TATA Annual Report 16.5 x 10.5 C to C

1

TWENTIETH ANNUAL REPORT 2005-06

CONTENTS

Corporate Details .............................................................................................................. 2

Notice .................................................................................................................................... 5

Directors’ Report ................................................................................................................ 10

Report on Corporate Governance .............................................................................. 21

Declaration by CEO regarding Company’s Code of Conduct andCEO/CFO Certification ..................................................................................................... 36

Auditors’ Certificate on Corporate Governance ..................................................... 37

Financial Ratios .................................................................................................................. 38

Auditors’ Report ................................................................................................................. 39

Balance Sheet ..................................................................................................................... 42

Profit & Loss Account ....................................................................................................... 43

Cash Flow Statement ....................................................................................................... 44

Schedules ............................................................................................................................. 45

Notes to the Accounts ..................................................................................................... 55

Section 212 of the Companies Act, 1956, related to Subsidiary Companies 73

Consolidated Accounts

Auditors’ Report on Consolidated Financial Statements .................................... 77

Consolidated Balance Sheet .......................................................................................... 78

Consolidated Profit & Loss Account ........................................................................... 79

Consolidated Cash Flow Statement ........................................................................... 80

Consolidated Schedules ................................................................................................. 81

Consolidated Notes to the Accounts ......................................................................... 88

Board of Directors ............................................................................................................. 107

Annual General Meeting on Wednesday, September 13, 2006, at MC Ghia Hall, Kalaghoda Mumbai at 11.00 a.m.As a measure of economy, copies of the Annual Report will not be distributed at the Annual General Meeting.

Shareholders are requested to kindly bring their copies to the meeting.

VIDESH SANCHAR NIGAM LIMITED

Twentieth Annual Report 2005-2006

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CORPORATE DETAILS

BOARD OF DIRECTORS(As on 1st August 2006)

Mr. Subodh Bhargava (Chairman) (Independent)

Mr. N. Srinath (Executive Director)

Mr. Ishaat Hussain (Panatone Nominee)

Mr. Kishor Chaukar (Panatone Nominee)

Mr. Pankaj Agrawala (Government Nominee)

Dr. Mukund Rajan (Panatone Nominee)

Mr. N. Parameswaran (Government Nominee)

Mr. P. V. Kalyanasundaram (Independent)

Dr. V.R.S. Sampath (Independent)

Mr. Amal Ganguli (Independent)

Mr. Satish Ranade Company Secretary & Chief Legal Officer

REGISTERED OFFICE Videsh Sanchar Bhavan, Mahatma Gandhi Road,Mumbai – 400 001.

CORPORATE OFFICE Lokmanya Videsh Sanchar BhawanKashinath Dhuru Marg, Prabhadevi, Mumbai – 400 028.

BANKERS Citibank Inc.Indian Overseas BankStandard Chartered BankHDFC BankHongkong & Shanghai Banking CorporationState Bank of IndiaICICI Bank Ltd.

LEGAL ADVISORS Messrs ANS Law AssociatesMessrs Mulla & Mulla and Craigie Blunt & Caroe

STATUTORY AUDITORS Messrs S.B. Billimoria & Co., Chartered Accountants

REGISTRARS & Messrs Sharepro Services (India) Pvt. Ltd.TRANSFER AGENTS Satam Estate, 3rd Floor,

Above Bank of Baroda, ChakalaAndheri (East), Mumbai - 400 099.

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Wholesale Voice 55%

Enterprise &Carrier Data 31%

Other TrafficRevenue 9%

Other Income 3%

Interest 2%

REVENUE EARNED 2005-06

Network Cost 54%

Operating & Other Expenses 15%

Depreciation 9%

Taxes 5%

Dividend 4%

Reserve 8%

Staff Cost 5%

DISTRIBUTION OF REVENUE 2005-06



4

AVG. CAPITAL EMPLOYED AND ROCE

0

10000

20000

30000

40000

50000

60000

70000

Average Capital Employed

2005-062004-052003-040

5

10

15

20

25

30

35

40

ROCE

Rs. i

n M

illio

ns

9.00

19.73

11.91

4194838342 40938

EBIDTA

Rs. i

n M

illio

ns

0100020003000400050006000700080009000

10000

5154

76918759

2005-062004-052003-04

WHOLESALE VOLUME

Min

ute

s in

Mill

ion

s

0

1000

2000

3000

4000

5000

6000

7000

2005-062004-052003-04

2967

4282

6746

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NOTICENOTICE is hereby given that the Twentieth Annual General Meeting of Videsh Sanchar Nigam Limited will be held at 1100hours on Wednesday, 13 September 2006, at MC Ghia Hall, Bhogilal Hargovindas Building, Second Floor, 18/20 KaikhushruDubash Marg, Kalaghoda, Mumbai – 400 023 to transact the following business:

1. To receive, consider and adopt the Balance Sheet of the Company as on 31 March 2006, the audited Profit and LossAccount for the year ended on that date, the Auditors’ Report thereon and the Report of the Board of Directors.

2. To declare a dividend for the financial year 2005-2006.

3. To appoint a Director in place of Mr. N. Srinath who retires at this Annual General Meeting and being eligible offershimself for reappointment.

4. To appoint a Director in place of Mr. Ishaat Hussain who retires at this Annual General Meeting and being eligibleoffers himself for reappointment.

Special Business

5. To appoint a Director liable to retire by rotation in place of Dr. Mukund Rajan who holds office only up to this AnnualGeneral Meeting and in respect of whom a notice under the provisions of Section 257 of the Companies Act, 1956has been received by the Company from a member signifying his intention to propose Dr. Mukund Rajan as acandidate for the office of director.

6. To appoint a Director liable to retire by rotation in place of Mr. P.V. Kalyanasundaram who holds office only up to thisAnnual General Meeting and in respect of whom a notice under the provisions of Section 257 of the Companies Act,1956 has been received by the Company from a member signifying his intention to propose Mr. P.V. Kalyanasundaramas a candidate for the office of director.

7. To appoint a Director liable to retire by rotation in place of Dr. V.R.S. Sampath who holds office only up to this AnnualGeneral Meeting and in respect of whom a notice under the provisions of Section 257 of the Companies Act, 1956has been received by the Company from a member signifying his intention to propose Dr. V.R.S. Sampath as acandidate for the office of director.

8. To appoint a Director liable to retire by rotation in place of Mr. Amal Ganguli who holds office only up to the date ofthis Annual General Meeting and in respect of whom a notice under the provisions of Section 257 of the CompaniesAct, 1956 has been received by the Company from a member signifying his intention to propose Mr. Amal Ganguli asa candidate for the office of director.

9. To consider and, if thought fit, to pass with or without modification the following Resolution as a Special Resolution:

“RESOLVED THAT pursuant to Section 224 A and other applicable provisions, if any, of the Companies Act, 1956, M/s S.B.Billimoria & Co., Chartered Accountants be and are hereby appointed Statutory Auditors of the Company to hold officefrom the conclusion of this Annual General Meeting until the conclusion of the next Annual General Meeting and toexamine and audit the accounts of the Company for the financial year 2006-2007 on such remuneration as may bemutually agreed upon between the Board of Directors and the Auditors, plus reimbursement of service tax, traveling andout of pocket expenses.”

“RESOLVED FURTHER THAT the Auditors of the Company be and are hereby authorized to carry out (either themselves orthrough qualified associates) the audit of the Company’s accounts maintained at all its branches and establishments(whether now existing or acquired during the financial year ending 31 March 2007) wherever in India or abroad.”

10. To consider and, if thought fit, to pass with or without modification the following Resolution as a Special Resolution:

“RESOLVED THAT pursuant to Section 309 and other applicable provisions, if any, of the Companies Act, 1956 (the Act) andpursuant to the provisions of Clause 49 I (B) of the Listing Agreement, a sum not exceeding one percent per annum of thenet profits of the Company calculated in accordance with the provisions of Sections 198, 249 and 350 of the Act, be paid toand distributed amongst the Directors of the Company or some or any of them (other than the Whole-time Directors), insuch amounts or proportions and in such manner and in all respects as may be directed by the Board of Directors or anyCommittee formed by the Board of Directors and entrusted with such responsibilities, and such payments shall be made inrespect of the profits of the Company for each year of the period of five years commencing 1 April 2005.”

By Order of the Board of Directors

Satish RanadeDated : 11 August 2006 Company Secretary

Registered Office : & Chief Legal OfficerVidesh Sanchar BhavanM.G. Road, Mumbai - 400 001.



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NOTES :1. A MEMBER ENTITLED TO ATTEND AND VOTE IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE INSTEAD OF

HIMSELF AND THE PROXY NEED NOT BE A MEMBER. THE INSTRUMENT APPOINTING A PROXY SHOULD, HOWEVER, BEDEPOSITED AT THE REGISTERED OFFICE OF THE COMPANY NOT LESS THAN 48 HOURS BEFORE THE COMMENCEMENTOF THE MEETING.

2. Members who hold shares in dematerialized form are requested to bring their DP ID and Client ID numbers for easyidentification of attendance at the meeting.

3. The statement of material facts pursuant to Section 173 (2) of the Companies Act, 1956, setting out the material factsin respect of the business under all items except item Nos.1 to 4 is annexed hereto.

4. The details regarding the persons proposed to be appointed as Directors have been given in the Annexure attachedto the Notice and their brief resume is published elsewhere in the Annual Report.

5. This may be taken as notice of declaration of dividend for 2005-2006 in accordance with Article 93 of Articles ofAssociation of the Company in respect of dividend for that year when declared.

6. Register of members and transfer books of the Company shall remain closed from 16 August 2006 to 22 August2006 (both days inclusive) for the purpose of ascertaining eligibility to dividend.

7. The dividend as recommended by the Board of Directors, if declared at this Annual General Meeting, shall be paid onor after Wednesday the 20 September 2006.(i) to those shareholders whose names appear on the Company’s Register of Members after giving effect to all

valid share transfers in physical form lodged with the Registrar & Transfer Agents (R&T Agents) of the Companyon or before Monday, 14 August 2006.

(ii) in respect of shares held in electronic form, to those “deemed members” whose names appear in the statementsof beneficial ownership furnished by National Securities Depository Limited (NSDL) and Central DepositoryServices (India) Limited (CDSL) as at the end of business on Monday, 14 August 2006. In respect of shares held indemat mode, the dividend will be paid on the basis of beneficial ownership as per details to be furnished byNSDL and CDSL for this purpose.

8. Pursuant to the provisions of Section 205A(5) of the Companies Act, 1956, dividends for the financial year ended 31March 1995 and thereafter, which remain unclaimed in the unpaid dividend account for a period of seven years fromthe date of transfer of the same, will be transferred to the Investor Education and Protection Fund established by theCentral Government. The Members and Shareholders who have not encashed their dividend warrant(s) so far for thefinancial year ended 31 March 1999 or any subsequent financial years are requested to make their claim to the R&TAgents of the Company. According to the provisions of the Act, no claims shall lie against the said Fund or theCompany for the amounts of dividend so transferred nor shall any payment be made in respect of such claims. Thesummary of the unpaid dividend for the past years and the date on which the outstanding amount shall be transferredto Investor Education and Protection Fund on the dates as given in the table below:

Date of Balance as on Dividend for Transfer to InvestorAGM/Board 30 June 2006 the year Remarks Education &

Protection Fund

30 Sept 1999 40,478.50 1998-99 Final Dividend 11 Nov 2006

10 March 2000 543,486.00 1999-00 Interim Dividend 21 April 2007

26 Sept 2000 339,134.00 1999-00 Final Dividend 7 Nov 2007

27 Sept 2001 2,770,900.00 2000-01 Final Dividend 27 Oct 2008

14 Dec 2001 3,054,084.00 2001-02 Interim Dividend 13 Jan 2009

20 Aug 2002 2,388,446.00 2001-02 Final Dividend 19 Sept 2009


2 Sept 2004 854,676.00 2003-04 Final Dividend 2Oct 2011


Total 12,421,250.50

9. Consequent upon the introduction of Section 109A of the Companies Act, 1956, shareholders are entitled to makenomination in respect of shares held by them in physical form. Shareholders desirous of making nominations arerequested to send their requests in Form No. 2B in duplicate (which will be made available on request) to the R&TAgents of the Company.

10. Members are requested to notify any change in their addresses immediately, in any event not later than Monday, 14August 2006, so as to enable us to despatch the dividend warrants at the correct addresses:a) In case of physical shares to the R&T Agents, M/s Sharepro Services India Private Limited, Satam Estate, 3rd Floor,

Above Bank of Baroda, Chakala, Andheri East, Mumbai-400 099.b) In case of shares held in demat form to their depositary participants (DPs).

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Annexure to the Notice dated 11 August 2006The Statement of Material Facts pursuant to Section 173 (2) of the Companies Act, 1956.

In respect of Item No. 5

Dr. Mukund Rajan was appointed on 6 May 2005 in casual vacancy of Mr. Ratan Tata who was appointed in the 17th AGMheld on 2 September 2003. Mr. Ratan Tata being a director liable to retire by rotation would have retired in the ensuingAGM. Under Section 262 of the Companies Act, 1956 and under Article 66C, Dr. Mukund Rajan holds office up to thedate till when Mr. Tata would have held the office i.e. till the date of the forthcoming Annual General Meeting. Dr. MukundRajan is eligible for appointment as a Director of the Company and the Company has, pursuant to Section 257 of theCompanies Act, 1956, received a notice in writing proposing his candidature for appointment. If appointed, Dr. MukundRajan will act as a non-executive Director liable to retire by rotation.

None of the Directors other than Dr. Mukund Rajan is concerned or interested in the above Resolution.


Mr. P.V. Kalyanasundaram was appointed as an Additional Director on the Board with effect from 14 September 2005under Article 66B of the Articles of Association of the Company. Under Section 260 of the Companies Act, 1956 and underthe said Article, Mr. P.V. Kalyanasundaram holds office only up to the date of the forthcoming Annual General Meeting. Mr.P.V. Kalyanasundaram is eligible for appointment as a Director of the Company and the Company has, pursuant to Section257 of the Companies Act, 1956, received a notice in writing proposing his candidature for appointment. If appointed, Mr.P.V. Kalyanasundaram will act as a non-executive Director liable to retire by rotation. For the purposes of Clause 49 of theListing Agreement with Indian Stock Exchanges, Mr. Kalyanasundaram would be an Independent Director.

None of the Directors other than Mr. P.V. Kalyanasundaram is concerned or interested in the above Resolution.


Dr. V.R.S. Sampath was appointed as an Additional Director on the Board with effect from 14 September 2005 underArticle 66B of the Articles of Association of the Company. Under Section 260 of the Companies Act, 1956 and under thesaid Article, Dr. V.R.S. Sampath holds office up to the date of the forthcoming Annual General Meeting. Dr. V.R.S. Sampathis eligible for appointment as a Director of the Company and the Company has, pursuant to Section 257 of the CompaniesAct, 1956, received a notice in writing proposing his candidature for appointment. If appointed, Dr. V.R.S. Sampath will actas a non-executive Director liable to retire by rotation. For the purposes of Clause 49 of the Listing Agreement withIndian Stock Exchanges, Dr. V.R.S. Sampath would be an Independent Director.

None of the Directors other than Dr. V.R.S. Sampath is concerned or interested in the above Resolution.


Mr. Amal Ganguli was appointed as an Additional Director on the Board with effect from 17 July 2006 under Article 66Bof the Articles of Association of the Company. Under Section 260 of the Companies Act, 1956 and under the said Article,Mr. Ganguli holds office only up to the date of the forthcoming Annual General Meeting. Mr. Ganguli is eligible forappointment as a Director of the Company and the Company has, pursuant to Section 257 of the Companies Act, 1956,received a notice in writing proposing his candidature for appointment. If appointed, Mr. Ganguli will act as a non-executive Director liable to retire by rotation. For the purposes of Clause 49 of the Listing Agreement with Indian StockExchanges, Mr. Ganguli would be an Independent Director.

None of the Directors other than Mr. Ganguli is concerned or interested in the above Resolution.


Section 224A of the Companies Act, 1956 provides that the appointment or reappointment of an Auditor or Auditors of theCompany at each Annual General Meeting shall be by way of a special resolution if the company is one in which not lessthan 25% of the subscribed share capital is held singly or in combination thereof by the Central Government, publicfinancial institutions, etc.

The Central Government holds about 26.12% of the subscribed and paid-up capital of the Company; and hence, reappoinmentof M/s. S. B. Billimoria & Co., Chartered Accountants, the Statutory auditors, is required to be made by way of a SpecialResolution. As required under Section 224 of the Act, necessary certificates have been received from them to the effect thattheir appointment, if made, will be in accordance with the limits specified in Section 224 (1B) of the Act.

The Board commends the resolution for acceptance by the members.

None of the Directors is interested in this resolution.



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Taking in to account the responsibilities of Directors, it is proposed that in terms of Section 309(4) of the Companies Act,1956, the directors (apart from the the Whole-time Directors) be paid, for each of the financial years of the Companycommencing from 1 April 2005, remuneration not exceeding one percent per annum of the net profits of the Companycomputed in accordance with the provisions of the Companies Act, 1956. Such remuneration can be paid by way ofcommission with the prior approval of shareholders whereas the same would require prior approval of government if it ispaid by way of monthly or periodical payments. The remuneration will be distributed amongst all or some of theDirectors in accordance with the directions given by the Board or any sub-committee of the Board formed for thepurpose.

Under the provisions of Clause 49 I (B) of the Listing Agreement, all fees / compensation (except sitting fees), if any, paidto the non-executive directors including independent directors shall be fixed by the board of directors and shall requireprevious approval of shareholders in general meeting. The consent of the members and shareholders of the Company istherefore being sought pursuant to the said provisions of the Listing Agreement and the Act.

All the Directors of the Company, except the Whole-time Directors, are concerned or interested to the extent of theremuneration that may be received by them.

By Order of the Board of Directors

Satish RanadeDated : 11 August 2006 Company Secretary

Registered Office : & Chief Legal OfficerVidesh Sanchar BhavanM.G. Road, Mumbai - 400 001.

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Brief resume of Directors Seeking Appointment/Re-Appointment at the20th Annual General Meeting

Particulars

Date of Birth

Date of Appointment

Qualifications

Expertise in Specific FunctionalArea

Directorships held in otherPublic Companies (excludingforeign and private companies)

Memberships/Chairmanships ofCommittees in other PublicCompanies

Shareholding In VSNL

Mr. N. Srinath

8 July 1962

13 February2002

Graduated as aMechanicalEngineer fromIIT (Madras),Post GraduateDiploma inManagementfrom IIM(Calcutta), TataAdministrativeServices Officer

GeneralManagement

TataTeleservicesLimited, VSNLBroadbandLimited

NIL

Mr. IshaatHussain

2 September1947

1 July 2002

Graduated inEconomicsfrom St.StephensCollege, Delhi,Fellow of theInstitute ofCharteredAccountants inEngland andWales, attendedAdvancedManagementProgram atHarvardBusiness School

FinancialManagement

Tata SonsLimited,TataSteel Ltd., TitanIndustries Ltd. ,Voltas Ltd, TataTeleservicesLtd.,TataIndustries Ltd.,Tata AIGGeneralInsurance Co.Ltd., Tata AIGLife InsuranceCo. Ltd., CMCLimited, TataSky Ltd,TataRefractoriesLimited

AuditCommitteeTata Steel Ltd.,Titan IndustriesLtd. , TataIndustriesLimited, TataTrusteeCompanyLtd.,Tata AIGGeneralInsurance Co.Ltd., TataTeleservicesLimited TataAIG LifeInsurance Co.Ltd.

NIL

Dr. MukundRajan

5 April 1968

6 May 2005

Bachelor ofTechnologyfrom IIT Delhi,Masters andDoctorate inInternationalRelations fromOxfordUniversity, TataAdministrativeService Officer

GeneralManagement

TataTeleservicesLimited,Piem HotelsLimited

TataTeleservicesLimited – ShareTransferCommittee

15

Mr. P.V.Kalyanasundaram

25 February1958

9 September2005

Bachelor of Artsdegree inhistory, fromthe NewCollege,Chennai,Bachelor of Lawdegree fromMadras LawCollege.

EminentLawyer

NIL

Dr. V.R.S.Sampath

12 August 1956

9 September2005

Bachelor of Artsdegree inHistory fromthe PresidencyCollege,Bachelor of Lawdegree fromMadras LawCollege, Masterof Law degreeand a PHD fromthe Universityof Madras.Master of Artsdegree inHistory fromthe MaduraiKamarajUniversity

EminentLawyer

Arni VegetableOil Ltd

NIL

Mr. Amal Ganguli

17 October 1939

17 July 2006

Fellow of the Institute ofChartered Accountants inEngland and Wales, Fellowof Institute of CharteredAccountants of India,Fellow of British Instituteof Management, memberof New Delhi Chapter ofInstitute of InternalAuditors, Florida, USA,Alumnus of IMI, Geneva

Accounting andAudit

Hughes CommunicationsIndia Ltd., FlextronicsSoftware Systems Ltd.,Tube Investments of IndiaLtd., HCL TechnologiesLtd., Samtel Colour Ltd.,New Delhi Television Ltd.,Century Textiles andIndustries Ltd., Avtec Ltd.,ICRA Ltd., Maruti UdyogLtd.

Audit CommitteeFelxtronics SoftwareSystems Ltd., HCLTechnologies Ltd., SamtelColour Ltd., New DelhiTelevision Ltd., CenturyTextiles and IndustriesLtd., Maruti Udyog Ltd.

NIL



10

DIRECTORS’ REPORTDear Shareholders,

The directors are pleased to present the annual report andaudited accounts for the financial year ended March 31,2006.

FINANCIAL PERFORMANCE

During financial year 2005-06, your Company succeededin growing each one of its business segments. A total of3.8 billion voice minutes were carried by the India businesswhich translates into a volume increase of 36% over theprevious year. The revenue in the Wholesale Voice segmentgrew by 15.25%, from Rs.18.77 billion to Rs.21.63 billion.The pressure on margins continued during this year aswell. The Enterprise and Carrier Data segment reportedrevenue of Rs.12.62 billion, a growth of 12.95% over theprevious year. The revenues in the ‘Other Services’ segment,which includes TV uplinking, transponder leasing services,retail internet, etc., reported a growth of 15.24% over theprevious year. Consequent to substantial increases in thecomplexities of the Company’s businesses, and its focuson growth and globalisation, total expenditure at Rs.32.66billion in FY 05-06 was higher by 17.57% (Rs.27.78 billionin FY 04-05). VSNL’s profit before tax and exceptional itemsincreased from Rs.6.33 billion in FY 04-05 to Rs.7.54 billionin FY 05-06.

In the previous year, your Company had substantialexceptional earnings from the disposal of its investmentsmade in earlier years in international satellitecompanies.

A summary of VSNL’s financial performance for the year isas follows:

TABLE 1

Audited financial results for the year 2005-2006 (Rs. in Million)

Description 2005-06 2004-05 % Change

Income from operations- Wholesale Voice 21,626 18,765 15.25- Enterprise & Carrier Data 12,618 11,170 12.95- Other services 3,565 3,095 15.24Other income 2,288 1,075 113.04Total Revenue 40,097 34,105 17.57EBITDA margins beforeexceptional items (%) 23.16 23.28 (0.52)Depreciation 3,594 2,440 47.30Prior years adjustment –net expense/(income) (109) - -Exceptional items –expense/(income) 676 (4,214) (116.04)Profit before tax 6,867 10,540 (34.85)Tax 2,072 2,976 (30.38)Profit after tax 4,795 7,564 (36.61)Earnings per share (Rs.) 16.83 26.54 (36.59)Net worth(Excluding Capital Reserve) 58,554 55,220 6.04Normal dividend per share (Rs.) 4.50 4.50 -Special dividend per share (Rs.) - 1.50 -

Previous year’s figures have been regrouped wherever necessary.

Dividend

The directors are pleased to recommend a dividend ofRs.4.50 per share for the financial year ended March 31,2006. The directors propose that profits be appropriatedin the following manner:

TABLE 2(Rs. in Million)

DESCRIPTION Amount

Amount available for appropriation

- balance carried forward 11,859.08

- Profit for the year 4,795.42 16,654.50

Less:

- Dividend @45% on the paid-up capital of Rs.2,850 million 1,282.50

- Tax on total dividend 179.87

- Transfer to general reserve 479.54

Surplus carried to balance sheet 14,712.59

CONSOLIDATED FINANCIAL PERFORMANCE

For the first time, your Company is reporting theconsolidated financial results. The results of the keyacquisitions made during the year - Tyco Global Network,Teleglobe, and VSNL Broadband Limited - are included inthe Company’s consolidated results from their respectiveacquisition dates.

For 2005-06, the Company’s total income on a consolidatedbasis was Rs.47.97 billion, EBIDTA Rs.6.23 billion and profitbefore tax and exceptional items Rs.3.45 billion.

STRATEGIC OVERVIEW

Your Company is evolving into India’s first truly globaltelecommunications company. Today, VSNL is among theworld’s top three providers of international wholesale voiceservices, and the number one wholesale Voice over InternetProtocol provider (according to independent publishedreports). Your Company provides seamless connectivityacross the globe to both carriers and enterprises, supportedby a state-of-the-art network infrastructure. VSNL’ssubmarine cable network of over 2,00,000 route kilometresis one of the world’s largest. Your Company already offerstelecommunication services in Sri Lanka and Nepal, andhas received the licence to be a strategic partner andinvestor in South Africa’s Second National Operator (SNO).As of June 30, 2006, VSNL had 52 subsidiaries in 21countries and about 25% of its employees are locatedoutside India.

Meanwhile, in India, your Company continues to be thecountry’s largest player in international telecommunicationservices and has a strong pan-India domestic backbone.Your Company is also a leading player in the Indian

11

enterprise data market, offering customers a range oftelecommunication solutions, such as Private LeasedCircuits, Managed Data Networks and Virtual PrivateNetwork services. In the retail space, VSNL remains apremier Internet Service Provider, offering a variety ofservices including connectivity, messaging and Internettelephony. Having pioneered the use of the Internet inIndia, your Company is now a key player in India’s emergingbroadband revolution.

VSNL has transformed itself over the last few years byreworking its strategies and repositioning itself. During theyear, your Company completed the acquisition of the TycoGlobal Network which is a robust network of internationalsubmarine cable systems and Teleglobe which was one ofthe leading global long distance voice and wholesale dataplayers. Domestically, your Company acquired Tata PowerBroadband, now known as VSNL Broadband Limited, havingabout 1000 kilometres of optical fibre infrastructure inMumbai and Pune; acquired the assets of 7 Star.com Pvt.Limited, a suburban cable operator in Mumbai offeringbroadband services and acquired Direct Internet Limitedwhich provides internet and related servicespredominantly to small and medium sector enterprisecustomers. Your Company’s overall strategy remains to:

• Maintain its leadership in wholesale services with aglobal footprint, new products and enhanced servicelevels.

• Diversify and de-risk its business model and ensurehigh growth, by expanding into high-potential newerbusinesses like enterprise and carrier value added dataand broadband services.

• Extend and strengthen its global presence in differentways, such as by delivering network andcommunication solutions globally, and by expandinginto overseas telecom markets through greenfieldventures or through acquisitions.

• Support all its businesses by selective and strategicexpansion and modernisation of its state-of-the-artinfrastructure network.

• Fully leverage synergies with other Tata Groupcompanies in the telecom and software sectors, togive customers a range of end-to-end solutions.

• Continuously improve efficiency, competitiveness andcustomer satisfaction through initiatives such asquality, cost rationalisation and profit enhancement.

OPERATIONAL REVIEW

Your Company operates under three business segments inIndia – Wholesale Voice, Enterprise and Carrier Data andOther Services. VSNL’s investments internationally arethrough its wholly owned subsidiary headquartered inSingapore. Your Company now has major operations spreadacross Singapore, Canada, the United States of America, theUnited Kingdom, France and other key commercial andstrategically important locations across the globe.

WHOLESALE VOICE

Your Company’s largest revenue segment in India is thetraditional wholesale voice business consisting ofInternational Long Distance (ILD) and National LongDistance (NLD) voice services.

International Long Distance (ILD) Voice

ILD voice services have been traditionally the core businessof your Company. Over the last four years, the internationaltelephony market in India has been pressured by increasedcompetition, falling rates and lower margins. During 2005-06, VSNL acquired international wholesale voice serviceprovider Teleglobe International Holdings for an enterprisevalue of US$239 million. Your Company has transformeditself from a single-country operator to a globallycompetitive, large-scale player, backed by assets that cansupport its businesses across the globe. VSNL is nowamong the top three wholesale voice providers in theworld, and owns and operates world’s one of the largestinternational networks with coverage to more than 240countries and territories. Your Company also has over 415direct and bilateral relationships with leading internationalvoice telecommunication providers and carries over 20billion minutes of international wholesale voice traffic onannualised basis.

VSNL retains its position as India’s top ILD services provider,offering telephone services to more than 200 internationaldestinations. During 2005-06, international settlement rates(determining ILD services payments between telecomproviders of different countries) remained more or lessstable. However, both tariffs and interconnect rates(determining VSNL’s revenues for international calls passedto or from other domestic telecom networks) declined,sustaining the pressure on margins.

During 2005-06, the Telecom Regulatory Authority of India( TRAI) reduced the Access Deficit Charge (ADC) onincoming ILD calls from Rs.3.25 per minute to Rs.1.60 perminute and on outgoing ILD calls from Rs.2.50 per minuteto Rs.0.80 per minute. However, from March 1, 2006onwards, telecom operators must also pay a revenue shareof 1.5% of the Adjusted Gross Revenue (AGR) towards ADC.Meanwhile, the Department of Telecommunications (DoT)relaxed the licence conditions for international andnational long distance services, and reduced the entry feefor these businesses from Rs. 250 million and Rs. 1 billionrespectively to Rs.25 million each, effective January 1, 2006.The licence fee payable by all long distance serviceproviders to the DoT has also been reduced to a uniform6% of the AGR, effective January 1, 2006. These changesmay serve to raise traffic volumes, although they also raisecompetitive pressures.From February 13, 2004, VSNL ceased to be the preferredcarrier for outbound traffic from the public sector accessproviders Bharat Sanchar Nigam Limited (BSNL) andMahanagar Telephone Nigam Limited (MTNL). Despite this,during 2005-06, outgoing traffic volumes stayed at moreor less the same level as in the previous year, whileincoming traffic volumes increased by 67%.



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This business is now characterised by increasedcompetition and falling rates and margins, both in Indiaand internationally. Therefore, your Company’s focus is onincreasing volumes and thus revenues, while improvingmargins by cutting costs. VSNL is capitalising on its long-standing relationships with international carriers, offeringthem flexible solutions. Your Company has signedinterconnect agreements/arrangements with all domesticcellular service providers and private basic operators fordirect termination and pick up of ILD traffic. Simultaneously,VSNL is restructuring its costs through negotiations withsuppliers and carriers, better efficiencies, and re-engineering of its networks. Your Company is also in theprocess of offering higher margin and higher value servicesto improve profits in this segment. For example, VSNL isnow a major player in the mobile signalling businessglobally, supplying wholesale services to mobile operatorsfor their international roaming and messaging needs.

Your Company believes that its strategic advantage in thisbusiness comes from its volumes, reach, and robustnetworks, which are all difficult to replicate.

A key concern in the ILD voice business is the illegal market(please see Management Discussion and Analysis for adiscussion of regulatory issues). In the past, VSNL hadundertaken major initiatives to combat grey traffic,supporting the enforcement authorities who have beentracking and shutting down illegal operators. These efforts,if consistently enforced, will help to curb the grey market.

National Long Distance (NLD) Voice

In September 2002, your Company entered the NLDservices market to offer national long distance services toits customers, as a logical extension of its internationaltelephony expertise. NLD services now account for asignificant component of VSNL’s voice services, andvolumes in this segment increased from 1.4 billion minutesin 2004-05 to 2.9 billion minutes in 2005-06. From March1, 2006, TRAI abolished the per-minute ADC of a uniform30 paise per minute on all NLD calls; however, it introduceda revenue share-based ADC of 1.5% of the AGR. VSNLwelcomes the reduction in ADC, which has contributed toa substantial increase in call volumes and benefits the endcustomer with lower tariffs.

Your Company has a robust national network infrastructureand interconnect agreements with all basic and cellularmobile service operators in the country to carry NLD trafficto their networks.

The delay in implementing Direct Customer Accessmechanisms such as Carrier Access Code (CAC) or CarrierPre-Selection (CPS) have resulted in VSNL continuing tobe absent from the retail voice market. Your Company isdependent on its relationships with access providers (fixedline and cellular) for wholesale long distance traffic. In thisregard, your Company’s equity investment in TataTeleservices Ltd. (TTSL) has enabled VSNL to offer ILD and

NLD services to all subscribers of TTSL. This attempts to fillan important gap in VSNL’s access to end customers.(Please see Management Discussion and Analysis fordetails.)

