorities, the provision for current taxes in these years had been accounted in the basis of normal tax rates. During the 2007 fiscal year, the assessing officer made fresh assessment for calculation of deduction under section 80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to us. We have filed appeals against that partial allowance to the higher authority. Also refer to Note 25iii(b)(ii) to the notes to the consolidated financial statements.
 
During the 2008 fiscal year, we received refunds from Income Tax Authority in respect of penalty levied for the 1996, 1997, 2001 and 2002 fiscal years.  These penalties pertained to the claims we had made under section 80IA of the Indian Income Tax Act.  The income tax department refunded the penalty amount together with the interest thereon which we had accounted for in our statement of income for the 2008 fiscal year.
 
During the 2009 fiscal year, the Assessing Officer allowed partial refunds in respect of deductions under section 801A for assessment years 2001-02 and 2003-04.
 
During the 2010 fiscal year, the Honorable ITAT allowed deduction under section 801A for six assessment years (1998-99, 1999-2000, 2000-01, 2001-02, 2002-03 and 2005-06) to exempt up to 75% of the income we earned from services.  The Income Tax Authorities have refunded the tax amount of Rs.2,819 million (including interest of Rs.1,361.84) for assessment year 1998-99, and the claims for the rest of the years were pending.
 
During the 2011 fiscal year, the Income Tax Authorities refunded the aggregate tax amount of Rs.13,766 million (including interest of Rs.7,310 million) for assessment years 1998-99, 1999-2000, 2000-01, 2001-02 and 2002-03.  We also filed a further appeal with the Honorable High Court of Delhi for a 100% claim under section 80IA, based upon the treatment of BSNL which is similarly situated.
 
During the 2012 fiscal year, the appeals for the claim under section 80IA for the 1998-99, 1999-2000, 2000-01, 2002-03 and 2005-06 assessment  years have been admitted by the Hon’ble High Court.  Another appeal for the assessment year 2004-05 under section 80IA claim has been filed before Hon’ble High Court and also been admitted.  All above appeals/cases are now pending for regular hearing before Hon’ble High Court.  During the 2012 fiscal year, Income Tax authorities has refunded Rs.3,507.43 million on account of rectification of refund orders issued for the 1998-99 and 2001-02 assessment years.
 
 
Legal Contingencies.  As discussed in Note 25 to the notes to the consolidated financial statements, legal proceedings covering a wide range of matters are pending or threatened against us.  We have accrued amounts as appropriate that represent our estimate of the probable outcome of these matters. The judgments we make with regard to whether to establish a reserve are based on an evaluation of all relevant factors by internal and external legal counsel, as well as subject matter experts and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies.  Claims are continually monitored and reevaluated as new information is obtained.  We may not establish a liability for a particular matter until long after the litigation is filed, once a liability becomes probable and estimable. The actual settlement of such matters could differ from the judgments made in determining how much, if any, to accrue.  We do not believe these proceedings will have a material adverse effect on our consolidated financial position.  While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, our results of operations may be over or understated.
 
Recoverability of DOT Receivables.  We are a Government company under the Indian Companies Act.  As of March 31, 2012, the Government owned 56.25% of our issued share capital.  Consequently, the Government, acting through the DoT, continues to control us and will have the power to determine the outcome of our transactions with the DoT or the assertion of our claims against the DoT.  We also provide and receive services to/from other Governmental departments and other public sector organizations on normal commercial terms.  Refer to the notes to the consolidated financial statements for a further discussion on our related party transactions and significant risks and uncertainties.  The receivables from the DoT constitute a significant portion of our assets and our assessment of the recoverability of these assets involves critical accounting estimates.  The assessments reflect management’s best assumptions and estimates. Significant management judgment is involved in estimating these factors, and they include inherent uncertainties.  Management periodically evaluates and updates the estimates based on the conditions that influence these factors. The variability of these factors depends on a number of conditions, including uncertainty about future events, and thus our accounting estimates may change from period to period. If other assumptions and estimates had been used in the current period, the balances for these assets could have been materially impacted.  Furthermore, if management uses different assumptions or if different conditions occur in future periods, future operating results could be materially impacted.
 
