XNAS:REDF Rediff.com India Ltd ADR Annual Report 20-F Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

 

     ¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     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

 

     ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     ¨ 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 000-30735

REDIFF.COM INDIA LIMITED

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

Republic of India

(Jurisdiction of incorporation or organization)

Mahalaxmi Engineering Estate

1st Floor, L. J. First Cross Road

Mahim (West)

Mumbai - 400016, India

+91-22-6182-0000

(Address of principal executive offices)

Swasti Bhowmick

Tel No - +91-22-6182-0000 ext 390 Facsimile - +91-22- 2445-5346

(Name, telephone and facsimile number of company contact 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 represented by one-half of one

equity share, par value LOGO 5 per share

     NASDAQ Global Market


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Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Not Applicable

(Title of Class)

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: 14,810,178 Equity Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes ¨  No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes ¨  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                 Accelerated filer  ¨                 Non-accelerated filer  x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  x

    

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 ¨  Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

 

 

 


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TABLE OF CONTENTS

 

     Page  

CROSS REFERENCE TO FORM 20-F ITEM HEADINGS

     1   

CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS

     4   

FORWARD-LOOKING STATEMENTS

     5   

EXCHANGE RATES

     6   

SELECTED CONSOLIDATED FINANCIAL DATA

     7   

RISK FACTORS

     8   

BUSINESS

     30   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     44   

MANAGEMENT

     60   

RELATED PARTY TRANSACTIONS

     69   

EXCHANGE CONTROLS

     70   

TRADING MARKET

     74   

RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES

     76   

PRINCIPAL SHAREHOLDERS

     83   

TAXATION

     85   

CONTROLS AND PROCEDURES

     92   

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     94   

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASER

     95   

PRESENTATION OF FINANCIAL INFORMATION

     96   

ADDITIONAL INFORMATION

     97   

EXHIBIT INDEX

     104   

INDEX TO FINANCIAL STATEMENTS

     F-1   


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CROSS REFERENCE TO FORM 20-F ITEM HEADINGS

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

See “Exchange Rates”, “Selected Consolidated Financial Data” and “Risk Factors”.

Item 4. Information on the Company

See “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Additional Information”.

Item 4A. Unresolved Staff Comments

Not applicable.

Item 5. Operating and Financial Review and Prospects

See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Item 6. Directors, Senior Management and Employees

See “Management” and “Principal Shareholders”.

Item 7. Major Shareholders and Related Party Transactions

See “Principal Shareholders,” “Related Party Transactions” and “Additional Information”.

Item 8. Financial Information

See the Report of Independent Registered Public Accounting Firm, U.S. GAAP Consolidated financial statements and the notes thereto for Rediff.com India Limited for the fiscal years ended March 31, 2010, 2011 and 2012 and the related three-year period ended March 31, 2012. Also see “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Item 9. The Offer and Listing

See “Trading Market”.

Item 10. Additional Information

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Exchange Controls”, “Restriction on Foreign Ownership of Indian Securities”, “Taxation” and “Additional Information”.

 

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Item 11. Quantitative and Qualitative Disclosures About Market Risk

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risks”.

Item 12. Description of Securities Other than Equity Securities

See “Trading Market”.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

See “Additional Information — Memorandum and Articles of Association”.

Item 15. Controls and Procedures

See “Controls and Procedures”.

Item 16A. Audit Committee Financial Expert

See “Management”.

Item 16B. Code of Ethics

See “Management”.

Item 16C. Principal Accountant Fees and Services

See “Principal Accountant Fees and Services”.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

See “Purchases of Equity Securities by the Issuer and Affiliated Purchasers”

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

See “Management — NASDAQ Corporate Governance Requirements.

Item 16H. Mine Safety Disclosure

Not Applicable

 

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PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements

See the Report of Independent Registered Public Accounting Firm, U.S. GAAP Consolidated financial statements and the notes thereto for Rediff.com India Limited and its consolidated subsidiaries for the fiscal years ended March 31, 2010, 2011 and 2012 and the related three-year period ended March 31, 2012.

Item 19. Exhibits

See the Exhibit Index and the attached exhibits.

 

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CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS

In this annual report, all references to “we”, “our”, “us”, “Rediff”, “Rediff.com” and the “Company”, unless otherwise relevant to the context, are to Rediff.com India Limited, a limited liability company organized under the laws of the Republic of India, and its consolidated subsidiaries. References to “U.S.” or the “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India.

In this annual report, references to “$” or “US$” or “dollars” or “U.S. dollars” are to the legal currency of the United States and references to “ LOGO ” or “Rs” or “Rs.” or “Rupees” or “Indian Rupees” are to the legal currency of India. Our financial statements are prepared in Indian Rupees and presented in U.S. dollars except for the financial statements of our U.S. subsidiaries which are prepared and presented in U.S. dollars. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to a particular “fiscal” or “financial” year are to Rediff’s fiscal year ended March 31 of such year.

Although we have presented Indian Rupee amounts in this annual report in U.S. dollars, this does not mean that the Indian Rupee amounts referred to have been, or could be, converted into dollars at any particular rate, the rates stated below in the section of this annual report entitled “Exchange Rates”, or at all. Except as otherwise stated in this annual report and except for the information derived from our financial statements included in this annual report, all translations from Indian Rupees to U.S. dollars contained in this annual report are based on the exchange rates published by The Reserve Bank of India, as at the close of March 31, 2012 which was LOGO 51.16 to US$1.00. The translation from Indian Rupees to U.S. dollars of the information derived from our financial statements included in this annual report are based on daily rates published by the Reserve Bank of India.

 

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FORWARD-LOOKING STATEMENTS

We have included statements in this annual report which contain words or phrases such as “may”, “will”, “aim”, “will likely result”, “believe”, “expect”, “will continue”, “anticipate”, “estimate”, “intend”, “plan”, “contemplate”, “seek to”, “future”, “objective”, “goal”, “project”, “should”, “will pursue” and similar expressions or variations of such expressions, all of which are “forward-looking statements”, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and reflect our current expectations. We have made forward-looking statements with respect to the following, among others:

 

   

our goals and strategies;

 

   

our recently acquired businesses and other acquisitions, investments and divestments;

 

   

the impact of regulations and court orders on our business;

 

   

our future investments, costs and working capital;

 

   

the importance and expected growth of Internet technology, including sales of personal computers and mobile phones, and the development of broadband Internet and 3G networks in India;

 

   

the pace of change in the Internet market;

 

   

the demand for Internet services;

 

   

advertising demand and revenues; and

 

   

new product and services.

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. These include, but are not limited to, risks or uncertainties associated with our ability to successfully implement our strategy, our ability to successfully integrate the businesses we have acquired with our business, demand for e-commerce and changes in the Internet marketplace, technological changes, investment income, cash flow projections and our exposure to market risks. By their nature, certain of our market risk disclosures are only estimates and could be materially different from what actually occur in the future. As a result, actual future gains, losses or impacts on net interest income could materially differ from those that have been estimated.

In addition, other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to, the slowdown in the U.S. and Indian economies and in the sectors in which our clients are based, the slowdown in the Internet and IT sectors world-wide, general economic and political conditions in India and the United States, acceptance of new products and services, the development of broadband Internet and 3G networks in India, changes in the value of the Rupee, foreign currency exchange rates, equity prices or other rates or prices, the level of Internet penetration in India and globally, changes in domestic and foreign laws, regulations and taxes, changes in competition, and other factors beyond our control. For further discussion of factors that could cause actual results to differ, see the discussions under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this annual report. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as of the date hereof. In addition, readers should review the other information contained in this annual report and in our periodic reports filed from time to time with the U.S. Securities and Exchange Commission (the “SEC”). We undertake no obligation to update or revise this annual report in order to amend its forward-looking statements to reflect events or circumstances after the date hereof, whether as a result of new information, future events or otherwise.

 

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EXCHANGE RATES

Fluctuations in the exchange rate between the Indian Rupee and the U.S. dollar may affect the market price of our American Depositary Shares (the “ADSs”), which trade on the NASDAQ Global Market. Such fluctuations may also affect U.S. dollar conversion made by our depositary for the ADSs, Citibank, N.A. (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 periods indicated, certain information concerning the exchange rates between Indian Rupees and U.S. dollars based on rates published by the Reserve Bank of India:

 

      Period End      Average  (1)(2)      High      Low  

Fiscal Year Ended March 31,

   LOGO      LOGO      LOGO      LOGO  

2008

     39.97         40.13         43.15         39.27   

2009

     50.95         46.46         52.06         39.89   

2010

     45.14         47.36         50.53         44.94   

2011

     44.65         45.57         47.57         44.03   

2012

     51.16         48.11         54.23         43.95   

 

Notes:

 

(1) The average rate for each period differed from the exchange rates used in the preparation of our financial statements.
(2) The column titled “Average” represents the average of the closing rate as at the last day of each month during the period.

The following table sets forth the high and low exchange rates for the previous six months and are based on daily closing rates published by the Reserve Bank of India:

 

      High      Low  

Month

   LOGO      LOGO  

January 2012

     53.30         49.50   

February 2012

     49.64         48.68   

March 2012

     51.31         49.15   

April 2012

     52.79         50.56   

May 2012

June 2012

    

 

56.42

57.22

  

  

    

 

52.85

55.14

  

  

On July 25, 2012, the closing exchange rate in India was LOGO 56.37 to US$1.00

 

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SELECTED CONSOLIDATED FINANCIAL DATA

Our consolidated financial statements are presented in U.S. dollars and prepared in accordance with U.S. GAAP. The selected balance sheet data set forth below as of March 31, 2011 and 2012, and the selected statement of operations data for the fiscal years ended March 31 2010, 2011 and 2012 have been derived from our audited financial statements presented elsewhere in this annual report. The selected balance sheet data set forth below as of March 31, 2008, 2009 and 2010 and the selected statement of operations data for the fiscal years ended March 31, 2008 and 2009 are derived from U.S. GAAP financial statements which are not included in this annual report. (See note below)

 

     Fiscal Years Ended March 31,  
     2008      2009     2010     2011     2012  
     (in US$ thousands, except per share data)  

Statement of Operations data:

           

Revenues

     32,249         25,429        18,843        21,795        19,942   

Cost of revenues

     9,699         10,376        10,115        10,796        10,774   

Operating expenses

     24,669         30,589        20,302        19,696        20,006   

Net (loss) income

     4,908         (11,258     (8,028     (6,572     (7,677

Earnings (loss) per Equity Share – basic

   US$ 0.336       US$ (0.770   US$ (0.552   US$ (0.477   US$ (0.558

Earnings (loss) per Equity Share – diluted

   US$ 0.332       US$ (0.770   US$ (0.552   US$ (0.477   US$ (0.558

Weighted average number of equity shares

           

- Basic

     14,607         14,615        14,563        13,783        13,759   

- Diluted

     14,772         14,615        14,563        13,783        13,759   

 

     As of March 31,  
     2008      2009      2010      2011      2012  
     (in US$ thousands)  

Balance Sheet Data:

              

Current assets

     74,208         54,345         52,244         45,804         32,073   

Current liabilities

     10,570         6,927         8,161         8,773         6,530   

Total Liabilities

     11,699         7,605         8,935         9,838         7,732   

Total assets

     101,422         71,612         69,541         63,940         50,468   

Total shareholders’ equity

     90,150         64,007         60,606         54,102         42,736   

Note:

The selected consolidated financial data set forth above should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes to those statements included elsewhere in this annual report.

 

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RISK FACTORS

An investment in our ADSs involves a high degree of risk. You should carefully consider the following information about risks, together with the other information contained in this annual report on Form 20-F, including our consolidated financial statements and related notes, before you decide to buy our ADSs. If any of the circumstances or events described below actually arises or occurs, our business, results of operations and financial condition would likely suffer. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment. This annual report also contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this annual report.

Risks Related to our Business

We face significant competition in India market for users, advertisers, publishers and distributors, principally from Google, Yahoo, Facebook and MSN and also from other traditional media companies and a host of other smaller competitors

We face significant competition from Google, Yahoo, Facebook and MSN, each offering an integrated variety of internet products, advertising services, technologies, online services and content in a manner similar to us.

These large competitors offer products and services that directly compete with our offerings, including consumer e-mail, search, instant messaging, photos, maps, video sharing, content channels, mobile applications, and shopping services.

We also compete with traditional media companies to attract advertising revenues, both domestically and internationally. Currently many advertisers allocate a portion of their advertising budgets to internet advertising. In response, traditional media companies are increasingly expanding their content offerings on the Web and are competing for both offline and online revenues. We also compete with a variety of other providers of online services, including social media and networking sites like Facebook and Orkut for users, advertisers and developers. Social networking sites in particular are attracting a substantial and increasing share of users and user’s online time, which could enable them to attract an increasing share of online advertising.

Some of our existing competitors and possible additional entrants may have greater brand recognition for certain products and services, more expertise in a particular segment of the market, and greater operational, strategic, technological, financial, personnel, or other resources than we do. In addition, Google, Yahoo, Facebook and MSN have access to considerable financial and technical resources with which to compete aggressively, including funding future growth and expansion investing in acquisitions and in research and development. Further, emerging start-ups may be able to innovate and provide products and services faster than we can. In addition, competitors may consolidate with each other or collaborate, and new competitors may enter the market.

We are also subject to competition from companies known as “aggregators”, which aggregate advertising space in third party websites and resell such space to our customers or potential customers. There has also been a trend toward industry consolidation so our smaller competitors today may become part of larger competitors in the future.

We may also face competition from companies engaged in providing mailing services to mobile users. Some of our existing competitors and possible additional entrants may have greater brand recognition for certain products and services and greater operational, strategic, technological, financial, personnel, or other resources than we do. In addition our e-commerce services face competition from the existing leading e-commerce companies who have significantly greater financial resources, longer operating histories and more experience in attracting and retaining users and managing customers than we do.

 

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We may also face competition from companies engaged in procuring advertisement from advertisers who want to reach out to a niche customer segment by choosing to advertise in a particular city or specific area within a city and cannot afford to advertise on television channels. Some of our existing competitors and possible additional entrants may have greater brand recognition for certain products and services and greater operational, strategic, technological, financial, personnel, or other resources than we do.

If our competitors are more successful than we are in developing compelling products or services or attracting and retaining users, advertisers, publishers, developers, or distributors, our revenues and potential growth rates could decline. In addition, new competitors may enter the market which may adversely impact our financial performance.

Competition for visitors, customers, subscribers, advertisers and shopping partners is intense and is expected to increase significantly in the future as there are no substantial barriers to entry in our market. Furthermore, it is difficult to predict which online advertising pricing model, if any, will emerge as the industry standard. This makes it difficult to predict our future advertising rates and revenues. Intense competition in our businesses could have a material adverse effect on our results of operation, including our ability to achieve and sustain profitability. For additional information regarding our competition, please see “Business – Competition” in this annual report.

Our future results and growth prospects may be materially and adversely affected if our expansion into new business segments and verticals is not successful

We, as part of our growth strategy have, from time to time, entered into new internet business segments by leveraging our large internet user base to generate additional revenue streams. For each new internet business or segment we enter into, we may face competition from existing leading players in that business. Further the operating and marketing challenges of the new internet business segment(s) may be different from those that we currently face. If we cannot successfully compete and meet the challenges in the new internet business segment(s), we may not be able to recover costs incurred for developing and marketing new businesses and accordingly our future results and growth prospects may be materially and adversely affected.

Our business could be disrupted if our investment in new products, services, technologies and new business strategy is not successful, as our current plans for growth depend in part, on the further development of broadband Internet and 3G and 4G networks in India

We have invested significantly in the development of new products, services, technologies and new business strategies and will continue to invest in the future. Such investment may involve significant risks and uncertainties including but not limited to inadequate returns on capital on our investments, and any such distractions of management from current and future operations. On account of the inherent risk involved in such investment, we offer no assurance that such investment(s) will be successful and will not adversely affect our reputation, financial condition and operating results.

The success of technological infrastructure and consumer base for our products and services depends on the acceptance of the Internet in India, which may be slowed by cost and affordability issues, technical obstacles and unfavorable Government policies

The growth of our India Online business is highly dependent on the growth in the number of PCs in use, and the growth of broadband, Internet and mobile phones.

 

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The growth of the telecom and mobile industry in India will be a significant factor in determining whether we can grow our business. As with many developing nations, the fixed line telecommunications infrastructure in India is not fully developed. Although this industry has been opened for private sector participation, service levels remain inferior to service levels in most developed countries. Further, telephone penetration rates, measured by the number of telephone lines per one thousand persons in India, are low when compared to most developed countries. In addition, limitations in network architecture in India sometimes limit Internet connection speeds to 28 Kbps or less, which are less than the 56 Kbps connection speeds on conventional dial-up telephone lines, and significantly less than the up to 1.5 Mbps connection speed on direct satellite links, digital subscriber lines and cable modems in the United States. These speed and cost constraints may severely limit the quality and desirability of using the Internet in India, which consequently may limit our ability to expand our pool of customers and reduce our desirability to online advertisers.

Further, our growth could be limited by the cost of obtaining hardware, software and communications links necessary to connect to the Internet in India. If much of India’s population is not able to afford access to the Internet, it may be difficult for us to execute our business strategy.

In other developing Asian markets such as South Korea and Malaysia, an increase in broadband penetration rates led to rapid growth in the number of online subscribers. Currently, broadband penetration rates in India are very low compared to other developed countries. According to the Telecom Regulatory Authority of India (the “TRAI”), India had an estimated broadband subscriber base of 13.79 million in March 2012, which has increased by double digit percentages over the past year. If the broadband and telecom industry in India fails to register significant growth, however, as has been experienced by other developed countries, our potential growth may also be affected.

If we are unable to develop new services or enhance existing services in anticipation of our users’ needs, our users’ level of engagement with our services may decline and our business could suffer as a result.

Our success is dependent, in part, on our ability to anticipate customers’ needs in advance and develop new services or enhance the existing services to fulfill those needs, on a cost-effective and timely basis. On February 21, 2012, we formally launched “Rediff Real Time News Search” an innovative news search engine which delivers fresh and recent news from India and the world. The service not only delivers fresh, recent news but also predicts user search terms and returns results within milliseconds of a query being made. Very recently we launched “rediff LOCALNEWS” helps user to explore any area within the map and see news from cities and localities around that region. We also launched “rediff WEBPro” a web solutions for professionals. The development and implementation of such services and any new services including the enhancement of existing service(s), entails significant technical and business risks. There can be no assurance that we will successfully implement new services or that any of our new products or services will be accepted by our users.

New technologies are giving rise to new business opportunities, such as in local search and social networking. We believe that much of our future growth will depend on our ability to seize upon these opportunities and successfully launch new products and services, and our ability to retain or improve the level of user engagement with our services. If we are unable, for technical, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, our business and our future financial performance could be materially adversely affected.

Our strategy of acquiring businesses to complement our existing market offering may fail

As part of our growth strategy, we have made selective strategic and opportunistic acquisitions of businesses that complement our existing market offering. Such acquisitions may involve uncertainties and risks, including but not limited to, government regulations, diversion of resources and management attention, costs and difficulties of integrating acquired businesses and managing a larger business, unforeseen liabilities and ongoing financial obligations.

 

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If we fail to address such risks successfully, it may have a material adverse effect on our financial condition and growth prospects. Further such acquisition(s) would require a significant amount of capital investment which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we fund the acquisition or acquisitions through the use of our equity securities, we may dilute the value of our ADSs and the underlying ordinary shares.

More individuals are utilizing non-PC devices to access the Internet, and versions of our services developed for these devices might not gain widespread adoption by the devices’ users, manufacturers, or distributors. or might fail to function as intended on some devices.

The number of individuals, who access the Internet through devices other than a PC, such as mobile telephones and related “smartphones” or “tablet-based” devices, has substantially increased and the trend is likely to continue. Our services were originally designed for rich, graphical environments such as those available on the desktop and PC. The different hardware and software, memory, operating systems, resolution, and other functionality associated with alternative devices may make our services unusable or difficult to use on such devices, and the versions of our services developed for these devices may not be compelling to users, manufacturers, or distributors of alternative devices. Similarly, the licenses we have negotiated to present third-party content to desktop and PC users may not extend to users of alternative devices. In those cases, we may need to enter into new or amended agreements with content providers in order to present a similar user-experience on the new devices. The content providers may not be willing to enter into such new or amended agreements on reasonable terms or at all.

Further, new devices, operating systems, networks, and platforms are continually being released. It is difficult to predict the problems we may encounter in developing versions of our services for use on these alternative devices. We may also need to devote significant resources to the creation, support, and maintenance of such versions.

If we fail to detect click fraud or other invalid clicks, we could lose the confidence of our advertisers, which would cause our business to suffer.

We are exposed to the risk of fraudulent clicks and other invalid clicks on our ads from a variety of potential sources. Invalid clicks are clicks that we have determined are not intended by the user to link to the underlying content, such as inadvertent clicks on the same ad twice and clicks resulting from click fraud. Click fraud occurs when a user intentionally clicks on an ad displayed on a website for a reason other than to view the underlying content. An increase in click fraud or invalid clicks could cause our advertisers to lose confidence in the effectiveness of our services, which could negatively damage our brand and impact our performance.

New technologies could block our ads, which would harm our business.

Technologies have been developed that can block the display of industry ads, as well as our own. Most of our revenues are derived from fees paid to us by advertisers in connection with the display of ads on web pages. As a result, ad-blocking technology could adversely affect our operating results.

The ongoing global slowdown, especially in India and the United States, could continue to negatively impact revenues from some of our key customers and thus, negatively impact our business.

We are dependent on the health of the Indian and U.S. economies. A continued slowdown in the United States and Indian economies or an overall reduction in consumer and business spending could have a material adverse impact on our business and our prospects.

Advertisement expenditures tend to be cyclical, reflecting overall economic conditions and nature of industry, budgeting and buying patterns. Since a significant portion of our revenue is derived from advertisements, the adverse economic conditions have caused, and a continuation of adverse economic conditions could cause, additional decreases in or delays in advertising spending, a reduction in our revenues and a negative impact on our short term ability to grow our revenues.

 

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A significant portion of our Indian advertising revenues include revenues from BFSI segment and from other Internet companies, including those engaged in the business of jobs, travel, matrimonial, real estate and online shopping. Some of these companies are startups without proven long-term business models and are dependent on external funding for future growth. These companies have been adversely affected by the global economic slowdown and this has resulted in lower online advertising revenues in the past. While general economic conditions have recently improved compared to the heart of the global economic recession, the robustness and pace of the global economic recovery remains uncertain and there is no assurance that these and other segments will recover from the impact of the recession, succeed in raising financial resources and increase online advertising spends.

Further, a future slowdown in the Indian and U.S. economies may make it difficult for us to raise money in the equity and debt markets on terms favorable to us or at all, which may have an adverse effect on our financial condition and operating results.

Our publication business in the United States and Canada faces competition and industry wide declines

Our publication business in the United States and Canada faces competition from not only Internet-based publications but also from other publications targeted at Indian-Americans and from television channels featuring Indian news and programming. In addition, competition to provide news and information regarding India or content that is of interest to Indian-Americans in these markets for paying subscribers for our India Abroad newspaper, which is subscription-based, is intense due to the presence of other paid newspapers such as News India Times, Indian Express and India West among others. Further, our publications also face competition from free newspapers and from electronic media, such as television channels dedicated to Indian news and programming and online publications and services. If our U.S. and Canadian publishing businesses are unable to successfully compete, our results of operation could be adversely affected.

A slowdown in economic growth, in particular, a slowdown in the growth of companies that advertise products or services targeted at Indian-Americans, may also reduce advertising revenues for our U.S. publications. Further, as is the case with our contracts with online advertisers, our contracts with advertising customers for our India Abroad business usually do not commit them to continue to provide us with a specific volume of business and can typically be terminated by them with or without cause, with little or no advance notice and without penalty. Any of these factors could have an adverse effect on our business and our future financial performance.

We may be required to record a significant charge to earnings if our goodwill, long lived assets, or investments in equity interests become impaired

We are required under generally accepted accounting principles to test goodwill for impairment at least annually and to review our long lived assets and investments in equity interests for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. Factors that could lead to impairment of goodwill and long-lived assets include significant adverse changes in the business climate and declines in the financial condition of our business. Factors that could lead to impairment of investments in equity interests include a prolonged period of decline in the operating performance of, or adverse changes in the business outlook of the company in which we invested. With the advent of online news sites, print publications in the United States have started facing pressures on revenue and could face prospects of a substantial diminution of their asset values. Our online businesses in India and the United States have been facing pressures on account of the economic slowdown and increasing competition for online revenues. We have recorded in the past and may be required in the future to record additional significant charges to earnings if a portion of our goodwill, long-lived assets, or investments in equity interests becomes impaired. Any such charge would adversely impact our results of operations.

 

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We have a history of losses. We may incur losses in the future and we may not achieve or maintain profitability

We have incurred significant net losses and negative cash flows since our inception in January 1996. As of March 31, 2012, we had an accumulated deficit of approximately US$76.27 million. We incurred a net loss of US$7.68 million for the fiscal year ended March 31, 2012. We may in the future incur additional net losses and negative operating cash flows.

In order to grow our online user base and attract new advertisers, we expect to continue to invest in new and innovative products and product enhancements, expand the content and services on our network and procure more bandwidth and network equipment.

We have incurred and in the future may incur expenses in connection with acquisitions and investments. Accordingly, we will need to generate significant additional revenues in order to become profitable and may not be able to do so. Our business model is not yet proven in India or the United States, and we cannot assure you that we will achieve profitability or that we will not incur operating losses in the future. If we are unable to achieve profitability, we will be unable to build a sustainable business. In this event, the price of our ADSs and the value of investments in our company would likely decline.

Our revenues could be adversely affected if we are unable to successfully adapt to new forms of pricing for the services and products we offer

Increased competition or the actions of our existing competitors may result in:

 

   

loss of visitors and decreased website traffic;

 

   

loss of paid subscribers;

 

   

loss of advertisers;

 

   

reduced operating margins;

 

   

loss of market share; and

 

   

diminished value in our services.

Any one of these factors could materially and adversely affect our business, financial condition and operating results. For additional information regarding our competition, please see “Business — Competition” in this Annual Report.

Increasing consumer resistance to online advertising may result in loss of revenues

There is a growing consumer resistance to intrusive advertising online. In our desire to improve the user experience on our site. We have reduced the number of advertisements served on our site and in particular, eliminated all advertising from our home page. As a consequence of this we experienced a decline in our advertising revenues and expect the same to continue. Although we are hopeful that a better user experience will lead to a higher number of users over time. We can however give no assurances that this will happen. If we are unable to compensate for the loss of advertising revenues from such restriction with incremental revenues due to increased user traffic, our results of operations could be materially adversely impacted.

 

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Our quarterly operating results may fluctuate significantly and may fail to meet the expectations of securities analysts and investors, which may cause the price of our ADSs to decline

Our quarterly results have fluctuated significantly in the past and may continue to fluctuate significantly in the future based on a variety of factors. These factors could affect our both near and long-term performance. Some of these factors include but are not limited to:

 

   

increased competition;

 

   

slowdown in the Indian and global economies;

 

   

lower than expected revenues from one or more of our customers;

 

   

changes in prices for our product and service offerings;

 

   

increases in personnel, marketing and other operating expenses;

 

   

our ability to attract new users and to retain existing users at reasonable costs;

 

   

our ability to adequately maintain, upgrade and develop our website, our computer network and the systems that we use to process customer orders and payments;

 

   

the timing of our expansion plans in India and other geographic markets;

 

   

seasonality in retail sales;

 

   

technical difficulties, system or website downtime or Internet service disruptions; and

 

   

entry into new businesses or development of new products or services requiring substantial investments.

Our operating results are volatile and can be difficult to predict. As a result, quarter-to-quarter comparisons of our operating results may not be good indicators of our future performance. In addition, it is possible that our operating results in any future quarter could be below the expectations of investors generally and any published reports or analyses on us. In that event, the market price of our ADSs may decline.

We may not be able to grow our business if online advertising in our markets does not expand

Our business strategy depends heavily on the anticipated growth of online advertising in our markets and the growth of our revenues depends on increased revenues generated by online advertising. We anticipate that a high portion of our future revenues will continue to be derived from online advertising on our website. Online advertising is an evolving business and our ability to generate and maintain significant advertising revenues will (among other factors) depend on:

 

   

our ability to attract and retain advertisers at profitable rates in light of intense competition;

 

   

our ability to generate and continue to grow a large community of users with demographics attractive to advertisers;

 

   

advertisers’ acceptance of the Internet as an effective and sustainable medium;

 

   

the effectiveness of our advertising delivery, tracking and reporting systems; and

 

   

our ability to adapt, including technologically, to new forms of Internet advertising.

 

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Different pricing models are used to sell online advertising, and it is difficult to predict which, if any, of the models will emerge as the industry standard. This makes it difficult to project our future advertising rates and revenues. A reduction in traffic on our website may cause new advertisers not to enter into contracts with us and could cause existing advertisers not to renew their contractual arrangements with us, each of which, in turn, would reduce our potential advertising revenues. Additionally, any development of Internet software that blocks advertisements before they appear on a user’s screen may hinder the growth of online advertising and could materially and adversely affect our ability to grow our online advertising revenues and our business. Also, a slowdown in economic growth, and in particular a slowdown in the growth of companies that advertise on the Internet, may result in a reduction in our advertising revenues.

Our contracts with advertising customers do not commit them to continue to provide us with a specific volume of business and can typically be terminated by them with or without cause, with little or no advance notice and without penalty. Additionally, our contracts with advertising customers are usually limited to a specific project and/or for a specific time period and not any future work. There are also a number of factors, other than our performance, which are not within our control that could cause the loss of advertising customers. Early termination of material contracts or non-renewal of an expired material contract could have a material adverse effect on our business and our future financial performance.

The loss of one or more significant advertisers could adversely affect our revenues

We derive a considerable portion of our revenues from certain key advertisers. For the fiscal year ended March 31, 2012, our top ten advertisers in India accounted for approximately 24% of our India Online Advertising revenues and concentrate 44% of India receivables. For the same period, for our US Publishing business, our top ten advertisers contributed approximately 16% of total US Publishing revenues. Any failure to meet advertiser expectations could result in cancellation or non-renewal of contracts, which typically can be terminated by advertisers with or without cause, with little or no advance notice and without penalty. The loss of, or a significant reduction in the volume of business from, one or more of our large advertisers could have a material adverse effect on our operating results and financial condition.

Our operations could be disrupted by unexpected network interruptions caused by system failures, natural disasters or unauthorized tampering of our systems

Our online businesses rely heavily on the Internet and, accordingly, depend upon the continuous, reliable and secure operation of Internet servers, related hardware and software and network infrastructure, such as telephone lines leased from service providers. The continual accessibility of our websites and the performance and reliability of our network infrastructure are critical to our reputation, and our ability to attract and retain users, advertisers and merchants. Any system failure or performance inadequacy that causes interruptions in the availability of our services or increases the response time of our services could reduce our appeal to advertisers and consumers. Factors that could significantly disrupt our operations include but are not limited to:

 

   

system failures and outages caused by fire, floods, earthquakes, tsunamis, power loss, telecommunications failures and similar events;

 

   

software errors; computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems;

 

   

security breaches related to the storage and transmission of proprietary information, such as credit card numbers or other personal information; and

 

   

terrorist acts.

 

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While we have taken steps to improve security and network reliability we have limited backup systems and redundancy. The failure of these backup systems could lead to the disruption of our services and the loss of important data. We have suffered temporary service outages in the past from time to time that have resulted in a disruption of our services. Future disruptions or the occurrence of any of the foregoing factors may result in users being temporarily unable to access our services. Any sustained disruption will reduce the number of visitors to our website and could have a material adverse impact on the transactions handled through our website. Such disruptions could also reduce the number of advertisers and online shopping on our site and materially affect our operating results, which may lead to a decline in the market price of our ADSs.