Calling Cards

Your Company launched Tata Indicom calling cards in 2004.While the ‘Global’ calling card was targeted at Indianoutbound travellers and overseas residents, ‘Hello Duniya’was aimed at Indian customers for cheaper and convenientNLD/ILD calling. VSNL stopped the ‘Hello Duniya’ outboundcalling service in March 2005, as directed by TRAI on thegrounds that only access providers (basic service licenseor unified access service license holders) can provide suchservices. In May 2006, the Telecom Dispute Settlement andAppellate Tribunal ( TDSAT ) rejected your Company’spetition maintaining that VSNL cannot access subscribersdirectly and provide outbound calling cards under its NLD/ILD license. Your Company believes that calling cards are aglobally recognized mechanism for operators to offer retaillong distance services, and in the absence of CAC / CPS,the only mechanism available to provide customers withchoice in India. Your Company is examining its option toappeal against this TDSAT ruling in the Supreme Court.

ENTERPRISE AND CARRIER DATA

The Indian enterprise data market continues to grow atan annualised rate of 60-70% each year. VSNL’s EnterpriseBusiness Unit serves large, mid-sized and small businesses,and its industry-specific solutions encompass banking andfinancial services, information technology/IT enabledservices, industrial and distribution, pharma, petroleum,media and entertainment, travel, and Government verticals.

With voice, data and video communications converging,the demand for enterprise data services is growing. Inaddition to international and national private leasedcircuits (IPLCs and NPLCs), your Company offers a widerange of Internet Protocol (IP) services encompassinginternet telephony, MPLS VPNs (Virtual Private Networks),internet access, managed hosting and other data centreservices, internet leased lines, mail and messaging services,video conferencing, website hosting services with securityback-up and database management services and networkmanagement.

VSNL’s telecom service offerings can be seamlesslyintegrated across products and geographies, andcustomised to meet the varied requirements of theenterprise sector. The Company continues to extend itsreach in the main global markets to provide IP-VPNservices.

VSNL has progressed up the value chain to deliverconsulting and managed solutions to customers. During2005-06, the Company significantly expanded its VPN anddata centre offerings, establishing state-of-the-artAsynchronous Transfer Mode (ATM) and Multi ProtocolLabel Switching (MPLS) networks.

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VSNL also launched several new offerings. In November2005, it introduced the Tata Indicom Web ConferencingService powered by the Microsoft Office Live MeetingPlatform. Microsoft and VSNL also announced an allianceto create rich solutions and services targeted at theenterprise, small and medium business and consumersegments.

In July 2005, VSNL announced its intention to partner withThomson, the leading technology and service provider inthe media and entertainment space. The two companieswill offer high quality services and new technologies tothe Indian media and entertainment market and alsoexplore opportunities in managing and delivering contentfor third parties, and developing end-to-end solutions fornetwork operators as well as content management anddistribution solutions.

To further strengthen its customer value proposition, VSNLpartners with TCS and CMC, the software companies ofthe Tata Group, for integrated joint product and serviceofferings. VSNL also partners with TCS in the internationalmarket to leverage TCS’s existing relationships withnumerous Fortune 500 companies globally. Your Companyalso markets its services through indirect channels cateringto the small and medium enterprise market.

VSNL is extending its services beyond India to enterprisesglobally, through its subsidiaries in different geographies.The aim is to make inroads into the large and lucrativeglobal market by developing differentiated services andoffering competitive pricing. This is made possible byVSNL’s low-cost global infrastructure, and by capitalisingupon its existing international organisation and employeesfor sales and marketing initiatives.

OTHER SERVICES

VSNL was the first company to introduce retail internetservices in India in 1995. Since then, VSNL has been apremier Internet Service Provider, offering a variety ofservices including connectivity, messaging and internettelephony. VSNL is now a significant broadband player andis currently extending its broadband services infrastructure,including last mile connectivity and a content and servicesportal, across all major Indian cities.

Dial Up Internet Service

VSNL continues to lead the dial up market in India in termsof innovations and services for the customer, and offersservices in 300 towns and cities. However, this business isundergoing fundamental changes, as higher-end usersmigrate to similarly-priced broadband services, while low-end users are being targeted by basic telephony operatorswho have direct access to customers and offer post-paidor pay-as-you-use services. VSNL’s strategy in this segmentis to retain customers with excellent service and valueaddition, while also capturing those that wish to convertto broadband.

Broadband Business

VSNL began offering broadband services in April 2004 soon

after it acquired the narrowband and broadband businessof Dishnet, and now serves 125,000 broadband and high-speed Internet customers in 43 cities. The Government’s2004 broadband policy estimates that India will have 20million broadband subscribers by end-2010. During 2005-06, VSNL’s broadband business grew by well over 100%,keeping pace with the industry’s high growth. VSNL aimsto be the forerunner in this service which offers greatgrowth potential.

VSNL has licensed content and services from some of thebest content owners in India and abroad, providing accessto videos, live news, radio channels, feeds from religiousinstitutions, over 4,200 education modules, more than300,000 music downloads, online tests, games, e-books,mobile ring-tones and a host of other services. Additionally,for business users, VSNL offers services like domainregistration, website hosting, Web2SMS, Mail SMS alertsand Bulk Web2SMS.

Last-mile access to the customer is a crucial factor in thesuccess of a broadband business. Therefore, VSNL isbuilding a Metropolitan Area Network (MAN) in key citiesand continues to evaluate and test newer access andapplication technologies.

Wi-Fi and Cybercafes

VSNL is now one of India’s largest public broadband accessproviders, using Wi-Fi hotspots and a chain of cybercafés.(Wireless Fidelity or Wi-Fi enables computers, PDAs andother computing devices to use high speed Internetwithout any wires or cables, at places which are Wi-Fienabled, called hotspots.) Today VSNL provides access atmore than 100 hot spot locations across the country,including railway stations, airports, five star hotels, coffeeshops and restaurant chains. VSNL is also tying up domesticand international roaming agreements, through whichVSNL will provide public access to travellers into India andoffer access to VSNL customers at around 50,000 hotspotsinternationally.

Internet Telephony

Effective April 2002, the Government of India permittedInternet Service Providers to offer voice telephony overthe Internet using the Voice over Internet Protocol (VoIP).VSNL has deployed its unique, fully owned internettelephony infrastructure. This self-managed network allowsVSNL to offer enhanced features, flexibility in billing andplans and superior voice quality. VSNL offers both corporateand retail net telephony services, complementing its voicebusiness. Low tariffs in Internet telephony could encourageusage and increase international call volumes.

INTERNATIONAL INITIATIVES

VSNL’s international operations (VSNL International) areheadquartered out of Singapore, through its wholly ownedsubsidiary, VSNL Singapore Pte. Limited (VSPL). As on 30June 2006, your Company has 52 subsidiaries in 21countries and has a direct operating presence with over1000 employees in several countries in North America,



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Europe and Asia, offering services to both wholesale andenterprise customers. VSNL International is rapidly growingits global footprint, with offices currently in Virginia, NewJersey, London, Paris, Madrid, Amsterdam, Frankfurt,Singapore and Tokyo.

In a parallel international initiative, your Company also aimsto leverage its expertise to operate telecom services incountries that are liberalising and opening up their telecommarkets. VSNL already participates in a Joint Venture thatprovides telecom services in Nepal and has a subsidiarywhich holds an External Gateway Operators licence in SriLanka. VSNL, as reported last year, will soon offer telecomservices in South Africa through its participation in theSecond National Operator (SNO) process.

VSNL Singapore Pte. Ltd. (VSPL)

Your Company set up VSPL in January 2004 as a whollyowned subsidiary. VSPL manages and maintains theSingapore landing for the Tata Indicom Cable (TIC). Thecompany also acquires and sells other cable capacitythroughout the Asia Pacific region. VSPL has obtained therequired FBO license from the Singapore authorities toown and operate facilities used in the provision of telecomservices. VSPL is also the holding company for all of VSNL’sinternational operations, including TGN and Teleglobe.

Acquisition of Tyco Global Network

In July 2005, your Company completed the acquisition ofTGN, a state-of-the-art undersea cable network that spans60,000 kilometres (37,280 miles) and the continents ofNorth America, Europe and Asia. With the acquisition ofTGN for US$130 million, VSNL is now one of the world’slargest submarine cable system owners, providingsubmarine cable bandwidth to its customers in multiplecontinents.

Acquisition of Teleglobe International Holdings Limited

In February 2006, your Company completed its acquisitionof Bermuda-based Teleglobe International Holdings Ltd.VSNL will leverage Teleglobe’s network and capabilities aspart of its strategy to deliver key mobile, data and voiceofferings to global enterprise customers. Teleglobe servesas the product brand for the voice, mobile and IP transitwholesale services. VSNL International is the product brandfor the Company’s wholesale IPL and ethernet offerings,as well as the full enterprise portfolio.

South Africa -Second National Operator (SNO)

In February 2005, the South African government selecteda consortium of VSNL and Tata Africa Holdings Ltd., theinvestment arm of the Tata Group in South Africa, as thestrategic investor in that country’s proposed SNO structure.The equity partners in the SNO are Eskom, Transnet andNexus and a holding company with 51% stake. VSNL willhold its stake in this holding company with two otherprivate consortia. This new venture is allowed to providedomestic and international voice and data services, exceptmobile services. The SNO received its license in December2005 and expects to make a business launch during the

later part of 2006. The South African market is a large andexciting opportunity in its own right, and also provides afuture gateway to the rest of Africa. VSNL SNOSPV Pte.Ltd., a wholly-owned subsidiary of VSNL incorporated inSingapore, is the investment vehicle for all investmentsmade by VSNL in the SNO venture.

VSNL Lanka Limited (VLL)

In June 2003, VSNL Lanka Ltd., a wholly owned subsidiaryset up by VSNL in Sri Lanka, received an External GatewayOperator (EGO) licence. The EGO licence allows VLL to offerILD voice and data services, which it began providing inFebruary 2004. The Sri Lankan market, growing at anestimated 20%-25% every year, allows VSNL to increase itssub-continental presence and extend offerings in theregion to international carriers. VLL has witnessedsubstantial growth in its very short existence. It was ableto earn cash profits within the first six months of itsoperations and recorded net profits in the first year of itsoperations.

CUSTOMER SERVICE

VSNL has transformed itself into a customer-focusedorganisation. The charter of the Customer ServiceOrganization is to support the entire customer life cyclefrom service delivery to service assurance, includingretention and growth.

To support VSNL’s international presence, the Company isdefining and implementing stringent service deliverystandards that adhere to global best practices. In addition,VSNL has created a dedicated team to bring focus to itsrelationship with other carrier partners.

In order to support the enterprise and internationalbusiness functions, VSNL has established a centralized 24x7call centre. Retail and broadband customers are supportedby two other outsourced call centres. The organisation isalso providing its expertise in setting up the entirecustomer service function including customer impactingprocesses and systems, to support the SNO initiative inSouth Africa.

HUMAN RESOURCES

VSNL has been constantly reviewing its HR policies in orderto keep pace with the market changes and has embarkedon a range of initiatives focusing on creating a positivework environment that provides employees with ampleopportunities for growth and development as well asensuring high levels of motivation and engagement.

Manpower Planning

The manpower requirements are assessed on a regularbasis keeping in view the competitive nature of ourindustry and talent induction has been done in areas likeCustomer Service, Sales, Networks, Finance, etc. Also effortshave been put in to ensure creation of an internal talentpool by recruiting and training Graduate Engineer Traineesand Management Trainees.

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VSNL employed 2,926 employees on March 31, 2006,against 2,479 on March 31, 2005. Of these, 2,258 areexecutives and 668 are non-executives.

Training and Leadership Development

The changing business scenario necessitates continuousdevelopment of employees in terms of skills andcompetencies in line with the Company’s requirements.In-house training programs as well as programs with thehelp of external faculty were conducted coveringfunctional, behavioural and management areas. TheCompany has implemented a systematic process fororientation and training of new recruits.

Compensation and benefit practices

Compensation and benefit practices which the Companyhad evolved during the period under review aim to becompetitive, attractive and innovative and is either globalor local in orientation depending on what best drivesbusiness performance and rewards individual contribution.

Performance based pay and performance linked incentiveare some of the initiatives that have contributed to attractand retain key talent, foster a superior performance cultureand accomplishment of targets. The benefit packages andpersonnel policies are continuously being reviewed to giveour employees comparable industry and market practices.

Employee Relations

During the year, harmonious relationships were maintainedwith the employee representative bodies. A significantmilestone was the introduction of a PerformanceManagement System for non-executives, as a consequenceof a three-year accord reached on productivity-linkedincentive and performance linked pay.

The Company conducted its second employee satisfactionsurvey in January 2006. Based on the findings, VSNL hastaken up various enterprise and team level issues toenhance satisfaction.

INFRASTRUCTURE

One of the biggest strengths of your Company is its global,robust, scalable network, with the unique advantage ofdiversity and multiple connectivity options internationally.Your Company operates a total of 26 switches: 5international gateway switches and 21 NLD switches. VSNLhas over 50 earth stations, ownership in over 100 sub-seaand terrestrial cable systems with 200,000 kilometres offibre and cable, 275 points of presence in 25 countries andaccess to five geo-stationary satellites. Your Company alsohas seven data centres globally.

Tata Indicom Cable (TIC)

In March 2005, VSNL operationalised its own Tata IndicomCable (TIC). The state-of-the-art 3,100 km submarine cablesystem between Chennai and Singapore is VSNL’s first fullyowned undersea cable with an initial capacity of 320gigabits per second that can be ultimately scaled up to

5.12 terabits per second. With an estimated life of 25 years,the new cable enhances significantly India’s connectivityinto the Asia-Pacific region and the U.S, via the Pacific.

SEA-ME-WE4

VSNL is one of the founding members of SEA-ME-WE4, aconsortium of 16 parties that has set up a cable systembetween France and Singapore with Mumbai as one ofthe landing points. The cable has a design system capabilityof 1.28 terabits per second with initial capacity of 160gigabits per second. This system has an estimated life of25 years. This new cable enhances significantly India’sconnectivity into the Asia-Pacific region, Middle East,Europe and the U.S, both via the Atlantic and the PacificOcean. VSNL has been assigned the crucial responsibilityof network administration and the operation of thecentralised network operating centre located at Mumbaito manage the entire system, thereby giving credibility toyour Company’s skills and technical expertise. The systemwas inaugurated for service in November 2005.

VSNL is already utilising SEA-ME-WE2, SEA-ME-WE3, SAFE,FLAG and TIC submarine cable systems as part of itsinternational network out of India.

VSNL’s submarine cable landing stations in India areintegrated with its domestic NLD network and providecustomers with a choice of bandwidth options. VSNL offersredundancy on the intra Asia, Trans Pacific, Trans Atlantic,continental Europe and U.S long distance routes. VSNL alsobenefits from mutual restoration agreements betweencable systems in which it participates. These arrangementshelp reduce or eliminate the cost of restoration, drivingdown the cost to customers and increasing reliability andcustomer service. A cable restoration agreement for VSNL’sTIC cable with i2i, a parallel Chennai-Singapore cable, cameinto force in June 2005.

NLD Backbone

VSNL’s domestic long distance network infrastructureincludes a 37,000 kilometre fibre optic network and a newMPLS based IP-VPN backbone linking over 120 points ofpresence, which is integrated with the Company’sinternational MPLS network thereby enabling multinationalcompanies to seamlessly connect deep into India. YourCompany has rolled out its metro ethernet services in eightmajor cities.

Last Mile

In view of the fact that the last mile was not readilyavailable, in order to be able to provide IP VPN services tocorporate clients as a part of its ISP offering your Companyhas invested substantially in Wireless last mile onMultipoint Microwave Distribution System(MMDS)technology and fiber as well as through arrangements withcable operators to provide broadband services. In view ofthe recent amendments in the telecom licenses, the IP VPNservices have now become a part of the NLD license andthe MMDS as well as the other last mile network can nowbe utilised for providing services under the NLD license.



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Another significant change brought about by theamendment is that the NLD service provider is permittedto make its own arrangements for laying the last mile toserve its customers directly for provision of leased circuitsand CUG’s, which was hitherto not permitted. Thisamendment removes a major hurdle in terms of availabilityof the last mile to VSNL.

INTERNAL INITIATIVES

Your Company continues with various internal initiativessuch as organisation restructuring, profit enhancement,cost optimisation, quality, customer care and informationtechnology to compete effectively, improve organisationalflexibility and respond quickly to customers. Someimportant initiatives are:

Business Excellence

Your Company has been re-inventing its business modeland transforming itself in tandem with business andregulatory changes. To help drive the transformation, VSNLis implementing the Tata Business Excellence Model(TBEM), a framework that lays down best practices in areaslike leadership, strategy, customer and market focus,knowledge management, human resources, processmanagement planning, customer service and socialresponsibility. During the past year, VSNL has made furtherprogress in implementing TBEM, with many continuousimprovement projects underway and extensive employeeparticipation.

Amongst the many initiatives undertaken, your Companybecame the world’s first telecom service provider to obtainthe TL 9000 certification (a set of quality system metricsdesigned for the telecom industry, encompassing ISO 9001and other best practices). Your Company is also the firsttelecom service provider in India to obtain the BS7799certification.

In line with a Tata Group priority, your Company has beenactively promoting innovations. In the first year of theinitiative, VSNL has registered six copyrights for innovationdone by its employees. VSNL is also a member of the TataKnowledge Centre, a key initiative started by Tata QualityManagement Services (TQMS) this year.

Your Company is successfully running the Six Sigma GreenBelt and Black Belt programmes, and has completed morethan 100 projects over the last year, with many more inthe pipeline.

Compliance with section 404 of Sarbanes Oxley Act,2002

Pursuant to its listing on the New York Stock Exchange,VSNL must comply with section 404 of the Sarbanes OxleyAct by March 2007, which lays down requirements forinternal control over financial reporting in the Company.VSNL continues to make rapid progress towardscompliance with these stringent requirements.

Revenue Assurance and Cost Reduction

VSNL continues with its ongoing cost reduction exercisethat began in September 2002, and has successfullycompleted several cost reduction projects as a part of itscontinuous improvement activities.

VSNL’s Revenue Assurance function aims to proactivelyprevent revenue leakages and ensure robust internalcontrols and processes that keep pace with increasingbusiness complexities, thus moving towards zero toleranceof revenue leakages. A Revenue Assurance charter andmanual have been formulated to further structure theseactivities.

Business Process Improvement

In its constant endeavour for excellence, your Companyhas initiated an exercise to streamline internal processesand institutionalise a culture of continuous improvement.The internal audit and revenue assurance teams activelycontribute to sustaining process improvement efforts.Senior management regularly tracks implementation ofimprovement ideas.

Enterprise Risk Management

VSNL is establishing an enterprise-wide risk management(ERM) framework to take advantage of opportunities andoptimally manage risks, as well as to duly comply withclause 49 of the Listing Agreement. In line with VSNL’scommitment to delivering sustainable value, thisframework aims to provide an integrated and organisedapproach for evaluating and managing risks.

FIXED DEPOSITS

VSNL has not accepted nor does it hold any publicdeposits.

STATUTORY INFORMATION AND DISCLOSURES

Information in accordance with the provisions of Section217 (2A) of the Companies Act, 1956, read with theCompanies (Particulars of Employees) Rules, 1975, asamended, regarding employees is given in Annexure ‘II’ tothe Directors’ Report. There are no particulars to bedisclosed pertaining to the year under review, in respectof R&D and technology absorption as required underCompanies (Disclosure of Particulars in the Report of theBoard of Directors) Rules, 1988. For the purpose of Form ‘C’under the said rules, foreign exchange earnings wereequivalent to Rs.17,120 million and foreign exchangeoutgo was equivalent to Rs. 7,958 million. There are noqualifications contained in the report of the statutoryauditors for the year 2005-06.

SUBSIDIARIES

The Statement pursuant to section 212 of the CompaniesAct, 1956 containing details of the Company’s subsidiariesis attached. The consolidated financial statements of theCompany and its subsidiaries, prepared in accordance withaccounting standard 21 (AS 21) prescribed by The Instituteof Chartered Accountants of India, form part of the annualreport and accounts. The Company has been grantedexemption from attaching the accounts etc., of itssubsidiary companies with the balance sheet of the parentcompany. These documents will be provided on requestto any shareholder wishing to have a copy, on receipt ofsuch request by the deputy company secretary at theregistered office of the Company. These documents willalso be available for inspection by any shareholder at theregistered office of the Company.

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THE BOARD OF DIRECTORS

The VSNL Board presently consists of ten Directors.Mr. Subodh Bhargava took over as Chairman of VSNL witheffect from April 11, 2005. Dr. Mukund Rajan joined theBoard on May 6, 2005. Mr. N. Parameswaran, GovernmentNominee Director, joined the Board with effect from August30, 2005 and on September 14, 2005, Mr. P.V.Kalyanasundaram and Dr. V.R.S. Sampath, IndependentDirectors, joined the Board. On 17 July 2006, Mr. AmalGanguli, Independent Director, joined the Board of VSNL.

On April 11, 2005, Mr. Ratan Tata resigned as a Director ofVSNL; on August 10, 2005, Mr. Rakesh Kumar, governmentnominee Director, resigned as Director of VSNL; onSeptember 9, 2005, Mr. Vivek Singhal and Dr. AshokJhunjhunwala, Independent Directors, resigned as Directorsof VSNL; on November 25, 2005, Mr. F.A. Vandrevala, Director,resigned as Director of VSNL and on March 21, 2006, Mr.Suresh Krishna, Independent Director, resigned and theyaccordingly ceased to be Directors on the Board of VSNLfrom the respective dates. For details about the Directors,please refer to Point 2 of the Report on CorporateGovernance below. The Board places on record itsappreciation for the services rendered by the outgoingDirectors.

In accordance with the provisions of the Companies Act,1956 and the Company’s Articles of Association, Mr. N.Srinath and Mr. Ishaat Hussain retire by rotation at theensuing annual general meeting and being eligible, offerthemselves for reappointment.

In accordance with the provisions of the Companies Act,1956 and the Company’s Articles of Association, Dr.Mukund Rajan, Mr. P.V. Kalyanasundaram, Dr. V.R.S. Sampathand Mr. Amal Ganguli hold office only up to this AnnualGeneral Meeting; notices under the provisions of section257 of the Companies Act, 1956 have been received bythe Company from members signifying their intention topropose them as a candidate for the office of Director.

None of the Company’s directors are disqualified frombeing appointed as Directors as specified in Section 274of the Companies Act, 1956 as amended by the Companies(Amendment) Act, 2000.

CORPORATE GOVERNANCE

Pursuant to Clause 49 of the listing agreements with thestock exchanges, a Management Discussion and Analysis,Corporate Governance Report and Auditors’ Certificateregarding compliance of conditions of CorporateGovernance are made a part of the annual report.

CORPORATE SUSTAINABILITY INITIATIVES

As a member of the Tata family, VSNL is committed to theGroup’s philosophy of improving the quality of life in thecommunities we serve. VSNL has a Corporate SocialResponsibility (CSR) Policy and is a member of the TataCouncil for Community Initiatives (TCCI). The Companyfosters an internal culture of volunteerism and contributesto the socio-economic development of the communitiesit operates in, through financial and other assistance tovarious causes and organisations.

VSNL is sensitive towards environmental, ecological andbiodiversity concerns arising out of its operations. Towardsthat end, VSNL has also become the first telecom serviceprovider in India to obtain ISO 14001 Certification.

MANAGEMENT OF BUSINESS ETHICS (MBE)

Consistent with the Group’s policy, VSNL is systematicallyimplementing the Tata Code of Conduct. VSNL has put inplace an organisational structure and a process toimplement and improve ethical standards and practices,and began implementing the Tata Code of Conduct in2003-04. VSNL conducts regular seminars, quizcompetitions, ethics awareness campaigns and workshopsto sustain the momentum and to strengthen ethical valuesand practices among various stakeholders.

DIRECTORS’ RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies Act, 1956,the Directors, based on the representations received fromthe operating management, confirm that-

• In the preparation of the annual accounts, theapplicable accounting standards have been followedand there are no material departures;

• They have, in the selection of the accounting policies,consulted the statutory auditors and have appliedthem consistently and made judgements andestimates that are reasonable and prudent so as togive a true and fair view of the state of affairs of theCompany at the end of the financial year and of theprofit of the Company for that period;

• They have taken proper and sufficient care, to thebest of their knowledge and ability, for themaintenance of adequate accounting records inaccordance with the provisions of the Companies Act,1956, for safeguarding the assets of the Company andfor preventing and detecting fraud and otherirregularities;

• They have prepared the annual accounts on a goingconcern basis.

ACKNOWLEDGMENTS

The Directors would like to express their thanks for thehard work and dedication of every employee. The Directorsappreciate the support of various Ministries anddepartments of the Government of India and the DoT. TheDirectors are also grateful to the Company’s stakeholdersand partners including its customers, shareholders, bankers,solicitors, suppliers and foreign telecom administrationsfor their support.

On behalf of the Board of Directors

Subodh BhargavaDated: 11 August 2006 Chairman

Registered Office :Videsh Sanchar BhavanM. G. Road,Mumbai - 400 001.



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INDUSTRY ANALYSIS

The Indian telecom industry has changed significantly overthe last decade with all its segments opening tocompetition. This market is now highly competitive,complex and evolving rapidly, with numerous serviceofferings of different kinds, including fixed-line, mobile,internet, long distance and various data services. India’stelecom market is growing rapidly and by 2010, telecomis expected to be a Rs.1,380 billion sector, contributing5.4% to India’s GDP.

According to the latest figures from TRAI, during 2005-06,the mobile subscriber base increased approximately 73%,from 52 million to over 90 million, while the fixedsubscriber base increased approximately 8% from 46million to 50 million. During the year, the subscriber basefor internet services grew 25%, from 5.5 million to 6.94million. Broadband subscribers exceeded 1.3 million as onMarch 31, 2006. STD charges fell substantially afterannouncement of new Interconnect Usage Charge (IUCs)with effect from March 1, 2006, international private leasedcircuit charges dropped by between 35-70%, andbroadband tariffs fell by 40-50%. The rapid growth in thismarket, combined with falling tariffs, offers great potentialdemand for various services of VSNL.

International Long Distance Voice (ILD)

The combined ILD traffic to and from India has grown fromabout seven billion minutes in 2004-05 to about 10 billionminutes in 2005-06, an increase of approximately 50%, witha total revenue of nearly Rs.20 billion. The increase inoutgoing traffic is an effect of the dramatic increase inmobile subscribers coupled with the decrease in ILD callingrates. At the same time, the increased global expansion ofIndian corporates and emergence of India as a globalservices center has led to an increase in incoming ILDtraffic.

National Long Distance Voice (NLD)

The increased mobile penetration has also resulted insignificant growth in the NLD traffic. The NLD traffic hasgrown by over 70% from 30 billion minutes in 2004-05 to48 billion minutes in 2005-06. The increased competitionalong with regulatory initiatives has reduced the gapbetween NLD and local tariffs. Further reduction in comingyears is expected to drive growth further, with NLD trafficexpected to almost double to 80 billion minutes (TRAIforecasts) over the next year.

Enterprise Data Services

Meanwhile, the Indian corporate segment has also beengrowing at a very healthy rate, with enterprise datavolumes growing almost 100%. Even coupled with the 35-40% price drop, the industry growth in revenue terms hasbeen a healthy 20-30% in the past financial year. There aretwo key drivers for this growth. First, the enhanced

capability of Indian corporates to deliver goods andservices on a global basis is opening up new customersand geographies for this business. Second, there issignificant growth in the existing customers’ endbusinesses. Banking and financial services (BFSI),information technology (IT), and BPOs/ Call Centres aresome examples of high growth sectors.

A combination of these two factors has created a platformfor VSNL’s Enterprise Business Unit to expand the existingbusiness and create a new portfolio of services.

Internet and Broadband Services

Broadband in India is a developing story with stronggrowth expected over the next few years. Broadbandservices to residential homes emerged in early 2005.Although the growth in broadband subscribers has beenslow in comparison to mobile, predominantly due to theinability to demonstrate a unique value proposition to themarket other than to enterprises and a small group ofusers. However, due to the recent focus of broadbandplayers on bundled services like the introduction of IPTV,the market may achieve higher growth rates within acouple of years. By the end of March 2006, the pace ofbroadband deployments had already quickened and thetotal number of broadband subscribers in the countrycrossed the one million mark for the first quarter of 2006.

India’s entertainment industry is large, with cable revenuesalone estimated at Rs.157 billion in 2005. The right mix ofcontent and information could help to proliferatebroadband usage among Indian consumers in the future.

PREMATURE TERMINATION OF MONOPOLY ANDCOMPENSATION

The Government of India (GoI) allowed private players intothe ILD business from April 1, 2002, terminating VSNL’sexclusivity two years ahead of schedule, and compensatedVSNL with a package of benefits. GoI had given assuranceprior to disinvestment that GoI would consider additionalcompensation if found necessary on a detailed review,when undertaken. However, prior to the disinvestment ofVSNL in February 2002, GoI granted a dispensation as fulland final settlement of every sort of claim againstpreponing of ILD de-monopolisation of VSNL by two years.VSNL had been pursuing GoI for considering additionalcompensation. Since legalities warranted the filing of aplaint with the High Court within the stipulated time toensure that the claim is not barred by limitation, VSNL hasfiled a claim in the Mumbai High Court.

DEMERGER OF SURPLUS LAND

Under the terms of the share purchase and shareholders’agreements signed between the parties at the time ofprivatisation, it was agreed that certain identified landswould be demerged into a separate company. It wasfurther agreed that if for any reason the Company cannot

ANNEXURE 1: MANAGEMENT DISCUSSION AND ANALYSIS

19

hive off or demerge the land into a separate entity,alternative courses as stipulated in the share purchase andshareholders’ agreement would be explored. A draftscheme of demerger has been presented to the VSNLBoard, and the parties to the shareholders’ agreement arecurrently examining the legality and feasibility ofimplementing the scheme. The land identified fordemerger at different locations measures 773.13 acres, andcarries a book value (as indicated in the accounts) of Rs.1.64million.

IMPORTANT HISTORICAL EVENTS AT VSNL

Disinvestment

VSNL ceased to be a Public Sector Undertaking (PSU) onFebruary 13, 2002 when the Government of India, whichowned 52.97% of VSNL’s equity, divested 25% stake to theTata Group as a strategic partner along with the right tomanage the Company. Following its subsequent open offerfor a further 20% of VSNL’s equity, the Tata Group is theCompany’s biggest shareholder with a holding of over 45%as of June 30, 2006, while GoI is VSNL’s second-largestshareholder with a 26.12% stake.

Investment in TTSL

In 2002, VSNL was entirely dependent on the public sectorincumbent access providers and other cellular and basicservice providers to route their traffic through VSNL. Itbecame imperative for VSNL to acquire an end-customerbase of its own. The VSNL Board had accordingly decidedto invest in Tata Teleservices Ltd. (TTSL). At the time theinvestment was approved, TTSL was present in crucialtelecom circles across India that yielded over 65% of thecountry’s telecom revenues. TTSL has subsequently takenadditional licences that will give it nation-wide coverage.VSNL’s investment in TTSL now gives the Companysubstantial access to end customers across the entirecountry. VSNL’s total investment in TTSL’s equity as onMarch 31, 2006 stood at Rs.10.11 billion (16.14%). VSNL’seffective holding in TTSL stands at 14.14% as of March 31,2006.

RISKS AND CONCERNS

Like all companies, VSNL is exposed to certain risks andconcerns in the course of its business:

End Customer Ownership

An important concern for the Company on its voicebusiness continues to be VSNL’s lack of direct access toend customers. VSNL is dependent on cellular and basictelecommunication service providers to route the nationallong distance and international calls of their customersthrough VSNL. Some of these operators are alsocompetitors of VSNL in the long distance and othermarkets. It would be a serious disadvantage to VSNL notto have access to a large base of customers in order tocompete for its business. VSNL has also been pursuingimplementation of Direct Customer Access either throughthe long awaited Carrier Access Code (CAC, which allowssubscribers to choose their long distance provider) regime

or through services like calling cards.

Delay in Implementation of CAC Regime

The Carrier Access Code (CAC) regime was to have beenimplemented in phases for different segments of the longdistance sector, with the final implementation of CarrierPre Selection (CPS) to be completed by December 2003.Carrier selection gives subscribers the option to either pre-select a long distance carrier for all ILD calls, or choose aprovider for each call by dialling a carrier access codebefore making a call. Customers can then freely choosetheir long distance carrier based on competitiveness andquality, rather than the choice being made by accessoperators, as is the case at present.