Allowance for Accounts Receivable.  We estimate the amount of uncollectible receivables each period and establish an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts, information about the creditworthiness of customers, and other relevant information. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known.
 
Estimated Useful Lives of Property and Equipment.  We estimate the useful lives of plant and equipment in order to determine the amount of depreciation expense to be recorded during any reporting period.  If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. Likewise, if the anticipated technological or other changes occur more slowly than expected, the useful lives could be extended. This could result in a reduction of depreciation expense in future periods.  Further, property and equipment are being depreciated over their useful lives which exceed the license term since we believe that our licenses will be extended beyond their current term.
 
 
Impairment of Long-Lived Assets. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review these types of assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable over the remaining life of the asset or asset group. In order to determine if the asset or asset group is recoverable, we determine if the expected future undiscounted cash flows directly related to the asset or asset group are less than the carrying amount of the asset or asset group.  If so, we then determine if the carrying amount of the asset or asset group exceeds its fair value. We determine fair value using estimated discounted cash flows.  If impairment is indicated, the asset or asset group is written down to its fair value. Assets to be disposed are reported at the lower of the carrying value or the fair value less cost to sell.  The discounted cash flows calculation uses various assumptions and estimates regarding future revenue - which is a factor of the future subscriber base and the average revenue per subscriber, expenses, terminal values of the assets and the cash flows projections over the estimated remaining useful life of the asset or asset group. These forecasts are subject to changes in external factors including adverse regulatory and legal rulings.  We carried out an impairment review of our long lived assets in fiscal 2012.  Based on our review, the expected future cash flows directly associated with the asset groups exceed their carrying amount and hence there is no impairment of long lived assets in fiscal 2012.
 
Impairment of Held to Maturity Securities.  We invested Rs.1,000 million in 8.75% cumulative preference shares of ITI Limited (“ITI”) and Rs.2,500 million in bonds issued by Maharashtra Krishna Valley Development Corporation (“MKVDC”), a wholly-owned subsidiary of Government of Maharashtra. ITI is a government company in the telecommunication equipment and distribution business. ITI also supplies exchanges and cables to MTNL.
 
The ITI share purchase agreement includes a provision for a letter of comfort from the DOT to us endorsing the investment and also provides us a right to set off amounts receivable in respect of principal outstanding from the amounts payable to ITI in connection with our purchase of exchanges and cable supplies.
 
As of September 30, 2009, ITI had not redeemed the first, second, third, fourth and last tranches amounting to Rs.200 million each pursuant to the original repayment schedule.
 
Management has evaluated the investment in ITI for impairment, on the basis that the first, second and third tranches for repayment have not been settled by ITI.  Management has evaluated the financial condition and business outlook of ITI including the new purchase orders received by ITI for supply of GSM equipment from BSNL and us.  We currently have accounts payable to ITI of Rs.123 million as of March 31, 2012, which, pursuant to the share agreement, we can legally settle against the repayments owing under the cumulative preference shares.  In addition, we have the intent and ability to retain the debt security for a period of time sufficient to allow for anticipated recovery in value.
 
Based on this evaluation and specifically considering that the share purchase agreement includes a provision for a letter of comfort from the DoT to us endorsing the investment and also provides us a right to set off amounts receivable in respect of principal outstanding from the dues payable to ITI.  However, out of the total investment of Rs.1,000 million, Rs.800 million had been charged as an impairment during the 2008 fiscal year, another Rs.200 million of the debt security was impaired as of March 31, 2009.  The entire amount of investment in ITI has been impaired up to fiscal year 2009.
 
The DoT, by letter dated July 31, 2009, deferred the repayment schedule of the above cumulative preference shares to beginning 2012-13 and payable in five equal annual installments.
 
The MKVDC bonds have a coupon rate of 11.5% per annum and are redeemable at the end of the 10th year from the date of allotment (May 31, 2002).  The repayment of these bonds is guaranteed by the Government of Mahrashtra.  Based on our assessment of carrying value of investment in MKVDC bonds, we believe that there is no impairment of investments as of March 31, 2012.
 