We seek to protect our computer systems and network infrastructure from physical break-ins, as well as security breaches and other disruptive problems. We employ security systems, including firewalls and password encryption, designed to minimize the risk of security breaches. There can be no assurance that these security measures will be effective.

If someone breaches our network security or otherwise misappropriates sensitive data about our users, we could be subject to liability. These liabilities could include fraud claims and other claims for misuses of personal information, such as unauthorized marketing purposes. These claims could result in litigation and could have a material adverse effect on our business, results of operations and financial condition.

We do not carry material business interruption insurance to protect us in the event of a catastrophe, even though such an event could lead to a significant negative impact on our business. Any sustained disruption in Internet access provided by third parties could also adversely affect our business.

We may lose a significant portion of our assets if banks in India collapse.

A significant portion of our assets is held in the form of cash and cash equivalents. We maintain a majority of such cash and cash equivalents in Indian Rupees with banks in India. In case one or more of these banks collapses due to the current financial crisis, we may lose a substantial portion of our cash and cash equivalents. This could have a material adverse effect on our business, results of operations and financial condition.

We may not benefit from our acquisitions and investments and our acquired businesses could increase our net losses

We have made several strategic and opportunistic acquisitions and investments in order to penetrate new markets generate additional revenue streams and provide value-added services to our users. We may, if opportunities arise, acquire or invest in developing products, technologies or companies in the future. However, there can be no assurance that our acquisition and investment strategy will be successful or that we will realize the anticipated benefits from such acquisitions or investments. Lack of success in our acquisition and investment strategy could result in significant write-offs relating to such acquisitions and investments and thus, adversely impact our financial performance. Such transactions are accompanied by a number of risks, including:

 

   

the failure to identify operating weaknesses of the acquired business during the course of due diligence and negotiations of these transactions;

 

   

the difficulty of assimilating the operations, third-party relationships and personnel of the acquired companies with our operations;

 

   

diversion of management time and focus from operating our business to acquisition integration process;

 

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the difficulty of incorporating acquired technology, software or content into our products, and unanticipated expenses related to such integration;

 

   

the impairment of relationships with employees and customers as a result of any integration of new management personnel;

 

   

the potential unknown liabilities associated with acquired businesses;

 

   

the failure to develop successfully new products or technologies;

 

   

the failure to popularize such products or technologies and/or derive expected revenues therefrom;

 

   

unfavorable changes in business environment and government regulations;

 

   

unfavorable changes in accounting rules and guidelines relating to our acquisitions;

 

   

the failure of companies in which we invest to raise sufficient capital to maintain their business;

 

   

cultural challenges associated with integrating employees from the acquired company into our organization;

 

   

retention of employees from the businesses we acquire; and

 

   

litigation or other claims in connection with the acquisition or investment, including claims from terminated employees, customers, former stockholders, or other third parties.

Any or all of our future acquisitions may face similar risks and we may not be successful in addressing these risks or any other problems encountered in connection with such acquisitions.

Our business and growth will be impaired if we are unable to retain our existing key personnel and hire additional skilled employees

We are dependent on certain key members of our management team. In particular, our success depends upon the continued efforts of our Chairman and Managing Director, Ajit Balakrishnan. We do not carry any key employee insurance. All of our employees are located in India and the United States, and each may voluntarily terminate his or her employment with us. Our planned activities will require additional expertise in sales and marketing, technology and other areas. The labor market for skilled employees is extremely competitive, and the process of hiring employees with the necessary skills is time consuming and may lead to the diversion of resources. We may not be able to continue to retain existing personnel or identify, hire and successfully integrate additional qualified personnel in the future. The loss of the services of key personnel, especially the unexpected death or disability of such personnel, or the inability to attract additional or replacement qualified personnel, could impair the growth of our business.

We are dependent on our agreements with mobile service providers for service delivery and fee collection

Our mobile value added services, depend mainly on the cooperation of a large number of private and government mobile phone operators who have the necessary licenses to provide mobile services to consumers across various states/cities in India. We rely on all of these mobile phone operators to provide network and gateways for our mobile value added services. We also utilize their billing systems to collect service fees from customers. Certain of these mobile phone operators also provide services to their customers (such as the downloading of ringtones), which compete with the mobile services we offer. This may make them less eager to cooperate with us. If any or all of these mobile service providers encounter technical problems, or if they refuse to cooperate with us or reduce fees payable to us, our ability to provide mobile services may cease or be severely disrupted, which may have a significant and adverse impact on our future operating results.

 

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We rely on increased sales of, and high renewal rates for, our subscription and fee based products and services

Growth in our India Online revenues will depend on the increase in users of our fee-based Internet services, including paid e-mail services, other subscription services and mobile value added service in India. If not enough users adopt and use our fee-based Internet services, our India Online revenue may not increase.

We depend on mobile operators to reach out to their customers

We have arrangements with most Indian mobile operators which allow the customers of such mobile operators to download ringtones, wallpapers and other products from our servers. These customers can also access information relating to news, business and other information from us by using short messaging services. Some operators permit us to selectively send SMS messages, advertising our mobile products to a section of their customer base. The Telecom Regulatory Authority of India (“TRAI”) framed rules to prevent unsolicited commercial communications to mobile phone users who sign up for a “Do Not Disturb” registry. Subsequently, recently TRAI has directed operators to get written consent from users for activating value-added services (VAS) such as call ring back tone and hello tunes on their mobile phones. These and any other regulatory actions may have a material adverse impact on our future mobile VAS revenues.

Potential liability for information we publish may require us to defend against legal claims, which may cause significant operational expenditures

We may be subject to claims for defamation, libel, copyright or trademark infringement or other legal actions relating to the information we publish. These types of claims have been brought, sometimes successfully, against news and opinion publishing businesses in the past. Our insurance coverage may not adequately protect us against these claims. Liability claims could require us to spend significant time and money in litigation and to pay significant damages. As a result, liability claims, whether or not successful, could seriously damage our reputation and business.

For information regarding pending litigation filed against us, please see “Business — Litigation and other legal matters” in this annual report.

We may be liable to third parties for information uploaded on or retrieved from our website

We could be exposed to liability for content that may be accessible through our website or content and materials that we develop or that our users may upload or post in our social networking sites, message boards, chat rooms, blogs or via our other interactive services. For example, we are a party to a criminal writ petition filed in the High Court of Mumbai, India, which alleged that we, through our website, www.rediff.com, provided a search facility that enabled Internet users to view pornographic, objectionable and obscene material.

We may also be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we post or products sold by third parties on our website. For example, we had been named as a defendant in proceedings filed by The Board of Control of Cricket in India (“BCCI”) in the High Court of Madras, where BCCI sought to obtain a permanent injunction against a vendor who depicted the image of “IPL”. We could also become liable if confidential information is disclosed inappropriately on or through our website.

 

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It is also possible that if any information provided through our services contains errors, third parties could make claims against us for losses incurred in reliance on the information. Please see the section entitled “Business — Litigation and other legal matters” in this annual report for more information on the litigation described above.

We also offer Internet-based e-mail services, which could expose us to potential liabilities or claims resulting from:

 

   

unsolicited e-mail;

 

   

lost or misdirected e-mail;

 

   

illegal or fraudulent use of e-mail;

 

   

interruptions or delays in e-mail service; and

 

   

loss or deletion of data stored in mailboxes.

Our video sharing platform called iShare allows members to upload and share music, videos and photos. Under our terms of use, our members are responsible for their accounts and must agree and undertake not to post or upload any material that violates or infringes any copyright or other privacy laws and acknowledge that Rediff.com assumes no responsibility for the contents accessed or uploaded through this service. Nonetheless, we could be subject to litigation within or outside of India which could include civil or criminal prosecution and civil liability. Defending such litigation could involve substantial management time and cost and we can give no assurance that we would succeed in defending any such litigation.

The laws in India and the United States relating to the liability of companies which provide online services, like ours, for activities of their users, are still relatively unclear. Investigating and defending these claims is expensive process, even if they do not result in liability. We do not carry insurance to protect us against all types of claims, and there is no precedent on such liabilities under Indian law. Further, our business is based on establishing the Rediff.com website as a trustworthy and dependable provider of content and services. Allegations of impropriety, even if unfounded, could damage our reputation, disrupt our ongoing business, distract our management and employees, reduce our revenues and increase our expenses.

For information regarding pending litigation filed against us, please see “Business — Litigation and other legal matters” in this annual report.

If we are unable to provide innovative search experiences and other services that generate significant traffic to our Websites, our business could be harmed, causing our revenues to decline.

Internet search is characterized by rapidly changing technology, significant competition, evolving industry standards, and frequent product and service enhancements. We must continually invest in improving our users’ search experience — including improving the relevance of our search results, as well as presenting users with a search experience that is responsive to their needs and preferences in order to continue to attract, retain, and expand our user base. We currently deploy our own technology to provide search results on our network and failure to keep pace with industry and/or develop new innovative search offering could adversely impact our operating results.

We may be liable to third parties for the products they purchase online

Consumers may sue us if any of the products or services offered on our website’s marketplace are defective, fail to perform properly and/or injures the user. Although our agreements with manufacturers and distributors whose products are displayed on our website’s marketplace typically contain provisions intended to limit our exposure to such liability claims, these provisions may not be sufficient to limit all of our liability from such claims. Product warranties are the responsibility of those who sell products on our website’s marketplace, although our reputation can be adversely affected if a user is not satisfied with a purchase. Liability claims could require us to spend a considerable amount of resources, time and money in litigation and to pay significant damages. Allegations of impropriety, even if unfounded, or poor service provided by manufacturers and distributors on our website’s marketplace, could damage our reputation, disrupt our ongoing business, distract our management and employees, reduce our revenues and increase our expenses.

 

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For information regarding pending litigation filed against us, please see “Business — Litigation and other legal matters” in this annual report.

In addition, the laws relating to the online sale of goods and services are not fully developed. The various laws and regulations covering online sale of products and their interpretation involve a significant degree of uncertainty. Further, the application of tax law as it relates to online transactions for goods and services is likewise uncertain. Our business, financial condition and operating results may be materially affected if we were required to obtain such registrations or comply with various additional laws and regulations or pay additional taxes.

Privacy concerns may prevent us from selling demographically targeted advertising in the future and make us less attractive to advertisers

We collect personal data from our user base in order to better understand our users and their needs and to help our advertisers target specific demographic groups. If privacy concerns or regulatory restrictions prevent us from selling demographically targeted advertising, we may become less attractive to advertisers. For example, as part of our future advertisement delivery system, we may integrate user information such as advertisement response rate, name, address, age or e-mail address, with third-party databases to generate comprehensive demographic profiles for individual users. However, if we are unable to construct demographic profiles for Internet users because users refuse to give consent, we will be less attractive to advertisers and our business may suffer.

Regulatory authorities around the world are considering a number of legislative proposals concerning data protection. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

Further, failure or perceived failure by us to comply with our policies, applicable legal and other requirements, related to the collection, use, sharing or security of personal information, or other privacy, data-retention or data-protection matters could result in a loss of user confidence in us, damage to our brands, resulting in a loss of users, advertising partners, or affiliates, which could adversely affect our business.

We may not be able to manage our operations effectively if we grow, which could harm our business

We anticipate expansion of our business in India as we address growth in our customer base and market opportunities. In order to manage the expected growth of our operations and personnel, we will be required to improve existing and implement new operational and financial systems, procedures and controls, and to expand, train and manage our employee base. Further, our management will be required to maintain and expand our relationships with various other partners, including but not limited to, mobile phone operators, Internet and other online service providers and other third parties necessary to operate and grow our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations or that such relationships will be maintained or developed.

 

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Currency exchange rate fluctuations may adversely impact our operating results and financial condition

The exchange rate between the Indian Rupee and the U.S. dollar has fluctuated substantially both historically and in recent years, and could continue to fluctuate substantially in the future. Our Indian revenues are translated into US Dollars for reporting purposes at average annual U.S. Dollar/Indian Rupee exchange rates which are computed by us based on daily closing rates published by the Reserve Bank of India. If the Indian Rupee depreciates further, such depreciation may adversely affect our reported revenues, and operating results in US Dollars.

Additionally, because a substantial portion of our cash and cash equivalents is currently held in Indian Rupees, devaluation or depreciation of the value of the Indian Rupee will adversely affect the value of our cash reserves in foreign currency terms. In addition, our market valuation could be materially adversely affected by the devaluation of the Indian Rupee if U.S. investors analyze our value and performance based on the U.S. dollar equivalent of our financial condition and operating results.

A small group of our existing shareholders control our Company and may have interests which conflict with those of our other shareholders or owners of our ADSs

As of March 31, 2012, our six largest shareholders beneficially owned an aggregate of approximately 63% of our Equity Shares.

As a result, such shareholders could act collectively to exercise control over most matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions among other matters. Under Indian law, a simple majority is sufficient to control all shareholder action except for those items which require approval by a special resolution. In case of a special resolution, approval of three-fourths of the shareholders present and voting is required. Examples of actions that require a special resolution include:

 

   

amending our Articles of Association;

 

   

issuing additional shares of capital stock, except for pro rata issuance to existing shareholders;

 

   

commencing any new line of business; and

 

   

commencing liquidation.

Further, Ajit Balakrishnan, Diwan Arun Nanda and Rediffusion Holdings Private Limited (formerly Rediffusion Advertising Private Limited), are entitled to appoint and have appointed Mr. Balakrishnan as a Director and as our Chairman so long as they hold, singly or jointly, not less than 10.0% of our issued, subscribed and paid-up capital. Mr. Balakrishnan currently serves an indefinite term as a Director and is not required to retire by rotation.

The interests of our controlling shareholders may differ from our other shareholders or owners of our ADSs and could result in a delay or prevention of a change in control of our Company even if a transaction of that sort would be beneficial to our other shareholders, including the owners of our ADSs, or in the best interest of our Company.

For additional information regarding our principal shareholders, please see “Principal Shareholders” in this annual report.

The laws of India do not protect intellectual property rights to the same extent as those of the United States, and we may be unsuccessful in protecting our intellectual property rights, which could lead to a reduction in our revenues and an increase in our expenses

Our intellectual property rights are important to our business. We rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property.

 

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Our efforts to protect our intellectual property may not be adequate. Our competitors may independently develop similar technology or duplicate our products or services. Unauthorized parties may infringe upon or misappropriate our products, services or proprietary information. In addition, the laws of India do not protect proprietary rights to the same extent as the laws of the United States, and the global nature of the Internet makes it difficult to control the ultimate destination of our products and services. The misappropriation or duplication of our intellectual property could disrupt our ongoing business, distract our management and employees, reduce our revenues and increase our expenses. We may need to litigate to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be time-consuming and costly and may not ultimately prove successful which could have an adverse effect on our financial result.

We could be subject to intellectual property infringement claims as the number of our competitors grows and the content and functionality of our website or other product or service offerings overlap with competitive offerings. Defending against these claims, even if not meritorious, could be expensive and divert our attention and resources from operating our business. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay substantial damages awards and forced to develop non-infringing technology, obtain a license or cease selling the applications that contain the infringing technology. We may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, or at all.

For additional information regarding our intellectual property rights, please see “Business — Intellectual Property” in this annual report.

The limited installed personal computer base in India limits our pool of potential customers and restricts the growth of our business

The market penetration of, or access to, personal computers, or PCs, and, consequently, the Internet in India is far lower than in the United States. Alternate methods of obtaining access to the Internet, such as through mobile phones, cable television modems or set-top boxes for televisions, although available, are available in a limited manner in India. We cannot assure you that the market penetration of personal computers in India will increase rapidly or at all, or that alternate means of accessing the Internet will develop and become widely available in India. If these events do not occur we may not be able to expand our customer base, which will make it difficult for us to execute our business strategy.

The success of our e-commerce platform depends on its acceptance and growth in India, which is uncertain

Many of our existing and proposed products and services are designed to facilitate e-commerce in India, and demand and market acceptance for these products and services by consumers is highly uncertain. Critical issues concerning the commercial use of the Internet, such as legal recognition of electronic records, validity of contracts entered into through the Internet and the validity of digital signatures, are governed in India by the Information Technology Act, 2000 (the “IT Act”). In addition, many Indian businesses have deferred deploying e-commerce initiatives for a number of reasons, including the existence or perception of, among other things:

 

   

inconsistent quality of service;

 

   

lack of legal infrastructure relating to e-commerce in India;

 

   

lack of security of commercial data such as credit card numbers;

 

   

low number of Internet users in India; and

 

   

low levels of credit card penetration in India.

 

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If usage of the Internet, credit cards and e-commerce in India does not substantially increase and the legal infrastructure and network infrastructure in India are not further developed, we are not likely to achieve significant growth of our e-commerce products and services which could adversely impact our operating result.

Compliance with corporate governance and public disclosure requirements may increase our costs of compliance

Regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, Information Technology (Intermediaries Guidelines) Rules, 2011, Information Technology (Reasonable security practices and procedure and sensitive personal data or information) Rules, 2011 are resulting in additional costs for companies like ours. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance.

In particular, continuing compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting requires the commitment of significant financial and managerial resources and external auditor’s independent assessment of the internal control over financial reporting.

In connection with this annual report, our management assessed our internal controls over financial reporting, and determined that our internal controls were effective as of March 31, 2012, and our independent auditors have expressed an unqualified opinion over the effectiveness of our internal control over financial reporting as of the end of such period. However, we will undertake management assessments of our internal controls over financial reporting in connection with each annual report, and any deficiencies uncovered by these assessments or any inability of our auditors to issue an unqualified opinion could harm our reputation and the price of our equity shares and ADSs. Our efforts to comply with 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. Further, if we fail to comply with new or changed laws or regulations, our business and reputation may be harmed.

Risks Related to Investments in Indian Companies

We are incorporated in India, and a large part of our assets, business operations and employees are located in India. Consequently, our financial performance and the market price of our ADSs will be affected by social and economic developments in India and the policies of the Government of India, including taxation and foreign investment policies, as well as changes in exchange rates, interest rates and controls among other matters.

Terrorist attacks and other acts of violence or war involving India, the United States, and other countries could adversely affect the financial markets, result in a loss of business confidence and adversely affect our business, results of operations and financial condition

Terrorist attacks, such as the ones that occurred in New York and Washington, D.C., on September 11, 2001, New Delhi on December 13, 2001, the Mumbai train bombings on July 11, 2006, the terror attacks in Mumbai on November 26, 2008 and July 13, 2011 as well as other acts of violence or war, including those involving India, the United States or other countries, may adversely affect Indian and worldwide financial markets. These acts may also result in a loss of business confidence and have other consequences that could adversely affect our business, results of operations and financial condition. Travel restrictions as a result of such attacks may have an adverse impact on our ability to operate effectively. Increased volatility in the financial markets can have an adverse impact on the economies of India and other countries, including economic recession.

 

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If communal disturbances or riots erupt in India, or if regional hostilities increase, this would adversely affect the Indian economy, the health of which our business depends upon

Some parts of India have experienced communal disturbances, terrorist attacks and riots during recent years. If such events recur, the market for our services may be adversely affected, resulting in a decline in our income.

The Asian region has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including those between India and Pakistan. Since May 1999, military confrontations between India and Pakistan have occurred in Kashmir. The hostilities between India and Pakistan are particularly threatening because both India and Pakistan are nuclear powers. Hostilities and tensions may occur in the future and on a wider scale. Also, since 2003, there have been military hostilities and continuing civil unrest and instability in Iraq, Afghanistan, Egypt, Libya, Syria and other part of Middle East. Events of this nature in the future, as well as social and civil unrest within other countries in Asia, could influence the Indian economy and could have a material adverse effect on the market for securities of Indian companies, including our ADSs, and on the market for our services.

Future political instability in India could halt or delay the liberalization of the Indian economy and adversely affect economic conditions in India generally and our business in particular

The Government has traditionally exercised and continues to exercise significant influence over many aspects of the economy. Our business, and the market price and liquidity of our ADSs, may be affected by interest rates, changes in Government policy, taxation, social and civil unrest and other political, economic or other developments in or affecting India.

Since 1991, successive Indian governments have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. We cannot assure you that these liberalization policies will continue in the future. Any significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally, including our business.

Indian law limits our ability to raise capital and the ability of others to acquire us, which could prevent us from operating our business or entering into a transaction that is in the best interests of our shareholders

Indian law constrains our ability to raise capital through the issuance of equity or convertible debt securities. Foreign investment in an Indian company may require approval from relevant government authorities in India including the Reserve Bank of India. The Government of India has classified existing businesses into various categories for automatic approval of foreign direct investment up to certain prescribed percentages. Under the current guidelines, the Government of India provides for approval under the automatic route for foreign direct investment proposals relating to the information technology sector.

We cannot assure you that equity or other forms of financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of anticipated or unanticipated opportunities, develop or enhance our infrastructure and services, or otherwise respond to competitive pressures would be significantly limited. Our business, operating results and financial condition could be adversely affected by any such limitation.

Our ability to acquire companies organized outside of India may depend on the approval of the Government of India and the Reserve Bank of India. Our failure to obtain approval for acquisitions of companies organized outside India may restrict our growth, which could negatively affect our revenues

 

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As part of our business strategy, we may plan to acquire complementary businesses, including businesses based outside of India. For the acquisition of a business based outside India we may, under certain circumstances, be required to obtain approval of the Reserve Bank of India and/or the Government of India. Under guidelines issued by the Reserve Bank of India, the acquisition of companies organized outside India is permitted under certain circumstances without prior approval if such acquisition does not exceed 400% of the net worth of the acquiring company as of the date of the last audited balance sheet or unless the acquisition is funded with cash from acquiring company’s existing foreign currency accounts or with cash proceeds from the issuance of ADRs/ADSs. This ceiling includes contribution to the capital of companies organized outside India, loans granted by the Indian party to such companies organized outside India and all of the guarantees issued by the Indian party to or on behalf of such companies organized outside India.

If we move forward with such an acquisition outside of India, we cannot assure you that we will be able to obtain any required approval from the Reserve Bank of India and/or the Government of India. Our failure to obtain approval from the Reserve Bank of India and/or the Government of India for acquisitions of companies organized outside India may restrict our growth, which could negatively impact our business and prospects.

Statistical and third-party data in this document and documents incorporated by reference herein may be incomplete or unreliable

We have not independently verified data from industry publications and other third-party sources and therefore cannot assure you that they are complete or reliable. Such data may also be produced on different bases from those used in Western countries. Therefore, discussions of matters relating to India, its economy or our industry are subject to the caveat that the statistical and other data upon which such discussions are based may be incomplete or unreliable.

It may be difficult for you to enforce any judgment obtained in the United States against us or our affiliates

We are incorporated under the laws of the Republic of India and many of our directors and executive officers reside outside of the United States. In addition, a large part of our assets and the assets of many of these persons are located outside of the United States. As a result, you may be unable to:

 

   

effect service of process upon us outside India or these persons outside the jurisdiction of their residence; or

 

   

enforce against us in courts outside of India or these persons outside the jurisdiction of their residence, judgments obtained in U.S. courts, including judgments predicated upon the federal securities laws of the United States.

We have been advised by our Indian counsel that the United States and India do not currently have a treaty providing for reciprocal recognition and enforcement of judgments of courts in the United States in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States on civil liability, whether or not predicated solely upon the federal securities laws of the United States, would not be enforceable in India. However, the party in whose favor such final judgment is rendered may bring a new suit in a competent court in India based on a final judgment which has been obtained in the United States. A judgment of the courts in the United States shall be conclusive as to any matter directly adjudicated between the parties to the suit except if Indian courts were of the opinion that such judgment:

 

   

was not rendered by a court of competent jurisdiction;

 

   

was not rendered on the merits of the case;

 

   

appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognize the law of India in cases in which such law is applicable;

 

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was obtained in proceedings which are opposed to “natural justice”; or

 

   

sustains a claim founded on a breach of any law in force in India.

Risks Related to the ADSs and Our Trading Market

An active or liquid market for our ADSs is not assured

Trading volume in our ADSs is inconsistent and we cannot assure you that an active, liquid trading market in our ADSs will be established. Holders of our ADSs are entitled to withdraw the Equity Shares underlying the ADSs from our depositary facility at any time, subject to certain legal restrictions.

In addition, under current Indian law, Equity Shares may only be deposited into our depositary facility in exchange for ADSs and, under certain circumstances, the number of ADSs that can be outstanding at any time is limited as follows: after any offering of ADSs, Equity Shares can be deposited for issuance of ADSs only to the extent that (a) holders have surrendered ADSs and withdrawn Equity Shares from the ADS facility and (b) such holders sold such Equity Shares through stockbrokers registered with the Securities and Exchange Board of India (“SEBI”) in a domestic Indian stock market. Therefore, unless the law is changed, the number of outstanding ADSs and the trading volumes for all ADSs may significantly decrease at any time to the extent that Equity Shares are withdrawn from our depositary facility and not deposited for the re-issuance of ADSs, which may adversely affect the market price and the liquidity of the market for our ADSs.

Currently there is no public trading market for our Equity Shares in India or elsewhere which, together with existing Indian laws that restrict the conversion of outstanding equity shares into ADSs, reduce your ability to sell our Equity Shares represented by ADSs

Currently there is no public trading market for our Equity Shares in India or elsewhere, and we cannot assure you that we will take steps to develop one or that we will be able to meet applicable listing guidelines or regulations to list our Equity Shares on a stock exchange in India or elsewhere. Our Equity Shares are currently only traded on the NASDAQ Global Market in the form of ADSs. Under current Indian laws and regulations, outstanding Equity Shares not listed in India may not be deposited into our depositary facility except in certain limited circumstances or with certain regulatory approvals. Thus, if you elect to surrender your ADSs and receive Equity Shares, you will not be able to trade those Equity Shares on any securities market. Further, you will be prohibited from re-depositing such unlisted outstanding Equity Shares with our Depositary.

Under current Indian regulations and practice, approval of the Reserve Bank of India is not required for a renunciation in favor of a resident of India of rights to subscribe to equity shares pursuant to a rights offering or for the sale of equity shares underlying ADSs by a non-resident of India to a resident of India, unless the sale breaches the pricing guidelines laid down for this purpose by the RBI, which specify that where the equity shares of an Indian company are not listed on a stock exchange in India, the transfer of shares shall be at a price not less than the fair value to be determined by a SEBI registered Category –I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method. The price per share arrived at should be certified by a SEBI registered Category-I-Merchant Banker/Chartered Accountant.

Our management has broad discretion in using the proceeds from our securities offerings and cash from operations and therefore investors will be relying on the judgment of our management to invest those funds effectively

Our management has broad discretion with respect to the use of the net proceeds from our securities offerings and cash from our operations. As of March 31, 2012, we held approximately US$25 million as cash and cash equivalents and short term deposits with banks on which we are earning interest.

 

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We intend to use these funds primarily to develop additional platforms for the growth of our online business, product development, and general corporate purposes, including capital expenditures and strategic investments, partnerships and acquisitions. However, there is a possibility that we may be unable to make successful strategic investments, partnerships or acquisitions in the near future. Further, there could be a risk that our management may use these funds in an inefficient or ineffective manner.

Our ADS market price is highly volatile and could drop unexpectedly in the future. Should our ADS market price drop below $1.00, our ADSs may be delisted from the NASDAQ Global Market

The stock markets in the United States have from time to time experienced significant price and volume fluctuations that have affected the market prices for the securities of technology companies, particularly Internet companies. Volatility in the price of our ADSs may be caused by factors outside of our control and may be unrelated or disproportionate to our operating results. In the event that the bid price of our ADSs falls below $1.00 and remains below $1.00 for more than 30 consecutive days, our ADSs may be delisted from the NASDAQ Global Market. The delisting of our ADSs from the NASDAQ Global Market could negatively affect the market price of our ADSs and impair your ability to sell such ADSs.

In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. Securities class action litigation had been instituted against us in the United States in the past. Such litigation, if brought against us in the future, even if unsuccessful, could damage our reputation and result in substantial costs and a diversion of our management’s attention and resources.

Owners of our ADSs may be restricted in their ability to exercise preemptive rights and thereby may suffer future dilution of their ownership position

Under the Indian Companies Act, 1956, as amended (the “Companies Act”), a company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any new equity shares, unless the preemptive rights have been waived by adopting a special resolution by holders of three-fourths of the company’s equity shares which are voted on the resolution. U.S. owners of ADSs may not be able to exercise preemptive rights for Equity Shares underlying ADSs unless a registration statement under the Securities Act is effective with respect to the 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 given registration statement as well as the perceived benefits of enabling the owners of our ADSs to exercise their preemptive rights and any other factors that we deem appropriate to consider at the time the decision must be made. We may elect not to file a registration statement related to preemptive rights otherwise available by law to our shareholders. In the case of such future issuance, the new securities may be issued to our Depositary, which, if there is a trading market for such new securities which may not be the case, may sell the securities for the benefit of the owners of our ADSs. The value, if any, our Depositary would receive upon the sale of such securities cannot be predicted. To the extent that owners of ADSs are unable to exercise preemptive rights granted in respect of the Equity Shares represented by their ADSs, their proportional interests in our Company would be reduced.

Owners of our ADSs may be restricted in their ability to exercise voting rights because of the practical and legal limitations associated with instructing our Depositary to vote on your behalf

Holders of ADSs may exercise voting rights only through a depositary, unlike an owner of Equity Shares, who can exercise voting rights directly. An owner of ADSs generally will have the right under the deposit agreement to instruct our Depositary to exercise the voting rights for the Equity Shares represented by the ADSs. Owners of ADSs have no rights pursuant to the Companies Act, under which we are incorporated, and are limited to those rights granted to them pursuant to the depository agreement.

 

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If our Depositary timely receives voting instructions from an owner of ADSs, it will endeavor to vote the securities represented by those ADSs in accordance with such voting instructions. In the event that voting takes place by a show of hands, our Depositary will cause the custodian to vote all deposited securities in accordance with the instructions received from owners of a majority of the ADSs for which our Depositary receives voting instructions. However, the ability of our 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 holders of ADSs will receive voting materials in time to enable them to return voting instructions to our Depositary in a timely manner.

In June 2009 The Ministry of Company Affairs (MCA) of the Government of India has clarified that a depositary receipt holder cannot be considered to be a shareholder of the Company until such time as the holder elects to transfer / redeem depositary receipts for underlying equity shares. It has been further clarified that the depositary bank cannot be considered a nominee of the holder under the Indian Companies Act.

We do not plan to pay dividends in the foreseeable future

We do not anticipate paying cash dividends to the owners of our Equity Shares or ADSs in the foreseeable future. Accordingly, investors must rely on sales of their Equity Shares or ADSs, which may increase or decrease in value, as the only way to realize cash from their investment. Investors seeking cash dividends should not purchase our ADSs.

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or Equity Shares to adverse tax consequences

We do not expect to be classified as a passive foreign investment company (“PFIC”) for United States federal income tax purposes for the most recent taxable year ended March 31, 2012 However, there is no guarantee that the Internal Revenue Service will agree with our determination. Moreover, it is uncertain whether we will be classified as a PFIC for any future taxable year. PFIC status is a factual determination made annually on the basis of the composition of our income and the value of our active versus passive assets. We currently maintain a significant amount of passive assets, including cash, which contributes significantly to the risk that we may be or become classified as a PFIC. If we do not spend substantial amounts of our liquid assets for business development purposes or if our market capitalization does not substantially increase, we may also be classified as a PFIC for one or more future taxable years. If we are or become classified as a PFIC, United States investors holding our ADSs or our Equity Shares may be subject to penalizing tax and interest charge rules on gain recognized on the sale or other disposition of our ADSs or our Equity Shares and on the receipt of distributions on our ADSs or Equity Shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules. Please see the section in this annual report entitled “Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules”.