However, implementation of the CAC regime has beendelayed due to technical and other reasons. In view of theintense competition and the fact that other players areintegrated service providers, early implementation of theCAC regime is important to allow a stand-alone longdistance operator such as VSNL to develop its owncustomer base. The delay in implementation of the CACregime is a cause of concern for VSNL. The Company hopesthat this regime, which is essential to the survival of stand-alone ILD and NLD operators and is a fair entitlement ofsubscribers seeking competitive service options, will beimplemented at the earliest.

Regulatory Environment and Tariffs

Most of VSNL’s services including ILD, NLD and internetservices are operated under licences from the DoT, andthe Company is subject to the terms and conditionsincluded therein. As India continues to liberalise its telecomsector and the regulatory regime keeps pace with thechanging telecom scenario, it is possible that there maybe interpretational differences on the guidelines, licenceconditions etc. leading to the need for VSNL to defend itsposition in case of any notice etc. from the regulator orlicensor.

TRAI has recommended norms for a Unified LicensingRegime (ULR), which the DoT is considering. Ifimplemented, these norms may increase competitivepressures.

The telecom environment in the country has been furtherliberalized with significant changes in the NLD and ILDLicenses. Pursuant to the Press Note No. 5 dated November3, 2005 issued by the Department of Industrial Policy andPromotion, Ministry of Commerce and Industry,Government of India, the DoT vide its directives datedDecember 14, 2005 conveyed certain amendments to theILD and NLD licenses. The foreign Direct Investment ceilinghas been enhanced from 49% to 74 % with some stringentguidelines regarding remote access and the same has beenmade applicable to all telecom service providersirrespective of the level of foreign direct investment. Thiswill affect the efficient monitoring and maintenance ofinternational networks. The entry barriers for the telecomlicenses have also been substantially reduced byprescribing an entry fee of Rs. 2.5 crores each for ILD and



20

NLD licenses which is expected to lead to a number ofplayers entering the field leading to adverse effect onCompany’s margins.

The tariffs charged by telecommunication service providersin India including VSNL are subject to TRAI regulations.VSNL periodically renegotiates interconnect agreementswith various domestic mobile service operators and basictelecom service providers; and settlement rates withinternational carriers. The consequent revisions could havea material effect on VSNL’s operations and financialcondition.

The grey market and the IUC regime

On January 24, 2003, the Telecom Regulatory Authority ofIndia (TRAI) decided to introduce the interconnectionusage charge (IUC) regime to govern inter-operatorsettlements for calls passed between different networksand implemented the system from May 1, 2003. The IUCincludes the cost of the origination/termination of a calland an inbuilt Access Deficit Charge (ADC), which makesup for below-cost monthly rentals and local call chargesfor fixed telephone connections in rural areas.

High ADCs had encouraged grey market ILD services,especially in the larger cities. Illegal international routeoperators offer cheaper services since they do not pay ADC.According to various market estimates these operators takea share of as much as 30%-40% of the incominginternational long distance traffic into India. Theseillegitimate operators take away the business of licensedproviders and deprive the Government of income sincelicence fees are revenue based; they also pose a threat tothe security of the country since such grey calls cannot bemonitored.

During 2005-06, TRAI reduced the ADCs on incoming ILDcalls from Rs. 3.25 to Rs. 1.60 per minute and from Rs.2.50to Rs.0.80 per minute on outgoing ILD calls, and abolishedthe per minute based ADC on NLD calls of Rs.0.30 perminute, effective March 1, 2006. However, a revenue sharebased ADC of 1.5% of the AGR has been introducedeffective from March 1, 2006. The reductions may have animpact on curbing illegal operations and increasingvolumes of legitimate carriers like VSNL.

Increased Competition

The de-regulation of the Indian telecom market exposesthe Company to increased competition:

• The Internet Service Provider (ISP) business is intenselycompetitive and has a large number of players.

• ISPs are allowed to provide Internet telephony callsoverseas. Though, the quality of such service may notbe comparable to traditional ILD calls, it may beaffecting VSNL’s ILD business as also the Company’sown Internet telephony services.

• VSNL has entered new businesses such as the nationallong distance and broadband businesses, where thereare several potential and existing competitors.Relaxation of licensing conditions for National and

International Long distance services by theDepartment of Telecommunications effective January1, 2006 is likely to intensify competition in thesesectors.

Integration of International Acquisitions

VSNL has embarked on an aggressive growth strategy inwhich acquisitions play an important role. Further, a largepart of VSNL’s operations are now in international markets.Integrating the acquisitions and managing operations indiverse international locations would be critical to thesuccess of VSNL’s plans.

Economic Conditions

Downturns in the Indian, regional and global economiescould have a material adverse effect on the Company’sshort-term business and prospects. VSNL’s operations couldbe affected by adverse developments in the operations ofsome of its key overseas business associates.

Exchange Rate Parity

A significant portion of Company’s revenues is received inforeign exchange. Similarly, a large portion of its costs isincurred in foreign exchange. Hence, the parity of the rupeeto the US dollar and the SDR to the US dollar can havesignificant impact on the Company’s revenues. Therefore,the Company partially hedges its foreign exchange risk.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

VSNL has a well-developed internal control system andhas also implemented the SAP system for accounting.Internal control systems for the newly acquired businessesare being reviewed and will be streamlined. The financialpowers of various executives are clearly defined in thedelegation of powers. Technical and financial operationsare controlled by state-of-the-art technology and systems.The accounts of the Company are subjected to statutoryaudit.

CAUTIONARY STATEMENT

Statements in the directors’ report and managementdiscussion and analysis describing the Company’sobjectives, projections, estimates and expectations may be‘forward-looking statements’ within the meaning ofapplicable securities laws and regulations. Actual resultscould differ substantially or materially from thoseexpressed or implied. Important factors that could make adifference to the Company’s operations include economicconditions affecting demand/supply and price conditionsin the domestic and overseas markets in which theCompany operates, changes in government regulations,policies, tax laws and other incidental factors. Further, theCompany retains the flexibility to respond to fast-changingmarket conditions and business imperatives. Therefore, theCompany may need to change any of the plans andprojections that have been outlined in this report,depending on market conditions.

***

21

REPORT ON CORPORATE GOVERNANCE FOR THE YEAR 2005-06(In accordance with clause 49 of the listing agreement with Indian stock exchanges)

Attendance No. of Directorships No. of Committee PositionsBoard Meetings at the last AGM in Public Companies held in Public Companies

Name of Director Category during the tenure (14.09.2005) Including VSNL Including VSNL

Held Attended Chairman Member Chairman Member

Directors in Office

Mr. Subodh Bhargava Independent[Chairman : w.e.f. Non Executive 11 11 Yes 2 10 3 511.04.05]

Mr. N. Srinath Not IndependentExecutive 11 11 Yes NIL 3 NIL NIL

Mr. Ishaat Hussain Not IndependentNon Executive 11 10 Yes 1 11 3 6

Mr. Kishore A. Chaukar Not IndependentNon Executive 11 10 Yes NIL 12 4 3

Corporate governance is the system by which businesscorporations are directed and controlled. The corporategovernance structure specifies the distribution of rightsand responsibilities among different participants in thecorporation, such as the board, managers, shareholders andother stakeholders, and spells out the rules and proceduresfor making decisions on corporate affairs. By doing this, italso provides the structure through which the companyobjectives are set, and the means of attaining thoseobjectives and monitoring performance.

1. CORPORATE GOVERNANCE PHILOSOPHY ANDPRACTICE

VSNL has evolved from a monopoly ILD player to a multi-national corporation having its presence felt across theglobe. Its businesses are no longer confined within theboundaries of India but are now spread across the globeoffering a wide spectrum of basic and value added services.The challenge for VSNL for governance lies in designing amodel addressing the specific and unique needs ofgeographies and yet strengthening and aligning the overallbusiness objectives and goals.

The Company believes that total business risk eliminationis never possible but can be minimized by consistentlydeveloping and following the best practices of CorporateGovernance. To this end, the Company focuses ondeveloping and implementing higher standards ofaccountability to enable optimum returns to allstakeholders. The company is installing new state-of-theart systems including integrated financial accounting andbudgeting systems and through a systematic process oftraining and development has increased the quality of itspersonnel.

Fairness in words, actions and deeds with all stakeholdersare the pillars of corporate governance philosophy of theCompany. Corporate Governance in substance rather thanform is what the Company believes in and actively

implements. To ensure this, a high level CorporateGovernance Council has been formed to ensure that thebest practices of Corporate Governance are adopted.

VSNL’s operations and accounts are audited at three levels:an internal audit; a statutory audit by an Indian accountingfirm under Indian accounting requirements and theirrestatement by an internationally recognised accountingfirm according to US GAAP. The Company communicatesregularly with its shareholders through bulletins,presentations and meetings with analysts and investors.

2. BOARD OF DIRECTORS

The Company is managed exclusively by and under thedirections of the Board. The composition of the Board isgoverned by the applicable laws and regulations as wellas the Articles of Association of the Company. The powersdelegated by the Board to the Managing Director and bythe Managing Director to the sub-ordinate officers aredocumented in the Delegation of Powers (DoP). The DoPis revised periodically.

Nine out of ten directors are non-executive directors,forming more than half of the total number of directors.VSNL has four independent directors and one executivedirector.

None of the directors hold directorships in more than thepermissible number of companies under the applicableprovisions. Similarly, none of the directors on the board’ssub-committees hold membership of more than tencommittees of boards, nor is any director a chairman ofmore than five committees of boards.

The names and categories of the directors on the board,their attendance at board meetings during the year andat the last annual general meeting, and the number ofdirectorships and committee memberships held by themin other companies as of 31 March 2006 (with Directorshipsupdated as of 30 July 2006) are given below:



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1 Nominee director of the Government of India.

Notes :

(a) None of the directors is related to any other director.

(b) None of the directors has any business relationship with the company.

(c) None of the directors received any loans and advances from the company during the year.

(d) The information as required under Annexure IA to Clause 49 is being made available to the board.

(e) The company did not have any pecuniary relationship or transactions with non-executive directors during 2005-06.

(f ) The detailed resume of each director and the details of the directors proposed to be appointed/reappointed at the20th Annual General Meeting are published elsewhere in the Annual Report.

(g) The gap between two board meetings did not exceed four months. The dates on which the 11 board meetings wereheld are as follows:

11 April 2005 9 June 2005 28 July 2005 30 August 2005

14 September 2005 7 October 2005 25 October 2005 7 December 2005

31 January 2006 1 March 2006 31 March 2006

Attendance No. of Directorships No. of Committee PositionsBoard Meetings at the last AGM in Public Companies held in Public Companies

Name of Director Category during the tenure (14.09.2005) Including VSNL Including VSNL

Held Attended Chairman Member Chairman Member

Directors in Office

Mr. Pankaj Agrawala1 Not IndependentNon Executive 11 8 No NIL 2 NIL 3

Dr. Mukund Rajan Not Independent[w.e.f. 06.05.05]. Non Executive 10 9 Yes NIL 3 NIL NIL

Mr. N. Parameswaran1 Not Independent[w.e.f. 30.08.05] Non Executive 8 7 Yes NIL 2 NIL NIL

Mr. P.V. Kalyanasundaram Independent[w.e.f. 14.09.05] Non Executive 7 6 N/A NIL NIL NIL 1

Dr. V.R.S. Sampath Independent[w.e.f. 14.09.05] Non Executive 7 6 N/A NIL 2 NIL 1

Mr. Amal Ganguli Independent[w.e.f. 17.07.06] Non Executive N/A N/A N/A NIL 11 3 4

Directors served during the year

Mr. R.N. Tata Not Independent[Until 11.04.05] Non Executive 1 1 N/A 12 2 NIL 8

Mr. Rakesh Kumar1 Not Independent[Until 10.08.05] Non Executive 3 3 N/A NIL NIL NIL NIL

Mr. Suresh Krishna Independent[Until 21.03.06] Non Executive 10 3 No 6 3 2 3

Mr. Vivek Singhal Independent[Until 09.09.05] Non Executive 4 1 N/A NIL 6 1 1

Dr. Ashok Jhunjhunwala Independent[Until 09.09.05] Non Executive 4 4 N/A NIL 8 NIL 8

Mr. F.A. Vandrevala Not Independent[Until 25.11.05] Non Executive 5 5 Yes 2 13 NIL 2

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3. AUDIT COMMITTEE

The audit committee consists of four members. TheChairman of the committee is Mr. Subodh Bhargava, anindependent director, who earlier served as the Chairmanand Managing Director of Eicher Motors and has necessaryand sufficient financial and accounting background.

The other members of the committee are Mr. PankajAgrawala, Government Nominee Director, Mr. P.V.Kalyanasundaram, Independent Director and Mr. AmalGanguli, Independent Director. Mr. Satish Ranade, CompanySecretary and Chief Legal Officer is the audit committee’sSecretary. Mr. Ishaat Hussain, Director (Finance), Tata SonsLimited, who was a member of the Audit Committee till24 October 2005, is a special invitee for Audit Committeemeetings.

The audit committee has adequate powers and detailedterms of reference to play an effective role as requiredunder the provisions of the Companies Act, 1956 andclause 49 of VSNL’s listing agreement with the stockexchanges.

Attendance at the Audit Committee Meetings

Name of Member Audit CommitteeMeetings during the tenure

Held Attended

Mr. Subodh Bhargava 6 6

Mr. Pankaj Agrawala 6 5

Mr. P.V. Kalyanasundaram[W.e.f. 24.10.05] 3 2

Mr. Amal Ganguli[W.e.f. 17.07.06] N/A N/A

Mr. Ishaat Hussain (SpecialInvitee) [Member till24.10.05] 3 1

Mr. Vivek Singhal[Until 09.09.05] 3 2

Dr. Ashok Jhunjhunwala[Until 09.09.05] 3 2

At the Annual General Meeting held on September 14,2005, the Chairman of the Audit Committee, Mr. SubodhBhargava was present. During the last financial year, theAudit Committee held five formal meetings and oneinformal meeting and not more than four months hadelapsed between any two meetings. The dates of meetingsof the Audit Committee are as follows:

3 June 2005 8 June 2005 28 July 2005(Informal meeting)

24 October 2005 31 January 2006 1 February 2006

4. REMUNERATION COMMITTEE

a) Constitution and Terms of Reference

The Remuneration Committee consists of two members.The Chairman of the Committee is Mr. Kishor Chaukar,Mr. Subodh Bharagava is the other member on theCommittee. Mr. Satish Ranade, Company Secretary andChief Legal Officer is the Remuneration Committee’sConvener. In January 2006, the Remuneration Committeethrough a circular resolution had recommended certainchanges in the terms of appointment of the executivedirector. One meeting of the Remuneration Committeewas held on 26 June 2006.

The broad terms of reference of the RemunerationCommittee are to review the performance of the Whole-time Directors, after considering the Company’sperformance and recommend to the Boardremuneration including salary, perquisites andcommission to be paid to the Company’s Whole-timeDirectors within the overall ceilings approved by theshareholders.

b) Remuneration Policy

The non-executive Directors were not paid anyremuneration till 2004-05 except payment by way ofsitting fees. For the financial year 2005-06, subject toapproval of shareholders at the 20th Annual GeneralMeeting, the Company proposes to pay remunerationto the non-executive directors (NEDs) by way ofcommission at a rate not exceeding 1% per annum ofthe profits of the Company (computed in accordancewith Section 309(5) of the Companies Act, 1956). Thedistribution of commission amongst the NEDs is placedbefore the Board. The commission to NEDs is proposedto be distributed broadly on the basis of their attendanceand contribution at the Board and certain Committeemeetings as well as the time spent on operationalmatters other than at the meetings.

The Company pays sitting fees of Rs.10,000/- (Rs.5000/-till 1 March 2006) per meeting to the non-executivedirectors for attending the meetings of the Board andCommittee meetings.



24

The Company pays remuneration by way of salary,perquisites and allowances (fixed component) andcommission (variable component) to the whole timedirector. Salary is paid within the range approved by theshareholders. Annual increments, recommended by theRemuneration Committee are approved by the Board.Within the prescribed ceiling, the perquisites package isapproved by the Remuneration Committee. Commissionis calculated with reference to net profits of the Companyin a particular financial year and is determined by theBoard of Directors at the end of the financial year basedon the recommendations of the remunerationcommittee, subject to overall ceilings stipulated inSections 198 and 309 of the Companies Act, 1956.Specific amount payable to the whole-time director isbased on the performance criteria laid down by theBoard which broadly takes in to account the profitsearned by the Company for the year.

c) The details of commission proposed to be paid to thenon-executive directors for the year 2005-06, subject toapproval of the shareholders at the Annual GeneralMeeting are as follows:

(Amount in Rs.)

Name of the Director Commission Sitting Fees

Mr. Subodh Bhargava(Chairman Board/Audit) 8,23,500 1,15,000

Mr. Ishaat Hussain 2,37,900 70,000

Mr. Kishor Chaukar 3,01,950 95,000

Mr. Pankaj Agrawala 2,65,350 NIL

Dr. Mukund Rajan 1,64,700 50,000

Mr. N. Parameswaran 1,28,100 NIL

Mr. P.V. Kalyanasundaram 1,46,400 45,000

Dr. V.R..S. Sampath 1,37,250 55,000

Mr. R.N. Tata(Chairman Board)[Till 11 April 2005] 45,750 5,000

Mr. Rakesh Kumar[Till 10 August 2005] 54,900 NIL

Mr. Suresh Krishna[Till 21 March 2006] 54,900 20,000

Mr. Vivek Singhal[Till 9 September 2005] 54,900 15,000

Dr. Ashok Jhunjhunwala[Till 9 September 2005] 2,10,450 70,000

Mr. F.A. Vandrevala[Till 25 November 2005] 1,46,400 40,000

Total 27,72,450 5,80,000

d) The details of remuneration to the whole-time directorduring the year 2005-06 are as follows:

(Amount in Rs.)

Name Salary Perquisites & Commission*Allowances

Mr. N. Srinath 44,85,035 375042 25,00,000

Total 44,85,035 375042 25,00,000

* Commission payable will be paid only after the date ofthe Annual General Meeting.

5. INVESTOR GRIEVANCE COMMITTEE

The committee consists of three members. The Chairmanof the Committee is Mr. Kishor A. Chaukar who is theManaging Director of Tata Industries Limited. The othermembers are Mr. Pankaj Agrawala, nominee Director ofthe Government and Dr. V.R.S. Sampath, IndependentDirector. Mr. Satish Ranade, Company Secretary and ChiefLegal Officer is the Investor Grievance Committee’ssecretary. During the last financial year, the Committee heldthree meetings.

The details of grievances received from the shareholdersduring the year and their status on 31 March 2006 is givenbelow:

Sr. Nature of Complaints No. of Complaints

No. Received Pending

1. SEBI/Stock ExchangeComplaint 2 NIL

2. Direct/Miscellaneous/Other Complaint 17 NIL

TOTAL 19 NIL

This committee has been delegated the powers to approvethe issue of Duplicate Share Certificates and approvetransfer/transmission of shares exceeding 500 shares perfolio. The Registrar and Transfer Agents have beenauthorised to issue Duplicate Share Certificates andapprove transfer/transmission up to a maximum of 500shares per folio, limited only to routine day-to-day work.As the shares of the company are under compulsorydematerialized trading for all investors, this delegation isconsidered adequate. All the shares received for transfertill March 31, 2006 have been duly processed.

6. ETHICS AND COMPLIANCE COMMITTEE

In accordance with the Securities and Exchange Board ofIndia (Prohibition of Insider Trading) Regulations, 1992, as

25

amended, the Board of Directors of the Company adoptedthe “VSNL Code Of Conduct For Prevention of InsiderTrading and Code of Corporate Disclosure Practices” to befollowed by “Directors”, “Designated Employees”,“Designated Persons” and “Insiders”. The code is based onthe principle that Directors, Designated Employees,Designated Persons and Insiders should not have undueadvantage over other shareholders, in their personalsecurity transactions, due to their possible advanceknowledge of Price Sensitive Information. The code,therefore, seeks to ensure timely and adequate disclosureof Price Sensitive Information to the investor communityby the Company to enable them to take informed

7. GENERAL BODY MEETINGS

The location and time of the last three general body meetings are as follows:

Meeting Date Location, Description and Type of Resolutions Voting

1 March 2006 An Extraordinary General Meeting was Both the resolutions were put to voteheld at 1500 hours at Birla Matushri Sabhagar, by show of hands and were carriedNew Marine Lines, Mumbai - 400020. unanimously.There were two resolutions, both of which were Special.

14 September 2005 The 19th Annual General Meeting was held at 1100 hours All the resolutions were put toat Birla Matushri Sabhagar, New Marine Lines, vote by show of hands and wereMumbai – 400020. carried unanimously.There were Six resolutions (1 special and 5 ordinary).

2 September 2004 The 18th Annual General Meeting was held at 1100 hours All the resolutions were put toat Birla Matushri Sabhagar, New Marine Lines, vote by show of hands and wereMumbai - 400020. carried unanimously.There were Six resolutions (1 special and 5 ordinary).

2 April 2004 An Extraordinary General Meeting was held at 1500 hours Both the resolutions were putat Birla Matushri Sabhagar, New Marine Lines, to vote by show of hands and wereMumbai - 400020. carried unanimously.There were two resolutions, both of which were Special.

2 September 2003 The 17th Annual General Meeting was held at 1100 hours All the resolutions were put to voteat Birla Matushri Sabhagar, New Marine Lines, by show of hands and were carriedMumbai - 400020. unanimously.

There were ten resolutions (2 special and 8 ordinary).

investment decisions with regard to the Company’ssecurities.In terms of the said code, an Ethics and ComplianceCommittee was constituted in 2003. The presentcommittee consists of three members. The Chairman ofthe committee is Mr. Kishor A. Chaukar, who is theManaging Director of Tata Industries Limited, Mr. PankajAgrawala, government nominee director and Dr. V.R.S.Sampath, Independent Director are the members. Mr. SatishRanade, Company Secretary and Chief Legal Officer is theconvener of the Committee.Three meetings of the committee were held during theyear 2005-06.

8. DISCLOSURES

i) There were no significant related-party transactionsof the company with its promoters, directors ormanagement, their subsidiaries or relatives that mayhave potential conflict with the interest of thecompany at large. Note number B.20 of the Notes onAccounts may also be referred to in this respect. Nonon-compliance notice has been issued and no

penalties or strictures have been imposed on thecompany by SEBI, any stock exchange or any statutoryauthority on any matter related to capital marketsduring the last three years.

ii) The Company has adopted a Whistle Blower Policyand has established necessary mechanisms for



26

employees to report concerns about unethicalbehaviour. No person has been denied access to theAudit Committee.

iii) SECRETARIAL AUDIT

A qualified practicing Company Secretary carried outquarterly secretarial audit to reconcile the totaladmitted capital with National Securities DepositoryLimited (NSDL) and Central Depository Services (India)Limited (CDSL) and the total issued and listed capital.The audits confirm that the total issued/paid-upcapital is in agreement with the total number of sharesin physical form and the total number ofdematerialized shares held with NSDL and CDSL.

iv) The Company fulfilled the following non-mandatoryrequirements:

a. The Company has setup a RemunerationCommittee. Please see the paragraph onRemuneration Committee.

b. REGULATORY AUDIT

Though not required under any statutoryobligations but in the interest of better CorporateGovernance and benchmarking, VSNL isundergoing a voluntary Regulatory Audit. TheAudit is being carried out by M/s. Ernst and YoungPvt. Ltd., an external agency.

c. The Auditor’s Report on the financial statementsof the Company is unqualified.

9. DISCLOSURE REQUIRED BY CLAUSE 32 OF THE LISTING AGREEMENT

Amount of loans and advances in the nature of loans outstanding from subsidiaries during the year ended 31 March2006

Name of the Company Outstanding Maximum Investment in Investmentas at amount shares of the in shares of

31 March, 2006 outstanding Company subsidiaries ofduring the year the Company

Rupees ‘000 Rupees ‘000 No of shares No of Shares

a) Subsidiaries

(i) VSNL Broadband Ltd. - - - -

(ii) VSNL America Inc. 233,226 233,226 - *

(iii) VSNL Lanka Ltd - - - -

(iv) VSNL Singapore Pte Ltd. 2,519,256 6,479,889 - **

(v) VSNL SNOSPV Pte. Ltd - - - -

Name of the Subsidiary No of Shares

* VSNL UK Ltd 1

** VSNL Netherlands BV 16,718,000

** VSNL Bermuda Ltd 1,200,000

** VSNL Japan K.K 300

** VSNL Telecommunications (Bermuda) Ltd. 1,200,000

** VSNL HongKong Ltd 1

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Subsidiaries of VSNL Netherlands B.V

VSNL International (US) Inc 3,000

VSNL Telecommunications(UK) Inc 6,500,002

VSNL France SAS 1,847,000

VSNL Spain Srl 2,053,006

VSNL (Portugal) Unipessoal Limitada 1,055,000

VSNL Belgium BVBA 186

VSNL(Germany) GMBH 1

VSNL International (Portugal) Instalacao e

Manutencao de Redes LDA 12,447,000

Subsidiaries of VSNL Telecommunications (Bermuda)Ltd

Teleglobe Bermuda Ltd. 1,200,000

TLGB Luxembourg Holdings S.ar.l 500

Subsidiary of VSNL Telecommunications(US) Inc.

VSNL International (Guam) Llc NA

Subsidiaries of TLGB Luxembourg Holdings S. ar.l

TLGB Netherlands Holdings B.V 18,000

Subsidiaries of Teleglobe Bermuda Ltd

VSNL International(Poland) Sp. Zo.o 1

ITXC IP Holdings S.a.r.l 500

Teleglobe International Ltd 8,416,801

Teleglobe International HongKong Ltd 10,000

VSNL International Australia Pty. Ltd 555,001

VSNL International GBRM Ltd 1,200,000

VSNL International Puerto Rico Inc 1,000

Teleglobe Asia Pte. Ltd 100,000

Teleglobe Asia Data Transport Pte. Ltd 100,000

ITXC Global Japan YK 120

Teleglobe International Luxembourg S.a.r.l 500




28

ITXC Global UK Ltd. (Under liquidation) 100

ITXC (UK)Ltd. (Under liquidation) 100

ITXC Global HongKong Ltd. (Under liquidation) 1,180,000

Subsidiary of TLGB Netherlands Holdings B.V

VSNL International(ITXC) Corp. 1,000

Subsidiaries of Telelobe International Luxembourg S.a.r.l

Teleglobe International Belgium S.P.R.L 1

Teleglobe Italy S.r.l 500

Teleglobe Netherlands B.V 22,000

Subsidiaries of Teleglobe Netherlands B.V

Teleglobe Italy S.r.l 9,500

Teleglobe France International S.A.S 37,000

TLGB International Germany GmbH 1

Teleglobe Spain Communications S.L 278,939

Teleglobe International Belgium S.P.R.L 99

Teleglobe Canada ULC 402

VSNL International(Poland) Sp. Zo.o 999

VSNL International ( Nordics) AS 1,000

Subsidiary of VSNL Portugal Unipessol Limitada

VSNL International (Portugal) Instalacao e Manutencao de Redes LDA 12,447,000

Subsidiaries of VSNL International (ITXC) Corp.

Teleglobe America Inc 100

VSNL International (Global) Corp. 100

Enhanced Services Inc (Under liquidation) NA

Subsidiaries of VSNL International (Global) Corp.

ITXC Global Zagreb d.o.o (Under liquidation) 20,000

Subsidiaries of Teleglobe America Inc

VSNL International IPCO LLC NA


29

10. MEANS OF COMMUNICATION

VSNL’s quarterly results are published in the Indian Expressand Loksatta among others, and are also hosted on VSNL’swebsite: www.vsnl.in. The company’s press releases, detailsof significant developments and investor updates are alsomade available on the website. The company generallyholds a press conference/investors’ meet after thehalf-yearly results are taken on record by the board relatingto the period ending September 30th and March31st every year.

The management discussion and analysis forms part ofthe directors’ report and is included in the annual reportfor the year 2005-06. Segmental information may bereferred to in Note number B.19 of the Notes on Accounts.

11. SHAREHOLDER INFORMATION

DATE AND VENUE OF THE AGM

The twentieth annual general meeting of Videsh SancharNigam Limited will be held at 1100 hours on Wednesday,13 September 2006, at MC Ghia Hall, Bhogilal HargovindasBuilding, Second Floor, 18/20 Kaikhushru Dubash RoadMarg, Kalghoda, Mumbai - 400023.

FINANCIAL CALENDAR

Fiscal year ending : March 31, 2006

Annual General Meeting : September 13, 2006

KEY FINANCIAL REPORTING DATES FOR THE FINANCIALYEAR 2006-07

First quarter ending June 30, 2006 : July 29, 2006

Second quarter ending Sept 30, 2006: On or before

October 31, 2006

Third quarter ending Dec 31, 2006 : On or before

January 31, 2007

Fourth quarter ending : On or before April

March 31, 2007 30, 2007 or if

audited, on or

before

June 30, 2007.

BOOK CLOSURE DATES FOR THE PURPOSE OF DIVIDEND

VSNL’s register of members and share transfer books willremain closed from 16 August 2006 to 22 August 2006(both days inclusive), to determine the entitlement ofshareholders to receive the final dividend as may bedeclared for the year ended March 31, 2006.

DIVIDEND PAYMENT

The dividend as recommended by the Board of Directors,if declared at this Annual General Meeting, shall be paidon or after Wednesday the 20 September 2006:

(i) to those shareholders whose names appear on theCompany’s Register of Members after giving effect toall valid share transfers in physical form lodged withthe Registrar & Transfer Agents (R&T Agents) of theCompany on or before Monday, 14 August 2006.

(ii) in respect of shares held in electronic form, to those“deemed members” whose names appear in thestatements of beneficial ownership furnished byNational Securities Depository Limited (NSDL) andCentral Depository Services (India) Limited (CDSL) asat the end of business on Monday, 14 August 2006. Inrespect of shares held in demat mode, the dividendwill be paid on the basis of beneficial ownership asper details to be furnished by NSDL and CDSL for thispurpose.

BANK DETAILS

In order to provide protection against fraudulentencashment of dividend warrants, members are requestedto provide, if they have not already provided, their bankaccount numbers, bank account type and names andaddresses of bank branches, quoting folio numbers, to theR&T agents (in case of physical shareholding) to enablethem to incorporate the same on the dividend warrants.In case of dematerialised holding the bank account detailsshould be intimated and updated with the shareholder’sDepository Participant.

LISTING ON STOCK EXCHANGES IN INDIA AND LISTINGFEES

The company’s shares are listed on the stock exchanges atMumbai (BSE) and National Stock Exchange (NSE) in India.Annual listing fees as due to each of the above stockexchanges for 2006-2007 have been paid.

LISTING ON STOCK EXCHANGE OUTSIDE INDIA

The Company’s ADRs are listed on the New York StockExchange (NYSE) and have been traded on the NYSE sinceAugust 15, 2000. The annual listing fee payable to the NYSEis being paid regularly.

DEPOSITORY BANK FOR ADR HOLDERS

The Bank of New York, 101, Barclays Street, 22nd Floor West,New York, NY 10286, Telephone: +1 (212) 815 8365,Facsimile: +1 (212) 571 3050

Local Address : The Bank of New York, Express Towers,12th Floor, Nariman Point, Mumbai 400 021, Telephone:(022) 2204 4941/43, Facsimile: (022) 2204 4942.



30

CUSTODIAN FOR THE DEPOSITORY IN INDIA

ICICI Bank Limited, Securities Markets Services, 1st Floor,Empire Complex, 414 Senapati Bapat Marg, Lower Parel,Mumbai – 400013. Telephone: 91-22-5667 2026, 5667 2030Facsimile: 91-22-5667 2779/2740.

STOCK CODE

Bombay Stock Exchange : 500483National Stock Exchange : VSNL

New York Stock Exchange : VSLISIN No. for equity shares : INE151A01013ISIN No. for ADRs : US92659G6008CUSIP No. for ADRs : 92659G600

Reuters Codes

VSNL.BO (BSE)VSNL.NS (NSE)VSNLq.L (LSE).

