Twentieth Annual Report 2005-06 - MTNLmtnl.net.in/Final_Report_2006.pdf · 7 MTNL N O T I C E Notice is hereby given that the Twentieth Annual General Meeting of the members of Mahanagar

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TwTwTwTwTwentiethentiethentiethentiethentiethAnnual ReportAnnual ReportAnnual ReportAnnual ReportAnnual Report

2002002002002005-065-065-065-065-06

MAHANAGAR TELEPHONE NIGAM LIMITED(A Nav Ratna Company)

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MISSION OF MAHANAGAR TELEPHONE NIGAM LIMITED

"To provide in its area of operation, in a leading way, world class telecom

services which are demanded, keeping always the customer's delight as its

aim, so that it continues to be the premier Indian Telecom Company".

________________

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CONTENTS

Page No.

1. Board of Directors 4

2. Statutory Auditors, etc. 5

3. Performance Highlights 6

4. Notice 7-9

5. Directors’ Report 10-19

6. Corporate Governance Report 20-30

7. Management Discussion & Analysis 31-34

8. Compliance Certificate 35

9. Auditors’ Report 36-47

10. Annual Accounts (Balance Sheet, Profit & Loss Account,Schedules, Consolidated Accounts & Cash Flow Statement) 48-91

11. Addendum to Directors’ Report- Comments of StatutoryAuditors & Management replies thereto. 92-97

12. Annexure to Directors’ Report – Comments of C&AG 98-100

13. Replies of Management to the Comments of C&AG 101-103

14. Statement u/s 212 regarding Subsidiary Companies 104-105

15. Millennium Telecom Limited – Directors’ Report,Auditors’ Report, Balance Sheet & Comments of C&AG 106-125

16. Mahanagar Telecom Mauritius Limited – Directors’ Report,Auditors’ Report, Balance Sheet 126-141

17. Proxy & Admission Forms 143

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BOARD OF DIRECTORS(AS ON 11.8.2006)

Shri R.S.P. Sinha Chairman & Managing Director

Shri V. Shivakumar Director (H.R.)

Shri Kuldip Singh Director (Technical)

Smt. Anita Soni Director (Finance)

Shri S. Balasubramanian Director

Shri M. Sahu Director

Smt. Annie Moraes Director

COMPANY SECRETARYShri S.C. Ahuja

REGISTERED AND CORPORATE OFFICEJeevan Bharti Building,

Tower I, 12th Floor,124 Connaught Circus,

New Delhi - 110 001Tel: 91 11 23742212/3326

Fax: 91 11 23314243Website: < http://www.mtnl.net.in>http:www.bol.net.in

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STATUTORY AUDITORS

M/s Dhawan & Co.Wegmans House

21 Veer Savarkar BlockVikas Marg,ShakarpurNEW DELHI - 110 092

BRANCH AUDITORSM/s Gandhi Minocha & Co. M/s. S.R. Goyal & Co.Chartered Accountants Chartered Accountants82, Shakti Apartments 1-A, Sangram Colony,Ashok Vihar, Delhi-110 017 C-Scheme, Jaipur

Rajasthan - 302 001

BANKERSState Bank of India, New Delhi/Mumbai

Indian Overseas Bank, New Delhi/MumbaiPunjab National Bank, Mumbai

Oriental Bank of Commerce, New DelhiCentral Bank of India, Mumbai

Dena Bank,Union Bank of India, MumbaiUnited Bank of India, New Delhi

Syndicate Bank, Mumbai,Vijaya Bank, New Delhi/Mumbai

Indian Bank, New Delhi,ICICI Bank, MumbaiUTI Bank, Mumbai

REGISTRARS AND TRANSFER AGENTS

M/s. Beetal Financial & Computer Services (P) Ltd.3rd Floor, Beetal House

99,Madangir, Behind Local Shopping CentreNear Dada Harsukhdas Mandir,

New Delhi - 110 062.Ph: 011-29961281-82Fax : 011-29961284

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PERFORMANCE HIGHLIGHTS(2005-06)

Particulars (Rs. In Million)

Total Income 60909.98

Total Expenditure 54196.40

Revenue Sharing 12263.19

License Fees 4589.56

Profit before tax and Prior Period 6713.58Adjustment

Dividend 2520.00

Earnings Per Share (EPS) Rs. 9.21

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MTNLN O T I C E

Notice is hereby given that the Twentieth Annual General Meeting of the members of Mahanagar TelephoneNigam Limited will be held on Tuesday, the 26th September 2006 at 11.00 A.M. at FICCI Golden JubileeAuditorium, Tansen Marg, New Delhi-110 001 to transact the following business:-

I. ORDINARY BUSINESS :1. To receive, consider and adopt the audited Balance Sheet of the company as at 31st March, 2006

and the Profit and Loss Account for the year ended on that date together with the reports of theAuditors and Directors and the comments of the Comptroller and Auditor General of India thereonu/s 619(4) of the Companies Act, 1956.

2. To declare a dividend.

3. To appoint a director in place of those retiring by rotation:• To appoint a director in place of Shri M.Sahu, who retires by rotation and being eligible, offers

himself for reappointment..

4. To fix the remuneration of the Statutory and Branch Auditors appointed by the Comptroller &Auditor General of India for the Financial Year 2006-07 .

II. SPECIAL BUSINESS :To pass, with or without modifications, the following Resolution as Ordinary Resolution:-

"RESOLVED THAT Dr. S. Balasubramanian who was appointed as non-official part-time director ofthe company by the Govt. of India, D.o.T, vide their letter No. 1-24/01-OC/PSA dt 8th Nov 2005 fora period of 3 years and whose appointment was ratified by the Board in terms of Article of Associationof the company as Additional Director of the company from 25th November 2005 till the next AGM,be and is hereby appointed as Director of the Company from the date of AGM i.e. 26th September2006 in terms of D.O.T.'s aforesaid letter dt. 8th November 2005 subject to retire by rotation, as perprovisions of Companies Act."

Explanatory statement pursuant to Section 173 of the Companies Act 1956 is enclosed.

By order of the BoardFor MAHANAGAR TELEPHONE NIGAM LIMITED

(S.C. AHUJA)Company Secretary

Place : New DelhiDate : 24/8/2006

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MTNLExplanatory statement pursuant to Section 173 of the Companies Act 1956 for the Special Businessto be conducted at the AGM.

Dr. S. Balasubramanian was appointed as non-official part-time director of the company by the Govt. ofIndia, D.o.T, vide their letter No. 1-24/01-OC/PSA dt 8th Nov 2005 for a period of 3 years. In terms ofArticle of Association of the company Dr. S. Balasubramanian was appointed as Additional Director of thecompany from 25th November 2005 till the next AGM, subject to the provisions of the Companies Act.Accordingly Dr. S. Balasubramanian ceases to hold office of Director at this AGM, and may be appointedas Director of the Company from the date of AGM i.e. 26th September 2006 in pursuance to D.O.T.'saforesaid letter dt. 8th November 2005 subject to retirement by rotation as per the provisions of CompaniesAct.

Dr. S. Balasubramanian holds M.A.(Economics) degree, M.Phil (Economics) degree, Ph.D (Eco) and DSSfrom University of Madras. He has served as Professor of Economics in Madras University for 28 yearsincluding Head of Deptt. of Economics for 15 years in Presidency College, Chennai. He has publishedseveral publications on Socio-Economic thoughts, etc. He has also served as a Member of TamilnaduPublic Service Commission. The company is getting benefits of his vast experience in this field.

In terms of D.o.T.'s aforesaid letter dated 8th November 2005 the tenure of appointment ofDr. S. Balasubramanian is 3 years. Therefore the appointment of Dr. S. Balasubramanian is recommendedfor approval.

Dr. S. Balasubramanian is interested in the resolution. None of the other directors exceptDr. S. Balasubramanian are personally interested in the resolution.

By order of the BoardFor MAHANAGAR TELEPHONE NIGAM LIMITED

(S.C. AHUJA)Company Secretary


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MTNLNOTES

1. A MEMBER ENTITLED TO ATTEND AND VOTE IS ENTITLED TO APPOINT A PROXY TO ATTENDAND VOTE INSTEAD OF HIMSELF AND THE PROXY NEED NOT BE A MEMBER OF THECOMPANY. PROXIES IN ORDER TO BE VALID MUST BE LODGED AT THE REGISTERED OFFICEOF THE COMPANY AT 12TH FLOOR, TOWER-1, JEEVAN BHARTI BUILDING, 124, CONNAUGHTCIRCUS, NEW DELHI-110001, NOT LESS THAN 48 HOURS BEFORE COMMENCEMENT OF THEMEETING. PROXY FORM IS ANNEXED.

2. The Register of members and Share Transfer Books will remain closed from 20th September to26th September 2006. (both days inclusive).

3 (i) Final Dividend, if any, approved at the 20th Annual General Meeting of the Company will be paidto those shareholders whose names appear:(a) As beneficial owners as at the end of the business hours on 19th September 2006 as per the

list to be furnished by the Depository in respect of the shares held in electronic form, and(b) As members in the register of members of the company after giving effect to all valid share

transfers in physical form lodged with the company on or before 19th September 2006.(ii) Members are advised to avail ECS facility for the credit of dividend directly to their bank accounts.

This facilitates quick credit of the dividend amount and eliminates any delay or loss of thedividend warrants in the transit and also ensures safety against fraudulent encashment.

(iii) While opening a depository account with the participants of NSDL/CDSL you may have givenyour bank account details, which will be used by your company for printing of dividend warrants.This ensures that the dividend warrants, even if stolen or lost, cannot be used for any purposeother than for depositing the money in the account specified on the dividend warrant. Thisensures safety for investors. However, you may want to receive dividend in an account otherthan the one specified, while opening the depository account. You may change/correct bankaccount details with your depository participant accordingly. We also request you to kindly giveMICR code of your bank to your depository participant.

4 The Members are requested to notify change of address, if any, to:-(i) the company's Registrar & Transfer Agent, M/s. Beetal financial & Computer Services (P)

Ltd. 3rd Floor, Beetal House 99,Madangir, Behind Local Shopping Centre Near DadaHarsukhdas Mandir, New Delhi - 110 062 in case the shares are held in physical form and

(ii) to the respective Depository Participant (DP) with whom the members are having their DematAccounts, in case the shares are held in electronic form.

5. It will be appreciated that queries, if any, on the accounts and operations of the company are sent tothe company 10 days in advance of the meeting so that the answers could be made readily available.

6. As a measure of economy, copies of Annual Report will not be distributed at the Annual GeneralMeeting. Members are therefore, requested to bring their copies of the Annual Report to the meeting.

7. Members are requested to fill up their name, folio No./ID No. and to affix their signature at the spaceprovided on the attendance sheet (given at the end of the Annual Report) and hand over the same atthe entrance of the place of the meeting.

8. Members, who are holding shares in identical order of names in more than one folio, are requested towrite to the Registrar & Transfer Agents of the company, enclosing their share certificates to enablethe company to consolidate their holding in one folio. The share certificates will be returned to themembers after making necessary endorsement in due course.

9. In terms of Section 109A of the Companies Act, 1956, nomination facility is available to individualshareholders. Members holding shares in physical form may nominate a person in respect of all theshares held by them whether singly or jointly. Members who hold shares singly are advised to avail ofthe nomination facility by filing up the prescribed form.

Please note that no gifts of any sort would be distributed at the AGM.

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MTNLDIRECTORS' REPORT

ToThe Shareholders ofMahanagar Telephone Nigam Limited

Dear Shareholders,

Your Directors have pleasure in presenting the 20th Annual Report of your Company together with theStatement of Accounts and Auditors' Report as well as comments of Comptroller and Auditor General onthe Accounts for the financial year ended on March 31, 2006.

HIGHLIGHTS

The financial year 2005-06 was a year of excitement and challenges for -the Indian telecom Industry. Theindustry witnessed significant regulatory development along with changes in competitive landscape. Therewas downward revision of ILD and NLD tariff changes introduced during the year. Still your Companyregistered a profit of Rs. 6713.58 million before tax as against Rs.12156.67 million for the previous financialyear.

MTNL has emerged as the No. 1 GSM operator in terms of new subscriber additions in Delhi and Mumbaiduring 2005-06.

We strengthened our leadership in GSM mobile services by improving on market shares in both themetros.

During the year, there has been a tremendous increase in the Cellular subscribers. The total cellularsubscriber has increased from 881,696 as on 31.3.2005 to 1,941,155 as on 31.3.2006.Thus there is anincrease of 1,059,459 subscribers during this year which is equivalent to 120.16 %. The income fromcellular services has gone up almost two fold from Rs.2770.73 million to Rs.5726.62 million.

As on 31.3.2006 there are 211,935 Broad Band subscribers, up nearly 40 times over 5,374 subscribers on31.03.2005. Income from broadband services during this year is Rs.704.25 million.

Your company made Net profit of Rs.5802.92 million for the financial year under review as against Rs.9389.79 million for the previous financial year.

Churn of fixed line subscribers and pressure on revenues due to this as well as downward trend in tariffcontinue to be areas of concern.

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MTNLFINANCIAL RESULTSSources and application of funds for the year under review are given below:-

(Rs. in Million)

2005-06 2004-05

Income from Services 55,609.85 55,820.70

Expenditure (excluding 53,952.04 48,223.09Interest & prior periodAdjustments)

Operating Profit 1657.81 7597.61Other Income 5,300.13 4,917.18Interest 244.36 358.12Profit before tax 6,713.58 12156.67Tax provision for the year 936.95 2672.41Prior Period Adjustments (26.29) 94.47Net Profit for the year 5802.92 9389.79Profit available for 5802.92 9389.79Appropriation

Interim/Proposed final dividend 2520.00 2835.00Dividend Tax 353.43 392.82Transfer to:a) Contingency Reserve -- 710.30b) Reserve for R&D -- --c) General Reserve 2929.49 5451.67

SOURCES AND USES OF FUNDSAuthorised Capital 8000.00 8000.00Issued, Subscribed & paid-up Capital 6300.00 6300.00Reserves & Surplus 106,067.74 103138.25Secured and unsecured loan --Deferred Tax Liability (Net) 6,116.27 5740.08

REPRESENTED BYFixed Assets* (Net Block) 65687.49 64,686.29Investment 4187.24 3974.65Net Current Assets 42,211.83 40246.82Deferred Revenue Expenditure 1,142.48 --Capital Work-in-Progress 5,254.97 6,270.57

Note:Previous year's figures have been re-grouped/re-cast wherever considered necessary.

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MTNLDIVIDENDThe Company has paid an interim dividend @ 30 % for the year 2005-06 and the Board is pleased torecommend payment of final dividend @ 10% i.e. total 40% on the paid up equity capital of Rs. 6300million. The dividend will absorb a sum of Rs.2873.43 million including dividend tax.

SUBSIDIARY COMPANIESYour Company has two wholly owned subsidiaries viz. Millennium Telecom Ltd. (MTL) at Mumbai andMahanagar Telephone Mauritius Ltd. (MTML) at Mauritius. The reports and accounts of subsidiary companiespursuant to section 212 of the Companies Act, 1956 are annexed.

Millennium Telecom Ltd. (MTL)MTL is handling a new project for laying submarine cable from India to south East Asia and Middle Eastwith ultimate intent to extend eventually to the USA and Europe. By investing in this project, MTNL(holding company) & BSNL (would be joint venture partner with 49% equity participation in capital of MTL)can get International Bandwidth to support its own network demand as well as to lease it to others at verycompetitive rates. Thus, MTNL & BSNL would not be dependent on other operators for internationalbandwidth. It has been decided to enhance the equity base from present Rs. 2,87,58,800 to Rs. 20 crores.

Mahanagar Telephone Mauritius Ltd. (MTML)Mahanagar Telephone (Mauritius) Ltd. MTML is registered with an Authorised Capital of Mauritius Rupees(MUR) 600M and paid up by the capital of MUR 300M.

Mahanagar Telephone (Mauritius) Limited (MTML), is providing cheap and quick services for its customers.It has already launched its international long distance calls post paid service, through Carrier AccessCode (060) in June 2005. The service is cost effective and a better quality is offered.

The company aims to cater for fix, mobile and international long distance service with high connectivitythrough CDMA technology at a cheap rate in Mauritius. MTML is looking to serve 100,000 lines; 50,000this year and 50.000 the next year. MTML's services aims at bringing true value to the money that customerpays.

JOINT VENTURES

UNITED TELECOMMUNICATIONS LTD. (UTL)

This Joint Venture Company was formed in the year 2001 by MTNL jointly with TCIL, VSNL and NVPL (ANepal based company). The JV Company has been awarded a license to provide WLL based Basic TelecomServices in Nepal. Despite stiff competition from other operators UTL has achieved a financial turnover ofRs 249,539,356 , during the year under review, as compared to the previous year's turnover of Rs.196,878,596.

UTL's profit from operation during the year was Rs. 89,522,331 as against Rs. 80,761,621 for the previousfinancial year.

The company incurred Net loss of Rs. 222,021,360 for the financial year under review as against Rs.232,676,484 for the previous financial year. The loss is mainly attributed to high depreciation, interestand Amortazation.

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MTNLMTNLSTPI IT SERVICES Ltd.Your company has formed a Joint Venture company with Software Technology Parks of India (STPI) (aSociety registered under the Societies Registration Act, 1860) under Department of Information Technology,Ministry of Communication and Information Technology, New Delhi, with an authorized capital of Rs.50crores. The new company in the name of MTNLSTPI IT Services Ltd. has been registered with theRegistrar of Companies, (Delhi & Haryana), New Delhi on 31.03.06.

The main object of company is to undertake all such activities that are required to make "India.in" theplatform of choice on which to obtain web-hosting, data/application hosting and related services and helppopularize the ".in" domain in general and make the "India.in" portal a platform by which to bring aboutinformation dissemination and knowledge sharing.

SYSTEM STATUS OF MTNL AS ON 31st MARCH 2006.

S. NO. PARTICULARS DELHI MUMBAI TOTAL1. Number of Exchanges 336 193 5292. Equipped Capacity 4219689 4217143 8436832*

Digital Lines 4219689 4217143 8436832DLC Capacity 158712 114096 272808Digitalization % lines 100 % 100 % 100 %

3. DELs (Including WLL Fixed and GSM) 2626845 3297583 59244284. DELs

a) Wired Lines. 1621506 2211418 3832924b) WLL-Fixed 4448 21858 26306c) Garuda (FWT) 7224 22826 30050c) WLL-Mobile 69193 36472 105665d) Cellular Mobile (GSM) 936146 1005009 1941155

5. DLC (Nos) 421 481 9027. Leased circuits 16317 33368 496858. PCOs

Local 66920 150988 217918STD 30208 30925 61133Total 97128 181913 279041

9. Tax capacity 150000 155200 305200Tandem 370500 350960 721460

10. ISDN 13 14322 1433511. Internet connection

a) Pre paid 19090 10975 30065b) Post paid 536532 621607 1158139c) Broadband (including ADSL) 101723 110212 211935

12. Waiting List Nil Nil Nil13. OFC (in Route Kms) 5649.508 4590.356 10239.864

14. OFC (in Fibre Kms) 144493.488 96203.938 240697.426

* Equipped Capacity (Including WLL Fixed, WLL Mobile and GSM)

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MTNLCUSTOMER CARE AND AFTER SALE SERVICESMTNL pays utmost attention to customer care and after sales services. The already working 1500 seriescustomer care help lines have been strengthened and more trained staff have been posted on SancharHaats to provide on the spot solutions to the customers queries. With a view to provide world classcustomer care services for customers, the company has recently increased seats of call center andqualified professionals have been detailed to scrutinize the complaints of the customers.

HUMAN RESOURCE DEVELOPMENT

The Telecom industry in India is undergoing through a volatile phase and fate of the organizations isbeing written and re-written everyday.

In the recent past, we have identified Human Resources as one of the strategic partners for rapidbusiness strides leading to success in all strata of our operations. During last fiscal also we continuedour endeavors towards HR practices of world standards.

We have always considered our Manpower as one of our greatest assets and this is what differentiatesMTNL from its competitors. We have a strong manpower base of slightly more than 51000 with widearray of Technical and Managerial aptitudes and also talented support staff having exposure to stateof the art technologies prevailing in Telecom Industry of India.

As a step towards restructuring of our manpower we have adopted dual pronged strategy, viz., atone end we have recruited young and talented professionals in areas like Telecom, Finance, HR,Marketing, Law and on the other hand we have taken steps towards rightsizing of the organization.Thus fine-tuning our existing manpower mix in terms age, qualification, and aptitude to meet thedemands posed by the changing Business Environment and to take advantage of the opportunitiespresented to serve ever-increasing customer base.

The recruitment of Officer Trainees was completed on pre-scheduled time, thus benchmarking ourHR practices at par with global standards. Further, special efforts are being made to clear the backlogvacancies reserved for SC/ST candidates through organizing Campus and Walk - In interviews.

Further, to give our HR perspective a professional outlook, we have hired experienced HR professionalsat higher level of management from open market.

Similarly, as per commitments made in our last year's report, rightsizing efforts have been initiated, i.e.,a Voluntary Retirement Scheme for Executives was introduced and 604 (10% of total Executive Strength)employees were separated from the rolls. In continuation to the same 2nd round of VR for Non- Executiveemployees was also introduced in March 2006 and separation of about 1400 employees is underway.

During the year under reckoning our employees have been exposed to best available training modulesin various technologies that have great business potential, by deputing them to both within as wellas outside India for acquiring specialized skills.

The absorption of Group A Officers is underway and we hope that in near future our Middle and TopManagement will be on our rolls thus bringing in sense of belongingness in all strata of our organization.

Our Company is also striving towards building, maintaining and sustaining high employee morale byproviding better facilities and amenities to its employees so that a highly motivated workforce shallstrive towards achieving Company Vision of becoming Global Telecom giant.

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MTNLTRAINING PERFORMANCE

Our Company has been conducting various Training & Development activities, which apart fromminimizing the skill gap and technical obsolescence, are also focusing towards attaining the biggerorganizational purpose of building a competent workforce to take the challenge in the currently existingTelecom sector.

We are happy to share that your Company has surpassed MoU targets for the year 2005-06, where,against a target of 7000, more than 7923 employees have been trained in various disciplines andareas such as Customer Care, Behavioral & Attitudinal Training, Technical / Information Technology,Training in foreign countries for international exposure.

PERSONNEL TRAINED DURING 2005-06

Unit No. of officials trainedDelhi 2799Mumbai 5015Corporate Office 109Total 7923

→ In addition to above, your Company has provided 12 months training to Apprentices under theApprentices Act' 1961. Industrial Training, close to 300 students from Engineering & MBA, were alsoprovided during the above period.

→ All total, 9 officers from MTNL were provided exposure in Specialized Training / Management coursesin abroad.

→

With the ever-growing competitions in the telecom sector, efforts are now being taken to enrich theawareness level of the various employees Unions so as to make them act as a change agent. In thisregard, perhaps, for the first time Workshops were conducted for the leaders of the various TradeUnions of MTNL in Delhi & Mumbai.

→

Further, to assimilate the organization culture and to give a feel of our business endeavors, our newrecruits were imparted with extensive trainings at our state of the art training center, CETTM inMumbai.

CENTRE FOR EXCELLENCE IN TELECOM TECHNOLOGY AND MANAGEMENT(CETTM)

Our dream for having a world-class in house Training Centre furthered one step when CETTM (Centre ofExcellence in Telecom Training & Management) was awarded ISO 9001:2000 certification. CETTM isslowly taking the lead role and becoming the nodal center for HRD. Induction Training programme for 309newly recruited executive Trainees in the field of Telecom, Finance, Marketing, HR, Legal have beenconducted at CETTM. During the last recruitment of executive Trainees the Induction Training for Telecomand Finance was conducted in BSNL. However, this time, the Induction Training for all the new recruitswas conducted in CETTM.

CETTM has started generating revenues by leasing out infrastructure and providing training to otherorganizations of repute.

In this series a Training Programme was arranged for 60 candidates in two batches in collaboration withTelecom Consultants of India (TCIL) and support from Ministry of External Affairs of Govt. of India.

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MTNLThe candidates hailed from other major developing countries like Cambodia, Angola, Oman, Kenya,Afghanistan, Bangladesh, Bhutan, Syria and South Africa.

During the FY 05-06 CETTM has earned revenues more than Rs 50.00 Lacs. It also gives us immensepleasure in sharing with you that CETTM has generated notional income of more than Rs 5.7 Crores duringthe reckoning financial year.

INDUSTRIAL RELATIONSIndustrial peace and Industrial harmony based on healthy Employee Relations, like the previous yearprevailed throughout the year. The Grievances/Issues raised by the employees/Union/Associations wasgiven due attention and regard. The cases/issues brought up by them were settled through regular meetingsad interactions between Management and Unions/Associations and action as mutually agreed was takento settle them.

A further step towards Worker's Participation in critical issues concerning business endeavors, a specialJoint Negotiation Committee meeting was convened to share the views of recognized Unions on thevarious aspects of our business endeavors and to obtain opinion from them in further improving the same.

Further, Standing Order for our employees in final stages of negotiation with recognized Unions of Delhiand Mumbai Unit. These discussions are taking place with assistance from Regional Labour Commissioner,where representatives from Management and Unions are jointly taking part.

EMPLOYEES' WELFAREEmployees Welfare Schemes like subsidized Canteen, Crèches, Housing, Medical facilities, Scholarshipsto wards of employees, Group Insurance, dormitories for females working in night shift etc. continued andmaintained by the Company for its employees. Sports and Cultural activities were also given priorityduring the year.

Further to provide our employees cashless medical facility, Group Health Insurance Scheme has beenintroduced and the functioning of the same is closely monitored. This on one hand will result in reductionof wasteful expenditure for the purpose and at the other will ensure hassles free Medicare for our employees.

IMPLEMENTATION OF OFFICIAL LANGUAGE POLICYThe company continued its efforts to comply with statutory requirements in promoting the use of Hindi andhas been able to achieve most of the annual targets set by the Government for implementation andpromotion of Hindi as Official Language in the Company.

IMPLEMENTATION OF RESERVATION POLICY FOR SC/ST/OBC & PH COMMUNITYYour Company has endevoured to fulfill all the statutory requirements with regard to implementation of reservationpolicy for candidates belonging to SC/ST/OBC communities and as well as Physically Challenged candidates.

WORKING CONDITIONS OF WOMEN EMPLOYEESWe are continuously striving towards gender sensitization amongst our employees. Special care has beentaken in case of woman employees working in night shifts. Also to redress the issues of Sexual Harassmentat workplace Special Cells have been constituted.

CORPORATE SOCIAL RESPONSIBILITYFulfilling the Social Responsibility was always high on our agenda and in last fiscal year also your companysupported a lot of Organizations fighting for the bigger social cause. In many instances we also took thesame responsibility on our shoulders.

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MTNLFurther to spread awareness about general health and nutritional aspects in day-to-day life, yourcompany has sponsored the Perfect Health Mela. The event was organized by Ministry of Health,Delhi Govt. This 10-day event witnessed a no. of activities like free health check up camps, primary& secondary Medicare, Mother & infant care etc. Approximately one million people benefited fromthe Health Mela.