Sales of substantial amounts of securities in the public market could depress the price of our ADSs and could impair our ability to raise capital through the sale of additional Equity Shares

The market price of our ADSs could decline as a result of sales of a large number of Equity Shares represented by ADSs on a U.S. stock exchange or elsewhere, or the perception that such sales could occur. Such sales also might make it more difficult for us to sell Equity Shares in the future at a time and at a price that we deem appropriate. As of March 31, 2012, we had an aggregate of 14,810,178 Equity Shares outstanding. Of the outstanding Equity Shares, 9,295,956 ADSs, representing 4,647,978 Equity Shares, are freely tradable. Our remaining Equity Shares may be sold in the United States pursuant to a registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act. Further, certain holders of at least 30% of our Equity Shares can require us, subject to limitations, to effect a registration of such Equity Shares and/or to list the Equity Shares either on the NASDAQ Global Market (formerly the NASDAQ National Market), the National Stock Exchange of India or the Bombay Stock Exchange Limited (formerly The Stock Exchange, Mumbai).

 

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We may be required to list our Equity Shares on an Indian stock exchange. If we were to list our Equity Shares on an Indian stock exchange, conditions in the Indian securities market may affect the price or liquidity of our Equity Shares

On June 28, 2006, the Ministry of Finance of the Republic of India issued amendments to the “Issue Of Foreign Currency Convertible Bonds And Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993” (the “Scheme”). The amendments included a statement that Indian companies that have issued depositary receipts and/or foreign currency convertible bonds prior to August 31, 2005 will be permitted to comply with listing conditions on the Indian stock exchanges within three years of having started to make profits. At present, the manner in which the amendments to the Scheme prescribed by the Ministry of Finance will be interpreted and implemented, and how they would apply to us, is still uncertain.

We may be required by the Government of India at some point in time to list on a local Indian stock exchange. We may not be able to comply with any timeline for listing and other standards imposed on us, and we are uncertain as to the consequences to us of any non-compliance.

The Indian securities markets are smaller than securities markets in more developed economies and are more volatile than the securities markets in other countries. Indian stock exchanges have in the past experienced substantial fluctuations in the prices of listed securities.

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, broker defaults, settlement delays and strikes by brokers. In addition, the governing bodies of the Indian stock exchanges have from time to time restricted securities from trading, limited price movements and restricted margin requirements. Further, from time to time, disputes have occurred between listed companies and the Indian stock exchanges and other regulatory bodies that, in some cases, have had a negative effect on market sentiment. If we were to list our Equity Shares on an Indian Stock Exchange and similar problems occur in the future, they could harm the market price and liquidity of the Equity Shares and this could have an adverse effect on the price of our ADSs.

 

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BUSINESS

Overview

Our legal name is Rediff.com India Limited and our commercial name is Rediff.com. We were incorporated in India on January 9, 1996 as Rediff Communication Private Limited under the Indian Companies Act. We converted to a public company on May 29, 1998. On February 15, 2000, we changed our name to Rediff.com India Limited. Our principal office is located at Mahalaxmi Engineering Estate, 1st Floor, L.J. First Cross Road No-1, Mahim (West), Mumbai 400 016, India, and our telephone number is +91-22-6182-0000. Our Internet address is www.rediff.com.

We are a leading Internet destination in India, focusing on providing world-class online business and consumer offerings in India and to the global Indian community. Our websites in India and the U.S. consist of communication services, such as e-mail, news and information channels, community features including a social networking platform, photo/video and music sharing capabilities, local search, and mobile and online marketplace services. We have also launched new offerings for the mass-Indian market, including our flagship mobile email service RediffMail NG and Deal Ho Jaye!, a group deals initiative providing localized deals for consumers. Recently we have re-launched our Web hosting and Business Email service under the WebPro brand, offering an affordable and easy to use way to set up an own domain-name email service plus a web presence with video streaming and e-commerce facilities. Early this year, we launched a real-time news search service, news search engine, that delivers fresh and recent news sourced from over 30,000 news sites from India and the world.

We also publish two weekly newspapers, “India Abroad” and “India in New York”. These news publications are targeted at the Indian-American community based in the United States and Canada.

In June 2000, we issued 5.3 million ADSs, representing 2.65 million Equity Shares, at a price of US$12.00 per ADS, raising net proceeds of US$57.3 million, after underwriting discounts and expenses, and we listed our ADSs on the NASDAQ Global Market (formerly the NASDAQ National Market). In November 2005, we issued an additional 3.0 million ADSs, representing 1.5 million Equity Shares, at a price of US$15.86 per ADS, raising net proceeds of US$44.1 million, after underwriting discounts and other expenses, and these ADSs were also listed on the NASDAQ Global Market. Our ADSs are listed and traded on the NASDAQ Global Market under the ticker symbol REDF. The net proceeds of our ADS offerings have been used by us, and in future, are intended to be used by us, to develop content for our Internet website, to advertise and promote our brand, to improve the technological capabilities of our company, and for general corporate purposes, including capital expenditures, strategic investments, partnerships and acquisitions.

On November 26, 2010, we acquired Vubites India Private Limited (“Vubites”) for approximately US$0.30 million in cash and the assumption of a $2.7 million loan. Vubites helps small and local businesses advertise on national TV channels within their cities to reach their target audiences.

Our Markets

We believe that the growth of our revenues and profits from our India Online business is dependent on the growth of the Indian Internet market and mobile phone user base, improvements in the broadband infrastructure the mass-Indian market and particularly in highly populated areas, the evolution of adequate online payment mechanisms in India, a consequent increase in online advertising and fee based revenues, and our ability to capture a sizeable share of any increases in market revenues.

The growth of the user base for Internet and mobile phones, in turn, is dependent on Indian government policies that facilitate a competitive and financially healthy telecom industry policies that stimulate broadband Internet investments by telecom companies. During the last few years, the Government of India has taken a number of steps in this direction, opening most sectors of the telecom industry to the private sector and foreign capital, establishing independent regulatory authorities and reducing taxes on personal computers and mobile phones.

 

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We expect that the growth of the Internet market in India will be driven by an increase in broadband subscribers. The number of such scribers stood at 13.79 million as of March 2012 (source: TRAI). The government of India has set a target of reaching 160 million broadband subscribers by 2014 (source: TRAI) and is planning to spend LOGO 650 billion over two years to lay an optical fibre network to reach all areas of India (source: TRAI Recommendations on National Broadband Plan 2010). On the other hand, the Indian mobile phone user base, which stood at 919 million as at March 31, 2012 (source: TRAI), continues to grow at a fast rate, witnessing a growth of 13% during the fiscal year ended March 2012 over the corresponding previous year (source: TRAI estimate).

The growth of our international business, particularly our US operations, is dependent on our ability to launch new services that appeal to our worldwide user base, which consists principally of Indians living outside India and potential new users of our service, as well as revenue growth from our weekly newspapers, India Abroad and India in New York.

Our growth is also dependent on general economic conditions in all our markets, particularly India and the United States, and on the pace of economic expansion in India and other emerging markets where we do business.

Our Opportunity

In India Internet access and usage through PCs and mobile phones is still at an early stage of development and adoption. Given the demographics in India and market dynamics, primarily driven by Government of India and private sector investment in the Indian market, we believe that over time, there will be growth in demand for the services provided by our Company. We believe our opportunities are driven by the following factors, among others:

 

   

We are an early entrant in the Indian Internet market and our brand continues to be recognized and trusted by Indian Internet users;

 

   

We offer services based on contemporary technology, thus making them easy to use and accessible through both PCs and mobile phones, as well as tablet-based devices that have Internet capabilities;

 

   

We are one of the few Internet companies in India offering comprehensive website services, including but not limited to, e-mail, search, social media, community features, blogs, news, daily deals and online shopping;

 

   

We expect the growth of e-commerce in India to be fueled by anticipated improvement in broadband access, online payment infrastructure and distribution and fulfillment facilities, an increase in credit and debit card penetration rates, and the development of alternative payment mechanisms for online purchases, such as cash on delivery; and

 

   

We expect growth over time in Internet access in India through PCs, mobile phones and other mobile devices such as tablets, further fueled by the recent issuance of 3G licenses in India and the expected roll out of both 3G and 4G services.

We believe that as an operator of a website with a large number of users, we are well positioned to benefit from the anticipated growth of revenues generated from these services.

 

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Our Strategy

We are focused on providing a full range of culturally relevant online products and services to Indians living in India and other parts of the world. We intend to continue this strategy, and may from time to time introduce new products and services or make strategic investments in related area to further increase our brand name recognition and our user base and grow both our top and bottom-lines. Such products and services may include but may not be limited to:

 

   

Online advertising services on our Rediff.com website, revenues from which currently account for a significant portion of our India Online business. These include banner advertising, performance based advertising, e-mail and text link campaigns, the sponsorship of online events and rich media ad formats. Our target client base for advertising and sponsorships include global companies doing business in India, domestic corporations and both small and medium sized enterprises.

 

   

Our new offering, Rediff Deal Ho Jaye!, an advertising service for small and local advertisers. The service was recently introduced in 40 Indian cities. With Rediff Deal Ho Jaye !, merchants now have the ability to take advantage of Rediff.com’s reach throughout India, to generate new business by offering special discounts and promotions on Rediff DealHoJaye!. The Rediff Deal Ho Jaye! offering enables consumers to discover new services and experiences in their city, such as restaurants, spas, hotels, healthcare, tattoos, hobby classes, adventure sports and other local attractions across 70 categories and at 30-60% discounts, helping them make the most of their quality time with their family and friends. In addition to traditional online payment options, Rediff also enables users to pay by cash on delivery of deal coupons to their doorstep. This is deliverd through our extensive network of third-party logistics partners. The primary objective of introducing this mode of payment is to make it easy for a large number of users without credit cards or Internet banking facilities to buy from Rediff Deal Ho Jaye!.

 

   

Community and social networking platforms, which connect people through an online network. Our social networking initiatives are centered around the availability of individualized “MyPage web page” for each user of our service. Our other community products and platforms include Get Ahead, Q&A and Rediff Blogs. We believe our video, audio/music and photo-sharing platform, iShare, holds significant brand recognition throughout India and that our position in this market, as evidenced by our user base, makes Rediff a market leader in this category. We are also a leading provider of free e-mail communication services which we provid in many Indian languages.

 

   

News and information services, including breaking news, our money channel Moneywiz, message boards for users to post their opinions, a facility for users to personalize news to suit their interests, and periodic newsletters distributed to users via email. Our news and information channels cover politics, business, entertainment and sports among other categories of interest.

 

   

Mobile value added services, include facilities for downloading ringtones, mobile games, wallpapers, chat and e-mail. We provide these services for 2G, 2.5G and 3G mobile services.

 

   

In India, the growth of free webmail is being slowed by the growth of social network-based and mobile phone SMS-based messaging. However, the usage of paid email services for businesses is gaining traction with most, if not all businesses in our target market deeming it necessary to have email addresses based on their own respective domains. Such mail services for enterprises require sophisticated administration facilities as well as mobile phone-based access to mail. Rediff has long been one of the leading players in India in both free webmail and the paid enterprise mail business. To address growth in the paid email segment we recently re-tooled our product offerings under the brand “Rediff WebPro” which offers an affordable and easy to use way to set up an own-domain-name email service plus a web presence with video streaming and e-commerce facilities. With this offering, we intend to address the 30 million micro, small and medium sized enterprises that the Ministry of Medium and Small Enterprises estimates to exist in India.

 

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Search services, including web search facilities as well as services to locate local information on domestic airfares, train fares, job listings, images and products, among others.

 

   

Online shopping services, including a platform for merchants in India to create online shops and ways for consumers to explore the wide product range available on our site, conveniently place orders, track their packages and rate merchants, among other functions. We believe that not only do we offer the widest range of payment options available to our Indian consumers, but that we also have one of the largest delivery coverages of any online shopping sites in India. We are positioning ourselves to be a continued leader in the e-commerce and online shopping space in India. Over the past year there have been multiple private equity-led startups in India offering a wide range of products at considerable discounts. This has attracted a large number of consumers online and helped grow the demand for online products generally. To capitalize on this growing demand, Rediff has added more merchants to its marketplace (from 230 to 400) and extended its product range to over 100,000 products, along with making improvements in the search and browse functionality of our website. We have also added voice-based call center support.

Our India Online Business

Our Rediff.com India website consists of information, communication and content services, free community products and platforms, e-commerce and mobile services. With 16.7 million monthly active users in India and 19.9 million monthly active users worldwide, as reported by ComScore Media Metrix (March 2012 report) we believe Rediff.com is one of the most recognized online brands in India and among the Indian community worldwide.

Information and Content

We deliver information and content to our users in an easy to use interface. The information and content channels currently available to our users include news, business, movies, cricket/sports and several other topics of interest. We currently offer this information and content without charge to our users.

In our endeavor to enhance the user’s browsing experience, our website now sports a clutter-free layout, clean user interface and easy navigation aids, all of which make it convenient for the user to discover content. This minimalist user interface approach, which is based on the design philosophy of convention over configuration, coupled with the use of collective intelligence/technology, enables pages to load faster, offering users’ instant responses even when accessing the site over mobile phones and related services.

We believe that a significant percentage of our online users are in the 18 to 34 years old age group. As such, we place emphasis on reaching younger users through focused information and content relevant to this audience, and target our marketing efforts to reach this demographic, as well as others, both in rural and urban regions across in India.

Our primary information and content channels are broadly classified into news content and interest specific subjects. News content includes current affairs, business and finance, movies,and sports. We provide our users with up-to-date news of interest to Indians, including feature stories, interviews and online chats with leading Indian personalities in public life, as well as sports and entertainment, breaking news and in-depth coverage of significant events. We use our in-house staff to generate this content as well as freelancers and news feeds from wire services and other online and offline media houses. This content can be in text, audio and video formats and we offer our users tools to search this content, opt to get news items by email or on their mobile phones and share the content with other users in their network by adding it to their individualized web page using our “MyPage” service.

 

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Recently, we introduced a Real-time News Search service that delivers recent news from across 30,000 news sources in India and worldwide, within minutes of the news appearing on these sources and within milli-seconds of the query being made. The service also offers the latest images from these sources and currently has an index size of 13 billion images. In addition to high quality images published on news sites, it also contains a real-time feed of photographs taken at live Bollywood and sports celebrity events.

Community Features and Products

Through a single login facility, we provide a combination of free and paid community features and products to consumers and businesses. Our offerings include e-mail, web and vertical search tools, blogs, message boards, shopping, social networking and mobile related services. Some of these features and products are offered without charge, while others are offered on a subscription or fee basis. Payment for our fee-based services can be made by credit card and within India by check/demand draft or through direct debit of the user’s Internet banking account. In case of shopping, we also offer the additional payment option of cash on delivery.

Our specific offerings include:

E-mail

We offer our users a variety of e-mail solutions tailored to their needs. We believe that we have priced each of our branded

e-mail products competitively. All of our e-mail services offer spam control and support the use of English and eight Indian languages. Our e-mail offerings are described below.

 

   

Rediffmail, our flagship e-mail service, is provided free of charge to our users. In fiscal 2009 we enabled integration of feeds from social networking sites Orkut, Facebook and LinkedIn into the Rediffmail inbox, facilitating users getting updates of their friends’ activities through Rediffmail. We have now made our interface more user friendly by providing easy navigation tools to quickly perform actions like reading unread mails, composing a new mail, deleting mails and accessing the calendar and contacts. The service is also accessible on mobile device and works seamlessly on most mobile phones.

 

   

Rediff Webpro is aimed at the small and medium sized enterprise (“SME”) segment in India. Through this product, we offer SMEs a range of web management services such as web hosting business e-mail. and mail on mobile phones and devices.

Local TV Advertising

Vubites enables local businesses to advertise on national TV channels within their city. Vubites works with TV broadcasters and cable multi system operators (MSOs) in the principal cities of India, enhancing their revenues by helping to make advertising on TV more affordable. Vubites offers web-based tools that small merchants can use to create low cost TV ads in mpeg2 format, which, play on television directly, an online media planning tool with which advertisers can create their media plan without any assistance, and a technology to insert TV ads at the city level.

Blogs

Rediff Blogs enables users to set up their own blogs and publish their thoughts and ideas directly and instantly on the web as well as the ability to visit other blogs and comment on them. Users can also post pictures and create multiple blogs under a single username and password. We provide users with the option of blogging in eight different Indian languages- Hindi, Gujarati, Marathi, Tamil, Telugu, Malayalam, Bengali and Kannada.

 

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Social Networking

Our video, audio/music and photo sharing platform, Rediff iShare, continues to increase in popularity since its launch. Rediff iShare videos and music files are now available for viewing on iPhones and other mobile devices. Video files are now available in both MP4 and flash video formats.

Rediff MyPage is our free online social networking product which allows users to become part of a network by creating and uploading profiles that include details about their profession, education and interests. Thereafter, users can invite friends to join their network and can become linked to a larger network. Our MyPage service enables users to capture photos via mobile devices and upload and share them within their social network on the service. Other features include bookmarks, viewing profiles of persons, adding friends, posting on message boards, receiving updates from other social networks and personalization tools. Rediff MyPage allows companies, colleges, celebrities and individuals to create their respective profiles where their communities can connect with them and receive updates on their latest offerings, events and releases.

Get Ahead, our editorial content channel also supports a forum for questions and answers. This social media platform allows users to post questions and answers on various issues, and vote for the most relevant answers within a community environment.

Finance Channel

Our Finance platform, Moneywiz, provides stock market quotes, company information and a personal portfolio tracker. In addition, we provide business news, feature articles, expert columns and interviews. Our business channel offers business news from India and coverage of Indian stock markets. This channel also provides regular columns and feature stories, as well as personal finance information. Our free, real-time stock market indices and stock quotes tool, which enables users to benchmark returns on their investments has been well received by users.

Online Shopping

Rediff Shopping is an online marketplace which allows users to purchase products and services from various merchants. We offer products and services from merchants in various categories, the most popular of which currently include electronics, apparel, personal accessories, flowers and jewelry.

Customers can pay for their purchases using a variety of payment options, including credit cards, debit cards, online banking services, cash on delivery, gift vouchers and checks/demand drafts. We have entered into agreements with leading Indian banks to facilitate payment processes. In our effort to provide more users with the convenience of online shopping, we have recently partnered with India Posts as a logistics partner. This allows us to service more than 29,000 pin codes across the country. We also continue to work with our vendors to improve delivery cycles to better serve our customers.

Rediff Shopping also features a vendor rating system to enable online shoppers on our e-commerce platform to rate their shopping experience with different online merchants. Customers are invited to provide feedback when items are delivered, rating their experience with the vendor as satisfactory, unsatisfactory or undecided. Vendors are rated based on the feedback provided.

Local Deals Services

Rediff Deal Ho Jaye!, a local deals service, enables advertisers to reach consumers in 40 cities by offering special discounts and promotions. It allows consumers to discover new services and experiences in their city, such as restaurants, spas, hotels, healthcare, tattoos, hobby classes, adventure sports and other local attractions across 70 categories and at 30-60% discounts.

 

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We are focused on further developing our social media, e-commerce and search capabilities and believe our individual and collective offerings will help us grow our market presence, expand our reach and increase Rediff’s brand name recognition throughout India and to Indian worldwide.

Our Revenue Sources

Our India Online business primarily includes revenues from advertising and fee-based services. Online advertising includes revenues from advertisements and sponsorships from customers. Fee based services include revenues from online shopping, subscription services and mobile value added services.

Advertising

Advertising includes revenues from banner advertising, performance based advertising, e-mail and text link campaigns and sponsorships of events. Our advertisers enter into agreements pursuant to which they either pay a fixed fee per thousand banner impressions for a given time-period, usually ranging from a few weeks to one year, or a variable fee depending upon the number of clicks or leads provided to them through our website.

Some of our advertisers also enter into agreements pursuant to which they pay a fixed fee for a guaranteed number of impressions on our site. Our rate per thousand impressions, commonly referred to as CPMs, for banner advertisements varies depending on banner size, location of the advertisements on our site, the targeted geographical areas and the extent to which the advertisements are targeted to a particular audience. Discounts from standard CPM rates may be provided for higher volume and longer-term advertising contracts. We have introduced other formats for advertisers to broaden the appeal of the advertisements to our users, such as text links, image ads, video ads and any combinations of these options.

We had over 470 advertisers on our Rediff.com India website during the fiscal year ended March 31, 2012. Our top ten advertisers accounted for approximately 24% of our India advertising revenues for the fiscal year ended March 31, 2012. A partial list of our advertising clients includes Sharekhan.com, Naukri.com, Microsoft Corporation, Dr Batra’s Positive Health Clinic, LIC of India, Citibank and Hewlett Packard, among others.

Fee-based services

Revenues from fee-based services primarily include income from various paid subscription service products, and from our online shopping marketplace.

Subscription service revenues primarily include income from our various paid e-mail service products and our domain name registration and web hosting services. The revenue for subscription based products is recognized ratably over the period of subscription.

Online shopping revenues primarily consist of commissions earned on the sale of electronics, books, music, apparel, confectionery, gifts and other items to customers who shop from vendors on our online store. Revenues from online shopping services also include fees charged to vendors for creating, designing and hosting the vendors’ product information on our website.

 

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Our Infrastructure

Technology

Our operating infrastructure is scalable and has been designed with a view to serving and delivering millions of page views per day and allowing users to access our products and services quickly and efficiently from different locations worldwide. Our infrastructure is also designed to provide high-speed access by forwarding queries to web-hosting sites with greater resources or lower loads. Our web pages are generated, served and cached by servers located at co-location web hosting sites in India.

We use Apache and IIS servers that run on Linux and Windows platforms. Servers in India are maintained mainly at service providers in India and elsewhere as needed to support our customer base. We have built the capability to deliver content using our own content delivery network and also use an external content delivery network where we are not present. We believe that using these hosting services enhance our ability to protect our systems from power loss, break-ins and other potential external causes of service interruption. These hosting services also provide continuous customer service, multiple Internet connections and continuous power supply to our systems. In addition, we conduct online monitoring of all our systems for accessibility, load, system resources, network-server intrusion and timeliness of content.

Our services are accessible with equal ease over both PCs and mobile phone. We have the ability to detect browser capabilities to serve pages with appropriate layouts and supported features. We can engage in real time log capturing and the analyzing of internally developed systems in order to provide an online capability to mine information. We have improved upon our search technology and have introduced social and collective intelligence features across all our services.

Advertising

Our sales and marketing professionals are responsible for securing advertisers and shopping merchants, planning and creating advertising campaigns and obtaining and analyzing customer feedback. Sales team members are based in Mumbai, New Delhi, Bangalore, Chennai, Hyderabad and New York. The sales team coordinates regularly regarding advertising across all of our businesses. Our sales team includes designers, copywriters, programmers and campaign managers.

In India our sales team focuses its sales efforts on major advertisers as well as smaller corporations. Our sales team consults regularly with advertisers on the design and placement of their web-based advertising, provides advertisers with advertising measurement analysis and focuses on providing a high level of customer service satisfaction.

In the past few years, a number of advertising agencies have been established in India to promote the Internet as an advertising medium among Indian advertisers. In addition, several full-service advertising agencies in India have expanded their operations by creating and growing their Internet / interactive advertising divisions. Our advertising business has moved up significantly from digital agencies over a period of time and currently account for approximately 70% of our advertisement revenues.

Online Shopping

Our shopping platform has a host of user-friendly features such as product search and detailed product category listings. The “tracking order”, “view account”, “shopping bag details” and “order status update by automated e-mail” features make online shopping more convenient for users. Users can place orders from anywhere in the world for delivery into India. They can pay for purchases by credit card, local check, cash-on-delivery, or direct debit to an Internet banking account with designated Indian banks. Our customer service officers address customer inquiries and solicit feedback from users to seek to continuously improve our offerings. Customers are invited to provide feedback when items are delivered using our vendor rating system, rating their experience with three options — satisfied, unsatisfied or undecided.

 

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Once a user places an order on our website, we process and collect payment (except where the method of payment is C.O.D.) and notify the merchant who then packages the product and arranges for delivery through one of our designated couriers or the user’s designated courier. We make payment to the merchant once we receive proof that the merchant has delivered the product. Most products purchased through our website are delivered within ten business days. Product warranties are the responsibility of those who sell products on our website’s marketplace, although our reputation can be adversely affected if a user is not satisfied with a purchase.

Pursuant to the terms of our agreements with merchants, we may receive a one-time entry fee and a separate commission on the sale of each product posted on our website.

Our sales force targets manufacturers and vendors of the leading products in India for them to offer their products through the Rediff Shopping platform. We also target manufacturers and vendors that supply products in categories that are fast moving over the Internet.

Electronic Payments

We were among the first Internet companies in India to accept credit cards for online payments. Users can use all leading international and Indian credit cards and online money transfers methods for online payments. All online transactions are secured by VeriSign Secure Socket Layer (SSL) technology.

We have entered into agreements with Axis Bank, Citibank N.A., Federal Bank and ICICI Bank Limited to automate Visa and MasterCard credit card payments through our website.

We also have arrangements with a number of major banks in India to facilitate online money transfers.

United States Publishing Business

Our United States publishing business consists primarily of the Rediff India Abroad website, which is targeted at the

Indian-American community in North America, and our two flagship newspapers India Abroad and India in New York.

Rediff India Abroad website

The Rediff India Abroad website offers information and content which is similar to the information and content on our Rediff.com India website, along with additional offerings relevant to North American users.

India Abroad

India Abroad, which we acquired in April 2001, was established over 38 years ago and is one of the oldest weekly newspapers focused on the Indian community residing in North America. The newspaper is published in five North America editions — New York, Tristate, Chicago/Dallas, Los Angeles and Canada.

The paper is divided into five sections: News, Community, Business and Sports, Classifieds and Magazine. India Abroad’s content is targeted at Indians living in North America.

India Abroad offers classified advertising, which includes advertisements listed together in sequence by the nature of the advertisement, such as matrimonial, business/finance, employment, medical and real estate. The paper also has a Bulletin Board on the back cover which offers enhanced classified advertising. India Abroad also has an associated website, www.indiaabroad.com, which allows users to start and renew subscriptions, make payments and change their delivery addresses. Users can also place classified advertisements through this website. Recently, we launched the e-edition of this publication. Subscribers can have copies emailed to them for their convenience

 

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India in New York

India in New York, a guide to events and entertainment from India Abroad, was started in 1997 as a sister publication of India Abroad. India in New York features news, events, sports and entertainment and a wide array of classifieds. The India in New York newspaper is distributed free in the Tristate area of New York, New Jersey and Connecticut. India in New York is available at restaurants, temples, Indian associations, community events and Indian grocery stores in the Tristate area.

Competition

Online

There are a number of companies that provide websites focusing on India and the global Indian community. These companies compete with us for websites visitors, online advertising and shopping and subscription revenues. Competition for visitors, online advertising and online shopping and subscription revenues is intense and is expected to increase in the future as there are no substantial barriers to entry in to these market. Our competitive ability is determined by how quickly we adopt new technologies, the user friendliness of our site designs, our ability to device popular online products and services ,our execution skills and our financial management skills.

We compete with providers of Indian content over the Internet, including web directories, search engines, content sites, websites, horizontal sites and Internet Service Providers (“ISPs”). Our current and anticipated competitors include Google, Yahoo, Facebook, Microsoft, AOL,eBay and Snapdeal as well as a host of other international and Indian companies. As we embark on new initiatives in the mobile arena and with group deal services, we anticipate that competition will intensify. consequently, we continue to make strategic investments in our business and in our marketing efforts to reach a wider demographic.

We also indirectly compete for advertising revenue with other forms of media, such as print media, radio and television, as well as companies known as “aggregators”, which aggregate advertising space in third party websites and resell such space to among others our customers and potential customers.

Many of our competitors have a longer operating history, greater name recognition larger customer base, and greater management, financial, technical, marketing, sales, brand, and other resources than we do. They can use their superior experience and resources in a variety of competitive ways, including by investing more aggressively in research and development, creating superior content, making acquisitions, and competing more aggressively for advertisers. In addition, emerging start-ups may be able to innovate and provide products and services faster than we can. There has also been a trend toward industry consolidation as a result of which our smaller competitors today may become larger in the future. If our competitors are more successful than we are at generating visitors and website traffic, our revenues may decline.

Print

There are a limited number of companies in the United States that provide newspapers focusing on India and the global Indian community. These newspapers compete with our US publishing outlets for advertising revenues. One of our newspaper competitors is India West.

Intellectual Property

Intellectual property rights are important to our business. We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property. We require employees, independent contractors and, when practicable, vendors to enter into confidentiality agreements upon the commencement of their relationships with us. These agreements generally provide that confidential information developed or made known during the course of a relationship with us must be kept confidential.

 

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Our efforts to protect our intellectual property may not be adequate. Our competitors may independently develop similar technology or duplicate our products or services. Unauthorized parties may infringe upon or misappropriate our products, services or proprietary information, including our domain name. For example, there are some parties who have registered domain names similar to or slightly different from our domain name, Rediff.com, and we have taken legal action in India and overseas to protect our rights in respect of our domain names. We do not believe that the outcome of these lawsuits will have a material adverse effect on our business. However, the laws of India do not protect proprietary rights to the same extent as the laws of the United States. Further, the global nature of the Internet makes it difficult to control the ultimate destination of our products and services. In the future, further litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be time-consuming and costly.

We could be subject to intellectual property infringement claims as the number of our competitors grows and the content and functionality of our websites or other product or service offerings overlap with competitive offerings. Defending against these claims, even if not meritorious, could be expensive and divert our attention from our operations. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial damage award and be forced to try to obtain or develop non-infringing technology, obtain a license or cease selling the applications that contain the infringing technology. If this were to occur, we may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, or at all.

We rely on a variety of technologies that are licensed from third parties. The software developed by these third parties is used in our website to perform key functions. These and other third-party licenses may not be available to us on commercially reasonable terms in the future. The loss or inability to obtain or retain any of these licenses could delay the introduction of software enhancements, interactive tools and other features until equivalent technology can be licensed or developed. Any such delays could materially adversely affect our business, operating results and financial condition.

We have registered our trademarks for “Rediff”, “Rediff on the Net and Design (Square)” and “Rediff.com” under various classes with the United States Patents and Trademarks Office. We have received registration for our trademarks “Rediff”, “Rediff.com”, “Rediffmail”, “Rediffmail Mobile”, “Rediff Mobile”, “Rediff Bol”,”Rediffmail NG Mobile”, “Rediff iShare”, “Sociali”and “Rediff Shopping”, and have applied for registration for “RediffDeal Ho Jaye”, “Rediff ZaraBol” in India. We have also received copyright registration for our artworks entitled “How Hot Is This Stock”, “origami dog”and “sociali” and for 40 “profile photo illustrations” in India.

Facilities

India

Our corporate headquarters is located in Mumbai, India, where we lease approximately 22,700 square feet, in two buildings. In one facility we lease approximately 10,800 square feet and in the other, we lease a total of approximately 11,900 square feet under three separate lease agreements. The lease for our 10,800 square feet facility expires on January 20, 2014. Out of three other leases the lease 3,000 square feet expires on September 30, 2012 and the lease for 3,000 square feet of adjoining offices expires on September 30, 2014. The third lease for 5,900 square feet started from May 1, 2011 and will expire by April 30, 2014.

We lease office space for our branch offices in India. Our lease for approximately 3,165 square feet of office space in New Delhi which will expire on November 30, 2012 and our lease for 5,200 square feet of office space in Bangalore, will expire on January 31, 2014.

 

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United States

Our US subsidiary leases approximately 6,300 square feet of office space in New York, the lease for which expires on May 31, 2018.

We do not anticipate having material difficulties renewing any of our current lease or alternatively, entering into different space arrangement, if necessary.

Seasonality

Seasonal fluctuations in Internet advertising have affected, and are likely to continue to affect, our business. Internet advertising in India is generally slow during the first half of the fiscal year for most Indian companies. Such seasonal trends have in the past caused, and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.