STOCK MARKET DATA RELATING TO SHARES LISTED IN INDIA

Monthly high and low quotations and volume of shares/ADRs traded at BSE, NSE & NYSE for 2005-2006 are:

MonthBSE Share Price NSE Share Price NYSE ADR Price in USD

High Low Volume High Low Volume High Low Volume

Apr-05 218.00 180.00 1891929 208.60 194.80 5837756 10.04 7.83 1702200

May-05 215.00 196.00 1070946 209.15 206.65 3440165 9.61 8.30 820700

Jun-05 251.90 206.50 4107489 246.65 207.10 10368247 9.85 9.20 2959000

Jul-05 444.00 243.00 41461082 417.50 250.90 107345506 11.35 9.45 5012000

Aug-05 444.70 347.15 44967171 433.05 357.70 111947988 19.70 11.33 4234400

Sep-05 408.70 328.00 15851379 404.30 345.30 46120535 19.94 16.29 2223500

Oct-05 372.40 270.10 15636391 369.75 272.90 44314645 18.23 15.30 2531200

Nov-05 379.90 287.00 20765253 377.05 291.90 59428570 17.15 12.15 2649600

Dec-05 430.55 355.50 35435974 424.50 367.30 95856103 16.35 12.95 1808500

Jan-06 406.20 351.00 14028299 398.50 358.20 39864907 18.95 16.15 1963800

Feb-06 402.45 362.50 9176451 392.90 364.95 29363269 18.19 16.01 1200600

Mar-06 493.45 362.00 30940616 470.75 366.20 57258468 18.25 16.16 2672600

Total 235332980 611146159 29778100

31

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32

SHARE TRANSFER SYSTEM

Share transfers in physical form can be lodged with the R&T agents of VSNL. The transfers are normally processed within15 days from the date of receipt if the documents are complete in all respects. The Investor Grievances Committee isempowered to approve the share transfers. However, in the interests of shareholder friendliness, the R&T Agents havebeen empowered to approve the share transfers up to 500 shares per folio per transfer.

DISTRIBUTION OF SHAREHOLDING

Number of ShareholdersNumber of ordinary shares held

31.03.2006 31.03.2005

1 to 500 51536 59450

501 to 1000 1295 1751

1001 to 10000 1624 2154

Over 10000 183 115

Total 54638 63470

Dematerialisation of Shares and Liquidity

Approx 99.9% of the company’s share capital available in the market is dematerialised as on March 31, 2006. The company’sshares are regularly traded on the Bombay Stock Exchange Limited and the National Stock Exchange, as is evident fromthe table containing stock market data.

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VSNL Closing ADR Price at NYSE V/S NYSE Composite Index

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33

CATEGORIES OF SHAREHOLDERS AS OF 31 MARCH

Category Number of Voting Strength Number of Shares Held

Shareholders (Percentage)

2006 2005 2006 2005 2006 2005

PROMOTERS

Tata Group

- Panatone Finvest Limited 2 2 40.61 45.00 115738857 128250000

- Tata Sons Limited 2 2 3.64 1.58 10360497 4494497

- The Tata Power Company Limited 1 0 0.90 0 2575837 0

- The Tata Iron & Steel Company Limited 0 0 0.00 0 0 0

- Tata Industries Limited 0 0 0.00 0 0 0

Central Government 1 1 26.12 26.12 74446885 74446885

NON-PROMOTERS

Indian Public Financial Institutions 43 47 9.36 9.13 26686978 26010736

Indian nationalised banks 12 9 0.09 0.16 248448 466485

Foreign Financial Institutions 88 34 9.66 2.35 27528395 6696329

Foreign companies (shares heldby The Bank of New York asdepository for ADRs) 2 2 5.99 11.25 17081284 32071857

Non-resident individuals /Overseas Corporate Bodies 446 393 0.05 0.06 144635 178508

Other Indian Bodies Corporate 1730 1420 0.88 0.74 2494521 2101892

Indian Public 52310 61559 2.70 3.61 7691428 10280576

In transit demat shares 1 1 0.00 0.00 2235 2235

Total 54638 63470 100 100 285000000 285000000



34

Outstanding ADRs

8540642 ADRs (each representing two ordinary share of the company) are outstanding as of March 31, 2006. In respect ofthese ADRs, the option to convert into shares is alive.

SHARE CAPITAL HISTORY

Details of share capital history since incorporation is as follows:

Dates Particulars of Issue Number of Total Number Nominal Value

Shares of Shares of Shares (Rs.)

19.3.86 Allotted as Purchase consideration for assets &liabilities of OCS 126 126 126,000

1.4.86 Allotted as Purchase consideration for assets &liabilities of OC +599,874 600,000 600,000,000March’91 Shares of Rs.1000/- each subdivided intoshares of Rs.10/- each NIL 60,000,000 600,000,000

06.02.92 Bonus of 1:3 issued to Government of India. +20,000,000 80,000,000 800,000,000

Jan-Feb 92 12 million shares disinvested in favour of IndianFinancial Institutions by GOI @ Rs.123/- per share NIL 80,000,000 800,000,000

1994-95 2,382,529 Shares transferred to disinvested partiesas bonus shares NIL 80,000,000 800,000,000

27.03.97 VSNL raised its share capital by way of GDR Issue,and also GOI Divested 39 lakh shares in GDRmarkets @ US$13.93 per GDR equivalent toRs.1000 per share. +12,165,000 92,165,000 921,650,000

04.04.97 VSNL raised its capital by way of GDR Issue GreenShoe option @ US$13.93 per GDR equivalentRs.1000 per share. +2,835,000 95,000,000 950,000,000

Feb. 1999 10million shares divested by GOI in GDR markets@ US$9.25 per GDR equivalent to Rs.786.25per share. NIL 95,000,000 950,000,000

May 1999 396,991 shares Divested by GOI by way of offer ofshares to employees of VSNL @ Rs.294 per sharelocked in for a period of 3 years. NIL 95,000,000 950,000,000

Sept’99 10 lakh shares Divested by GOI in domesticmarkets @ Rs.750 per share. NIL 95,000,000 950,000,000

15 August Listing of ADRs on New York Stock Exchange NIL 95,000,000 950,000,0002000

24.11.2000 Bonus shares in the ratio of 2:1. +190,000,000 285,000,000 2,850,000,00027.9.2001 VSNL declares dividend @ 500% i.e. Rs.50/-

per share at 15 AGM. NIL 285,000,000 2,850,000,000January VSNL pays special interim Dividend of 750%2002 i.e. Rs.75/- per share NIL 285,000,000 2,850,000,000

35

13.02.2002 25% of VSNL Stake transferred to Tata Group’sinvestment vehicle Panatone Finvest Ltd. Govtholdings reduced to 27.97% from 52.97%. VSNLceases to be a Government of India Enterprise NIL 285,000,000 2,850,000,000

21.02.2002 5264555 shares Divested by GOI by way of offerof shares to employees of VSNL @ Rs.47.85 pershare locked in for a period of 1 year. NIL 285,000,000 2,850,000,000

10.04.02 Open Offer by Panatone Finvest Limited inaccordance with SEBI guidelines to acquire upto57 million shares @ Rs.202/- per share NIL 285,000,000 2,850,000,000

08.06.02 Open offer complete with Panatone holdingtotal of 128249910 shares including 57 millionshares as above. NIL 285,000,000 2,850,000,000

Locations of Other Offices

Regional Offices : Mumbai, Chennai, Kolkata and New Delhi.

Branches : Ambattur, Arvi, Bangalore, Bhubaneswar, Chandigarh, Coimbatore, Dehradun, Ernakulam, Gandhinagar, Goa,Guwahati, Hyderabad, Indore, Jaipur, Jalandhar, Kanpur, Patna, Pondicherry, Pune, Thiruvananthapuram.

Address for Correspondence

Registered Office

Videsh Sanchar Bhavan (VSB)Mahatma Gandhi Road,Mumbai - 400 001.Tel : +91 (22) 6657 8765Fax : +91 (22) 6639 5162Email : [email protected] : www.vsnl.in

Compliance OfficerMr. Satish RanadeCompany Secretary & Chief Legal OfficerLokmanya Videsh Sanchar BhavanKashinath Dhuru Marg, Prabhadevi,Mumbai - 400 028.Tel : +91 (22) 6657 8765Fax : +91 (22) 6659 1962Email : [email protected]

Any queries relating to financial statements of theCompany may be addressed to:Investor Relations CellVidesh Sanchar Nigam LimitedLokmanya Videsh Sanchar BhavanKashinath Dhuru Marg, Opposite Kirti College,Prabhadevi, Mumbai - 400 028.Tel : +91 (22) 66578765Fax: +91 (22) 66395162Email: [email protected]

Corporate Office

Lokmanya Videsh Sanchar Bhavan (LVSB)Kashinath Dhuru MargPrabhadevi Mumbai – 400 028.Tel : +91 (22) 6657 8765Fax : +91 (22) 6639 5162Email : [email protected] : www.vsnl.in

Any shareholder complaints/queries may be addressedto:Registrar and Transfer AgentsM/s. Sharepro Services (India) Pvt. Ltd.Unit : Videsh Sanchar Nigam LimitedSatam Estate, 3rd Floor,Above Bank of Baroda,Chakala, Andheri (East),Mumbai - 400 099.Tel : +91 (22) 2821 5168Fax : +91 (22) 2837 5646E-mail : [email protected]

Dates Particulars of Issue Number of Total Number Nominal Value

Shares of Shares of Shares (Rs.)



36

DECLARATION REGARDING COMPLIANCE BY BOARD MEMBERSAND SENIOR MANAGEMENT PERSONNEL WITH THE

COMPANY’S CODE OF CONDUCT

This is to confirm that the Company has adopted a Code of Conduct for its Board Members and senior management of theCompany.

I confirm that the Company has in respect of the financial year ended March 31, 2006, received from the senior managementteam of the Company and the Members of the Board a declaration of compliance with the Code of Conduct as applicable tothem.

Place: Mumbai N. SrinathDate: 27 July 2006 Executive Director

CHIEF EXECUTIVE OFFICER (CEO) AND CHIEF FINANCIAL OFFICER (CFO) CERTIFICATION

17 July 2006

As required under Clause 49(V) of the Listing Agreement with Indian Stock Exchanges, the under signed hereby confirm thefollowing:

a) We have reviewed financial statements and the cash flow statement for the year and that to the best of our knowledgeand belief :

i) these statements do not contain any materially untrue statement or omit any material fact or contain statementsthat might be misleading;

ii) these statements together present a true and fair view of the company’s affairs and are in compliance with existingaccounting standards, applicable laws and regulations.

b) There are, to the best of our knowledge and belief, no transactions entered into by the company during the year whichare fraudulent, illegal or violative of the company’s code of conduct.

c) We accept responsibility for establishing and maintaining internal controls for financial reporting and that we haveevaluated the effectiveness of internal control systems of the company pertaining to financial reporting and havedisclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, ifany, of which we are aware and the steps we have taken or propose to take to rectify these deficiencies.

d) We have indicated to the auditors and the Audit committee the following:

i) significant changes in internal control over financial reporting during the year, if any;ii) significant changes in accounting policies during the year and that the same have been disclosed in the notes to

the financial statements, if any; andiii) There have been no instances of significant fraud of which we have become aware.

Rajiv Dhar N. Srinath(Chief Financial Officer) (Executive Director)

37

AUDITORS’ CERTIFICATE ON COMPLIANCE WITH THE CONDITIONS OF

CORPORATE GOVERNANCE UNDER CLAUSE 49 OF THE LISTING AGREEMENTS

To the Members of


We have examined the compliance of conditions of corporate governance by VIDESH SANCHAR NIGAM LIMITED (“theCompany”), for the year ended on 31 March, 2006, as stipulated in Clause 49 of the Listing Agreement of the saidCompany with stock exchanges.

The compliance of conditions of Corporate Governance is the responsibility of the management. Our examination wasbeen limited to a review of the procedures and implementation thereof, adopted by the Company for ensuring compli-ance with the conditions of corporate governance. It is neither an audit nor an expression of opinion on the financialstatements of the Company.

In our opinion and to the best of our information and according to the explanations given to us and the representationsmade by the Directors and the Management, we certify that the Company has complied with the conditions of corporategovernance as stipulated in the above mentioned Listing Agreement.

We further state that such compliance is neither an assurance as to the future viability of the Company nor the efficiencyor effectiveness with which the management has conducted the affairs of the Company.

For S. B. BILLIMORIA & CO.Chartered Accountants

N VENKATRAMPartner

Membership No: 71387Mumbai: 11 August, 2006



38

FINANCIAL RATIOS

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006

Profitability ratios

EBIDTA Margin 22.85 25.13 16.29 23.28 23.16

Cash Profit Margin 21.62 19.26 16.30 29.33 20.92

Net Profit Margin 19.79 16.21 11.20 22.18 11.96

Return on Average Capital Employed 25.15 15.29 9.00 19.73 11.71

Return on Net Worth 24.20 14.73 7.05 13.88 8.14

Total Expenditure/Total Income 70.83 73.93 83.62 81.45 81.19

Figures are in %

BUSINESS CHARCTERISTICS

Debt to Equity Ratio 0.11 0.06 0.01 - 0.02

Tax rate (%) 32.14 37.81 30.48 28.24 30.17

Revenue to Capital Ratio 1.21 0.77 0.64 0.59 0.64

Income/Debtors Ratio 4.78 5.76 7.19 5.42 5.13

Income/Avg Assets Ratio 2.59 1.56 1.12 1.19 1.04

Net Working Capital as part of TCE % 66.00 61.00 37.00 39.00 15.81

Current Ratio 2.90 3.37 1.77 1.99 1.32

Quick Ratio 2.90 3.37 1.77 1.99 1.32

Cash and Equivalents/Total Assets Ratio 42.96 37.89 19.99 24.18 4.12

Depreciation/Gross Block % 4.60 4.46 7.31 7.67 8.77

GROWTH(% OVER PRECEDING YEARS)

Growth in Turnover (10.72) (32.33) (29.95) 1.17 17.57

Growth in FE Earnings (14.16) (31.79) (51.45) 41.06 (11.08)

Growth in PBIDT (excl other income) (15.25) (29.81) (54.81) 49.22 13.88

Growth in PAT (20.88) (44.57) (51.59) 100.28 (36.60)

Growth in Cash Profit (19.07) (39.74) (40.72) 82.09 (16.14)

PER SHARE DATA

Earnings (Rs.) 49.38 27.37 13.25 26.54 16.83

Dividend % 875.00 85.00 45.00 60.00 45.00

Book Value (Rs.) 176.98 194.75 181.30 200.98 212.67

P/E (as of Year End) 3.79 2.67 15.46 7.05 27.38

39

AUDITORS’ REPORT

TO THE MEMBERS OF VIDESH SANCHAR NIGAM LIMITED

1. We have audited the attached balance sheet ofVIDESH SANCHAR NIGAM LIMITED as at 31 March,2006, and also the profit and loss account and thecash flow statement for the year ended on that dateboth annexed thereto. These financial statements arethe responsibility of the Company’s Management. Ourresponsibility is to express an opinion on thesefinancial statements based on our audit.

2. We conducted our audit in accordance with auditingstandards generally accepted in India. Those standardsrequire that we plan and perform the audit to obtainreasonable assurance about whether the financialstatements are free of material misstatement. An auditincludes examining, on a test basis, evidencesupporting the amounts and disclosures in thefinancial statements. An audit also includes assessingthe accounting principles used and significantestimates made by the management, as well asevaluating the overall financial statementpresentation. We believe that our audit provides areasonable basis for our opinion.

3. As required by the Companies (Auditor’s Report)Order, 2003 issued by the Central Government of Indiain terms of sub-section (4A) of Section 227 of theCompanies Act, 1956, we enclose in the Annexure astatement on the matters specified in paragraphs 4and 5 of the said Order to the extent applicable.

4. Further to our comments in the Annexure referred toin paragraph 3 above, we report that:

(i) we have obtained all the information andexplanations, which to the best of our knowledgeand belief were necessary for the purpose of ouraudit;

(ii) in our opinion, proper books of account asrequired by law have been kept by the Companyso far as appears from our examination of thosebooks;

(iii) the balance sheet, profit and loss account andcash flow statement dealt with by this report arein agreement with the books of account;

(iv) in our opinion, the balance sheet, profit and lossaccount and cash flow statement dealt with bythis report comply with the accounting standardsreferred to in sub-section (3C) of Section 211 ofthe Companies Act, 1956;

(v) on the basis of written representations receivedfrom the directors, as on 31 March, 2006, andtaken on record by the Board of Directors, wereport that none of the directors is disqualifiedas on 31 March, 2006 from being appointed asa director in terms of clause (g) of sub-section(1) of Section 274 of the Companies Act, 1956;and

(vi) in our opinion and to the best of our informationand according to the explanations given to us,the said accounts give the information requiredby the Companies Act, 1956, in the manner sorequired and give a true and fair view inconformity with the accounting principlesgenerally accepted in India:

(a) in the case of the balance sheet, of the stateof affairs of the Company as at 31 March,2006;

(b) in the case of the profit and loss account, ofthe profit for the year ended on that date;and

(c) in the case of the cash flow statement, ofthe cash flows for the year ended on thatdate.

For S. B. BILLIMORIA & Co.Chartered Accountants

N VENKATRAMPartner

Membership No: 71387

Mumbai, 26 June, 2006



40

(i) (a) The Company has maintained proper recordsshowing full particulars including quantitativedetails and situation of fixed assets.

(b) As explained to us, physical verification of amajor portion of fixed assets as at 31 March,2006 was conducted by the Managementduring the year. In our opinion, the frequencyof physical verification is reasonable. Havingregard to the size of the operations of theCompany and on the basis of explanationsreceived, in our opinion, the net differencesfound on physical verification were notsignificant.

(ii) (a) As explained to us, the stocks of stores andspares have been verified during the year. Inour opinion, the frequency of verification isreasonable.

(b) In our opinion and according to the informationand explanations given to us, the proceduresof physical verification of stocks followed by theManagement are reasonable and adequate inrelation to the size of the Company and thenature of its business.

(c) In our opinion and according to the informationand explanations given to us, the Company ismaintaining proper records of inventory. Thediscrepancies noticed on verification betweenthe physical stocks and the book records werenot material having regard to the size of theoperations of the Company.

(iii) The Company has not taken or granted any loansduring the year to parties covered in the registermaintained under Section 301 of the Companies Act,1956.

(iv) In our opinion and according to the informationand explanations given to us, there is adequateinternal control system commensurate with thesize of the Company and the nature of its businessfor the purchase of inventory and fixed assets andfor rendering of services. During the course of ouraudit, we have not observed any major weaknessin the internal controls in relation to purchase ofinventor y, fixed assets and for rendering ofservices.

(v) (a) To the best of our knowledge and belief andaccording to the information and explanationsgiven to us, we are of the opinion that thetransactions that need to be entered into theregister maintained under Section 301 of theCompanies Act, 1956 have been so entered.

(b) In our opinion and having regard to ourcomments in paragraph (iv) above, andaccording to the information and explanationsgiven to us, transactions made in pursuance ofcontracts or arrangements entered in theregister maintained under Section 301 of theCompanies Act, 1956 and exceeding the valueof Rupees five lakhs in respect of any partyduring the year have been made at prices whichare reasonable having regard to prevailingmarket prices at the relevant time, where suchmarket prices are available.

(vi) In our opinion and according to the information andexplanations given to us, the Company has notaccepted deposits from the public to which theprovisions of Section 58A, 58AA or any other relevantprovisions of the Companies Act, 1956 are applicableduring the period covered by our audit report.

(vii) In our opinion, the Company has an internal auditsystem commensurate with the size and nature ofits business.

(viii) We have broadly reviewed the books of account andrecords maintained by the Company relating totelecommunication activities pursuant to the Rulesmade by the Central Government for themaintenance of cost records under Section 209 (1)(d) of the Companies Act, 1956 and, are of theopinion that prima facie, the prescribed accounts andrecords have been made and maintained. We havenot, however, made a detailed examination of therecords with a view to determining whether theyare accurate or complete.

(ix) (a) According to the information and explanationsgiven to us, the Company is generally regularin depositing with appropriate authoritiesundisputed statutory dues including providentfund, investor education and protection fund,income tax, sales tax, wealth tax, service tax,customs duty, excise duty, cess and other

ANNEXURE TO THE AUDITORS’ REPORT(Referred to in paragraph 3 of our report of even date)

41

material statutory dues applicable to it. TheCompany has received exemption from theoperation of Employees’ State Insurance Act,1948.

(b) According to the information and explanationsgiven to us, no undisputed amounts payable inrespect of income tax, wealth tax, sales tax,service tax, customs duty, excise duty and cesswere in arrears, as at 31 March, 2006 for a periodof more than six months from the date theybecame payable.

(c) According to the information and explanationsgiven to us, details of dues of sales tax, incometax, excise duty and service tax which have notbeen deposited on account of any dispute aregiven below:

Particulars Period to which Forum where Amountthe amount relates the dispute is in Rs. ‘000

pending

Sales Tax 1989-90, 1996-97, Tribunal 100,3851997-98, 1998-99,1999-00, 2000-01,2001-02, 2003-04

Sales Tax 2001-02, 2002-03 Asst. Commissioner 10,705

Sales Tax 2001-02, 2002-03, High Court 14,6892003-04, 2004-05

TDS 2002-03, 2003-04 Commissioner 1,038

Entry Tax 2002-03, 2004-05 High Court 59,392

(x) The Company does not have accumulated losses.The Company has not incurred cash losses duringthe financial year covered by our audit and theimmediately preceding financial year.

(xi) In our opinion and according to the information andexplanations given to us, the Company has notdefaulted in repayment of dues to a financialinstitution, bank or debenture holder.

(xii) The Company has not granted any loans andadvances on the basis of security by way of pledgeof shares, debentures and other securities duringthe year. Accordingly, the provisions of clause 4 (xii)of the Companies (Auditor’s Report) Order, 2003 arenot applicable to the Company.

(xiii) In our opinion, the Company is not a chit fund or anidhi/mutual benefit fund/society. Accordingly, theprovisions of clause 4 (xiii) of the Companies(Auditor’s Report) Order, 2003 are not applicable tothe Company.

(xiv) In our opinion and according to the information andexplanations given to us, the Company is not dealing

in or trading in shares, securities, debentures andother investments. Accordingly, the provisions ofclause 4 (xiv) of the Companies (Auditor’s Report)Order, 2003 are not applicable to the Company.

(xv) In our opinion and according to the information andexplanations given to us, the terms and conditionson which the Company has given guarantee forloans taken by others from banks or financialinstitutions are not prejudicial to the interest of theCompany.

(xvi) In our opinion and according to the informationand explanations given to us, no term loans havebeen raised during the financial year covered byour audit.

(xvii) In our opinion and according to the information andexplanations given to us, and on an overallexamination of the balance sheet of the Company,we report that no funds raised on short-term basishave been used for long-term investment.

(xviii) According to the information and explanations givento us, the Company has not made any preferentialallotment of shares to parties and companiescovered in the register maintained under Section301 of the Companies Act, 1956.

(xix) In our opinion and according to the informationand explanations given to us, the Company hasnot issued any secured debentures during theperiod covered by our report. Accordingly, theprovisions of clause 4 (xix) of the Companies(Auditor’s Report) Order, 2003 are not applicableto the Company.

(xx) During the period covered by our audit report, theCompany has not raised any money by public issues.

(xxi) To the best of our knowledge and belief andaccording to the information and explanationsgiven to us, no fraud on or by the Company hasbeen noticed or reported during the course of ouraudit.

For S. B. BILLIMORIA & Co.Chartered Accountants

N VENKATRAMPartner

Membership No: 71387




42

BALANCE SHEET AS AT 31 MARCH, 2006As at

Schedule 31 March, 2005Rupees’000 Rupees’000

FUNDS EMPLOYED:1 SHARE CAPITAL 1 2,850,000 2,850,0002 RESERVES AND SURPLUS 2 57,761,671 54,430,468

3 TOTAL SHAREHOLDERS’ FUNDS 60,611,671 57,280,4684 UNSECURED LOANS 3 982,501 —5 DEFERRED TAX LIABILITY (NET) 750,926 996,796

(Refer Note B15, Schedule 20)

62,345,098 58,277,264

APPLICATION OF FUNDS:6 FIXED ASSETS 4

(a) Gross Block 40,996,363 31,826,824(b) Less: Accumulated Depreciation/Amortisation 10,910,817 8,356,542

(c) Net Block 30,085,546 23,470,282(d) Capital work-in-progress 1,478,094 5,131,681

31,563,640 28,601,963

7 INVESTMENTS 5 24,993,393 12,005,8398 A. CURRENT ASSETS

(a) Inventories 6 38,019 19,651(b) Sundry Debtors 7 7,375,710 5,140,573(c) Cash and Bank Balances 8 2,568,815 14,091,243(d) Other Current Assets 9 983,025 752,809

10,965,569 20,004,276B. LOANS AND ADVANCES 10 13,063,532 14,892,865

24,029,101 34,897,141

9 Less: CURRENT LIABILITIES ANDPROVISIONS

(A) Current Liabilities 11 15,674,824 14,535,221(B) Provisions 12 2,566,212 2,692,458

18,241,036 17,227,679

10 NET CURRENT ASSETS [(8) less (9)] 5,788,065 17,669,462

11 TOTAL ASSETS (NET) 62,345,098 58,277,264

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 20

As per our report attached For and on behalf of the BoardFor S.B. BILLIMORIA & CO.Chartered Accountants

N. VENKATRAM SUBODH BHARGAVA N. SRINATHPartner Chairman Executive Director

RAJIV DHAR SATISH RANADEChief Financial Officer Company Secretary & Chief Legal Officer

MUMBAI MUMBAIDATED: 26 June, 2006 DATED: 26 June, 2006

43

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2006Schedule Year ended

31 March, 2005Rupees’000 Rupees’000

INCOME:1 REVENUES FROM TELECOMMUNICATION SERVICES 13 37,809,525 33,030,3912 OTHER INCOME 14 1,334,228 519,8733 INTEREST INCOME 15 389,302 554,9384 INTEREST ON INCOME TAX REFUNDS 564,218 —

5 TOTAL INCOME 40,097,273 34,105,202EXPENDITURE:

6 SALARIES AND RELATED COSTS 16 2,090,591 1,412,8087 NETWORK COSTS 17 20,958,674 20,030,8938 OPERATING AND OTHER EXPENSES 18 6,001,739 3,895,6609 INTEREST EXPENSE 18,027 77910 DEPRECIATION AND AMORTISATION 4 3,595,572 2,441,535

Less: TRANSFER FROM CAPITAL RESERVE (1,846) (1,859)11 PRIOR PERIOD ADJUSTMENTS (NET) 19 (109,004) —

12 TOTAL EXPENDITURE 32,553,753 27,779,816

PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 7,543,520 6,325,38613 EXCEPTIONAL ITEMS:

(a) Profit from sale of long term investment, net of licence fee — 4,687,303(b) Provision for recoverable pension obligation

(Refer Note B6, Schedule 20) (64,220) (472,866)(c) Fixed Assets written off

(Refer Note B8, Schedule 20) (612,127) —

PROFIT BEFORE TAXES 6,867,173 10,539,82314 TAXES

(a) CURRENT TAX (2,275,260) (2,050,519)(b) DEFERRED TAX 245,870 (925,630)(c) FRINGE BENEFIT TAX (42,363) —

PROFIT AFTER TAXES 4,795,420 7,563,67415 BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR 11,859,083 7,004,890

AMOUNT AVAILABLE FOR APPROPRIATIONS 16,654,503 14,568,56416 APPROPRIATIONS :

(a) PROPOSED DIVIDEND (Refer Note B3, Schedule 20) 1,282,500 1,710,000(b) TAX ON DIVIDEND 179,871 243,114(c) GENERAL RESERVE 479,542 756,367

BALANCE CARRIED TO BALANCE SHEET 14,712,590 11,859,083

EARNINGS PER SHARE (EPS)17 Basic/Diluted earnings per share, before exceptional items (Rs.) 18.40 14.34

(Refer Note B18, Schedule 20)18 Basic/Diluted earnings per share, including exceptional items (Rs.) 16.83 26.54

(Refer Note B18, Schedule 20)SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 20







44

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH, 2006Year ended

31 March, 2005(Rupees in ‘000) (Rupees in ‘000)

1 CASH FLOWS FROM OPERATING ACTIVITIESPROFIT BEFORE TAX AND EXCEPTIONAL ITEMS 7,543,520 6,325,386Adjustments for:Depreciation 3,595,572 2,441,535Transfer from capital reserve (1,846) (1,859)Loss/(Profit) on sale of fixed assets 21,131 (11,111)Interest income (389,302) (554,938)Interest expense 18,027 366Fixed assets written down - 32,547Interest on income tax refunds (564,218) -Dividend income/profit on sale of current investments (483,069) (287,445)Exchange difference on cash and cash equivalents 886 (4,673)Valuation loss on current investments - 149Dividend income from long-term investments - (6,331)

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 9,740,701 7,933,626Inventories (18,368) 4,440Sundry debtors (2,231,725) (1,634,425)Other current assets (360,068) 121,419Loans and advances (113,156) (25,059)Current liabilities and provisions 2,290,637 589,198Cash generated from operations before tax 9,308,021 6,989,199Income taxes refunds / (paid ) 265,563 (3,756,751)Interest on income tax refunds 564,218 -

NET CASH FROM OPERATING ACTIVITIES 10,137,802 3,232,448

2 CASH FLOWS FROM INVESTING ACTIVITIESPurchase of fixed assets (7,969,579) (10,605,756)Purchase of long-term investments (1,755,180) (2,354,000)Investments in preference share capital of subsidiaries (1,083,052) -Investments in equity share capital of subsidiaries (2,037,776) (202,880)(Purchase)/Sale of current investments (net of mutual funds dividend re-invested) (net) (6,142,630) 8,570,632Payment made for acquisition of Seven Star Dot Com business (Refer note 3, Schedule 11) (30,483)Proceeds from sale of fixed assets 7,023 733,930Proceeds from sale of long-term investment ( net of licence fee ) - 7,789,383Proceeds from liquidation of subsidiaries - 221Sale of investments in subsidiary 525 -Advances paid for equity investments in subsidiaries - (226,237)Loans to subsidiaries (net) (2,175,146) (1,881,735)Dividend income on long term investments - 6,331Dividend income on current investments 44,264 56,850Fixed deposits (net) 11,750,682 (1,702,391)Interest received 449,417 580,089

NET CASH FROM / (USED IN) INVESTING ACTIVITIES (8,941,935) 764,4373 CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from unsecured loan (net) 982,501 -Repayment of unsecured loans (net) - (630,000)Dividends paid including dividend tax (1,949,693) (1,450,549)Interest paid (5,072) (366)

CASH FLOW FROM / (USED IN) FINANCING ACTIVITIES (972,264) (2,080,915)

NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 223,603 1,915,970CASH AND CASH EQUIVALENTS AS AT 1 APRIL, 2005 2,222,581 301,938(Refer note B14, Schedule 20)Exchange difference on cash and cash equivalents (886) 4,673

CASH AND CASH EQUIVALENTS AS AT 31 MARCH, 2006 2,445,298 2,222,581(Refer note B14, Schedule 20)

Notes :1. Figures in brackets represent outflows.2. Advances paid for equity investments in VSNL Singapore Pte.Ltd. and VSNL Lanka Ltd. of Rs.226,237 thousands have been converted into equity

during the year ended 31 March,2006.3. Loans to Subsidiaries of Rs.1,304,400 thousands have been converted into equity during the year ended 31 March,2006.