MANPOWER STATUSAs on 31st March 2006 your Company had a strength of employees as per details given below:-

Group Total SC STA 1130 135 14B 6658 459 86C 29834 3116 333D 13511 1802 291Total 51133 5512 724DRMs 79Grand Total 51221 5512 724

VIGILANCE

Vigilance Cell in MTNL headed by Shri Kabal Singh, IRSSE who has joined as CVO in Corporate Office on24.3.2005. CVO is responsible for total vigilance management of MTNL. In 2005-06, emphasis had beenlaid on preventive vigilance measures as per Central Vigilance Commission guidance/instructions underwhich system improvement proposals had been made for simplification of rules and procedures in severalareas. Training programmes and workshops had been conducted from time to time to update the knowledgeand skills of officers and officials regarding different provisions of the conduct rules and importance oftheir role in overall development of the organization. One-day seminar was organized on 09.03.06 on theInvestigation of Vigilance Cases and process of procurements & purchases. The Vigilance AwarenessWeek was celebrated from 07.11.2005 to 11.11.2005 and various activities were observed during thisweek to interact with the field staff, public and suppliers/contractors in order to get feedback/suggestionsfor further improvement in the network and customers care services. Monthly Vigilance meetings wereregularly conducted to monitor the progress of pending vigilance/disciplinary cases and remedial measurestaken to redress the problems being faced in timely settlement of such cases. Total 231 disciplinarycases were finalized during 2005-06. Five cases of hi-tech telecom frauds causing revenue leakage weredetected through Fraud Management and Control Centre. On verification, some customers were identifiedwho were making huge calls and absconding without paying bills and the loss caused by them reducedconsiderably. Bill tracking system had also been introduced resulting in reduction of delay in payment ofbills. Anomaly in delegation of financial powers to Civil Wing Officers between Delhi & Mumbai wasrectified. CVO was also instrumental on getting redundant hired accommodations vacated resulting monthly/annual amount incurred on them reduced considerably. Vigilance branch received 892 complaints. Thesecomplaints were expeditiously examined and necessary action taken. Regular inspections were carriedout by Vigilance Cell at sensitive areas and activities and taken corrective actions wherever required.

CONSERVATION OF ENERGY AND TECHNOLOGY ABSORPTIONBeing a service providing organization, the relevant rules in this regard are not applicable to yourCompany.

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MTNLFOREIGN EXCHANGE EARNINGS

Information with regard to foreign exchange earnings and outgo is as follows:-

a) Activities relating to Export:

Initiatives taken to increase export, development of new export markets for products and servicesand export plants: Not applicable to your Company.

b) Total Foreign Exchange earned and used:-

Earned : Rs. 83.52 Million

Expenditure in Foreign Currency Rs. 27.64 Million

CORPORATE GOVERNANCEYour company follows the principles of effective corporate governance practices. The Company has takensteps to comply with the requirements of revised Clause 49 of the Listing Agreement with the StockExchanges. A report on Corporate Governance has been appended under separate section titled ' CorporateGovernance Report ' and forms a part of the Annual Report.

COMPLIANCE CERTIFICATEA certificate from the Practicing Company Secretary regarding compliance of conditions of CorporateGovernance as stipulated under revised Clause 49 of the Listing Agreement is attached to this report.

DIRECTORS' RESPONSIBILITY STATEMENTPursuant to the provisions of Sec 217(2AA) of the Companies Act, 1956, the Directors to the best of theirknowledge and belief confirm that:

(i) in the preparation of the annual accounts, the applicable accounting standards have been followedalong with proper explanation relating to material departures;

(ii) they have selected such accounting policies and applied them consistently and made judgmentsand estimates that are reasonable and prudent so as to give a true and fair view of the state ofaffairs of the company as at the end of the financial year and of the profit or loss of the company forthat period;

(iii) they have taken proper and sufficient care for the maintenance of adequate accounting records inaccordance with the provisions of the Companies Act 1956 and for safeguarding the assets of thecompany and for preventing and detecting fraud and other irregularities;

(iv) they have prepared the annual accounts on a going concern basis.

PARTICULARS OF EMPLOYEESDuring the year under report, there was no employee who was in receipt of remuneration in excess of limitsprescribed under the provisions of Section 217(2A) of the Companies Act, 1956 read with the Companies(Particulars of Employees), Rules, 1975.

COMMENTS OF C & AG ON THE ACCOUNTSComments of C&AG and management replies thereto are given as an Annexure to the Directors'Report.

19

MTNLDIRECTORS

During the year under report, the Board of Directors of your Company met frequently. At these meetings, theBoard held intensive discussions on the budget, important financial transactions and various steps to face theimpending competition from private operators both in Basic Telephone Service and Cellular Mobile Telephony.

Sh.R.S.P.Sinha continued to be the CMD of your company and Sh. V. Shivakumar, Sh. Kuldip Singh, andSmt. Anita Soni continued to be the Directors(HR), Director(Tech) and Director(Fin) of your Company respectively.

During the period under report, the following changes took place in the ̀ Directorship of the Company:-

1. Sh. M.Sahu, Jt. Secretary, DOT was appointed as director w.e.f. 05.08.2005 in place of Sh.Yashwant Bhave.

2. Dr.S.Balasubramanian was appointed as Part-Time Independent Director w.e.f. 25.11.2005.

3. Smt. Annie Moraes, DDG (FEB), DOT was appointed Director w.e.f. 25.04.2006 in place ofSh.A.C. Padhi.

4. Sh. Adhik Shirodkar ceased to be director of the company w.e.f. 28th September 2005(A/N).

5. Sh. Kuldeep Goyal, ED(Mumbai) ceased to be director of the company on 28th October 2005on his option to join BSNL.

The Board places on record its deep appreciation for the excellent services rendered by Sh. YashwantBhave. Sh.A.C. Padhi. Sh. Adhik Shirodkar and Sh. Kuldeep Goyal during their tenure as Directors on theBoard of MTNL.

AUDITORSM/s. Dhawan & Co., Chartered Accountants, were appointed as Statutory Auditors of your Company bythe Comptroller and Auditor General of India. In addition, M/s. Gandhi Minocha & Co. and M/s S.R. Goel& Co., Chartered Accountants were appointed as Branch Auditors for Delhi and Mumbai units includingMobile Service Unit respectively for the year 2006-07.

ACKNOWLEDGEMENTYour Directors take this opportunity to gratefully acknowledge the help, guidance and support receivedfrom Deptt. of Telecom (DOT) and various Ministries of the Government of India. Your Directors areespecially grateful to its Bankers, all stakeholders and investors including, ADR holders, for their continuedpatronage and confidence reposed in the company.

The Directors would like to express their thanks for the sincere hard work and dedication of every employeeleading to impressive results of your company. The Board is confident that with the employees' continuedenthusiasm, initiative and dedicated efforts, your Company could face the new challenges and opportunitiesarising out of the resultant competition from private operators in the Cellular Mobile, Basic Telephone andInternet services and other Value Added services.

For and on behalf of the Board of Directors

(R.S.P. SINHA)CHAIRMAN AND MANAGING DIRECTOR

PLACE : NEW DELHIDATE : 11/8/2006

20

MTNLCORPORATE GOVERNANCE REPORT

1. COMPANY'S PHILOSOPHY ON CODE OF GOVERNANCE

The company's philosophy on corporate governance encompasses achieving the balance betweenshareholders interest and corporate goals through the efficient conduct of its business and meeting itsstakeholders obligation in a manner that is guided by transparency, accountability and integrity.

2. BOARD OF DIRECTORS

The Company currently has seven Directors including the Chairman and Managing Director and threeFunctional Directors as per the following details.

Name Category Directorship in Other Companies.

Sh.R.S.P. Sinha Chairman and Managing Director. Chairman of MTML, MTNLSTPI ITServices Ltd. MTL & Director of UTL.

Sh. V.Shivakumar Director (HR) ----

Sh. Kuldip Singh Director (Technical) Director, MTNLSTPI IT ServicesLtd.,MTML, MTL

Smt.Anita Soni Director (Finance) Director, MTNLSTPI IT Services Ltd.and MTL

Sh.M. Sahu Government Director Director, BSNL.

Smt. Annie Moraes Government Director ----

Dr.S.Balasubramanian Part-Time Director ----

2.1 Attendance of Directors at the Board Meeting and the last Annual General Meeting.The Company holds regular Board Meetings. The detailed agenda along with the explanatorynotes is circulated in advance. The Directors can suggest inclusion of any item(s) in the agendaat the Board meeting.

During the year 2005-06,ten meetings were held.

The attendance of the Directors at the Board meetings and Annual General Meetings held during the year2005-06 was as follows:-

Name of the Director No. of Board Perce- Attendance at Remarksmeetings ntage the last AGMAttended (%) held on

28th September,2005

Sh. R.S.P.Sinha 10 out of 10 100 Yes -

Sh. V.Shiva Kumar 10 out of 10 100 Yes -

Sh. Kuldip Singh 10 out of 10 100 Yes -

Smt. Anita Soni 9 out of 9 100 Yes Assumed off ice w.e.f .26.04.2005

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MTNLSh. A.K.Girotra 2 out of 2 100 Not Applicable Ceased to be director

w.e.f. 30.06.2005

Sh.Kupdeep Goyal 6 out of 6 100 Yes Ceased to be directorw.e.f. 28.10.2005

Sh. Y.S.Bhave 3 out of 3 100 Not Applicable Ceased to be directorw.e.f. 05.08.2005

Sh. M.Sahu 4 out of 7 57 No Assumed off ice w.e.f .05.08.2005

Sh. A.C.Padhi 9 out of 10 90 Yes Ceased to be directorw.e.f. 25.04.2006

Sh. Adhik Shirodkar 2 out of 5 40 No Ceased to be Directorw.e.f. 28.09.2005

Dr.S.Balasubramanian 3 out of 3 100 Not applicable Assumed off ice w.e.f .05.11.2005

DETAILS OF BOARD MEETING HELD DURING 2005-06

Sl. Meeting No. Date Place No. of Directors present

1 204 April 25, 2005 New Delhi 7

2 205 June 21, 2005 New Delhi 8

3 206 July 25, 2005 New Delhi 8

4 207 September 16, 2005 New Delhi 8

5 208 September 28, 2005 New Delhi 6

6 209 October 17, 2005 New Delhi 6

7 210 October 28, 2005 New Delhi 6

8 211 November 25,2005 New Delhi 7

9 212 January 30, 2006 New Delhi 6

10 213 February 23,2006 New Delhi 6

2.2 DETAILS OF MEMBERSHIP OF BOARD COMMITTEESNone of the Directors of the Company hold memberships of more than ten Committees nor is any Director/Chairman of more than five Committees of Boards of all the companies where he holds Directorships. Forthis purpose committees comprise Audit Committee and Shareholders'/Investors' Grievance Committee.

2.3 CODE OF CONDUCT FOR DIRECTORS AND SR. MANAGEMENT PERSONNELThe Board in its Meeting held on 30th Jan 2006 has adopted the Code of Conduct for Directors andSenior Management Personnel as per the requirement of clause 49 of the Listing Agreement dealingwith Corporate Governance. The Code is comprehensive Code applicable to all Directors and SeniorManagement Personnel Viz. Executive Directors, General Managers and all functional heads of thecompany. The Code lays down in detail the standard of business conduct, ethics governance andcenters around the following theme:

22

MTNL"Integrity and transparency are the core value in all our business dealings. We shall act in compliancewith applicable laws and regulations, in a manner that excludes considerations of personal advantageand will not compromise in our commitment to honesty and integrity in any aspect of our business. Weare committed to excellence, in all our endeavours".

3. AUDIT COMMITTEE

The scope of the Audit Committee has been defined by the Board of Directors in accordance with theprovisions of the Companies Act read with clause 49 of the listing agreement, which among others, includes:-

Reviewing the Company's financial reporting processes and systemsRecommending the appointment and removal of statutory auditors, taking decisions regarding auditfee and related expensesReviewing the Company's financial and risk management policiesReviewing with management the quarterly and annual financial statements, before submission to theBoard, focusing primarily on:

changes in accounting policies and practices;major accounting entries, qualifications and accounting issues based on the managementsdiscretion and judgement;compliance with the accounting standards;compliance with the stock exchange and legal requirements, concerning financial statements;any related party transactions; andinternal audit processes and systems

The Audit Committee specifically reviews the un-audited quarterly financial results before these are submittedto the Board for approval. Minutes of each Audit Committee meeting are placed before the Board for information.

Since all posts of non-official part-time directors on the Board of MTNL had fallen vacant since last AGMheld on 28.9.05 (A/N), the Audit Committee of the Board ceased to exist. However to comply with theprovisions of NYSE corporate governance standards the Committee was re-constituted with two GovernmentDirectors namely Sh.M.Sahu, Sh.A.C. Padhi and Smt. Anita Soni, Director (Finance) being PermanentInvitee, pending the appointment of non-official part time directors on 29.09.2005. After appointment of Dr.S. Balasubramanian as a part time Director, the committee was again reconstituted on 25th November2005 and after joining of Smt Annie Moraes it was again reconstituted on 25TH April 2006. Presently, theAudit Committee consists of the following directors:-

1. Dr.S.Balasubramanian Chairman2. Sh. M. Sahu Member3. Smt. Annie Moraes Member4. Smt. Anita Soni, Director (Finance) Permanent Invitee

3.1 Meetings and attendanceThe Audit Committee held three meetings after its reconstitution during the year 2005-06.

The members' attendance at the Committee Meetings was as under:-

S. No. Name of Director No. of meetings attended1. Dr.S.Balasubramanian 1 out of 1

2. Sh. M. Sahu None out of 3

3. Sh. A.C.Padhi 3 out of 3

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MTNL4. SHAREHOLDERS'/INVESTORS'GRIEVANCES COMMITTEE

Terms of Reference:-To look into the investors' complaints, if any, and to redress the same expeditiously. The Committeeoversees and reviews all matters connected with the Securities' transfers. The Committee looks intoredressing of shareholders complaints like non-receipt of Balance Sheet, non-receipt of dividends,etc. The Committee oversees the performance of the Registrar and Transfer Agents, and recommendsmeasures for overall improvement in the quality of investor services.Since all posts of non-official part-time directors on the Board of MTNL fell vacant on 28.9.05 (A/N)i.e. the last AGM, the Shareholders'/investors'grievances Committee of the Board ceased to exist.Hence no meeting of the Shareholders'/Investors' Grievances Committee was held during April 2005to Dec 2005 However after appointment of Dr.S.Balasubramanian as a part time Director thecommittee was reconstituted on 25th November 2005 and after joining of Smt Annie Moraes it wasagain reconstituted on 25th April 2006 as under:

1. Dr.S.Balasubramanian Chairman2. Smt. Annie Moraes Member3. Smt. Anita Soni, Director (Finance) Member

4.1. MEETINGS AND ATTENDANCEThe Investors' Grievance Committee held one meeting after its reconstitution during the year 2005-06and all the members of the committee attended it.

5. SHARE TRANSFER COMMITTEEPursuant to clause 47A of the Listing Agreement the Board has delegated the powers to approvetransfer of securities, issue of duplicate shares, request for issue of new certificates on split/consolidation etc., to a committee of officers consisting of Company Secretary and Dy. CompanySecretary. The Committee held regular meetings during the year and approved the transfer of shares,transmission of shares, Dematerialization of shares, rematerialisation of shares and issue of duplicateshares. No share transfer request case is pending as on the date of the preparation of this report.

5.1. DETAILS OF SHAREHOLDERS/INVESTORS' COMPLAINTS ARE GIVEN HEREUNDER:-No. of Share holders’ No. of Shareholders No. of Shareholderscomplaints Received complaints Solved complaints as on 31.03.06*

1470 1396 74

* These complaints have since been resolved.

6. COMPANY SECRETARYName of the Company Secretary Sh. S.C. AhujaAddress Jeevan Bharti Building, 12th floor, Tower I,

124 Connaught Circus, New Delhi - 1.Contact Telephone 011-23327225Fax 011-23716655

7. COMPLIANCE OFFICERName of the Compliance officer Sh. S.C. AhujaAddress Jeevan Bharti Building, 12th floor, Tower I,

124 Connaught Circus, New Delhi - 1.Contact Telephone 011-23327225Fax 011-23716655

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MTNL8. REMUNERATION COMMITTEE

The whole time Directors of the company including the Chairman and Managing Director are appointedby the Government of India and are being paid remuneration as per the terms of their appointment.The Company, therefore, has not constituted a Remuneration Committee. The non-official part-timeDirectors are paid Rs.5000/- by way of sitting fees for every meeting of the Board/Committee of theBoard attended by them. No other remuneration is paid to the non-official part-time Directors.

9. DISCLOSUREa. All the relevant information in respect of materially significant related party transactions, i.e.

transactions of the Company of material nature with its Promoters, Directors or Management, ortheir relatives or subsidiaries of the Company, etc. having potential conflict with the interest ofthe Company at large has been given in the Annual Accounts.

b. The Company has complied with statutory compliances and no penalty or stricture has beenimposed on the Company by the Stock Exchanges or SEBI or any other statutory authority onany matter relating to the capital markets during the last three years.

10. MEANS OF COMMUNICATIONa. The quarterly and half yearly results were published in English and Hindi Newspapers.b. The Company's Audited & Un-audited periodic financial results and Press Releases are posted

on the Company's website.c. Detailed Management Discussion and Analysis Reports have been included in this Annual Report.d. The Company has also posted information relating to its financial results on Electronic Data Information

Filing and Retrieval System (EDIFAR) as required by the Bombay Stock Exchange Ltd..

11. GENERAL BODY MEETINGSLOCATION AND TIME FOR LAST THREE ANNUAL GENERAL MEETINGS WERE:

Nature of meeting Date and Time Venue

Nineteenth September 28, 2005 FICCI Golden Jubilee Auditorium,Annual General Meeting at 3.00 P.M. Tansen Marg New Delhi-110 001

Eighteenth Annual September 29, 2004 FICCI Golden Jubilee Auditorium,General Meeting at 4.00 P.M. Tansen Marg New Delhi-110 001

Seventeeth Annual September 20, 2003 Conference Hall, Mahanagar DoorGeneral Meeting at 11.00 A.M. Sanchar Sadan, 9 CGO Complex,

Lodi road, New Delhi-110003.

••••• Whether special resolutions were put through postal ballot last year?No special resolution was passed last year, so there was no requirement of postal ballot.

Person who conducted the Postal Ballot exercise.Not applicable.

••••• Whether special resolutions are proposed to be conducted through postal ballot?If any Special resolution on matters notified vide Companies (Passing of the resolution by postalballot) Rules, 2001 read with section 192A of the Companies Act, 1956 is required to be passed, thesame will be passed through Postal ballot.

••••• Procedure for Postal Ballot.The procedure shall be as per the provisions of the Companies Act, 1956 read with Companies(Passing of the resolution by postal ballot) Rules, 2001.

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MTNL12. GENERAL SHAREHOLDER'S INFORMATION:(i) Annual General Meeting

Date and Time - 26th September 2006, 11.00 A.M.

Venue - FICCI Golden Jubilee Auditorium, Tansen Marg

New Delhi-110 001

(ii) Dates of Book Closure - 20th September to 26th September 2006.

(iii) Dividend Payment - Within 30 days from the date of AGM

(iv) Financial CalendarFinancial Year of the Company is from April 1st to March 31st.

Board Meeting for considering Audited Annual Accounts for the yearended 31st March, 2006 & recommendation of dividend. 30th June 2006

Submission of Audited Accounts to Comptroller and AuditorGeneral of India. 30th June 2006

Board Meeting for considering Unaudited quarterly financial resultFor the quarter ended 30th June, 2006. 28th July 2006

For the quarter ending 30th September, 2006. End of October 2006

For the quarter ending 31st December 2006. End of January, 2007.

For the quarter ending 31st March, 2007. End of April, 2007.

(v) Registered Office - Mahanagar Telephone Nigam Limited.Jeevan Bharti Building,Tower-I, 12th Floor,124, Connaught Circus,New Delhi-110001.Tel: 911123742212Fax: 911123716655

(vi) Listing Details - The Equity Shares of the Company are listed on the followingStock Exchanges:

(i) The Delhi Stock Exchange Association LimitedDSE House,3/1, Asaf Ali Road,New Delhi-110002.Tel: 011-23292039/40Fax: 011-23292181

(ii) Bombay Stock Exchange Limited, MumbaiRotunda Building,Phiroze Jeejeebhoy Towers, Dalal Street,Mumbai-400001.Tel: 022-22655614/21/22Fax: 022-22721072

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MTNL(iii) The Calcutta Stock Exchange Association Limited

7, Lyons Range,Kolkata-700001.Tel: 033-22201488/22206957/22209366Fax: 033-22104500

(iv) Madras Stock Exchange Limited11, Second Lines Beach.Chennai-600001.Tel: 044-25224382/83/93Fax: 044-25244897.

(v) The National Stock Exchange of India LimitedExchange Plaza, 5th floor,Plot No. C/1, G Block,Bandra-Kurla Complex, Bandra(E)Mumbai-400051.Tel: 022-26598100/8235/8236Fax: 022-26598237/8238.

(vi) New York Stock Exchange11, Wall Street,New York. (For ADRs)

The Listing Fee for the Financial Year 2006-07 has been paid to all stock exchanges.

(vii) Name and Designation of - Shri S.C.AhujaCompliance Officer Company Secretary

Jeevan Bharti Building Tower-I, 12th Floor,124, Connaught Circus, New Delhi-110001Tel: 91-11-23742212/23327225Fax: 91-11-23716655Email: [email protected].

(viii) (a) Stock CodeBombay Stock Exchange - 'MAHANGR TELE 108'Delhi Stock Exchange - '13069'Madras Stock Exchange - 'MTP'National Stock Exchange - 'MTNL EQ'Calcutta Stock Exchange - '23036'New York Stock Exchange - 'MTE'

(b) Demat ISIN Numbers in - INE 153A01019NSDL & CDSL.

(ix) Registrar and Transfer Agents - M/s. Beetal Financial &Computer Services (P) Ltd.3rd Floor, Beetal House, 99,Madangir, Behind LocalShopping Centre, Near Dada Harsukhdas Mandir,New Delhi - 110 062.Ph: 011 29961281-82Fax No.: 011- 29961284

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MTNL(x) Stock Market Data - The monthly high, low, closing prices & volume for the month at each

of the Stock Exchanges where the Company's shares are listed aregiven in the following table:-

BOMBAY STOCK EXCHANGE (BSE)

MONTH HIGH LOW CLOSE QUANTITYApril, 2005 123.50 110.00 116.45 6768023May , 2005 122.35 113.00 120.90 4646288June, 2005 127.00 115.15 115.80 4725623July, 2005 142.40 116.20 133.35 14850288August, 2005 135.00 121.00 127.10 6576959September, 2005 138.00 125.00 127.50 5732591October, 2005 141.46 108.00 109.65 9418077November, 2005 128.80 111.90 119.55 8521161December, 2005 150.35 118.80 144.20 37605923January ,2006 154.50 135.00 141.70 17688807February ,2006 158.00 132.50 142.55 17012095March,2006 194.70 141.10 183.80 47067046

NATIONAL STOCK EXCHANGE (NSE)

MONTH HIGH LOW CLOSE QUANTITYApril, 2005 124.40 110.30 116.70 20297675May , 2005 122.45 112.25 120.90 16691289June, 2005 126.70 115.00 115.40 14215040July, 2005 142.25 116.10 133.30 10340551August, 2005 134.90 120.85 127.20 19473425September, 2005 139.10 121.00 127.45 18245134October, 2005 141.40 108.25 109.85 25535811November, 2005 128.70 112.00 119.70 24717613December, 2005 150.40 118.50 144.20 101570426January ,2006 156.90 134.85 141.70 49309070February ,2006 156.90 132.10 142.65 49925317

March,2006 194.75 140.10 183.70 121491632

(xi) Share Transfer System - As per the directives of Securities & Exchange Board of India,the Equity Shares of your Company have been mandated fortrading in dematerialized form by all categories of investors since 1997.

Share transfers in physical form are registered, if documents arecomplete in all respects, and returned within 15 days from thedate of receipt in most cases and in any case within 30 days fromthe date of receipt.

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MTNL(xii) Distribution of Shareholding (AS on 31.3.2006)

( NOMINAL VALUE OF EACH SHARE/UNIT RS 10 )

SHARE NUMBER OF % TO NO OF SHARES AMOUNT IN Rs. % TOHOLDING OF SHAREHOLDE TOTAL TOTALNOMINAL RSVALUE OF RS.

UP TO 5000 65,318 92.51 71,93,436 7,19,34,360 1.1418

5001 TO10000 2,569 3.64 21,16,099 2,11,60,990 0.3359

10001 TO20000 1,178 1.67 18,40,038 1,84,00,380 0.2921

20001 TO30000 425 0.60 10,75,024 1,07,50,240 0.1706

30001 TO40000 208 0.29 7,34,635 73,46,350 0.1166

40001 TO50000 161 0.23 7,62,841 76,28,410 0.1211

50001 TO100000 289 0.41 20,85,828 2,08,58,280 0.3311

100001 ANDABOVE 458 0.65 61,41,92,099 6,14,19,20,990 97.4908

TOTAL 70,606 100.00 63,00,00,000 6,30,00,00,000 100.00

a) Dematerialization of Shares - As on 31st March 2006, almost all shares of the Company'sequity share capital avai lable in the market is indematerialized form. The Company has entered intoagreements with both the depositories viz. NationalSecurities Depository Ltd. (NSDL) and Central DepositoryServices Ltd. (CDSL), whereby shareholders have an optionto dematerialize their shares with any of them.

b) Liquidity - MTNL shares are actively traded in the Indian StockExchanges and NYSE. MTNL shares consistently rankamong the top few traded shares, both in terms of volumeand value. The Shares of the Company are traded in the"A" Group at the Bombay Stock Exchange and are includedin the NIFTY index on the NSE.

(xiii) Investor Services under MCA 21 PortalMinistry of Company Affairs (MCA) has launched a major e-Governance initiative christened as"MCA-21" on the MCA portal (www.mca.gov.in). One of the key benefits of this initiative includestimely redressal of investor grievances.

29

MTNLMCA-21 system accepts complaints under the e-Form prescribed, which has to be filed online. Thenature of compliant may relate to

• Shares/Dividend• Debentures / Bond• Fixed Deposits - non-receipt of amount• Miscellaneous - non-receipt• Any other

The status of complaint can be viewed by quoting the Service Request Number (SRN) provided atthe time of filing the complaint.

(xiv) Status of unclaimed and unpaid dividend for different years.

The Unclaimed Dividends have been transferred to the Govt. of India/IEPF as and when becamedue (upto 1997-98).

Information in respect of unclaimed and unpaid dividend declared for 1998-99 and thereafter isgiven below and the shareholders who have not received the same, may claim it from the Companybefore the dates mention herein.