Litigation and Other Legal Matters

Action Relating to Access to Pornographic Material

On June 21, 2000, the Company, certain of our directors and others (Ajit Balakrishnan, Arun Nanda, Abhay Havaldar, Sunil Phatarphekar, Charles Robert Kaye and Tony Janz) were named as defendants in a criminal complaint (RCC Complaint Number 76 of 2000) filed by Mr. Abinav Bhatt, who was then a 22 year old student, before the Judicial Magistrate, First Class, Pune, India, alleging commission of an offence, under Section 292 of the IPC for distributing, publicly exhibiting and putting into circulation obscene, pornographic and objectionable material. The RCC Complaint alleged that we, through our website “www.rediff.com”, provided a search facility that enabled Internet users to view pornographic, objectionable and obscene material. On November 27, 2000, the Judicial Magistrate passed an order on the complaint holding that a prima facie case under Section 292 of the IPC had been made out against us and directed commencement of criminal proceedings against all the defendants. A criminal writ petition was filed in the High Court of Mumbai (Sunil N. Phatarphekar & Ors. v. Abhinav Bhatt and Ors., Mumbai High Court, Criminal Writ Petition No. 1754 of 2000), seeking among other relief the setting aside of the order of the Judicial Magistrate. The High Court of Mumbai in its order dated December 20, 2000, while granting ad-interim relief to the petitioners in the Writ Petition, stayed the order of the Judicial Magistrate pending final disposal of the Writ Petition. The Writ Petition has been admitted by the High Court of Mumbai and currently hearings have commenced. While we believe that the lawsuit is without merit, and that we and our directors have a valid defense to the charges, in the event that we are unsuccessful in our defense, we and our directors may face both criminal penalties and monetary fines or damages.

Under Indian law, any person who publishes or transmits or causes to be published in the electronic form, any material which is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely, having regard to all relevant circumstances, to read, see or hear the matter contained or embodied in it, shall be punished (i) for the first conviction, with imprisonment of up to five years and with a fine of up to LOGO 100,000 (approximately US$2,000); and (ii) in the event of a second conviction, with imprisonment of up to ten years and with a fine of up to LOGO 200,000 (approximately US$4,000).

 

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Actions Relating to Trademark Infringement

In May, 2008, a complaint was filed by The Board of Control of Cricket in India (“BCCI”) against Sandeep Goyal and us alleging that the depiction of images on the online game known as Indian Fantasy League started by Sandeep Goyal infringed the Indian Premier League (“IPL”) trademark. BCCI is seeking (a) a permanent injunction restraining defendants from the use of logo “Indian Fantasy League.com”; (b) shutdown of the website Indianfantasyleague.com;and (c) to render the accounts of all profits earned by the said website and damages to the tune of LOGO 1.0 million (approximately US$20,000). We have filed our response to the BCCI complaint, and among the defenses we have raised are: (a) it is Sandeep Goyal who has infringed the trademark of IPL and not Rediff.com; (b) Rediff.com only provides the domain hosting and web based email solution services which enables the subscriber to set up and manage their website as per the terms and conditions of Rediff business solutions;and (c) subscribers such as Sandeep Goyal are required to abide by and comply with the terms and conditions we impose on our subscribers which provides that the subscriber shall be solely responsible for producing, electronically uploading and maintaining his website and such subscriber shall ensure that all upload material shall be owned and/or properly licensed by the subscriber and shall not adversely affect any rights of any third party. Although we believe we have valid defenses to the charges, if we are unsuccessful in our defense, we could be subject to monetary fines or damages.

In February, 2006, a complaint was filed by Marksman Pvt. Ltd. against various telecom operators and internet service providers and Rediff.com alleging infringement of copyright of Marksman by way of the dissemination of information relating to scores, alerts updates and or other events via Short Message Service (SMS) technology on wireless and mobile telephones in respect of One Day International Cricket Matches (“ODIs”) during India’s tour of Pakistan scheduled in February, 2006. We have filed our response and among the defenses we have raised are: (a) Rediff.com along with other telecom operators and service providers has not infringed the copyrights of Marksman; and (b) the information relating to scores, alerts and updates and or other events happening via Short Message Service (SMS) Technology on wireless and mobile telephones in respect of ODIs which was being provided to subscribers was sourced from the public domain and as such no exclusivity can be claimed. The one judge panel, while dismissing a request for an interim order, has directed the defendants to maintain the accounts of the SMS received during the ODIs. Marksman will have to first amend the suit to seek damages before any claim could stand against Rediff.com. In 2006, Marksman sought to amend the suit prayer to include damages. Although we believe we have valid defenses to the charges, if we are unsuccessful after exhausting all legal remedies, we could be subject to monetary fines or damages.

Actions Relating to Patent Infringement

In March, 2009, a complaint was filed against Rediff.com and 12 other defendants by S. Ramkumar, alleging violation of his patent rights in respect of mobile phones with a plurality of SIM cards sold through the Rediff Shopping website. S. Ramkumar is seeking a permanent injunction restraining the defendants, including us, from infringing upon his patent with respect to mobile phones with a plurality of SIM cards allocated to different communication networks. S. Ramkumar is also claiming damages in the amount of LOGO 1.0 million (approximately US$20,000). We have already filed our response, based on the following defenses: (a) it is the vendors, and not Rediff.com, that sell shopping products on the Rediff website, and we have not infringed any of Ramkumar’s intellectual property rights; (b) the Rediff Shopping website only provides an online platform that enables customers and sellers to enter into sale/purchase transactions and we are not involved in the sale or purchase of the goods/products listed on our website; and (c) vendors are required to comply with the terms and conditions we impose on them in exchange for using Rediff Shopping, which include providing us with a description of their products, prices and product images, and which also specifically require that vendors do not infringe third party rights, including third-party intellectual property rights. Although we believe that we have valid defenses to the charges, if we are unsuccessful in our defense, we could be subject to monetary fines or damages. However, given the nature of the suit and pleadings, there should not be any substantial monetary claim against us.

We cannot predict the outcome of these lawsuits, nor can we predict the amount of time and expense that would be required to resolve these lawsuits. If these lawsuits become time-consuming and expensive, or if there are unfavorable outcomes against us in these cases, there could be a material adverse effect on our business, financial condition and results of operations. We may be subject to additional lawsuits of these natures filed in the future.

We currently hold insurance policies for the benefit of our directors and officers (the “D&O Policy”), which provide coverage against certain claims. However, the amount of coverage may not be sufficient for our needs or the various exclusions in the D&O Policy could result in denial of coverage, in which case we would have to self-fund all or a substantial portion of our indemnification obligations.

 

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Other proceedings

We are also subject to other legal proceedings and claims, which have arisen in the ordinary course of our business and which includes some claims from the Indian tax authorities. These proceedings and claims, when ultimately concluded and determined, will not, in the opinion of management, have a material effect on our results of operations or financial position.

Subsidiaries

Rediff Holdings, Inc. (“Rediff Holdings”) is our wholly owned subsidiary and is incorporated in the State of Delaware. Rediff Holdings holds all of the outstanding voting shares of Rediff.com, Inc. (formerly, thinkindia.com) and all of the outstanding voting shares of India Abroad Publications Inc.

Rediff.com, Inc., which runs our U.S.-based Internet website, is incorporated in Delaware. India Abroad Publications Inc., which publishes India Abroad, is a New York corporation,. Value Communication Corporation, an Illinois corporation incorporated in 1996, is another subsidiary of ours. In April 2004, we sold its business to Worldquest Networks, Inc. (“WQN”).

In November 2010, we acquired a 100% equity stake in Vubites India Private Limited. Vubites is an Indian-incorporated entity that offers affordable local TV advertising in India.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and operating results should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report particularly in the “Risk Factors” section of this annual report.

Overview

We are a leading Internet destination in India focusing on providing world-class online business and consumer offerings in India and to the global Indian community. Our websites in India and the U.S. consist of communication services, such as e-mail, news and information channels, community features including a social networking platform, photo/video and music sharing capabilities, local search and mobile and online marketplace services including mobile-based email and daily deal offerings. We have 16.7 million monthly active users in India and 19.9 million active users worldwide, as reported by ComScore Media Metrix (March 2012 report). With 113.78 million online registered user worldwide as at March 31, 2012, we believe Rediff.com is one of the most recognized online brands both in India and among the Indian community worldwide.

We also publish two weekly newspapers aimed at the Indian-American community based in the United States and Canada: “India Abroad” and “India in New York”.

By providing a platform for users that combines our technology, content, and communities and allows our users to personalize and integrate products and services across devices, we aim to become more relevant to our existing users and to increase the number of users of our products and services. We believe that a deeper engagement with new and existing users, coupled with expected growth of PC and mobile based Internet in India as an advertising medium, may enable us to increase our revenues in the future.

We have incurred significant net losses and negative cash flows since our inception in January 1996. We incurred a net loss of US$7.7 million for the fiscal year ended March 31, 2012, and as of the same date, we had an accumulated deficit of US$76.3 million, compare to a net loss of US $6.6 million and an accumulated deficit of US $68.6 million for the fiscal year ended March 31, 2011. We are focused on generating additional revenues, while controlling our expenses, to achieve profitability and to reduce our accumulated deficit.

In June 2000, we issued 5.3 million ADSs, representing 2.65 million Equity Shares, at a price of US$12.00 per ADS, raising net proceeds of US$57.3 million, after underwriting discounts and expenses, and we listed our ADSs on the NASDAQ Global Market. In November 2005, we issued an additional 3.0 million ADSs, representing 1.5 million Equity Shares, at a price of US$15.86 per ADS, raising net proceeds of US$44.1 million, after underwriting discounts and other expenses, and these ADSs were also listed on the NASDAQ Global Market. The net proceeds of our ADS offerings have been used by us, and in the future, are intended to be used by us, to develop content for our Internet website, to advertise and promote our brand, and for general corporate purposes, including capital expenditures, strategic investments, partnerships and acquisitions.

Our reportable business segments are:

 

   

India Online business, which primarily includes revenues from advertising and fee-based services. Advertising includes revenues largely from display and performance based advertising and to a lesser extent from sponsorships. Fee-based services include revenues from online shopping, subscription services and mobile value-added services.

 

   

US Publishing business, which primarily includes revenues from the Rediff India Abroad website and revenues from the print newspapers India Abroad and India in New York.

 

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Critical accounting policies and the use of estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent liabilities. On an on-going basis, we evaluate our estimates, including but not limited to allowances for doubtful accounts, valuation of investments, income taxes, contingencies, useful life of intangible assets, goodwill impairment, deferred tax assets, employee benefits and litigation. We base our estimates on historical experience and on assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following are the significant accounting policies used in the preparation of our consolidated financial statements. Refer to Note 2 to the Consolidated Financial Statements for a more complete discussion of all of the Company’s significant accounting policies.

Revenue Recognition

India Online business

Revenues from display of advertisement and sponsorships are recognized ratably based on delivery over the contractual period of the advertisement, commencing from the time the advertisement is placed on our website. Revenues are also derived from sponsor buttons placed in specific areas of our website, which generally provide users with direct links to sponsor websites. Such revenues are recognized ratably over the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable. Our obligations sometimes include guarantee of a minimum number of impressions or the number of times that an advertisement appears in pages viewed by users of our website. To the extent that minimum guaranteed impressions are not met, we defer recognition of corresponding revenues until the guaranteed impression levels are achieved. We also earn revenues from sending e-mail messages to some of our users on behalf of advertisers and these revenues are recognized ratably over the contacted period.

Fee-based services include online shopping, subscription services and mobile value-added services. Online shopping marketplace revenues primarily consist of commission from the sale of electronics, apparel, books, music, confectionery, gifts and other items. Customers place orders directly with vendors through our website. When an order is placed, we inform the vendor through an intranet connections and also confirm whether payment has already been collected by us through credit card/debit card or checks, or whether the payment is to be made by the customer on a C.O.D. basis. The vendor then dispatches the products to the customers. The vendor sends a periodic summary of transactions executed for which we collected payments on its behalf. We make payment to the vendor after deduction of our share of commission and costs. We recognize as revenues commissions earned on these transactions and shipping costs recovered from customers at the time of delivery of goods as evidence by delivery receipts provided by the vendor. Revenues from online shopping services also include fees charged to vendors for creating, designing and hosting the vendors’ product information on our website.

Subscription service revenues primarily include income from our various paid e-mail service products and our domain name registration and web hosting services. Revenues for subscription based products are deferred and recognized pro-rata as fulfilled over the terms of such subscription.

We also derive revenues from providing mobile value-added services such as ring tones, picture messages, logos, wallpapers and other related products to mobile phone users. Our contracts are with third-party mobile phone operators from whom we receive a share of revenues for such services. Mobile value added services revenues are recognized when the service is performed.

 

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US Publishing business

Our US Publishing business primarily includes revenues from subscription and advertising services from the publication of India Abroad, India in New York and our Rediff India Abroad website.

We recognize advertising revenues at the time of publication of the related advertisement. Subscription income is deferred and recognized pro rata over the term of the subscription. Revenues from banners and sponsorships on our Rediff India Abroad website are recognized over the contractual period of the advertisement, commencing from the date the advertisement is placed on the website, provided that no significant obligations remain and collection of the resulting receivable is probable. Obligations may include guarantee of a minimum number of impressions, or times that an advertisement appears in pages viewed by users of our website. To the extent that minimum guaranteed impressions are not met, we defer recognition of the corresponding revenues until the guaranteed impression levels are achieved.

Allowances for doubtful accounts receivable and other recoverables

We maintain allowances for doubtful accounts receivable and other recoverables for estimated losses resulting from the inability of our customers to make contractually agreed payments. We establish an allowance for doubtful accounts on trade accounts receivable after considering the financial condition of the customer, ageing of the accounts receivable, historical experience and the current economic environment.

Depreciation and amortization

We depreciate/amortize our assets on a straight-line basis over the useful life of the assets, which range from one to ten years.

Goodwill

Goodwill is tested for potential impairment on an annual basis, which is performed on January 1 or in interim periods if events and circumstances indicate a potential impairment. As reporting units are determined after an acquisition or evolve with changes in business strategy, goodwill is assigned and it may no longer retain its association with a particular transaction. All revenue streams and related activities of a reporting unit, whether acquired or organic, are available to support the carrying amount of goodwill. The reporting units for impairment assessments have been identified as the US Publishing business. Under the applicable accounting standard, goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. The adjustments to measure the assets, liabilities and intangibles at fair value are only for the purpose of measuring the implied fair value of goodwill and these adjustments are not reflected in the consolidated balance sheet. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversals of goodwill impairment losses are not permitted.

 

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Estimating the fair value of reporting units is a subjective process that requires significant estimates and assumptions, particularly related to cash flows and the appropriate discount rates. The fair values of the reporting units were determined using a valuation technique consistent with the income approach. For the purposes of the income approach, internal forecasts were used to estimate the future cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) after considering current economic conditions and trends, estimated future operating results and growth rates. Due to the inherent uncertainty involved in making those estimates, actual results could differ from the estimates. The Company evaluates the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting unit, as well as the fair values of the corresponding assets and liabilities within the reporting unit, for reasonableness. Cash flows are discounted based on a discount rate which the Company believes adequately reflects the inherent risk in the businesses of the reporting unit, uncertainty in the economic environment and risks associated with the internally developed forecasts.

Current Trends and Business Outlook

During the fiscal year ended March 31, 2012, revenues from our India Online and US Publishing segments decreased by 9% and 5%, respectively, compared to the previous fiscal year. Our India online revenues were affected by several factors, including a decline in online advertising revenue due to weakness in the banking, financial services and insurance segment, a decline in mobile business due to the imposition by the TRAI in September 2011 or a “DO NOT DISTURB” policy pursuant to which mobile phone users can opt out of receiving commercial SMS messages and fluctuation of the value of the rupee versus the US dollar. Our revenues were also affected by general weaknesses in the U.S. and Indian economies.

During fiscal year 2012, our core business, online advertising, faced some specific challenges in some segments. The banking, financial services and insurance sector, which usually accounts for a third of online display ad spend in India, is still facing difficult times and this is reflected in lower ad spends by them. We noticed a trend for advertisers in the fast-moving consumer goods, auto and consumer electronics segments to reallocate portions of their ad spends from TV and Print to online but, as yet, this trend has not gained enough traction to make up for the decrease we experienced in revenues from the banking, financial services and insurance segments.

There has been considerable excitement regarding prospects for the consumer online shopping segment in India. To capitalize on anticipated market growth, we added new merchants to our marketplace (from 230 to 400) and extended our available product range to over 100,000 products. We further improved our search and browse quality and added voice-based call-center support. We have started to see improvement in key metrics, such as add-to-cart to order-placement ratios, and average value per order.

We believe that the growth of our revenues and profits from our India Online business is dependent on the growth of the Indian Internet market and mobile phone user base, the evolution of adequate online payment mechanisms, a consequent increase in advertising and fee-based revenues and our ability to capture a sizeable share of any increases in revenues from such developments. We continue to make strategic investments to improve our technology platform and website functionality and launch new Internet and mobile-based services, and we remain focused on growing our subscriber base within India and in Indian communities worldwide.

In order to grow our online user base and attract new advertisers, we expect to continue to invest in new products and product enhancements, expand the content and services on our network and procure more bandwidth and network equipment.

Actual results may differ materially from those suggested by our forward-looking statements due to certain risks or uncertainties associated with our expectations with respect to, but not limited to, the impact on our business of a continued economic slowdown or a downturn in the sectors in which our clients operate, our ability to successfully implement our strategy, acceptance of new products and services, the development of broadband Internet and 3G networks in India, our ability to successfully integrate the businesses we have acquired, demand for our online and offline service offerings, changes in the Internet

 

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marketplace, technological changes, investment income, cash flow projections and our exposure to market risks. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains, losses or impacts on net interest income could materially differ from those that have been estimated. For further discussion of forward-looking statements, see the discussion under the “Forward-Looking Statements” section of this annual report.

Operating Results

Results of our reportable business segments were as follows (amount in US$ million):

 

     2010      2011      2012  
     India
Online
Business
     US
Publishing
Business
     Total      India
Online
Business
     US
Publishing
Business
     Total      India
Online
Business
     US
Publishing
Business
     Total  

Revenues from external customers:

                          

Advertising

     10.6         3.8         14.4         13.8         3.6         17.4         12.5         3.4         15.9   

Fee based services

     4.1         0.3         4.4         4.1         0.3         4.4         3.7         0.3         4.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     14.7         4.1         18.8         17.9         3.9         21.8         16.2         3.7         19.9   

Cost of revenues

     7.6         2.5         10.1         8.3         2.5         10.8         8.2         2.5         10.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Segment Results

     7.1         1.6         8.7         9.6         1.4         11.0         8.0         1.2         9.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The comparative analysis presented below relates to our operations.

Fiscal Year Ended March 31, 2012 compared to Fiscal Year Ended March 31, 2011

Revenues

Total revenues for the fiscal year ended March 31, 2012 decreased by 9% to US$19.9 million from US$21.8 million for the fiscal year ended March 31, 2011.

India Online business

We recognized US$16.2 million in revenues from our India Online business for the fiscal year ended March 31, 2012, as compared to US$17.9 million for the fiscal year ended March 31, 2011, representing a decrease of US$1.7 million, or 9%, over the previous fiscal year. This decrease resulted from a decline in India Online advertising revenue due mostly to weakness in the BFSI Sector and a decline in our mobile business, which was negatively affected by the TRAI’s “DO NOT DISTURB” policy.

In addition, our reported revenues (but not our actual revenues) in fiscal year 2012 were adversely affected by changes in exchange rates. During the fiscal year ended March 31, 2012, the Indian rupee depreciated against the US dollar by approximately 6%. Had the exchange rate between Indian rupees and US dollars remained constant, our India Online revenues in constant currency terms for fiscal 2012 would have been US$17.1 million, rather than our reported revenues of US$16.2 million, or a decrease of 4% rather than our reported decline of 9%.

 

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U.S. Publishing business

We recognized US$3.7 million in revenues for the U.S. Publishing business for the fiscal year ended March 31, 2012, as compared to US$3.9 million for the fiscal year ended March 31, 2011, representing a decrease of US$0.2 million, or 5%, over the previous fiscal year. The decrease in revenues was primarily due to a decrease in print revenues from our weekly newspapers “India Abroad” and “India in New York”.

Cost of revenues

In the fiscal year ended March 31, 2012, cost of revenues was US$10.8 million, or 54% of total revenues, compared to US $10.8 million, or 50% of total revenues in the previous fiscal year.

India Online business

Cost of revenues for the India online business includes Internet communication, data storage and software usage costs, the cost of content for the Rediff websites, the cost of editorial functions (including payroll costs and travel costs of staff in the editorial department), stock-based compensation costs, the direct costs of providing fee-based services such as courier charges, content cost for mobile value-added services and the cost of domain registrations.

In the fiscal year ended March 31, 2012, cost of revenues for the India Online business was US $8.2 million (51% of revenue) as compared to US $8.3 million (46% of revenue) for the fiscal year ended March 31, 2011. This represents a decrease of US $0.1 million, or 1% over the previous fiscal year, although cost of revenues increased as a percentage of revenues due to the decline in revenues.

We anticipate that our cost of revenues in absolute dollar terms for our India Online business will increase during the fiscal year ended March 31, 2013, as compared to the fiscal year ended March 31, 2012, as we expect to incur additional costs to continue to grow our business.

U.S. Publishing business

Cost of revenues for the U.S. Publishing business includes printing and circulation costs (including payroll costs) for the “India Abroad” and “India in New York” newspapers.

In the fiscal years ended March 31, 2012 and 2011 cost of revenues for the U.S. Publishing business remained steady at US$2.5 million (68% of revenue for fiscal year ended March 31, 2012 as compared to 65% of revenue for the fiscal year ended March 31, 2011), although cost of revenues increased as a percentage of revenues due to the decline in revenues.

Segment results

Analysis of the results presented below is based on the segment results as assessed by the Company’s chief operating decision maker and has been determined as revenues less cost of revenues before operating expenses.

India Online business

As a result of the decrease in the revenues described in the preceding paragraphs, segment profit of the India Online business decreased by 17% to US$8.0 million for the fiscal year ended March 31, 2012, as compared to US$9.6 million for the fiscal year ended March 31, 2011.

 

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U.S. Publishing business

As a result of the decrease in the revenues described in the preceding paragraph, segment profit of the U.S. publishing business decreased by 14% to US$1.2 million for the fiscal year ended March 31, 2012, as compared to US$1.4 million for the fiscal year ended March 31, 2011, mainly on account of the reduction in revenues.

Sales and marketing expenses

Sales and marketing expenses primarily include employee compensation for sales and marketing personnel, stock-based compensation cost, advertising and promotion expenses, and market research costs. For the fiscal year ended March 31, 2012, sales and marketing expenses were US$5.3 million, compared to US$5.4 million for the fiscal year ended March 31, 2011, representing a decrease of US $0.1 million, or 2%, over the previous fiscal year. This decrease was mainly attributable to lower marketing spend.

We expect our sales and marketing expenses in absolute dollar terms will increase for the fiscal year ended March 31, 2013, as compared to the fiscal year ended March 31, 2012, as we launch more products and services, expand the range of offerings on our websites and invest further in brand building, advertising and personnel. All of these investments are being made to position the Company for expected growth, in terms of revenues and subscribers in the coming years given the increased investments by the Government of India and many global corporations in India’s telecommunications infrastructure.

Product development expenses

Product development expenses primarily include software development expenses and compensation for product development personnel including stock-based compensation costs. Third-party technology and development expense, and other related operating costs are also included in product development. For the fiscal year ended March 31, 2012, product development expenses were US$3.1 million, compared to US$3.8 million for the fiscal year ended March 31, 2011, representing a decrease of US $0.7 million, or 18%, over the previous fiscal year. This decreased was mainly on account of reduced spending on the product development. We have optimized our in house development team who has been working on multiple projects/products. The cost of which is constantly being benchmarked against third party development expenses.

We expect to continue to invest in product development to maintain our position as a leading Internet destination for the global Indian community. Therefore, we expect our product development expenses in absolute dollar terms to increase in the future.

Depreciation and amortization expenses

For the fiscal year ended March 31, 2012, depreciation and amortization expense was US$3.5 million compared to US$3.8 million for the fiscal year ended March 31, 2011, representing a decrease of US$0.3 million, or 8%. This decline was primarily due to a lower base of depreciable assets. The lower base was primarily due to the continuing depreciation of existing assets.

General and administrative expenses

General and administrative costs primarily consist of compensation for administrative personnel, fees for legal and professional services, allowances for doubtful accounts, insurance premium, stock-based compensation cost and sundry administrative costs. For the fiscal year ended March 31, 2012, general and administrative expenses were US$7.9 million, compared to US$6.6 million for the fiscal year ended March 31, 2011, representing an increase of US$1.3 million, or 20%. An increase in payroll by US$1.0 million and other administrative expenses by US$0.3 million contributed US$1.3 million increase in general and administrative expenses. Payroll increased primarily on account of hiring of employees for the Deals business.

 

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Long-lived assets impairment

During the fiscal year ended March 31, 2011, we abandoned certain projects due to changes in the technological environment and recorded an impairment charge of US$ 0.1 million. There was no such impairment charge in the current fiscal year.

Foreign exchange gain or (loss)

In the fiscal year ended March 31, 2012, we recorded a US$ 0.1 million foreign exchange loss as compared to a foreign exchange loss of US$0.02 million in the previous fiscal year, arising from the conversion of U.S. dollar amounts held by us into our functional currency for financial reporting purposes (i.e., the Indian Rupee).

Other income (expenses), net

Other income (expenses), net, primarily comprised of interest income, gain on sale of equity method investee and miscellaneous income. During the fiscal year ended March 31, 2012, net other income were US$3.4 million, as compared to net other income of US$2.9 million for the fiscal year ended March 31, 2011, representing an increase of US$0.5 million.

Interest income

Interest income for the fiscal year ended March 31, 2012 was US$2.6 million, compared to US$3.4 million for the fiscal year ended March 31, 2011, representing a decrease of US$0.8 million, or 23%. The decrease in interest income was primarily due to a utilization of bank deposits held under cash and cash equivalents.

Investment impairment

During the fiscal year ended March 31, 2011, the Company recorded an investment impairment of US$0.5 million, whereas no investment impairment was recorded in the current fiscal year ended March 31, 2012.

Gain on sale of equity method investee

During the fiscal year ended March 31, 2012, the Company sold its investment in Eterno Infotech Private Limited for a consideration of US$0.9 million and recorded a gain of US$ 0.7 million.

Equity in net earnings of affiliate

During the fiscal year ended March 31, 2012, we recorded a loss of US$0.2 million as our share of the losses of our investee companies as compared to a loss of US$0.8 million in the previous fiscal year. These losses are determined under the equity method of accounting.

Net income (loss)

As a result of the foregoing, our net loss for the fiscal year ended March 31, 2012 was US$7.7 million, as compared to a net loss of US$6.6 million for the fiscal year ended March 31, 2011, an increase in net loss from fiscal 2011 to 2012 of 14%.

 

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Fiscal Year Ended March 31, 2011 compared to Fiscal Year Ended March 31, 2010

Revenues

Total revenues for the fiscal year ended March 31, 2011 increased by 16% to US$21.8 million from US$18.8 million for the fiscal year ended March 31, 2010.

India Online business

We recognized US$17.9 million in revenues from our India Online business for the fiscal year ended March 31, 2011, as compared to US$14.7 million for the fiscal year ended March 31, 2010, representing an increase of US$3.2 million, or 22%, over the previous fiscal year. The increase in revenues was a result of new service offerings, growth in our user base, coupled with the ongoing recovery in India online advertising market.

U.S. Publishing business

We recognized US$3.9 million in revenues for the U.S. Publishing business for the fiscal year ended March 31, 2011, as compared to US$4.1 million for the fiscal year ended March 31, 2010, representing a decrease of US$0.2 million, or 7%, over the previous fiscal year.

The decrease in revenues was primarily due to a decrease of US$0.2 million or 7%, over the previous fiscal year in print revenues from our weekly newspapers “India Abroad” and “India in New York”. We believe this was a direct result of the continued slowdown in the U.S. economy as part of the global financial crisis.

Cost of revenues

In the fiscal year ended March 31, 2011, cost of revenues was US$10.8 million, or 50% of total revenues, compared to US $10.1 million or 54% of total revenues in the previous fiscal year.

India Online business

In the fiscal year ended March 31, 2011, cost of revenues for the India online business was US $8.3 million (46% of revenue) as compared to US $7.6 million (52% of revenue) for the fiscal year ended March 31, 2010. This represents an increase of US $0.7 million, or 8% over the previous fiscal year. This increase was primarily related to higher internet communication costs and payroll costs.

US Publishing business

In the fiscal years ended March 31, 2011 and 2010 cost of revenues for the U.S. Publishing business remained at US$2.5 million (65% of revenue for fiscal year ended March 31, 2011 as compared to 59% of revenue for the fiscal year ended March 31, 2010).

Segment results

Analysis of the results presented below is based on the segment results as assessed by the Company’s chief operating decision maker and has been determined as revenues less cost of revenues before operating expenses.

India Online business

As a result of the increase in revenues and the increase in cost of revenues described in the preceding paragraphs, segment profit of the India Online business increased by 37% to US$9.6 million for the fiscal year ended March 31, 2011, as compared to US$7.1 million for the fiscal year ended March 31, 2010.

 

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U.S. Publishing business

Segment profit of the U.S. publishing business decreased by 20% to US$1.4 million for the fiscal year ended March 31, 2011, as compared to US$1.6 million for the fiscal year ended March 31, 2010, mainly on account of the reduction in revenues.

Sales and marketing expenses

For the fiscal year ended March 31, 2011, sales and marketing expenses were US$5.4 million, compared to US$7.1 million for the fiscal year ended March 31, 2010, representing a decrease of US $1.7 million, or 25%, over the previous fiscal year. This decrease is mainly attributable to lower marketing spending.

Product development expenses

For the fiscal year ended March 31, 2011, product development expenses were US$3.8 million, compared to US$2.7 million for the fiscal year ended March 31, 2010, representing a decrease of US $1.1 million, or 44%, over the previous fiscal year. The increase is mainly on account of higher payroll costs and other product development expenses in line with our new product and service initiatives.

Depreciation and amortization expenses

For the fiscal year ended March 31, 2011, depreciation and amortization expense was US$3.8 million compared to US$5.0 million for the fiscal year ended March 31, 2010, representing a decrease of US$1.2 million, or 24%. This decline is primarily due to a lower base of depreciable assets.

General and administrative expenses

For the fiscal year ended March 31, 2011, general and administrative expenses were US$6.6 million, compared to US$5.5 million for the fiscal year ended March 31, 2010, representing a increase of US$1.1 million, or 19%. The increase was primarily attributed to reversal of allowance for doubtful accounts in fiscal 2010 on account of collection of debts and increases in office establishment expenses and other administrative expenses.

Long-lived assets impairment

In the fiscal year ended March 31, 2011 and 2010, we abandoned certain projects due to changes in the technological environment and recorded an impairment charge of US$0.1 million in each of those years.

Foreign exchange gain (loss)

In the fiscal year ended March 31, 2011, we recorded insignificant foreign exchange loss as compared to a foreign exchange gain of US$0.2 million in the previous fiscal year, arising from the conversion of U.S. dollar amounts held by us into our functional currency for financial reporting purposes (i.e., the Indian Rupee).

Other income (expenses), net

During the fiscal year ended March 31, 2011, net other income were U.S. $2.9 million, as compared to net other income of US$4.0 million for the fiscal year ended March 31, 2010, representing a decrease of US$1.1 million.

 

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Interest income

Interest income for the fiscal year ended March 31, 2011 was US$3.4 million, compared to US$4.0 million for the fiscal year ended March 31, 2010, representing a decrease of US$0.6 million, or 16%. The decrease in interest income was primarily due to a reduction in cash and cash equivalents.

Investment impairment

During the fiscal year ended March 31, 2011, the Company impaired an investment of US$0.5 million after concluding that such investment was other than temporarily impaired as compared to US$0.1 million for the fiscal year ended March 31, 2010.

Equity in net earnings of affiliate

During the fiscal year ended March 31, 2011, we recorded a loss of US$0.8 million as our share of loss of investee companies as compared to a loss of US$0.4 million in the previous fiscal year under the equity method of accounting.