As per our report attached For and on behalf of the Board

For S.B. BILLIMORIA & CO.Chartered Accountants




45

SCHEDULES FORMING PART OF THE BALANCE SHEETSCHEDULE - 1 As at As at

31 March, 2006 31 March, 2005SHARE CAPITAL Rupees ‘000 Rupees ‘000AUTHORISED300,000,000 (2005:300,000,000) Equity Shares of Rs.10 each 3,000,000 3,000,000

ISSUED, SUBSCRIBED AND PAID UP285,000,000 (2005: 285,000,000) Equity Shares of Rs.10 each, fully paid-up 2,850,000 2,850,000

Notes:1) 60,000,000 (2005: 60,000,000) shares have been allotted as fully

paid up, pursuant to the contract without payment being receivedin cash

2) 210,000,000 (2005: 210,000,000) shares have been allotted as fully paidbonus shares by capitalisation of General Reserve

3) 15,000,000 (2005:15,000,000) shares are allotted as fully paid up byway of Euro issue represented by 30,000,000 American DepositoryReceipts (ADRs)

SCHEDULE - 2RESERVES AND SURPLUS(a) CAPITAL RESERVE (Refer Note B2, Schedule 20)

Balance at the beginning of the year 2,059,898 2,061,757Less : Transferred to profit and loss account (1,846) (1,859)

2,058,052 2,059,898

(b) Securities Premium AccountBalance at the beginning of the year 8,348,834 8,348,834

8,348,834 8,348,834

(c) General ReserveBalance at the beginning of the year 32,162,653 31,406,286Add: Transferred from profit and loss account 479,542 756,367

32,642,195 32,162,653

(d) PROFIT AND LOSS ACCOUNTBalance carried forward 14,712,590 11,859,083

57,761,671 54,430,468

SCHEDULE - 3UNSECURED LOANSShort Term Foreign Currency Loans From Banks 982,501 —

982,501 —



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47

SCHEDULES FORMING PART OF THE BALANCE SHEETSCHEDULE - 5 Number of shares As at As at

31 March, 2006 31 March, 2005INVESTMENTS Rupees ‘000 Rupees ‘000I. TRADE INVESTMENTS (At Cost)A. Fully paid Equity Shares (Unquoted)

(a) Tata Teleservices Ltd. 952,812,000 10,113,180 8,358,000(117,012,000 equity shares of Rs 10 each subscribedduring the year)(Refer Note B4, Schedule 20)

(b) New ICO Global Communications (Holdings) Limited 180,373 65 65(Class A common stock of US$ 0.01 each)

(c) United Telecom Limited - Joint Venture 3,732,400 233,275 233,275(Equity shares of NRS 100)(Refer Note B5, Schedule 20)

B. Investment in Subsidiary Companies (Unquoted)

(a) VSNL Lanka Limited 15,179,358 82,382 73,396(1,586,159 equity shares of LKR 10 each subscribedduring the year)

(b) VSNL Singapore Pte Limited

(i) 35,000,000 equity shares of US$ 1 each subscribedduring the year 40,000,000 1,747,873 226,170

(ii) 24,205,250 10% cumulative convertible redeemablePreference Shares of US$1 each subscribedduring the year 24,205,250 1,083,052 —

(Refer Note B23, Subnote (3), Schedule 20)

(c) VSNL America Inc. 3,000 13,125 13,125(3,000 equity shares of US$ 0.01 each)

(d) VSNL Bermuda Limited — — 525(During the year 1,200,000 equity shares of US$ 0.01sold to VSNL Singapore Pte Limited)

(e) VSNL SNOSPV Pte. Ltd. 401,655 16,786 —(401,655 equity shares of US$ 1.00 each subscribedduring the year)

(Refer Note B11, Schedule 20)

(f ) VSNL Broadband Ltd (formerly known as Tata PowerBroadband Company Limited) 70,000,000 2,020,937 —(70,000,000 equity shares of Rs. 10 each acquiredduring the year)(Refer Note B12, Schedule 20)

15,310,675 8,904,556



48

II. OTHERSINVESTMENTS IN MUTUAL FUNDS (Unquoted)(a) Liquid Dividend Plan (including dividend reinvestment)

Birla Cash Plus-Daily Dividend 10,119,643 101,394 —DSP Merrill Lynch Liquid Fund-Daily Dividend 395,563 395,642 —Principal Cash Management Fund- Liquid OptionInstitutional Premium Plan- Dividend Reinvestment Plan — — 200,073Prudential ICICI Sweep Cash Option Daily Dividend 13,557,797 135,578 —Standard Chartered Liquidity Manager-Plus-Daily Dividend 450,186 450,211 —TATA Liquidity Management Fund-Daily Dividend 558,906 560,138 —UTI Liquid Cash Plan Institutional Daily Income Option — — 105,144UTI Money Market Fund-Daily dividend option 38,094,837 663,813 —

(b) Fixed Maturity PlanABN AMRO Fixed Term Plan Series 2 Quarterly Plan A Dividend 30,000,000 300,000 —ABN AMRO Fixed Term Series-Regular Growth 10,000,000 100,000 —Birla FMP Quarterly Series 3- Plan A Dividend payout — — 239,851Birla FTP-Quarterly Series 1 Dividend Payout 30,000,000 300,000 —Birla FTP-Quarterly Series 2 Dividend Payout 30,000,000 300,000 —Chola FMP- Series 2 (Quarterly Plan-I)-Dividend 20,000,000 200,000 —Chola FMP-Series 2 (Quarterly Plan II)-Dividend 20,000,000 200,000 —Chola FMP-Series 3 (Quarterly Plan I)-Dividend 20,000,000 200,000 —Deutsche Fixed Term Fund Series 8-Dividend Option 20,000,000 200,000 —DSP Merrill Lynch -Fixed Term Plan-Series 1B Dividend 301,224 301,225 —DSP Merrill Lynch-Fixed Term Plan -Series 2-Dividend 30,195,924 301,960 —HDFC Fixed Investment Plan- June2004 — — 250,031HDFC FMP 3M March06 10,000,000 100,000 —HSBC Fixed Term Series-3-Dividend 30,124,644 301,246 —HSBC Fixed Term Series-7-Dividend 30,177,059 301,771 —JM Fixed Maturity Plan QSA 5- Dividend — — 252,192Kotak FMP Series 20-Dividend 20,000,000 200,000 —Kotak FMP Series 23 -Dividend 10,000,000 100,000 —Kotak FMP Series XV-Dividend 25,275,700 252,758 —Kotak FMP Series XVIII-Dividend 30,000,000 300,000 —Principal Deposit Fund (FMP-3) 91 Days-Dividend Reinvestment Plan — — 201,654Principal Deposit Fund (FMP-3-20) 91 Days Plan 40,255,495 402,556 —Principal Pnb Fixed Maturity Plan 91 Days SeriesII 30,147,799 301,479 —Prudential ICICI FMP- Quarterly Dividend Series — — 150,000Prudential ICICI FMP-Yearly Series XXIV Dividend 30,107,619 301,077 —Prudential ICICI FMP-Yearly Series XXV Dividend 60,808,800 608,088 —SBI Magnum Debt Fund Series 180 Days(December 04) Dividend Option — — 201,672SBI Magnum Debt Fund Series 180 Days(November 04) Dividend Option — — 150,666Standard Chartered Fixed Maturity- 4th Plan Dividend 20,077,000 200,770 —Standard Chartered Fixed Maturity-3 rd Plan Dividend 30,165,000 301,650 —Sundaram Fixed Term Plan Series 1 Feb 06(100 days)-Dividend Plan 20,000,000 200,000 —TATA Fixed Horizon Fund-Series 2B Option(18 Months) Growth 10,000,000 100,000 —

SCHEDULE - 5 No of Units As at As at31 March, 2006 31 March, 2005

INVESTMENTS (Contd.) Rupees ‘000 Rupees ‘000

49

TATA Fixed Horizon Fund Series 2 Plan A(13 Months)-Growth 10,000,000 100,000 —TATA Fixed Horizon Fund Series 3 Scheme 2 B(18 Months)-Growth 10,000,000 100,000 —TATA Fixed Horizon Fund Series 3 Scheme D(13 Months)-Growth 10,000,000 100,000 —TATA Fixed Horizon Fund Series 3 Scheme F(18 Months)-Growth 10,000,000 100,000 —TATA Fixed Horizon Fund Series 5 Scheme B(6 Months)-Dividend 30,136,030 301,362 —TATA Fixed Horizon Fund Yearly Growth (August 04) — — 100,000TATA Fixed Horizon Fund Yearly Growth (November 04) — — 50,000TATA Fixed Horizon Fund Yearly Growth (September 04) — — 500,000UTI Fixed Maturity Plan - Qfmp (SeriesIX) Dividend Plan — — 200,000UTI Fixed Maturity Plan - Qfmp (SeriesVIII) Dividend Plan — — 300,000UTI-Fixed Maturity Plan (QFMP/0206/11) Dividend Plan 30,000,000 300,000 —

(c) Income PlanJM equity and derivative fund — — 200,000

9,682,718 3,101,283

24,993,393 12,005,839

Notes :

(1) Book Value of unquoted investments 24,993,393 12,005,839

(2) All investments other than investments in Mutual Funds are long-term investments

(3) Current Investment bought and sold during the year

Scheme Name Face Value No. of Units Purchase CostIn Rs. Rs. in ‘000

Birla FMP- Series 2- Quarterly- Dividend Payout 10 39,968,425 400,000

DSP ML Quarterly Fixed Maturity Plan Dividend Reinvestment 10 50,641,021 506,411

Grindlays Fixed Maturity Plan-Quarterly Dividend Reinvestment 10 25,000,000 250,000

Grindlays Fixed Maturity Plan Quarterly Series 18- Dividend 10 20,000,000 200,000

ING Vysya Quarterly Fixed Maturity Plan Series IV- Dividend 10 45,000,000 450,000

JM Fixed Maturity Fund QSE 7- Dividend Option 10 20,238,808 202,388

JM Fixed Maturity Fund QSA5- Dividend Option 10 80,282 803

JM Fixed Maturity Plan QSF 6- Dividend Option 10 20,000,000 200,000

JM Fixed Maturity Fund- QSG7- Dividend Option 10 20,000,000 200,000

Kotak FMP Series XII Dividend 10 50,580,686 505,810

Principal Fixed Maturity Plan Quarterly 10 68,764 688

Prudential ICICI FMP Quarterly Series XXV- Dividend 10 165,126 1,651

SBI Magnum Debt Fund Series II - Monthly Dividend Reinvestment 10 145,440 1,473

SBI Magnum Debt Fund Series I - Monthly Dividend Reinvestment 10 221,676 2,253

UTI Fixed Maturity Plan- QFMP 1105/ II 10 40,000,000 400,000

UTI Fixed Maturity Plan- QFMP 1205/ II 10 50,000,000 500,000

JM Floater Short term plan Fortnightly Dividend Reinvestment 10 94,795,864 954,147

SCHEDULE - 5 No of Units As at As at31 March, 2006 31 March, 2005

INVESTMENTS (Contd.) Rupees ‘000 Rupees ‘000



50

Deutsche Floating Rate Fund - Weekly Dividend Reinvestment 10 8,830,561 90,707

Grindlays Floating Rate Fund “Plan C” Daily Dividend Reinvestment 10 14,124,962 141,255

Kotak Floater Long Term- Weekly Dividend Reinvestment 10 6,082,993 60,863

Prudential ICICI Long Term Floating Rate Plan B Dividend 10 59,246,179 595,542

TATA Floater Fund Dividend Reinvestment 10 20,070,451 200,705

TATA Floating Rate Short Term Institutional Plan- Daily Dividend Reinvestment 10 50,801,425 508,552

UTI Floating Rate Fund Short Term Plan Daily Dividend Reinvestment 10 196,245,982 1,975,266

Birla Cash Plus Institutional Premium Plan Daily Dividend Reinvestment 10 261,777,929 2,622,884

Birla Sunlife Cash Manager Institutional Plan- Daily Dividend Reinvestment 10 152,375,909 1,523,987

DSP ML Liquidity Institutional Plan Daily Dividend Reinvestment 1000 3,740,658 3,741,406

Deutsche Insta Cash Plus- IP- Daily Dividend Reinvestment 10 149,887,680 1,501,800

Grindlays Cash Fund SIP “Plan C” Daily Dividend Reinvestment 10 231,032,836 2,310,333

Grindlays Liquidity Manager- Daily Dividend Reinvestment 10 218,330,652 2,183,515

HDFC Cash Management Fund- Savings Daily Dividend Reinvestment 10 16,454,791 175,020

HDFC Cash Management Savings Plus- Weekly Dividend Reinvestment 10 17,790,074 178,209

ING Vysya Liquid Institutional Premium Plan Daily Dividend Reinvestment 10 571,952,243 5,720,673

JM High Liquidity- Super Institutional Plan Daily Dividend Reinvestment 10 215,994,355 2,163,507

Kotak Liquid Institutional Premium Plan- Daily Dividend Reinvestment 10 76,232,633 932,180

Kotak Liquid Institutional Premium Plan Growth 10 29,968,832 400,000

Principal Cash Management LO Institutional Premium Plan

Daily Dividend Reinvestment 10 295,909,851 2,959,292

Prudential Liquid Super Institutional Plan- Daily Dividend Reinvestment 10 21,443,498 254,137

Prudential Liquid Institutional Premium Plan- Daily Dividend Reinvestment 10 278,848,282 3,097,869

Prudential ICICI Liquid Sweep Daily Dividend Reinvestment 10 15,000,000 150,000

Sundaram Liquid Super Institutional Plan- Daily Dividend Reinvestment 10 139,587,332 1,409,176

TATA Liquid Super High Investment Plan- Daily Dividend Reinvestment 1000 5,705,326 6,358,591

Templeton India Treasury Management Account Institutional Plan-

Daily Dividend Reinvestment 1000 262,522 262,531

UTI Liquid Cash Plan Institutional - Daily Income Option 1000 9,555,971 9,704,430

UTI Liquid Cash Fund Institutional Plan- Growth 1000 459,772 500,000

UTI Liquid Cash Fund Institutional Plan Daily Dividend Reinvestment 1000 1,056,708 1,073,412

UTI Money Market Fund Daily Dividend Reinvestment 10 70,577,652 1,229,835

Birla Bond Plus- Institutional- Fortnightly Dividend Reinvestment 10 5,823,218 60,960

Deutsche Short Maturity Fund- Weekly Dividend Reinvestment 10 18,938,290 194,094

Kotak Short Term Bond Fund- Monthly Dividend 10 6,126,834 61,633

Principal Short term Income Plan- Weekly Dividend 10 27,962,081 305,704

Prudential ICICI Short Term Plan Inst Plan- Fortnightly Dividend 10 47,131,572 514,823

TATA Short Term Bond Fund- Dividend 10 106,162,234 1,157,784

Templeton Short Term Income Plan- Weekly Dividend Reinvestment 1000 132,078 144,009

Templeton Short Term Income Fund Institutional Plan Weekly Dividend 1000 144,941 144,942

Templeton Short Term Income Fund Institutional Plan Weekly Dividend 1000 121,757 121,758

Templeton Short Term Income Plan- Weekly Dividend Reinvestment 1000 110,952 120,932

SCHEDULE 5 (3): Current Investment bought and sold during the year (Contd.)

Scheme Name Face Value No. of Units Purchase CostIn Rs. Rs. in ‘000

51

SCHEDULES FORMING PART OF THE BALANCE SHEETAs at As at

31 March, 2006 31 March, 2005SCHEDULE - 6 Rupees ‘000 Rupees ‘000INVENTORIESEquipment for resale 10,174 26,334Less: Provision for obsolescence (85) (9,926)

10,089 16,408Consumable stores and spares 27,930 3,243

38,019 19,651

SCHEDULE - 7SUNDRY DEBTORS(a) Over six months (Unsecured)

Considered good 705,867 411,495Considered doubtful 1,249,820 1,310,532

1,955,687 1,722,027Less: Provision for doubtful debts (1,249,820) (1,310,532)

705,867 411,495(b) Other debts (unsecured)

Considered good 6,669,843 4,729,078

7,375,710 5,140,573

Note:(1) Includes amounts due from subsidiaries of Rs. 1,572,655 thousands (2005: Rs. 229,075 thousands)

SCHEDULE - 8CASH AND BANK BALANCES(a) Cash in hand 440 890(b) Cheques in hand 1,635,070 28,620(c) Remittances in transit 630,265 —(d) Current accounts with Scheduled Banks 190,831 193,071(e) Deposit accounts with Scheduled Banks 112,209 13,868,662

2,568,815 14,091,243

Note:(1) Deposit accounts include Rs. Nil (2005: Rs. 5,972,069 thousands) representing unutilised monies from GDR issue

SCHEDULE - 9OTHER CURRENT ASSETS(a) Interest receivable 91,192 151,307(b) Service tax recoverable 306,076 279,453(c) Pension contributions recoverable from Government of India

(net of provision of Rs. 537,086 thousands; 2005: Rs. 472,866 thousands)(Refer note B6, Schedule 20) 74,424 74,424

(d) NLD licence fees reimbursement recoverable from Government of India 511,158 245,608(e) Others 175 2,017

983,025 752,809

Note:(1) Interest receivable includes interest due from subsidiaries of Rs. 54,986 thousands (2005: Rs. 25,588 thousands)



52

SCHEDULES FORMING PART OF THE BALANCE SHEETAs at As at

SCHEDULE - 10 31 March, 2006 31 March, 2005LOANS AND ADVANCES Rupees ‘000 Rupees ‘000(a) Unsecured - Considered good

(i) Staff advances (note 1) 113,157 135,171(ii) Deposits with public bodies 49,417 40,953(iii) Other deposits 124,612 71,904(iv) Other loans and advances (note 2) 829,158 754,228(v) Prepaid expenditure 265,481 270,225(vi) Advance payment of tax (net of provision for tax) 8,929,226 11,512,412(vii) Advance against equity investments in subsidiaries — 226,237(viii) Loans to subsidiaries 2,752,481 1,881,735

13,063,532 14,892,865(b) Unsecured - Considered doubtful

Other loans and advances 73,786 73,786Less: Provision for doubtful advances (73,786) (73,786)

13,063,532 14,892,865

Notes:(1) Staff Advances includes loans due by an officer of the Company Rs. 151 thousands (2005:Rs. 176 thousands)

(Maximum amount outstanding during the year Rs. 176 thousands (2005: Rs. 199 thousands))(2) Other loans and advances includes amounts due from subsidiaries of Rs.378,522 thousands (2005: Rs. 242,174 thousands)

SCHEDULE - 11CURRENT LIABILITIES(a) Sundry Creditors:

(i) Creditors for interconnect charges 4,431,513 3,504,086(ii) Others (note 3) 4,905,910 5,721,507

(b) Unearned income and deferred revenues 3,212,198 2,972,834(c) Liability towards Investors Education and Protection Fund under Section 205C

of the Companies Act 1956 (not due): Unpaid dividend 11,906 11,772(d) Government of India Current Account 205,747 210,393(e) Other liabilities (note 4) 2,894,595 2,114,629(f ) Interest accrued but not due on short term foreign currency loans from banks 12,955 —

15,674,824 14,535,221

Notes:(1) Rs.173 thousands dues to Indochem Industries,

a small scale industrial undertaking, for more than 30 days(2) Dividends are not outstanding for a period exceeding seven years.(3) Sundry creditors includes Rs. 140,250 thousands payable on purchase of

ISP business of Seven Star Dot Com Pvt. Ltd. (Refer Note B13, Schedule 20)(4) Includes Rs. 248,849 thousands overdrawn book bank balance

(2005:Rs. 74,556 thousands)(5) Sundry creditors includes Rs. 77,699 thousands

(2005: Rs. 525 thousands) due to subsidiaries

SCHEDULE - 12PROVISIONS(a) Provisions for employee benefits 917,365 701,893(b) Provision for proposed dividend 1,282,500 1,710,000(c) Tax on dividend 179,871 239,828(d) Provision for contingencies (Refer Note B22, Schedule 20) 186,476 40,737

2,566,212 2,692,458

53

SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNTYear ended Year ended

SCHEDULE - 13 31 March, 2006 31 March, 2005REVENUES FROM TELECOMMUNICATION SERVICES Rupees ‘000 Rupees ‘000

(a) Telephone 21,638,671 18,784,022

(b) Leased channel 7,618,766 7,191,914

(c) Frame relay 1,639,859 1,382,652

(d) Internet 6,258,623 4,953,008

(e) Other traffic revenues 653,606 718,795

37,809,525 33,030,391

SCHEDULE-14

OTHER INCOME

(a) Dividend income from current investments 406,515 278,419

(b) Dividend income from long term investments — 6,331

(c) Profit on sale of of current investments (net) 76,554 9,026

(d) Profit on sale of fixed assets (net) — 11,111

(e) Rent 102,226 48,786

(f ) Exchange gain (net) 70,872 —

(g) Provisions no longer required written back 344,039 13,761

(h) Other 334,022 152,439

1,334,228 519,873

SCHEDULE-15

INTEREST INCOME

(a) Interest income-

i. Bank deposits 275,235 520,800

(Tax deducted at source Rs.58,603 thousands,2005:Rs.93,487 thousands)

ii. Other loans and advances 114,067 34,138

(Tax deducted at source Rs.12,742 thousands2005:Rs.1,648 thousands)

389,302 554,938

Note:(1) Interest income includes Rs. 106,157 thousands (2005: Rs. 25,588 thousands) from subsidiaries. Tax deducted at

source on such income is Rs. 11,446 thousands (2005: Nil)

SCHEDULE - 16

SALARIES AND RELATED COSTS

(a) Salaries and bonus 1,677,249 1,165,971

(b) Contributions to provident,gratuity and other funds 156,028 56,217

(c) Staff welfare expenses 257,314 190,620

2,090,591 1,412,808



54

Year ended Year endedSCHEDULE-17 31 March, 2006 31 March, 2005NETWORK COSTS Rupees ‘000 Rupees ‘000(a) Rent of satellite channels 882,408 1,084,800(b) Rent of landlines 279,345 1,193,634(c) Administrative lease charges 117,606 95,389(d) Royalty and licence fee to Department of Telecommunications 2,037,868 2,112,526(e) Charges for use of transmission facilities

(i) Telephone [net of excess provision written back Rs. 82,400 thousands 15,192,527 14,064,532(2005: Rs.118,489 thousands)]

(ii) Leased channel 664,936 137,286(iii) Frame relay 377,990 196,101(iv) Internet 836,470 856,555(v) Others 569,524 290,070

20,958,674 20,030,893

SCHEDULE - 18OPERATING AND OTHER EXPENSES(a) Consumption of stores 19,517 16,507(b) Light and power 369,235 335,325(c) Repairs and Maintenance:

(i) Buildings 121,553 54,300(ii) Plant and Machinery 1,594,333 1,074,857(iii) Others 156,444 90,212

(d) Bad debts written off 175,506 526,909(e) Provision for doubtful debts written back (60,712) (582,138)(f ) Provision for doubtful advances - 35,677(g) Rent 176,976 123,204(h) Rates and taxes 98,294 83,673(i) Travelling expenses 246,274 149,601(j) Telephone and telex 118,159 67,268(k) Printing, postage and stationery 35,924 27,511(l) Security expenses 11,227 56,939(m) Computer software and maintenance 40,295 56,591(n) Legal and professional fees 496,428 323,046(o) Advertising and publicity 1,095,010 642,537(p) Commissions 200,791 77,244(q) Water charges 10,104 10,774(r) Insurance 53,070 38,735(s) Donations 27,867 1,029(t) Loss on sale of fixed assets (net) 21,131 —(u) Exchange loss (net) — 151,617(v) Services rendered by third parties 683,170 227,533(w) Other expenses 311,143 306,709

6,001,739 3,895,660

SCHEDULE - 19PRIOR PERIOD ADJUSTMENTS (NET)INCOME:Revenues from telecommunication services 67,005 —EXPENSES:Charges for use of transmission facilities, written back (186,904) —Repairs and maintenance 8,157 —Other expenses 2,738 —

(109,004) —

Note : Figures in brackets are credits

SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNT

55

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

SCHEDULE 20


A. SIGNIFICANT ACCOUNTING POLICIES

1. Basis of preparation

The financial statements are prepared under the historical cost convention, in accordance with the accountingstandards issued by the Institute of Chartered Accountants of India and in accordance with the applicablerequirements of the Companies Act, 1956.

2. Use of estimates

The preparation of financial statements requires the management of the Company to make estimates and assumptionsthat affect the reported balances of assets and liabilities and disclosures relating to the contingent liabilities as atthe date of the financial statements and reported amounts of income and expenses during the period. Examples ofsuch estimates include provisions for doubtful debts and advances, employee retirement benefit obligations, provisionfor income taxes, impairment of assets and useful lives of fixed assets.

3. Fixed assets

a) Fixed assets are stated at cost less accumulated depreciation. Cost includes freight, duties, taxes and all incidentalexpenses incurred to bring the assets to their present location and condition.

b) Fixed assets received as gifts from other Foreign Telecom Administrations are capitalised and credited to capitalreserve on the basis of notional cost (cost assessed by customs authorities). Cost includes freight, insurance andcustoms duty.

c) Intangible assets in the nature of Indefeasible Rights of Use (IRUs) for international and domestictelecommunication circuits are recorded as fixed assets. IRU agreements transfer substantially all the risks andrewards of ownership.

d) Jointly owned assets are capitalised in proportion to the Company’s ownership interest in such assets.

e) Consideration for purchase of business in excess of the value of net assets acquired is recognised as goodwill.

f ) Assets acquired pursuant to an agreement for exchange of similar assets are recorded at the net book value ofthe asset given up, with an adjustment for any balancing receipt or payment of cash or other consideration.

4. Depreciation

Depreciation is provided on straight line basis (SLM), at the rates and in the manner prescribed in Schedule XIV tothe Companies Act, 1956 except as follows:

Assets Rates of depreciation/ period of amortisation

i) Plant and Machinery

a. Land cables 6.33 %

b. Earth station and switches 7.92 %

c. Other networking equipment 11.88 %

d. Overhead fibre cables 19.00 %

ii) Goodwill 60 months

iii) Indefeasible Rights of Use (IRU’s) Life of IRU or period of agreement, whichever is loweriv) Leasehold land Over the lease period

5. Operating lease

Lease arrangements where the risk and rewards incident to ownership of an asset substantially vests with the lessorare classified as operating lease.

Rental income and rental expense on assets given or obtained under operating lease arrangements are recognisedon a straight - line basis over the term of the lease.

The initial direct costs relating to operating leases are recorded as expense as they are incurred.



56

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

6. Impairment

At each balance sheet date, the Company reviews the carrying amounts of its fixed assets to determine whetherthere is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverableamount of the asset is estimated in order to determine the extent of the impairment loss. Recoverable amount is thehigher of an asset’s net selling price and value in use. In assessing the value in use, the estimated future cash flowsexpected from the continuing use of the asset and from its ultimate disposal are discounted to their present valuesusing a pre-determined discount rate that reflects the current market assessments of the time value of money andrisks specific to the asset.

7. Investments

Long-term investments are valued at cost less provision for diminution in value. Provision for diminution in the valueis made to recognise a decline, which is other than temporary. Current investments comprising investments inmutual funds are stated at the lower of cost or fair value, determined on an individual investment basis.

8. Inventories

Inventories are valued at the lower of cost and net realisable value. Cost is determined on a weighted average basis.

9. Retirement Benefits

a) Provision for unutilised leave due to employees, gratuity and pension contribution are actuarially determinedas at the balance sheet date.

b) Contributions to Employees’ Provident Fund and other defined contribution plans are recognised in the profitand loss account in the period when such contributions are made.

10. Revenue recognition

a) Revenues from telephony services are recognised at the end of each month based upon minutes of incomingor outgoing traffic completed in such month. Substantial portion of revenues are on account of recoveries fromForeign Telecommunication Administrations for incoming traffic and recovery from domestic carriers for deliveryof calls on foreign networks.

b) Revenues from data services are recognised over the lease period based on contracted fee schedules.

c) Revenues from internet services are recognised based on usage.

d) Dividend from investments is recognized when the right to receive payment is established and no significantuncertainty as to measurability or collectibility exists.

e) Transactions relating to exchange or swapping of capacities, which results in little or no consideration, representthe exchange of productive assets not held for sale in the ordinary course of business. Such exchanges do notresult in the culmination of the earnings process and hence the Company does not recognize any revenue forthese types of transactions.

11. Taxation

Current tax expense is determined in accordance with the provisions of the Income Tax Act, 1961. Deferred taxassets and liabilities are measured using the tax rates, which have been enacted or substantively enacted at thebalance sheet date. Deferred tax assets and liabilities are recognised for future tax consequences attributable totiming differences between the taxable and accounting income.

Deferred tax assets in respect of unabsorbed depreciation and carry forward tax losses are recognised if there isvirtual certainty that there will be sufficient future taxable income available to realise such losses. Deferred tax assetsin respect of other timing differences are recognised if there is a reasonable certainty that sufficient future taxableincome will be available to realise such assets.

12. Foreign currency transactions

a) Foreign currency transactions are converted into Indian Rupees at rates of exchange approximating thoseprevailing at the transaction date. Foreign currency monetary assets and liabilities are translated to Indian

57


Rupees at the closing rate prevailing on the balance sheet date. Exchange differences, other than on foreigncurrency liabilities to purchase fixed assets from countries outside India are recognised in the profit and lossaccount. Exchange differences on translation of foreign currency liabilities incurred to purchase fixed assetsfrom countries outside India are adjusted in the cost of such assets.

b) Premium or discount on forward contracts is amortised over the life of such contracts and is recognised in theprofit and loss account, except in respect of forward contracts taken for liabilities for fixed assets where suchamortisation is adjusted in the carrying cost of fixed assets. Forward contracts outstanding as at the balancesheet date are stated at exchange rate prevailing at the reporting date and any gains or losses are recognised inthe profit and loss account. Profit or loss arising on cancellation or renewal of forward exchange contract isrecognised in the profit and loss account in the period of such cancellation or renewal, except in case of aforward contract relating to liabilities for purchase of fixed assets from countries outside India, in which casesuch profit or loss is adjusted to the carrying cost of such fixed assets.

B. NOTES TO ACCOUNTS

1. The Company was incorporated on 19 March, 1986. The Government of India vide its Order No. G 25015/6/86-OCdated 27 March, 1986, transferred all the assets and liabilities of the OCS (part of the Department ofTelecommunications, Ministry of Communications) as appearing in the Balance Sheet as at 31 March, 1986 to theCompany with effect from 1 April,1986. As per the letter no. G-25015/6/86-OC dated 23 October, 2001 of Governmentof India, Department of Telecommunications, there was no requirement to register a formal transfer deed or deed ofsale in the matter of such transfer of assets.

2. Capital reserve includes Rs. 2,052,161 thousands (2005:Rs. 2,052,161 thousands) in respect of foreign exchangegains on unutilised proceeds from Global Depository Receipts credited to Capital Reserve in a previous year.

3. The Board of Directors recommended a dividend of Rs. 4.5 (2005: Rs. 6.0 including Rs. 1.5 special dividend) per sharefor the year ended 31 March, 2006.

4. The Company has an investment of Rs. 10,113,180 thousands in Tata Teleservices Ltd.(“TTSL”) representing an equityinterest of 16.14 percent in the issued and paid-up capital of TTSL. TTSL has accumulated losses, which havesignificantly eroded its net worth. In the opinion of the management, having regard to the long gestation periodinevitable to the nature of its business, there is no permanent diminution in value of the investment.

During the current financial year, TTSL issued equity shares to certain other investors at a price that is higher thanthe carrying value of the equity shares in the books of the Company.

5. The Company has an investment of Rs. 233,275 thousands in United Telecom Ltd. Nepal (“UTL”) representing anequity interest of 26.66 percent in the issued and paid-up capital of UTL. UTL has accumulated losses, which havesignificantly eroded its net worth. In the opinion of the management, having regard to the long gestation periodinevitable to the nature of its business and future business projections, there is no permanent diminution in value ofthe investment.

6. As at 1 April, 2004 proportionate share of pension obligation and payments to erstwhile OCS employees of Rs.547,290thousands were recoverable from the Government of India (“the Government”). Pursuant to discussions with theGovernment, the Company had made a provision of Rs. 472,866 thousands in the year ended 31 March, 2005.

In the current year, consequent to an actuarial valuation, the pension obligation towards the erstwhile OCS employeeshas increased by Rs. 64,220 thousands. Pending resolution of the matter and recovery of this amount from theGovernment, the Company has provided for the additional amount recoverable in the Profit and Loss account.

7. During the year, a consortium owned, high-capacity fibre-optic submarine cable system, SEA-ME-WE 4, wascommissioned. The SEA-ME-WE 4 cable system links France to Singapore with Mumbai, India as one of its landingpoints. As part of the consortium, the Company has capitalised an amount of Rs.1,689,728 thousands as contributiontowards the construction of the cable system.



58


8. During the year the Company has charged to the Profit and Loss account a sum of Rs.612,127 thousands towardswrite off of certain fixed assets having a gross value and accumulated depreciation of Rs. 1,594,407 thousands andRs. 982,280 thousands respectively. In the opinion of the management, these assets do not have future economicuse consequent to technological changes and product related advancements.

9. On 30 June, 2005 the Company, through its wholly owned subsidiary VSNL Singapore Pte. Limited (“VSPL”), completedthe acquisition of Tyco Global Network (“TGN”) through the purchase of certain net assets and shares of certaincompanies formed by Tyco International Ltd (“Tyco”) pursuant to the Stock and Asset Purchase Agreement dated 1November, 2004, for a total purchase consideration of Rs. 6,143,243 thousands ($137.7 million).

10. On 13 February, 2006, the Company through its wholly owned subsidiary VSPL, completed its acquisition of Teleglobeby acquiring 100% of the common shares of Teleglobe pursuant to the Agreement and Plan of Amalgamation dated25 July, 2005, amongst Teleglobe, the Company and VSNL Telecommunications (Bermuda) Ltd - a wholly-ownedsubsidiary of VSPL for a total purchase consideration of Rs.8,186,336 thousands ($183.5 million).

11. The Company has incorporated a wholly owned subsidiary, VSNL SNO SPV Pte. Ltd.(“SNOSPV”), which has invested 47percent in the issued and paid-up share capital of SEPCO Communications Pty. Ltd.(“SEPCO”).

SEPCO is an investment company which has acquired 51 percent controlling stake in the issued and paid-up sharecapital of SNO Telecommunications (Pty.) Ltd. (“SNO”), the licensed second network operator in South Africa.

12. On 31 October, 2005, the Company completed its acquisition of VSNL Broadband Ltd. (“VBL”) (formerly Tata PowerBroadband Ltd.) by purchasing 100% of the common shares of VBL for a cash consideration of Rs.2,020,937 thousands.