Financial Year ended Date of declaration of Last date for claiming unpaidDividend dividend.

31.03.1999 30th September 1999 29th September 2006







(xv) Procedure to get changes in address registered in the Company's records.

Shareholders holding shares in physical form, may send a request letter duly signed by all theholders giving the new address along with Pin Code. Shareholders are also requested to quote theirfolio number and furnish proof such as attested copies of Ration Card/ PAN card/ Passport/ Latestelectricity or telephone bill/Lease Agreement, etc. If shares are held in dematerialised form,information about change in address needs to be sent to the DP concerned.

(xvi) Procedure for registering change of name of shareholders.

Shareholders may request the Company's R&TA for effecting change of name in the sharecertificate(s) and records of the Company. Original share certificate(s) alongwith the supportingdocuments like marriage certificate, court order etc. should be enclosed. The Company's R&TA,after verification, will effect the change of name and send the share certificate(s) in the new nameof the shareholders. Shareholders holding share in demat form, may request the concerned DP inthe format prescribed by DP.

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MTNL(xvii) BRIEF RESUME OF THE DIRECTORS PROPOSED TO BE APPOINTED/REAPPOINTED AT THE

ANNUAL GENERAL MEETING:

i) Sh. M. Sahu - Government Director

Mr. M. Sahu has been a member of our Board since September 16, 2005 and is presentlyworking as Joint Secretary in the Department of Telecommunications. After obtaining thedegree of Bachelor of Electrical Engineering in 1977, Mr. Sahu has done Post-GraduationDegree in Development Administration from the University of Brimingham, U.K. in 1993-94with focus on Industrial Development and re-location of Industries. Prior to this, Mr. Sahuworked in UNIDO as Project Director. He was working as Joint Secretary in Ministry ofEnvironment & Forests and worked in different departments in Govt. of Gujrat in variouscapacities. He has more than 23 years of experience in Civil Service and 15 years practicalexperience in industries including that of more than 5 years in Govt. of India.

ii) Dr. S. Balasubramanian - Independent DirectorDr.S. Balasubramanian has been a member of MTNL Board since 25.11.05 as Non-officialpart-time Director. He holds M.A.(Economics) degree, M.Phil (Economics) degree, Ph.D (Eco)and DSS from University of Madras. He served as Professor of Economics in Madras Universityfor 28 years as well as served as Head of Deptt. Of Economics for 15 years in PresidencyCollege, Chennai. He has published several publications on Socio-Economic thoughts etc.He has also served as a Member of Tamilnadu Public Service Commission.

Any queries relating to the financial statements of the Company can be addressed to:-

Mrs. Anita SoniDirector (Finance)Jeevan Bharti Building, Tower - I, 12th floor124 Connaught Circus, New Delhi - 110 001.Tel: 23321095/ 23710460 Fax : 23738361

_______________________

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MTNLMANAGEMENT DISCUSSIONS & ANALYSIS

This discussion contains forward looking statements, the performance of the company for the year 2005-06 and an outlook for the future. The report conveys expectations on future performance based on anassessment of current business environment. These could vary based on future developments.

INDUSTRY STRUCTURE & DEVELOPMENTSOver the past few years, the role of Telecom Industry evolved from a support function into a strategicnecessity for businesses. The Telecom Sector is one of the fastest growing sectors of the Indian Economy.The company is well equipped to keep pace with the growing economy of the country. During the year therewas a tremendous increase in the cellular and Broadband subscriber base. The company has accordinglycontinued to provide a sustained push to mobile and Internet services through an expanding network andthrough a large range of services to fast expanding customer base.Our performance exudes from our belief in and commitment to the telecom sector; and translates intocreating innovative exciting opportunities for one and all.

FINANCIAL PERFORMANCEThe financial performance of the company for the year ended 31st March 2006 has to be viewed in thelight of extremely challenging business conditions. The company intensified its efforts to increase itsmarket share in Mobile and Broadband Internet services. A significant proportion of the company'srevenues are derived from the landline customers. The company is making continuous efforts to retainthese customers by providing high quality services.Despite stiff competition from other operators your Company has achieved a financial turnover of Rs. 60909.98million, during the year under review, as compared to the previous year's turnover of Rs. 60737.88 million.There was downward revision of tariff charges based on regulatory rules & regulations introduced duringthe year; still your Company registered a profit of Rs.6713.58 million before tax as against Rs. 12156.67million for the previous financial year.Your company made Net profit of 5802.92 million for the financial year under review as against Rs.9389.79 million for the previous financial year.

OUTLOOKMTNL has emerged as the No. 1 GSM operator in terms of new subscriber additions in Delhi and Mumbaiduring 2005-06. We have become more popular than our private competitors in the two metros. MTNL hassurpassed the competition by adding 10,59,459 new GSM customers during 2005-06. GSM customers ofMTNL Mumbai crossed one million mark on 31st March 06. MTNL Mumbai achieved a record sale ofTrump Recharge coupons of Rs 1,30,37,578/- on a single day i.e on 31st March 06.It is pleasant to state that through the Readers Digest's "Most Trusted Brand Survey 2006" our esteemedcustomers have voted us as the "Best Telecom Company" and putting only MTNL in the Platinum Categoryof the most trusted brands. This is reflective of our sincere efforts put in through the recent past.MTNL in its endeavor to provide third generation (3G) services intends to be one of the first telecomcompanies to start telecommunication services under 3G technology. The company has already startedexpansion of its GSM operation and expects to add two millions GSM capacity with 3G capability.Procurement of convergent billing system for MTNL is being done. Once the system is in place it will addto the convenience of our esteemed customers.The company has achieved a milestone in broadband customer base by having the highest number ofbroadband customers in Delhi and Mumbai as on 31st March 06. MTNL also continues to be a dominantISP by maintaining an impressive growth rate in the last financial year. MTNL has launched seamless,reliable and scalable layer 2 VPN service using the broadband network in Mumbai. This service is suitablefor corporate customers who need multiple connectivity for their dispersed offices within Mumbai.

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MTNLOur maiden NLD initiative between Delhi and Mumbai has been well appreciated by our customers and isborne out by the fact that voice traffic between Delhi & Mumbai has already doubled. We also expect thatdemand for landline will also pick up in due course. The churn in fixed lines, however, remains to be anarea of major concern. It is expected that with launch of Broadband service as well as other measures thetrend should be reversed.

OPPORTUNITIES AND THREATSTelecom sector is booming. After the liberalization policy in 1992, the government protected TelecomSector was thrown open for private players. Since then, Indian Telecom Industry made rapid strides andthrown open enormous challenges and opportunities to tackle. Technology supported by India's steadygrowth rate has made Telecom, a sought after profitable investment. More competition is yet to be facedwith the ceiling on Foreign Investments increasing from 49 percent to 74 percent.Telecom operators worldwide are looking for killer applications of 3G services. They are hoping thatmobile TV will provide opportunities like telecast of live sports events, movies, video on demand, cablenetwork etc. MTNL is expected to be one of the first companies that would be ready with 3G Networkwhich is essential for providing services requiring high band width on mobile. The company has alreadyplaced advance orders for buying and deploying network in Mumbai and is in process of ordering for Delhi.Broadband has once again brought the fixed wire connectivity into focus and MTNL would endeavour toreach more than two million customers utilizing the existing telecom infrastructure by end of 2007.There are about 3.8 million fixed lines in Delhi and Mumbai under MTNL network. TRAI had suggestedway back in April 2004, non-discriminatory local loop unbundling (LLU) so that the access networks of theBasic Service Operators (BSOs) could be shared with Internet Service Providers (ISP) and other competingoperators for improving broadband penetration. However, MTNL view LLU as infringements on its propertyrights and hence have requested the government for not implementing the same.Unbundling of local loop is one of the contentious issue between DOT and private operators.MTNL developed the telecom infrastructure to a sufficiently respectable level specially connecting theremotest corners of both the metros through copper and optical fibre. It comprises major part of itsinvestment and returns on this investment form part of MTNL's growth plans.Another area of concern is the allocation of the spectrum by the DOT. MTNL will require spectrum both forexisting 2.5 G services as well as expansion of 2.5G and introduction of 3G services.Introduction of CDMA 1x system in WLL network has opened up the new era of technology in CDMAservices and company is looking forward to further consolidation of market share in mobile services. Thesurrender of landlines connections has declined significantly and the value added services provided tolandline customers are being highlighted to retain these customers. Downward trend in tariffs as well aschurning of fixed line subscribers, however, remain major areas of concern for the Company.MTNL high staff strength is both an opportunity to tap the large talent pool available to expand into newareas of work; it is also a matter of concern since staff costs limit MTNL's flexibility to compete and putpressure on margins. However, since MTNL operates in the two most affluent cities of the country, whichoffer ample opportunities for growth, MTNL is looking at various avenues of investment and generation ofrevenues by exploiting its assets.Your company is striving towards building, maintaining and sustaining high customer support servicesand by providing better after sales services through training and re-training of existing manpower and alsoby selective intake of young and experienced professionals at appropriate levels. Thus furthering thevision of our Company of becoming a Global Telecom Giant.The stiff competition from other operators and downward revision of access deficit charges based onregulatory changes introduced by regulator has adversely affected the profits of the company.The austerity measures taken by your company during the year under review will improve the operativeperformance of the company.

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MTNLThe company is today having a strong workforce of over 51000 and is all set to leverage their productivecapabilities and unleash their creative potential for better business propositions and deliver value tocustomers and shareholders.

The company is also taking steps towards developing a knowledge pool in the emerging technologies likeGSM, CDMA, Wi-MAX, Broadband etc. Knowledge Management has been identified as a key strategicinitiative, which shall build a talented and knowledge driven workforce fully geared to transform thechallenges into opportunities.

NEW DEVELOPMENTS AND SCHEMESTo attract the new customers in Mobile services and to retain the landline customers your company hadlaunched number of new schemes and modified the existing schemes to fulfill the needs and expectations of allcategories of customers. Some of the schemes launched during the year are as follows:

(1) MTNL has launched its National Long Distance Service (NLD) between Delhi and Mumbai in the presenceof Minister of Communications and Information Technology in the month of May 2006. HonorableMoC&IT Thiru Dayanidhi Maran lauded the initiative of MTNL and expressed his confidence that moreand more competition will lead to further lowering of bandwidth prices, which will make IT and ITeSindustry more competitive internationally.

(2) We have tied-up with M/s VSNL for bandwidth for traffic carriage between Delhi and Mumbai. This tie-upwill lead to considerable savings in our carriage charges and thus reduction in call rates for our esteemedcustomers.

(3) Your company has brought Delhi and Mumbai landline network under 95-dialing facilitiy (local call).Delhi-Mumbai calls will be cheaper on MTNL landlines, the new rates are about 78% lower, i.e Rs 1.20 fora three-minute call. Subscriber are elated over the steep drop in STD charges between Delhi and Mumbai.The call rate expected to register a good rise in Delhi-Mumbai Traffic.

(4) MTNL Mumbai has introduced 'Reverse Query Service' (1297) for its customers. Through this service,one can get the address of any fixedline customer whose telephone number is known.

(5) In order to enhance covenience to its customers MTNL in association with M/s Creative Network Technologyhas introduced a premium rate service (126126) based on IVRS for landline customers. The service willprovide complete and prompt information pertaining to Western Railways.

(6) MTNL Mumbai has reduced ISD call rates for its Dolphin mobile customers, effective from 11th May 06.However these rates are not effected on Dolphin "One India & Jeevan Saathi" plans.

(7) As a customer friendly initiative MTNL Mumbai has offered 10% additional talktime on select Trumprecharge coupons on denomination of Rs.500 and above.

(8) To further promote the sale of Post paid GSM connections and increase the revenue from calls, MTNLDelhi has launched an attractive discount scheme for the users of Dolphin JeevanSaathi. Discount shallbe extended to the users of Dolphin Jeevan Saathi for local calls made.

(9) MTNL Delhi provided special services for checking the CBSE results of class 10th, 12th, AIEEE andPMT through landline IVRS, SMS from MTNL mobiles and through MTNL's websites to facilitate quickand easy access to CBSE results for our esteemed customers.

(10) One India Plan was launched on 1st March, 2006.

(11) A Triband Prepaid Broad Band connection ( Both Volume And Time Based) scheme was also launchedin the month June 2006.

(12) MTNL intends to introduce WiMAX technology, WiMAX enables broadband access at a download speedof upto 75 mbps through wireless. WiMAX works best for computing platforms such as laptops.

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MTNLHUMAN RESOURCE DEVELOPMENTYour Company attachés the highest priority to the quality of intellectual capital at its disposal and believes thatknowledge and skill level of its employees are the key to achievements of its corporate mission. MTNL has asound recruitment policy and comprehensive training system.During the past one year, your Company has laid greater emphasis on Human Resources Development. Wehave been devoting substantial resources on building a skilled workforce that has an innate capability to counterthreats posed by ever changing business environment and to take advantages of opportunities presented toserve ever increasing customer base.Your Company has been conducting various training and development activities which apart from reorientingthe employees towards the greater organizational purpose, are also focusing on eliminating any skill gap andtechnical obsolescence. The management's view on training is one of development of employees' overallpersonality and enabling them in becoming a vital productive resource.

INTERNAL CONTROL SYSTEM & THEIR ADEQUACYThe company has internal control system commensurate with its size and nature of business and meeting withfollowing objectives:-(i) Efficient use and safeguarding of resources(ii) Compliance with statutes, policies and procedures(iii) Transactions being accurately recorded and promptly reported

The Internal Control System provides well-documented policies, guidelines authorizations and approvalprocedures. The internal Audit Department conducts periodic audits across all locations and all functionsthroughout the year. The observations raised out of the audit are subject to periodic review and compliancemonitoring. The Audit Committee of the Board on a regular basis reviews the internal audit Reports along withthe report of the status of implementation of recommendations contained therein.

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MTNLV.K. SHARMA & CO.Company SecretariesB-2, Ansal Towers, Nehru Place, New Delhi-110 019Tel. : 26440966, 26423115, Mobile : 9811009592E-mail : [email protected]

CERTIFICATE OF COMPLIANCE AS STIPULATED UNDER CLAUSE 49OF THE LISTING AGREEMENT OF THE STOCK EXCHANGES OF INDIA

To,The shareholders

We have examined the compliance of conditions of Corporate Governance by Mahanagar TelephoneNigam Limited for the year ended 31st March 2006, as stipulated in clause 49 of the Listing Agreement ofthe said Company with stock exchanges in India.

The compliance of conditions of Corporate Governance is the responsibility of the management. Ourexamination was limited to procedures and implementation thereof, adopted by the company for ensuringthe compliance of the conditions of Corporate Governance. It is neither an audit nor an expression on thefinancial statements of the company.

In our opinion and to the best of our information and according to the explanations given to us, we certifythat the company has complied with the conditions of Corporate Governance as stipulated in the abovementioned Listing Agreement except that:1. The composition of the board of directors is not as per the stipulation as regards number of non-

executive directors and independent directors as required by the Clause.2. The Audit Committee and the Shareholder's / Investors Grievance Committee which had ceased to

exist as of 30.09.04 due to retirement of independent directors, were reconstituted only on 29.09.05without any independent director and again reconstituted on 25.11.05 with one independent directoras Chairman of these committees after the independent director joined. In the absence of requisitenumber of independent directors the composition of both the committees lack the mandatory twothird independent directors..

3. To the extent that the Audit Committee and the Shareholder's / Investors Grievance Committee werereconstituted with delay, the requirements of the Clause 49 of the Listing Agreement were not met.

4. A review of compliance of all laws applicable to the company is yet to be placed before the board.5. The Chairman of the Audit Committee was not present in the Annual General Meeting of the company

held on 28th September 2005.6. The procedure about risk management and minimisation procedures has been prepared but is yet

to be placed before the board.As per information furnished to us the company had 74 investor grievances pending as on 31st March2006 which have been satisfactorily solved on the date of this report.

We further state that such compliance is neither an assurance as to the future viability of the companynor the efficiency or effectiveness with which th management had conducted the affairs of the company.

For V.K.SHARMA & CO.Company Secretary

(V.K.Sharma)


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MTNL

Annual AccountsAnnual AccountsAnnual AccountsAnnual AccountsAnnual Accounts(2005-06)(2005-06)(2005-06)(2005-06)(2005-06)

37

MTNLDHAWAN & CO.

Chartered Accountants312, Wegmans House, 21, Veer Savarkar Block,

Shakarpu, Vikas Marg, Delhi-110092Ph. : 011-22017651, Fax : 011-22025360

AUDITORS’ REPORT TO THE MEMBERS OFMAHANAGAR TELEPHONE NIGAM LIMITED

The Members of Mahanagar Telephone Nigam Limited1. We have audited the attached Balance Sheet of Mahanagar Telephone Nigam Limited as at March 31,

2006, the Profit and Loss Account and the Cash Flow Statement of the Company for the year ended on thatdate, annexed thereto, in which, the accounts of 3 units namely Delhi unit, Mumbai unit and MS unit (Delhi& Mumbai both) are incorporated, which are audited by the branch auditors appointed by the Comptroller &Auditor General of India. These financial statements are the responsibility of the company's management.Our responsibility is to express an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with the Auditing Standards generally accepted in India. Thesestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by the management, as wellas evaluating the overall financial statement presentation. We believe that our audit provides a reasonablebasis for our opinion.

3. As required by the Companies (Auditor's Report) Order, 2003 as amended by the Companies (Auditor'sReport) Order, 2004 (together the 'Order'), issued by the Central Government of India in terms of Section227 (4A) of the Companies Act, 1956, and on the basis of such checks as we considered appropriate andaccording to the information and explanation given to us, we give in the Annexure, a statement on thematters specified in paragraphs 4 and 5 of the said Order, to the extent applicable to the company.

4. Further to our comments in the Annexure referred to in paragraph 3 above and subject to: -i) Based on the legal opinion received by the Company, the management is claiming benefit

under section 80 - IA of the Income Tax Act, 1961. The benefit is claimed on operationalprofit earned by the Company. Provision for Income Tax for the Financial Years 1999 - 2000to 2005 - 06 was made after considering such benefit. However, Provision for Income Taxfor the years 1996 - 97, 1997 - 98 & 1998 - 99 was made without considering such benefit. TheCompany had revised its Income Tax Return for the financial year 1997 - 1998 and filed theReturn for the financial years 1998 - 1999 to 2004 - 2005 after considering benefit underSection 80 IA of the Income Tax Act, 1961. In case, the benefit under Section 80 IA of theIncome Tax Act is finally accepted, the Provision for Income Tax for these years viz. 1996 -97, 1997 - 98 & 1998 - 99, will be excess to the extent of Rs. 7442.80 Millions and in the eventof the tax benefit claimed by the Company under Section 80 - IA not being finally acceptedby the Income Tax authorities, provision for taxation as at 31st March, 2006 would be higherby Rs. 14,203.65 Millions.

ii) Non - Provision of 1/5th of the VRS Compensation payable to the employees, who opted forVRS during the year amounting to Rs. 138.27 Millions. The Profit of the company for theyear, therefore, is overstated to that extent. The total amount payable under VRS is Rs.691.36 Millions. Consequently, the Current Liabilities are understated by Rs. 691.36 Millionsand Deferred Revenue Expenses are understated by Rs. 553.09 Millions.Further, no provision has been made for VRS compensation payable to employees, whoopted for VRS upto 31st March 2006, for the Scheme launched on 28th March 2006 and

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MTNLclosed on 10th April 2006. The impact of the same has, however, not been ascertained bythe company. The final calculation may have an impact on the Profitability of the company.(Refer Note No. 15).

iii) Pending resolution of dispute, an amount of Rs. 1044.84 Millions (Being amount depositedwith the company) has been booked as income in respect of bills of Rs. 3412.74 Millionsraised earlier to one UASL operator. The matter is sub-judice and actual amount dependson the order of the court / arbitrator. The Profit of the company, therefore, is overstated byRs. 1044.84 Millions and the Current Liabilities are understated by an equivalent amount.(Refer Note No. 12).

iv) Booking of Income of Rs. 2481.67 Millions on account of charges for usage of MTNL TrunkAutomatic Exchange (TAX) by BSNL for the period from 01.02.2004 to 31.03.2006, which hasbeen rebutted by BSNL. The Profit of the company, therefore, is overstated to that extentand Current Assets of the company are overstated by an equivalent amount. [Refer Note No.13 (b)].

v) As per the Significant Accounting Policy No. 2 (v) of Schedule - T, the assets scrapped / de-commissioned, have to be valued at lower of the Net Book Value or Net Realisable Value.The same has, however, not been followed by Delhi unit, resulting in overstatement ofProfit by Rs. 275.40 Millions and Fixed Assets overstated by an equivalent amount.

vi) The company, during the year under review, has changed its Significant Accounting Policywith regard to non-charging of reciprocal services to BSNL and has booked an Income onaccount of Service Connections provided to BSNL employees for the period from 1.10.2000 to31.03.2006, amounting to Rs. 320.39 Millions. The company has, however, not made anyprovision for Service Connections provided by BSNL to its employees, in view of non receiptof Bills / Claims from BSNL. (Net Impact not ascertainable). [Refer Note No. 3 C and 13 ©].

vii) Non - Provision for ADC claim of BSNL towards Garuda FW calls amounting to Rs. 63.40Millions. The Profit of the company is, therefore, overstated to that extent and CurrentLiabilities are understated by an equivalent amount. [Refer Note No. 13(e)].

viii) Non - Provision of balance outstanding for more than 3 years from National Operators andInternational Operators amounting to Rs. 6.04 Millions and 7.41 Millions, respectively inrespect of Mobile Services. The Profit of the company, therefore, is overstated by Rs. 13.45Millions and Current assets are also overstated by an equivalent amount.

ix) Short Provision of Doubtful Debts by Rs. 76.60 Millions due to ageing of Sundry Debtors formore than 180 days. The Profit of the company is, therefore, overstated to that extent andCurrent Assets are overstated by an equivalent amount.

x) Short Provision of Rs. 53.20 Millions by Delhi unit on account of cloned calls. The Profit ofthe company, therefore, is overstated to that extent and Current Assets are overstated by anequivalent amount. (Refer Note No. 26).

xi) Booking of income amounting to Rs. 53.93 Millions by Delhi unit on account of surchargeon late payments from subscribers in contravention of Accounting Standard - 9 on RevenueRecognition, issued by the Institute of Chartered Accountants of India. The Profit of thecompany is, therefore, overstated to that extent and Current Assets are overstated by anequivalent amount.

xii) Based on the order of Income Tax Appellate Tribunal (ITAT) on the issue of License Fee andcertain other issues and the opinion received from the Company's Income Tax consultants,refund due and interest due thereon from Income Tax Department has been calculated andan amount of Rs. 1944.84 Millions has been booked as Interest Income for the year underreview. The actual calculation of interest by the Income Tax Department may differ and havean impact on the Profitability of the company. Amount not ascertainable. (Refer Note No. 8).

39

MTNLxiii) Inventory of Stores & Spares at Delhi unit includes Slow / Non Moving / Obsolete items of Rs.

32.31 Millions. Pending detailed investigations and segregation, no provision has been madefor these items. The amount, in above case, is not ascertainable for want of necessary details.The final calculation of the above may have an impact on the Profitability of the company.

xiv) In case of MS unit Delhi, Debtors amounting to Rs. 371.70 Millions inclusive of Service Taxof Rs. 17.60 Millions have been written off. Service Tax on the same has been ascertainedon estimated basis instead of actual amount payable thereon. In case of MS unit, Mumbai,out of Debtors of Rs. 128.40 Millions written off during the year, no accounting entry inrespect of writing back of Service Tax has been passed. Amount not ascertained. The CurrentAssets and Current Liabilities are, therefore, overstated by the amount of Service Tax relatedto the Debtors written off.

xv) The company, in its Delhi unit, has reversed a billing of Rs. 240 Millions, on ad-hoc basis,in the absence of billing as per revised tariff w.e.f. 1st May 2005. The final calculation of thesame, as per revised tariff, may have an impact on the Profitability of the company. Amountnot ascertainable. (Refer Note No. 17).

xvi) The Bank Reconciliation Statements as at 31st March, 2006 include the unmatched / unlinkedcredits and debits aggregating Rs. 2.09 Millions and Rs. 6.08 Millions, respectively, whichhave not been properly accounted for, in the absence of adequate particulars. The impact ofsuch entries on the accounts is not ascertainable. (Refer Note No. 20 ).

xvii) The basis of valuation of inventories (except for WLL handsets) as stated in SignificantAccounting Policy No. 3 in Schedule - T, is not in accordance with the Accounting Standard- 2 on "Valuation of Inventories", issued by the Institute of Chartered Accountants of India,which prescribes for the valuation of the same at the lower of Cost and Net Realisable Value.

xviii) Non - Provision of Stamp Duty payable on registration of properties acquired by / vested inthe company. Impact on Profit not ascertainable for want of details. (Refer Note No. 10).

xix) Non - Provision of amounts payable to Spice Communications Limited on account ofoutbound Roaming charges and expenses, in terms of the agreement for which details arenot available. Amount not ascertainable.

xx) The balance in Subscriber's Deposit Accounts Rs. 11593.29 Millions, Interest Accrued &Due thereon Rs. 47.99 Millions, Unlinked Receipt from Subscribers Rs. 204.96 Millions aresubject to reconciliation. The final reconciliation of the account may have an impact on theProfitability of the company. Proper reconciliation of metered and chargeable calls generatingrevenue in Service unit at Mumbai has not been conducted. The same is, however, inprocess at Delhi and MS unit. The final impact of above on the accounts is presently notascertainable and the same may have an impact on the Profitability of the company. [ReferNote No. 21 (b)].

xxi) a) Amount recoverable on current account from DOT Rs 29,443.50 Millions. and amountpayable on current account to DOT Rs. 195.61 Millions i.e. Net Recoverable Rs. 29247.90Millions (Previous Year Rs. 25999.20 Millions) are subject to reconciliation, confirmationand consequent adjustments.

(b) Amount recoverable on current account from BSNL Rs. 4872.04 Millions and amountpayable on current account to BSNL Rs. 4005.48 Millions i.e. Net Recoverable Rs.866.56Millions (Previous Year Rs. 6910.20 Millions) are subject to reconciliation, confirmationand consequent adjustments.