 
Revenue
 
We derive a substantial portion of our revenue from local, domestic long distance and international calls that originate on our network and from telephone rentals.  We realize revenue in the form of installation charges, ongoing subscription/rental charges and usage charges.  We also derive revenues from providing Internet and broadband services, our Intelligent Network services, public call office or public payphone services, interconnection with basic service, long distance service and cellular operators, narrow-band ISDN services, CDMA-based mobile and fixed wireless services, leased-line services, telex services, trunk services, VOIP, IPTV, GSM cellular services in Delhi and Mumbai, those value-added services for which we charge a fee.
 
We began receiving interconnect payments in respect of incoming international long distance calls since April 2002, when several interconnect agreements, including our agreement with VSNL, took effect. In fiscal year 2003, revenue sharing with BSNL and other operators for incoming and outgoing domestic long distance or subscriber trunk dialing calls was done on the basis of the TRAI’s Interconnect Usage Charges Regulation 2003, and modified by Interconnect Usage Charges Regulation 2003, and further amended from time to time.  Call revenue is generally a function of the number of access lines in service, the volume of traffic carried and the level of call charges.  Telephone and other rental revenue is a function of the number of access lines in service and the rental tariffs we charge.  Public call office revenue is driven by the number of our public call offices, the volume of traffic carried and the level of call charges.  Interconnect revenue is a function of the contractual and legal/regulatory rates prescribed for interconnection and the level of call volumes originating from sources that pay interconnect fees.  There has been a continuous decrease in the number of fixed lines that, coupled with a decrease in the related tariffs, and also downfall in the GSM revenue though there are significant additions in GSM connections, is mainly attributable to reduction in tariff. However, there has been an increase in revenue due to increased broadband connections, despite a drastic decrease in related tariffs for the year ended March 31, 2012.
 
Since October 2004, we have drastically reduced the ISD tariff.  We reduced the ILD tariff on a promotional basis for our GSM postpaid and prepaid subscribers under the GSM service license for the licensed service area for 90 days effective as of June 26, 2010 for Delhi and July 1, 2010 for Mumbai.
 
The calls within our own networks of Delhi and Mumbai are treated as local calls.  For all other places the STD rate is flat (i.e. Rs.1.20 per minute from Fixed and WLL(M)) and the STD rate for Cellular service is Rs.0.60 per minute for Mumbai and Delhi. We have also reduced roaming charges between Mumbai and Maharashtra.
 
Primarily as a result of these tariff reductions, excluding termination revenues, our average revenue per access line in service has been declining.  Any further tariff rebalancing may result in lower call charges, particularly for domestic long distance and international calls, which might be offset by an increase in rental tariffs.  We are not able to assess at this time the full long-term impact that the tariff order will have on subscriber calling patterns or on revenues.  As competition intensifies, we expect call charges will likely decline and, to the extent that call volumes do not increase as a result of lower call charges, excluding termination revenues, our revenue per access line in service may continue to decline.
 
We expect that call revenue and revenue from public call offices may decline as a percentage of total revenue as demand for our other products and services, particularly our GSM cellular services, increases and if rental charges increase as a result of further tariff rebalancing.
 
 
Cost of Revenues
 
Our operating costs include staff costs, license fees and network utilization charges, depreciation expenses, maintenance costs and commissions paid to public call office franchise operators.
 
Staff costs.  In general, employees receive a base salary and salary-related housing and other allowances, productivity-based incentive payments and certain benefits, including a pension/gratuity plan and medical benefits for themselves and certain members of their immediate families.  The increase  in our staff costs was primarily due to implementation of wage revision with effect from January 1, 2007 and consequent impact on retirement benefits in the 2009 and 2010 fiscal years.
 