13. On 1 March, 2006, the Company purchased the internet service provider (ISP) business of Seven Star Dot Com Pvt.Ltd. (“Seven Star”) under a slump sale agreement. The Company acquired net assets of Rs. 8,795 thousands for apurchase consideration of Rs. 170,683 thousands. Consequently, an amount of Rs. 161,888 thousands has beenrecognised as goodwill and included under Fixed Assets.

The valuation of fixed assets amounting to Rs. 13,543 thousands acquired under the slump sale agreement has beendetermined by the management based on an independent valuation. Legal formalities relating to transfer of assetsand contracts in the name of the Company are pending completion.

14. Cash and cash equivalents represent:-

As at As at31 March, 2006 31 March, 2005

Rupees ‘000 Rupees ‘000

Cash and Cheques on hand and balances held with scheduled banks 1,826,341 222,581

Remittances in transit 630,265 -

Deposit accounts held with scheduled banks 112,209 13,868,662

2,568,815 14,091,243

Deposits with original maturity over three months (111,709) (11,862,391)

Current Account / Deposits held for unpaid dividends (11,808) (6,271)

Cash and cash equivalents 2,445,298 2,222,581

59


15. Deferred tax liability:As at As at

31 March, 2006 31 March, 2005Rupees ‘000 Rupees ‘000

Deferred tax liabilityDifference between accounting and tax depreciation 1,816,193 1,857,787Deferred tax assetsProvision for doubtful debts 420,689 441,125Expenditure on Voluntary retirement schemes 138,634 210,369Expenditure incurred on NLD license fees (Refer Note (a) below) 265,737 -Unearned income and deferred revenues 181,781 177,169

Others 58,426 32,328

1,065,267 860,991

Net deferred tax liability 750,926 996,796

Note:a. In March 2002, the Company paid a one time entry fee of Rs. 1,000,000 thousands to the Department of

Telecommunications for providing National Long Distance (“NLD”) service. The Company commenced its NLDoperations with effect from September 2002. Owing to uncertainty relating to the allowability of the one timeentry fee paid under Sec 35 ABB of the Income Tax Act, 1961, the Company did not consider the deduction inthe provision for tax and consequently did not set up a deferred tax asset. During the current year the Companyhas setup a deferred tax asset of Rs. 265,737 thousands consequent to the deduction being allowed in itsincome tax assessment for A.Y. 2003-2004.

16. Included in operating and other expenses:Year ended Year ended


Auditors’ remuneration and expenses(i) Audit fees 8,250 5,500(ii) Tax audit fees 1,500 1,000(iii) Other professional services 2,635 1,648(iv) Service tax 1,263 727

Auditors’ remuneration excludes fees of Rs. 4,840 thousands (2005: Rs.2,000 thousands) payable/paid for professionalservices to a firm of chartered accountants in which some partners of the firm of statutory auditors are partners.

17. Managerial Remuneration

a) Managerial Remuneration for whole time director and non-executive directors.

The above is inclusive of :Year ended Year ended


(i) Salaries 4,067 3,305(ii) Contribution to provident and other funds 418 551(iii) Estimated monetary value of perquisites 375 1,392(iv) Commission 5,273 2,500(v) Non-executive directors’ sitting fees 580 615

10,713 8,363



60


b) Computation of Net Profit in accordance with Section 309(5) of the Companies Act,1956

Year ended Year ended31 March, 2006 31 March, 2005


Profit before taxes as per profit and loss account 6,867,173 10,539,823

Add:Managerial Remuneration 10,713 8,363

Provision for doubtful advances - 35,677

6,877,886 10,583,863

Less:Capital profit on sale of investments - 5,514,486

Provision for doubtful debts written back (net) 60,712 582,138

Net profit as per Section 309(5) of the Companies Act, 1956 6,817,174 4,487,239

c) Commission

(i) Whole-time Director 2,500 2,500

(ii) Non-executive Directors 2,773 -

Note:

The commission payable to whole time director and non-executive directors aggregating to Rs. 5,273 thousands issubject to approval of the shareholders.

18. Earnings per Share

Rupees in 000’s,except Number of Shares and

Earnings per share dataYear ended Year ended

31 March, 2006 31 March, 2005

Profit before taxes and exceptional items 7,543,520 6,325,386

Income tax expense on profit excluding exceptional items 2,299,411 2,238,229

Profit after tax excluding exceptional items 5,244,109 4,087,157

Exceptional (expense)/ income (net) (676,347) 4,214,437

Income tax benefit/(expense) on exceptional items 227,658 (737,920)

Net Profit after tax and exceptional items 4,795,420 7,563,674

Number of Shares 285,000,000 285,000,000

Earnings per share excluding exceptional items Rs.18.40 Rs.14.34

Earnings per share including exceptional items Rs.16.83 Rs.26.54

61


19. Business Segments

In the year ended 31 March, 2006, as a result of changes in the form and content of segment information providedto and used by the Management to allocate resources and assess performance and change in the organisationalstructure, the Company has reviewed and revised its reportable segments.The reportable segments in the current year are “Wholesale Voice”, “Enterprise and Carrier Data” and “Others”. Thecomposition of the reportable segments is as follows

- Wholesale Voice: includes International and National Voice services.- Enterprise and Carrier Data: includes corporate data transmission services like IPLC, Frame Relay, ILL and

NPLC.- Others: includes Internet, GPSS, Telex, Telegraph, TV up-linking, Transponder lease and other services.

In the previous year, “Telephony and related services” which included international and national voice and dataservices and internet was considered as a reportable segment and other services including transponder lease,television uplinking, gateway packet switching services and video conferencing facilities were reported under “OtherServices”.

Year ended 31 March, 2006Rupees ‘000

Wholesale Enterprise andVoice Carrier Data Others Total

Revenues 21,626,466 12,617,977 3,565,082 37,809,525

Segment Profits 4,599,952 10,258,602 862,111 15,720,665

Unallocated expenses (net) 8,286,149

Prior Period Income (net) 109,004

Profit before taxes and exceptional items 7,543,520

Exceptional Items (676,347)

Profit before taxes 6,867,173

Income Taxes 2,071,753

Profit after taxes 4,795,420



Revenues 18,764,997 11,170,435 3,094,959 33,030,391

Segment Profits 3,095,514 8,738,441 639,468 12,473,423


Profit before taxes and exceptional items 6,325,386Exceptional Items 4,214,437

Profit before taxes 10,539,823Income Taxes 2,976,149




62


i). Revenues and expenses, which are directly identifiable to segments, are attributed to the relevant segment.Expenses on rent of satellite channels and landlines, and royalty and license fee are allocated on the basis ofusage. Segment result is segment revenues less segment expenses. Certain costs, including depreciation whichare not allocable to segments have been classified as “unallocable expense”.

ii). Telecommunication services are provided utilizing the Company’s assets which do not generally make adistinction between the types of services. As a result, fixed assets are used interchangeably between segments.In the absence of a meaningful basis to allocate assets and liabilities between segments, no allocation has beenmade.

iii). Segment information for the year ended 31 March, 2005 has been presented in accordance with the basis ofsegmentation adopted for the current year for comparative purposes.

Geographical Segment:

Segment revenues byGeographical Market

Year ended31 March, 2006

Rupees ‘000India 20,870,790

United States of America 4,833,240

United Kingdom 3,242,811

United Arab Emirates 2,600,211

Others 6,262,473

37,809,525



Rupees ‘000India 19,075,781

United States of America 3,804,508

United Arab Emirates 2,633,825

Saudi Arabia 1,026,045

Others 6,490,232

33,030,391

For the year ended 31 March, 2006 and 31 March, 2005, revenues from customers, comprise mainly revenues fromWholesale Voice and Enterprise and Carrier data segments under the revised segments.

63

20. Related Party Disclosures

(a) List of related parties and relationship:

I. Investing party

• Panatone Finvest Limited

II. Subsidiaries (Held directly)

• VSNL Broadband Limited

• VSNL America Inc.

• VSNL Lanka Ltd.

• VSNL Singapore Pte. Ltd.

• VSNL SNOSPV Pte. Ltd

III. Other Subsidiaries (Held indirectly)

• VSNL UK Ltd

• VSNL Netherlands BV

• VSNL Bermuda Ltd

• VSNL Japan K.K

• VSNL Telecommunications (Bermuda) Ltd.

• VSNL Hong Kong Ltd

• ITXC Global Japan YK

• ITXC IP Holdings S.a.r.l

• Teleglobe America Inc

• Teleglobe Asia Data Transport Pte. Ltd

• Teleglobe Asia Pte. Ltd

• Teleglobe Bermuda Ltd.

• Teleglobe Canada ULC

• Teleglobe France International S.A.S

• Teleglobe International Belgium S.P.R.L

• Teleglobe International Hong Kong Ltd

• Teleglobe International Ltd

• Teleglobe International Luxembourg S.a.r.l

• Teleglobe Italy S.r.l

• Teleglobe Netherlands B.V

• Teleglobe Spain Communications S.L




64

• TLGB International Germany GmbH

• TLGB Luxembourg Holdings S.a.r.l

• TLGB Netherlands Holdings B.V

• VSNL (Portugal) Unipessoal Limitada

• VSNL Belgium BVBA

• VSNL France SAS

• VSNL International (Nordics) AS

• VSNL International (Global) Corp.

• VSNL International (Guam) Llc

• VSNL International (Portugal) Instalacao e Manutencao de Redes LDA

• VSNL International (US) Inc

• VSNL International Australia Pty. Ltd

• VSNL International GBRM Ltd

• VSNL International IPCO LLC

• VSNL International Puerto Rico Inc

• VSNL International (ITXC) Corp.

• VSNL International(Poland) Sp. Zo.o

• VSNL Spain Srl

• VSNL Telecommunications(UK) Inc

• VSNL(Germany) GMBH

• ITXC Global UK Ltd.

• ITXC Global Zagreb d.o.o

• Enhanced Services Inc

• ITXC (UK)Ltd.

• ITXC Global HongKong Ltd.

IV. Joint Venture

• United Telecom Limited

V. Joint Venture of wholly owned subsidiary

• SEPCO Communications Pty. Ltd.

• SNO Telecommunications (Pty) Ltd. (Subsidiary of SEPCO)

VI. Key Managerial Personnel

• N.Srinath - Executive Director


65

(b) Related party transactions(Rupees ‘000)

Transactions Investing Subsidiaries Key Joint Joint Venture ofCompany Managerial Venture wholly owned

Personnel subsidiary

Dividend paid 694,433 — — — —577,125 — — — —

Revenues fromtelecommunication services 3,127,525 — 19,887 —

345,254 — 11,949 —Network cost 416,076 — 9,995 —

60,837 — 180 —Purchase of fixed assets

(includes purchase fromVSNL Broadband Ltd. Rs. 8,454) 10,036 — — —

3,509 — — —Sale of fixed assets 106 — — —

727,132 — — —Sale of Investment in

subsidiary to VSPL 525 — — —— — — —

Services rendered 12,780 — — — 6,869 — — —

Services received 5,968 — — —— — — —

Equity capital contributions(includes contribution in

VSPL Rs. 1,521,703) 1,530,689 — — — 386,839 — — —

Preference capital contribution in VSPL 1,083,052 — — — — — — —

Interest Income 106,157 — — — 25,588 — — —

Loans given(includes loans givento VSPL Rs.15,650,743) 15,767,648 — — —

1,885,244 — — —Loans repaid(includes loans

repaid by VSPL Rs.12,904,302) 13,592,502 — — —3,509 — — —

Advances given 1,269,814 — — 33,554441,086 — — —

Managerial remuneration — 7,360 — —— 7,748 — —

Balances:Receivables 1,627,641 — 16,111 —

237,956 — 9,297 —Payables 77,699 2,500 — —

525 2,500 — —Loans given 2,752,481 — — —

1,907,323 — — —Advances receivable 378,522 — — 33,554

459,529 — — —Deferred Revenue 423,935 — — —

— — — —

Guarantee on behalf of subsidiaries 10,160,045 — — — 98,656 — — —

Letter of Comfort on behalf of VSPL 8,029,800 — — —— — — —

Note: Figures in italic are in respect of the previous year




66

(c ) Disclosure in respect of material transactions with related parties


Rupees ‘000 Rupees ‘000Revenues from telecommunication services

VSNL UK Ltd. 1,225,296 86,061

VSNL America Inc. 1,112,191 -

VSNL Singapore Pte. Ltd. 449,472 109,826

Network cost


VSNL Lanka Ltd. 51,820 41,344

Interest Income


VSNL Bermuda Ltd. 20,983 9,084

VSNL America Inc. 10,998 1,126

21. Operating lease arrangements:

(a) As lessee :Year ended Year ended


Minimum lease payments under operating leasesrecognized as expense in the year 882,408 1,232,160

At the balance sheet date, minimum lease payments under non- cancellable operating leases fall due as follows:



Due not later than one year 518,117 713,384

Due later than one year but not later

than five years 714,936 903,041

Later than five years 45,198 92,885

1,278,251 1,709,310

Operating lease payments represent rentals payable by the Company for certain buildings and satellite channels.

67

(b) As lessor:

(i) The Company has leased under operating lease arrangements certain IRU’s with gross carrying amount andaccumulated depreciation of Rs. 874,174 thousands and Rs. 57,787 thousands respectively as at 31 March, 2006.Depreciation expense of Rs. 43,389 thousands (2005: Rs. 14,397 thousands) in respect of these assets has beenrecognised in the profit and loss account for the year ended 31 March, 2006.

In respect of the above, rental income of Rs.42,470 thousands (2005: Rs. 18,150 thousands) has been recognisedin the profit and loss account for the year ended 31 March, 2006.

Future lease rental receipts will be recognised in the profit and loss account of subsequent years as follows:



Not later than one year 68,303 36,370

Later than one year but not later than five years 273,212 145,480


963,935 527,400

(ii) The Company has leased certain premises under operating lease arrangements. Future lease rental income inrespect of these leases will be recognised in the profit and loss account of subsequent years as follows:


Rupees ‘000 Rupees ‘000Not later than one year 46,873 50,058


Later than five years 325 -

59,555 84,862

Lease rental income of Rs. 64,777 thousands (2005: Rs. 32,419 thousands) in respect of the above leases have beenrecognised in the profit and loss account for the year ended 31 March, 2006.

22. Provision for Contingencies:

Asset Retirement Obligation (“ARO”) Others Total

Rupees ‘000 Rupees ‘000 Rupees ‘000

Balance as on 1 April, 2005 40,737 - 40,737Provision made during the year 19,934 125,805 145,739Provision written back during the year - - -

Balance as on 31 March, 2006 60,671 125,805 186,476

Notes:1) Provision for ARO has been made in respect of under-sea cables and switches owned by the Company.2) Contingent liabilities as at 1 April, 2005, included approximately Rs. 172,000 thousands relating to an escalation

claim by a creditor. During the year, consequent to an arbitration award the Management has provided Rs. 90,000thousands towards such liability.

3) Rs. 35,805 thousands has been provided in respect of a carrier claim, which is under dispute.



68

23. Contingent Liabilities and capital commitments

A. Contingent LiabilitiesAs at As at


Letters of Credit 207,989 292,532

Guarantees 2,550,452 3,683,246

Guarantees given on behalf of subsidiaries 10,160,045 -

i. Claims for taxes on income (Refer Note 1 )

(a) Income tax disputes where the department isin appeal against the Company 1,935,518 1,694,521

(b) Income tax disputes where the Company hasa favourable decision in other assessment yearfor the same issue 78,248 1,860,194

(c ) Income tax disputes other than the above 9,257,720 9,593,879

ii. Claims for other taxes 211,961 229,135

iii. Other claims 3,974,458 381,738

Notes:

(1) Significant claims by the revenue authorities in respect of income tax matters are in respect of:

(a) expenditure on licence fees for the Assessment Year 1995-96 disallowed by the revenue authorities. TheCompany’s appeal was allowed at the Tribunal stage, and the matter is now pending before the High Court. TheCompany has obtained favourable decisions in other assessment years, which have not been contested by therevenue authorities, and the Company is of the view that the claims will eventually be decided in its favour.

(b) deductions claimed under Section 80 IA of the Income Tax Act,1961 from Assessment years 1996-97 onwardshave been disallowed by the revenue authorities. The Company has contested the disallowance and has preferredappeals.

(c) reimbursement by the Department of Telecommunications (DoT) of income tax paid by the Company on theDoT levy during 1994-95, that was taxed by the revenue authorities. The Commissioner of Income Tax (Appeals)has upheld the disallowance. The Company is in appeal with the Income Tax Appellate Tribunal.

(2) A claim of Rs.66,915,000 thousands (US $ 1,500 million) have been made against the Company by a strategicbusiness alliance associate for breach of contract relating to access and sale of bandwidth capacity on the Company’sTGN network acquired during the year. The claim has been made in the US Federal District Court for the SouthernDistrict of New York. The Company has filed its reply to the complaint denying all liability and believes that theprobability of the claim succeeding is remote.

(3) During the year, the Company issued Letters of Comfort for credit facility agreements, aggregating to Rs. 8,029,800thousands (USD $ 180 million) availed by VSPL from different banks to finance the acquisition of TGN and for itsworking capital requirements. The Company has undertaken to the lenders of VSPL that it shall retain managementcontrol in VSPL so long as amounts are due to the lenders.

B. Capital commitments

Estimated amount of contracts remaining to be executed on capital account and not provided for Rs.1,307,914thousands (2005 Rs. 5,365,977 thousands).

69

24. Value of Imports on C.I.F. basis



Stores and spares 111,490 52,869

Capital goods 1,639,867 5,966,872

25. Expenditure in foreign currencies

As at As at

31 March, 2006 31 March, 2005


i. Charges for use of transmission facilities 5,941,900 5,465,237

ii. Rent of satellite channels 882,408 1,219,098

iii. Administrative lease charges 117,080 88,809

iv. Repairs and maintenance 589,208 646,429

v. Advertisement 1,263 1,740

vi. Legal and professional fees 349,476 66,516

vii. Travel expenditure 41,206 24,744

viii. Others 35,541 35,040

7,958,082 7,547,613

26. Earnings in foreign currencies

As at As at

31 March, 2006 31 March, 2005


i. Revenues from telecommunications services 16,938,734 13,954,610

ii. Profit on sale of long-term investments - 5,514,486

iii. Interest income 106,157 26,495

iv. Other income 75,175 23,286

17,120,066 19,518,877

27. Value of imported and indigenous stores/spares consumed



Value % Value %

Imported 111,805 90.00 571 3.00

Indigenous 12,283 10.00 18,159 97.00

124,088 100.00 18,730 100.00



70

28. UTL is a Joint Venture between the Company, Mahanagar Telephone Nigam Limited, Telecommunications ConsultantIndia Limited and Nepal Ventures Private Limited. The Company has 26.66 percent equity ownership in UTL. UTLoperates basic telephony services in Nepal based on Wireless-in-local loop technology.

The Company’s share in income, expenses, assets and liabilities of UTL for the year ended 31 March, 2006 are asfollows:



Income 71,846 54,613

Expenses 137,565 118,656



Assets 328,837 380,497

Liabilities 248,573 239,977

Contingent liability in respect of claims of taxes and duties Rs. Nil (2005: Rs.28,283 thousands).

29. Net Dividend remitted to non-resident shareholders in foreign currency

The Company has not remitted any amount in foreign currencies on account of dividends during the year and doesnot have information as to the extent to which remittances, if any, in foreign currencies on account of dividendshave been made by/on behalf of non – resident shareholders. The particulars of final dividends for the year ended31 March, 2005 paid to non – resident shareholders, for which dividends were declared during the year, are as under:


Rupees ‘000 Rupees ‘000i. Number of non-resident shareholders 383 293

ii. Number of shares held by them 41,265,837 38,042,841

iii. Year to which dividend relates 2004-2005 2003-2004

iv. Amount remitted net of tax (in Rupees 000s) 247,595 171,192

30. Subsequent Events

(i) On 8 May, 2006, the Company signed a Share Purchase Agreement (SPA) to acquire Direct Internet Limited(‘‘DIL’’)and its wholly-owned subsidiary, Primus Telecommunications India Limited (‘‘PTIL’’) for a total purchaseconsideration of Rs. 942,351 thousands. The acquisition was completed on 23 June, 2006.

(ii) On 24 May, 2006, an Arbitration Tribunal of the International Chamber of Commerce (ICC), International Court ofArbitration issued a ruling on certain issues in a matter initiated by FLAG Telecom Group Limited (FLAG) inDecember 2004. FLAG also claimed damages to compensate it for the loss of revenue and/or market. TheTribunal by majority decision has ordered the Company to grant FLAG access to the Mumbai cable landingstation of the FEA cable system for various purposes. The Tribunal has retained jurisdiction to determine thefinancial consequences, if any, of its findings. The Company is not in a position to make a reliable estimate of theobligation.

31. Previous year’s figures have been regrouped and reclassified wherever necessary.

71

Balance Sheet Abstract and Company’s General Business Profile in terms of Part IV of Schedule VI to the CompaniesAct, 1956.

I. Registration Details

Registration No. 3 9 2 6 6 State Code 1 1 (REFER CODE LIST)

Balance Sheet Date 3 1 0 3 2 0 0 6

Date Month Year

II. Capital Raised during the year (Amount in Rs. Thousands)Public Issue Right Issue

N I L N I L

Bonus Shares Private Placement

N I L N I L

III. Position of Mobilisation and Deployment of Funds (Amount in Rs. Thousands)Total Liabilities Total Assets

8 0 5 8 6 1 3 4 8 0 5 8 6 1 3 4

Source of FundsPaid-up Capital Reserves & Surplus

2 8 5 0 0 0 0 5 7 7 6 1 6 7 1

Secured Loans Unsecured Loans

N I L 9 8 2 5 0 1

Deferred Tax Liability

7 5 0 9 2 6

Application of FundsNet Fixed Assets Investments

3 1 5 6 3 6 4 0 2 4 9 9 3 3 9 3

*Net Current Assets Misc. Expenditure

5 7 8 8 0 6 5 N I L

Accumulated Losses

N I L

IV. Performance of Company (Amount in Rs. Thousands)Turnover Total Expenditure

4 0 0 9 7 2 7 3 3 2 5 5 3 7 5 3

+ - Profit/Loss Before Tax + - Profit/Loss After Tax

+ 6 8 6 7 1 7 3 + 4 7 9 5 4 2 0

(Please tick appropriate box + for Profit, - for Loss)Earning per Share in Rs. Dividend%

1 6 . 8 3 4 5



72

V. Generic Names of Three Principal Products/Services of Company (as per monetary terms)

Item Code No. (ITC Code)

Product Description I N T E R N A T I O N A L T E L E C O M

M U N I C A T I O N S S E R V I C E S


Product

Description


Product

Description

* Note : For ITC code of products please refer to the publication Indian Trade Classification based on harmonized commoditydescription and coding system by Ministry of Commerce, Directorate General of Commercial Intelligence & Statistics,Calcutta - 700 001

ANNEXURE ICode List 1 : State Codes

State Code State Name State Code State Name

01 Andhra Pradesh 02 Assam03 Bihar 04 Gujarat05 Haryana 06 Himachal Pradesh07 Jammu & Kashmir 08 Karnataka09 Kerala 10 Madhya Pradesh11 Maharashtra 12 Manipur13 Meghalaya 14 Nagaland15 Orissa 16 Punjab17 Rajasthan 18 Tamil Nadu20 Uttar Pradesh 21 West Bengal22 Sikkim 23 Arunachal Pradesh24 Goa 52 Andaman Islands53 Chandigarh 54 Dadra Islands55 Delhi 56 Daman & Diu57 Lakshwadeep 58 Mizoram59 Pondicherry

For and on behalf of the Board of directorsVidesh Sanchar Nigam Limited

SUBODH BHARGAVA N. SRINATHChairman Executive Director


MUMBAIDATED: 26th JUNE, 2006

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DAT

ED: 2

6 Ju

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200

6

75

CONSOLIDATED ACCOUNTS2005-06

76



77

1. We have audited the attached consolidated balancesheet of Videsh Sanchar Nigam Limited (‘theCompany’), and its subsidiaries (collectively referredas ‘the VSNL Group’) as at 31 March, 2006 and alsothe consolidated profit and loss account and theconsolidated cash flow statement for the year endedon that date annexed thereto. These financialstatements are the responsibility of the Company’smanagement and have been prepared by themanagement on the basis of separate financialstatements and other financial information regardingcomponents. Our responsibility is to express anopinion on these financial statements based on ouraudit.

2. We conducted our audit in accordance with theauditing standards generally accepted in India. ThoseStandards require that we plan and perform the auditto obtain reasonable assurance about whether thefinancial statements are free of material misstatement.An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in thefinancial statements. An audit also includes assessingthe accounting principles used and significantestimates made by the management, as well asevaluating the overall financial statementpresentation. We believe that our audit provides areasonable basis for our opinion.

3. (a) We did not audit the financial statements ofcertain subsidiaries, whose financial statementsreflect total assets of Rs.44,275,145 thousands asat 31 March, 2006, total revenues of Rs. 11,234,273thousands and net cash flows amounting to Rs.1,932,626 thousands for the year then ended.These financial statements and other financialinformation have been audited by other auditorswhose reports have been furnished to us, andour opinion is based solely on the report of otherauditors.

(b) The financial statements of a subsidiary and jointventure which represents total assets of Rs.332,419 thousands as at 31 March, 2006, totalrevenues of Rs.71,906 thousands and net cashoutflows amounting to Rs.12,751 thousands forthe year then ended have been incorporated in

AUDITORS’ REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

TO THE MEMBERS OF VIDESH SANCHAR NIGAM LIMITED

the consolidated financial statements on thebasis of unaudited financial statements asprovided by the management of that subsidiaryand joint venture.

4. Subject to our remark in paragraph 3 (b) above:

(a) We report that the consolidated financialstatements have been prepared by theCompany’s management in accordance with therequirements of the Accounting Standard (AS)21, Consolidated Financial Statements,Accounting for Investments in Associates inConsolidated Financial Statements andAccounting Standard (AS) 27, Financial Reportingof Interests in Joint Ventures issued by theInstitute of Chartered Accountants of India.

(b) Based on our audit and on consideration ofreports of other auditors on separate financialstatements and on the other financial informationof the components, and to the best of ourinformation and according to the explanationsgiven to us, we are of the opinion that theattached consolidated financial statements givea true and fair view in conformity with theaccounting principles generally accepted in India:

(i) in the case of the consolidated balancesheet, of the state of affairs of the VSNLGroup as at 31 March, 2006;

(ii) in the case of consolidated profit and lossaccount, of the profit for the year ended onthat date; and

(iii) in the case of the consolidated cash flowstatement, of the cash flows for the yearended on that date.

For S. B. BILLIMORIA & CO.Chartered Accountants

N. VENKATRAMPartner

Membership No. 71387


78



CONSOLIDATED BALANCE SHEET AS AT 31 MARCH, 2006As at

Schedule 31 March, 2005Rupees ‘000 Rupees ‘000

FUNDS EMPLOYED:1 SHARE CAPITAL 1 2,850,000 2,850,0002 RESERVES AND SURPLUS 2 51,151,964 51,894,856

3 TOTAL SHAREHOLDERS’ FUNDS 54,001,964 54,744,8564 SECURED LOANS 3 775,959 169,3715 UNSECURED LOANS 4 18,905,503 -6 OBLIGATIONS UNDER FINANCE LEASE 745,318 -7 DEFERRED TAX LIABILITY (NET) 753,509 996,796

(Refer note B14, Schedule 22)

75,182,253 55,911,023

APPLICATION OF FUNDS:8 FIXED ASSETS: 5

(a) Gross Block 71,934,540 33,338,956(b) Less: Depreciation 12,515,766 8,484,629

(c) Net Block 59,418,774 24,854,327(d) Capital work-in-progress 4,035,962 6,118,741

63,454,736 30,973,068

9 GOODWILL (ON CONSOLIDATION) 1,188,718 -(Refer note B10, Schedule 22)

10 INVESTMENTS 6 17,862,468 9,447,91711 A. CURRENT ASSETS

(a) Inventories 7 96,194 74,043(b) Sundry Debtors 8 14,994,422 5,103,725(c) Cash and Bank Balances 9 4,873,854 14,291,087(d) Other Current Assets 10 1,196,643 767,915

21,161,113 20,236,770B. LOANS AND ADVANCES 11 11,918,803 12,727,566

33,079,916 32,964,33612 Less: CURRENT LIABILITIES AND PROVISIONS

(A) Current Liabilities 12 37,201,951 14,780,853(B) Provisions 13 3,201,634 2,693,445

40,403,585 17,474,298

13 NET CURRENT (LIABILITIES) / ASSETS [(11) less (12)] (7,323,669) 15,490,038

TOTAL ASSETS (NET) 75,182,253 55,911,023

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 22





79

CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2006Schedule Year ended

31 March, 2005Rupees ‘000 Rupees ‘000

INCOME:1 REVENUES FROM TELECOMMUNICATION SERVICES 14 45,624,243 33,083,0612 OTHER INCOME 15 1,467,753 522,2413 INTEREST INCOME 16 317,522 529,5174 INTEREST ON INCOME TAX REFUNDS 564,218 -

5 TOTAL INCOME 47,973,736 34,134,819EXPENDITURE:

6 SALARIES AND RELATED COSTS 17 3,796,450 1,600,6477 NETWORK COSTS 18 25,806,670 20,082,8178 OPERATING AND OTHER EXPENSES 19 9,770,955 4,060,1409 INTEREST EXPENSE 20 398,393 12,28010 DEPRECIATION 4,858,323 2,533,347

Less: TRANSFER FROM CAPITAL RESERVE (1,846) (1,859)11 PRIOR PERIOD ADJUSTMENT (NET) 21 (109,004) -

12 TOTAL EXPENDITURE 44,519,941 28,287,372

PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 3,453,795 5,847,44713 EXCEPTIONAL ITEMS:

(a) Profit from sale of long terminvestment, net of licence fee - 4,687,303

(b) Provision for recoverable pensionobligation (Refer note B6, Schedule 22) (64,220) (472,866)

(c) Fixed Assets written off (Refer note B7, Schedule 22) (612,127) -PROFIT BEFORE TAXES 2,777,448 10,061,884

14 TAXES(a) CURRENT TAX (2,282,580) (2,050,519)(b) DEFERRED TAX 245,870 (925,630)(c) FRINGE BENEFIT TAX (42,673) -

PROFIT AFTER TAXES 698,065 7,085,73515 BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR 9,330,126 4,953,87216 AMOUNT AVAILABLE FOR APPROPRIATIONS 10,028,191 12,039,60717 APPROPRIATIONS :

(a) PROPOSED DIVIDEND (Refer note B4, Schedule 22) 1,282,500 1,710,000(b) TAX ON DIVIDEND 179,871 243,114(c) GENERAL RESERVE 479,542 756,367

BALANCE CARRIED TO BALANCE SHEET 8,086,278 9,330,126

EARNINGS PER SHARE (EPS)18 Basic/Diluted earnings per share, excluding

exceptional items (Rs.) (Refer note B15, Schedule 22) 4.02 12.6619 Basic/Diluted earnings per share, including exceptional

items (Rs.)(Refer note B15, Schedule 22) 2.45 24.86SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 22





80



CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH, 2006Year ended

31 March, 2005(Rupees in ‘000) (Rupees in ‘000)

1. CASH FLOWS FROM OPERATING ACTIVITIESPROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 3,453,795 5,847,447Adjustments for:Depreciation 4,858,323 2,533,347Transfer from capital reserve (1,846) (1,859)(Profit)/Loss on sale of fixed assets (35,869) 17,828Interest income (317,522) (529,517)Interest expense on bank loans 395,741 11,867Fixed assets written down - 38,618Interest on income tax refunds (564,218) -Dividend income/profit on sale of current investments (483,999) (287,445)Valuation loss on current investments - 149Dividend income from long-term investments - (6,331)

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 7,304,405 7,624,104Inventories (20,321) 1,755Sundry debtors (1,956,481) (1,597,015)Other current assets, loans and advances (779,308) 201,476Current liabilities and provisions 4,171,712 698,351

Cash generated from operations 8,720,007 6,928,671Income tax refunds/ (paid) 245,981 (3,756,979)Interest on income tax refunds 564,218 -

NET CASH FROM OPERATING ACTIVITIES 9,530,206 3,171,6922. CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets (10,631,463) (12,716,343)Purchase of long-term investments (1,755,180) (2,354,000)(Purchase)/Sale (net of mutual funds dividend reinvested) of current investments (net) (6,177,522) 8,570,651Business acquisitions, net of cash (13,326,495) -Proceeds from sale of fixed assets 127,444 714,478Proceeds from sale of long-term investment (net of licence fees) - 7,789,383Dividend income on long-term investments - 6,331Dividend income on current investments 44,423 56,831Fixed deposits (net) 11,555,755 (1,706,406)Interest received 399,417 580,255

NET CASH (USED IN)/FROM INVESTING ACTIVITIES (19,763,621) 941,1803. CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from secured loans (net) 6,588 62,202Proceeds from/ repayment of unsecured loans (net) 14,444,503 (630,000)Finance lease repayment (42,851) -Dividends paid including dividend tax (1,949,694) (1,450,549)Interest paid (215,372) (11,867)

CASH FLOW FROM/ (USED IN) FINANCING ACTIVITIES 12,243,174 (2,030,214)

NET INCREASE IN CASH AND CASH EQUIVALENTS 2,009,759 2,082,658CASH AND CASH EQUIVALENTS AS AT 1 APRIL, 2005 2,393,252 305,588(Refer note B13 Schedule 22)Effect of exchange on cash and cash equivalents (1,412) 5,006

CASH AND CASH EQUIVALENTS AS AT 31 MARCH, 2006 4,401,599 2,393,252(Refer note B13, Schedule 22)

Note :Figures in brackets represent outflows.