The final impact of the above on the accounts is, presently, not ascertainable. The same may,however, have an impact on reconciliation / settlement.xxii) The Mumbai unit of the Company has computed and accounted for the IUC charges of

BSNL for the Current Year on the basis of actual CDR's recorded in MTNL's Mumbai Exchange

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MTNLand in respect of Intra Circle Calls, as per Leased Lines, which is disputed by BSNL. Anyadjustment after settlement of dispute may have an impact on the Profits of the company.Amount not ascertainable. [Refer Note No. 13 (f)].

xxiii) The MS Delhi unit of the company has not made any provision for the liability arising fornon - deduction of Income Tax on payment due / paid to IUC operator and Roaming operator.Impact of the same is not ascertainable.

xxiv) The disclosures of the total outstanding dues to Small Scale Industrial undertaking (SSIs)and to others as well as the names of the SSIs to whom the Delhi unit owes a sum exceedingRs. One Lac, which is outstanding for over 30 days has not been made as, required by part1 of schedule VI to the Companies Act, 1956 (Refer Note No. 33). Information required tobe furnished as per the provisions of paragraph 3 (x) (a) and 4D (c) of part II of schedule VIto the companies act 1956 is not ascertainable. (Refer Note No. 34).

xxv) The classification of Sundry Debtors as unsecured without considering the security depositthat the unit has received from subscribers and non furnishing of requisite age wise detailsof Loans and Advances contravenes the requirement of part I of schedule VI to thecompanies Act 1956. Further, in respect of MS, the ageing of sundry debtors for more than6 months is as per system debtors and not based on the Trial Balance Debtors and theresidual figure has been taken as debtors outstanding for less than 6 months, which is notcorrect. (Amount not ascertainable)

xxvi) The MS unit has not taken into inventory the value of SIM cards lying with franchisees andQCSCs. Amount not ascertainable.

xxvii) The following mentioned practices and procedures followed by the Company in respect ofFixed Assets and Depreciation Accounting, in our opinion, are not in accordance with theAccounting Standard - 10 on 'Accounting for Fixed Assets'; Accounting Standard - 6 on'Depreciation Accounting' and Accounting Standard - 28 on "Impairment of Assets" issuedby the Institute of Chartered Accountants of India : -(a) The overheads are allocated as a percentage of capital expenditure in respect of all the

capital projects including turnkey projects as prescribed by DOT [Refer SignificantAccounting policy 2 (iv)] and not on the basis of directly allocable costs.

(b) Expenditure on replacement of assets, equipments, instruments and rehabilitation workis capitalised if it results in enhancement of revenue earning capacity as stated inSignificant Accounting Policy 2 (iii). This being a technical matter, we have placedreliance on the opinion of the management.

(c) In respect of Delhi Unit, some cases of capitalisation of Rehabilitation work have notbeen done for the want of date of completion. The impact of the same on Fixed Assets& Depreciation thereon could not be ascertained.

(d) In respect of various fixed assets scrapped / decommissioned during the year, thesame are not valued at lower of Net Book Value or Realisable Value and consequentloss, if any, has not been charged to the Profit and Loss Account.

(e) In respect of WLL handsets held by defaulter subscribers, no adjustment has beenmade in the books of accounts and consequent loss, if any, has not been charged toProfit and Loss Account.

(f) In respect of WLL hand sets capitalised & which are not usable, no adjustments hasbeen made in the Books of Accounts & consequent loss of Rs. 307.99 million has notbeen charged to the Profit & Loss Account. The Profit of the company, therefore, isoverstated to that extent and Current Assets are overstated by an equivalent amount.(Refer Note No. 16)

(g) In respect of Mumbai unit, various Fixed Assets (including WLL handsets but notincluding exchange equipments), replacement cost have been capitalised and / or the

41

MTNLassets are sold, without any adjustments of the relevant costs and written down valueof such assets from the Fixed Assets block.

(h) In respect of MS unit Delhi, the unit had installed one new billing system, in place ofold billing system, which was retired from active use. The old system is not accountedfor as per "Accounting Standard - 10" and depreciation is charged as usual.

(i) In respect of MS unit Delhi, during the year old 42 BTS's are swapped with new one, inaddition to 187 BTS's in the last year. Further, during the year, some of the antennasare also replaced with new one. Most of these equipments are not in active use.

The resultant impact of the above on the value of Fixed Assets and Depreciation except(xvii) f is not ascertainable.

xxviii) In-spite of the Opinion from the Expert Advisory Committee of the Institute of CharteredAccountants of India, Installation Charges received from the subscribers are accounted asincome and not adjusted against the cost thereon.

xxix) Booking of One Time Lump-sum payment received from subscribers for life long connectionsunder Trump pre-paid mobile connections, in the year of receipt, in contravention of theAccounting Standard - 9 on Revenue Recognition and Significant Accounting Policy No. 1 (ii).

xxx) Non - confirmation and reconciliation of balances recoverable and payable. Impact on Profitsnot ascertainable. (Refer Note No. 25).

(The overall impact of the above qualifications on the Profit and Assets / Liabilities of the company isplaced in Annexure - II, which is annexed hereto and is forming part of the report.)

We report that : -i) We have obtained all the information and explanations, which to the best of our knowledge and belief

were necessary for the purposes of our audit;ii) In our opinion, proper Books of Account, as required by law, have been kept by the Company, so far as

appears from our examination of those books except that the following items referred to in paragraphl (i) of Significant Accounting Policies are consistently accounted on cash basis, instead of onaccrual basis as required under section 209 of the Companies Act, 1956 :a) Interest Income / Liquidated Damages, when realisability is uncertain.b) Annual recurring charges of amount up to Rs.0.10 Millions each for overlapping period.

iii) The Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by this report, arein agreement with the books of account;

iv) In our opinion, the Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with bythis report comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of theCompanies Act, 1956 except AS - 2 regarding Valuation of Inventories (Refer Significant AccountingPolicy No. 3); AS - 4 regarding Contingencies and Events Occurring after the date of BalanceSheet (Refer Note No. 15); AS - 5 regarding Net Profit or Loss for the Period, Prior Period Itemsand Changes in Accounting Policies [Refer Significant Accounting Policy No. 1 (vi)]; AS - 6 regardingDepreciation Accounting [Refer Significant Accounting Policy No. 2 (vi)]; AS - 9 regarding RevenueRecognition [Refer Accounting Policy No. 1 (ii)], AS - 10 regarding Accounting of Fixed Assets(Refer Significant Accounting Policy No. 2); AS - 11 regarding The Effects of Changes in ForeignExchange; AS - 15 regarding Accounting for Retirement Benefits in the Financial Statements ofEmployers (Refer Note No. 6) and AS -28 regarding Impairment of Assets (Refer SignificantAccounting Policies No. 2);

v) Since the company is a Government company, clause (g) of sub-section (1) of section 274 of theCompanies Act, 1956 regarding obtaining written representations from the directors of the company, isnot applicable to the Company in terms of Notification No.GSR-829 (E) dated 21.10.2003);

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MTNLvi) Attention is further invited to the following : -

a. The value of the properties, where conveyance / lease deeds remain to be executed remainsunascertained. The outstanding liability, if any, towards lease rent payable also remain unascertained.

b. Settlement of claim with DOT, in respect of Pension, Gratuity, GPF and Leave encashmentliability of absorbed employees is still pending.

c. Non - holding of Share / Bonds Certificates in respect of Investments made by the company inthe shares of subsidiaries amounting to Rs. 1445.89 Millions, respectively.

d. Non - Provisioning of Fringe Benefit Tax (FBT) on the Service connections provided to theemployees of the company, Free of cost / at concessional rate.

e. The capitalisation of the various jobs is based on completion certificate from the concernedengineering departments, on which we have placed reliance.

f. As per suspense list, certain CDRs are lying unmatched in the computer billing system andare pending reconciliation.

g. Provision has been made in the accounts for one time permission charges payable to MCD /NDMC relating to BTS sites acquired on ad-hoc basis in the absence of detailed information.Reconciliation of site taken as per field record and as per account is not available.

h. Non - Provision of liability arising for non-deduction of Income Tax on payment due / paid toIUC operator and Roaming operator. Impact of the same is not ascertained.

i. Non Existence of Audit Committee from 29th September 2004 to 27th September 2005. Thereconstituted Audit Committee formed thereafter is defective to the extent that it has only oneindependent director in place two, as required by law.

j. Non - Redemption of Ist & IInd installment of 8.75% Cumulative Redeemable Preference Sharesamounting to Rs. 400 Millions by ITI Limited, due in the year 2005 and 2006. Consequently,the funds of the company have been blocked to the tune of Rs. 400 Millions. (Refer Note - 19).

k. Non - registration of GPF Trust with Registrar of Trust or other Governing Apex bodies.l. Debtors Balance as per subsidiary records are short by Rs. 11.77 Millions as compared to

General Ledger balances and are under reconciliation. Impact on the accounts not ascertainable.m. A review of the balances with Non-Scheduled Banks reveal that the company is having accounts

with some non-scheduled banks, where the accounts are closed and still the balances arelying in the account.

vii) In our opinion, and to the best of our information and according to the explanations given to us, the saidaccounts read with the significant Accounting Policies and together with the notes thereon, give theinformation required by the Companies Act, 1956, in the manner so required and also give, subject toour observations in paragraph 4(i) to 4(xxx) foregoing, a true and fair view, in conformity with theaccounting principles generally accepted in India:

(a) in the case of Balance Sheet, of the State of Affairs of the Company as at 31st March, 2006;

(b) in the case of the Profit & Loss Account, of the Profit of the Company for the year ended on thatdate; and

(c) in the case of the Cash Flow Statement, of the cash flows of the Company for the year ended onthat date.

For & on behalf ofDhawan & Co.

Chartered Accountants

Place : Mumbai I. J. DhawanDated : June 30, 2006 (Partner)

43

MTNLANNEXURE - I TO THE AUDITORS' REPORT

(Referred to in Paragraph - 3 of our Report of Even Date to The Members ofMahanagar Telephone Nigam Limited on The Accounts for the year ended 31st March 2006)

As required by the Companies (Auditor's Report) Order, 2003, issued by the Central Government of Indiain terms of section 227(4A) of the Companies Act, 1956 and as per the information and explanations givento us, the books and records examined by us in the normal course of audit, the reports received from theBranch Auditors and to the best of our knowledge and belief, we further report that:

1. (a) Delhi unit has maintained records of fixed assets. However, full particulars of the assets& location as required are not maintained in most of the cases. In respect of assetsacquired from DOT on 1st April 1986, particulars are not available. In case of MumbaiUnit, fixed assets registers maintained w.e.f. 1.4.2002 are not adequate in so far asthese do not give full particulars of quantitative details and situation of fixed assets.These registers have also not been updated. In MS unit, Fixed Assets Register, withrequisite details, are under preparation. Corporate Office has maintained fixed assetsregister showing full particulars including quantitative details. The situation / location offixed assets have, however, not been mentioned in most of the cases.

(b) As per the Accounting Policy of the company, Fixed Assets are required to be physicallyverified by the Management on rotation basis, once in three years. In respect of Mumbaiunit, the work of physical verification of fixed assets namely Underground Cables is beingconducted in accordance with accounting policy No. 2 (ii). The work of physical verificationof other fixed assets, with reference to asset registers and dealing with thediscrepancies, if any, is pending. In respect of Mobile Service (MS) unit, no physicalverification has been conducted for Mumbai unit. However, in case of Delhi unit, thephysical verification has reportedly been conducted but proper report for the samehas not been submitted. In respect of Corporate office, no physical verification hasbeen conducted by the Management. In respect of Delhi unit, as certified by theManagement, the Land and Building, Furniture & office equipment were physically verified,in accordance with the programme of verification by the management in this year and reliedon by us. According to information furnished to us, no material discrepancies were noticedduring the physical verification of these fixed assets.In our opinion, the area of physical verification of fixed assets needs to be strengthened &discrepancies needs to be categorically reported and adjusted.

(c) The company has not disposed off any substantial part of its fixed assets during the yearand as such there is no effect on the going concern.

2. (a) In our opinion, physical verification of inventory, except WLL instruments in case ofDelhi Unit, has been conducted by the management at reasonable intervals. In MS unit,the physical verification of inventory was not conducted during the year.

(b) In our opinion, the procedure of physical verification of the inventory followed by themanagement is inadequate and needs to be strengthened. According to the informationand explanations given to us, the physical verification of all the items of stores wascarried out during the year, but detailed physical verification reports were not madeavailable. In case of MS unit, however, no physical verification of inventory wasconducted. We, in view of the same, are unable to offer our comments on the same.

(c) The Company is maintaining proper records of inventory except WLL instruments in caseof Delhi Unit and Post Paid SIM cards lying with QCSC & franchises in MS unit.Discrepancies noticed on physical verification of inventory in respect of Delhi unit,have not been dealt with in the books of accounts. In case of Mumbai Unit, discrepancies

44

MTNLnoticed on physical verification of inventory were not material and have been properly dealtwith in the books of accounts. In MS unit, in the absence of physical verification, nodiscrepancies were identified.

3. According to the information and explanations given to us, the Company has neither granted nortaken any loans, secured or unsecured, to or from companies, firms or other parties covered inthe register maintained u/s 301 of the Companies Act, 1956.

4. In our opinion and according to the information and explanations given to us, there are adequateinternal control procedures commensurate with the size of the Company and the nature of itsbusiness for the purchase of inventory and fixed assets and for the sale of goods / services.However, in case of Delhi unit, reconciliation & confirmation of deposits to variousdepartments, maintenance of subsidiary ledgers, reconciliation between the exchangegenerated calls & billed calls, reconciliation of the balance in subscriber deposit accountwith subsidiary records & FMS area of capitalisation of W.I.P. needs to be strengthened.In case of Mumbai Unit, the overall internal control on revenue billing and income fromprepaid calling cards in Service Units; Work Orders issued and non maintenance ofsubscriber wise debtors ledger in LC Unit; revision of estimates in Units; reconciliationand confirmation of deposits with various departments; records for used and returnedFWP instruments, ADSL modems and CDMA handsets needs to be strengthened and thereis continuing failure to correct above weaknesses in the internal control systems. Theoverall internal control system on revenue billing needs to be strengthened as the systemis not generating sub-ledger with respect to deposits & service tax in both the units andsubscriber wise outstanding report in Mumbai unit. System of IUC billing needs to bestrengthened as the billing generated as per the system in certain cases has to be reconciledwith some operators. Further, with some operators in case of Delhi unit, there is continuingfailure to correct the above weakness in the Internal Control System.

5. As informed to us, the Company has not made any purchase of material from and sale ofservice to, companies firms or other parties listed in the register required to be maintained undersection 301 of Companies Act 1956, aggregating during the year to Rs. 5,00,000/- or more invalue in respect of each party. In respect of expenditure payments to subsidiary companyMillennium Telecom limited, we are unable to verify the adequacy of expenditure since itis a single service provider to the Company.

6. As informed to us, the Company has not accepted any deposits from the public during the yearwithin the meaning of section 58A of the Companies Act 1956 and the rules framed there under.Therefore, the directives issued by the Reserve Bank of India are not applicable.

7. In our opinion, the Internal Audit System of the company commensurate with the size of theCompany and the nature of its business. However, the extent of coverage of the areas ofoperations, frequency / quality of reporting and the follow up of internal audit observationsneed to be strengthened.

8. The Central Government has prescribed the maintenance of cost records under clause (d) ofsub section (1) of section 209 of Companies Act, 1956 w.e.f. 01.04.2003. The company hasnot made available Cost Records for the year under review and in the absence of thesame, we are unable to express our opinion.

9. (a) There were no undisputed amounts payable in respect of Statutory Dues including ContributoryProvident Fund, Investor Education and Protection Fund, Income Tax, Sales Tax, WealthTax, Custom Duty, Excise Duty, Cess and any Other Statutory Dues outstanding as at31.03.2006 for a period of more than six months from the date they become payable exceptservice tax amounting to Rs. 2.27 Lacs collected from subscribers in MS unit Mumbai

45

MTNLand the amount lying in unlinked credits accounts in other units (amount not ascertainable).As informed to us, the provisions of Employees State Insurance Act are not applicable to thecompany. There has generally been no delay in depositing CPF contribution to the trust. GPFcontribution, in respect of employees on deemed deputation, are generally remitted regularly toDOT cell. GPF contribution, in respect of absorbed DOT employees, has been deposited with theGPF Trust after registration of the trust with Income Tax Department, in time. However, asreported in our main report, GPF Trust is not registered with the Registrar of Trust or anyother Apex body. The Company is regular in depositing with appropriate authorities, the otherundisputed statutory dues such as Investor Education Protection Fund, Sales Tax, Custom duty,Excise duty, Cess and other material statutory dues applicable to it.

(b) According to the information and explanation given to us, there are no dues in respect ofCustom Duty, Excise Duty and Cess that have not been deposited with the appropriateauthorities on account of any dispute. However, the Company has not deposited SalesTax Dues, and Income Tax Dues on account of disputes as under : -

Local Sales Tax and Central Sales Tax : -

Name of the Amount(Rs) Amount (Rs) Period Authority whereStatute L.S.T C.S.T pendingDelhi Sales Tax Act 268131 92302769 1988 - 89 Addl. Comm. Sales Tax

Delhi Sales Tax Act 162120 20517000 1989 - 90 Addl. Comm. Sales TaxDelhi Sales Tax Act 1006001 15337192 1990 - 91 Addl. Comm. Sales Tax

Delhi Sales Tax Act 11660806 63932673 1991 - 92 Addl. Comm. Sales Tax


Delhi Sales Tax Act 1699669 176491 1993 - 94 Addl. Comm. Sales TaxDelhi Sales Tax Act 1032760 201103762 1994 - 95 Addl. Comm. Sales Tax



Delhi Sales Tax Act 25751 3148261 1997 - 98 Addl. Comm. Sales TaxDelhi Sales Tax Act 740850 102613 1998 - 99 High court

Delhi Sales Tax Act 28020991 550178 1999 - 00 High court& 2000 -01


Delhi Sales Tax Act 0 180544146 1987 - 88 Addl. Comm. Sales Taxto

1993 - 94BST Act 54829094.00 NIL 2000 - 01 Order served appeal yet to be

filed.

BST Act 40201675.00 NIL 1999 - 00 MSTT

BST Act 59424662.00 NIL 1998 - 99 MSTT

BST Act 53193370.00 NIL 1996 - 97 DCBST Act 3560222.00 NIL 1993 - 94 MSTT

BST Act 308084.00 NIL 1988 - 89 MSTT

However, Delhi Unit has already deposited Rs. 15,40,07,233.00 out of the total disputed liability as above.

46

MTNLIncome Tax Dues

Name of Nature of the Amount (Rs.) Period Forum wherethe statute dues outstanding pendingIT Act Income Tax / Penalty 304,093,761 1993 - 94 CIT (Appeals)IT Act Income Tax / Penalty 62,324,668 1995 - 96 CIT (Appeals)IT Act Income Tax / Penalty 59916054 1996 - 97 CIT (Appeals)/ITATIT Act Income Tax / Penalty 8,115,170 1997 - 98 CIT (Appeals)IT Act Income Tax 674,92,25,574 2000 - 01 ITATIT Act Income Tax 177,15,21,137 2001 - 02 CIT (Appeals)/ITATIT Act Income Tax / Penalty 993,496,367 2002 - 03 CIT (Appeals)IT Act Income Tax / Penalty 4,075,443,575 2003 - 04 CIT (Appeals)IT Act Income Tax 2,037,188,461 2004 - 05 CIT (Appeals)

10. The company has not incurred any losses in the current year and in the financial year immediatelypreceding such financial year.

11. The Company has neither taken any loans from a financial institution / bank nor issued any debentures.Accordingly, clause 4 (xi) of the order is not applicable.

12. The Company has not granted loans and advances on the basis of security by way of pledge ofshares, debentures and other securities. Accordingly, clause 4 (xii) of the order is not applicable.

13. The Company is not a Chit Fund or a Nidhi Mutual Benefit Fund / Society. Accordingly, clause4(xiii) of the order is not applicable.

14. The Company is not dealing in or trading in shares, securities, debentures and other investments.Accordingly clause 4(xiv) of the Order is not applicable.

15. According to the information and explanation given to us, the Company has not given any guaranteesfor loans taken by others from banks or financial institutions. Accordingly clause 4(xv) of the Orderis not applicable.

16. The Company has not obtained any Term Loans. Accordingly, clause 4(xvi) of the Order is notapplicable.

17. The Company has not raised any Long Term or Short Term Loan. Accordingly, Clause 4(xvii) of theOrder is not applicable.

18. The Company has not made any preferential allotment of shares to parties and companies covered inthe register maintained under section 301 of the Act.

19. The Company has not issued any debentures. Accordingly clause 4(xix) of the Order is not applicable.20. The Company has not raised any money by public issues during the year. Accordingly, clause 4(xx)

of the Order is not applicable.21. According to the information and explanations given to us, no major fraud on or by the company has

been noticed or reported during the year except the subscribers fraud noticed in MS unit Mumbaiamounting to Rs. 7.97 lacs. As explained by the management, the amount of frauds by subscribersare not ascertainable.

For Dhawan & Co.Chartered Accountants

Place : Mumbai I. J. DhawanDated : June 30, 2006 (Partner)

47

MTNLANNEXURE - II TO THE AUDITORS REPORT

Impact of Audit Observations given in our report dated 30th June 2006, on theProfit, Assets & Liabilities of M/s Mahanagar Telephone Nigam Limited as at 31st March 2006

Particular Rupees in MillionAmount Amount

A) Overstatement of Profit 4508.75 -B) Understatement of Profit 0.00 -

- Net Impact on Profit & Cumulative Profit 4508.75 -- Accumulated Profit would have been 81115.65

(85624.40)C) Overstatement of Current Assets 2986.84D) Understatement of Current Assets 0.00

- Net Impact on Current Assets 2986.84- Current Assets would have been 130533.44

(133520.28)E) Overstatement of Current Liabilities 0.00F) Understatement of Current Liabilities 1799.60

- Net Impact on Current Liabilities 1799.60- Current Liabilities would have been 42050.86

(40251.26)G) Overstatement of Fixed Assets 275.40H) Understatement of Fixed Assets 0.00

- Net Impact of Fixed Assets 275.40- Fixed Assets would have been 65412.09

(65687.49)I) Overstatement of Deferred Revenue Expenditure 0.00J) Understatement of Deferred Revenue Expenditure 553.09

- Net Impact on Deferred Revenue Expenditure 553.09- Deferred Revenue Expenditure would have been 1695.57

(1142.48)

Impact of Audit Observation Nos. 4 (i), (vi), (xii) to (xxvi), (xxvii) a to e,(xxvii) g to (i) and (xxviii) to (xxx) not ascertainable, hence not ascertained

Note : Figures shown in bracket represent figures reported in the Balance Sheet.For & On behalf of


Place : Mumbai I. J. DhawanDated : 30th June, 2006 (Partner)

48

MTNLMAHANAGAR TELEPHONE NIGAM LIMITED

Balance Sheet as at 31st March, 2006

As at 31.3.2006 As at 31.3.2005 (Rs.in Million) (Rs.in Million)

SOURCES OF FUNDSShareholders' FundsShare Capital A 6,300.00 6,300.00Reserves & Surplus B 106,067.74 103,138.25Deferred Tax Liability (Net) C 6,116.27 5,740.08Total 118,484.01 115,178.33APPLICATION OF FUNDSFixed Assets DGross Block 148,541.50 142,522.52Less : Depreciation 82,854.01 77,836.23Net Block 65,687.49 64,686.29Capital Work-in-Progress E 5,254.97 6,270.57Investments F 4,187.24 3,974.65Current Assets, Loans & AdvancesInventories G 1,378.16 1,866.04Sundry Debtors H 14,151.03 17,580.39Cash & Bank Balances I 20,583.99 25,173.98Other Current Assets J 944.11 849.84Loans & Advances K 96,462.99 101,457.60

133,520.28 146,927.85Less : Current Liabilities and ProvisionsCurrent Liabilities L 40,251.26 50,645.03Provisions M 51,057.19 56,036.00Net Current Assets 42,211.83 40,246.82Deferred Revenue Expenditure 1,142.48 -Total 118,484.01 115,178.33Accounting Policies & Notes to Accounts TThe Schedules referred to above form an integral part of the Balance Sheet.

( S.C.Ahuja) ( R.C.Sen) (Anita Soni) (R.S.P. Sinha)Company Secretary Dy. General Manager Director (Finance) Chairman &

(Accounts) Managing DirectorIn terms of our report of even dateFor Dhawan & Co.Chartered Accountants

(I.J.Dhawan) Partner (M.No:81679)PLACE: MUMBAIDATED : 30th June, 2006

49


Profit & Loss Account for the year ended 31st March, 2006

For the year For the year ended 31.3.2006 ended 31.3.2005

(Rs.in Million) (Rs. in Million)

INCOMEIncome from Services N 55,609.85 55,820.70Other Income O 5,300.13 4,917.18

60,909.98 60,737.88EXPENDITUREEmployees' Remuneration and Benefits P 19,053.12 18,361.06Revenue Sharing 12,263.19 8,781.99Licence Fee 4,589.59 4,971.63Administrative,Operating & Other Expenses Q 11,579.15 10,228.34Depreciation D 6,466.99 5,880.07Interest R 244.36 358.12

54,196.40 48,581.21Profit Before Tax 6,713.58 12,156.67Provision for Taxation 560.76 2,566.90Provision for Deferred Taxation 376.19 105.51Profit After Tax 5,776.63 9,484.26Prior Period Adjustments S (26.29) 94.47Profit For the Year 5,802.92 9,389.79Profit Available for Appropriation 5,802.92 9,389.79Appropriations :Interim/Final Dividend 2,520.00 2,835.00Tax on Dividend 353.43 392.82Transfer To Contingency Reserve - 710.30Transfer to General Reserves 2,929.49 5,451.67

5,802.92 9,389.79Earning Per ShareBasic/Diluted earnings per share (in Rs.) 9.21 14.90(Refer note 38)Accounting Policies & Notes to Accounts T

The Schedules referred to above form an integral part of the Profit & Loss Account.


(Accounts) Managing DirectorIn terms of our report of even dateFor Dhawan & Co.Chartered Accountants

(I.J.Dhawan) Partner (M.No:81679)PLACE: MUMBAIDATED : 30th June, 2006

50

MTNLSCHEDULES FORMING PART OF BALANCE SHEETSCHEDULE-AShare Capital


AUTHORISED CAPITAL80,00,00,000 Equity Shares of Rs.10/- each 8,000.00 8,000.00ISSUED SUBSCRIBED AND PAID UP CAPITAL63,00,00,000 Fully paidEquity Shares of Rs. 10/- each 6,300.00 6,300.00Out of the above shares(i) 59,99,98,400 Equity Shares are allotted as fully paid up pursuant to a contract without payment being received in cash out of which 35,43,72,740 Shares are held by the Government of India

(ii) 3,00,00,000 Equity Shares areallotted as fully paid up represented byGlobal Depository Receipts (GDRs) throughan International Offering in US Dollars.OneGDR represented two equity shares.In Nov,2001 the GDRs were exchanged in AmericanDepository Shares (ADSs) on a one-for one basis.One ADS also represents two of our equity shares.