Net income (loss)

As a result of the foregoing, our net loss for the fiscal year ended March 31, 2011 was US$6.6 million, as compared to a net loss of US$8.0 million for the fiscal year ended March 31, 2010.

Liquidity and Capital Expenditures

Our primary liquidity needs have been to finance our losses from operations, acquisitions and capital expenditures. These have been funded primarily from the private sales of equity securities, sale of ADSs and from cash received from our operations.

As of March 31, 2012, we had cash and cash equivalents of US$24.5 million as compared to US$36.9 million as at March 31, 2011.

For the fiscal years ended March 31, 2010, 2011 and 2012, we incurred net losses of US$8.0 million, US$6.6 million and US$7.7 million respectively.

As of March 31, 2012, our accounts receivable balance was US$6.1 million compared to US$7.2 million as of March 31, 2011, net of allowances of US$3.2 million and US$4.0 million as of March 31, 2012 and 2011, respectively. There was a decrease of US$1.1 million primarily due to the decrease in revenues over the same period coupled with collections from old debtors.

 

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Cash Flows

 

     For the Fiscal Year Ended March 31,  
     2010     2011     2012  
     US$     US$     US$  

Net cash (used in ) generated from operating activities

     982,659        495,637        (5,203,546

Net cash used in investing activities

     (3,883,854     (7,278,620     (4,423,623

Net cash provided by (used in) financing activities

     (3,106,447     (1,320,158     1,364,677   

Net decrease in cash and cash equivalents

     (6,007,642     (8,103,141     (8,262,492

Effect of exchange rate changes on cash

     5,176,783        334,952        (4,113,794

Fiscal Year Ended March 31, 2012

Net cash used in operations was US$ 5.2 million, after adjusting our net loss of US$ 7.7 million to account for non-cash items and changes in working capital. Non-cash items, comprising the sale of equity investments, depreciation, amortization, allowances for doubtful debts and stock-based compensation costs, totaled US$3.9 million. Our working capital increased by US$ 1.4 million.

Net cash used in investing activities was US$4.4 million, consisting of purchases of servers and other capital equipment aggregating to US$5.4 million in connection with the expansion of our network and data storage facility, partially offset by the sale of an equity investment that generated cash of US$0.9 million.

Net cash provided by financing activities was US$1.4 million, which represented the cash proceeds from the issue of shares during the year due to the exercise of stock options by our employees.

As of March 31, 2012, we had cash and cash equivalents of US$24.5 million.

Fiscal Year Ended March 31, 2011

We generated net cash from operations of US$0.5 million, after our net loss of US$6.6 million to account for non-cash items and changes in working capital. Non-cash items, comprising impairments, depreciation, amortization, allowances for doubtful debts and stock-based compensation costs, totaled US$5.6 million. Our working capital decreased by US$1.5 million.

Net cash used in investing activities was US$7.3 million, consisting of purchases of servers and other capital equipment aggregating to US$4.0 million in connection with the expansion of our network and data storage facility, the purchase of promissory notes of US$0.3 million, the acquisition of all of the equity interests of Vubites India Private Limited for US$ 0.3 million and the repayment of an assumed principal shareholder’s loan aggregating to US$ 2.7 million.

Net cash used in financing activities was US$1.3 million. We repurchased a total amount of US$1.3 million of our own Equity Shares through our ESOP trust, which was formed during the fiscal year 2010.

As of March 31, 2011, we had cash and cash equivalents of US$36.9 million.

 

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Fiscal Year Ended March 31, 2010

We generated net cash from operations of US$1.0 million, after adjusting our net loss of US$8.0 million to account for non-cash items and changes in working capital. Non-cash items, comprising goodwill and other impairments, depreciation, amortization, allowances for doubtful debts and stock-based compensation costs, totaled US$6.3 million. Our working capital decreased by US$2.7 million.

Net cash used in investing activities was US$3.9 million, consisting of purchases of servers and other capital equipment aggregating to US$1.8 million in connection with the expansion of our network and data storage facility, investments amounting to US$0.4 million in technology companies and the purchase of promissory notes of US$1.7 million.

During the fiscal year ended March 31, 2010, we formed an ESOP trust. and this trust repurchased US$3.1 million of our own Equity Shares.

As of March 31, 2010, we had cash and cash equivalents of US$44.7 million.

Contractual Obligations

Our contractual obligations relate to operating leases and capital commitments, payments for which are to be made as per the table below:

 

Year ended March 31,    Operating leases      Capital
commitments
 
   US$      US$  

2013

     362,418         1,002,591   

2014

     211,450         —     

2015

     217,794         —     

2016

2017

    

 

224,328

231,058

  

  

    

 

—  

—  

  

  

and there after

     278,742         —     
  

 

 

    

 

 

 

Total

     1,525,790         1,002,591   
  

 

 

    

 

 

 

Capital Expenditures

Our principal capital expenditures are for purchases of computer equipment, such as servers for our websites. In the fiscal years ended 2012, 2011 and 2010, we had capital expenditures of US$5.4 million, US$4.0 million and US$1.8 million, respectively.

Internal and external costs incurred to develop internal use software during an application development stage is capitalized when the Company’s managing director has authorized and committed to funding the development, and it is probable that the software development will be complete and the software will perform the function intended. Upgrades and enhancements are capitalized only when these relate to additional features or result in additional functionality that the existing software is incapable of performing. All costs incurred during the preliminary project, post- implementation and operation stages are expensed as incurred.

Dividends

We have not declared or paid any cash dividends on our equity shares since our inception and we do not expect to pay any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. For additional information, please see the sections of this annual report entitled “Risk Factors — Risks Related to our Business” and “Taxation”.

 

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We believe our cash balances and liquid assets and cash generated from future operations will be adequate to satisfy anticipated working capital requirements, capital expenditures and investment commitments for the next twelve months. As business and market conditions permit, we may from time to time, invest in or acquire complementary businesses, products or technologies. These activities may require us to seek additional equity or debt financing to fund such activities, which could result in ownership dilution to existing shareholders, including holders of our ADSs. We believe that our working capital is sufficient for our present requirements.

Income Tax Matters

The reconciliation of estimated income tax expense at Indian statutory income tax rate to income tax expense reported in our statement of operations is as follows:

 

     2010     2011     2012  
     US$     US$     US$  

Loss before income taxes and equity in net earnings of affiliates

     (7,575,383     (5,769,028     (7,395,955

Indian statutory income tax rate

     33.99     33.218     32.445

Expected income tax expense (benefit)

     (2,574,873     (1,916,356     (2,399,618

Tax effect of:-

      

Adjustments to reconcile expected income tax expense to reported income tax expense:

      

Employee stock-based compensation

     283,210        185,741        298,428   

Change in valuation allowance

     2,568,076        1,805,725        2,337,757   

Tax in foreign jurisdictions

     (149,127     (26,208     (52,715

Loss of equity method investees

     (143,811     (260,996     (69,995

Others

     46,525        229,373        (48,302
  

 

 

   

 

 

   

 

 

 

Income tax expense

     30,000        17,279        65,555   
  

 

 

   

 

 

   

 

 

 

Our net operating loss carry forwards aggregating approximately US$ 1,981,976 as of March 31, 2012 will expire between April 1, 2013 and March 31, 2019.

As of March 31, 2012, our U.S. subsidiary ValuCom had net operating loss carry forwards available to offset future federal taxable income of US$ 3,021,000, which expire in years 2021 through 2031.

As of March 31, 2012, our U.S. subsidiary Rediff Holdings had net operating loss carry forwards available to offset future federal taxable income of approximately US$ 5,175,000, which expire in years 2020 through 2031.

Unabsorbed depreciation of US$ 12,378,421 can be indefinitely carried forward.

Market Risks

Foreign Currency Exchange Rate Risk

The functional currency for our Indian operations is the Indian Rupee. We are exposed to foreign currency exchange rate fluctuations, principally the fluctuations of the U.S. dollar to Indian Rupee exchange rate. We face foreign currency exchange risk with respect to funds held in foreign currencies and in particular will have foreign exchange losses with respect to these funds if there is an appreciation in the value of the Indian Rupee compared to such foreign currency. We also face foreign currency exchange risk from accounts payable to overseas vendors, which we partially mitigate with receivables in foreign currency from overseas customers and balances in foreign currency with overseas banks.

 

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The following table sets forth information about our net foreign currency exchange (U.S. dollars) exposure as of March 31, 2012:

 

     As of March 31,  2012
(in US$ thousands)
 

Accounts payable in U.S. dollars

     (994

Accounts receivable in U.S. dollars, net of allowance

     1,061   

Cash balances held in U.S. dollars

     9   

Net foreign currency exchange exposure

     76   

We do not currently try to reduce our exposure to foreign currency exchange rate fluctuations by using hedging transactions. However, we may choose to do so in the future. We may not be able to do this successfully. Accordingly, we may experience economic losses and negative impacts on earnings and equity as a result of foreign currency exchange rate fluctuations. If the Indian Rupee appreciates against the U.S. dollar by one Rupee, the net foreign currency exchange loss as of March 31, 2012 would be approximately US$1,600.

Interest Rate Risk

We hold interest-bearing accounts in India as well as outside India and fluctuations in interest rates affected our interest earnings for the fiscal year ended March 31, 2012. These interest rates are linked to the interest rates prevailing in India and the United States. We expect that our interest earnings will continue to be affected in the future by fluctuations in interest rates. A hypothetical 1% increase or decrease in the prevailing interest rates applicable to cash deposits during such period would have affected our interest income by approximately US$225,000.

Off-balance Sheet Arrangements

As of the date of this annual report, we are not a party to any off-balance sheet obligations or arrangements.

New Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04 and revised the accounting and disclosure requirements in ASC 820, Fair Value Measurements and Disclosures. The revision limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We are evaluating impact of this change on its financial statements.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amends the guidance in ASC 350-20. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We are evaluating impact of this change on its financial statements.

 

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On December 23, 2011, the FASB issued ASU 2011-12, which defers certain provisions of ASU 2011-05. One of ASU 2011-05’s provisions required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). Accordingly, this requirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date. The new ASU is in response to constituents’ concerns about whether the requirements under ASU 2011-05 for the presentation of reclassification adjustments were operational.

The FASB also decided that during the deferral period, entities would be required to comply with all existing requirements for reclassification adjustments in ASC 220, which indicates that “an entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is reported, or it may disclose reclassification adjustments in the notes to the financial statements.”

The effective date of ASU 2011-12 is the same as that for the unaffected provisions of ASU 2011-05 (i.e., those related to the requirement to report the components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements). Accordingly, for public entities, the effective date is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011.

 

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MANAGEMENT

The following table sets forth, as of June 30, 2012, the name, age and position of each of our directors and executive officers.

 

Name    Age    Position

Ajit Balakrishnan(1)(2)

   64    Chairman and Managing Director

Swasti Bhowmick

   46    Chief Financial Officer

Diwan Arun Nanda(1)(2)

   68    Director

Sunil N. Phatarphekar(1)(2)(3)

   48    Director

Ashok Narasimhan(1)

   64    Director

Sridar Iyengar(1)(3)

   65    Director

Rashesh C. Shah(1) (3)

   48    Director

M. Madhavan Nambiar(1) (3)

   62    Additional Director

 

(1) Member of the Board of Directors
(2) Member of the Compensation Committee
(3) Member of the Audit Committee

Ajit Balakrishnan is the founder, Chairman and Managing Director of the Company. He is a director of Rediffusion Holdings Private Limited, Rediffusion Dentsu Young & Rubicam Private Limited, Quintrol Technologies Private Limited, Rediff Holdings Inc USA, India Abroad Publications, Inc., India In New York, Inc., India Abroad Publications (Canada) Inc., Rediff.com Inc USA and Value Communications Corporation. Mr. Balakrishnan is also Chairman of the Board of Governors of The Indian Institute of Management Calcutta and Chairman of the Working Group of Internet Governance set up by the Government of India. Mr. Balakrishnan holds a Bachelor’s Degree in Physics from Kerala University and a Post Graduate Diploma in Management from the Indian Institute of Management, Calcutta. At our annual general meeting held on September 24, 2008, our shareholders re-appointed Mr. Balakrishnan for a five-year term as Managing Director with effect from August 23, 2008.

Swasti Bhowmick joined us in February 2012 as our Chief Financial Officer. He joined us from Tata TeleServices Ltd., where he helped create the Finance Transformation Roadmap. He has over 20 years of experience in Sales Accounting, Cost Management, MIS, Budgeting, Credit Control and Operations Finance in IT/Telecom, including managing startups and established FMCG brands. Swasti is a member of The Institute of Chartered Accountants of India and a member of The Institute of Cost Accountants of India. He also holds an Executive MBA from the Indian Institute of Management, Calcutta.

Diwan Arun Nanda has been a director of the Company since its incorporation in 1996. Mr. Nanda is also a director of Rediffusion Holdings Private Limited, Arion Horse Company Private Limited, Rediffusion Dentsu, Young & Rubicam Private Ltd., Wunderman India Private Limited, Rediffusion Dentsu, Young & Rubicam Pvt. Ltd. Sri Lanka, Everest Brand Solutions Pvt. Ltd., Clariant Chemicals (India) Limited, Eveready Industries (India) Ltd. and Oriental Hotels Ltd. Mr. Nanda holds a Bachelor’s Degree in Commerce from Loyola College, Chennai University, and a Post Graduate Diploma in Management from the Indian Institute of Management, Ahmedabad.

Sunil N. Phatarphekar is an Attorney and has been a director of the Company since 1998. Mr. Phatarphekar is also a director of several other Indian companies. Mr. Phatarphekar is proprietor of SNP Legal (Advocates), a Mumbai law firm. Prior to that, he was a partner of Doijode, Phatarphekar & Associates. After obtaining his Bachelor’s Degree in Commerce from Jai Hind College, Bombay University, and a Bachelor’s Degree in Law from Government Law College, Bombay University, he joined Crawford Bayley & Company. Thereafter, he was a partner at two Mumbai law firms, Mahimtura & Co. and Shah Desai Doijode & Phatarphekar.

 

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Ashok Narasimhan has been a director of the Company since 2002. He is currently Chairman and CEO of Runa Inc. He is a limited partner and advisor for a number of U.S. and Indian venture capital funds. He is also a director on the board of Tarang Software Technologies Pvt. Limited, Genie Technologies India Pvt. Limited, Atma Investments and Resources Pvt. Limited. Earlier, he was Chairman and Co-Founder of July Systems Inc and prior to that, he was founder of Prio, Inc., where he served as Chairman and CEO from early 1996 until its merger with InfoSpace. He subsequently served on the Board of InfoSpace. Prior to that, he served as Head of Worldwide Marketing and Business Development of VeriFone, a leader in automated electronic payment transactions. Earlier, he was the founding President of Wipro’s IT organizations. He holds a Bachelor’s Degree in Physics from Madras University and a Post-Graduate Diploma in Management from the Indian Institute of Management, Calcutta.

Sridar A. Iyengar has been a director of the Company since September 2004. He heads the India Advisory Group for Bessemer Venture Partners and serves on the Board of Infosys Technologies Limited, a NASDAQ-listed company, ICICI Bank Ltd, a NYSE-listed company, and other companies in India and the United States. He also advises many early-stage companies in the United States and India. He is a member of the boards of the American India Foundation Inc. From 1968 until his retirement in March 2002, he was employed by KPMG, retiring as the Partner-in-Charge of KPMG’s Emerging Business Practice. He worked as a partner in all three of KPMG’s regions - Europe, America and Asia Pacific - as well as in all four of KPMG’s functional disciplines - assurance, tax, consulting and financial advisory services. He was Chairman and CEO of KPMG’s India operations between 1997 and 2000 and during that period was a member of the Executive Board of KPMG’s Asia Pacific practice. Prior to that, he headed up the International Services practice on the west coast of the United States. On his return from India in 2000 he was asked to lead a major effort of KPMG’s focused on delivering audit and advisory services to early stage companies. He also served as a member of the Audit Strategy group of KPMG LLP. He is a Fellow of the Institute of Chartered Accountants in England and Wales, and holds a Bachelor’s Degree in Commerce (Honors) from the University of Calcutta.

Rashesh Shah is co-founder of Edelweiss Group, has over 20 years of diverse experience in the financial services industry in India and has been instrumental in building Edelweiss into one of India’s leading diversified financial service companies. Prior to founding Edelweiss, he worked with ICICI Limited. Rashesh has served on the boards of various companies and public institutions. He has in the past served on the Executive Committee of the National Stock Exchange and has recently been appointed as Chairman of the Maharashtra Council of FICCI. He also chairs the National Council on Capital Markets formed by ASSOCHAM. He has been nominated to the Executive Committee of a US – India investors’ forum. His academic qualifications include an MBA from the Indian Institute of Management, Ahmedabad and a Diploma in International Trade from the Indian Institute of Foreign Trade, New Delhi.

M. Madhavan Nambiar has been an Additional Director on the Board since January 2012. Mr. Nambiar has spent over 36 years in the Indian Administrative Service with many years focused on Information Technology. Mr. Nambiar most recently served as Secretary to the Government of India, first in the Ministry of Information Technology and then in the Ministry of Civil Aviation. Mr. Nambiar is a Fellow at the Judge Business School, University of Cambridge. He holds a Bachelor of Arts Degree from Loyola College, Madras University and a Master of Business Administration Degree from the Faculty of Management Studies, Delhi University.

Board Composition

On March 16, 2000, we amended our Articles of Association to set the minimum number of directors at three and the maximum number of directors at seven. We currently have seven directors. Our Articles of Association provide as follows:

 

 

Ajit Balakrishnan, Diwan Arun Nanda and Rediffusion Holdings Private Limited (earlier called Rediffusion Advertising Private Limited), are entitled to appoint and have appointed Mr. Balakrishnan as Director on the Board and Chairman of Rediff.com India Ltd. so long as they hold, singly or jointly, not less than 10.0% of the issued, subscribed and paid up capital of Rediff.com India Ltd. Mr. Balakrishnan serves an indefinite term and is not required to retire by rotation.

 

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The remaining directors on the Board of Directors are non-permanent directors who are appointed by shareholders and retire by rotation. Sridar Iyengar and Ashok Narasimhan retired by rotation and were re-elected by the shareholders at our last annual general meeting held on September 16, 2011. Rashes Shah and Diwan Arun Nanda will retire by rotation at our next Annual General Meeting of shareholders, which is scheduled to be held on or before September 30, 2012. M.Madhavan Nambiar who has been appointed as Additional Director will be holding office till our next Annual General Meeting of Shareholders and shall be appointed as Director thereat.

As of the date of this annual report, our Board has determined that the following members qualify as independent directors: Sunil N. Phatarphekar; Sridar A. Iyengar; Rashesh C. Shah and M. Madhavan Nambiar.

No directors have service contracts with us providing for benefits upon termination of their service as a director.

Code of Ethics

Effective February 15, 2004, we adopted a code of ethics for all of our employees and for all of our directors and senior officers in accordance with the provisions of the Sarbanes-Oxley Act of 2002. On July 19, 2005, we adopted amendments to the code of ethics for our officers. On August 19, 2005, we adopted amendments to the code of ethics for our directors.

We will provide a copy of the codes of ethics for our directors, officers and employees to any person without charge, upon a written request sent to our principal executive office.

Audit Committee

The Audit Committee of the Board of Directors reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the recommendation of our independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, the performance of our independent auditors and our accounting practices.

As of the date of this annual report, our Audit Committee is comprised of the following members, all of whom are independent directors, as determined by the NASDAQ listing standards applicable to us: Sridar A. Iyengar; Sunil N. Phatarphekar; Rashesh C. Shah and M. Madhavan Nambiar .

Audit Committee Financial Expert

Mr. Sridar A. Iyengar has been designated the independent audit committee financial expert as defined under the applicable rules of the SEC issued pursuant to Section 407 of the Sarbanes Oxley Act of 2002. Prior to his appointment as a member of our Board of Directors, Mr. Iyengar was a partner at KPMG, retiring in March 2002 as Partner-in-Charge of KPMG’s Emerging Business Practice.

Compensation Committee

The Compensation Committee of the Board of Directors administers our stock option plans. The members of the Compensation Committee are Ajit Balakrishnan, Diwan Arun Nanda and Sunil N. Phatarphekar.

 

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NASDAQ Corporate Governance Requirements

In general, corporate governance principles for Indian companies whose shares are not traded on any Indian stock exchange are set forth in India’s Companies Act. Corporate governance principles under provisions of Indian law may differ in significant ways from corporate governance standards for U.S. NASDAQ-listed companies. Under NASDAQ Marketplace Rule 5615(a)(3), foreign private issuers such as ourselves are permitted to follow certain home country corporate governance practices in lieu of certain of the requirements of the NASDAQ Market Place Rules (the “Rules”). Under the Rules, foreign private issuers must disclose any alternative home country practices that they follow.

The following are the requirements of the Rules we do not follow and the home country practices we follow in lieu of these Rule requirements. Our independent Indian counsel has submitted to the NASDAQ a letter, dated June 27, 2005, certifying that our corporate governance practices as described below are not prohibited by and are consistent with Indian law.

 

  (i) Rule 5250(d)(2) and Rule 5250 (d)(3)—Distribution of quarterly and interim reports

In lieu of the requirements of Rule 5250(d)(2) and Rule 5250(d)(3), we follow Indian law, under which companies whose shares are not traded on any Indian stock exchange are not required to prepare and/or distribute quarterly and interim reports to shareholders. However, we have in the past regularly released copies of press releases and conference call transcripts relating to our quarterly results of operations by posting them on our website. Further, we furnish press releases relating to our quarterly results of operations with the SEC on Form 6-K and we currently intend to continue to do so.

 

  (ii) Rule 5605(b)(1)—Independent Directors

In lieu of the requirements of Rule 5605(b)(1), we follow the Companies Act, which does not require that a majority of the Board of Directors of Indian companies be comprised of independent directors. Nevertheless, as of the date of this annual report, our Board has determined that four out of its seven members are independent.

 

  (iii) Rule5605(b)(2)—Executive sessions of Independent Directors

In lieu of the requirements of Rule 5605(b)(2), we follow the Companies Act, which does not require independent directors to hold regularly scheduled meetings at which only such independent directors are present (i.e., executive sessions). Under the Companies Act, our Board of Directors as a whole is responsible for monitoring our business, although it is permitted to delegate specific responsibilities to designated directors or to non-director executive officers.

 

  (iv) Rule 5605(d)—Compensation of Officers

In lieu of the requirements of Rule 5605(d), we follow Indian law, which requires companies to form a Compensation Committee in case of remuneration payable to specified managerial personnel by companies having no profits or inadequate profits. In such a case, a “Remuneration Committee” is required to be constituted for approving the payment of remuneration to certain specified “managerial personnel” as defined in the Companies Act. Such Remuneration Committee, if constituted for this purpose, should consist of at least three non-executive independent directors including nominee directors, if any. For purposes of the Companies Act “managerial personnel” include the company’s managing director, whole time director and manager, each as defined under the Companies Act.

We do not pay and currently do not intend to pay any remuneration to any of our managerial personnel as defined in the Companies Act. As such, we are not required to constitute a Remuneration Committee under the Companies Act. However our Board of Directors has formed a compensation committee, which currently comprises of three directors including one independent director, for the sole purpose of administering our stock option plans and other compensation plans as may be approved by our shareholders from time to time.

 

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Four of our directors, Mr. Ajit Balakrishnan, Mr. Sridar Iyengar, Mr. Sunil Phatarphekar and M . Madhavan Nambiar, receive remuneration from our wholly-owned US subsidiary Rediff Holdings, Inc., in their capacity as directors of that subsidiary. There is no restriction under Indian law on paying remuneration to directors of an Indian company having no profits or inadequate profits who are, at the same time, also directors of a non-Indian subsidiary.

 

  (v) Rule 5605(e)—Nomination of Directors

In lieu of the requirements of Rule 5605(e), we follow the requirements of the Companies Act pursuant to which directors are required to be appointed by shareholders at their general meeting. In addition, under the Companies Act, our board can make appointments, subject to any regulations in a company’s articles of association, to fill any casual vacancies caused if the office of a director is vacated before his term of office has expired. Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office. Our board also has the power to appoint additional directors who shall hold office only up to the date of our next annual general meeting of the company. The Companies Act also allows our board to appoint an alternate director to act for a director during his absence for a period of not less than three months from the state in which the board meetings are ordinarily held. Finally, our Articles of Association states that Ajit Balakrishnan, Diwan Arun Nanda and Rediffusion Holdings Private Limited (earlier called Rediffusion Advertising Private Limited), are entitled to appoint and have appointed Mr. Balakrishnan as Director on the Board and Chairman of Rediff.com India Ltd. so long as they hold, singly or jointly, not less than 10.0% of the issued, subscribed and paid up capital of Rediff.com India Ltd. Mr. Balakrishnan serves an indefinite term and is not required to retire by rotation.

 

  (vi) Rule 5620(c) – Quorum

In lieu of the requirements of Rule 5620(c), we follow the Companies Act, under which a quorum for purposes of a meeting of the holders of our common stock is considered present as long as five of our members are present in person.

 

  (vii) Rule 5620(b)—Solicitation of Proxies

As a foreign private issuer, we are not subject to Regulations 14A and 14C under the Securities and Exchange Act of 1934, as amended. As such, in lieu of the requirements of Rule 5620(b), we follow the requirements of the Companies Act. Section 176 of the Companies Act prohibits a company incorporated thereunder, such as us, from soliciting proxies. Because we are prohibited from soliciting proxies under Indian law, we will not meet the proxy solicitation requirement of Rule 5620(b). However, in accordance with Indian law, we give written notices of all our shareholder meetings (containing a statement that a shareholder is entitled to appoint a proxy, or, where that is allowed, one or more proxies, to attend and vote instead of himself, and that a proxy need not be a member) to all our shareholders and we also furnish such notices with the SEC under Form 6-K.

Other than as noted above, we intend to comply with all other applicable NASDAQ corporate governance standards.

 

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Employees

As of March 31, 2012, we had 418 employees and full-time consultants. Of such employees, 120 are in our shopping, sales and marketing teams, 100 are creative and editorial, 108 are dedicated to technology and product development, 7 are dedicated to production and circulation and 83 are administrative and deals. We believe that our relationship with our employees is good. The table sets forth the distribution of our employees by main category of activity:

 

      As at March 31,  

Department

   2010      2011      2012  

Technology and Product Development

     106         119         108   

Sales and Marketing

     88         79         120   

Editorial

     67         80         81   

General & Administration

     32         33         83   

Creative

     16         17         19   

Production & Circulation

     7         7         7   
  

 

 

    

 

 

    

 

 

 

Total

     316         335         418   
  

 

 

    

 

 

    

 

 

 

Compensation

Our Articles of Association provide that each of our directors may receive an attendance fee for every Board and Committee meeting, provided that no director shall be entitled to an attendance fee in excess of LOGO 2,000 per meeting. In fiscal year 2012, we did not pay any attendance fees to our directors. Mr. Ajit Balakrishnan, who is our Managing Director, does not receive any additional compensation for his service on our Board of Directors. Directors of our US subsidiaries receive compensation for their service on the boards of these subsidiaries.

The following table sets forth details regarding compensation paid to executive officers and directors of the Company during the fiscal year ended March 31, 2012;

 

Name    Salary and other compensation (US$)  

Ajit Balakrishnan

     200,000 (1) 

Jayesh Sanghrajka

     111,005 (2) 

Swasti Bhowmick

     24,364 (3) 

Sridar A. Iyengar

     25,000 (1) 

Sunil Phatarphekar

     20,000 (1) 

M. Madhavan Nambiar

     4,000 (1) 

 

(1) Each of Mr. Balakrishnan, Mr. Iyengar Mr. Phatarphekar and Mr Nambiar receive a salary and/or other compensation from Rediff Holdings, Inc., our wholly-owned U.S.-incorporated subsidiary, in their capacity as directors of Rediff Holdings, Inc. None of them receive any salary from Rediff.com India Limited. During the year Sridar Iyengar was granted 9000 options (equivalent to 9,000 shares) under Employee Stock option Plan 2006 at a exercise price of US$21.25.

 

(2) Jayesh Sanghrajka was granted 10,000 options (equivalent to 5,000 equity shares) under ADR linked Employee Stock option Plan 2006 at exercise price of $2.95. The Plan will expire in September 2019. During the year he exercised 2,500 options at US$10.64. He resigned the Company w.e.f. March 2012

 

(3) Swasti Bhowmick was granted 10,000 options (equivalent to 5,000 equity shares) under ADR linked Employee Stock option Plan 2006 at exercise price of $6.34. The Plan will expire in February 2022.

 

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Employee Benefit Plans

2002 Stock Option Plan

In January 2002, our Board of Directors approved the 2002 Stock Option Plan (“2002 plan”) which provides for the grant of incentive stock options and non-statutory stock options to our employees. All options under these plans are exercisable for our ADSs. Necessary approvals from the regulators in India have been obtained. During the fiscal year ended March 31, 2004, we made appropriate filings with the SEC prior to the first exercise date of the options granted under the 2002 plan. Unless terminated sooner, this plan will terminate automatically in January 2012. A total of 280,000 of our Equity Shares were reserved for issuance under the 2002 plan.

During the fiscal year ended March 31, 2012, we granted options equivalent to the right to purchase 10,500 equity shares at a weighted average exercise price of US$22.06 per share. During the same period, options equivalent to 55,125 equity shares were exercised at a weighted average price of US$4.41.

Unless otherwise determined by the Board of Directors, the warrants granted under the 2002 plan vest at a rate of 25% on each successive anniversary of the grant date, until fully vested. The options granted under the 2002 ADR plan vest at the rates set forth in every award.

2004 Stock Option Plan

In June 2004, our Board of Directors approved the 2004 Stock Option Plan (“2004 plan”), which provides for the grant of stock options to our employees. All options under the 2004 plan are exercisable for our ADSs. Unless terminated sooner, the 2004 plan will terminate automatically in January 2014. A total of 358,000 Equity Shares are currently reserved for issuance pursuant to the 2004 plan.

During the fiscal year ended March 31, 2012, options equivalent to 99,503 equity shares were exercised at a weighted average price of US$9.17. During the same period, 11,500 options equivalent to 5,750 equity shares at a weighted average exercise price of US$5.16 per share were forfeited due to resignation of the employees.

Under the terms of the 2004 plan, our Board of Directors or a committee or a sub-committee of the board will determine and authorize the grant of options to eligible employees. These options will vest at the rates set forth in each award. Each option grant carries with it the right to purchase a specified number of our ADSs at the exercise price during the exercise period, which expires ten years from the date of grant. The exercise price is determined by our Board of Directors (or a committee or a sub-committee of the board) and shall be no more than 110% of the fair market value and no less than 50% of the fair market value of our ADSs on the date of the grant.

We have obtained the approvals for the implementation of the 2004 plan. We also made the necessary filings with the SEC prior to the first exercise date of the options granted under the 2004 plan.

2006 Employee Stock Option Plan

Our 2006 Employee Stock Option Plan (the “ESOP 2006”) allows for the grant to our employees of options to purchase our Equity Shares. Each option granted gives the employee the right to purchase a specified number of our Equity Shares under the ESOP 2006. The ESOP 2006 was adopted and approved by our Compensation Committee on June 20, 2006 in accordance with the approval granted by our shareholders on March 31, 2006. A total of 150,000 Equity Shares were approved for issuance under the ESOP 2006.

During the fiscal year ended March 31, 2012, we granted options equivalent to the right to purchase 23,000 equity shares at a weighted average exercise price of US$12.68 per share. During the fiscal year ended March 31, 2012, options equivalent to 39,750 equity shares were exercised at a weighted average price of US$5.26. During the same period, 26,000 options equivalent to 13,000 equity shares at a weighted average exercise price of US$11.69 per share were forfeited due to resignation of the employees.