81

SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEETAs at As at


SCHEDULE - 1SHARE CAPITALAUTHORISED :300,000,000 (2005: 300,000,000) Equity Shares of Rs.10 each 3,000,000 3,000,000

ISSUED, SUBSCRIBED AND PAID UP285,000,000 (2005: 285,000,000) Equity Shares of Rs.10 each, fully paid up 2,850,000 2,850,000

SCHEDULE - 2RESERVES AND SURPLUS(a) Capital Reserve 2,058,052 2,059,898(b) Securities Premium 8,348,834 8,348,834(c) General Reserve 32,642,195 32,162,653(d) Profit and Loss Account 8,086,278 9,330,126

51,135,359 51,901,511(e) Exchange Translation Reserve (net) 16,605 (6,655)

51,151,964 51,894,856

Notes:1. Depreciation on gifted assets of Rs. 1,846 thousands (2005: 1,859 thousands) has been transferred from capital

reserve to the profit and loss account for the year ended 31 March, 20062. Capital reserve includes Rs. 2,052,161 thousands (2005: 2,052,161 thousands) in respect of foreign exchange gains

on unutilised proceeds from Global Depository Receipts credited to capital reserve in a previous year3. As at 31 March, 2006 Rs. 479,542 thousands (2005: Rs 756,367 thousands) has been transferred from the profit and

loss account to general reserveSCHEDULE - 3SECURED LOANSFrom BanksTerm-Loan from Hongkong and Shanghai Banking Corporation Limited 600,000 -(Secured by hypothecation of moveable properties both present and future)

Term-Loan from Punjab National Bank (Refer note 1) 167,160 160,902Term-Loan from Everest Bank Limited (Refer note 1) 8,799 8,469

775,959 169,371

Note:1. Secured against Plant and Machinery of Joint Venture

SCHEDULE - 4UNSECURED LOANSFrom Banks 18,880,299 -From Others 25,204 -

18,905,503 -

Note:1. Loans repayable within one year Rs. 9,066,099 thousands (2005: Nil)

82



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83



SCHEDULE - 6INVESTMENTSI. TRADE INVESTMENTS - LONG TERM (At Cost)

A. Fully Paid Equity Shares (Unquoted)(a) Tata Teleservices Ltd. 8,101,749 6,346,569

(Refer note B5, Schedule 22)(b) New ICO Global Communications (Holdings) Limited 65 65(c) Wmode inc. 25,276 -

8,127,090 6,346,634B. Current Investments (Unquoted)

Investments In Mutual Funds 9,735,378 3,101,283

17,862,468 9,447,917

SCHEDULE - 7INVENTORIESEquipments for resale 66,554 80,726Less: Provision for obsolescence (85) (9,926)

66,469 70,800Consumable stores and spares (at cost) 29,725 3,243

96,194 74,043

SCHEDULE - 8SUNDRY DEBTORS(a) Over six months (unsecured)

Considered good 3,092,860 411,495Considered doubtful 2,185,545 1,314,693

5,278,405 1,726,188Less: Provision for doubtful debts (2,185,545) (1,314,693)

3,092,860 411,495(b) Other debts (unsecured)

Considered good 11,901,562 4,692,230

14,994,422 5,103,725

SCHEDULE - 9CASH AND BANK BALANCES(a) Cash in hand 1,200 1,120(b) Cheques in hand 1,639,166 28,620(c) Remittances in transit 630,265 -(d) Current accounts with banks 2,083,594 321,769(e) Deposit accounts with banks 519,629 13,939,578

4,873,854 14,291,087

Note:i) Deposit accounts include Rs.NIL (2005: Rs. 5,972,069 thousands) representing unutilised monies from GDR issue.

84





SCHEDULE - 10OTHER CURRENT ASSETS(a) Interest receivable 43,825 125,720(b) Service tax recoverable 306,076 294,020(c) Pension contributions recoverable from Government of India (net of provision of

Rs. 537,086 thousands; 2005: Rs. 472,866 thousands) (Refer note B6, Schedule 22) 74,424 74,424(d) Licence fees paid recoverable from Government of India 531,158 245,606(e) Others 241,160 28,145

1,196,643 767,915

SCHEDULE - 11LOANS AND ADVANCES(a) Unsecured - Considered good

(i) Staff advances 125,895 135,308(ii) Deposits with public bodies and others 433,794 116,319(iii) Other loans and advances 448,371 672,765(iv) Prepaid expenditure 1,968,785 289,982(v) Advance payment of tax (net of provision for tax) 8,941,958 11,513,192

11,918,803 12,727,566(b) Unsecured - Considered doubtful

Other loans and advances 73,786 73,786Less: Provision for doubtful advances (73,786) (73,786)

11,918,803 12,727,566

SCHEDULE - 12CURRENT LIABILITIES(a) Sundry Creditors:

(i) Creditors for interconnect charges 14,164,788 3,595,601(ii) Others (note 2) 8,148,334 5,779,497

(b) Unearned income and deferred revenues 10,627,095 2,996,878(c) Investor Education and Protection Fund - unpaid dividend 11,906 11,772(d) Government of India current account 205,747 210,393(e) Other liabilities (note 1) 3,863,712 2,186,712(f ) Interest accrued but not due on loans taken from banks 180,369 -

37,201,951 14,780,853

Notes:(1) Includes Rs.249,120 thousands overdrawn

book bank balance (2005: Rs.74,556 thousands)(2) Sundry creditors includes Rs. 140,250 thousands payable on purchase of

ISP business of Seven Star Dot Com Pvt. Ltd. (Refer note B11, Schedule 22)

SCHEDULE - 13PROVISIONS(a) Provisions for employee benefits 1,408,037 702,880(b) Provision for proposed dividend 1,282,500 1,710,000(c) Tax on dividend 179,871 239,828(d) Provision for contingencies (Refer note B20, Schedule 22) 331,226 40,737

3,201,634 2,693,445

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SCHEDULES FORMING PART OF THE CONSOLIDATED PROFIT AND LOSS ACCOUNTYear ended Year ended


SCHEDULE - 14REVENUES FROM TELECOMMUNICATION SERVICES(a) Telephone 26,171,865 18,852,517(b) Leased channel 9,203,174 7,124,052(c) Frame relay 1,642,046 1,382,652(d) Internet 6,941,524 5,005,044(e) Other traffic revenues 1,665,634 718,796

45,624,243 33,083,061

SCHEDULE-15OTHER INCOME(a) Dividend income from current investments 406,674 278,419(b) Dividend income from long-term investments - 6,331(c) Profit on sale of current investments (net) 77,325 9,026(d) Profit on sale of fixed assets (net) (Refer note B12, Schedule 22) 35,869 -(e) Rent 103,476 48,786(f ) Exchange gain (net) 89,031 -(g) Provisions no longer required written back 344,039 -(h) Other 411,339 179,679

1,467,753 522,241

SCHEDULE-16INTEREST INCOME(a) Interest income-

i. Bank deposits 308,340 520,800(Tax deducted at source Rs.58,603 thousands;2005:Rs.93,487 thousands)

ii. Other loans and advances 9,182 8,717(Tax deducted at source Rs.1,296 thousands;2005:Rs.1,648 thousands)

317,522 529,517

SCHEDULE - 17SALARIES AND RELATED COSTS(a) Salaries and bonus 3,326,560 1,339,059(b) Contribution to provident, gratuity and other funds 167,513 69,473(c) Staff welfare expenses 302,377 192,115

3,796,450 1,600,647

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SCHEDULE-18NETWORK COSTS(a) Rent of satellite channels 883,014 1,084,971(b) Rent of landlines 301,968 1,195,195(c) Administrative lease charges 117,606 95,389(d) Royalty and licence fee to Department of Telecommunications 2,048,389 2,118,149(e) Charges for use of transmission facilities

(i) Telephone (net of excess provision written backRs 82,400 thousands; 2005: Rs. 118,489 thousands) 19,066,500 14,070,670

(ii) Leased channel 1,523,237 167,227(iii) Frame relay 377,990 -(iv) Internet 836,848 856,549(v) Others 651,118 494,667

25,806,670 20,082,817

SCHEDULE - 19OPERATING AND OTHER EXPENSES(a) Consumption of stores 19,526 16,507(b) Light and power 623,440 336,343(c) Repairs and Maintenance:

(i) Buildings 222,563 54,300(ii) Plant and Machinery 2,543,671 1,082,085(iii) Others 169,259 91,161

(d) Bad Debts written off 300,335 526,909(e) Provision for doubtful debts written back (58,935) (577,943)(f ) Provision for doubtful advances - 35,677(g) Rent 942,595 142,106(h) Rates and taxes 285,498 83,737(i) Travelling expenses 380,293 172,436(j) Telephone and telex 170,125 73,153(k) Printing, postage and stationery 225,861 29,090(l) Security expenses 22,659 57,569(m) Computer software and maintenance 79,229 57,798(n) Legal and professional fees 625,454 350,362(o) Advertising and publicity 1,160,284 650,504(p) Commissions 212,352 77,244(q) Insurance 118,666 41,946(r) Donations 65,415 1,039(s) Loss on sale of fixed assets (net) - 17,828(t) Exchange loss (net) - 152,980(u) Services rendered by third parties 1,091,659 228,682(v) Other expenses 571,006 358,627

9,770,955 4,060,140

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SCHEDULE - 20INTEREST EXPENSEInterest on:- Bank loans 395,741 11,867- Others 2,652 413

398,393 12,280

SCHEDULE - 21PRIOR PERIOD ADJUSTMENTS (NET)INCOME:Revenues from telecommunication services 67,005 -EXPENSES:Charges for use of transmission facilities (186,904) -Repairs and maintenance 8,157 -Other expenses 2,738 -

(109,004) -

Note: Figures in brackets are credits





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SCHEDULE 22

A. SIGNIFICANT ACCOUNTING POLICIES

1. Basis of preparation

The consolidated financial statements of Videsh Sanchar Nigam Limited (the Company), its subsidiary companiesand joint ventures (“the Group”) have been prepared under the historical cost convention, in accordance with theaccounting standards issued by the Institute of Chartered Accountants of India.

Comparative figures do not include the figures of new entities consolidated during the year namely Teleglobe andits subsidiaries, VSNL Broadband Ltd. (“VBL”), VSNL SNOSPV Pte. Ltd. (“SNOSPV”), SEPCO Communications Pty. Ltd.(“SEPCO”) and its subsidiary and companies formed by Tyco International Ltd. (“Tyco”) for takeover of the Tyco GlobalNetwork (“TGN”) business by the Company. Consequently, the corresponding figures for the previous year are notcomparable with the figures for the year ended and as at 31 March, 2006.

2. Principles of consolidation

The financial statements of the subsidiary companies used in the consolidation are drawn up to the same reportingdate as of the Company.

The consolidated financial statements have been prepared on the following basis:

i) The financial statements of the Company and its subsidiary companies have been combined on a line-by-linebasis by adding together like items of assets, liabilities, income and expenses. Inter-company balances andtransactions, and unrealised profits or losses have been fully eliminated.

ii) The consolidated financial statements include the interest in joint ventures which has been accounted as perthe ‘proportionate consolidation’ method as per Accounting Standard 27-‘Financial Reporting of Interests inJoint Ventures’. Unrealised profits and losses have been eliminated to the extent of the Company’s share in thejoint ventures.

iii) The excess of cost to the Company of its investment in a subsidiary company over its share of the equity of thesubsidiary company at the date on which the investment in the subsidiary company is made is recognized as‘Goodwill’ being an asset in the consolidated financial statements. Alternatively, where the share of equity in thesubsidiary companies as on date of investment, is in excess of cost of investment of the Company, it is recognisedas `Capital Reserve’ and shown under the head `Reserves and Surplus’, in the consolidated financial statements.

iv) Minority interest in the net assets of consolidated subsidiaries consists of the amount of equity attributable tothe minority shareholders at the dates on which investments are made by the Company in the subsidiarycompanies and further movements in their share in the equity, subsequent to the dates of investments.

3. Use of estimates

The preparation of financial statements requires the management of the Company to make estimates and assumptionsthat affect the reported balances of assets and liabilities and disclosures relating to the contingent liabilities as atthe date of the financial statements and reported amounts of income and expenses during the period. Examples ofsuch estimates include allocation of purchase price on acquisition, provisions for doubtful debts and advances,employee retirement benefit obligations, provision for income taxes, provision for cable restoration, impairment ofassets, asset retirement obligation and useful lives of fixed assets.

4. Fixed assets

a) Fixed assets are stated at cost less accumulated depreciation. Cost includes freight, duties, taxes, salaries andemployee benefits directly related to the construction or development of the asset, interest costs incurred tofinance construction and all incidental expenses incurred to bring the assets to their present location andcondition.

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b) Fixed assets received as gifts from other Foreign Telecom Administrations are capitalised and credited to capitalreserve on the basis of notional cost (cost assessed by customs authorities). Cost includes freight, insurance andcustoms duty.

c) Intangible assets in the nature of Indefeasible Rights of Use (IRUs) for international and domestictelecommunication circuits are recorded as fixed assets. IRU agreements transfer substantially all the risks andrewards of ownership.

d) Jointly owned assets are capitalised in proportion to the Company’s ownership interest in such assets.

e) Consideration for purchase of business in excess of the value of net assets acquired is recognised as goodwill.

f ) Internally developed computer software, distribution rights and licence fees have been classified as intangibleassets.

g) Assets acquired pursuant to an agreement for exchange of similar assets are recorded at the net book value ofthe asset given up, with an adjustment for any balancing receipt or payment of cash or other consideration.

5. Depreciation

Depreciation is charged over the periods set out below so as to write-off the cost of the asset on a straight line basisover the estimated useful lives, at the following rates:

a) Leasehold land Lease period

b) Leasehold improvements Lease period

c) Buildings 1.64% to 4.00%

d) Plant and Machinery

(i) Indefeasible Rights of Use (IRU’s) life of IRU or period of agreement, whichever is lower

(ii) Other plant and machinery 4.75% to 33.33%

e) Furniture and fixtures 6.33% to 25.00%

f ) Office equipment 4.75% to 25.00%

g) Computers 15.83% to 33.33%

h) Motor vehicles 9.50% to 20.00%

i) Goodwill on purchase of business 60 months

j ) Intangibles

(i) Internally developed computer software 20.00% to 33.33%

(ii) Distribution rights 25.00%

(iii) License fees 4.00%

6. Leases

Lease arrangements where the risk and rewards incident to ownership of an asset substantially vests with the lessorare classified as operating lease.

Rental income and rental expense on assets given or obtained under operating lease arrangements are recognisedon a straight - line basis over the term of the relevant lease.

The initial direct costs relating to operating leases are recorded as expense as they are incurred.

Assets given under finance lease are recognised at an amount equal to the net investment in the lease and thefinance income is based on a constant rate of return on the outstanding net investment.

Assets acquired under lease where the Company has substantially all the risks and rewards of ownership are classifiedas finance lease. Such leases are capitalised at the inception of the lease at lower of the fair value or the presentvalue of the minimum lease payments and a liability is created for an equivalent amount. Each lease rental paid isallocated between the liability and the interest cost so as to obtain a constant periodic rate of interest on theoutstanding liability for each year.



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7. Impairment

At each balance sheet date, the Company reviews the carrying amounts of its fixed assets to determine whetherthere is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverableamount of the asset is estimated in order to determine the extent of the impairment loss. Recoverable amount is thehigher of an asset’s net selling price and value in use. In assessing the value in use, the estimated future cash flowsexpected from the continuing use of the asset and from its ultimate disposal are discounted to their present valuesusing a pre-determined discount rate that reflects the current market assessments of the time value of money andrisks specific to the asset.

8. Asset Retirement Obligation (“ARO”)

The Company’s ARO relate to the removal of cable systems and switches when they will be retired. Provision isrecognised based on management’s best estimate of the eventual costs that relate to such obligation and is adjustedto the cost of such assets.

9. Investments

Long-term investments are valued at cost less provision for diminution in value. Provision for diminution in the valueis made to recognise a decline, which is other than temporary. Current investments comprising investments inmutual funds are stated at the lower of cost or fair value, determined on an individual investment basis.

10. Inventories

Inventories are valued at the lower of cost and net realisable value. Cost is determined on a weighted average basis.

11. Retirement Benefits

a) Provision for unutilised leave due to employees, gratuity and pension contribution are actuarially determinedas at the balance sheet date.

b) Contributions to Employees’ Provident Fund, other defined contribution plans and overseas pension plans arerecognised in the profit and loss account in the period when such contributions are made.

12. Revenue recognition

a) Revenues from telephony services are recognised at the end of each month based upon minutes of incomingor outgoing traffic completed in such month. Substantial portion of revenues are on account of recoveries fromForeign Telecommunication Administrations for incoming traffic and recovery from domestic carriers for deliveryof calls on foreign networks.

b) Revenues from data services are recognised over the lease period based on contracted fee schedules.

c) Revenues from right to use of fibre capacity provided based on IRU are recognised over the period of sucharrangements.

d) Revenues from internet services are recognised based on usage.

e) Dividend from investments is recognized when the right to receive payment is established and no significantuncertainty as to measurability or collectibility exists.

f ) Transactions relating to exchange or swapping of capacities, and which results in little or no consideration,represent the exchange of productive assets not held for sale in the ordinary course of business and, as such, donot result in the culmination of the earnings process and hence the Company does not recognize any revenuefor these types of transactions.

g) Transactions with providers of telecommunication services such as buying, selling, swapping and / or exchangeof traffic are accounted for as non-monetary transactions, depending upon the terms of the agreements enteredinto with such telecommunication service providers.

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13. Taxation

Current income tax expense comprises taxes on income from operations in India and foreign tax jurisdictions.Income tax payable in India is determined in accordance with the provisions of the Income Tax Act, 1961.Taxexpense relating to overseas operations is determined in accordance with tax laws applicable in countries wheresuch operations are domiciled.

Deferred tax expense or benefit is recognised on timing differences being the difference between taxable incomeand accounting income that originate in one period and are capable of reversal in one or more subsequent periods.Deferred tax assets and liabilities are measured using the tax rates and tax laws that have been enacted orsubstantively enacted by the balance sheet date.

Deferred tax assets in respect of unabsorbed depreciation and carry forward tax losses are recognised only to theextent that there is virtual certainty that there will be sufficient future taxable income available to realise theseassets. All other deferred tax assets in respect of other timing differences are recognised if there is a reasonablecertainty that sufficient future taxable income will be available to realise such assets.

14. Foreign currency transactions

a) Foreign currency transactions are converted at rates of exchange approximating those prevailing at thetransaction date. Foreign currency monetary assets and liabilities are translated at the exchange rate prevailingon the balance sheet date. Exchange differences, other than on foreign currency liabilities to purchase fixedassets from countries outside India are recognised in the profit and loss account. Exchange differences ontranslation of foreign currency liabilities incurred to purchase fixed assets from countries outside India areadjusted in the cost of such assets.

b) Premium or discount on forward contracts is amortised over the life of such contracts and is recognised in theprofit and loss account, except in respect of forward contracts taken for liabilities for fixed assets where suchamortisation is adjusted in the carrying cost of fixed assets. Forward contracts outstanding as at the balancesheet date are stated at exchange rate prevailing at the reporting date and any gains or losses are recognised inthe profit and loss account. Profit or loss arising on cancellation or renewal of forward exchange contract isrecognised in the profit and loss account in the period of such cancellation or renewal, except in case of aforward contract relating to liabilities for purchase of fixed assets from countries outside India, in which casesuch profit or loss is adjusted to the carrying cost of such fixed assets.

c) For the purpose of consolidation of foreign subsidiaries and joint ventures, income and expenses are translatedat average rates and the assets and liabilities are stated at closing rate. The net impact of such change isdisclosed under exchange translation reserve.

B. NOTES TO ACCOUNTS

1. Particulars of subsidiaries and joint ventures :

Country of Incorporation Percentage of votingpower

Subsidiaries (held directly)

VSNL Broadband Ltd. India 100.00

VSNL Lanka Ltd. Sri Lanka 100.00

VSNL America Inc. United States of America 100.00

VSNL Singapore Pte Ltd. Singapore 100.00

VSNL SNOSPV Pte. Ltd. Singapore 100.00



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Country of Incorporation Percentage of votingpower

Subsidiaries (held indirectly)

VSNL Telecommunications(Bermuda) Ltd. Bermuda 100.00

VSNL UK Ltd. United Kingdom 100.00

VSNL Bermuda Ltd. Bermuda 100.00

VSNL Netherlands BV Netherlands 100.00

VSNL Hong Kong Ltd. Hong Kong 100.00

Enhanced Services Inc. United States of America 100.00

ITXC (UK)Ltd. United Kingdom 100.00

ITXC Global Hong Kong Ltd. Hong Kong 100.00

ITXC Global Japan YK Japan 100.00

ITXC Global UK Ltd. United Kingdom 100.00

ITXC Global Zagreb d.o.o Croatia 100.00

ITXC IP Holdings S.a.r.l Luxembourg 100.00

Teleglobe America Inc. United States of America 100.00

Teleglobe Asia Data Transport Pte. Ltd. Singapore 100.00

Teleglobe Asia Pte. Ltd. Singapore 100.00

Teleglobe Bermuda Ltd. Bermuda 100.00

Teleglobe Canada ULC Canada 100.00

Teleglobe France International S.A.S France 100.00

Teleglobe International Belgium S.P.R.L Belgium 100.00

Teleglobe International Hong Kong Ltd. Hong Kong 100.00

Teleglobe International Ltd. United Kingdom 100.00

Teleglobe International Luxembourg S.a.r.l. Luxembourg 100.00

Teleglobe Italy S.r.l. Italy 100.00

Teleglobe Netherlands B.V Netherlands 100.00

Teleglobe Spain Communications S.L Spain 100.00

TLGB International Germany GmbH Germany 100.00

TLGB Luxembourg Holdings S.a.r.L Luxembourg 100.00

TLGB Netherlands Holdings B.V Netherlands 100.00

VSNL (Portugal) Unipessoal Limitada Portugal 100.00

VSNL Belgium BVBA Belgium 100.00

VSNL France SAS France 100.00

VSNL International (Nordics) AS Norway 100.00

VSNL International (Global) Corp. United States of America 100.00

VSNL International (Guam) Llc Guam 100.00

VSNL International (Portugal) Instalacao eManutencao de Redes LDA Portugal 100.00

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VSNL International (US) Inc. United States of America 100.00

VSNL International Australia Pty. Ltd. Australia 100.00

VSNL International GBRM Ltd. Bermuda 100.00

VSNL International IPCO LLC United States of America 100.00

VSNL International Puerto Rico Inc. Puerto Rico 100.00

VSNL International(ITXC) Corp. United States of America 100.00

VSNL International(Poland) Sp. Zo.o Poland 100.00

VSNL Japan K.K Japan 100.00

VSNL Spain Srl Spain 100.00

VSNL Telecommunications(UK) Inc. United Kingdom 100.00

VSNL(Germany) GMBH Germany 100.00

Joint Ventures

United Telecom Ltd. Nepal 26.66

SEPCO Communications Pty. Ltd. South Africa 47.00

and its subsidiary

2. The contributions of the significant subsidiaries and joint ventures acquired / formed during the year is as under:

Rupees ‘000

Name of Subsidiary Revenue Net Profit/(Loss) Net Assets(post acquisition) (post acquisition)

VSNL Singapore Pte. Ltd. and its subsidiaries 10,801,448 (4,079,329) (1,544,491)

VSNL Broadband Ltd. 200,269 77,673 909,892

VSNL SNOSPV Pte. Ltd. 61 (28,732) (10,815)

SEPCO Communications Pty. Ltd 756 (28,548) (29,366)

3. The Company was incorporated on 19 March, 1986. The Government of India vide its Order No. G 25015/6/86-OCdated 27 March,1986 transferred all the assets and liabilities of the OCS (part of the Department ofTelecommunications, Ministry of Communications) as appearing in the Balance Sheet as at 31 March, 1986 to theCompany with effect from 1 April,1986. As per the letter no. G-25015/6/86-OC dated 23 October, 2001 of Governmentof India, Department of Telecommunications, there was no requirement to register a formal transfer deed or deed ofsale in the matter of such transfer of assets.

4. The Board of Directors of the Company recommended a dividend of Rs. 4.5 (2005: Rs. 6.0 including Rs. 1.5 specialdividend) per share to its shareholders for the year ended 31 March, 2006 based on the financial results of theCompany.

5. The Company has an investment of Rs. 8,101,749 thousands in Tata Teleservices Ltd.(“TTSL”) representing an equityinterest of 16.14 percent in the issued and paid-up capital of TTSL. TTSL has accumulated losses, which havesignificantly eroded its net worth. In the opinion of the management, having regard to the long gestation periodinevitable to the nature of its business, there is no permanent diminution in value of the investment.

During the current financial year, TTSL issued equity shares to certain other investors at a price that is higher thanthe carrying value of the equity shares in the books of the Company.



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6. As at 1 April, 2004 proportionate share of pension obligation and payments to erstwhile OCS employees of Rs.547,290thousands were recoverable from the Government of India (“the Government”). Pursuant to discussions with theGovernment, the Company had made a provision of Rs. 472,866 thousands in the year ended 31 March, 2005.

In the current year, consequent to an actuarial valuation, the pension obligation towards the erstwhile OCS employeeshas increased by Rs. 64,220 thousands. Pending resolution of the matter and recovery of this amount from theGovernment, the Company has provided for the additional amount recoverable in the Profit and Loss account.

7. During the year the Company has charged to the Profit and Loss account a sum of Rs.612,127 thousands towardswrite off of certain fixed assets having a gross value and accumulated depreciation of Rs. 1,594,407 thousands andRs. 982,280 thousands respectively. In the opinion of the management, these assets do not have future economicuse consequent to technological changes and product related advancements.

8. On 30 June, 2005 the Company, through its wholly owned subsidiary VSNL Singapore Pte. Limited (“VSPL”), completedthe acquisition of TGN through the purchase of certain net assets and shares of certain companies formed by Tycopursuant to the Stock and Asset Purchase Agreement dated 1 November, 2004. The Company acquired net assets ofRs. 6,143,243 thousands ($ 137.7 million), for a total purchase consideration of Rs. 6,143,243 thousands ($137.7million).

9. On 13 February, 2006, the Company through its wholly owned subsidiary VSPL, completed its acquisition of Teleglobeby acquiring 100% of the common shares of Teleglobe pursuant to the Agreement and Plan of Amalgamation dated25 July, 2005, amongst Teleglobe, the Company and VSNL Telecommunications (Bermuda) Ltd - a wholly-ownedsubsidiary of VSPL. The Company acquired net assets of Rs. 2,699,447 thousands($ 60.5 million), for a total purchaseconsideration of Rs.8,186,336 thousands ($183.5 million). Consequently, an amount of Rs. 5,486,889 thousands($123.0 million) has been recognised as goodwill and included under fixed assets.

The amalgamation has been accounted for under the Purchase Method as prescribed by Accounting Standard (AS-14) issued by the The Institute of Chartered Accountants of India. Accordingly, the assets and liabilities have beentaken over based on the allocation of consideration to individual identifiable assets and liabilities of Teleglobe onthe basis of their fair values at the date of amalgamation.

10. On 31 October, 2005, the Company completed its acquisition of VBL (formerly Tata Power Broadband Ltd.) bypurchasing 100% of the common shares of VBL. The Company acquired net assets of Rs. 832,219 thousands for acash consideration of Rs.2,020,937 thousands. Consequently, Rs. 1,188,718 thousands has been recognised as goodwillon consolidation.

11. On 1 March, 2006, the Company purchased the internet service provider (ISP) business of Seven Star Dot Com Pvt.Ltd. (“Seven Star”) under a slump sale agreement. The Company acquired net assets of Rs. 8,795 thousands for apurchase consideration of Rs. 170,683 thousands. Consequently, an amount of Rs. 161,888 thousands has beenrecognised as goodwill and included under fixed assets.

The valuation of fixed assets amounting to Rs. 13,543 thousands acquired under the slump sale agreement has beendetermined by the management based on an independent valuation. Legal formalities relating to transfer of assetsand contracts in the name of the Company are pending completion.

12. Profit on sale of fixed asset includes sale of a portion of land by an overseas subsidiary in the Group for Rs. 120,447thousands resulting in a gain of Rs. 53,532 thousands.

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13. Cash and cash equivalents represent:-



Cash and Cheques on hand and balances held with banks 3,723,960 351,509Remittances in transit 630,265 -Deposit accounts held with banks 519,629 13,939,578

4,873,854 14,291,087

Deposits with original maturity over three months (334,957) (11,890,712)

Current Account / Deposits held for unpaid dividends (11,808) (6,271)

Deposit accounts held as margin money (125,490) (852)

Cash and cash equivalents 4,401,599 2,393,252

14. Deferred tax liability:



Deferred tax liability

Difference between accounting and tax depreciation 1,818,776 1,857,787

1,818,776 1,857,787

Deferred tax assets

Provision for doubtful debts 420,689 441,125

Expenditure on voluntary retirement schemes 138,634 210,369

Expenditure incurred on NLD license fees ( Refer note below ) 265,737 -

Unearned income / deferred revenues 181,781 177,169

Others 58,426 32,328

1,065,267 860,991

Net deferred tax liability 753,509 996,796

Note:

In March 2002, the Company paid a one time entry fee of Rs. 1,000,000 thousands to the Department ofTelecommunications for providing National Long Distance (“NLD”) service. The Company commenced its NLDoperations with effect from September 2002. Owing to uncertainty relating to the allowability of the one time entryfee paid under Sec 35 ABB of the Income Tax Act, 1961, the Company did not consider the deduction in the provisionfor tax and consequently did not set up a deferred tax asset. During the current year, the Company has set up adeferred tax asset of Rs. 265,737 thousands consequent to the deduction being allowed in its income tax assessment



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for A.Y. 2003-2004.

15. Earnings per Share

Rupees ‘000,except Number of Shares and Earnings

per share data


Profit before taxes and exceptional items 3,453,795 5,847,447

Income tax expense on profit excluding exceptional items 2,307,041 2,238,229

Profit after tax excluding exceptional items 1,146,754 3,609,218

Exceptional (expense)/ income (net) (676,347) 4,214,437

Income tax benefit/(expense) on exceptional items 227,658 (737,920)

Net Profit after tax and exceptional items 698,065 7,085,735

Number of Shares 285,000,000 285,000,000

Earnings per share excluding exceptional items Rs. 4.02 Rs.12.66

Earnings per share including exceptional items Rs. 2.45 Rs.24.86

16. Business Segments

In the year ended 31 March, 2006, as a result of changes in the form and content of segment information providedto and used by the Management to allocate resources and assess performance and change in the organisationalstructure, the Company has reviewed and revised its reportable segments.

The reportable segments in the current year are “Wholesale Voice”, “Enterprise and Carrier Data” and “Others”. Thecomposition of the reportable segments is as follows

- Wholesale Voice: includes International and National Voice services.

- Enterprise and Carrier Data: includes corporate data transmission services like IPLC, Frame Relay, ILL and NPLC.

- Others: includes Internet, GPSS, Telex, Telegraph, TV up-linking, Transponder lease, Global Roaming and otherservices.

In the previous year, “Telephony and related services” which included international and national voice and dataservices and internet was considered as a reportable segment and other services including transponder lease,television uplinking, gateway packet switching services and video conferencing facilities were reported under “OtherServices”.