6,300.00 6,300.00

SCHEDULE-BReserves & Surplus

As at Addition Deduction As at 1.4.2005 during the year during the year 31.3.2006

(Rs in Million) (Rs in Million) (Rs in Million) (Rs in Million)Bonds Redemption Reserve - - - -

Bonds Redemption Reserve(Prev.Yr) (0) (0) (0) -

Share Premium 6,650.05 6,650.05

Share Premium(Prev.Yr) (6,650.05) (0) (0) (6,650.05)

General Reserve 81,976.55 2,929.49 84,906.04

General Reserve(Prev.Yr) (76,524.88) (5,451.67) - (81,976.55)

Reserve For Contingencies 14,203.65 - 14,203.65

Reserve For Contingencies(Prev.Yr) (13,493.35) (710.30) (0) (14,203.65)

Reserve For Research & Development 308.00 308.00

Reserve For Research & Development(Prev.Yr) (308.00) - (0) (308.00)

TOTAL 103,138.25 2,929.49 - 106,067.74 (96,976.28) (6,161.97) - (103,138.25)

51

MTNLSCHEDULE CDeferred Tax Liability (Net) (Rs. in million)

Deferred Tax Current Year Deferred TaxLiability(Asset) Charge/(Credit) Liability(Asset)As at 1.04.2005 As at 31.03.2006(Rs. in million) (Rs. in million) (Rs. in million)

Deferred Tax Liabilities

Difference between Book,Tax Depreciation & others 11,265.42 1,377.76 12,643.18

Difference between Book,Tax Depreciation & others(Prev.Yr) (9,741.57) (1,523.85) (11,265.42)

11,265.42 1,377.76 12,643.18

(9,741.57) (1,523.85) (11,265.42)

Deferred Tax Assets

Provision for Doubtful Debts,Advances and Bank Balances (2,781.82) (329.33) (3,111.15)

Provision for Doubtful Debts,Advances and Bank Balances(Prev.Yr) (-2377.81) (-404.01) (-2781.82)

Provision for Obsolete Stock (186.09) (44.15) (230.24)

Provision for Obsolete Stock(Prev.Yr) (-127.9) (-58.19) (-186.09)

Others (2,557.43) (628.09) (3,185.52)

Others(Prev.Yr) (-1601.29) (-956.14) (-2557.43)

Total B (5,525.34) (1,001.57) (6,526.91)

(-4107) (-1418.34) (-5525.34)

Deferred Tax Liability (A) – B) 5,740.08 376.19 6,116.27 (5,634.57) (105.51) (5,740.08)

52

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53

MTNLSCHEDULE-ECapital Work-In-Progress

As at As at31.3.2006 31.3.2005

(Rs. in Million) (Rs. in Million)

Buildings 509.45 777.97Apparatus & Plants 3,037.26 3,782.25Lines & Wires 17.69 18.10Cables 1,437.16 1,444.65Subscribers' Installations 136.29 144.37Air Conditioning Plants 142.99 121.18Less Provision For Abandoned Works (25.87) (17.95)

5,254.97 6,270.57

SCHEDULE-FInvestments

As at As at31.3.2006 31.3.2005


Long Term-Non Trade (At Cost)Investment in 10000000 8.75%Un Quoted preferenceshare of Rs. 100/- each fully paid up with M/s. ITI Ltd.(Refer Note No.19) 1,000.00 1,000.00Investment in subsidiary company-MillenniumTelecom Ltd. ( Un Quoted 2875880 Equity sharesof Rs. 10 each fully paid up) 28.76 28.76Mahanagar Telephone Mauritius Ltd. (Un Quoted Equity Shareof 26925526 of MUR 10 (INR 15.7854) each fully paid up) 425.03 212.44Investment in Joint Ventureswith United Telecom Ltd. (Un-Quoted 2334500 Equity Shareof Rs.100 each, fully paid up) 233.45 233.45 Investment in Un Quoted 11.5% Bonds fully paid up ofMaharashtra Krishna Valley Development Corporation Ltd. 2,500.00 2,500.00(Redemption in the Year 2012) 4,187.24 3,974.65

54

MTNLSCHEDULE - GInventories (At Cost)

As at As at31.3.2006 31.3.2005

(Rs.in Million) (Rs.in Million)

Stores and Spares : Building Material 0.62 0.46 Lines & Wires 86.25 82.72 Cables 880.58 1,060.86 Exchange Equipments 337.49 495.27 WLL Equipments 9.43 3.37 Telephone & Telex instruments 150.12 297.32 WLL Instruments 179.86 192.38 Telephones & Telex Spares 0.08 0.09 Installation Test Equipments 21.21 4.08 Store - in -Transit 0.07 - Mobile Handsets & Sim Cards 11.15 9.76

1,676.86 2,146.31 Less: Provision for obsolete stores 298.70 280.27

1,378.16 1,866.04SCHEDULE - HSundry Debtors (Unsecured)*

As at As at31.3.2006 31.3.2005


Outstanding for a Period Exceeding Six MonthsConsidered Good 3,626.86 7,618.93Considered Doubtful 1,733.62 2,943.35

Other Debts#Considered Good 10,434.27 9,066.55Considered Doubtful 65.71 85.71

15,860.46 19,714.54Less: Provision for doubtful debts 1,690.84 2,116.64Less: Provision for wrong billing 18.59 17.51

14,151.03 17,580.39

# Include Rs 7807.65 Millions (4307.72) on account of income accrued from services* Except to the extent covered by Security Deposits from subscribers.For the current year, debtors exceeding Six months, considered good & doubtful includes service tax of Rs.318.83 (Rs303.68Millions) & Rs.117.81(Rs.78.83Millions) respectively.Other debtors considered good & doubtfulinclude service tax of Rs192.27 (Rs.244.43 Millions) & Rs. 7.14 (Rs. 7.73Millions) respectively.

55

MTNLSCHEDULE - ICash & Bank Balances

As at As at31.3.2006 31.3.2005


Cash in hand,Including cheques in handRs. 75.24 Millions (Rs104.02 Millions) 112.93 144.49Balance with Scheduled BanksIn Current Accounts 1,480.87 1,655.34In Fixed Deposit Accounts 18,990.49 23,372.90

Balance with Non-Scheduled BanksIn Current Account 5.66 7.01

20,589.95 25,179.74Less: Provision for Doubtful Bank Balances 5.96 5.76

20,583.99 25,173.98

SCHEDULE - JOther Current AssetsUnsecured Considered Good

As at As at31.3.2006 31.3.2005


Interest Accrued on Deposits with Banks, 101.99 103.49 Interest Accrued on Bonds 192.19 192.19 Income Accrued From other Deposits & Loans & Advances 649.93 554.16

944.11 849.84

56

MTNLSCHEDULE - KLoans & AdvancesUnsecured Considered Good*

As at As at31.3.2006 31.3.2005


Loans & AdvancesSecured LoansHousing Loan To Employees 2,220.89 2,399.00Un Secured Loans

(Considered good, unless otherwise stated)*(1) To Subsidiary Company 0.35 4.58(2) To Employees i) Vehicles 37.64 47.78 ii) Others 147.54 207.30Amount Recoverable from DOT 29,443.50 26,171.15Amount Recoverable from BSNL 4,872.04 10,782.59Amount Recoverable from VSNL 1,198.18 746.97Advances Recoverable in Cash or in Kindor for value to be received.# 12,090.93 992.93Advance to JV Co (MTNLSTPI Ltd) 3.36 -Advance Tax 44,671.30 59,323.30Deposits with Govt. Deptt. 379.76 342.66Inter Corporate deposit - -Inter corporate loans - -Capital Advance 288.62 244.56Amount Recoverable from GPF Trust 1,183.01 -Others 476.34 621.19

97,013.46 101,884.01 Less: Provision for Doubtful Advances 550.47 426.41

96,462.99 101,457.60

* Except to the extent of doubtful advances recoverable in cash or in kind or for value to be received for whichprovision has been made.# Including Rs.55.69 Millions (Nil) receivable from Gratuity Trust

57

MTNLSCHEDULE - LCurrent Liabilities

As at As at31.3.2006 31.3.2005


Sundry Creditors(i) For Goods and Services 5,076.63 5,150.14(ii) For Work done 2,950.32 2,860.38(iii) For Others 1,509.83 2,056.17Advances Received from Customers & Others 368.22 433.01Deposits from :(i) Contractors 328.33 344.91(ii) Customers & Others 12,280.93 12,921.34Unclaimed Bonds 1.56 2.96Other Liabilities(i) For Salaries and Other Benefits 458.43 458.54(ii) Bonus/ Ex-Gratia 461.18 467.78(iii) GPF of MTNL optee 8,517.42 10,457.94(iii) Others 2,568.43 9,011.03Income Received in advance againstServices 1,345.66 1,746.58Amount Payable:(i) To DOT 195.61 171.95(ii) To BSNL 4,005.48 3,872.39(iii) To VSNL 81.46 633.34(iv) To Subsidiary 5.92 1.76(v) To Others 90.08 49.40Interest Accrued but not due :(i) On Deposits 5.77 5.41

40,251.26 50,645.03

58

MTNLSCHEDULE - MProvisions


Pension (i) Company Employees 26,391.19 23,163.70 (ii) Others 143.80 238.25 Leave Encashment (i) Company Employees 2,472.90 1,133.98 (ii) Others 23.55 29.90 Gratuity 2,623.24 2,544.78 Proposed Final Dividend 630.00 1,575.00 Tax on Dividend 88.36 220.89 Income Tax 18,579.08 27,085.87 Fringe Benefit tax 55.90 - Wealth Tax 49.17 43.63

51,057.19 56,036.00Schedules Forming Part of Profit and Loss AccountSCHEDULE - NIncome from Services

For the year For the year ended 31.3.2006 ended 31.3.2005 (Rs. in Million) (Rs. in Million)

Telephone (a) Rentals 11,482.20 11,940.99 (b) Calls & Other Charges 16,646.57 18,958.92 (c) Franchises Services 8,870.34 10,188.86 (d) Rent & Junction Charges 2,934.63 1,142.66 (e) Access Calls & Other Charges 6,333.65 7,285.95 VCC 606.13 750.22 Internet 175.15 192.62 Telex 0.45 13.47 Circuits 598.22 945.20 WLL Rent 275.44 433.89 WLL Call Charges 398.09 609.60 Mobile (a) Rentals, calls& IUC revenue 1,829.35 960.32 (b) Income from Roaming 870.14 527.68 (c) Pre paid Trump 2,913.41 1,196.42 (d) Activation Charges 49.64 52.29 Broadband 704.25 9.40 Value added and Other Services (a) Indonet 2.86 3.43 (b) Voice Mail 64.08 34.03 (c ) Free Phone 125.10 98.30 (d) Premium Rate 1.00 0.84 (e) ISDN - Rental 236.92 132.91 (f) ISDN - Call Charges 483.40 321.99 Others 8.83 20.71

55,609.85 55,820.70

59

MTNLSCHEDULE - OOther Income

For the year For the yearended 31.3.2006 ended 31.3.2005

(Rs. in Million) (Rs. in Million) Interest (i) From Banks (Tax deducted at source Rs.418.17 Millions (Rs. 341.64 Millions) 1,601.17 1,340.87 (ii) Interest on Advances to Employees 173.21 181.76 (iii) Interest on Deposits, Advances and Others 290.20 290.37 (iv) Interest from Income Tax Department (Refer Note No 8) 1,944.84 665.46 Sale of Directories,Publications, Forms etc. 74.28 99.58 Profit on Sale of Assets 6.70 8.50 Liquidated Damages 171.30 201.36 Foreign Currency Fluctuation 0.71 0.55 Bad Debts Recovered 37.56 61.15 Credit Balances Written Back 821.31 1,886.17 Rent on Quarters, Inspection Quarters, Hostels and other services provided 8.93 56.37 Others 169.92 125.04

5,300.13 4,917.18

SCHEDULE - PEmployees' Remuneration and Benefits


(Rs. in Million) (Rs. in Million) Salaries,Wages,Allowances and other Benefits 11,275.91 11,381.56 Bonus/ Ex-Gratia 460.34 463.74 Medical Expenses/Allowances 878.51 845.95 Leave Encashment (i) Company Employees 1,325.17 311.98 (ii) Others 7.51 12.70 Pension Contribution (i) Company Employees 4,513.79 5,177.14 (ii) Others 9.12 24.70 Contribution to Provident Fund 263.25 208.98 Gratuity 448.93 777.74 Compensation under VRS Scheme 285.63 - Staff Welfare Expenses 228.80 119.71

19,696.96 19,324.20 Less : Allocation to Capital Work-In-Progress 643.84 963.14

19,053.12 18,361.06

60

MTNLSCHEDULE - QAdministrative, Operating and Other Expenses


(Rs. in Million) (Rs. in Million) Power & Fuel 1,558.49 1,401.61 Rent 608.09 641.55 Repairs & Maintenance: - Buildings 201.65 193.95 - Plant & Machinery 686.30 602.72 - Others 476.00 364.83 Lease Rentals - 0.01 Insurance 44.60 47.14 Rates & Taxes 298.92 322.67 Travelling Expenses 38.71 92.52 Postage & Courier 200.47 209.21 Printing & Stationery 154.46 164.94 Vehicle Expenses: (i) Maintenance 16.73 18.36 (ii) Running 37.42 35.33 (iii) Hiring 99.83 93.85 Commission paid on Franchised Services 2,626.14 3,055.61 Comm. Paid to Pre Paid services 121.35 10.68 Advertising/Business Promotion Expenses 414.11 276.86 Donations - 28.19 Provision for Doubtful Debts including Disputed Bills 977.04 1,002.45 Provision for Wrong Billing 1.37 0.45 Bad Debts Written Off 1,502.44 227.60 Provision for Obsolete Stores 131.16 159.02 Professional & Consultancy Charges 85.43 66.09 Seminar and Training Expenses 6.71 6.80 Miscellaneous Expenses * 854.46 813.38 Loss on Sale of Assets 94.27 208.08 Internet charges 123.21 77.34 Spectrum Charges(WLL) 15.58 22.95 Spectrum Charges(MS) 157.57 67.38 Loss of Assets 46.64 16.77

11,579.15 10,228.34

* Including Rs. 24.04 Millions (52.37 million) on account of Sale Tax paid

61

MTNLSCHEDULE - RInterest :



Interest on :

Customers' deposits 25.45 28.09GPF 206.79 330.03Other Loans 12.12 -

244.36 358.12

SCHEDULE - SPrior Period Adjustments



Debits Salary,Wages,Allowances & Staff Expenses 10.14 1.39 Rent 1.15 4.57 Rates & Taxes - 2.48 Repairs to Buildings - 11.98 Repairs to Plant & Machinery 17.68 1.61 Depreciation 28.95 81.62 Others 27.52 19.89

85.44 123.54 Credits Rate & Taxes written back 7.96 5.81 Excess provision written back(Income Tax) 71.11 Others 32.66 23.26

111.73 29.07

Net Adjustment (26.29) 94.47

62

MTNLSCHEDULE - T

SIGNIFICANT ACCOUNTING POLICIES OF MTNL FOR THE YEAR 2005-06.

1. Income and Expenditurei. The accounts are prepared under the historical cost convention adopting the accrual method of

accounting except the following items, which are accounted for on cash basis:

(a) Interest income/liquidated damages where realisability is uncertain.

(b) Annual recurring charges of amount up to Rs. 0.10 Millions each for overlapping period.

ii. Revenue Recognition

(a) Revenue is recognised on accrual basis, including income from subscribers whose disputesare pending resolution, and closure of the subscribers' line. Revenue in respect of serviceconnection is recognised when recoverability is established.

(b) Provision is made for wrong billing, disputed claims from subscribers, cases involvingsuspension of revenue realisation due to proceedings in Court and debtors outstanding formore than 3 years. In case of Mobile Services (GSM), the provision is made for dues, whichare more than 180 days.

(c) Installation charges recovered from the subscribers at the time of new telephone connectionis recognised as income in the year of connection.

(d) Activation charges in case of Mobile Services (GSM) is recognised as revenue on connection.

(e) Income from services includes income from leasing of infrastructure to other service providers.

iii. The cost of stores and materials is charged to project or revenue job at the time of issue.However, spill over items at the end of the year lying at various stores are valued at weightedaverage method.

iv. The sale proceeds of scrap arising from maintenance & project works are taken into miscellaneousincome in the year of sale.

v. Bonus / Ex - Gratia is paid based on the productivity - linked parameters and it is providedaccordingly.

vi. Income from services pertaining to prior years is not disclosed as prior period item. In respect ofother income/expenditure, only cases involving sums exceeding Rs. 0.10 Millions are disclosedas prior period items.

1.1 Retirement Benefitsa) In respect of officials who are on deemed deputation from DOT and other Govt. Departments, the

provision for pension contribution is provided at the rates specified in Appendix 2(A) to FR 116and 117 of FR. & SR. and provision for leave encashment is made @ 11% of pay as specified inappendix 2(B) of F.R.116 and 117 of F.R. & S.R. Provision of gratuity, in respect of theseofficers, is not required to be made.

b) In respect of others, provision is made as per Actuarial Valuation.

2. Fixed Assets

I. Fixed Assets are carried at cost less accumulated depreciation. Cost includes allocatedestablishment expenses as described in (iv) below. Assets are capitalised, as per the practicesdescribed below, to the extent completion certificates have been issued, wherever applicable.

63

MTNL(a) Land is capitalised when possession of the land is taken. Value of Leasehold Land is amortised

over the period of lease.

(b) Building is capitalised to the extent it is ready for use.

(c) Apparatus & Plants principally consisting of Telephone Exchange Equipments and Air ConditioningPlants are capitalised on commissioning of the exchange. Subscribers Installations are capitalisedas and when the exchange is commissioned and put to use either in full or in part.

(d) Lines & Wires are capitalised as and when laid or erected to the extent completion certificateshave been issued.

(e) Cables are capitalised as and when ready for connection with the main system.

(f) Vehicles and Other Assets are capitalised as and when purchased

II. The fixed assets of the company are being verified by the management at reasonable intervals i.e.once in every three years by rotation. The physical verification of underground cables is done on thebasis of working of network and based on records available together with a certificate from the technicalofficers.

III. Expenditure on replacement of assets, equipments, instruments and rehabilitation work is capitalisedif it results in enhancement of revenue earning capacity.

IV. Allocation of establishment expenses, including employees remuneration and benefits to capitalexpenditure is based on a percentage of capital expenditure as prescribed by the DOT.

v. Upon scrapping / decommissioning of assets, these are classified in fixed assets at the lower of NetBook Value and Net Realisable Value and the estimated loss, if any, is charged to Profit and Loss A/c.

VI Depreciation

(a) Depreciation is provided on Straight Line Method at the rates prescribed in Schedule XIV to theCompanies Act, 1956 except in respect of Apparatus & Plant (including Air Conditioning Systemattached to exchanges), which is depreciated at the rates based on technical evaluation of usefullife of these assets i.e. 9.5%, which is higher than the rates prescribed in Schedule XIV to theCompanies Act, 1956.

(b) 100 % depreciation is charged on assets of small value in the year of purchase, other than thoseforming part of project, the cost of which is below Rs.0.01 Millions in case of Apparatus & Plants,Training Equipment & Testing Equipment and Rs.0.20 Millions for partitions.

3. InventoriesInventories being stores and spares (includes inventories held for capital consumption) are valued at cost,which are worked out on weighted average method. WLL handsets are valued at cost or net realisablevalue, whichever is lower.

4. Foreign Currency TransactionsTransactions in foreign currency are stated at the exchange rate prevailing on the transaction date. Year-end balances of current assets and liabilities are restated at the closing exchange rates and the differenceadjusted to Profit & Loss Account.

5. Deferred Revenue ExpenditureCompensation paid to employees retired under Voluntary Retirement Scheme (VRS) is treated as deferredrevenue expenditure to be written off over a period of five years.

64

MTNLB. NOTES TO ACCOUNTS

2005-2006 2004-2006(Rs. in Million) (Rs. in Million)

1. Contingent Liabilities(a) Income Tax

Demands disputed and under appeal 62994.99 55228.39(b) Sales Tax & Service Tax, Municipal

Tax Demands disputed and under appeal 1069.60 2807.20(c) * Disputed Demand under Lease Act 2649.99 2649.99(c) i Interest to DDA on delayed Amount Amount

payments/Pending Court Cases Indeterminate Indeterminateii Pending Court Cases/Tax cases Amount Amount

Indeterminate Indeterminateiii Stamp duty payable on land and Amount Amount

buildings acquired by the Company Presently PresentlyUnascertainable Unascertainable

(e) Claims against the Company notacknowledged as Debts. 3009.67 1721.23

(e) Bank guarantee & Letter of Credit 771.00 459.00(f) Directory dispute 2852.50 2852.50(g) Interest on cancellation of 959.94 959.94

6th series of Bonds(Canfina)

* Sales Tax Authorities of Maharashtra State withdrew the demand made from 1986-87 to 1997-98consequent to Sales Tax Tribunal Judgment and refunded the advance payment made there fromconsequent to the judgment by Supreme Court in the matter of U.P. State Government vs. Union ofIndia (DOT), the authorities have raised fresh demand for the period from 1998-99 to 2002-03 for Rs.2649.99 Millions (including Rs. 705.99 Millions as penalty). Demands for 2003-04, 2004-05 and 2005-06 are yet to be received.

2. Estimated amount of contracts remaining to be executed on Capital Account and not provided for(Net of Advances) in relation to execution of works and purchase of equipments is Rs. 3923.25Millions (Rs. 2162.15 Millions). In respect of contracts where expenditure already incurred has exceededthe contract value and the contract remains incomplete,additional expenditure required to completethe same cannot be quantified.

3.A. During the year following are the changes in the Accounting Policies:

i) In case of Mobile Services (GSM), the provision is made for dues, which are outstanding formore than 180 days as against the earlier Policy for more than 120 Days. The change in accountingpolicy has resulted in decrease in the provision for doubtful debts by Rs. 37.30 Millions and theconsequential increase in the profit before tax by the same amount.

ii) The earlier policy with regard to inventory - "Inventory being Stores and Spares is valued at cost.In case of exchange equipment, cost is worked out on a specific basis. In case of other inventory,it is worked out on weighted average method. WLL handsets are valued at cost or Net RealizableValue, whichever is lower." has been changed to "Inventories being stores and spares (includesinventories held for capital consumption) are valued at cost, which are worked out on weightedaverage method. WLL handsets are valued at cost or Net Realizable Value, whichever is lower."

There is no impact of the above in the accounts.

65

MTNL3.B. New Accounting Policies introduced during the year 2005 - 06

a. Income from services includes income from leasing of infrastructure to other services providers.Hitherto income from leasing of infrastructure to other service providers was shown under otherincome. During the year, the above income is shown under head "Income from Services". Thereis no impact due to change in depiction of the accounts.

b. The Compensation paid to employees retired under VRS is scheme is treated as deferred revenueexpenditure and is to be written off over a period of five years.

3.C. Deletion of Accounting Policy during the year 2005 - 2006During the year, the following policy has been deleted : -

"In terms of the arrangement between the DOT / BSNL and the company, charges for reciprocalservices are not accounted for." The change in accounting policy has resulted in increase in Incomefrom Services by Rs. 320.39 Millions.

4. During the year an amount of Rs. 40.83 Millions (Rs.368.52 Millions) was written back on account ofnon settlement of unmatched receipts for the period 1.4.2001 to 31.03.2002.

5. Other liabilities include credits on account of receipts including service tax from subscribers amountingto Rs.204.96 Millions (Rs.203.22 Millions), which could not be matched with corresponding debtors oridentified as liability, as the case may be. Appropriate adjustments/ payments shall be made inclusiveof service tax, when these credits are matched or reconciled.

6. No provision has been made for post retirement medical benefits as Post Retirement Medical schemeis only an adhoc and non-contributory scheme.

7. a) As per legal opinion received by the Company, it can avail benefit under Section 80 IA of theIncome Tax Act, 1961. Accordingly, the benefit has been claimed from Financial Year 1996-97onwards. Provision for Income Tax from the year 1999-2000 to 2005-06 has been made consideringsuch benefit. The company has claimed this benefit during 1996-97 by way of written submissionbefore the assessing officer and for financial Year 1997-98, the company has revised its incometax return and filed the return for 1998-99 availing benefit u/s 80IA of the Income Tax Act 1961.However, provision for Income Tax for 1996-97, 1997-98 and 1998-99 has been made in theaccounts without considering benefit under Sec 80 IA.

b) An amount of Rs. 14203.65 Millions (including Rs. NIL for the Current Year) which has beenprovided in the accounts till date by claiming benefit under Section 80IA has been transferred toContingency Reserve to meet any contingency arising from denial of this benefit.

c) Provision for taxation for the current year comprises of Income Tax of Rs. 499.33 Millions,Deferred Tax liability of Rs. 376.19 Millions, Wealth Tax of Rs. 5.53 Millions and Rs. 55.90Millions for Fringe Benefit Tax.

8. During the year, the company has received an order from Income Tax Appellate Tribunal (ITAT), onthe issue of License Fee and certain other issues, for the Assessment Years 1998 - 99, 1999- 00,2000-01 and 2002-03. On of the basis of the above order and the opinion received from company'sIncome Tax Consultant, Refund due and Interest Due thereon from Income Tax Department has beencalculated and an amount of Rs. 1944.84 Millions has been booked as Income on account of InterestReceivable from Income Tax Department.

9. (a) The supplemental agreement entered into between United India Periodicals Pvt. Ltd./UnitedData Base(India) Pvt. Ltd/ Sterling Computers Ltd and the company for printing of telephonedirectories was struck down by the Hon'ble High Court of Delhi on 30.9.92 and the said decision

66

MTNLwas upheld by the Hon'ble Supreme Court of India on 12.1.93. A claim against the Company hasbeen raised by Sterling Computers Ltd. for Rs. 258.2 Millions which being under dispute, has notbeen provided for. The company has filed its counter claims of Rs. 228.7 Millions before theHon'ble High Court against Sterling/UDI/UIP and has also filed arbitration claims of Rs. 561.8Millions against these parties under the original agreement. Pending finalisation of this dispute,the company has raised and recorded as 'Claims Recoverable', a claim for Rs. 154.91 Millions(Rs. 154.91 Millions) on account of royalty, interest and billing charges and on payments madethrough Letter of Credit; Rs.130.47 Millions (Rs.130.47 Millions) recovered there against by thecompany from subscribers for the issue of directories, is carried under 'Current Liabilities'. Furtherclaims of the Nigam for interest and service charges aggregating Rs.143.67 Millions (previousyear Rs.143.67 Millions) have not been accounted for. Financial implication of the claim raisedagainst the company, adjustment of the sums received against outstanding claims, any non-realisation of claim and further claims recoverable shall be effected upon determination based onthe outcome of the proceedings in the court of law.MTNL has moved an application under section 446 of the Companies Act, 1956 praying to showarbitral proceedings to be continued between parties pending beforeHon'ble Mr. Justice K.S.Tiwana (Retd.) Sole Arbitrator and grant permission to continue withOMP No. 135/94.

(b) MTNL entered into contracts with M/s M & N Publications Limited for printing, publishing andsupply of telephone directories for Delhi and Mumbai units for a period of 5 years starting from1993. In view of the breaches of the terms and conditions of the contracts committed by thecontractor in publishing first issue of the directories of both units and their failure to execute theremaining part of the contracts, both the contracts were terminated by MTNL on 22.07.1996.Income from royalty and other applicable recoveries, for first issue published by contractor, Rs.181.2 Millions have been accounted for and received. Sole Arbitrator has been appointed by boththe parties. The effect of claims under the contract for remaining issues published by contractorwill be accounted for in the year of issuing of award by Sole Arbitrator.