In fiscal year 2000, substantially all of our non-executive employees originally employed by the DoT decided to terminate their services with the DoT and accept employment with us effective November 1998.  Under the option given to them for pension benefits, most of our absorbed employees have opted for retaining pension benefits in accordance with the Central government pension rules. Some other employees have opted for retirement rules, which are applicable to our directly recruited employees, and opted to draw pro rata monthly pension until their absorption.  Accordingly, with effect from November 1, 1998 we started accruing for pension and gratuity for these employees.  In 2002, the DoT indicated that the Government would pay for the pension benefits of the government employees absorbed by us who opted for either the Central government scheme of pension or for the pro rata pension scheme for the period served with the DoT.  However, the terms of such payments are in the process of finalization. Once these terms are finalized and the payments are made to the DoT for the period of employment of these employees with us, we expect that our liability for post retirement obligations would be limited to monthly contributions on the basis of the rules to be prescribed by the government of India.  Presently, in the absence of any further movement from the Government, we are discharging all such liabilities.
 
Approximately 98% of our executive employees have accepted absorption into our company and are now our direct employees.  These employees are entitled to certain pension and gratuity benefits from the government of India.
 
We have finalized a new compensation structure for our senior executive employees.  The new structure provides for higher salaries and benefits for our senior executive employees upon exercise of their option for our absorption.
 
As a public sector enterprise, we abide by general DoT and Department of Public Sector Enterprises personnel policies that, among other things, limit our ability to reduce employment levels and control the amount of salaries and other remuneration that we may pay to our employees.  Our employee productivity measured by access lines in service per employee has been increasing steadily but remains significantly lower than the Asian and global averages.  During the 2005 fiscal year, we implemented a Voluntary Retirement Scheme (VRS) for executive as well as non-executive employees.  Under the scheme, the eligible employees were given an option to voluntarily take retirement from service and make their choice within the specified period of time.  The scheme provided for ex gratia payments to eligible employees opting for voluntary retirement based on the respective employee’s salary and term of employment.  The Scheme was closed in 2007 fiscal year. As of March 31, 2012, no employee had retired under this scheme.
 
License Fees and Network Utilization.  The DoT periodically adjusts the license fees and network utilization charges.  The license fee had been revised at 10% of Adjusted Gross Revenues with effect from April 1, 2004.  The license fee for the NLD (national long distance) and ILD (international long distance) service licenses which we have obtained is 6% of AGR.  A license fee on Internet services of 6% of AGR has been in effect since 2006.
 
 
A method of calculation of the ISP license fee was implemented for the 2010 fiscal year, and also extended the fee for the previous year.  The change was approved in the ECM held on June 12, 2010, and accordingly the license fees were reduced by Rs.70.4 million in the 2009 fiscal year.
 
We finalized the charges for network utilization and domestic long distance agreements with BSNL.  Since November 2006, NLD carriage charges have been at the negotiable rates.  These rates are not applicable to NLD for traffic between Delhi and Mumbai, which is routed on our own leased bandwidth.
 
We are responsible for collecting payments for calls from our subscribers and bear the risk of non-collection of these charges.  Until the May 1, 2003 effectiveness of the interconnection usage charges regulation, we did not receive any payments for call coming into our network from BSNL’s network.  BSNL has also established its own Trunk Automatic Exchanges (TAXs) at Delhi and Mumbai.  All the other private operators in Delhi and Mumbai have established interconnection with these TAXs and consequently we have stopped transiting their long distance calls to minimize the risk of bad debts.
 
Inflation
 
We do not believe that inflation in India has had a material impact on our results of operations in recent years.  However, the TRAI has been granted the authority to determine tariffs, and we are therefore restricted in our ability to increase tariff’s to compensate for inflation.  As a result, inflation could adversely affect our results of operations.  See Item 4B. “Business Overview-Tariffs and Other Charges” in this report.
 
Effect of New Accounting Pronouncements
 
There are a number of new accounting standards that been issued that will affect our information presented in accordance with US GAAP.  For a description of these recent pronouncements, see Note 2(s) of the notes to our consolidated financial statements included elsewhere in this report.
 
Other Matters
 
See Item 4B. “Information on the Company-Business Overview- Legal Proceedings” and Note 25 of the notes to our consolidated financial statements included elsewhere in this report for information about our contingent liabilities.
 