 

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Equity Shares acquired upon the exercise of options granted pursuant to the terms of the ESOP 2006 are not subject to any lock-ups. In the case of termination or resignation of the employee, the employee shall have the right to exercise only the options vested up to the time of termination or resignation, and the unvested warrants options shall lapse. In the case of the death of an employee, all options granted to him or her shall vest in full on his or her legal heirs. The period during which vested options may be exercised expires ten years after the date of grant.

2006 ADR Linked Employee Stock Option Plan

Our 2006 ADR Linked Employee Stock Option Plan (the “ADR Linked ESOP 2006”) allows for the grant to our employees of options to purchase our ADRs representing Equity Shares of the Company. Each option granted gives the employee the right to purchase a specified number of our ADRs under the ADR Linked ESOP 2006. The ADR Linked ESOP 2006 was adopted and approved by our Compensation Committee on October 3, 2006 in accordance with the approval granted by our shareholders on March 31, 2006. A total of 335,000 Equity Shares (equivalent to 670,000 ADRs) were approved for issuance under the ADR Linked ESOP 2006.

During the fiscal year ended March 31, 2012, we granted options equivalent to the right to purchase 24,000 equity shares at a weighted average exercise price of US$13.59 per share. During the same period, 26,000 options equivalent to 10,000 equity shares at a weighted average exercise price of US$0.20 per share were forfeited due to resignation of the employees.

ADRs acquired upon the exercise of options granted pursuant to the terms of the ADR Linked ESOP 2006 are not subject to any lock-ups. In the case of termination or resignation of the employee, the employee shall have the right to exercise only the options vested up to the time of termination or resignation, and the unvested options shall lapse. In the case of the death of an employee, all options granted to him or her shall vest in full on his or her legal heirs. The period during which vested options may be exercised expires ten years after the date of grant.

Retirement Plans

Gratuity

The Company provides for gratuity on an actuarial valuation. The Company has an unfunded defined benefit retirement plan covering eligible employees in India. This plan provides for a lump-sum payment to be made to vested employees at retirement, death or termination of employment of an amount equivalent to 15 days basic salary, payable for each completed year of service. These gratuity benefits vest upon an employee’s completion of five years of service.

The following tables set out the amounts recognized in the Company’s consolidated financial statements for the fiscal years ended March 31, 2010, 2011 and 2012. The measurement date used is March 31 of the relevant fiscal year.

 

     2010     2011     2012  
     US$     US$     US$  

Change in benefit obligation

      

Benefit obligation at the beginning of the year

     288,136        349,624        434,594   

Acquisition

     —          7,874        —     

Actuarial (gain) loss

     (19,112     (16,687     (10,478

Service cost

     63,183        74,660        78,983   

Interest cost

     32,683        36,731        41,987   

Benefits paid

     (53,452     (22,851     (39,297

Effect of exchange rate changes

     38,186        5,243        (59,643
  

 

 

   

 

 

   

 

 

 

Benefit obligation at the end of the year

     349,624        434,594        446,146   
  

 

 

   

 

 

   

 

 

 

 

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Accumulated benefit obligation was US$229,022 and US$ 247,312 as of March 31, 2011 and 2012 respectively.

Net gratuity cost for the years ended March 31, 2010, 2011 and 2012 comprise of the following:

 

     2010     2011     2012  
     US$     US$     US$  

Service cost

     63,183        74,660        78,983   

Interest cost

     32,683        36,731        41,987   

Recognized net actuarial (gain) loss

     (19,112     (16,687     (10,478
  

 

 

   

 

 

   

 

 

 

Net gratuity cost

     76,754        94,704        110,492   
  

 

 

   

 

 

   

 

 

 

The assumptions used in accounting for gratuity in the years ended March 31, 2010, 2011 and 2012 were as follows:

 

     2010    2011    2012

Discount rate

   9.10%    9.00%    9.24%

Rate of increase in compensation

   10% for first 2 years

and 7% thereafter

   10% for first year and

7% thereafter

   7%

The following benefit payments, which reflect expected future services, as appropriate are expected to be paid

 

Year ending March 31,

   US$  

2013

     36,884   

2014

     48,084   

2015

     44,957   

2016

     57,649   

2017

2018-2022

    

 

180,023

419,840

  

  

The expected benefits are based on the same assumptions used to measure the company’s benefit obligation as of March 31, 2012.

Provident Fund

Employees based in India and the Company each, contribute at the rate of 12% of salaries to a provident fund maintained by the Government of India for the benefit of such employees. The provident fund is a defined contribution plan. Accordingly, the Company expenses such contributions as incurred. Amounts contributed by the Company to the provident fund, in aggregate, were US$204,589, US$252,004 and US$279,396 for the years ended March 31, 2010, 2011 and 2012 respectively.

Compensated Absences

The Company provided US$138,330 US$137,007 and US$197,905 for the years ended March 31, 2010, 2011 and 2012, respectively, as the compensated absences liability for the amounts to be paid as a result of employee’s rights to compensated absences, considering anticipated forfeiture, in the year in which earned.

 

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RELATED PARTY TRANSACTIONS

Six of our largest shareholders beneficially hold an aggregate of approximately 63% of our Equity Share capital. As a result, such shareholders, if they were to act collectively, could exercise control or significantly influence most matters requiring shareholder approval, including significant corporate transactions.

Advertising Revenues

During the fiscal year ended March 31, 2010, 2011 and 2012, we earned advertising revenues of US$ 328,815, US$721,974, and Nil, respectively, from Edelweiss Capital Services Ltd in which Rashesh Shah a director of Rediff is shareholder and director.

Product Development Expenses

During the fiscal years ended March 31, 2010, 2011 and 2012, we incurred product development expenses (including amount capitalized) of US$ Nil, US$ 167,833 and US$ 137,490, respectively, on account of services rendered by Tachyon Technologies Private Ltd, an equity method investee.

Purchase of Convertible Promissory Note

During the fiscal year ended March 31, 2010, 2011 and 2012, we purchased secured convertible promissory notes (referred as “notes”) of US$ 1,300,000, US$ Nil, and US$ Nil, respectively, from Runa Inc. in which a director of the Company is a shareholder and key management personnel. In August 2010, notes of Runa Inc. with a carrying amount of US$ 1,300,000 were converted into equity shares upon exercise of conversion option by the Company resulting in an equity interest ownership in Runa Inc. of 10%.

Balances with related parties include:

 

     As of March 31,  
     2011      2012  
     US$      US$  

Trade account receivable for advertising revenues (net of allowance of US$169,962 and US$206,974 as of March 31, 2011 and 2012, respectively)

     171,268         90,835   

Accounts payable for product development expense

     7,226         12,612   

Acquisition of business

On November 26, 2010, we acquired all of the equity interest in Vubites India Private Limited from the Ajit Balakrishnan the Chairman and Managing Director of the Company and who is also a principal shareholder of the Company. Details of the acquisition including the purchase consideration and the identifiable assets acquired and liabilities assumed have been disclosed in note 6 to the accompanying consolidated financial statements.

 

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EXCHANGE CONTROLS

Restrictions on Conversion of Rupees

There are restrictions on conversion of Indian Rupees into U.S. dollars. Before February 29, 1992, the Reserve Bank of India determined the official value of the Rupee in relation to a weighted basket of currencies of India’s major trading partners. In February 1992, a new dual exchange rate mechanism was introduced by allowing conversion of 60% of the foreign exchange received on trade or current account at a market-determined rate and the remaining 40% at the official rate. All importers were, however, required to buy foreign exchange at the market rate except for certain specified priority imports. In March 1993, the exchange rate was unified and allowed to float. In February 1994 and again in August 1994, the Reserve Bank of India announced relaxation in payment restrictions in the case of a number of transactions. Since August 1994, the Government of India has substantially complied with its obligations owed to the International Monetary Fund, under which India is committed to refrain from using exchange restrictions on current international transactions as an instrument in managing the balance of payments. Effective July 1995, the process of current account convertibility was advanced by relaxing restrictions on foreign exchange for various purposes, such as foreign travel and medical treatment.

In December 1999, the Indian Parliament passed the Foreign Exchange Management Act (“FEMA”) , which replaced the earlier Foreign Exchange Regulation Act, 1973 (“FERA”). The FEMA came in to effect on June 03, 2000. This legislation indicated a major shift in the policy of the government with regard to foreign exchange management in India. While FERA was aimed at conservation of foreign exchange and its utilization for the economic development of the country, the objective of FEMA is to facilitate external trade and promote the orderly development and maintenance of the foreign exchange market in India.

FEMA permits most transactions involving foreign exchange except those prohibited or restricted by the Reserve Bank of India. FEMA has eased restrictions on current account transactions. However the Reserve Bank of India continues to exercise control over capital account transactions (i.e., those which alter the assets or liabilities, including contingent liabilities, of persons). The Reserve Bank of India has issued regulations under FEMA to regulate various kinds of capital account transactions, including certain aspects of the purchase and issuance of shares of Indian companies.

Restrictions on Sale of the Equity Shares Underlying the ADSs and for Repatriation of Sale Proceeds

Other than mutual funds that may purchase ADSs subject to terms and conditions specified by the Reserve Bank of India (“RBI”), a person resident in India is not permitted to hold ADSs of an Indian company. ADSs issued by Indian companies to non-residents have free transferability outside India. However, under Indian regulations and practice, a dealer authorized by the Reserve Bank of India must be notified of the sale of equity shares underlying ADSs by a non-resident of India to a resident of India, as well as of any renunciation by a non-resident in favor of a resident of India of the right to subscribe to such equity shares granted pursuant to a rights offering, provided the price for sale of such equity shares is in accordance with Reserve Bank of India pricing guidelines. If not, prior approval of the Reserve Bank of India is required for any such transfer. Under current Indian law, Equity Shares may only be deposited into our depositary facility in exchange for ADSs, under certain circumstances, and the number of ADSs that can be outstanding at any time is limited as follows: after any offering of ADSs, Equity Shares can be deposited for issuance of ADSs only to the extent that (a) holders have surrendered ADSs and withdrawn Equity Shares from the ADS facility and (b) such holders sold such Equity Shares through SEBI registered stock brokers in a domestic Indian stock market. As our Equity Shares are not listed on any Indian stock exchange, if you elect to surrender your ADSs and receive Equity Shares, you would be unable to redeposit outstanding Equity Shares with our Depositary and receive ADSs.

 

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Notwithstanding the foregoing, if a foreign investor were to withdraw its equity shares from the ADS program, its investment in the equity shares would be subject to the general restrictions on foreign ownership and may be subject to the portfolio investment restrictions and limitations. Further, foreign investors who withdraw their equity shares from the ADS program with the result that their direct or indirect holding in the company crosses certain thresholds specified in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”), the shareholder may be required to make a public offer to the remaining shareholders of the company under the Takeover Code. For details see the section titled “Restriction on Foreign Ownership and Indian Securities”. Our shares are not listed on the Indian stock exchange and, therefore, we are not subject to the Takeover Code. If on conversion of our ADSs, an ADS holder does cross the specified threshold, he will not be required to make any public offer.

Investors who seek to sell in India to resident Indians any Equity Shares withdrawn from the depositary facility will be subject to the pricing guidelines specified by the Reserve Bank of India for such sales and also be subject to certain reporting requirements and approval in certain circumstances if the investors desires to convert the Rupee proceeds from such sale into foreign currency and repatriate such foreign currency from India. Prior approval of the Reserve Bank of India will be required in the event the price for any such sale does not comply with such pricing guidelines.

An Active or Liquid Market for Our ADSs is Not Assured

Active, liquid trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. Liquidity of a securities market is often a function of the volume of the shares that are publicly held by unrelated parties. Although ADS owners are entitled to withdraw the Equity Shares underlying the ADSs from the depository facility at any time, subject to certain legal restrictions, there is no public market for our Equity Shares in India or elsewhere. Under current Indian law, Equity Shares may only be deposited into our depositary facility in exchange for ADSs, under certain circumstances and the number of ADSs that can be outstanding at any time is limited as follows: after any offering of ADS, Equity Shares can be deposited for issuance of ADS only to the extent that (a) holders have surrendered ADS and withdrawn Equity Shares from the ADS facility and (b) such holders sold such Equity Shares through SEBI-registered stock brokers in a domestic Indian stock market. Since our Equity Shares are unlisted, if you elect to surrender your ADS and receive Equity Shares, you may be unable to re-deposit our Equity Shares on an automatic basis under existing laws.

Restriction on Debt Issues

Indian companies are permitted to raise debt in various forms (commonly referred to as “External Commercial Borrowing” or “ECB”) from internationally recognized sources such as international banks, international capital markets, multilateral financial institutions, export credit agents, suppliers of equipment, foreign collaborators and foreign equity holders, subject to the regulations laid down by the Reserve Bank of India in this regard. These regulations govern all the important aspects of ECBs including amount and maturity, all-in cost ceilings (including rate of interest and fees and expenses payable in foreign currency) end-use, security and prepayment/redemption.

Indian borrowers are allowed to raise up to US$20 million, in the event the minimum average maturity of the ECB is three years and up to US$750 million, in the event the minimum average maturity is five years, without Reserve Bank of India approval (the “automatic route”) so long as, inter alia, the following conditions are met.

 

 

“All-in cost” ceiling does not exceed 300 basis points over the six-month LIBOR for the respective currency of borrowing, in the case of ECBs with a minimum average maturity of three to five years, and 500 basis points over the six-month LIBOR for the respective currency of borrowing, in the case of ECBs with a minimum average maturity of more than five years. Borrowers proposing to avail of ECBs beyond the permissible all-in-cost ceilings must seek prior RBI approval.

 

 

Proceeds from ECBs may only be raised for permitted purposes, such as capital investments, investment during construction, overseas direct investment in a joint venture or a wholly-owned foreign subsidiary. ECB proceeds cannot be used for on-lending, for investing in capital markets and real estate, for working capital and general corporate purposes or for refinancing existing domestic loans, save for infrastructure sectors, which may use 25% of the fresh ECB proceeds to refinance the Rupee loan, under the approval route and subject to certain conditions.

 

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ECBs may be secured by assets of the borrower subject to compliance with the relevant regulations issued by the Reserve Bank of India.

 

 

Pre-payment or redemption of ECBs prior to maturity in amounts up to US$750 million is permitted without prior Reserve Bank of India approval, provided that any such prepayment and redemption can only be undertaken if the same complies with the stipulated average maturity period of three years, in the case an ECB of up to US$20 million, and five years, in the case of an ECB of up to US$750 million.

 

 

Preference shares and convertible debentures that are not mandatorily and fully convertible into equity shares would be treated as ECBs for all purposes under the law.

All proposals for the issuance of ECBs that do not fall into the parameters set out above will need the approval of the Reserve Bank of India.

The maximum amount of ECBs that may be raised by an eligible borrower under the automatic route is US$750 million, or its equivalent, during a single financial year. The primary responsibility to ensure that ECBs raised/utilized are in conformity with the RBI instructions is that of the borrower and any contravention of the RBI guidelines will be viewed seriously and may invite penal action.

The Ministry of Finance, through the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depositary Receipt Mechanism) Scheme 1993 (the “Scheme”), has allowed Indian corporates to issue Foreign Currency Convertible Bonds (“FCCBs”). Unless otherwise expressly provided in the Scheme, the issuance and terms of FCCBs are subject to the same conditions and restrictions set forth above for ECBs. All proposals for the issuance of FCCBs that do not fall under the automatic approval route set out in the Scheme and that do not meet the conditions and restrictions set forth for ECBs will need the approval of the Reserve Bank of India.

Fungibility of ADSs

Pursuant to the directions issued by the RBI on the two-way fungibility of ADSs, a person resident outside India is permitted to purchase, through a registered stock broker in India, shares of an Indian company for the purposes of converting the same into ADSs, subject, inter alia, to the following conditions:

 

   

the shares of the Indian company are purchased on a recognized stock exchange in India;

 

   

the shares of the Indian company are purchased on a recognized stock exchange with the permission of the domestic custodian for the ADSs and such shares are deposited with the custodian after purchase;

 

   

the Indian company has authorized the custodian to accept shares from non-resident investors for re-issuance of ADSs;

 

   

the number of shares of the Indian company so purchased does not exceed the ADSs converted into underlying shares; and

 

   

compliance with the provisions of the ADR Scheme and the guidelines issued thereunder.

 

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Sponsored ADR Schemes

From November 23, 2002, the Reserve Bank of India has permitted existing shareholders of Indian companies to sell their shares through the issuance of ADRs against the block of existing shares of the Indian company, subject to the following conditions:

 

 

The facility to sell the shares would be available pari passu to all categories of shareholders.

 

 

The sponsoring company whose shareholders propose to divest existing shares in the overseas market through issue of ADRs will give an option to all its shareholders indicating the number of shares to be divested and mechanism how the price will be determined under the ADR norms. If the shares offered for divestment are more than the pre-specified number to be divested, shares would be accepted from the existing shareholders in proportion to their existing shareholdings.

 

 

The proposal for divestment of the shares would have to be approved by a special resolution of the Indian company.

 

 

The proceeds of the ADR issue raised abroad shall be repatriated into India within a period of one month from the closure of the issue. However, the proceeds of the ADR issue can also be retained abroad to meet the future foreign exchange requirements of the company.

 

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TRADING MARKET

General

There is no public market for our Equity Shares in India, the United States or any other market. Our ADSs evidenced by ADRs have been traded in the United States, initially on the NASDAQ National Market (now the NASDAQ Global Market), under the ticker symbol “REDF” since June 14, 2000, when they were issued by our depositary, Citibank, N.A., pursuant to a Deposit Agreement. From June 24, 2002 to October 6, 2006, our ADSs traded on the NASDAQ Capital Market (formerly the NASDAQ Small Cap Market) under the same ticker symbol. Beginning on October 9, 2006, our ADSs have been trading on the NASDAQ Global Market. Each ADS represents one-half of one Equity Share.

The number of outstanding Equity Shares as of March 31, 2012, was 14,810,178. We have been informed by our depository that as of June 14, 2012, there were 22 record holders of ADRs evidencing 9,295,956 ADSs (representing 4,647,978 Equity Shares) in the United States.

The tables below set forth high and low trading prices for our ADSs on the NASDAQ Capital Market from April 1, 2005 to October 6, 2006 and on the NASDAQ Global Market since October 9, 2006.

Annual and Quarterly high-low price history:

 

     Price Per ADS
(in U.S. dollars)
 
     High      Low  

Fiscal year ending March 31, 2008

     27.50         6.46   

Fiscal year ending March 31, 2009

     9.77         1.40   

Fiscal year ending March 31, 2010

     4.50         1.75   

Fiscal year ending March 31, 2011

     

First Quarter (April 1,2010 to June 30, 2010)

     3.42         1.97   

Second Quarter (July 1,2010 to September 30, 2010)

     6.25         1.69   

Third Quarter (October 1, 2010 to December 31, 2010)

     5.64         2.90   

Fourth Quarter (January 1, 2011 to March 31, 2011)

     9.90         4.95   

Fiscal year ended March 31, 2012

     

First Quarter (April 1, 2011 to June 30, 2011)

     17.98         7.13   

Second Quarter (July 1, 2011 to September 30, 2011)

     14.48         6.57   

Third Quarter (October 1, 2011 to December 31, 2011)

     11.20         4.89   

Fourth Quarter (January 1, 2012 to March 31, 2012)

     9.55         6.40   

Fiscal year ending March 31, 2013

     

First Quarter (April 1, 2012 to June 30, 2012)

     7.21         3.50   

Monthly high-low price history for previous six months:

 

Previous six months

   High      Low  

January 2012

     9.55         7.12   

February 2012

     7.98         6.80   

March 2012

     7.48         6.40   

April 2012

     7.21         6.10   

May 2012

     6.34         4.12   

June 2012

     4.32         3.50   

 

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Fees and other payments made by the Depository

During fiscal year ended March 31, 2012, expenses in an aggregate amount of approximately US$4,144 was borne by the depository in relation to the Company’s ADS program. Apart from this, the Company did not receive any other reimbursement or payments from the depository, either directly or indirectly, during fiscal year 2012.

Fees charged by the Depositary

The Company’s ADS depositary has sought, and the Company has agreed to, certain changes to the terms of the ADS deposit agreement and related arrangements under which the depositary provides its services. Pursuant to these changes, the depositary may charge persons holding or beneficially owning ADSs on applicable record dates established by the depositary up to $2.00 per 100 ADSs (or fractions thereof) held, as a “depositary services fee”. A portion of the aggregate depositary services fees that the depositary may collect in a given year, as well as certain other amounts, may be made available to the Company, solely to defray costs the Company may incur in conducting certain investor relations and other activities related to the ADS program.

In addition to the depositary services fee, the depositary retains the right under the ADS deposit agreement to charge holders or beneficial owners of ADSs certain other fees, including in the event a holder or beneficial owner withdraws from the ADS program the shares underlying its ADSs, or in the event the Company distributes cash or stock dividends or makes other distributions to ADS holders. In most of these cases, the depositary has the right to charge up to $5.00 per 100 ADSs (or fractions thereof) as to which the particular service is being provided.

For further information concerning the fees that the depositary retains the right to charge, and other aspects of the terms under which the depositary provides its services, see the deposit agreement filed as an exhibit to the post-effective amendment no. 1 to the registration statement on Form F-6, being filed with the U.S. Securities and Exchange Commission in connection with the ADS program and the amending of the terms of the deposit agreement.

 

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RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES

As of June 1, 2000, foreign investment in and divestment from Indian securities have been regulated by the provisions of Foreign Exchange Management Act (“FEMA”), the notifications and regulations issued by the Reserve Bank of India (“RBI”) thereunder, and the rules made by the Ministry of Finance of the Government of India. A summary of the regulatory environment for foreign investment in India is provided below.

The RBI issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, as amended (the “Regulations”) to regulate the issuance of Indian securities including American Depositary Receipts to persons resident outside India and the transfer of Indian securities by or to persons resident outside India.

The Regulations provide that an Indian entity may issue securities to a person resident outside India or record in its books any transfer of security from or to such person only in the manner set forth in the FEMA and the rules and regulations made there under or as permitted by the Reserve Bank of India.

ADR Guidelines

Subject to the fulfillment of certain conditions, Indian companies issuing ADSs are no longer required to obtain approval of the Ministry of Finance or the Reserve Bank of India under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, as amended from time to time, or the 1993 Scheme.

The 1993 Scheme is distinct from other policies described below relating to investments in Indian companies by foreign investors. The issuance of ADSs pursuant to the 1993 Scheme also affords to holders of ADSs the benefits of Sections 115AC and 115ACA of the Income-tax Act, 1961 for purposes of the application of Indian tax.

Foreign Direct Investment

Currently, subject to certain exceptions, foreign direct investment and investment by individuals of Indian nationality or origin residing outside India, or non-resident Indians, including investment in the ADSs, does not require prior approval of the Government of India or the Reserve Bank of India, although a declaration in the prescribed form, detailing the foreign investment must be filed with the Reserve Bank of India once the foreign investment is made in the Indian company. The Government of India has indicated that in all cases the Reserve Bank of India would continue to be the primary agency for the purposes of monitoring and regulating foreign investment. The foregoing description applies only to an issuance of shares by, and not to a transfer of shares of, Indian companies.

The consolidated FDI Policy dated April 10, 2012 states that indirect foreign investment shall include all types of foreign investments i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and convertible preference shares and convertible currency debentures and that all investment directly by a non-resident entity into the Indian company would be counted towards direct foreign investment.

Chapter 4 of the FDI policy sets out guidelines for calculation of direct and indirect foreign investment in Indian Companies.

Foreign investment through an investing Indian company would not be considered for calculation of indirect foreign investment in case the Indian company is “owned and controlled” by resident Indians. If the investing company is owned or controlled by “non resident entities”, the entire investment by the investing company into the Indian company would be considered as indirect foreign investment.

 

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Transfer of Shares of an Indian company by a Person Resident outside India

Subject to the limitations set forth below, a person resident outside India may transfer the shares held by him in Indian companies in accordance with the Regulations. A person not resident in India (a “non-resident Indian”) may transfer, by way of sale or gift, the shares held by him to any other person resident outside India without the prior approval of the RBI. A non-resident Indian may transfer the shares held by him, by way of sale, only to another non-resident Indian without the prior approval of RBI.

Person’s resident outside India may also transfer shares or convertible debentures in Indian companies held by them to a person resident in India by way of gift, without prior approval of the RBI. Person’s resident outside India can sell the shares of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI, without prior approval of the RBI. Further, Chapter 3 of the FDI Policy grants general permission for the transfer of shares by a person resident outside India to a person resident in India (and vice versa) subject to compliance with certain terms, conditions and reporting requirements mentioned therein.

Under current Indian regulations and practice, the RBI must approve the sale of equity shares underlying GDSs from a non-resident of India to a resident of India if the sale does not meet the requirements of paragraph 3.4.2 of chapter 3 of the FDI policy As foreign exchange controls are in effect in India, the RBI will approve the price at which equity shares are transferred based on a specified formula, and sale at a higher price per share may not be permitted.

Pursuant to recent amendments, subject to certain RBI pricing guidelines, no RBI approval is required for the sale by a person resident outside India to a person resident in India of underlying shares withdrawn from an ADR program, if certain conditions are met, the prescribed procedure is followed and a confirmation from the authorized dealer is obtained in the prescribed form in respect of the transfer of shares.

In the event of a sale of the underlying shares withdrawn from an ADR program, remittance overseas of the proceeds from such sale is permitted.

The following investments require the prior permission of the FIPB:

 

(i) investments in excess of specified sectoral caps or in sectors in which foreign direct investment is not permitted or in sectors which specifically require approval of the FIPB;

 

(ii) The activity of the issuer company does not require an industrial license under the provisions of the Industries (Development & Regulation) Act, 1951 or under the location policy notified by Government of India under the Industrial Policy of 1991, as amended from time to time.

 

(iii) All proposals relating to the acquisition of existing shares of an Indian company by a foreign investor (including a non-resident Indian) beyond specified sectoral caps or in sectors in which FDI is not permitted or in case such proposals do not comply with certain RBI pricing guidelines.

The RBI has consolidated its various circulars on foreign investments in India, in a Master Circular No. 15/2011-12 dated July 1, 2011, summarizing the current regulatory provisions as amended from time to time.

Pursuant to the Master Circular, foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as trusts), which is engaged or proposes to engage in the following activities:

 

(i) business of “chit” fund;

 

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(ii) “nidhi” company;

 

(iii) real estate business or construction of farm houses; or

 

(iv) trading in Transferable Development Rights (“TDRs”).

Real estate business does not include the development of townships, construction of residential/commercial premises and roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Partnership firms / proprietorship concerns having investments pursuant to FEMA regulations are not allowed to engage in the print media sector.

In addition to the above, investment in the form of foreign direct investment is also prohibited in certain sectors such as:

 

  a) retail trading (except single brand product retailing);

 

  b) atomic energy;

 

  c) lottery business including Government/private lottery, online lotteries, etc;

 

  d) gambling and betting including casions etc;

 

  e) Activities/sectors not opened to private sector investment;

 

  f) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

Besides foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities. Foreign investment in Trusts other than investment by SEBI registered FVCIs in domestic VCF is not permitted.

The Ministry of Finance, in its notification dated April 30, 2007, categorized as debt all foreign investment in the form of preference shares (other than fully convertible preference shares), such as nonconvertible, optionally convertible or partially convertible, and mandated that such investments conform with the ECB Guidelines. Foreign investment in the form of fully convertible preference shares is treated as part of share capital. Such investment is included in calculating foreign equity for purposes of sectoral caps on foreign equity, where such caps have been prescribed.

Pricing

The price of shares of an Indian company listed on any recognized stock exchange in India and issued to non-residents under the foreign direct investment Scheme on an automatic basis, cannot be less than the price established in accordance with the applicable guidelines issued by the SEBI. Where an Indian company is not listed on any recognized stock exchange in India, the minimum issue price of the shares would be based on a fair valuation of shares done by a chartered accountant as per the discounted free cash flow (“DCF”) method.

Every Indian company issuing shares or convertible debentures in accordance with the Regulations is required to submit a report to the RBI within 30 days of receipt of the consideration and another report within 30 days from the date of issue of the shares, in the prescribed form, to the non-resident purchaser.

 

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The above description applies only to a primary issuance of shares or convertible debentures by, and not to a transfer of shares of, an Indian company.

The Indian Government has set up the Foreign Investment Implementation Authority (“FIIA”) in the Department of Industrial Policy and Promotion. The FIIA has been mandated to (i) translate foreign direct investment approvals into implementation, (ii) provide a proactive one-stop aftercare service to foreign investors by helping them obtain necessary approvals, (iii) sort out operational problems and (iv) meet with various Indian Government agencies to find solutions to foreign investment problems.

Portfolio Investment by Non-Resident Indians

A variety of methods for investing in shares of Indian companies are available to non-resident Indians. Subject to certain terms and conditions, these methods allow non-resident Indians to make portfolio investments in shares and other securities of Indian companies on a basis not generally available to other foreign investors. Under the Portfolio Investment Scheme, an non-resident Indian can purchase up to 5% of the paid-up value of the shares issued by a company, subject to the condition that the aggregate paid-up value of shares purchased by all non-resident Indians do not exceed 10% of the paid-up capital of the company (which can be raised to 24% by a resolution of the shareholders of a company). The total holding of all FIIs in a company is subject to a cap of 24% of the total paid-up capital of a company, which can be increased to the relevant statutory cap/ceiling in respect of the said company with the passing of a special resolution by the shareholders of the company in a general meeting. In addition to portfolio investments in Indian companies, non-resident Indians may also make foreign direct investments in Indian companies pursuant to the foreign direct investment route discussed above.

Overseas Corporate Bodies, at least 60% of which are owned by non-resident Indians (Overseas Corporate Bodies), were allowed to invest into Indian companies by way of portfolio investment. The RBI no longer recognizes OCBs as an eligible class of investment vehicle under various routes and schemes under the foreign exchange regulations. However entities owned by Non-Resident Indians (which were formerly classified as Overseas Corporate Bodies) continue to enjoy all facilities available to other foreign investors.

Portfolio Investment by Foreign Institutional Investors

The Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, as amended (“Foreign Institutional Investor Regulations” or “FII Regulations”) enable foreign institutional investors, including institutions such as pension funds, investment trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers referred to as Foreign Institutional Investors, or FIIs, to make portfolio investments in all securities of listed and unlisted companies in India. Investments by registered Foreign Institutional Investors or non-resident Indians made through a recognized stock exchange are known as Portfolio Investments. Foreign institutional investors wishing to invest and trade in Indian securities in India under these guidelines are required to register with the SEBI. General permission has been granted by the RBI to FIIs to invest and trade in Indian securities and no separate application has to be made in this respect. However, since the SEBI provides a single window clearance, a single application must be made to the SEBI. Foreign institutional investors are not necessarily required to register with the SEBI as Foreign Institutional Investors and may invest in securities of Indian companies pursuant to the Foreign Direct Investment route discussed above, but in order to make Portfolio Investments freely and to remit funds into and outside India without an approval for each remittance, registration as an FII or as a ‘sub-account’ of an FII is necessary.

Foreign institutional investors, who are registered with the SEBI, are required to comply with the provisions of the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, or Foreign Institutional Investor Regulations. A registered FII may buy, subject to the ownership restrictions discussed below, and sell freely securities issued by any Indian company, realize capital gains on investments made through the initial amount invested in India, subscribe to or renounce rights offerings for shares, appoint a domestic custodian for custody of investments made and repatriate the capital, capital

 

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gains, dividends, income received by way of interest and any compensation received towards sale or renunciation of rights offerings of shares. An FII may not hold more than 10% of the total issued capital of a company in its own name, a corporate/individual sub-account of the FII may not hold more than 5% of the total issued capital of a company and a broad based sub-account of the FII may not hold more than 10% of the total issued capital of a company. The total holding of all FIIs in a company is subject to a cap of 24% of the total paid-up capital of a company, which can be increased to the relevant statutory cap/ceiling in respect of the said company with the passing of a special resolution by the shareholders of the company in a general meeting.