10. Certain Lands and Buildings capitalised in the books, are pending registration/legal vesting in thename of the company and the landed properties acquired from DOT have not been transferred in thename of the company and in the case of leasehold lands the documentation is still pending.

11. The Mumbai Unit had applied for amnesty under the Maharashtra Kar Nivaran Yojana, 1999 in respectof the sales tax demands of Rs 8.10 Millions (Rs. 8.10 Millions). The application for amnesty towardsdemands aggregating Rs.2.09 Millions (Rs.2.09 Millions) has been accepted. The balance applicationsrelating to demands of Rs.6.02 Millions (Rs.6.02 Millions) are under process and are not includedunder Contingent Liabilities.

12. As per directions of the court, one UASL operator has deposited Rs. 3412.74 Millions against theclaim of the same amount. The company has recognised revenue of Rs 2367.90 Millions in 2004-05and the balance amount of Rs. 1044.84 Millions in the current year. The petition filed by UASLoperator before Hon'ble High Court, Delhi is dismissed as withdrawn with a liberty to the UASL operatorto take steps in accordance with law. However, the UASL operator has filed an application in thesame court seeking appointment of arbitrator. As per the law settled by the Telecom Dispute Settlementand Appellate Tribunal (TDSAT) Order in Petition No. 6 of 2003 dated 6th January 2005, which hasattained finality has held that"…. Policy demands that jurisdiction of tribunal like TDSAT should beexclusive and arbitration agreement not to have any applicability." Law having been settled by theTDSAT, in the above judgement, the application for appointment of arbitrator as per the settledposition may not be allowed. Till now, the UASL operator has not taken any steps to file the casebefore the designated authority i.e. TDSAT.

67

MTNL13. a) BSNL has raised a claim of Rs 18400.00 Millions on MTNL for Network and other charges. A

committee was formed by DOT to resolve the issue. DOT had communicated that a sum of Rs2665.50 Millions would be payable by MTNL to BSNL.The dispute between BSNL & MTNL inrespect of revenue sharing for the period upto March'05 has been resolved and MTNL has paidthe amount to BSNL. An amount of Rs.2388.20 Million have still not been finalized and theamount is shown as receivable from BSNL. As a result of reconciliation, an amount ofRs.2665.50 Millions has been charged under Revenue Sharing A/c in Profit & Loss Accountduring the year and the balance amount of Rs. 1467 Millions has been written off. Consequent tothe above, necessary adjustments have been made in License Fees.

b) BSNL has been carrying all NLD traffic (both incoming as well as outgoing) of MTNL through theTAXs in Delhi and Mumbai owned & operated by MTNL since its inception & significantly expandedby MTNL over the years. In terms of IUC regulation of TRAI dated 29.10.2003, a claim for TAXusage/transit charges of Rs. 2481.67 Millions has been lodged with BSNL for the period from1.2.04 to 31.3.06. The same has been recognised as revenue. Similar transit charges are beinglevied by BSNL and are being accepted by MTNL as due.

c) During the year, the company has accounted for Rs.320.39 Millions, on account of serviceconnections provided to BSNL employees

d) During the year the Company has claimed from BSNL charges for leasing infrastructure ofRs.2115.64 Millions (Rs 964.62 Millions in respect of Delhi Unit and Rs.1151.02 Millions forMumbai unit) for the period from 01.10.2000 to 31.3.2006 as per the tariff in force. The same hasbeen recognised as revenue in the current year in accordance with the accounting policy of thecompany.

e) In Mumbai Unit, BSNL has claimed ADC for Garuda FW calls for the period from 14.11.2004 to31.03.2006 amounting to Rs. 63.40 Millions. No provision has been made for the same pendingdecision of the matter before the Hon'ble Supreme Court between BSNL and other operators.

f) The Mumbai unit has computed and accounted for IUC charges of BSNL for the Current year onthe basis of actual CDR's recorded in MTNL's Mumbai exchanges. In respect of intra circle calls,carriage charges are computed with reference to Leased Lines and accounted. Entries havebeen passed accordingly for amount payable of Rs. 2543.9 Millions (Rs. 2172.9 Millions) andamount receivables of Rs. 1984.8 Millions (Rs. 616.7 Millions).

14. During the year an amount of Rs. 832.50 Millions outstanding dues up to 31.3.2002 has been technicallywritten off in respect of Basic Services.

In respect of mobile services, Rs. 481.31 Millions outstanding dues up to 31.3.2003, has beentechnically written off.

15. During the year, the company offered two VRS schemes to its employees. The first scheme wasopened on 1st June 2005 and was closed on 30th June 2005 for its Group B employees. 604 executivesopted for VRS. The compensation amounting to Rs. 691.36 Millions has not been provided in the Booksof Accounts as the benefit will accrue to the Company in the subsequent years. The second scheme

was opened on 28th March 2006 and was closed on 10th April 2006 for its Group C & D employees.Since the scheme was still open as on the date of the Balance Sheet i.e. 31st March 2006, noprovision has been considered necessary.

16. WLL handsets (Model IS 95) are being used by staff for service connections, while exploring thepossibility of usage of these sets in stores which are kept with due care so that later on IS 95handsets may be used when need arises.

68

MTNL17. In respect of Delhi Unit, billing of Circuits has been done subject to revision of tariff w.e.f. 01/05/05

and its impact on finalization of billing is expected to be around Rs.240 Millions, for which provisionis already made in the accounts.

18. In respect of Mumbai Unit Provision for Bad & Doubtful Debts for CDMA based mobile services hasbeen made as per the policy for fixed line services. However, keeping in view the number of defaultingsubscribers, an ad-hoc provision of Rs 50 Millions has been made for debts of less than 3 years andEMI receivables, as a matter of prudent policy.

19. The company had subscribed to 8.75% Cumulative Preference Share of M/s. ITI Limited, amountingto Rs.1000 Millions during the year 2001-02. As per the terms of allotment, the above PreferenceShares were proposed to be redeemed in 5 equal installments in the 3rd, 4th, 5th, 6th and 7th year.Accordingly, two installments amounting to Rs. 200 Millions each have become redeemable. Thesame has not been redeemed by ITI Limited. Moreover, no dividend income has been booked in theaccounts for the same, as ITI Limited has not declared any dividend.

20. In respect of Mumbai Unit the bank reconciliation statements as at 31st March, 2006 include unmatched/unlinked credits/ debits given by the banks amounting to Rs. 2.09 Millions (Rs.3.97 Million) and Rs.6.08 Millions.(Rs.13.60 Million) respectively, which could not be properly accounted for in the absenceof adequate particulars.

21. a) Deposits from applicants and subscribers as on 31st March 1986 i.e prior to the incorporation ofMTNL were Rs.1503.58 Millions. Corresponding assets shown under claims recoverable are beingreduced by the amount of recovery of rebate on rental and by the amount of recovery of applicationdeposit for which connections have been released to subscribers with effect from 1.4.1986.Balance still recoverable from DOT on this account is Rs. 558.38 Millions (Rs. 555.12 Millions).

b) The balance in the Subscribers' Deposit Accounts of Rs. 11593.29 Millions (Rs.12625.48 Millions)and Interest Accrued and Due thereon of Rs. 47.99 Million (Rs. 52.27 Millions) is subject toreconciliation with the relevant subsidiary records.

22. The aggregate balance of sundry debtors as per the subsidiary records is short by Rs. 11.77 Millions(Rs. 10.26 Millions) as compared to the balance in General Ledger and is under reconciliation. Theresultant impact of the above on the account is not ascertainable.

23. a) Amount recoverable on current account from DOT is Rs. 29443.50 Millions (Rs. 26171.15 Millions)and amount payable is Rs. 195.61 Millions (Rs. 171.95). The net recoverable of Rs.29247.90Millions (Rs. 25999.20 Millions) is subject to reconciliation and confirmation.

b) Amount recoverable on current account from BSNL is Rs.4872.04 Millions (Rs. 10782.59 Millions)and amount payable is Rs. 4005.48 Millions (Rs. 3872.39 Millions). The net recoverable of Rs.866.56 Millions (Rs. 6910.20 Millions) is subject to reconciliation and confirmation

24. a) Out of total provision of Gratuity of Rs. 6109.09 Millions upto 31.3.2006, an amount of Rs.1943.72 Millions and Rs. 679.51 Millions is recoverable from DOT, in respect of Group C & D andGroup B employees respectively, for the period prior to their absorption. As on 31.3.2006 Rs.3485.86 Millions is available with the Gratuity Trust.

b) The total provision of Leave Encashment is Rs. 2472.90 Millions upto 31.3.2006. Out of this, anamount of Rs. 433.74 Millions and Rs. 979.52 Millions is recoverable, from DOT in respect ofGroup B and Group C & D employees respectively for the period prior to their absorption in MTNL.

69

MTNLc) An amount of Rs. 8517.42 Millions (Rs. 10457.94 Millions) towards GPF contribution is recoverable

from DOT as on 31.3.2006. The amount pertains to Group C& D and Group B employees absorbedin MTNL w.e.f. 01.11.98 and 01.10.2000, respectively.

d) The total provision of Pension is Rs. 26391.19 Millions upto 31.3.2006. Out of this an amount ofRs. 7546.20 Millions and Rs. 2236.98 Millions is recoverable from DOT in respect of Group C&Dand Group B employees for the period prior to their absorption.

25. The amount of receivables and payables is subject to confirmation and reconciliation. Pending suchconfirmation/ reconciliation, the impact on the account is not ascertainable at this stage.

26. CDMA revenue includes Rs.133.60 Millions (Rs. 68.26 Millions) towards suspected cloning calls outof which provision for Rs. 80.40 Millions (previous year - amount not ascertained) has been made tothe extent identified. The Management is in process of reviewing the same.

27. As per suspense list in MS Mumbai unit, 15,39,080 CDR's are lying in rejection in the computer billingsystem and an amount of Rs. 5.40 Millions being estimated value of these CDR's are accounted asincome. In MS Delhi unit, as per suspense list, CDR's are lying in rejection in computer billing system.Certain discrepancies have been noticed in 'Tap in & Tap' out files upon checking of the bills ofroaming operators. This is under reconciliation.

28. a) During the year, MS Delhi Unit has booked IUC charges from other operators w.e.f Dec. 04 toMarch 06 amounting to Rs. 23.30 Millions and Rs. 0.24 Millions, respectively as recoverable &Rs. 1.4 Millions and Rs. 0.86 Millions, respectively as payable.

b) In respect of accounting for billing of subscribers for Mobile Services and collections madethereon, the MS Delhi unit has implemented computerised billing system and the financial entriesfor booking of income and debtors accounting have been incorporated in the books of accountsbased on the output generated through computer system.

c) In respect of MS Unit, reconciliation between number of active connections and billed connectionsis in progress and its consequential effect on the accounts is not ascertainable.

29. Pending final settlement, the following have not been accounted for:

(Rupees in million)2005-06 2004-05

a) Customs Duty Refund Claims 53.21 53.59b) Insurance Claims for damages due to floods 461.07 -c) Service Charges for 1992 issue of Directory. 0.59 0.59d) Interest on advances for 1992 Directory 797.99 634.67e) Service Tax Refund claimed 53.52 -

30. a) Remuneration paid/payable to the Chairman & Managing Director(s) and Other Directors for theyear ended 31st March 2006:-

For the Year For the yearended 31.03.2006 ended 31.03.2005

i) Remuneration 2.87 Millions 2.29 Millionsii) Perquisites 0.61 Millions 0.30 Millions

70

MTNLb) Remuneration to Auditors:

Statutory BranchAuditors Auditors

(Rs.in Million) (Rs.in Million)(i) As Audit Fee 0.55 1.55

(0.54) (1.52)(ii) As Tax auditors 0.16 0.52

(0.19) (0.45)(iii) In other capacity - for certification 0.10 0

(0.03) (0)(iv) Limited Review 0.41 1.17

(0.47) (1.10)(v) Auditors Expenses 0.29 0.54

(0.18) (0.47)

31. 2005-2006 2004-2005(Rs. in Million) (Rs. In Million)

(a) Value of(i) Imports on CIF basis NIL NIL(ii) Others NIL NIL

(b) Expenditure in Foreign Currencies 27.64 54.4(c) Earnings in foreign Exchange 83.52 46.76(d) Gross Income from Services 55609.85 55820.70

32. The Balances with Non Scheduled Banks comprise of :-Name of the Bank Balance as Maximum

on 31.3.2006 balance duringthe year


Patan Cooperative Bank Ltd.., Mumbai 0.03 0.03(Account closed. considered doubtful) (0.03) (0.03)Indira Sahakari Bank Ltd., Mumbai 5.59 5.69(Considered doubtful) (5.69) (5.69)The Mogaveera Coop. Bank Ltd, Mumbai 0.04 0.04

(Account closed, considered doubtful) (0.04) (0.04)

The maximum balance outstanding during the year have been taken as per the bank statements ofthe individual branches in respect of the operative accounts, since the unit maintains its accounts foreach bank as a whole without accounting for the balances with individual bank branches.

33. Disclosure in respect of Small Scale Industrial Undertakings (SSIs) as required by Part I of ScheduleVI to the Companies Act, 1956 is as follows:-a. Outstanding dues, over 30 days to SSIs exceeding Rs. 1 Lac for Mumbai Unit are Nil (Nil), for

MS Unit disclosure of outstanding dues has not been made & for Delhi Unit outstanding dues areRs 3.28 Millions (Rs. 1.95 Millions).

b. The liability for interest, if any, payable in terms of the Interest on Delayed Payments to SmallScale & Ancillary Industrial Undertakings Act, 1993 is not presently determined.

71

MTNL34. Information required under Paragraphs 3(x)(a) and 4D(c) of Part II of Schedule VI to the Companies

Act 1956 is not ascertainable, since (i) consumption of stores is included under the normal heads ofCapital Expenditure and/or Repairs & Maintenance, and (ii) the issue of imported and indigenousitems are not separately priced/ identified.

35. There is no agreement between the Company and DOT for interest recoverable/payable on current account.Accordingly no provision has been made for interest payable/receivable on balance during the year.

36. Information regarding Primary Business Segments: - AS - 17

AUDITED SEGMENT WISE REVENUE, RESULTS AND CAPITAL EMPLOYEDFOR THE YEAR ENDED ON 31/03/2006

Rs. in MillionS. Particulars Year Ended Year EndedNo. 31.3.2006 31.3.2005

(Audited) (Audited)1. Income from Services

Basic & Other Services 49,883.22 53,153.12Cellular 5,726.62 2,770.73Unallocable - -Total 55,609.85 55,923.85Less: Inter Unit Income - -Net Income From Services 55,609.85 55,923.85

2. Segment result before interest/ and TaxBasic & Other Services 2,124.74 9,573.10Cellular 2,644.17 1,069.42Unallocable 2,189.03 1,872.28Total 6,957.94 12,514.80Less: Interest 244.36 358.12Less: Prior Period Items (26.29) 94.46Profit before tax 6,739.87 12,062.22Less: Provision for Tax 936.95 2,672.41Profit after tax 5,802.92 9,389.81

3. Capital Employed(Segment Assets - Segment Liabilities)Basic & Other Services 46,401.19 41,324.50Cellular 3,535.22 3,118.35Unallocable 62,007.19 64,995.39Total 111,943.60 109,438.25

Notes:-1. The company has disclosed Business Segment as the Primary Segment. Segments have been

identified taking into account the nature of the services, the deferring risks and returns, theorganisational structure and internal reporting system

2. The company caters mainly to the needs of the two metro cities viz. Delhi and Mumbai. As suchthere are no reportable geographical segments.

3. Segment Revenue, Segment Result, Segment Asset and Segment Liabilities include the respectiveamount identifiable to each of the segments. The expenses, which are not directly relatable to thebusiness segment, are shown as unallocable corporate assets and liabilities respectively

72

MTNL37. Related Party Disclosures - AS-18

a) List of Related Parties and RelationshipsParty RelationDepartment of Telecommunication Holding 56.25% shares of the CompanyMillennium Telecom Limited Wholly owned SubsidiaryMahanagar Telecom Mauritius Ltd. Wholly owned SubsidiaryUnited Telecom Limited Joint VentureMTNL STPI IT Services Ltd. Joint VentureKey Management PersonnelMr. R.S.P. Sinha CMDMr. V. Shiv Kumar Director (HR)Mr. Kuldip Singh Director (Technical)Mrs. Anita Soni (Part of the year) Director (Finance)Mr. K. C. Gupta Executive Director (operation)Mr. M.S.Rana(Part of the year) Executive Director, Mumbai.Mr. A. K. Girotra (Part of the year) Executive Director, Delhi.Mr. A.K.Arora(Part of the year) Executive Director (Delhi)Mr. Kuldeep Goyal(Part of the year) Executive Director (Mumbai)

(Rs. In Million)b) Related Party Transactions

(Except DOT)

Transactions Subsidiary Joint Venture Key Management PersonnelGuarantees - - -Unsecured Loan 0.23 NIL NILRemuneration Paid - - 2.87Loans & Advances - 3.36 -Others 0.05

38. Earning Per Share - AS-201) Profit after Tax Rs. 5802.92 Million2) Number of Shares 630 Million3) Nominal value of shares Rs. 10/-4) Basic/ diluted EPS Rs. 9.21

39. Consolidated Financial Statements - AS 21 & AS 27The financial statements of Millennium Telecom Limited, Mahanagar Telephone Mauritius Limited(wholly owned subsidiaries of the Company) & United Telecom Limited (Joint Venture) has beenconsolidated in accordance with the Accounting Standard - 21 & Accounting Standard - 27,respectively. However, the financial statements of MTNL - STPI IT Limited have not been preparedand consolidated in view of the incorporation of the company on 31st March 2006.

40. No provision has been made for any loss on account of impairment of assets under AccountingStandard 28 as there is no indication of any impairment of assets of the Company.

41. During the year, One Time Lump-sum payment was received from the subscribers for life longconnection under Trump Pre-paid mobile connection. The same has been treated as revenue in theyear of receipt.

73

MTNL42. Balance Sheet Abstract and Company's General Business Profile - PART IVSources of Funds:

(i) Registration DetailsRegistration No. 23501 State Code 55Balance Sheet Date Date Month Year

31 03 2006(ii) Capital raised during the year (Rs. in Million)

Public Issue(GDR) Nil Rights Issue NilBonds Issue Nil

(iii) Position of Mobilisation and Deployment of Funds (Rs. in Million)Total Liabilities 118484 Total Assets 118484Sources of Funds:Paid up Capital 6300 Reserves & Surplus 106068Secured Loans NIL Unsecured Loans NILApplication of Funds:Net fixed assets+Capital WIP 70942 Investment 4187Net Current Assets 42212 Misc. Expenditure 1142Accumulated Losses NIL

iv) Performance of Company (Rs. in Million)Turnover 60910 Total Expenditure. 54196Profit before Tax 6714 Profit After Tax 5777Earning per share in Rs. 9.21 Dividend Rate 40%

v) Generic names of three Principal Product/services of Company (as per monetary terms)Item Code No. NOT AVAILABLE(ITC Code)Product Description TELEPHONE SERVICEItem Code No. NOT AVAILABLE(ITC Code)Product Description TELEXItem Code No. NOT AVAILABLE(ITC Code)Product Description CIRCUITS

43. Previous year figures have been regrouped / recast to confirm to current year's presentation.Amounts in brackets represent the previous year's figures.

44. Schedules "A" to "T" form an integral part of the Balance Sheet and the Profit and Loss Account.


(Accounts) Managing DirectorFor Dhawan & Co.Chartered Accountants

(I.J.Dhawan)Partner (M.No:81679)PLACE: MUMBAIDATED : 30th June, 2006

74

MTNLAnnexure-I

MAHANAGAR TELEPHONE NIGAM LIMITEDCash Flow Statement for the year ended 31st March, 2006

[Pursuant to Clause 32 of Listing Agreement(s) as (amended)]


A. Cash Flow from Operating ActivitiesNet profit before Tax and extra ordinary items 6713.58 12156.67

Adjustment for:Prior period adjustment (net) 55.22 -12.85Profit on sale of fixed assets -6.70 -8.50Loss on sale of fixed assets 94.27 208.08Depreciation 6466.99 5880.07Compensation charged under VRS Scheme 285.63Compensation paid under VRS Scheme -1428.11Interest Cost 244.36 358.12Interest Income -4009.42 -2478.46Interest paid -244.00 -360.68

Operating cash profit before working capital changes 8171.82 15742.46

Adjustment for:Trade and other receivables -6315.88 -3984.34Inventries 487.90 -978.17Trade and other payables -5848.67 6079.08

0.00 0.00Cash generated from operations -3504.82 16859.02Direct Taxes paid 5637.95 -4731.95

Net Cash Flow from Operating Activities 2133.13 12127.08

B. Cash Flow from Investing ActivitiesPurchase of fixed assets -6595.37 -10276.54(inclulding capital W.I.P.)Sale of Fixed Assets 26.28 79.24Interest received 4010.92 2514.92Investment -212.59 -167.72Net Cash Flow from Investing Activities -2770.75 -7850.10

75

MTNLC. Cash Flow from Financing Activitgies

Repayment of Loans -1.40 -3.87Dividend paid (including tax) -3950.97 -4630.17Net Cash Flow from Financing Activities -3952.37 -4634.04

D. Net Increase/Decrease in Cash and Cash Equivalents -4589.99 -357.06

Cash and Cash equivalent as at the beginning of the year 25173.98 25531.04 Cash and cash equivalient as at the end of the year 20583.99 25173.98

Note:-1. Previous year figures have been regrouped wherever necessary


(Accounts) Managing Director


(I.J.Dhawan)Partner (M.No:81679)

PLACE: MUMBAIDATED : 30th June, 2006

76

MTNLConsolidated Balance Sheet of Mahanagar Telephone Nigam Ltd.

as at 31st March, 2006As at 31.3.2006 As at 31.3.2005(Rs. in Million) (Rs. in Million)

SOURCES OF FUNDSShareholders' FundsShare Capital A 6,300.00 6,300.00Reserves & Surplus B 105,831.57 102,994.27

Loan FundsSecured Loans C 166.75 166.75Deferred Tax Liability (Net) D 6,091.13 5,738.87Total 118,389.45 115,199.89

APPLICATION OF FUNDSFixed Assets EGross Block 148,828.76 142,811.28Less : Depreciation 83,000.91 77,932.98Net Block 65,827.85 64,878.30

Capital Work-in-Progress F 5,483.46 6,270.57Investments G 3,500.00 3,500.00

Current Assets, Loans & AdvancesInventories H 1,431.24 1,919.60Sundry Debtors I 14,221.25 17,647.46Cash & Bank Balances J 20,693.58 25,340.47Other Current Assets K 945.44 850.89Loans & Advances L 96,541.90 101,495.59

133,833.42 147,254.01

Less : Current Liabilities and ProvisionsCurrent Liabilities M 40,346.80 50,691.33Provisions N 51,065.88 56,037.38Net Current Assets 42,420.74 40,525.30Miscellaneous Expenditure 1,157.40 25.72(to the extent not written off)Total 118,389.45 115,199.89The Schedules referred to above form an integral part of the Balance Sheet.


(Accounts) Managing DirectorFor Dhawan & Co.Chartered Accountants


77

MTNLConsolidated Profit & Loss Account of Mahanagar Telephone Nigam Ltd.

for the year ended 31st March, 2006

As at 31.3.2006 As at 31.3.2005(Rs. in Million) (Rs. in Million)

INCOMEIncome from Services O 55,720.93 55,886.37Other Income P 5,306.60 4,917.99

61,027.53 60,804.36EXPENDITUREEmployees' Remuneration and Benefits Q 19,057.87 18,365.59Revenue Sharing 12,294.40 8,781.99Licence Fee 4,609.22 5,034.23Administrative,Operating & Other Expenses R 11,661.88 10,285.35Depreciation E 6,514.19 5,939.04Interest S 261.23 369.27

54,398.79 48,775.47Profit Before Tax 6,628.74 12,028.89Provision for Taxation 560.83 2,567.46Provision for Deffered taxation 376.19 105.46Profit After Tax 5,691.72 9,355.97Prior period adjustments T (25.93) 94.47Profit For the Year 5,717.65 9,261.50Profit Available for Appropriation 5,717.65 9,261.50Appropriation :Interim/Final dividend 2,520.00 2,835.00Tax on Dividend 353.43 392.82Transfer To Contingency Reserve - 710.30Reserve for R&D - -General Reserve 2,844.22 5,323.44

5,717.65 9,261.56Earning Per ShareBasic/Diluted earnings per share (in Rs.) 9.08 14.70The Schedules referred to above form an integral part of the Profit & Loss Account.