Segment Information
 
We have identified basic and cellular as our two operating segments.  Basic services segment consists of voice, data through local calls, domestic long distance and international long distance calls on fixed line services in the cities of Delhi and Mumbai in India. It also includes revenues from internet access services.  Cellular consists of providing cellular services in cities of Delhi and Mumbai using Global System for Mobile communications, or GSM, technology.  Further, it includes revenues from Code Division Multiple Access, or CDMA, based cellular services.  See Note 26 of the notes to our consolidated financial statements.
 
The cellular services have met the thresholds of significance as a reportable segment during the 2010, 2011 and 2012 fiscal years.
 
 
Through our 100% subsidiary Mahanagar Telephone Mauritius Limited (MTML), we are providing fixed, mobile, ILD and Internet Services in Mauritius.  MTML has installed the state of art CDMA IX EVDO switch having capacity of 110K, with a strategically spread radio network of base stations.  The system is equipped to provide value added services, i.e., SMS, DATA, Multi Media service etc. MTML is also expanding the capacity of its core network to 310K lines and implementing a GSM network in Mauritius with 200K lines capacity the 110K core capacity of the CDMA IX EVDO network. During the 2012 fiscal year, MTML installed a 100K GSM network capacity with EDGE to meet the increasing demands as the existing CDMA capacity is already fully utilized.  See Item 4A.  “Information on the Company-History and Development of the Company - Telecommunications Services in Other Countries” in this report.
 
During the 2010, 2011 and 2012 fiscal years, no single customer has contributed for revenue in excess of 10% of total revenue.
 
The amounts reviewed by the CODM are based on our internal accounting policies which are different from U.S. GAAP.
 
Results of Operations
 
The following table sets forth selected income statement data expressed as a percentage of revenue for the period indicated, derived from financial statements that are prepared in accordance with US GAAP, included on pages F-1 to F-42 of this annual report.
 
   
Fiscal year ended March 31,
 
   
2010
   
2011
   
2012
 
Revenues, net
    100 %     100 %     100 %
Cost of revenues  (excluding depreciation shown separately below)
    -135 %     -103 %     -112 %
Selling, general and administrative expenses
    -50 %     -36 %     -42 %
Depreciation
    -41 %     -41 %     -48 %
Post retirement medical benefits liability written back
    0 %     0 %     0 %
Excess liabilities written back
    2 %     2 %     2 %
Income/ (loss) from operations
    -125 %     -78 %     -100 %
Interest and other income, net
    20 %     13 %     -22 %
Income before unusual items, income taxes and share of losses of affiliates
    -105 %     -64 %     -123 %
Income taxes
    33 %     -25 %     0 %
Equity in (losses)/profit of affiliates
    0 %     0 %     0 %
Net income(loss)
    -72 %     -89 %     -123 %
 
Comparison of Year Ended March 31, 2012 with Year Ended March 31, 2011
 
Revenues: Basic Services: Our revenues from basic services decreased by 13.66% from Rs.30,750 million for the 2011 fiscal year to Rs.26,550 million for the 2012 fiscal year. The decline in revenue due to exclusion of revenue from other operating activities such as revenues from the Commonwealth Games (Rs.2,850 million) and the cyber highway project (Rs.182 million) and also, shifting of CDMA segment from basic services to cellular services. Interconnect revenue increased by 7.35%  from Rs.3,012 million for the 2011 fiscal year to Rs.3,233 million for the 2012 fiscal year because of the reduction in IUC tariff mandated by the TRAI.  Revenue from telephone and other rentals and broadband services decreased by 9% from Rs.13,951 million for the 2011 fiscal year to Rs.13,917.96 million for the 2012 fiscal year.
 
 
Call revenue has gone down as a result of a decrease in the number of connections from approximately 3.74 million connections during the 2011 fiscal year to approximately 3.71 million connections during the 2012 fiscal year. Further, the call tariff rates were reduced during the current year due to increased competition in the market, resulting in a fall in the average revenue per connection per month from Rs.685 during the 2011 fiscal year to Rs.596  during the 2012 fiscal year, a decrease of Rs.89  per connection per month.