FIIs are also permitted to purchase shares and debentures, subject to FII limits, of an Indian company either through:

 

 

a public offer, where the price of the shares to be issued is not less than the price at which the shares are issued to the residents; or

 

 

by way of a private placement, where the price is not less than the price arrived at in terms of SEBI guidelines or guidelines issued by the erstwhile Controller of Capital Issues, as applicable.

Regulation 15A of the SEBI Regulations provides that an FII or sub-account may issue, deal in or hold, offshore derivative instruments such as participatory notes, equity linked notes or any other similar instruments against underlying securities, listed or proposed to be listed, on any stock exchange in India, only in favour of those entities which are regulated by any relevant regulatory authority in the countries of their incorporation or establishment, subject to compliance with a “know your client” requirement. An FII or sub-account is also to ensure that no further downstream issue or transfer of any offshore derivative instrument is made to any person other than a regulated entity. SEBI has made amendments to the Regulations, by adding Section 15A effective on 3 February 2004, to incorporate such changes. SEBI has pursuant to its circular dated 19 February 2004 clarified that the following entities would be deemed to be regulated entities for the purpose of Section 15A of the SEBI (Foreign Institutional Investors) Regulations, 1995:

 

  (a) any entity that is regulated, authorized or supervised by a central bank or any other similar body in any country, state or authority, provided that the entity must not only be authorized but also be regulated by the aforesaid;

 

  (b) any entity that is regulated, authorized or supervised by a securities or futures commission in any country, state or territory; and

 

  (c) any entity which is a broad based fund or portfolio, incorporated or established outside India or is a proprietary fund of a registered foreign institutional investor or university fund, endowment, foundation, charitable trust or charitable society whose investments are managed by a person covered by (a) or (b) above.

Historically, all FIIs issuing offshore derivatives or other financial instruments against underlying Indian securities were obliged to report any issuance, renewal, cancellation or redemption of the aforesaid instruments to SEBI every two weeks. However, in its circular dated 2 April 2004, SEBI advised all FIIs to change the frequency of submission of the report from bi-weekly to monthly. SEBI has specified that these submissions should be made by the seventh calendar day of the month following the relevant period. In addition and as a result of the 2 April 2004 circular, FIIs who have not traded and have no outstanding investments in Indian securities during a particular month (or reporting period) are not required to submit “any” reports for such period.

Registered FIIs are generally subject to tax under Section 115AD of the Income Tax Act, 1961. There is uncertainty under Indian law as to the tax regime applicable to foreign institutional investors that hold and trade ADSs. As such, FIIs are urged to consult with their Indian legal and tax advisors before making an investment in ADSs issued by an Indian company.

 

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In addition to making portfolio investments in Indian companies, foreign institutional investors may make foreign direct investments in Indian companies pursuant to the foreign direct investment route discussed above.

Investment by QFIs

Qualified Foreign Investor or QFI is a non-resident investor (other than SEBI registered FII and SEBI registered FVCI) who meets the KYC requirements of SEBI for the purpose of making investments in accordance with the regulations of RBI and/or SEBI.

QFls are permitted to invest through SEBI registered Depository Participants (DPs) in equity shares of listed Indian companies through recognized brokers on recognized stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India.

QFls are also permitted to acquire equity shares by way of right shares, bonus shares or equity shares on account of stock split / consolidation or equity shares on account of amalgamation, demerger or such corporate actions subject to the prescribed investment limits. QFIs are allowed to sell the equity shares so acquired subject to the relevant SEBI guidelines.

The individual and aggregate investment limits for the QFls is 5% and 10% respectively of the paid up capital of an Indian company. These limits are over and above the FII and NRI investment ceilings prescribed under the Portfolio Investment Scheme for foreign investment in India, but must be within the FDI sectoral cap.

Dividend payments on equity shares held by QFls may either be remitted to the designated overseas bank accounts of the QFIs or credited to a Rupee account. Dividend payments may be used for fresh purchases of equity shares.

Takeover and Insider Trading Regulations

Under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, as amended, or Takeover Code, upon the acquisition of more than 5% of the outstanding shares or voting rights of an Indian public listed company, a purchaser is required to notify the company, and the company and the purchaser are required to notify all the stock exchanges on which the shares of such company are listed. Upon the acquisition of 25% or more of such shares or voting rights or a change in control of the company, the acquirer must make an open offer to the other shareholders, offering to purchase at least 26% of the outstanding shares of the company at a minimum offer price as determined pursuant to the Takeover Code. Upon conversion of ADSs into equity shares, an ADS holder may be subject to the Takeover Code; if the shareholding of the ADS holder on conversion exceeds 25% of the paid up capital of the Indian company and the Indian company is listed in India. An ADS holder may also be subject to the Takeover Code if the ADS holder becomes entitled to exercise voting rights, in any manner whatsoever, on the underlying shares. Similar disclosures must be made under the SEBI (Prohibition of Insider Trading), Regulations, 1992, or Insider Trading Regulations, if the equity shares of the Indian company are listed on a recognized stock exchange in India. So long as our Equity

Shares are unlisted in India, the provisions of the Takeover Code and the Insider Trading Regulations will not be applicable.

 

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Qualified Institutional Placement under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

In order to make Indian markets more competitive and efficient, the Government of India introduced an additional instrument for listed companies to raise funds from domestic markets in the form of a Qualified Institutional Placement, or QIP. Key features of the QIP program are as follows:

 

 

Issuers. A company whose equity shares are listed on an Indian stock exchange with nationwide trading terminals and which is in compliance with the prescribed requirements of minimum public shareholding in its listing agreement will be eligible to raise funds in the domestic market by placing securities with Qualified Institutional Buyers, or QIBs.

QIBs are defined as:

 

   

Public financial institution as defined in Section 4A of the Companies Act;

 

   

Scheduled commercial banks;

 

   

Mutual funds;

 

   

FIIs and sub-account (other than a sub-account which is a foreign corporate or foreign individual) registered with SEBI;

 

   

Multilateral and bilateral development financial institutions;

 

   

Venture capital funds registered with SEBI;

 

   

Foreign venture capital investors registered with SEBI;

 

   

State industrial development corporations;

 

   

Insurance companies registered with the Insurance Regulatory and Development Authority;

 

   

Provident funds with minimum corpus of LOGO 250 million;

 

   

Pension funds with minimum corpus of LOGO 250 million; or National Investment Fund set up by the Government of India

 

   

National Investment Funds; and

 

   

Insurance funds set up and managed by Army, Navy or Air Force of the Union of India.

 

 

Securities: Securities which can be issued through the QIP program are equity shares, non-convertible debt instruments along with warrants and convertible securities other than warrants (hereinafter referred to as “eligible securities”). A security which is convertible into or exchangeable with equity shares at a later date, may be converted or exchanged into equity shares at any time after allotment of security but not later than sixty months from the date of allotment. The eligible securities must be fully paid up at the time of allotment.

 

 

Investors/Allottees: The specified securities can be issued only to QIBs, as defined above. Such QIBs must not be promoters or related to promoters of the issuer, either directly or indirectly. Each placement of the eligible securities issued through the QIP program shall be on a private placement basis, in compliance with the requirements of the Companies Act and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. A minimum of 10% of the securities in each placement must be allotted to mutual funds. If no mutual fund agrees to take up the minimum portion or any part thereof, such minimum portion or part thereof may be allotted to other QIBs.

 

 

Issue Size: The aggregate funds that can be raised through the QIP program in one financial year shall not exceed five times of the net worth of the issuer as of the end of its previous financial year.

 

 

Placement Document: The issuer shall prepare a placement document containing all the relevant and material disclosures. There will be no pre-issue filing of the placement document with SEBI. The placement document will be placed on the websites of the relevant Indian stock exchanges and of the issuer, with appropriate disclaimer to the effect that the placement is meant only for QIBs on a private placement basis and is not an offer to the public.

 

 

Pricing: The price of the shares issued under the QIP program must not be less than the average of the weekly high and low of the closing prices of the shares quoted on the stock exchange during the two weeks preceding the relevant date. “Relevant date” has been defined to mean the date of the meeting in which the Board of the company or the Committee of Directors duly authorized by the Board of the company decides to open the proposed issue. The issue price is subject to adjustment in case of corporate actions such as stock splits, rights issues and bonus issues.

Because our Equity Shares are not listed on any Indian stock exchange, we are not eligible to participate in the QIP program.

 

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PRINCIPAL SHAREHOLDERS

The following table provides information relating to the beneficial ownership of our equity shares for:

 

 

each of the executive officers named in the summary compensation table and each of our directors;

 

 

all of our directors and executive officers as a group; and

 

 

each person or group of affiliated persons who is known by us to beneficially own 5.0% or more of our Equity Shares.

 

      Shares Beneficially
Owned

As of June 30, 2012
    Shares  Beneficially
Owned
As of June 30, 2011
    Shares Beneficially
Owned
As of June 30, 2010
 

Name of Beneficial Owner

   Number of
Equity
Shares held
     Percent of
total Equity
Shares
outstanding
    Number of
Equity
Shares held
     Percent
of total
Equity
Shares
outstanding
    Number
of Equity
Shares

held
     Percent of
total
Equity
Shares
outstanding
 

Officers and Directors

            

Ajit Balakrishnan (1)(1A) (1B) (1C) (1D)

     3,463,982         23.39     3,463,982         23.42     3,463,982         23.70

Diwan Arun Nanda (1)

     3,444,742         23.26     3,444,742         23.29     3,444,742         23.57

All Directors and Officers as a Group

(2 persons)

     4,720,722         31.87     4,720,722         31.92     4,720,722         32.08

Other Shareholders holding more than 5 % shareholding

            

Rediffusion Holdings Private Limited(1)

     2,200,002         14.85     2,200,002         15     2,200,002         15

Draper-India International

     2,200,000         14.85     2,200,000         15     2,200,000         15

Edwlweiss Finance and Investment Limited

     1,523,000         10.28     1,523,000         10.30     1,258,000-         9

Rediff.com India limited Employee Trust (1D)

     1,015,000         6.85     1,015,000         6.86     750,000-         5

Notes:

 

(1) Includes 2,200,002 Equity Shares held by Rediffusion Holdings Private Limited, previously called Rediffusion Advertising Private Limited, of which Ajit Balakrishnan is a 50.0% shareholder and Director and Diwan Arun Nanda is a 50.0% shareholder and Director.

 

(1A) Includes 144,540 Equity Shares held by Quintrol Technologies Private Limited, of which Ajit Balakrishnan is a director as well as a 99.9% stockholder.

 

(1B) Includes 5,300 ADSs of the Company held by Mr. Ajit Balakrishnan.

 

(1C) Includes 33,200 ADSs of the Company held by A B Technologies, LLC a New York limited liability company, with respect to which Mr. Balakrishnan holds a position as the Managing Member as well as 99.9% stockholder.

 

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(1D) The trustees of the trust consist of 3 executive officers of Rediff. Mr. Balakrishnan in his capacity as the Chairman of Rediff has the power to remove and appoint the trustees of the trust, and therefore may be deemed to be the beneficial owner of the shares owned by the trust. Mr. Balakrishnan disclaims beneficial ownership of the shares owned by the trust.

Sunil N. Phatarphekar, a director of the Company, holds 6,000 equity shares which resulted from the exercise of the stock options.

Ashok Narasimhan, a director of the Company, holds 6,000 equity shares which resulted from the exercise of the stock options.

Our ADSs are currently listed and traded on the NASDAQ Global Market and each ADS is represented by one-half of one Equity Share of par value of LOGO 5 per share.

Our ADSs are registered pursuant to Section 12(b) of the Securities Act. We have been informed by our depository that as of June 14, 2012, 9,295,956 ADSs were held by 22 record holders of ADRs in the United States.

 

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TAXATION

Indian Tax

The following discussion of Indian tax consequences for investors in ADSs and Equity Shares received upon redemption of ADSs who are not resident in India, whether of Indian origin or not, is based on the current provisions of the Indian Income-tax Act as amended by the Finance Act, 2012, including the special tax regime for ADSs contained in Section 115AC, as amended, and certain regulations implementing the Section 115AC regime. The Indian Income-tax Act is amended every year by the Finance Act of the relevant year. Some or all of the tax consequences of Section 115AC and other relevant provisions may be amended or modified by future amendments to the Indian Income-tax Act.

In the event there is any double taxation avoidance agreement between two states and an investor is a resident of either of the states, then to the extent the provisions of the Double taxation avoidance agreement are more favorable to the investor, under the Indian Income-tax Act, the provisions of the Double taxation avoidance agreement would prevail. However, the Finance Act, 2012 has introduced provisions relating to General Anti-Avoidance Rules (GAAR) under which certain arrangements could be declared to be an impermissible avoidance arrangement. The consequences of such arrangements include denial of a tax benefit or a benefit under a tax treaty. The provisions are proposed to be applicable from fiscal year 2013 in accordance with guidelines which are yet to be prescribed. The tax provisions discussed hereinafter are therefore subject to the provisions of GAAR.

The following summary is not intended to constitute a complete analysis of the tax consequences under Indian law of the acquisition, ownership and sale of our ADSs and our Equity Shares by non-resident investors. Potential investors should, therefore, consult their own tax advisers on the tax consequences of such acquisition, ownership and sale, including specifically the tax consequences under Indian law, the law of the jurisdiction of their residence, any tax treaty between India and their country of residence, and in particular the application of the regulations implementing the Section 115AC regime.

Residence

For purposes of the Indian Income-tax Act, an individual is a resident of India during any fiscal year, if he (i) is in India in that year for 182 days or more or (ii) having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India for period or periods amounting in all to 60 days or more in that year. The period of 60 days is substituted by 182 days in case of an Indian citizen or person of Indian origin who being resident outside India comes on a visit to India during the financial year or an Indian citizen who leaves India as a member of the crew of an Indian ship or for the purposes of employment outside India. A company is resident in India in any fiscal year if it is an Indian company or the control and management of its affairs is situated wholly in India in that year. A firm or other association of persons is resident in India except where the control and the management of its affairs are situated wholly outside India.

Taxation of Distributions

Shareholders who receive dividends by a domestic company will not be subject to tax on the distribution if the company has paid the dividend distribution tax (the “DDT”). Consequently, withholding tax on dividends paid to shareholders does not apply. However, if dividends are declared, we are required to pay taxes at a rate of 16.223%, including applicable surcharge and Education Cess, of the total dividend declared. If the company has not paid the DTT, the shareholder would be taxable at the applicable Indian Income-tax rates depending on the legal status of the shareholders.

 

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Taxation on Sale of ADSs

Any transfer of ADSs outside India by a non-resident investor to another non-resident investor does not give rise to Indian capital gains tax.

Taxation on Redemption of ADSs

Though there is no specific provision exempting the redemption of ADSs, it can be inferred from the provisions of Section 47(xa) that transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of Section 115AC into shares or debentures of any company would not be considered as transfer and therefore the same would be exempt.

In terms of Article 8(3) of the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, (Scheme) issued by the Central Government, conversion of Foreign Currency Convertible Bonds (including ADSs) into equity shares will not give rise to any capital gains liable to tax in India.

Since the exemption is provided under the Scheme and not under the Indian Income-tax Act, it is not certain whether Indian tax authorities would grant the exemption. Moreover, Article 7(3) of the Scheme clarifies that the cost of acquisition of the underlying shares acquired through the redemption of ADRs, shall be determined as the price of ordinary shares of the issuing company prevailing on the Stock Exchange on the date of the advice or redemption. Therefore, the tax authorities may contend that since the Scheme does not provide the methodology for calculating the capital gains on sale of underlying shares in the case of unlisted companies, the benefit under the Scheme would not be available to companies not listed in India. In such a case, there may be a risk of taxability of gains on acquisition of underlying Equity Shares upon redemption of ADSs.

Taxation on Sale of Equity Shares

Subject to any relief under any relevant double taxation treaty, a gain arising on the sale of an equity share by a non-resident investor will generally give rise to a liability for Indian capital gains tax and tax is required to be withheld at source. Capital gains on sale of equity shares, which have been held for more than 12 months (measured from the date of advice of redemption of ADSs by the depositary in the case of non-resident sellers) are considered as long-term capital gains and generally taxable at the rate of 20%, except in the case of a sale of equity shares entered into on a recognized stock exchange in India and the transaction is chargeable to Securities Transaction Tax (“STT”). Surcharge on this tax would be applicable at the rate of 2% in the case of non-resident corporations if the total income exceeds LOGO 1 Crore ( LOGO 10 million). However, no surcharge is leviable on individuals or an association of persons for the fiscal year 2012. In all the above cases, the amount of tax and surcharge, if any, would be increased by an Education Cess of 2% and Secondary and Higher Education Cess of 1% resulting in an aggregate Education Cess of 3%.

Article 9(5) of the Scheme indicates that the long term capital gains on sale of redeemed underlying shares held by non-resident investors in the domestic market would be charged to tax at 10% in accordance with the provisions of section 115AC. Though section 115AC provides for lower rate of tax (i.e., 10% plus surcharge where applicable and Education Cess of 3%) on long term capital gains arising from transfer of ADSs (other than one between two non-residents made outside India), it is unclear whether the lower rate of tax would also extend to gains arising from transfer of shares converted from ADSs under the amended provisions of Section 115AC. However, it may be noted that certain other provisions of the Indian Income-tax Act also provide for lower rate of tax (i.e., 10% plus surcharge where applicable and Education Cess of 3%) for specific classes of taxpayers, such as FIIs, registered with SEBI.

Long-term capital gains realized on the sale of equity shares which are listed in India will be exempt from tax if the transaction of that sale is entered into on a recognized stock exchange in India and the transaction is charged to STT and the contract for the sale of the equity shares is settled by the actual delivery or transfer of those shares.

 

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Where equity shares have been held for 12 months or less, the rate of tax varies and will be subject to tax at normal rates of income tax applicable to non-residents under the provisions of the Indian Income-tax Act, subject to a maximum of 40% (plus applicable surcharge and Education Cess as mentioned above), except in the case of a sale of Equity Shares entered into in a recognized stock exchange in India and the transaction is charged to STT. The actual rate of tax on short-term gains depends on a number of factors, including the legal status of the non-resident holder and the type of income chargeable in India.

During the period the underlying Equity Shares are held by non-resident investors on a transfer from our depositary upon redemption of ADSs, the provisions of the Avoidance of Double Taxation Agreement entered into by the Government of India with the country of residence of the non-resident investors will be applicable in the matter of taxation of any capital gain arising on a transfer of our Equity Shares.

Short-term capital gains realized on the sale of equity shares which are listed in India will be chargeable to tax at 15%. Surcharge on this tax would be applicable at the rate of 2% in the case of non-resident corporations if the total income exceeds LOGO 1 Crore ( LOGO 10 million). However, no surcharge is leviable on individuals or an association of persons for the fiscal year 2012. In all the above cases, the amount of tax and surcharge, if any, would be increased by cess of 3%, provided the transaction of the sale is entered into in a recognized stock exchange in India and the transaction is charged to STT and the contract for the sale of the shares is settled by the actual delivery or transfer of those shares.

Pursuant to Article 7(3) of the Scheme, in the case of companies listed in India, the purchase price of the equity shares would be the price of the equity shares prevailing on the Bombay Stock Exchange Limited (“BSE”) or the National Stock Exchange of India Limited (“NSE”) on the date the depositary gives notice to the custodian of the redemption of ADSs. However, pursuant to Section 49(2A) of the Indian Income-tax Act , where the capital asset, being a share or debenture of a company, becomes the property of the assessee by way of conversion of bonds, debentures, debenture stock, or deposit certificate in any form, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock, bond or deposit certificate in relation to which such asset is acquired by the assessee. Therefore, it is unlikely that the beneficial tax treatment prescribed under the Scheme would be available to the investor for the fiscal year 2012.

Rights

Issuance to non-resident holders of additional ADSs or equity shares or rights to subscribe for equity shares made with respect to ADSs or equity shares are not subject to tax in the hands of the non-resident holder.

However, under section 56(2)(viia) of the Indian Income-tax Act, where a firm or a closely held company receives any share of another closely held company without consideration or for a consideration which is less than the fair market value (fair market value exceeding LOGO 0.05 million), the fair market value /excess shall be taxable in the hands of the recipient. There is a possibility that the tax authorities may tax the recipient under section 56(2)(viia) of the Indian Income-tax Act. A view may be taken that there is no transfer of shares when fresh shares or rights are allotted and that consequently the provisions of section 56(2)(viia) are not attracted. However, litigation with the tax authorities cannot be ruled out on this issue.

It is unclear as to whether capital gain derived from the sale of rights by a non-resident holder, not entitled to exemption under a tax treaty, to another non-resident holder outside India will be subject to Indian capital gains tax. If rights are deemed by the Indian tax authorities to be situated within India, as our situs is in India, the gains realized on the sale of rights will be subject to Indian taxation. These rights would generally be in the nature of short-term capital assets.

 

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Stamp Duty

Upon the issuance of the Equity Shares underlying our ADSs, we are required to pay a stamp duty of 0.1% per share of the issue price. A transfer of ADSs is not subject to Indian stamp duty. Normally, upon the acquisition of equity shares from a depositary in exchange for ADSs representing these equity shares in physical form, an investor would be liable for Indian stamp duty at the rate of 0.25% of the market value of the equity shares at the date of registration. Similarly, a sale of equity shares by an investor would also be subject to Indian stamp duty at the rate of 0.25% of the market value of the equity shares on the trade date, although customarily the tax is borne by the transferee, that is, the purchaser. In case the equity shares of the company are held in a “dematerialized” form, such as a book-entry system, no stamp duty would be payable on the acquisition or transfer of the equity shares.

Other Taxes

At present, there are no Indian taxes on wealth, gifts or inheritance, which may apply to our ADSs and any underlying Equity Shares.

Service Tax

Brokerage or commissions paid to stockbrokers in connection with the sale or purchase of shares traded in India is subject to a service tax of 12.36%. The stockbroker is responsible for collecting the service tax and paying it to the relevant authority. Payments received in India in convertible foreign exchange are currently exempted from the levy of service tax provided certain conditions are satisfied.

United States Federal Income Tax Considerations

The following is a summary of United States federal income tax considerations relating to the acquisition, ownership, and disposition of ADSs or Equity Shares by U.S. Holders (as defined below) that will hold their ADSs or Equity Shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code (the “Code”). This summary is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, including holders subject to special tax rules (e.g., financial institutions, insurance companies, broker-dealers, partnerships and their partners, and tax-exempt organizations (including private foundations)), holders that are not U.S. Holders, holders that own (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of our Equity Shares entitled to vote, holders that will hold our ADSs or our Equity Shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any non-United States, state, or local tax considerations. Prospective investors are urged to consult their tax advisors regarding the United States federal, state, local, and non-United States income and other tax considerations of an investment in our ADSs or our Equity Shares.

For purposes of this summary, a “U.S. Holder” is a beneficial owner of ADSs or Equity Shares that, for United States federal income tax purposes, is (i) an individual who is a citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation for United States federal income tax purposes created in, or organized under the law of, the United States or any State or political subdivision thereof, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code on the previous day, and elected to continue to be so treated.

 

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If a partnership is a beneficial owner of our ADSs or Equity Shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership.

For United States federal income tax purposes, U.S. Holders of ADSs will be treated as the beneficial owners of the underlying shares represented by the ADSs.

General

A primary consideration related to making an investment in ADSs or Equity Shares for United States investors is whether we will become classified as a “passive foreign investment company” (a “PFIC”). A foreign corporation, such as us, will be treated as a PFIC, for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of “passive” income or 50% or more of its assets are passive. For the purpose of applying the income and assets tests described above, we will be treated as owning its proportionate share of the assets and earning the proportionate share of the income of any other corporation that we own, directly or indirectly, 25% or more (by value) of the stock of such corporation.

We do not expect to be classified as a passive foreign investment company (“PFIC”) for United States federal income tax purposes for the most recent taxable year ending March 31, 2012. However, there is no guaranty that the Internal Revenue Service will agree with our determination. Moreover, we may become classified as a PFIC for one or more future taxable years, particularly under circumstances where we determine not to deploy significant amounts of cash for business development purposes. The determination of whether we are, or will become, classified as a PFIC is a fact intensive determination that is made annually based on the composition and amounts of income that we earn and the composition and valuation of our assets, all of which are subject to change. For purposes of determining whether we are, or will become, classified as a PFIC, cash and other liquid assets are categorized as passive assets and the value of our goodwill and other unbooked intangibles are taken into account. The value of our assets for a taxable year is determined by reference to the average of the fair market values of our assets determined as of the end of each quarterly period during the taxable year. In addition, the composition of our assets will be affected by how, and how quickly, we spend our liquid assets that we presently hold. To the extent we are able to deploy substantial amounts of cash for business development purposes, our level of active assets, as compared with our passive assets, may become more prominent.

If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or Equity Shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or Equity Shares.

Because PFIC status is a fact intensive determination made on an annual basis, no assurance can be given regarding our classification as a PFIC. The discussion immediately below under the headings “Distributions” and “Sale or Other Disposition of ADSs or Equity Shares” describes certain tax considerations if we are not subject to classification as a PFIC for United States federal income tax purposes, and are followed by a summary of the PFIC rules under the heading “Passive Foreign Investment Company” if we were to be classified as a PFIC. United States investors are urged to consult their tax advisors regarding the potential application and effect of the PFIC rules in connection with their prospective investment in our ADSs or our Equity Shares.

Distributions

The gross amount of cash distributions with respect to the ADSs (or Equity Shares) will, upon receipt by the Depositary (or by you), be includible in your gross income as dividend income to the extent of our current and accumulated earnings and profits, as determined under United States federal income tax principles. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be treated as a dividend for United States federal income tax purposes. A non-corporate recipient of dividend income will generally be subject to tax

 

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on dividend income from a “qualified foreign corporation” at a maximum United States federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income so long as certain holding period requirements are met. A non-United States corporation (other than a PFIC) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. There is currently a tax treaty in effect between the United States and India which the Secretary of Treasury has determined is satisfactory for these purposes and we believe we should be eligible for the benefits of the treaty. United States corporate holders will generally not be eligible for the dividends received deduction for distributions to domestic corporations in respect of distributions on our ADSs or our Equity Shares. Absent new legislation, the favorable 15% tax rate currently applicable to long term capital gains and certain qualified dividend income of non-corporate U.S. tax payers is due to expire at the end of 2012.

The United States dollar value of any distribution made by us in Rupees will be determined by reference to the exchange rate in effect on the date the distribution is received by the Depositary (or you if you hold our Equity Shares), regardless of whether the payment is in fact converted into U.S. dollars on that date. Any subsequent gain or loss in respect of such Rupees arising from exchange rate fluctuations will be ordinary income or loss. This gain or loss will generally be treated as United States source gain or loss for United States foreign tax credit limitation purposes.

Dividends generally will be treated as income from foreign sources for United States foreign tax credit limitation purposes. You may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on the ADSs or the Equity Shares. If you do not elect to claim a foreign tax credit for foreign tax withheld, you may instead claim a deduction, for United States federal income tax purposes, in respect of such withholding, but only for a year in which you elect to do so for all creditable foreign income taxes.

Sale or Other Disposition of ADSs or Equity Shares

You generally will recognize capital gain or loss for United States federal income tax purposes upon a sale or other disposition of ADSs or Equity Shares in an amount equal to the difference between the amount realized from the sale or disposition and your adjusted tax basis in the ADSs or the Equity Shares. Such gain generally will be long-term if, on the date of such sale or disposition, you held such ADSs or Equity Shares for more than one year and will generally be treated as United States source gain or loss for United States foreign tax credit limitation purposes. The deductibility of a capital loss may be subject to limitations.

Passive Foreign Investment Company

If we are or were to become classified as a PFIC for any taxable year, and unless you make a “mark-to-market” election (as described below), you would be subject to special rules with respect to (i) any gain realized on the sale or other disposition of ADSs or Equity Shares, and (ii) any “excess distribution” made by us on the ADSs or Equity Shares (generally, any distributions paid to you in respect of ADSs or Equity Shares during a single taxable year that are greater than 125% of the average annual distributions received by you during the three preceding taxable years or, if shorter, your holding period for such ADSs or Equity Shares).

Under the PFIC rules:

 

¨ the gain or excess distribution would be allocated ratably over your holding period for ADSs or Equity Shares;

 

¨ the amount allocated to the taxable year in which the gain or excess distribution was realized, and any taxable year prior to the first taxable year that you held our ADSs or our Equity Shares in which we are classified as a PFIC (a “pre-PFIC year”), would be taxable as ordinary income; and

 

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¨ the amount allocated to each prior year, other than the current year and any pre-PFIC year, would be subject to (i) tax at the highest tax rate in effect for that year and (ii) an interest charge generally applicable to underpayments of tax based on the amount of the tax deferred during the time in which you owned ADSs or Equity Shares.

As an alternative to the foregoing rules, a holder of “marketable stock” in a PFIC may make a mark-to-market election, provided that the shares are “regularly traded” on a “qualified exchange.” So long as our ADSs are regularly traded on the NASDAQ Global Market, our ADSs should be treated as marketable stock on a qualified exchange for this purpose. No assurances, however, may be given whether the ADSs would be treated, or continue to be treated, as “regularly traded” on such exchange. If you make a valid mark-to-market election, you will generally (i) include as ordinary income for each taxable year the excess, if any, of the fair market value of your ADSs or Equity Shares as determined at the end of the taxable year over the adjusted tax basis of such ADSs or Equity Shares and (ii) deduct as a loss the excess, if any, of the adjusted tax basis of your ADSs or Equity Shares over the fair market value of such ADSs or Equity Shares as determined at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election. Your adjusted tax basis in your ADSs or Equity Shares would be adjusted to reflect any income or loss resulting from the mark-to-market election.

If you own ADSs or Equity Shares during any year that we are classified as a PFIC, you must file an annual Internal Revenue Service Form 8621 that describes the distributions received on ADSs or Equity Shares and the gain realized on the disposition of ADSs or Equity Shares. You are urged to consult your tax advisor concerning the United States federal, state and local income tax consequences of acquiring, holding, and disposing of ADSs or Equity Shares.

 

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CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the objectives of the control system. As such, disclosure controls and procedures or internal control systems may not prevent all error and all fraud. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, at our Company have been detected.

Our management, with the participation of our Chairman and Managing director, who serves as our Principal Executive Officer, and our Chief Financial Officer who serves as Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 referred as the “Exchange Act “) as of the end of the period covered by this annual report. Based on such evaluation, our Chairman and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chairman and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is the process designed by, or under the supervision of, our Chairman and Managing director, who serves as our Principal Executive Officer, and our Chief Financial Officer who serves as Principal Financial Officer, and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with established policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chairman and Managing director and our Chief Financial Officer, our Management conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2012. In making this assessment, our management primarily used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO”). Based on such assessment, our management has concluded that we maintained effective internal control over financial reporting as of March 31, 2012.

 

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Our independent registered public accounting firm, Deloitte Haskins & Sells, has audited the consolidated financial statements included in this annual report on Form 20-F, and as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting as of March 31, 2012.

Changes in Internal Controls over Financial Reporting

During the period covered by this annual report, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table summarizes the fees billed to us by our principal accountant, Deloitte Haskins & Sells, Mumbai, India and its affiliates (collectively “Deloitte”) for various services rendered to us during the fiscal years ended March 31, 2010, 2011 and 2012, respectively.

 

     Fiscal year ended March 31,  
     2010      2011      2012  
     US$      US$      US$  

Audit Fee

     156,544         204,051         217,161   

Audit-Related Fees (in respect of certain review services)

     29,617         —           —     

Tax Fees

     20,097         26,391         24,979   
  

 

 

    

 

 

    

 

 

 

Total

     206,258         230,442         242,140   
  

 

 

    

 

 

    

 

 

 

Audit fee represents the aggregate fees for Deloitte in connection with the audits of our annual integrated consolidated financial statements, the reviews of our quarterly financial statements and statutory audits.

Tax fees primarily comprise fees for tax audit and permitted tax advisory services. Tax fees also include other corporate tax services such as assistance with foreign income tax and service tax.