In terms of our report of even dateFor Dhawan & Co.Chartered Accountants


78

MTNLSCHEDULES FORMING PART OF BALANCE SHEETSCHEDULE-A

Share CapitalAs at As at

31.3.2006 31.3.2005(Rs.in Million) (Rs.in Million)

AUTHORISED CAPITAL80,00,00,000 Equity Shares of Rs.10/- each 8,000.00 8,000.00

ISSUED SUBSCRIBED AND PAID UP CAPITAL63,00,00,000 Fully paidEquity Shares of Rs. 10/- each 6,300.00 6,300.00

Out of the above shares(i) 59,99,98,400 Equity Shares are

allotted as fully paid up pursuantto a contract without payment beingreceived in cash out of which35,43,72,740 Shares are held by theGovernment of India

(ii) 3,00,00,000 Equity Shares are allotted as fully paidup represented by Global Depository Receipts (GDRs)through an International Offering in US Dollars.One GDR represented two equity shares.In Nov, 2001the GDRs were exchanged in AmericanDepository Shares (ADSs) on a one -for-one basis one ADSalso represent two of our equity shares. 6,300.00 6,300.00

SCHEDULE-BReserves & Surplus

As at Addition Deduction As at 1.4.2005 during the year during the year 31.3.2006

(Rs in Million) (Rs in Million) (Rs in Million) (Rs in Million)

Bonds Redemption Reserve - - - -

Bonds Redemption Reserve(Prev.Yr) (0) (0) (0) -

Share Premium 6,650.05 6,650.05

Share Premium(Prev.Yr) (6,650.05) (0) (0) (6,650.05)

General Reserve 81,832.57 2,844.22 6.92 84,669.87

General Reserve(Prev.Yr) (76,510.65) (5,323.38) (1.46) (81,832.57)

Reserve For Contingencies 14,203.65 - 14,203.65

Reserve For Contingencies(Prev.Yr) (13,493.35) (710.30) (0) (14,203.65)

Reserve For Research & Development 308.00 308.00

Reserve For Research & Development(Prev.Yr) (308.00) - (0) (308.00)

TOTAL 102,994.27 2,844.22 6.92 105,831.57

(96,962.05) (6,033.68) (1.46) (102,994.27)

79

MTNLSCHEDULE CSecured Loans

As at As at31.3.2006 31.3.2005


Term Loan (PNB-EBL) 166.75 166.75

GRAND TOTAL 166.75 166.75

SCHEDULE DDeferred Tax Liability (Net)

Deferred Tax Current Year Deferred TaxLiability (Asset) Charge/(Credit) Liability (Asset)As at 1.04.2005 (Rs. in Million) As at 31.03.2006

Deferred Tax LiabilitiesDifference between Book,

Tax Depreciation & others 11,265.39 1,353.81 12,619.20Difference between Book,

Tax Depreciation & others(Prev.Yr) (9,741.58) (1,523.81) (11,265.39)

11,265.39 1,353.81 12,619.20(9,741.58) (1,523.81) (11,265.39)

Deferred Tax AssetsProvision for Doubtful Debts,

Advances and Bank Balances -2781.82 -329.33 -3111.15Provision for Doubtful Debts,

Advances and Bank Balances(Prev.Yr) (-2377.81) (-404.01) (-2781.82)

Provision for Obsolete Stock -186.09 -44.15 -230.24Provision for Obsolete Stock(Prev.Yr) (-127.9) (-58.19) (-186.09)

Others -2558.6 -628.08 -3186.68Others(Prev.Yr) (-1602.46) (-956.14) (-2558.60)

Total B -5526.51 (1,001.56) -6528.07(-4108.17) (-1418.34) (-5526.51)

Deferred Tax Liability (A) – B) 5,738.87 352.25 6,091.13 (5,633.41) (105.47) (5,738.87)

80

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81

MTNLSCHEDULE-F

Capital Work-In-Progress

As at As at31.3.2006 31.3.2005


Buildings 509.45 777.97 Apparatus & Plants 3,265.75 3,782.25 Lines & Wires 17.69 18.10 Cables 1,437.16 1,444.65 Subscribers' Installations 136.29 144.37 Air Conditioning Plants 142.99 121.18 Less Provision For Abandoned Works (25.87) (17.95)

5,483.46 6,270.57

SCHEDULE-G

InvestmentsAs at As at


Long Term-Non Trade (At Cost)

Investment in 10000000 8.75%Un Quoted preference share of Rs. 100/- eachfully paid up with M/s. ITI Ltd.(Refer Note No.19) 1,000.00 1,000.00

Investment in subsidiary company-MillenniumTelecom Ltd. (Un Quoted 2875880 Equity sharesof Rs. 10 each fully paid up) - -

Mahanagar Telephone Mauritius Ltd.(Un Quoted Equity Share of 26925526 ofMUR 10 (INR 15.7854) each fully paid up) - -Investment in Joint Ventures - -with United Telecom Ltd. (Un-Quoted 2334500Equity Share of Rs.100 each, fully paid up) - -

Investment in Un Quoted 11.5% Bonds fully paid up ofMaharashtra Krishna Valley Development Corporation Ltd. 2,500.00 2,500.00(Redemption in the Year 2012)

3,500.00 3,500.00

82

MTNLSCHEDULE-H

Inventories (At Cost)

As at As at31.3.2006 31.3.2005


Stores and Spares:Building Material 0.62 0.48Lines & Wires 86.25 82.72Cables 880.58 1,060.86Exchange Equipments 337.49 495.27WLL Equipments 9.43 3.37Telephone & Telex instruments 203.20 350.86WLL Instruments 179.86 192.38Telephones & Telex Spares 0.08 0.09Installation Test Equipments 21.21 4.08Store - in -Transit 0.07 -Mobile Handsets & Sim Cards 11.15 9.76

1,729.94 2,199.87Less: Provision for obsolete stores 298.70 280.27

1,431.24 1,919.60

SCHEDULE-I

Sundry Debtors (Unsecured)*As at As at


Outstanding for a Period Exceeding Six Months Considered Good 3,703.62 7,685.62 Considered Doubtful 1,733.62 2,943.35

Other Debts #Considered Good 10,427.73 9,066.93 Considered Doubtful 65.71 85.71

15,930.68 19,781.61 Less: Provision for doubtful debts 1,690.84 2,116.64 Less: Provision for wrong billing 18.59 17.51

14,221.25 17,647.46

# Include Rs 7807.65 Millions (4307.72) on account of income accrued from services

* Except to the extent covered by Security Deposits from subscribers.

For the current year, debtors exceeding Six months, considered good & doubtful includes service tax ofRs. 318.83 (Rs303.68Millions) & Rs.117.81(Rs.78.83Millions) respectively.Other debtors considered good& doubtful include service tax of Rs192.27(Rs.244.43 Millions) and Rs. 7.14 (Rs. 7.73 Million)

83

MTNLSCHEDULE-J

Cash & Bank BalancesAs at As at


Cash in hand,Including cheques in handRs. 75.24 Millions (Rs104.02 Millions) 112.93 144.49Balance with scheduled BanksIn Current Accounts 1,554.36 1,813.73In Fixed Deposit Accounts 19,026.49 23,380.90

Balance with Non-Scheduled Banks - -In Current Account 5.76 7.11

20,699.54 25,346.23Less: Provision for Doubtful Bank Balances 5.96 5.76

20,693.58 25,340.47

SCHEDULE-KOther Current AssetsUnsecured Considered Good

As at As at31.3.2006 31.3.2005


Interest Accrued on Deposits with Banks, 103.32 104.54 Interest Accrued on Bonds 192.19 192.19 Income Accrued From other Deposits & Loans & Advances 649.93 554.16

945.44 850.89

84

MTNLSCHEDULE-LLoans & AdvancesUnsecured Considered Good*

As at As at31.3.2006 31.3.2005


Loans & AdvancesSecured LoansHousing Loan To Employees 2,220.89 2,399.00Un Secured Loans(Considered good, unless otherwise stated)(1) To Subsidiary Company - -(2) To DOT - -(3) To BSNL - -(2) To Other Corporates - -(1) To Employees - - i) Vehicles 37.64 47.78 ii) Others 147.54 207.30Amount Recoverable from DOT 29,443.50 26,171.15Amount Recoverable from BSNL 4,872.04 10,782.59Amount Recoverable from VSNL 1,198.18 746.97Advances Recoverable in Cash or in Kindor for value to be received.# 12,090.93 992.93Advance to JV Co (MTNLSTPI Ltd) 3.36Advance Tax 44,672.62 59,324.16Deposits with Govt. Deptt. 379.76 342.66Inter corporate loans - (0.01)Capital Advance 288.62 244.56Amount Recoverable from GPF Trust 1,183.01Others 554.28 662.91

97,092.37 101,922.00Less: Provision for Doubtful Advances 550.47 426.41

96,541.90 101,495.59

* Except to the extent of doubtful advances recoverable in cash or in kind or for value to be received for which provision has been made.

# Including Rs.55.69 Millions (Nil) receivable from Gratuity Trust

85

MTNLSCHEDULE-MCurrent Liabilities

As at 31.3.2006 As at 31.3.2005(Rs.in Million) (Rs.in Million)

Sundry Creditors -(i) For Goods and Services 5,081.06 5,150.26(ii) For Work done 2,950.32 2,860.38(iii) For Others 1,509.83 2,056.17Advances Received from Customers & - -Others 368.22 433.01Deposits from : - -(i) Contractors 328.33 344.91(ii) Customers & Others 12,280.93 12,921.34Unclaimed Bonds 1.56 2.96Other Liabilities - -(i) For Salaries and Other Benefits 458.43 458.54(ii)Bonus/ Ex-Gratia 461.18 467.78(iii) GPF of MTNL optee 8,517.42 10,457.94(iii) Others 2,639.11 9,068.12Income Received in advance against - -Services 1,345.66 1,746.58Amount Payable: - -(i) To DOT 195.61 171.95(ii) To BSNL 4,005.48 3,872.39(iii) To VSNL 81.46 633.34(IV) To Subsidiary - (9.15)(v) To Others 116.43 49.40Interest Accrued but not due : - -(i) On Bonds - -(i) On Deposits 5.77 5.41

40,346.80 50,691.33

SCHEDULE-NProvisions

As at 31.3.2006 As at 31.3.2005(Rs.in Million) (Rs.in Million)

Pension(i) Company Employees 26,391.19 23,163.70(ii) Others 143.80 238.25Leave Encashment(i) Company Employees 2,472.90 1,133.98(ii) Others 23.55 29.90Gratuity 2,623.24 2,544.78Proposed Final Dividend 630.00 1,575.00Tax on Dividend 88.36 220.89Income Tax 18,579.70 27,086.43Fringe Benefit tax 55.90Wealth Tax 49.17 43.62Others 8.07 0.83

51,065.88 56,037.38

86

MTNLSCHEDULES FORMING PART OF PROFIT AND LOSS ACCOUNT

SCHEDULE-OIncome from Services



Telephone (a) Rentals 11,482.20 11,940.99 (b) Calls & Other Charges 16,676.93 18,958.92 (c ) Franchises Services 8,870.34 10,188.86 (d) Rent & Junction Charges 2,934.63 1,142.66 (e) Access Calls & Other Charges 6,333.65 7,285.95 VCC 606.13 750.22 Internet 175.15 205.56 Telex 0.45 13.47 Circuits 598.22 945.20 WLL Rent 342.02 486.42 WLL Call Charges 398.09 609.60 Mobile (a) Rentals, calls& IUC revenue 1,829.35 960.32 (b) Income from Roaming 870.14 527.68 (c) Pre paid Trump 2,913.41 1,196.42 (d) Activation Charges 49.64 52.29 Broadband 704.25 9.40 Value added and Other Services (a) Indonet 2.86 3.43 (b) Voice Mail 75.31 34.03 (c ) Free Phone 125.10 98.30 (d) Premium Rate 1.00 0.84 (e) ISDN - Rental 236.92 132.91 (f) ISDN - Call Charges 483.40 321.99 Others 11.74 20.91

55,720.93 55,886.37

87

MTNLSCHEDULE-P

Other Income



Interest(i) From Banks (Tax deducted at sourceRs.418.17 Millions (Rs. 341.64 Millions) 1,601.67 1,340.87(ii) Interest on Advances to Employees 173.21 181.76(iii) Interest on Deposits, Advances and Others 293.62 290.61(iv) Interest from Income Tax Department (Refer Note No 8) 1,944.84 665.46Sale of Directories,Publications, Forms etc. 74.28 99.58Profit on Sale of Assets 6.70 8.50Liquidated Damages 171.30 201.36Foreign Currency Fluctuation 0.71 0.55Bad Debts Recovered 37.56 61.15Credit Balances Written Back 821.31 1,886.17Rent on Quarters, Inspection Quarters, Hostels - -and other services provided 8.93 56.37Others 172.47 125.61Waste paper etc (added with others) - -

5,306.60 4,917.99SCHEDULE-QEmployees' Remuneration and Benefits



Salaries,Wages,Allowances and - other Benefits 11,279.60 11,386.07 Bonus/ Ex-Gratia 460.34 463.74 Medical Expenses/Allowances 878.67 845.96 Leave Encashment (i) Company Employees 1,325.17 311.99 (ii) Others 7.51 12.70 Pension Contribution (i) Company Employees 4,513.79 5,177.14 (ii) Others 9.12 24.70 Contribution to Provident Fund 263.25 208.98 Gratuity 448.93 777.74 Compensation under VRS Scheme 285.63 - Staff Welfare Expenses 229.70 119.71

19,701.71 19,328.73 Less : - - Allocation to Capital Work-In-Progress 643.84 963.14 Allocation to DOT for Bond Expenses - -

19,057.87 18,365.59

88

MTNLSCHEDULE - RAdministrative, Operating and Other Expenses



Power & Fuel 1,558.49 1,401.61Rent 611.29 646.84Repairs & Maintenance: - Buildings 201.65 193.95 - Plant & Machinery 686.30 602.72 - Others 476.32 365.15Lease Rentals - 0.01Insurance 44.61 47.14Rates & Taxes 298.92 322.67Travelling Expenses 39.44 93.13Postage & Courier 200.47 209.21Printing & Stationery 154.47 164.99Vehicle Expenses:(i) Maintenance 16.73 18.36(ii) Running 37.42 35.33(iii) Hiring 99.83 93.96Commission paid on Franchised Services 2,626.14 3,055.61Comm. Paid to pre paid services 121.35 10.68Advertising/Business Promotion Expenses 421.78 278.15Donations - 28.19Provision for Doubtful Debts including - -Disputed Bills 977.04 1,002.45Provision for Wrong Billing 1.37 0.45Bad Debts Written Off 1,502.44 227.60Provision for Obsolete Stores 131.16 159.02Professional & Consultancy Charges 85.43 66.09Seminar and Training Expenses 6.71 6.80Miscellaneous Expenses * 925.24 862.72Loss on Sale of Assets 94.27 208.08Internet charges 123.21 77.34PSTN Charges - -Spectrum Charges(WLL) 15.58 22.95Spectrum Charges(MS) 157.57 67.38Loss of Assets 46.64 16.77

11,661.88 10,285.35Less : Allocation to DOT for Bond Expenses -Less: Recoverable from Dot -

11,661.88 10,285.35

* Including Rs. 24.04 Millions (52.37 million) on account of Sale Tax paid

89

MTNLSCHEDULE - SInterest :



Interest on :

Customers' deposits 25.45 28.09GPF 206.79 330.03Other Loans 28.99 11.15Total 261.23 369.27

SCHEDULE - TPrior Period Adjustments



DebitsSalary,Wages,Allowances & Staff Expenses 10.14 1.39Rent 1.15 4.57Rates & Taxes - 2.48Repairs to Buildings - 11.98Repairs to Plant & Machinery 17.68 1.61Depreciation 28.95 81.62Others 27.88 19.89

85.80 123.54CreditsRate & Taxes written back 7.96 5.81Excess provision written back(Income Tax) 71.11Others 32.66 23.26

111.73 29.07 - -

Net Adjustment (25.93) 94.47

Note:1. For the current year Consolidated Figures includes Unaudited Provisional figures of United Telecom

Ltd as their financial year ends on 16thJuly.

90

MTNLAnnexure-I

MAHANAGAR TELEPHONE NIGAM LIMITEDConsolidated Cash Flow Statement for the year ended 31st March, 2006

[Pursuant to Clause 32 of Listing Agreement (as amended)]


A. Cash Flow from Operating ActivitiesNet profit before Tax and extra ordinary items 6,628.74 12,028.89Adjustment for: - -

Prior period adjustment (net) 55.22 (12.85)

Profit on sale of fixed assets (6.70) (8.50)

Loss on sale of fixed assets 94.27 208.08

Depreciation 6,514.19 5,939.04

Compensation charged under VRS Scheme 285.63

Compensation paid under VRS Scheme (1,428.11)

Interest Cost 244.36 358.12

Interest Income (4,009.42) (2,478.57)

Interest paid (243.98) (360.66)

Amortisation & Other non cash items 37.90 1.00

Operating cash profit before working capital changes 8,172.10 15,674.56

Adjustment for: -

Trade and other receivables (6,368.83) (4,022.95)

Inventries 488.38 (980.81)

Trade and other payables (5,806.20) 6,040.78

Cash generated from operations (3,514.56) 16,711.58

Direct Taxes paid 5,637.90 (4,732.36)

Net Cash Flow from Operating Activities 2,123.34 11,979.23

B. Cash Flow from Investing Activities -

Purchase of fixed assets (6,820.70) (10,254.98)

(inclulding capital W.I.P.) - -

Sale of Fixed Assets 26.28 79.29

Interest received 4,010.92 2,514.92

Investment (212.59) (167.72)

- -

Net Cash Flow from Investing Activities (2,996.08) (7,828.48)

91

MTNLC. Cash Flow from Financing Activities -

Repayment of Loans (1.40) (3.76)

Dividend paid (including tax) (3,950.97) (4,630.17)

Loan/Share Capital 178.22 267.97

Net Cash Flow from Financing Activities (3,774.15) (4,365.96)

Net Increase/Decrease in Cash and Cash Equivalents (4,646.88) (215.21)

Cash and Cash equivalent as at the beginning of the year 25,340.47 25,555.68

Cash and cash equivalient as at the end of the year 20,693.58 25,340.47

Note:-

1. Previous year figures have been regrouped wherever necessary




(I.J.Dhawan)Partner (M.No:81679)

PLACE: MUMBAIDATED : 30th June, 2006

92

MTNLANNEXURE TO DIRECTORS' REPORT

Addendum to Director's Report 2005-06Replies of Management to Auditors Report with regard to qualifications for the year 2005-06

(i) Based on the legal opinion received by the Company, themanagement is claiming benefit under section 80 - IA of theIncome Tax Act, 1961. The benefit is claimed on operationalprofit earned by the Company. Provision for Income Tax forthe Financial Years 1999 - 2000 to 2005 - 06 was made afterconsidering such benefit. However, Provision for Income Taxfor the years 1996 - 97, 1997 - 98 & 1998 - 99 was madewithout considering such benefit. The Company had revisedits Income Tax Return for the financial year 1997 - 1998 andfiled the Return for the financial years 1998 - 1999 to 2004 -2005 after considering benefit under Section 80 IA of theIncome Tax Act, 1961. In case, the benefit under Section 80IA of the Income Tax Act is finally accepted, the Provision forIncome Tax for these years viz. 1996 - 97, 1997 - 98 & 1998- 99, will be excess to the extent of Rs. 7442.80 Millions andin the event of the tax benefit claimed by the Company underSection 80 - IA not being finally accepted by the Income Taxauthorities, provision for taxation as at 31st March, 2006 wouldbe higher by Rs. 14,203.65 Millions

(ii) Non - Provision of 1/5th of the VRS Compensation payable tothe employees, who opted for VRS during the year amountingto Rs. 138.27 Millions. The Profit of the company for the year,therefore, is overstated to that extent. The total amount payableunder VRS is Rs. 691.36 Millions. Consequently, the CurrentLiabilities are understated by Rs. 691.36 Millions and DeferredRevenue Expenses are understated by Rs. 553.09 Millions.

Further, no provision has been made for VRS compensationpayable to employees, who opted for VRS upto 31st March2006, for the Scheme launched on 28th March 2006 andclosed on 10th April 2006. The impact of the same has,however, not been ascertained by the company. The finalcalculation may have an impact on the Profitability of thecompany. (Refer Note No. 15).

(iii) Pending resolution of dispute, an amount of Rs. 1044.84Millions (Being amount deposited with the company) has beenbooked as income in respect of bills of Rs. 3412.74 Millionsraised earlier to one UASL operator. The matter is sub-judiceand actual amount depends on the order of the court /arbitrator. The Profit of the company, therefore, is overstatedby Rs. 1044.84 Millions and the Current Liabilities areunderstated by an equivalent amount. (Refer Note No. 12).

(iv) Booking of Income of Rs. 2481.67 Millions on account ofcharges for usage of MTNL Trunk Automatic Exchange (TAX)by BSNL for the period from 01.02.2004 to 31.03.2006, whichhas been rebutted by BSNL. The Profit of the company,therefore, is overstated to that extent and Current Assets ofthe company are overstated by an equivalent amount. [ReferNote No. 13 (b)].

(i) As per legal opinion received by thecompany, the provision for income tax hasbeen made considering the claim of benefitu/s 80 IA of the Income Tax Act.

The Hon'ble Delhi High Court has admittedthe appeal filed by the company on claim ofbenefit u/s 80IA. The decision of the court isawaited.

However, Contingencies Reserve to theextent of benefit claimed u/s 80IA has beencreated for any contingencies in future fromthe profit available for appropriation.

(ii) No provision was required to be made in2005-06 as the employees were relieved inthe year 2006-07.

No provision was required to be made in2005-06 as the employees were relieved inthe year 2006-07.

(iii) The UASL Operator has deposited anamount of Rs.1044.84 million being thebalance amount as against total amountbilled Rs.3412.74 million. Since the amounthas already been deposited by the operator,the income has been booked correctly.

(iv) The income has been booked as peraccrual method of accounting in terms ofIUC Regulations of TRAI and pertains toactual usage of Tax by BSNL for passing itstraffic.

93

MTNL(v) As per the Signif icant Accounting Policy No. 2 (v) of

Schedule - T, the assets scrapped / de-commissioned, haveto be valued at lower of the Net Book Value or Net RealisableValue. The same has, however, not been followed by Delhiunit, resulting in overstatement of Profit by Rs. 275.40 Millionsand Fixed Assets overstated by an equivalent amount.

(vi)The company, during the year under review, has changed itsSignificant Accounting Policy with regard to non-charging ofreciprocal services to BSNL and has booked an Income onaccount of Service Connections provided to BSNL employeesfor the period from 1.10.2000 to 31.03.2006, amounting toRs. 320.39 Millions. The company has, however, not madeany provision for Service Connections provided by BSNL toits employees, in view of non receipt of Bills / Claims fromBSNL. (Net Impact not ascertainable). [Refer Note No. 3 Cand 13 ©].

(vii) Non - Provision for ADC claim of BSNL towards Garuda FWcalls amounting to Rs. 63.40 Millions. The Profit of thecompany is, therefore, overstated to that extent and CurrentLiabilities are understated by an equivalent amount. [ReferNote No. 13(e)].

(viii)Non - Provision of balance outstanding for more than 3 yearsfrom National Operators and International Operatorsamounting to Rs. 6.04 Millions and 7.41 Millions, respectivelyin respect of Mobile Services. The Profit of the company,therefore, is overstated by Rs. 13.45 Millions and Currentassets are also overstated by an equivalent amount.

(ix) Short Provision of Doubtful Debts by Rs. 76.60 Millions dueto ageing of Sundry Debtors for more than 180 days. TheProfit of the company is, therefore, overstated to that extentand Current Assets are overstated by an equivalent amount.

(x) Short Provision of Rs. 53.20 Millions by Delhi unit on accountof cloned calls. The Profit of the company, therefore, isoverstated to that extent and Current Assets are overstatedby an equivalent amount. (Refer Note No. 26).

(xi) Booking of income amounting to Rs. 53.93 Millions by Delhiunit on account of surcharge on late payments fromsubscribers in contravention of Accounting Standard - 9 onRevenue Recognition, issued by the Institute of CharteredAccountants of India. The Profit of the company is, therefore,overstated to that extent and Current Assets are overstatedby an equivalent amount.

(v) Market value of these scrapped telecomequipment could not be ascertained due totechnological obsolesce and lack of marketdata as these items are not normally tradedin the market. Hence the net depreciatedvalue has been retained in the book insteadof realisable value.

(vi) Necessary entries will be passed onreceipt of claim, if any, from BSNL after dueverification.

(vii) In case of some other operators, thematter relating to payment of ADC chargesto BSNL for CDMA FW Calls is subjudiced.Action shall be taken after the matter isdecided by the Hon'ble Supreme Court ofIndia.

(vi i i ) As per accounting pol icy of thecompany, the provision is made only forsubscribers dues, which are more than 3years old. No provision is made for duesfrom operators as other operators are inexistence, functional and are engaged inproviding services. Due to above, thepossibility of recovery from such operatorsis very high.

(ix) Necessary adjustments will be made inthe year 2006-07

(x) This wi l l be reviewed by theManagement for cases where cloning ofcalls is finally established.

(xi) This will be reviewed in the year 2006-07

94

MTNL(xii) Based on the order of Income Tax Appellate Tribunal (ITAT)

on the issue of License Fee and certain other issues and theopinion received from the Company's Income Tax consultants,refund due and interest due thereon from Income TaxDepartment has been calculated and an amount of Rs.1944.84 Millions has been booked as Interest Income for theyear under review. The actual calculation of interest by theIncome Tax Department may differ and have an impact onthe Profitability of the company. Amount not ascertainable.(Refer Note No. 8).

(xiii) Inventory of Stores & Spares at Delhi unit includes Slow /Non Moving / Obsolete items of Rs. 32.31 Millions. Pendingdetailed investigations and segregation, no provision hasbeen made for these items. The amount, in above case, isnot ascertainable for want of necessary details. The finalcalculation of the above may have an impact on theProfitability of the company.

(xiv) In case of MS unit Delhi, Debtors amounting to Rs. 371.70Millions inclusive of Service Tax of Rs. 17.60 Millions havebeen written off. Service Tax on the same has beenascertained on estimated basis instead of actual amountpayable thereon. In case of MS unit, Mumbai, out of Debtorsof Rs. 128.40 Mill ions written off during the year, noaccounting entry in respect of writing back of Service Tax hasbeen passed. Amount not ascertained. The Current Assetsand Current Liabilities are, therefore, overstated by theamount of Service Tax related to the Debtors written off.

(xv) The company, in its Delhi unit, has reversed a billing of Rs.240 Millions, on ad-hoc basis, in the absence of billing asper revised tariff w.e.f. 1st May 2005. The final calculation ofthe same, as per revised tariff, may have an impact on theProfitability of the company. Amount not ascertainable. (ReferNote No. 17).

(xvi) The Bank Reconciliation Statements as at 31st March, 2006include the unmatched / unlinked credits and debitsaggregating Rs. 2.09 Mil l ions and Rs. 6.08 Mil l ions,respectively, which have not been properly accounted for, inthe absence of adequate particulars. The impact of such entrieson the accounts is not ascertainable. (Refer Note No. 20).

(xvii) The basis of valuation of inventories (except for WLLhandsets) as stated in Significant Accounting Policy No. 3 inSchedule - T, is not in accordance with the AccountingStandard - 2 on "Valuation of Inventories", issued by theInstitute of Chartered Accountants of India, which prescribesfor the valuation of the same at the lower of Cost and NetRealisable Value.

(xviii) Non - Provision of Stamp Duty payable on registration ofproperties acquired by / vested in the company. Impact onProfit not ascertainable for want of details. (Refer Note No.10).

(xii) The income has been booked as peraccrual method of accounting and strictlyas per provision for Income Tax Act, 1961after categorical decision of ITAT in favourof MTNL's claim of treating licence fee asan allowable expense as is being permittedby Income Tax Department for all otherTelecom Operators in private and publicsector in the country.

(xi i i ) This wi l l be reviewed by theManagement in the year 2006-07.

(xiv) This will be reviewed in the year 2006-07.

(xv) Necessary adjustment if any will bemade in the year 2006-07.

(xvi) The reconciliation of unmatched /unlinked credit is in the process. Necessaryadjustments if any, shall be made in theaccounts after complet ion of thereconciliation process.

(xvii) As per AS-2 issued by ICAI, the inventoryshould be valued at the lower of Cost or NetRealisable Value. MTNL being a serviceindustry, the inventory is kept for use and notfor sale hence the same is valued at cost.

95

MTNL(xix) Non - Provision of amounts payable to Spice Communications

Limited on account of outbound Roaming charges andexpenses, in terms of the agreement for which details are notavailable. Amount not ascertainable.

(xx) The balance in Subscriber's Deposit Accounts Rs. 11593.29Millions, Interest Accrued & Due thereon Rs. 47.99 Millions,Unlinked Receipt from Subscribers Rs. 204.96 Millions aresubject to reconciliation. The final reconciliation of the accountmay have an impact on the Profitability of the company. Properreconciliation of metered and chargeable calls generatingrevenue in Service unit at Mumbai has not been conducted.The same is, however, in process at Delhi and MS unit. Thefinal impact of above on the accounts is presently notascertainable and the same may have an impact on theProfitability of the company. [Refer Note No. 21 (b)].