Wholesale Voice Enterprise and Others TotalCarrier Data

Revenues 26,152,432 14,707,511 4,764,300 45,624,243

Segment Results 6,029,849 11,626,517 2,441,612 20,097,978


Prior Period Income (net) 109,004

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Exceptional Items (676,347)



Profit after taxes 698,065

Year ended 31 March, 2005

Rupees ‘000


Revenues 18,833,494 11,154,609 3,094,958 33,083,061

Segment Results 3,312,531 8,666,434 1,159,758 13,138,723



Exceptional Items 4,214,437




i) Revenues and expenses, which are directly identifiable to segments, are attributed to the relevant segment. Expenseson rent of satellite channels and landlines, and royalty and license fee are allocated on the basis of usage. Segmentresult is segment revenues less segment expenses. Certain costs, including depreciation which are not allocable tosegments have been classified as “unallocable expense”.

ii) Telecommunication services are provided utilizing the Company’s assets which do not generally make a distinctionbetween the types of services. As a result, fixed assets are used interchangeably between segments. In the absenceof a meaningful basis to allocate assets and liabilities between segments, no allocation has been made.

iii) Segment information for the year ended 31 March, 2005 has been presented in accordance with the basis ofsegmentation adopted for the current year.



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Geographical Segment:Segment revenues byGeographical Market


Rupees ‘000

India 21,272,409United States of America 7,197,088United Kingdom 3,459,780United Arab Emirates 26,07,832Others 11,087,134

45,624,243



Rupees ‘000

India 19,078,700United States of America 3,812,001United Arab Emirates 2,633,825Saudi Arabia 1,026,045Others 6,532,490

33,083,061

For the year ended 31 March, 2006 and 31 March, 2005, revenues from customers comprise mainly revenues fromWholesale Voice and Enterprise and Carrier data segments under the revised segments.

17. Related Party Disclosures

(a) List of related parties and relationship:

I. Investing party

· Panatone Finvest Limited

II. Key Managerial Personnel

· N.Srinath - Executive Director

· Vinod Kumar - Executive Director (VSPL)

III. Joint Ventures

· United Telecom Ltd.

· SEPCO Communications Pty. Ltd.

· SNO Telecommunications Pty. Ltd. (“SNO”) – subsidiary of SEPCO

IV. Company owned by Executive Director of subsidiary.

· Panther Technology Partners Pvt. Ltd.

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(b) Related party transactions

Rupees ‘000

Investing Key Company owned JointCompany Managerial by Executive Ventures

Personnel Director ofsubsidiary

Transactions:

Revenues from telecommunication services 14,5858,763

Network Cost 7,330132

Loans given to SEPCO 9,650-

Managerial remuneration - 23,318- 24,021

Dividend paid 694,433 -577,125 -

Commissions 56,610

Balances:

Loans Given 9,650-

Advances given to SEPCO 17,784-

Receivables 11,8166,818

Payables - 2,500 56,878- 2,500 -

Note: Figures in italics are in respect of the previous year

18. Operating lease arrangements:

(a) As lessee:



Minimum lease payments under operating leases recognized asexpense in the year 2,014,608 1,242,295



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At the balance sheet date, minimum lease payments under non- cancellable operating leases fall due as follows:



Due not later than one year 2,673,092 721,221

Due later than one year but not later than five years 6,668,899 923,759

Later than five years 6,498,704 92,885

15,840,695 1,737,865

Operating lease payments represent rentals payable by the Company for certain buildings, satellite channels, officeequipments, computer equipments and certain circuit capacities.

The minimum future lease payments have not been reduced by minimum operating sublease rentals of Rs. 192,001thousands due in the future under non-cancellable subleases for certain buildings, which primarily commenced inJanuary 2002 and extend until 31 July, 2011. Rs. 36,000 thousands was recognised in the current year as minimumsublease rental against the same.

(b) As lessor:

(i) The Company has leased under operating lease arrangements certain IRUs with gross carrying amount andaccumulated depreciation of Rs. 874,174 thousands and Rs. 57,787 thousands respectively as at 31 March, 2006.Depreciation expense of Rs. 43,389 thousands (2005: Rs. 14,397 thousands)recognised in respect of these assetshas been recognised in the profit and loss account for the year ended 31 March, 2006.

In respect of the above rental income of Rs.42,470 thousands (2005: Rs. 18,150 thousands) has been recognisedin the profit and loss account for the year ended 31 March, 2006.

Future lease rental receipts will be recognised in the profit and loss account of subsequent years as follows:






963,935 527,400

101


(ii) The Company has leased certain premises under operating lease arrangements. Future lease rental income inrespect of these leases will be recognised in the profit and loss account of subsequent years as follows:





Later than five years 325 -

59,555 84,862

Lease rental income of Rs. 64,777 thousands (2005: Rs. 32,419 thousands) in respect of the above leases have beenrecognised in the profit and loss account for the year ended 31 March, 2006.

19. Finance Lease arrangements:

(a) As Lessee

As on 31 March, 2006, the following are included in the total fixed assets.

Gross carrying Accumulated Net carryingamount Depreciation amount


Building 18,414 661 17,753

Plant and Machinery 169,573 5,473 164,100

Furniture and Fixtures 42,177 543 41,634

Computers 53,364 2,419 50,945

283,528 9,096 274,432

Minimum lease payments and the corresponding present value are as follows:

Minimum lease Present Value Difference representingpayments (“MLP”) of MLP Interest


Not later than one year 164,994 148,893 16,101

Later than one year but not laterthan five years 164,892 153,853 11,039

Later than five years - - -

329,886 302,746 27,140

As there was no finance lease in the previous year, there are no corresponding amounts for the previous year.



102


20. Provision for Contingencies:

ARO Others TotalRupees ‘000 Rupees ‘000 Rupees ‘000

Balance as on 1 April, 2005 40,737 - 40,737

Provision made during the year 164,684 125,805 290,489

Provision written back during the year - - -

Balance as on 31 March, 2006 205,421 125,805 331,226

Notes:

1) Contingent liabilities as at 1 April, 2005, included approximately Rs. 172,000 thousands relating to an escalationclaim by a creditor. During the year, consequent to an arbitration award the Management has provided Rs. 90,000thousands towards such liability.

2) Rs. 35,805 thousands has been provided in respect of a carrier claim, which is under dispute.

21. Contingent Liabilities and Capital Commitments

Contingent Liabilities:

As at As at31 March, 2006 March, 2005

Rupees ‘000 31 Rupees ‘000

Letters of Credit 303,410 292,532

Guarantees 2,550,452 3,694,051

i. Claims for taxes on income (Refer note 1)

(a) Income tax disputes where the department is in appealagainst the Company 1,935,518 1,694,521

(b) Income tax disputes where the Company hasa favourable decision in other assessment year for the same issue 78,248 1,860,194

(c ) Income tax disputes other than the above 9,257,720 9,593,879

ii. Claims for other taxes 211,961 237,448

iii. Other claims 3,974,458 401,708

Notes:

(1) Significant claims by the revenue authorities in respect of income tax matters are in respect of:

(a) expenditure on licence fees for the Assessment Year 1995-96 disallowed by the revenue authorities. TheCompany’s appeal was allowed at the Tribunal stage, and the matter is now pending before the High Court. TheCompany has obtained favourable decisions in other assessment years, which have not been contested by therevenue authorities, and the Company is of the view that the claims will eventually be decided in its favour.

(b) deductions claimed under Section 80 IA of the Income Tax Act from Assessment years 1996-97 onwards havebeen disallowed by the revenue authorities. The Company has contested the disallowance and has preferredappeals.

(c) reimbursement by the Department of Telecommunications (DoT) of income tax paid by the Company on theDoT levy during 1994-95, that was taxed by the revenue authorities. The Commissioner of Income Tax (Appeals)has upheld the disallowance. The Company is in appeal with the Income Tax Appellate Tribunal.

103


(2) A claim of Rs.66,915,000 thousands (US $ 1,500 million) have been made against the Company by a strategicbusiness alliance associate for breach of contract relating to access and sale of bandwidth capacity on the Company’sTGN network acquired during the year. The claim has been made in the US Federal District Court for the SouthernDistrict of New York. The Company has filed its answer to the complaint denying all liability and believes that theprobability of the claim succeeding is remote.

(3) As part of its normal ongoing review of ITXC Corp.’s (“ITXC”) operations in connection with the post-merger integrationof Teleglobe, a predecessor in interest to VSNL Telecommunications (Bermuda) Ltd, and ITXC , Teleglobe had identifiedpotential instances of non-compliance with the United States Foreign Corrupt Practices Act (“FCPA”) relating toITXC’s operations in certain African countries prior to its merger with Teleglobe, consummated on 31 May, 2004.Teleglobe voluntarily notified the SEC and the U.S. Department of Justice (the “DOJ”) of the matter, and the Companyhas been co-operating fully with the SEC and the DOJ. The Company cannot predict the extent to which the SEC, theDOJ or any other governmental authorities will pursue administrative, civil or criminal proceedings, the impositionof fines or penalties or other remedies or sanctions. The Company has not identified, and does not believe it is likelythat, any material adjustment to its financial statements is or will be required in connection with the results of thisinvestigation, although it is possible that a monetary penalty, if any, may be material to its results of operations in theperiod in which it is imposed.

(4) The subsidiaries of the Company in various geographies are routinely party to suits for collection, commercialdisputes, claims from customers and/or suppliers over reconciliation of payments for voice minutes, circuits, internetbandwidth and/or access to the public switched telephone network, leased equipment, and claims from estates ofbankrupt companies alleging that the Company and / or its subsidiaries received preferential payments from suchcompanies prior to their bankruptcy filings. While management currently believes that resolving such suits andclaims, individually or in aggregate, will not have a material adverse impact on the Company’s consolidated financialposition, the FCPA investigation noted above is subject to inherent uncertainties and management’s view of thismatter may change in the future. If an unfavorable final outcome were to occur, such an outcome could have amaterial adverse impact on the Company’s consolidated financial position and results of operations for the period inwhich the effect becomes reasonably estimable.

Capital commitments

Estimated amount of contracts remaining to be executed on capital account and not provided for Rs. 2,764,862thousands (2005 : Rs. 5,541,991 thousands).

22. UTL is a Joint Venture between the Company, Mahanagar Telephone Nigam Limited, Telecommunications ConsultantIndia Limited and Nepal Ventures Private Limited. The Company has 26.66 percent equity ownership in UTL. UTLoperates basic telephony services in Nepal based on Wireless-in-local loop technology.

The Company’s share (unaudited) in income, expenses, assets and liabilities based on the uniform accounting policyadopted by the Company for the year ended 31 March, 2006 and 31 March, 2005 are as follows:


FUNDS EMPLOYED Rupees ‘000 Rupees ‘000

1 Share Capital 233,275 233,275

2 Reserves and Surplus (167,483) (92,755)

3 Secured Loan 175,956 169,371

4 Unsecured Loan 53,787 -

295,535 309,891



104

APPLICATION OF FUNDS

5 Fixed Assets

(a) Gross Block 294,623 288,620

(b) Less: Accumulated Depreciation 153,050 97,201

(c) Net Block 141,573 191,419

6 A. Current Assets

(a) Inventories 50,391 54,393

(b) Sundry Debtors 49,111 27,343

(c) Cash and Bank Balances 35,468 48,218

(d) Other Current Assets 18,952 38,661

153,922 168,615

B. Loans and Advances 18,870 20,463

172,792 189,078

7 Less: Current Liabilities 18,830 70,606

8 Net Current Assets 153,962 118,472

Total Assets (Net) 295,535 309,891


INCOME Rupees ‘000 Rupees ‘000

1 Traffic Revenue 70,253 39,711

2 Other Income - 14,483

3 Interest Income 1,593 419

Total Income 71,846 54,613

EXPENDITURE

4 Salaries and Related Costs 2,376 2,025

5 Network Costs 28,804 9,401

6 Operating and Other Expenses 50,988 35,381

7 Interest Expense 17,798 11,501

8 Depreciation 52,070 60,350

Total Expenditure 152,036 118,658

CONTINGENT LIABILITIES

(i) Claims for other Taxes - 8,313

(ii) Other Claims - 19,970

- 28,283

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)As at As at

31 March, 2006 31 March, 2005


105

23. During the year, the Company has incorporated a wholly owned subsidiary, SNOSPV, which has invested 47 percentin the issued and paid-up share capital of SEPCO.

SEPCO is an investment company which has acquired 51 percent controlling stake in the issued and paid-up sharecapital of SNO Telecommunications (Pty.) Ltd. (“SNO”), the licensed second network operator in South Africa.

The Company’s share (unaudited) in income, expenses, assets and liabilities based on the uniform accounting policyadopted by the Company for the year ended 31 March, 2006 are as follows:

As at31 March, 2006

FUNDS EMPLOYED Rupees ‘000

1 Share Capital 3

Reserves and Surplus (29,370)

3 Unsecured Loan 33,605

4,238

APPLICATION OF FUNDS

4 Fixed Assets

(a) Gross Block 325,673

(b) Less: Accumulated Depreciation 1

(c) Net Block 325,672

5 A. Current Assets

(a) Cash and Bank Balances 24,607

24,607

B. Loans and Advances 1,913

26,520

6 Less: Current Liabilities 347,954

7 Net Current Liabilities (321,434)

Total Assets (Net) 4,238




106


INCOME Rupees ‘000

1 Interest Income 756

Total Income 756

EXPENDITURE

2 Salaries and Related Costs 1,719

3 Operating and Other Expenses 27,583

4 Depreciation 1

Total Expenditure 29,303

24. Subsequent Events

(i) On 8 May, 2006, the Company signed a Share Purchase Agreement (SPA) to acquire Direct Internet Limited (DIL)and its wholly-owned subsidiary, Primus Telecommunications India Limited (PTIL) for a total purchaseconsideration of Rs. 942,351 thousands. The acquisition was completed on 23 June, 2006.

(ii) On 24 May, 2006, an Arbitration Tribunal of the International Chamber of Commerce (ICC), International Court ofArbitration issued a ruling on certain issues in a matter initiated by FLAG Telecom Group Limited (FLAG) inDecember 2004. FLAG also claimed damages to compensate it for the loss of revenue and/or market. TheTribunal by majority decision has ordered the Company to grant FLAG access to the Mumbai cable landingstation of the FEA cable system for various purposes. The Tribunal has retained jurisdiction to determine thefinancial consequences, if any, of its findings. The Company is not in a position to make a reliable estimate of theobligation.

25. Previous year’s figures have been regrouped and reclassified wherever necessary.


107

Mr. Subodh Bhargava

Born in Agra in 1942, Mr. Subodh Bhargava holds a degreein Mechanical Engineering from the University of Roorkee.He started his career with Balmer Lawrie & Co., Calcuttabefore joining the Eicher Group of Companies in Delhi in1975. On March 31, 2000, he retired as the group chairmanand chief executive and is now the Chairman Emaritus,Eicher Group.

He is the past President of the Confederation of IndianIndustry (CII) and the Association of Indian AutomobileManufacturers; and the Vice President of the TractorManufacturers Association. Over several years, he wastherefore a key spokesperson for Indian industry,contributing to and influencing government policy whilesimultaneously working with industry to evolve newresponses to the changing environment.

He was a member of the Insurance Tariff AdvisoryCommittee, the Economic Development Board of thegovernment of Rajasthan He was also the Chairman of theNational Accreditation Board for Certifying Bodies (NABCB)under the aegis of the Quality Council of India (QCI).

Mr. Bhargava has been closely associated with technical andmanagement education in India. He was the chairman ofthe Board of Apprenticeship Training and Member of the

Board of Governors of the University of Roorkee , the IndianInstitute of Foreign Trade, New Delhi; and theEntrepreneurship Development Institute of India,Ahmedabad.

He was also a member of the senior panel of the All IndiaCouncil for Technical Education (AICTE) set up for acomprehensive evaluation of research in engineering andtechnology; and on the committee set up by the Ministryof Human Resource Department, Government of India forpolicy perspectives for management education in India.

He is currently on the Board of the Centre for Policy Researchand IIM, Indore ; Trustee, Bhartiya Yuva Shakti Trust; ExecutiveTrustee, National Centre for Promoting Employment forDisabled Persons; Chairman Trustee Charity Aid Foundation.He is also on the Boards of Governors of other institutionsfor graduate engineering and bachelors and master’sdegree programmes in business management.

He has been conferred with the first IIT RoorkeeDistinguished Alumnus Award in 2005 by Indian Instituteof Technology, Roorkee.

Mr Bhargava is the Chairman of Videsh Sanchar Nigam Ltd (VSNL ) and also Wartsila India Ltd and Director on therespective Boards of several Indian Corporates.

Mr. N. Srinath

N Srinath, Executive Director, graduated as a MechanicalEngineer from IIT (Madras) and went on to do a PostGraduate Diploma in Management from IIM (Calcutta),specialising in marketing and systems. Joining the TataAdministrative Services (TAS) in 1986, he has held positionsin project management, sales and marketing and corporatefunctions in different Tata companies over the past 20 years.He has been responsible for setting up new projects andmanaging businesses in high-technology areas like ProcessAutomation and Control, Information Technology, Internetand Telecommunications.

On completing his probation with the TAS in 1987, he wasmade Project Executive in Tata Honeywell responsible foracquiring the necessary project approvals and initialfunding. He then moved to Tata Industries as ExecutiveAssistant to the Chairman, an assignment he handled tillmid-1992. In that period he was also part of the team thatset up Tata Information Systems (later Tata IBM and thenIBM India).

In June 1992 he moved to Tata Information Systems Limitedand over the next six years, handled various assignments insales and marketing. He has been responsible for both back

office sales support functions as well as direct customer salesinto various end-user enterprise segments such as ProcessManufacturing, Banking and Financial Services, Petroleumand Distribution. He was, since 1995, also concurrently theRegional Manager for the operations of the company in theWestern Region.

In March 1998, he returned as General Manager (Projects)to Tata Industries and worked with Tata Teleservices helpingto set up the company and its operations for fixed linetelecommunications services in Andhra Pradesh. He oversawthe market launch of services by the company in March 1999and in April he moved to Hyderabad as Chief OperatingOfficer of Tata Teleservices responsible for Sales & Marketing,Customer Service, Network and IT.

In late 2000 he took over as Chief Executive Officer of TataInternet Services, a new company set up to meet therequirements of both retail and corporate customers forInternet services. The company successfully launched andgrew its offerings in the market and also managed variouscustomer portals that it had developed.

In February 2002, when the Tata group acquired VSNL, he

BOARD OF DIRECTORS



108

was appointed as Director (Operations). With effect from 1October, 2004 when the term of the then Managing directorexpired, he was entrusted with the powers of the Managingdirector and was redesignated as Executive director witheffect from 1 April, 2005. Since February, 2003, the Companyhas transformed from being predominantly a monopoly,International wholesale voice services provider in India to aglobal telecommunications company operating in multiplebusinesses in over 30 countries. VSNL today, is the leadinginternational wholesale voice provider globally, is buildingon its leadership position in India to be a major player in

the enterprise and carrier data services market globally, isone of the largest submarine cable bandwidth providersglobally, is a Tier 1 ISP and is expanding its retail presence inthe broadband market in India. The company has also madeinvestments in Nepal and Sri Lanka and has recently beenchosen to be the strategic partner to manage the SecondNational Operator license in South Africa.

Recently, Mr. Srinath was chosen as the ‘Telecom CEO of theYear’ by the leading publishing group, Telecom Asia in the2006 edition of their awards.

Mr. Ishaat Hussain

Mr Ishaat Hussain joined the Board of Tata Sons as anExecutive Director on 1.7.99, and is Finance Director of TataSons Ltd. with effect from 28.7.2000. Prior to joining TataSons he was the Senior Vice President and Executive Director– Finance in Tata Steel for almost 10 years.

Born on September 2, 1947, Mr Hussain completed hisschooling from The Doon School in 1963 to join St. StephensCollege Delhi to do his graduation in Economics. A CharteredAccountant from England and Wales, Mr Hussain attendedthe Advanced Management Programme at the HarvardBusiness School. He joined the Board of The Indian TubeCompany (a Tata Steel associate company) in 1981.

Thereafter, he moved to Tata Steel in 1983 after Indian Tubewas merged with Tata Steel.

Besides being on Board of Tata Sons Limited, he is theChairman of Voltas Limited. He is also on the Boards ofseveral Tata Companies viz. Tata Steel, Tata Industries, TataTeleservices, Titan Industries Limited.

Mr. Hussain is a member on the Primary Markets AdvisoryCommittee of the Securities Exchange Board of India. In April2005, he has been appointed a Member of the Board ofTrade.

Mr. Kishor A. Chaukar

Mr. Kishor A. Chaukar (58), currently the Managing Directorof Tata Industries Limited ( TIL), is a post-graduate inManagement from the Indian Institute of Management atAhmedabad.

TIL is one of the two principal holding companies of the TataGroup, India’s largest and best-known conglomerate. TIL actsas the diversification and new projects-promotion arm ofthe Group, and spearheads the entry of the Group in theemerging high-tech and sunrise sectors of the economy.

In his capacity as Managing Director of TIL, Mr. Chaukar isresponsible for enhancing the value and the interest of TlLin TIL divisions and in companies where TIL has madeinvestments. One of the tasks performed in the quest forthis value enhancement is to provide strategic direction tothese companies.

Mr. Chaukar is a member of the Group Corporate Centre,which is engaged in strategy formulation at the House ofTata. He is on the Board of various companies like Tata

Teleservices Limited, Idea Cellular Limited, Videsh SancharNigam Limited, Tata Autocomp Systems Limited, TataInvestment Corporation Limited, among others. He alsooversees the functions of the Department of Economics &Statistics (DES) and the Tata Credit Card.

Mr. Chaukar is the Chairman of Tata Council for CommunityInitiatives (TCCI) – the nodal agency of the Group on allmatters related to social development, environmentalmanagement, bio-diversity restoration and conservation ofwild life.

Mr. Chaukar was previously the Managing Director of ICICISecurities & Finance Company Limited (July 1993 to October1998), and a member of the Board of Directors of ICICILimited from February 9, 1995 to October 15, 1998). His otherexperiences include stints in Bhartiya Agro IndustriesFoundation, a Public Trust engaged in rural developmenton a no-profit no-loss basis and based in Pune, Maharashtra,and Godrej Soaps Limited.

109

Mr. Pankaj Agrawala

Mr. Agrawala was born on October 16, 1955. Since May 2002,he has been the joint secretary to the GoI, Department of IT,Ministry of Communications and IT. Mr. Agrawala is in-chargeof e-infrastructure in the Department of IT and in thatcapacity represents India in the Government AdvisoryCommittee of Internet Corporation for Assigned Names &Numbers (ICANN). He is a vice chairman of GAC. Mr. Agrawalaalso serves on the Board of Telecom InfrastructureManufacturing Company, ITI and National internet Exchangeof India.

Mr Agrawala belongs to the 1978 batch of the IAS (UttarPradesh cadre). He holds a masters degrees in PublicAdministration, Development Economics and History andwas a Mason Fellow at the Kennedy School of Government,Harvard University, USA.

Mr. Agrawala has held various important U.P governmentpositions. He has worked on various field organizationsin districts and divisions of Uttar Pradesh. He hasbeen associated with rural development for nearly

12 years of his service.

He took over as director of the then Ministry of UrbanDevelopment, GoI in August 1991, and as director, HousingDivision, Ministry of Urban Affairs and Employment, GoI inJuly 1994. He was a member of the Indian delegation to theHabitat II City Summit, Istanbul. He then worked in theAdministrative Training Institute, Nainital in theDecentralised Training for Urban Development Project, anIndo-Dutch collaboration with the Institute for Housing andUrban Development, Rotterdam.

From July 1998 to May 2002, he was secretary to the U.Pgovernment, in various departments, including theDepartment of Planning; the Department of Banking andPrivate Capital Investments; the Department of ExternallyAided Projects, where he was responsible for five World Bankprojects; the department of IT and Electronics, when India’sfirst private-sector IT university was set up; and thedepartment of Small Scale Industries and Export Promotion.

Dr. Mukund Rajan

Dr. Rajan was born in Chennai on April 5, 1968. He completedhis B.Tech from the Indian Institute of Technology, Delhi in1989, and served in his final year as General Secretary of theStudent Affairs Council. He received a Rhodes Scholarshipto study at Oxford University, where he completed a Mastersand Doctorate in International Relations. His doctoraldissertation was published by Oxford University Press, andis titled “Global Environmental Politics - India and the North-South Politics of Global Environmental Issues.”

Dr. Rajan joined the Tata Group through the TataAdministrative Service ( TAS) in January 1995. He wasassigned to the office of Mr. Ratan Tata, Chairman, Tata SonsLimited, in 1996. Dr. Rajan’s current designation is VicePresident, Tata Sons Limited, and he continues to supportMr. Tata as a member of his office. He also serves on theboards of several Tata companies, including Tata TeleservicesLimited, Piem Hotels Limited, Videsh Sanchar Nigam LimitedandVSNL Singapore Pte. Limited.

Mr. N. Parameswaran

Mr. Parameswaran was born on November 15, 1955. SinceJuly 1998, he has been the Deputy Director General in theDepartment of Telecom, Government of India. He holds B.Sc.Engineering degree in Electronics and TelecommunicationsEngineering from College of Engineering Trivandrum,Master of Technology in Electrical Engineering from IIT(Bombay) and Post Graduate Diploma in BusinessManagement from All India Management Association, NewDelhi.

Mr. Parameswaran belongs to the IndianTelecommunications Service (1978) and has been with theDepartment of Telecommunications since January 1980. Forthe last ten years he has beenI involved in Telecom Licensingand Regulations. He has played a key role in the liberalizationof the Telecom Sector in India. Recently, he was on a two-

year deputation as the Executive Director of the Information& Communication Technologies Authority, Mauritius,wherein he set up the Authority and facilitated theliberalization of the ICT sector. He has held various positionsin DOT and MTNL where he was actively involved in theimplementation of IT solutions and New Services.

He has worked as an International TelecommunicationsUnion (ITU) expert in Africa, presented papers and chairedsessions in the ITU / Asia Pacific Telecommunity (APT)seminars/Forums. He was part of a number of Ministerialdelegations for bilateral meetings. He has madepresentations in Road shows held in a number of countriesto attract foreign investment.

He is also Director in the Board of HTL Limited.



110

Mr. P.V. Kalyanasundaram

Mr. P.V. Kalyanasundaram was born on February 25, 1958.He received a Bachelor of Arts degree in history, from theNew College, Chennai in 1977, followed by a Bachelor ofLaw degree from Madras Law College in 1982.

An advocate by profession, Mr. Kalyanasundaram is a legaladvisor for Pallavan Transport Corporation, Chennai, agovernment of Tamil Nadu undertaking, as well as a legaladvisor to the Chennai Metropolitan Water Supply andSewerage Board. He is also a trustee of the Jawaharlal NehruPort Trust, Mumbai, and a member of the Censor Board,Chennai as well as the Presidency Club, Chennai.

Mr. Kalyanasundaram has played a leading role in variouspublic activities. As the managing trustee of the Green PeaceWorld Charitable Trust, Chennai, he took an active part inthe various welfare measures organized by the trust. Theseinclude organizing free eye camps to treat poor people.

Between 2000 and 2004, Mr. Kalyanasundaram was thechairman and trustee, Pachayappa’s Trust, Chennai. In thatposition, he managed several educational institutions,including seven colleges and six schools, and looked afterimmovable properties worth Rs. 10,000 million belongingto the trust. He was also instrumental in conducting severaleducational seminars and courses in various institutions.

Dr. V.R.S Sampath

Dr. V.R.S Sampath received a Bachelor of Arts degree inHistory from the Presidency College in 1976, followed by aBachelor of Law degree from Madras Law College in 1980, aMaster of Law degree in 1987 and a PH.D in 1997, all fromthe University of Madras. He also holds a Master of Artsdegree in History from the Madurai Kamaraj University(1985).

Dr. Sampath also holds a Diploma in Tourism and hascompleted a large number of specialised trainingprogrammes and courses, notably in human rights andsocial work. He was awarded an honorary D.Litt for hiscontribution to global peace efforts by the World PeaceAcademy, Chicago, USA in 1994. He has published numerousresearch papers and traveled widely internationally,including on study tours. He has also published eight bookson subjects such as travel, law and society.

Dr. Sampath is currently an empanelled advocate to bothCanara Bank and Indian Overseas Bank, and a legal advisorto the Construction Industry Development Board of theGovernment of Malaysia. He started his career as a junioradvocate for the Aiyer and Dalia law firm in 1981 and hassince served as a legal advisor to the Tamil Nadu IndustrialDevelopment Corporation.

Dr. Sampath has served on various government committeesincluding the advisory committees of the Central Board ofFilm Certification and the All India Radio, both of thegovernment of India, Chennai. He is the chairman of variousnon-governmental organisations in Chennai including theInter-University Cultural Service, the Madras DevelopmentSociety, the India International Tourism Centre, the IndianInstitute for Aids Prevention, the International Centre forHuman Rights and the Madras Educational .

Mr. Amal Ganguli

Mr. Amal Ganguli, 65, is a fellow member of the Institute ofChartered Accountants of India and the Institute ofChartered Accountants of England and Wales and a memberof the New Delhi chapter of the Institute of Internal Auditors,Florida, U.S.A. He was the Chairman and Senior Partner ofPricewaterhouse Coopers (PWC), India till his retirement on31st March, 2003. Besides his qualifications in the area ofaccounting and auditing, Mr. Ganguli is a fellow of the BritishInstitute of Management and alumnus of IMI, Geneva.

Mr. Ganguli, trained in the UK to become a CharteredAccountant. He was econded as a Partner to PWC, UK/USAfor a year in 1972-73. During his career spanning over 40years, Mr. Ganguli’s range of work included International Taxadvice and planing, cross border investments, Corporatemergers and re-organisation, financial evaluation of projects,management, operational and statutory audit andconsulting projects funded by International fundingagencies. In the course of his professional career, he has dealtwith a variety of clients including US AID, World Bank, ADB,

NTPC, Alcatel, GE, Hindustan Lever, STC, Hewlett Packard andIBM.

Mr. Ganguli is a member of the Board of Directors of severalCompanies such as Hughes Escorts CommunicationsLimited, Flextronics Software Systems Limited, TubeInvestments of India Limited, Gillette India Limited, HCLTechnologies Limited, Samtel Colour Limited, Samcor GlassLtd., New Delhi Television Limited and Century Textiles andIndustries Ltd. Mr. Ganguli is a member of Audit Committeesof Hughes Escorts Communications Ltd., HCL TechnologiesLtd., Gillette India Limited, Samtel Colour Limited, SamcorGlass Limited and Century Textiles and Industries Ltd. He ischairman of the Audit Committee of Flextronics SoftwareSystems Limited and a member of RemunerationCommittees of Tube Investments of India Limited andGillette India Limited. He is also a member of Share Transferand Shareholders’/Investors’ Grievance Committee ofCentury Textiles and Industries Ltd.

Registered office : Videsh Sanchar Bhavan, M.G. Road, Mumbai - 400 001.

TWENTIETH ANNUAL GENERAL MEETING - 13 SEPTEMBER, 2006 AT 1100 HRS.

ATTENDANCE SLIP

I, Mr/Mrs./Miss................................................................................................. LF/Client ID. No ........................................................... hereby

record my presence at the 20th Annual General Meeting of Videsh Sanchar Nigam Limited at the M. C. Ghia Hall,Kalaghoda, Mumbai - 400 023.

...............................

Signature of the Shareholder or Proxy

Notes: 1. Please fill this Attendance Slip and hand it over at the entrance of the hall.

2. SHAREHOLDERS ARE REQUESTED TO BRING THEIR COPIES OF THE NOTICE DOCUMENT WITH THEM.

Registered office : Videsh Sanchar Bhavan, M.G. Road, Mumbai - 400 001.

PROXY

I/We ...........................................................................................................................(LF/Client ID. No...................................)

(Address).............................................................................................................being a Member/Members of Videsh Sanchar

Nigam Limited, do hereby appoint ........................................................................................ of ......................................or/failing

him ...................................................................................................................of ........................................as my/our proxy in my/our

absence to attend and vote for me/us on my/our behalf at the 20th Annual General Meeting of the Company to

be held at 1100 Hrs on Wednesday, the 13 September, 2006, and at any adjournment thereof.

IN WITNESS whereof I/We have set my/our hand/hands this...................day of..........................2006.

(Signature of the Shareholder across the stamp)

Note : 1. A member entitled to attend and vote is entitled to appoint a proxy to attend and vote instead of himself,and a proxy need not be a Member.

2. A One Rupee Revenue Stamp should be fixed to this and it should then be signed by the Member.

3. The instrument appointing the proxy and the power of attorney or other authority, if any, under which itis signed, or a copy of that power of authority duly certified by a notary or other proper authority, shall bedeposited at the Registered Office of the Company not later than forty-eight hours before the time forthe holding of the Meeting, in default, the instrument of proxy shall not be treated as valid.

Please affix1.00 Re.

RevenueStamp

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Documents

TATA Annual Report 16.5 x 10.5 C to C