Our Audit Committee charter requires us to obtain the prior approval of our Audit Committee on every occasion we engage our principal accountants or their associated entities to provide us any audit or non-audit services. We disclose to our Audit Committee the nature of services that are provided. All of the services provided by our principal accountants or their associated entities in the previous three fiscal years (since the emergence of the pre-approval rules), have been pre-approved by our Audit Committee.

 

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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

On February 23, 2010, our Board of Directors authorized the purchase of up to US$8,861,320 of our Equity Shares under a share repurchase program. In their meeting held on July 21, 2011, our Board of Directors, considering the then-current market price of our ADSs, terminated the share repurchase program. The information set forth below reflects the share purchases made in connection with the share repurchase program.

 

Period

   Total
number of
Shares
purchased (1)
     Average
price paid
per share
     Total
number of
shares
purchased as
part of
publicly
announced
plan or
programs
     Maximum
number (or
approximate
dollar value) of
shares that
may yet be
purchased
under the
plans or
programs
 
            US$             US$  

Month # 12 (March 2010)

     750,000         4.08         —           5,538,325   

Month # 09 (December 2010)

     265,000         5.16         —           NA   
  

 

 

          

Total

     1,015,000            
  

 

 

          

Note:

(1) Our ordinary share to ADS ratio is one ordinary share for two ADS.

 

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PRESENTATION OF FINANCIAL INFORMATION

The consolidated financial statements in this annual report have been prepared in accordance with U.S. GAAP. 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 these financial statements, audited by Deloitte Haskins & Sells, an independent registered public accounting firm, are set forth at the end of this annual report.

Although we have translated in this annual report certain Indian Rupee amounts into U.S. dollars, this does not mean that the Indian Rupee amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate, the rates stated earlier in this annual report, or at all. The Reserve Bank of India publishes the exchange rate on each date. The published rate on March 31, 2012 was LOGO 51.16 per US$1.00. The reporting currency for the financial statements is the U.S. dollar and the translation from Indian Rupees to U.S. dollars has been performed using rates specified by the Reserve Bank of India.

 

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ADDITIONAL INFORMATION

Memorandum and Articles of Association

Objectives and Purposes

The main objective as stated in our Memorandum of Association is to carry on and undertake the business of providing online information services in various languages via electronic and other forms of communications for local and other subscribers in India and abroad and to deal in all the materials connected therewith. For purposes of carrying out this main objective, we are also authorized under our Memorandum of Association to carry on and undertake the business of publishers of dailies, weeklies, fortnightly, newspapers, periodicals, journals, magazines, directories, souvenirs, year-books and other literary works in the electronic and other forms in any language and on any subject and marketing including export markets, sell/distribute such published items to subscribers in India and abroad.

Description of Share Capital

The following description of our share capital does not purport to be complete and is subject to and qualified in its entirety by the Company’s Articles of Association and Memorandum of Association, as amended, the provisions of the Companies Act, as currently in effect, and other applicable provisions of Indian law.

Share Capital

Our authorized share capital is 24,000,000 Equity Shares, par value LOGO 5 per share (after giving effect to our 2 for 5 reverse share split effective May 3, 2000). As of March 31, 2012, 14,810,178 Equity Shares were issued and outstanding.

The Equity Shares are our only class of share capital. However, our Amended and Restated Articles of Association and the Companies Act permit us to issue classes of securities in addition to the equity shares. For the purposes of this annual report, “shareholder” means a shareholder who is registered as a member in the register of members of our Company.

Shareholder Rights Agreements

In connection with our sales of Equity Shares to our investors from April 1998 through December 1999, we entered into nine separate shareholders rights agreements with our shareholders which provide for, among other things, certain preemptive, registration, co-sale and information rights, as well as the right of some shareholders to appoint members or observers of our Board of Directors. Some of the agreements also provide the shareholders with protective provisions that require us to obtain our shareholders’ consent to take certain actions that would otherwise only require our Board’s approval.

Amended and Restated Shareholders’ Rights Agreement

On February 24, 2000, we entered into an Amended and Restated Shareholders’ Rights Agreement with certain of our shareholders to amend, restate, supersede and replace all nine previous shareholder agreements we entered into with our shareholders. The Amended and Restated Shareholders’ Rights Agreement, which became effective on the completion of our initial ADR offering, provides for the following shareholder rights:

Registration Rights

Certain holders of at least 30% of our Equity Shares can require us, subject to limitations, to effect a registration or qualification of the securities either with the NASDAQ Global Market (formerly the NASDAQ National Market), the NSE or the BSE. We are not required to effect:

 

 

More than two such registrations or qualifications pursuant to such demand registration rights;

 

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a registration or qualification prior to the earlier of December 31, 2002, or six months after the effective date of any Indian law, regulation or other governmental order which allows our Equity Shares to be offered to the public on an Indian stock exchange; or

 

 

a registration for a period not to exceed 120 days, if our Board of Directors has made a good faith determination that such registration would be detrimental to us or our shareholders.

At any time after we become eligible to file a registration statement on Form F-3, certain holders of our Equity Shares may require us to file registration statements on Form F-3 with respect to their Equity Shares. We are not required to affect this registration:

 

 

More than once in a twelve month period;

 

 

unless the registration relates to securities that are valued in excess of US$1,000,000; or

 

 

if our Board of Directors has made a good faith determination that such registration would be detrimental to us or our shareholders.

Each of the foregoing registration rights is subject to conditions and limitations, including the right of the underwriters in any underwritten offering to limit the number of Equity Shares to be included in such registration. We are required to bear all the expenses of all such registrations, except underwriting discounts and commissions. The registration rights with respect to any holder thereof terminate upon the earlier of when the holder may sell the Equity Shares within a three-month period pursuant to Rule 144 of the Securities Act, or the time when the holder is able to convert the registrable securities into ADSs which are traded on the NASDAQ Global Market.

Other Rights

The Amended and Restated Shareholders’ Rights Agreement also provides certain preemptive, information and co-sale rights to our shareholders.

Dividends

Under the Companies Act, unless our Board of Directors recommends the payment of dividends, we may not declare dividends. Similarly, under our Amended and Restated Articles of Association, although the shareholders may, at the annual general meeting, approve a dividend in an amount less than that recommended by the Board of Directors, they cannot increase the amount of the dividend. In India, dividends are generally declared as a percentage of the par value of a company’s equity shares. The SEBI recently mandated that listed companies must declare dividends on a per share basis, so that there is clarity on the exact returns shareholders receive from equities on their equity ownership. Any dividend recommended by the Board of Directors subject to the limitations described above, will be distributed and paid to shareholders in proportion to the paid up value of their shares within 30 days of the approval by the shareholders at the annual general meeting. The Board of Directors may also declare interim dividends and the amount of dividends, including interim dividends, is required to be deposited in a separate bank account within five days from the date of declaration of such dividends. If such dividend, including interim dividend, has not been paid or claimed within 30 days of declaration of such dividend, we are required to transfer the total amount of dividend which remains unpaid or unclaimed within seven days of the expiry of the 30 day period, to a special bank account. Under the Companies Act if a dividend has been declared by a company but has not been paid within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, each director of the company, if he is knowingly a party to the default, will be punishable with imprisonment and also liable to fines. Pursuant to our Amended and Restated Articles of Association, our Board of Directors has discretion to declare and pay interim dividends without shareholder approval. With respect to Equity Shares issued during a particular fiscal year (including any Equity Shares

 

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underlying ADS issued to the Depositary in connection with the offering or in the future), cash dividends declared and paid for such fiscal year will be on a pari passu basis to the outstanding Equity Shares. Under the Companies Act, dividends can only be paid in cash to the registered shareholder (or to his order or his banker’s order) at a record date fixed on or prior to the annual general meeting.

Under the Companies Act, dividends and interim dividends may be paid out of profits of a company in the year in which the dividend is declared or out of the undistributed profits of previous fiscal years. Before declaring a dividend, the Companies Act requires that we provide for depreciation in accordance with the Companies Act and also transfer to our reserves a minimum percentage of our profits for that year, ranging between 2.5% to 10.0%, depending upon the dividend percentage to be declared in such year. The Companies Act further provides that, in the event of inadequacy or absence of profits in any year, dividends may be declared for such year out of the company’s accumulated profits, subject to the following conditions:

 

 

the rate of the dividend to be declared shall not exceed 10.0% of the company’s paid up capital or the average of the rate at which dividends were declared by the company in the previous five years, whichever is less;

 

 

the total amount to be drawn from the accumulated profits earned in the previous years and transferred to the reserves shall not exceed an amount equivalent to 10.0% of the company’s paid up capital and free reserves, and the amount so drawn is to be used first to set off the losses incurred in the fiscal year before any dividends in respect of preference or equity shares are declared; and

 

 

the balance of reserves after withdrawals shall not fall below 15.0% of the company’s paid up capital.

Bonus Shares

In addition to permitting dividends to be paid out of current or retained earnings as described above, the Companies Act permits us to distribute an amount transferred from the general reserve or surplus in our profit and loss account to our shareholders in the form of bonus shares which is similar to paying a stock dividend. The Companies Act also permits the issuance of bonus shares from a securities premium account. These bonus shares must be distributed to shareholders in proportion to the number of equity shares owned by them. Bonus shares are distributed to shareholders in the proportion recommended by the Board of Directors. Shareholders of record on a fixed record date are entitled to receive such bonus shares.

Preemptive Rights and Issue of Additional Shares

The Companies Act gives shareholders the right to subscribe for new shares in proportion to their respective existing shareholdings unless otherwise determined by a special resolution passed by a general meeting of the shareholders. For approval, this special resolution must be approved by a number of votes which is not less than three times the number of votes against the special resolution. If the special resolution is not approved, the new shares must first be offered to the existing shareholders as of a fixed record date. The offer must include: (1) the right, exercisable by the shareholders of record, to renounce the shares offered in favor of any other person; and (2) the number of shares offered and the period of the offer, which may not be less than 15 days from the date of offer. If the offer is not accepted it is deemed to have been declined. Our Board of Directors is authorized under the Companies Act to distribute any new shares not purchased by the preemptive rights holders in the manner that it deems most beneficial to the Company.

Annual General Meetings of Shareholders

We must convene an annual general meeting of shareholders within 15 months of the previous annual general meeting or within six months after the end of each fiscal year and may convene an

 

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extraordinary general meeting of shareholders when necessary or at the request of a shareholder or shareholders holding at least 10% of our paid up capital carrying voting rights. The annual general meeting of the shareholders is generally convened by our company secretary pursuant to a resolution of the Board. Written notice setting out the agenda of the meeting must be given at least 21 days (excluding the days of mailing and receipt) prior to the date of the general meeting to the shareholders of record. Shareholders who are registered as shareholders on the date of the general meeting are entitled to attend and vote at such meeting.

The annual general meeting of shareholders must be held at our registered office or at such other place within the city in which the registered office is located; meetings other than the annual general meeting may be held at any other place if so determined by the Board of Directors. Our registered office is located at 1st floor, Mahalaxmi Engineering Estate, L. J. First Cross Road, Mahim (West), Mumbai 400 016.

Our Articles of Association provide that a quorum for a general meeting is the presence of at least five shareholders in person.

Voting Rights

At any general meeting, voting is by show of hands unless a poll is demanded by a shareholder or shareholders present in person or by proxy holding at least 10% of the total shares entitled to vote on the resolution or by those holding shares with an aggregate paid up capital of at least LOGO 50,000. Upon a show of hands, every shareholder entitled to vote and present in person has one vote and, on a poll, every shareholder entitled to vote and present in person or by proxy has voting rights in proportion to the paid up capital held by such shareholders.

Any shareholder may appoint a proxy. The instrument appointing a proxy must be delivered to us at least 48 hours prior to the meeting. A proxy may not vote except on a poll. A corporate shareholder may appoint an authorized representative who can vote on behalf of the shareholder, both upon a show of hands and upon a poll.

Ordinary resolutions may be passed by simple majority of those present and voting at any general meeting for which the required period of notice has been given. However, specified resolutions such as amendments to our Amended and Restated Articles of Association and the Memorandum of Association, commencement of a new line of business, the waiver of preemptive rights for the issuance of any new shares and a reduction of share capital, require that votes cast in favor of the resolution (whether by show of hands or poll) are not less than three times the number of votes, if any, cast against the resolution.

Pursuant to the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001, issued on March 9, 2001, by the Department of Company Affairs, Government of India, a company limited by shares is authorized to issue shares with differential voting rights if the articles of association of the company so authorizes. Our Amended and Restated Articles of Association do not authorize issuance of shares with differential voting rights.

Pursuant to Section 192A of the Companies Act, a listed public company must pass certain corporate resolutions, as notified by the Central Government, only through postal ballot. Since as of the date of this report, the Company is not a “listed public company”, the provisions of Section 192A of the Companies Act do not currently apply to us.

Holders of our ADS may exercise voting rights only through a depositary, unlike an owner of Equity Shares, who can exercise voting rights directly. An owner of ADS generally will have the right under the deposit agreement to instruct the Depositary to exercise the voting rights for the Equity Shares represented by the ADS. Owners of ADS have no rights pursuant to the Companies Act, under which we were incorporated, and are limited to those rights granted to them pursuant to the deposit agreement.

 

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It is our expectation that our Depositary will forward notices of shareholders’ meetings to the ADS holders together with information explaining how to instruct the Depositary to exercise the voting rights on the Equity Shares represented by ADS. If the Depositary timely receives voting instructions from an owner of ADS, it will endeavor to vote the securities represented by those ADS in accordance with such voting instructions. In the event that voting takes place by a show of hands, the depositary bank will cause the custodian to vote all deposited securities in accordance with the instructions received from owners of a majority of the ADS for which the depositary bank receives 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 holders of ADS will receive voting materials in time to enable them to return voting instructions to the depositary bank in a timely manner.

Register of Shareholders; Record Dates; Transfer of Shares

We maintain a register of shareholders. For the purpose of determining the shares entitled to annual dividends, the register is closed for a specified period prior to the annual general meeting. The date on which this period begins is the record date.

To determine which shareholders are entitled to specified shareholder rights, we may close the register of shareholders. The Companies Act requires us to give at least seven days’ prior notice to the public before such closure. We may not close the register of shareholders for more than thirty consecutive days, and in no event for more than forty-five days in a year.

Following the introduction of the Depositories Act, 1996, as amended, and the repeal of Section 22A of the Securities Contracts (Regulation) Act, 1956, as amended, which enabled companies to refuse to register transfers of shares in some circumstances, the equity shares of a public company are freely transferable, subject only to the provisions of Section 111A of the Companies Act. Since we are a public limited company, the provisions of Section 111A will apply to us. Our Articles currently contain provisions which give our directors discretion to refuse to register a transfer of shares in some circumstances. Furthermore, in accordance with the provisions of Section 111A(2) of the Companies Act, our directors may refuse to register a transfer of shares if they have sufficient cause to do so. If our directors refuse to register a transfer of shares, the shareholder wishing to transfer his, her or its shares may file a civil suit or an appeal with the Company Law Board constituted under Section 10E of the Companies Act. Pursuant to Section 111A(3) of the Companies Act, if a transfer of shares contravenes any of the provisions of the Indian Securities and Exchange Board of India Act, 1992 or the regulations issued there- under or the Indian Sick Industrial Companies (Special Provisions) Act, 1985 or any other Indian laws, the Company Law Board may, on application made by the company, a depository incorporated in India, an investor, the Securities and Exchange Board of India or other parties, direct the rectification of the register of records. The Company Law Board may, in its discretion, issue an interim order suspending the voting rights attached to the relevant shares before making or completing its investigation into the alleged contravention. Notwithstanding such investigation, the rights of a shareholder to transfer the shares will not be restricted.

Under the Companies Act, unless the shares of a company are held in a dematerialized form, a transfer of shares is effected by an instrument of transfer in the form prescribed by the Companies Act and the rules there-under together with delivery of the share certificates.

Disclosure of Ownership Interest

Section 187C of the Companies Act requires beneficial owners of shares of Indian companies who are not holders of record to declare to us details of the holder of record and the holder of record to declare details of the beneficial owner. Any person who fails to make the required declaration within 30 days may be liable for a fine of up to LOGO 1,000 for each day the declaration is not made. Any lien, promissory note or other collateral agreement created, executed or entered into with respect to any equity share by its registered owner, or any hypothecation by the registered owner of any equity share, shall not be enforceable by the beneficial owner or any person claiming through the beneficial owner if such declaration is not made. Failure to comply with Section 187C will not affect our obligation to register a transfer of

 

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shares or to pay any dividends to the registered holder of any shares pursuant to which the declaration has not been made. While it is unclear under Indian law whether Section 187C applies to holders of ADS, investors who exchange ADS for the underlying Equity Shares will be subject to the restrictions of Section 187C. The provisions of Section 187C of the Companies Act do not, however, apply to a trustee holding shares of a company for the benefit of the beneficiaries of a trust.

Audit and Annual Report

At least 21 days before the annual general meeting of shareholders excluding the days of mailing and receipt, we must distribute to our shareholders a detailed version of our audited balance sheet and profit and loss account and the related reports of the Board and the auditors, together with a notice convening the annual general meeting. Under the Companies Act, we must file the balance sheet and annual profit and loss account presented to the shareholders within 30 days of the conclusion of the annual general meeting with the Registrar of Companies (“RoC”) in Mumbai, which is in the State of Maharashtra, India. Our registered office is located in Mumbai. We must also file an annual return containing a list of our shareholders and other information, within 60 days of the conclusion of the meeting.

Pursuant to a green initiative, the RoC has permitted companies to effect service of documents to its members through an electronic mode, provided the company has obtained e-mail addresses of its members for sending the documents through e- mail. In cases where any member has not registered his e-mail address with the company, service of documents will be effected by other modes of service.

Company Acquisition of Equity Shares

Under the Companies Act, approval of at least 75% of a company’s shareholders voting on the matter and approval of the High Court of the State in which the registered office of the company is situated is required to reduce a company’s share capital. A company may, under some circumstances, acquire its own equity shares without seeking the approval of the High Court. However, a company would have to extinguish the shares it has so acquired within the prescribed time period. A company is not permitted to acquire its own shares for treasury operations. An acquisition by a company of its own shares (without having to obtain the approval of the High Court) must comply with prescribed rules, regulations and conditions as laid down in the Companies Act. In addition, private and unlisted public companies such as ours, would have to comply with the Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999, notified by the Ministry of Law, Justice and Company Affairs of the Government of India on July 6, 1999 and public companies which are listed on a recognized stock exchange in India would have to comply with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998, or Buy-back Regulations. Since we are not listed on any recognized stock exchange in India, we would have to comply with the relevant provisions of the Companies Act and the Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999.

Liquidation Rights

Subject to the rights of creditors, workmen and the holders of any shares entitled by their terms to preferential repayment over the Equity Shares, if any, in the event of our winding-up the holders of the Equity Shares are entitled to be repaid the amounts of paid up capital or credited as paid upon those Equity Shares. Further, in the event of a winding up, the shareholders of the Company would be liable for an amount not exceeding the aggregate unpaid amount of the face value of shares of the Company held by such shareholders. All surplus assets after payments to the holders of any preference shares and other creditors shall be paid to holders of Equity Shares in proportion to their shareholdings at the commencement of the winding-up.

Material Contracts

None.

 

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DOCUMENTS ON DISPLAY

This annual report and other information filed or to be filed by the Company can be inspected and copied at the public reference facilities maintained by the SEC at:

Office of Investor Education and Assistance

100 F Street, NE

Washington, D.C. 20549

You may obtain information on the operation of the Public Reference Room by calling the SEC at 1800-SEC-0330.

Copies of these materials can also be obtained upon written request from the U.S. Securities and Exchange Commission, Office of Investor Education and Assistance, by mail: 100 F Street, NE, Washington, D.C. 20549, or by e-mail: PublicInfo@sec.gov

The SEC maintains a website at www.sec.gov that contains reports and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

Additionally, documents referred to in this Form 20-F may be inspected at our registered office, which is located at Mahalaxmi Engineering Estate, 1st Floor, L.J. First Cross Road, Mahim (West), Mumbai 400 016, India.

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description of Document

*1.1   Articles of Association, as amended.
*1.2   Memorandum of Association, as amended.
*1.3   Certificate of Incorporation, as amended.
*2.1   Form of Deposit Agreement among Rediff.com, Citibank, N.A., and holders from time to time of American Depository Receipts issued thereunder (including as an exhibit, the form of American Depository Receipt).
*2.2   Rediff.com’s specimen certificate for equity shares.
*2.3   Amended and Restated Shareholder Rights Agreement dated February 24, 2000 between Rediff.com and the shareholders of Rediff.com.
*4.1   1999 Employee Stock Option Plan.
*4.2   1999 Associate Stock Option Plan.
***4.3   2002 Stock Option Plan.
****4.4   2004 Stock Option Plan.
*******4.5   2006 Employee Stock Option Plan.
********4.6   2006 ADR Linked Employee Stock Option Plan.
*4.7   Form of Indemnification Agreement.
*******4.8   Indemnification Agreement dated November 8, 2005 between Rediff.com and Sridar A. Iyengar.
*******4.9   Indemnification Agreement dated November 8, 2005 between Rediff.com and Ashok Narasimhan.
*******4.10   Indemnification Agreement dated November 8, 2005 between Rediff.com and Pulak Chandan Prasad.
*******4.11   Indemnification Agreement dated November 8, 2005 between Rediff.com and Joy Basu.
*4.12   Sublease dated July 5, 1999 between Shreenathji Balaji Computech Private Limited and Rediff.com.
*4.13   Letter Agreement dated December 28, 1998 between Rediffusion-Dentsu, Young & Rubicam Limited and Rediff.com.
*4.14   Promoters Agreement dated January 9, 1996 between Ajit Balakrishnan and Diwan Arun Nanda.
**4.15   Stock Purchase Agreement among Rediff.com, ValuCom and shareholders of ValuCom dated March 21, 2001.
**4.16   Stock Purchase Agreement among Rediff.com, India Abroad and shareholders of India Abroad dated March 21, 2001, as amended on April 27, 2001.
**4.17   Amended and Restated Agreement and Plan of Reorganization among Rediff.com, Thinkindia.com, Inc., Rediff Holdings, Inc., the principal stock holders of Think India and certain other parties thereto dated February 27, 2001.
*****4.18   Agreement for sale of assets of Value Communications Corporation dated April 8, 2004.
******4.19   Underwriting Agreement dated November 9, 2005 between Rediff.com and Deutsche Bank Securities Inc.
†12.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†12.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†13.1   Certification of Principal Executive Officer pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†13.2   Certification of Principal Financial Officer pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†15.1   Consent of Independent Registered Public Accounting Firm
†101   The following financial information from Rediff.com India Limited Annual Report on Form 20-F for the year ended March 31, 2012 is formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.

 

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* Incorporated by reference to exhibits filed with the Registrant’s Registration Statement on Form F-1 (File No. 333-37376).
* Incorporated by reference to exhibits filed with the Registrant’s Form 20-F for the fiscal year ended March 31, 2001.
*** Incorporated by reference to exhibits filed with the Registrant’s Form 20-F for the fiscal year ended March 31, 2003.
**** Incorporated by reference to exhibits filed with the Registrant’s Form S-8 filed on December 30, 2004.
***** Incorporated by reference to exhibits filed with the Registrant’s Form 20-F for the fiscal year ended March 31, 2004.
****** Incorporated by reference to exhibits filed with the Registrant’s Form 6-K filed on November 9, 2005.
******* Incorporated by reference to exhibits filed with the Registrant’s Form 20-F for the fiscal year ended March 31, 2006.
******** Incorporated by reference to exhibits filed with the Registrant’s Form 20-F for the fiscal year ended March 31, 2007.
Filed herewith.

 

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INDEX TO FINANCIAL STATEMENTS

 

     Page(s)

Reports of Independent Registered Public Accounting Firm

   F-2 – F-3

Consolidated Balance Sheets as of March 31, 2011 and 2012

   F-4

Consolidated Statements of Operations for the years ended March 31, 2010, 2011 and 2012

   F-5

Consolidated Statements of Changes in Shareholders’ Equity for the years ended March  31, 2010, 2011 and 2012

   F-6

Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2011 and 2012

   F-7

Notes to Consolidated Financial Statements

   F-8 – F-31

 

F-1


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Rediff.com India Limited

Mumbai, India

We have audited the accompanying consolidated balance sheets of Rediff.com India Limited and subsidiaries (“the Company”) as of March 31, 2012 and 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 31, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE HASKINS & SELLS

Chartered Accountants

Mumbai, India

July 31, 2012

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Rediff.com India Limited

Mumbai, India

We have audited the internal control over financial reporting of Rediff.com India Limited and subsidiaries (“the Company”) as of March 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Item 15 under Controls and Procedures of the accompanying Form 20-F titled Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended March 31, 2012 and our report dated July 31, 2012 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE HASKINS & SELLS

Chartered Accountants

Mumbai, India

July 31, 2012

 

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REDIFF.COM INDIA LIMITED

CONSOLIDATED BALANCE SHEETS

as of March 31, 2011 and 2012

 

     2011     2012  
     US$     US$  

Assets

    

Current Assets

    

Cash and cash equivalents

     36,922,125        24,545,839   

Trade accounts receivable (net of allowances of US$ 4,022,664 and US$ 3,200,434 as of March 31, 2011 and 2012, respectively)

     7,178,848        6,151,846   

Prepaid expenses and other current assets (See Note 4)

     1,702,963        1,375,135   
  

 

 

   

 

 

 

Total current assets

     45,803,936        32,072,820   
  

 

 

   

 

 

 

Property, plant and equipment — net (See Note 5)

     5,972,595        7,399,081   

Goodwill (See Note 8)

     2,000,000        2,000,000   

Intangible assets, net (See Note 9)

     3,271,089        2,486,009   

Investments, at cost

     1,300,000        1,300,000   

Investments in equity method investees (See Note 7)

     540,902        81,473   

Recoverable taxes

     3,326,024        2,960,245   

Other non-current assets (See Note 10)

     1,725,624        2,168,591   
  

 

 

   

 

 

 

Total non-current assets

     18,136,234        18,395,399   
  

 

 

   

 

 

 

Total assets

     63,940,170        50,468,219   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities

    

Current liabilities

    

Accounts payable and accrued liabilities (See Note 11)

     7,189,236        4,378,101   

Customer advances and unearned revenues

     1,583,692        2,151,956   
  

 

 

   

 

 

 

Total current liabilities

     8,772,928        6,530,057   

Deferred tax liability (See Note 17)

     205,159        244,429   

Other non- current liabilities (See Note 12)

     859,892        957,329   
  

 

 

   

 

 

 

Total liabilities

     9,837,979        7,731,815   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 25)

    

Shareholders’ Equity

    

Equity shares: par value — LOGO 5, Authorized: 24,000,000 equity shares as of March 31, 2011 and 2012 ; Issued: 14,615,800 and 14,810,178 equity shares as of March 31, 2011 and 2012, respectively and outstanding 13,600,800 and 13,795,178 equity shares as of March 31, 2011 and 2012, respectively

     1,735,105        1,756,726   

Additional paid-in-capital

     128,827,344        130,958,274   

Accumulated other comprehensive loss

     (3,436,985     (9,278,078

Accumulated deficit

     (68,596,668     (76,273,913

Treasury shares, at cost (See Note 13) (1,015,000 equity shares as of March 31, 2011 and 2012, respectively)

     (4,426,605     (4,426,605
  

 

 

   

 

 

 

Total shareholders’ equity

     54,102,191        42,736,404   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     63,940,170        50,468,219   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements

 

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REDIFF.COM INDIA LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

For each of the years ended March 31, 2010, 2011 and 2012

 

     2010     2011     2012  
     US$     US$     US$  

Revenues

      

India Online

     14,694,576        17,942,609        16,223,222   

U.S. Publishing

     4,148,685        3,852,854        3,719,044   
  

 

 

   

 

 

   

 

 

 

Total revenues

     18,843,261        21,795,463        19,942,266   
  

 

 

   

 

 

   

 

 

 

Cost of revenues (excluding depreciation and amortization separately disclosed below)

      

India Online

     7,654,344        8,299,834        8,241,612   

U.S. Publishing

     2,460,959        2,496,145        2,532,509   
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     10,115,303        10,795,979        10,774,121   
  

 

 

   

 

 

   

 

 

 

Operating expenses

      

Sales and marketing

     7,143,440        5,373,345        5,341,678   

Product development

     2,663,319        3,826,350        3,136,778   

Depreciation and amortization

     5,004,262        3,786,398        3,499,769   

General and administrative

     5,549,891        6,582,091        7,935,447   

Long-lived assets impairment (See Note 5)

     136,878        109,658        —     

Foreign exchange loss (gain), net

     (195,865     17,783        91,926   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     20,301,925        19,695,625        20,005,598   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (11,573,967     (8,696,141     (10,837,453
  

 

 

   

 

 

   

 

 

 

Other income (expense), net

      

Interest income

     4,017,824        3,372,109        2,584,432   

Investment impairment

     (65,556     (543,220     —     

Gain on sale of equity method investee

     —          —          749,897   

Miscellaneous income

     46,316        98,224        107,169   
  

 

 

   

 

 

   

 

 

 

Total other income, net

     3,998,584        2,927,113        3,441,498   
  

 

 

   

 

 

   

 

 

 

Loss before income taxes and equity in net earnings of equity method investees

     (7,575,383     (5,769,028     (7,395,955

Income tax expense

     (30,000     (17,279     (65,555

Equity in net loss of equity method investees

     (423,099     (785,707     (215,735
  

 

 

   

 

 

   

 

 

 

Net loss

     (8,028,482     (6,572,014     (7,677,245
  

 

 

   

 

 

   

 

 

 

Weighted average number of equity shares — basic

     14,563,197        13,783,033        13,758,635   
  

 

 

   

 

 

   

 

 

 

Weighted average number of equity shares — diluted

     14,563,197        13,783,033        13,758,635   
  

 

 

   

 

 

   

 

 

 

(Loss) earnings per share — basic

     (0.552     (0.477     (0.558

(Loss) earnings per share — diluted

     (0.552     (0.477     (0.558

(Loss) earnings per ADS — (where 2 ADSs represent 1 equity share) — basic

     (0.276     (0.238     (0.279

(Loss) earnings per ADS — (where 2 ADSs represent 1 equity share) — diluted

     (0.276     (0.238     (0.279

See accompanying notes to the consolidated financial statements

 

F-5


Table of Contents

REDIFF.COM INDIA LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For each of the years ended March 31, 2010, 2011 and 2012

 

     Equity shares                         Treasury shares
(Equity shares held by
controlled trust)
             
     Number
of shares
     Equity
share
capital
US$
     Additional
paid-  in-

capital
US$
     Accumulated
other
comprehensive
income (loss)

US$
    Accumulated
deficit

US$
    No of
shares
    US$     Total
shareholders’
equity
US$
    Comprehensive
income (loss)
US$
 

Balance as of March 31, 2009

     14,615,800         1,735,105         127,014,384         (10,746,318     (53,996,172     —          —          64,006,999     

Stock- based compensation

           833,214                 833,214     

Net loss

                (8,028,482         (8,028,482     (8,028,482

Foreign currency translation adjustment

              6,900,715              6,900,715        6,900,715   

Repurchase of equity shares for treasury (See Note 13)

                  (750,000     (3,106,447     (3,106,447  
                     

 

 

 
                        (1,127,767 ) 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2010

     14,615,800         1,735,105         127,847,598         (3,845,603     (62,024,654     (750,000     (3,106,447     60,605,999     

Stock- based compensation

           559,157                 559,157     

Net loss

                (6,572,014         (6,572,014     (6,572,014

Foreign currency translation adjustment

              408,618              408,618        408,618   

Contribution from principal shareholder (See Note 6)

           420,589                 420,589     

Repurchase of equity shares for treasury (See Note 13)

                  (265,000     (1,320,158     (1,320,158  
                     

 

 

 
                        (6,163,396 ) 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2011

     14,615,800         1,735,105         128,827,344         (3,436,985