(xxi) (a) Amount recoverable on current account from DOT Rs29,443.50 Millions and amount payable on current accountto DOT Rs. 195.61 Millions i.e. Net Recoverable Rs. 29247.90Millions (Previous Year Rs. 25999.20 Millions) are subject toreconciliation, confirmation and consequent adjustments.

(b) Amount recoverable on current account from BSNL Rs.4872.04 Millions and amount payable on current account toBSNL Rs. 4005.48 Millions i.e. Net Recoverable Rs.866.56Millions (Previous Year Rs. 6910.20 Millions) are subject toreconciliation, confirmation and consequent adjustments.

The final impact of the above on the accounts is, presently,not ascertainable. The same may, however, have an impacton reconciliation / settlement.

(xxii)The Mumbai unit of the Company has computed andaccounted for the IUC charges of BSNL for the Current Yearon the basis of actual CDR's recorded in MTNL's MumbaiExchange and in respect of Intra Circle Calls, as per LeasedLines, which is disputed by BSNL. Any adjustment aftersettlement of dispute may have an impact on the Profits of thecompany. Amount not ascertainable. [Refer Note No. 13 (f)].

(xxiii) The MS Delhi unit of the company has not made any provisionfor the liability arising for non - deduction of Income Tax onpayment due / paid to IUC operator and Roaming operator.Impact of the same is not ascertainable.

(xxiv) The disclosures of the total outstanding dues to Small ScaleIndustrial undertaking (SSIs) and to others as well as thenames of the SSIs to whom the Delhi unit owes a sumexceeding Rs. One Lac, which is outstanding for over 30 dayshas not been made as, required by part 1 of schedule VI tothe Companies Act, 1956 (Refer Note No. 33). Informationrequired to be furnished as per the provisions of paragraph 3(x) (a) and 4D (c) of part II of schedule VI to the companies act1956 is not ascertainable. (Refer Note No. 34).

(xviii) As per Sale Deed executed betweenMTNL and DOT, stamp duty is not payableon the properties acquired by/vested in thename of company by the DOT.

(xix) This wi l l be reviewed by themanagement

(xx) The reconciliation is on going process.Necessary entries if any, shall be passedafter complet ion of the reconci l iat ionprocess.

(xxi) (a) This is being pursed by theManagement DOT has been requested toset up a committee consisting of DOT andMTNL officers to reconcile the balance.

(b) Management is in the process ofreconci l ing the balance. Necessaryadjustment entry, if any, arising out of thisreconci l iat ion would be passed afterconfirmation/acceptance.

(xxii) In case of Mumbai Unit, the entireMahrasthra traffic has been treated as intracircle calls as per leased lines basis in termsof DOT Order No. 842-503/2004-VAS dated28.5.05. In view of the above, there wouldnot be any additional liability, which willhave impact on the profit of the company.

(xxi i i ) This is being reviewed by theManagement.

(xxiv) This will be disclosed in the year2006-07.

96

MTNL(xxv)The classification of Sundry Debtors as unsecured without

considering the security deposit that the unit has receivedfrom subscribers and non furnishing of requisite age wisedetails of Loans and Advances contravenes the requirementof part I of schedule VI to the companies Act 1956. Further, inrespect of MS, the ageing of sundry debtors for more than 6months is as per system debtors and not based on the TrialBalance Debtors and the residual figure has been taken asdebtors outstanding for less than 6 months, which is notcorrect. (Amount not ascertainable)

(xxvi)The MS unit has not taken into inventory the value of SIMcards lying with franchisees and QCSCs. Amount notascertainable.

(xxvii) The following mentioned practices and procedures followedby the Company in respect of Fixed Assets and DepreciationAccounting, in our opinion, are not in accordance with theAccounting Standard - 10 on 'Accounting for Fixed Assets';Accounting Standard - 6 on 'Depreciation Accounting' andAccounting Standard - 28 on "Impairment of Assets" issuedby the Institute of Chartered Accountants of India:-

(a) The overheads are allocated as a percentage of capitalexpenditure in respect of all the capital projects includingturnkey projects as prescribed by DOT [Refer SignificantAccounting policy 2 (iv)] and not on the basis of directlyallocable costs.

(b) Expenditure on replacement of assets, equipments,instruments and rehabilitation work is capitalized if it resultsin enhancement of revenue earning capacity as stated inSignificant Accounting Policy 2 (iii). This being a technicalmatter, we have placed reliance on the opinion of themanagement.

(c) In respect of Delhi Unit, some cases of capitalization ofRehabilitation work have not been done for the want of dateof completion. The impact of the same on Fixed Assets &Depreciation thereon could not be ascertained.

(d) In respect of various f ixed assets scrapped /decommissioned during the year, the same are not valued atlower of Net Book Value or Realisable Value and consequentloss, if any, has not been charged to the Profit and LossAccount.

(e) In respect of WLL handsets held by defaulter subscribers,no adjustment has been made in the books of accounts andconsequent loss, if any, has not been charged to Profit andLoss Account.

(xxv) This will be reviewed in the year 2006-07.

(xxvi) This will be reviewed in the year 2006-07.

(a) MTNL has been consistently following themethod of allocation of establishmentexpenses including employees remunerationand benefits to capital expenditure asprescribed by DOT.

(b) Noted

(c) This is being reviewed by theManagement.

(d) It is very difficult to ascertain market valueof various f ixed assets scrapped /decommissioned as these i tems arenormally not traded in the market. The netdepreciated value has been retained in thebook instead of realisable value.

(e) As per Accounting Policy of MTNL,provision is made for dues, which are morethan 3 years old. In case of WLL hand setsby defaulter subscribers, EMI billed but notpaid Rs. 59.40 Million and EMI unbilledRs.54.40 Mil l ion is in the process ofrecovery. In both the cases, the outstandingdues are less than 3 years old as on 31.3.06,hence no provision is required to be made.

97

MTNL(f) In respect of WLL hand sets capitalized & which are notusable, no adjustments has been made in the Books of Accounts& consequent loss of Rs. 307.99 million has not been charged tothe Profit & Loss Account. The Profit of the company, therefore, isoverstated to that extent and Current Assets are overstated by anequivalent amount. (Refer Note No. 16)

(g) In respect of Mumbai unit, various Fixed Assets(including WLL handsets but not including exchangeequipments), replacement cost have been capitalized and /or the assets are sold, without any adjustments of the relevantcosts and written down value of such assets from the FixedAssets block.

(h) In respect of MS unit Delhi, the unit had installed onenew billing system, in place of old billing system, which wasretired from active use. The old system is not accounted foras per "Accounting Standard - 10" and depreciation is chargedas usual.

(i) In respect of MS unit Delhi, during the year old 42 BTS'sare swapped with new one, in addition to 187 BTS's in thelast year. Further, during the year, some of the antennas arealso replaced with new one. Most of these equipments arenot in active use.

The resultant impact of the above on the value of Fixed Assetsand Depreciation except (xvii) f is not ascertainable.

(xxviii) In-spite of the Opinion from the Expert Advisory Committeeof the Institute of Chartered Accountants of India, InstallationCharges received from the subscribers are accounted asincome and not adjusted against the cost thereon.

(xxix) Booking of One Time Lump-sum payment received fromsubscribers for life long connections under Trump pre-paidmobile connections, in the year of receipt, in contravention ofthe Accounting Standard - 9 on Revenue Recognition andSignificant Accounting Policy No. 1 (ii).

(xxx) Non - confirmation and reconci l iat ion of balancesrecoverable and payable. Impact on Profits not ascertainable.(Refer Note No. 25).

(R.S.P. Sinha)Chairman & Managing Director


(f) The CDMA Hand sets valued Rs.70 millionare being used by MTNL officials as serviceconnections. For the remaining handsets,MTNL is exploring possibilities for sale toBSNL on commercial terms. Further, MTNL isalso exploring the possibility to sell thesehandsets to other operators in India or abroad.

(g) In case of exchange equipments, wherevalue is substantial., the replacement costhave been capitalized after adjustment of therelevant cost/written down value. In case ofother assets, where the value is negligible, thereplacement cost have been capitalizedwithout any adjustment of the relevant cost andwritten down value of such assets from the fixedassets block. Once WFMS System ofAccounting is implemented, the other assetswill also be accounted after adjustment of therelevant cost and written down value

(h) The old system is very much in use andis not discarded. If required, the necessaryaccounting entries will be passed in the yearthat the billing systems is discarded

(i) MTNL is exploring several new sites,which will improve the coverage of GSMnetwork both in Delhi and other NCRs.These BTS will be used in those additionalsites as feasible.

(xxviii) The amount involved is not material,hence, instal lat ion charges has beenbooked as income.

(xxix) In the absence of any basis fordeferment of income, the income has beenbooked correctly.

(xxx) The necessary adjustments if any willbe made at the time of confirmation.

98

MTNL

ANNEXURE TO DIRECTORS' REPORT

dk;kZy;

egkfuns'kd ys[kkijh{kk] Mkd o nwjlapkj'kke ukFk ekxZ] ¼lehi iqjkuk lfpoky;½ fnYyh&110054

OFFICE OF THEDIRECTOR GENERAL OF AUDIT, POST AND TELECOMMUNICATIONS

Sham Nath Marg (Near Old Secretariat) Delhi-110 054

ConfidentialNo. Report-II/MTNL/A/cs/2005-06/579

Date : 11 August 2006

To,The Chairman and Managing Director,Mahanagar Telephone Nigam Limited,New Delhi.

Subject : Comments of Comptroller and Auditor General of India under Section 619(4) of theCompanies Act, 1956 on the accounts of Mahanagar Telephone Nigam Limited for theyear ended 31 March 2006.

Sir,

I am to forward herewith the comments of the Comptroller and Auditor General of India underSection 619(4) of the Companies Act, 1956 on the annual accounts of Mahanagar Telephone NigamLimited for the year ended 31 March 2006 for information and further necessary action.

Kindly acknowledge receipt.

Yours faithfully,

Sd/-(VIKRAM CHANDRA)

Director General of Audit (P&T)

lR;eso t;rs

99

MTNLComments of the Comptroller and Auditor General of India under Section 619(4)of the Companies Act, 1956 on the annual accounts of Mahanagar TelephoneNigam Limited for the year ended 31 March 2006.

1. Fixed AssetsGross Block (Schedule D) Rs 148541.50 millionNet Block Rs 65687.49 million

A reference is invited to Comment No.2 (v) of C & AG of India on the accounts of the Company forthe year ended 31 March 2005 regarding non charging of unamortized depreciable amount based onthe useful life of telephone instruments as six years. The Company continued a similar practiceduring the current year also.

This resulted in non-charging of Rs 105.02 million in Delhi unit on account of unamortized depreciableamount of such telephone instruments capitalized prior to 31 March 2000. Further, in cases oftelephone instruments capitalized on or after 1 April 2000 the rate of depreciation has also not beenre-fixed taking into consideration the useful life of 6 years, the financial implication of which couldnot be ascertained in audit in the absence of requisite details.

2. Current Liabilities (Schedule L) Rs 40251.26 millionShort provision of Sales Tax liability of Rs 55.24 million due to taking incorrect rate (4% instead of 12%)on WLL handsets for the period from April 2003 to March 2004 in Delhi unit has resulted in understatementof Current Liabilities by Rs 55.24 million, and overstatement of Profit by Rs 55.24 million.

3. Revenue Sharing Rs 12263.19 millionA reference is invited to Comment No. 8(iii) of CAG of India on the annual accounts for the year2004-05 regarding double accountal of revenue sharing expenses payable to VSNL and BSNL. Thoughthe comment pertained to Mumbai unit the corrective action had been taken in the accounts of bothDelhi and Mumbai units during the current year. Wrong accounting in Delhi Unit has resulted inunderstatement of Revenue Sharing expenditure by Rs 42.90 million, understatement of CurrentLiabilities by Rs 38.61 million, overstatement of Licence Fees by Rs 4.29 million and overstatementof Profit for the year by Rs 38.61 million.

4. Accounting Policies and Notes on Accounts (Schedule-T)As per the requirement of the Accounting Standard 13, the Company has not framed AccountingPolicy for treating the reduction in the value of investment or non-recovery of the principal as well asinterest accumulated thereon though huge funds have been invested in subsidiary Companies/jointventures and other undertakings.

5. General

A reference is invited to C & AG's comment no. 12 (ii) on the Company's annual accounts for theyear ended March 2005 regarding no corrective action being taken by the Company on the followingcomments raised repeatedly by the Statutory Auditors.

a) Amount recoverable/payable to Department of Telecommunications (DoT) were subject to confirmationand reconciliation.

100

MTNLb) Provision had not been made for lease rent payable in respect of certain leasehold properties where

the amounts were not yet finalized.

c) Overheads were allocated as a percentage of capital expenditure prescribed by DoT and not on thebasis of directly allocable costs.

d) The Company had not made any disclosure required under Schedule VI to the Companies Act, 1956as regards consumption of stores and spares, consumption of imported & indigenous stores andspares and percentage to the total consumption.

e) Balances in subscribers' deposit accounts had not been reconciled with respective subsidiary records.

f) Amounts receivable/payable from/to BSNL had not been reconciled.

Though the Management assured that the above points would be reviewed during the current year,no action was taken in this regard.

Sd/-(Vikram Chandra)


101

MTNLComments of the Comptroller and Auditor General of India under Section 619(4)of the Companies Act, 1956 on the annual accounts of Mahanagar TelephoneNigam Limited for the year ended 31st March 2006.

Comments of CAG of India

2. Fixed AssetsGross Block (Schedule D) Rs 148541.50 millionNet Block Rs 65687.49 millionA reference is invited to Comment No.2 (v) of C & AG of India on the

accounts of the Company for the year ended 31 March 2005 regarding noncharging of unamortized depreciable amount based on the useful life oftelephone instruments as six years. The Company continued a similarpractice during the current year also.

This resulted in non-charging of Rs 105.02 million in Delhi unit on accountof unamortized depreciable amount of such telephone instrumentscapitalized prior to 31 March 2000. Further, in cases of telephoneinstruments capitalized on or after 1 April 2000 the rate of depreciationhas also not been re-fixed taking into consideration the useful life of 6years, the financial implication of which could not be ascertained in auditin the absence of requisite details.

2. Current Liabilities (Schedule L) Rs 40251.26 millionShort provision of Sales Tax liability of Rs 55.24 million due to taking

incorrect rate (4% instead of 12%) on WLL handsets for the period from April2003 to March 2004 in Delhi unit has resulted in understatement of CurrentLiabilities by Rs 55.24 million, and overstatement of Profit by Rs 55.24 million.

Replies of the Management

During the year the companyhas reviewed the comment ofthe C&AG. During the reviewprocess it was observed thatas per significant AccountingPolicy No. 2(i)(c) of theCompany, the depreciation ischarged on straight line methodand at the rate as prescribedin the Companies Act 1956.Further, the company does nothave any fixed useful life oftelephone instrument as sixyears. Only an administrativeorder for replacement ofinstruments after six years onneed basis based on customercomplaints and after beingrepaired twice, had beenissued. The replacement iscarried out as and when needarises and not as a generalpolicy. Many instruments areworking well beyond six years.

The provision for Sale Taxliability in the books wasbooked on estimation basisassuming tax rate of 4% andpenalty are provided foraccordingly. Howeveradditional liability if any, will bereviewed in the year 2006-07.

102

MTNL3. Revenue Sharing Rs 12263.19 million

A reference is invited to Comment No. 8(iii) of CAG of India on theannual accounts for the year 2004-05 regarding double accountal of revenuesharing expenses payable to VSNL and BSNL. Though the commentpertained to Mumbai unit the corrective action had been taken in theaccounts of both Delhi and Mumbai units during the current year. Wrongaccounting in Delhi Unit has resulted in understatement of Revenue Sharingexpenditure by Rs 42.90 million, understatement of Current Liabilities byRs 38.61 million, overstatement of Licence Fees by Rs 4.29 million andoverstatement of Profit for the year by Rs 38.61 million.

4. Accounting Policies and Notes on Accounts (Schedule-T)

As per the requirement of the Accounting Standard 13, the Companyhas not framed Accounting Policy for treating the reduction in the value ofinvestment or non-recovery of the principal as well as interest accumulatedthereon though huge funds have been invested in subsidiary Companies/joint ventures and other undertakings.

5. General

A reference is invited to C & AG's comment no. 12 (ii) on theCompany's annual accounts for the year ended March 2005 regarding nocorrective action being taken by the Company on the following commentsraised repeatedly by the Statutory Auditors.a) Amount recoverable/payable to Department of Telecommunications

(DoT) were subject to confirmation and reconciliation.

b) Provision had not been made for lease rent payable in respect of certainleasehold properties where the amounts were not yet finalized.

c) Overheads were allocated as a percentage of capital expenditureprescribed by DoT and not on the basis of directly allocable costs.

d) The Company had not made any disclosure required under ScheduleVI to the Companies Act, 1956 as regards consumption of stores andspares, consumption of imported & indigenous stores and spares andpercentage to the total consumption.

e) Balances in subscribers' deposit accounts had not been reconciledwith respective subsidiary records.

Necessary adjustment will bemade in the year 2006-07

This will be reviewed in theyear 2006-07.

a) The management in theprocess reconciliation ofbalance with DOT.

b) This will be reviewed inthe year 2006-07.

c) As per Signif icantAccounting Policy of theCompany the overheadis al located as permethod as prescribed byDOT. This is beingfollowed consistently.

d) Noted. This wi l l bereviewed in the year2006-07.

e) Noted. This wi l l bereviewed in the year2006-07.

103

MTNLf) Amounts receivable/payable from/to BSNL had not been reconciled.

Though the Management assured that the above points would be reviewedduring the current year, no action was taken in this regard.

Sd/-(Vikram Chandra) (R.S.P. SINHA)Director General of Audit (P&T) Chairman & Managing Director


f) The management is inthe process reconciliationof balance with BSNL.

104

MTNLSTATEMENT PURSUANT TO SECTION 212 OF THE COMPANIES ACT,1956

RELATING TO SUBSIDIARY COMPANY

1. Name of the Subsidiary Company Millennium Telecom Ltd.(MTL)2. Financial Year of MTL ended on 31st March, 20063. Extent of MTNL's interest in MTL at the

end of financial year 2005-06 100%4. Net aggregate amount of MTL's profit (Loss). So far as it

concern the members of MTNL and is not dealt within theaccounts of MTNLi) For the Financial Year of MTNL ended

on 31st March 2006. Rs. 602,539ii) For previous Financial Years of MTL

since it became subsidiary Rs. 6,566,5715. Net aggregate amount ot MTL's profit (Loss). So far as

it concern the members of MTNL and is dealt withinthe accounts of MTNLi) For the Financial Year of MTL ended

on 31st March 2006. Nilii) For previous F.Y. of MTL since It became subsidiary Nil

6. Where the Financial Year(s) of MTL does not coincide Not Applicablewith that of MTNL, then :a) change in MTNL's interest in MTL between

the end of F.Y. of MTNL and that of MTLb) Details of material changes which have

occured between the end of F.Y. of MTNLand that of MTL in respect ofi. MTL's Fixed Assets'ii. Its investments:iii. The moneys lent by itiv. The moneys borrowed by it for any purpose

Other that of meting current liabilities

For and on behalf of Mahanagar Telephone Nigam Limited

(S.C. Ahuja) (R.C. Sen) (Anita Soni) (R.S.P. Sinha)Company Secretary Dy. General Manager (Acct.) Director (Fin.) Chairman & Managing Director

Place : New DelhiDate : 17.8.2006

105

MTNLSTATEMENT PURSUANT TO SECTION 212 OF THE COMPANIES ACT,1956

RELATING TO SUBSIDIARY COMPANY

1. Name of the Subsidiary Company Mahanagar Telephone (Mauritius)Ltd. (MTML)

2. Financial Year of MTML ended on 31st March, 20063. Extent of MTNL's interest in MTML at the

end of financial year 2005-06 100%4. Net aggregate amount of MTML's profit (Loss). So far as it

concern the members of MTNL and is not dealt within theaccounts of MTNLi) For the Financial Year of MTML ended

on 31st March 2006. Rs. (26,641,445)ii) For previous Financial Years of MTML

since it became subsidiary Rs. (54,508,647)5. Net aggregate amount ot MTML's profit (Loss). So far as

it concern the members of MTNL and is dealt withinthe accounts of MTNLi) For the Financial Year of MTML ended

on 31st March 2006. Nilii) For previous F.Y. of MTML since it became subsidiary Nil

6. Where the Financial Year(s) of MTML does not coincide Not Applicablewith that of MTNL, then :a) change in MTNL's interest in MTL between

The end of F.Y. of MTNL and that of MTLb) Details of material changes which have

occured between the end of F.Y. of MTNLand that of MTML in respect ofi. MTML's Fixed Assets'ii. Its investments:iii. The moneys lent by itiv. The moneys borrowed by it for any purpose

Other that of meting current liabilities

For and on behalf of Mahanagar Telephone Nigam Limited

(S.C. Ahuja) (R.C. Sen) (Anita Soni) (R.S.P. Sinha)Company Secretary Dy. General Manager (Acct.) Director (Fin.) Chairman & Managing Director

Place : New DelhiDate : 17.8.2006

106

MTNL

BOARD OF DIRECTORS(AS ON 24/8/2006)

Shri R.S.P. Sinha Chairman

Shri Kuldip Singh Director

Smt. Anita Soni Director

Shri S.D. Saxena Director

Shri R.L. Dube Director

Shri G.S. Grover Director

CHIEF OPERATING OFFICERShri Piyush Aggarwal

COMPANY SECRETARYShri S.C. Ahuja

REGISTERED OFFICE15th Floor, Telephone House,

V.S.Marg, Dadar(W),Mumbai-400028

STATUTORY AUDITORSM/s. Kapadia & Birader

8th Lane, Mangaldas Market,390 Shaikh Memon Street,2nd Floor, Mumbai-400 002

Millennium TMillennium TMillennium TMillennium TMillennium Telecom Limitedelecom Limitedelecom Limitedelecom Limitedelecom Limited(A Wholly Owned Subsidiary of MTNL)

107

MTNLMILLENNIUM TELECOM LIMITED

(A wholly owned subsidiary of MTNL)

DIRECTORS REPORTDear Shareholders,

The Directors of your company have pleasure in presenting the 6th Annual Report of your Companytogether with Statement of Accounts and Auditors Report for the period ended on 31st March, 2006.

OPERATIONS OF THE COMPANY

Your company is handling a new project for laying submarine cable from India to south East Asia andMiddle East with ultimate intent to extend eventually to the USA and Europe. By investing in this project,MTNL (holding company) & BSNL (would be joint venture partner with 49% equity participation in capitalof your company) can get International Bandwidth to support its own network demand as well as to leaseit to others at very competitive rates. Thus, MTNL & BSNL would not be dependent on other operators forinternational bandwidth.

FINANCIAL HIGHLIGHTS

During the year under report, the Company has achieved a turnover of Rs. 23,57,515 and made a profit ofRs 6,67,539 (before taxation) as against a profit of Rs 70,62,263 in the last year.

SHARE CAPITAL

The paid up Share Capital of the Company is Rs. 2,87,58,800 (28,75,880 equity shares of Rs 10/- each).All the shares are being held by MTNL (Holding Company) and its nominees. The Board of your companyin its 26th meeting held on 16.12.2005 has approved the infusion of further equity capital in order toexecute the above mentioned project and after deliberations decided to enhance the equity base frompresent Rs. 2,87,58,800 to Rs. 20 crores.

DIVIDEND

Your company made a net profit of Rs 6,02,539 (after taxation) which it has decided to plough back.Therefore, the Board of Directors has not considered it prudent to declare any dividend for the year endedon 31.03.2006.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to the provisions of Sec 217(2AA) of the Companies Act, 1956, the Directors of the Companyhereby confirm that:

(i) in the preparation of the annual accounts, the applicable accounting standards have been followedalong with proper explanation relating to material departures;

(ii) they selected such accounting policies and applied them consistently and made judgments andestimates that are reasonable and prudent so as to give a true and fair view of the state of affairsof the company at the end of the financial year and of the profit or loss of the company for thatperiod;

(iii) they have taken proper and sufficient care for the maintenance of adequate accounting records inaccordance with the provisions of the Companies Act for safeguarding the assets of the companyand for preventing and detecting fraud and other irregularities;

(iv) they have prepared the annual accounts on a going concern basis.

108

MTNLCONSERVATION OF ENERGY AND TECHNOLOGY ABSORPTION

Being a service providing organization, the relevant rules in this regard are not applicable to your Company.

FOREIGN EXCHANGE EARNINGS AND OUTGO

The company has not earned or spent any foreign exchange during the period under report.

PARTICULARS OF EMPLOYEES

During the year under report, there was no employee who was in receipt of remuneration in excess oflimits prescribed under the provisions of Section 217(2A) of the Companies Act, 1956 read with theCompanies (Particulars of Employees), Rules, 1975.

DIRECTORS

Sh. R.S.P. Sinha continued to be Chairman of the Company. Sh. Kuldeep Goyal, on being opted to workin BSNL, resigned from the post of ED Mumbai and ceased to be director of your company. Smt. AnnieMoraes has ceased to be director of the company consequent upon her transfer to DOT. In her place,Smt. Anita Soni, Director (Finance), MTNL has been appointed as director w.e.f. 16.12.2005. Sh. KuldipSingh, Director(T), MTNL has been appointed as director of your company in place of Sh. J.Gopal w.e.f.16.12.2005.

The Board places on record its appreciation for the excellent services rendered by Sh. Kuldeep Goyal,Sh. J. Gopal and Smt. Annie Moraes during their tenure as directors of your company.

AUDITORS

M/s Kapadia & Biradar, Chartered Accountants were re-appointed as statutory auditors of your companyby C &AG for the year 2005-2006.

ACKNOWLEDGEMENT

The Board of Directors expresses its gratitude to the holding company i.e. MTNL, Department ofTelecom(DOT) and other Govt. Ministries/Departments for their help, guidance and support extended toyour company from time to time.

The Board feels pleasure in placing on record its sincere appreciation for the valuable services renderedby management of MTNL at all levels.

For and on behalf of Board of Directors

(R.S.P. SINHA) CHAIRMAN


109

MTNLM/s. Kapadia & Birader

8th Lane, Mangaldas Market,390, Saikh Memon Street,

2nd Floor, Mumbai-400 002AUDITORS REPORT

ToThe Members of Millennium Telecom LimitedReport on the Accounts for the period ended 31st March 2006 in compliance with section 227(2) of theCompanies Act 1956.

1. We have examined the Balance Sheet of MILLENIUM TELECOM LIMITED as at 31st March 2006and the related statements of Profit and Loss Account for the year then ended, prepared in conformitywith the accounting principles generally accepted in India. These financial statements are theresponsibility of the Company's management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believe that our audit providesa reasonable basis for our opinion

3. In our opinion, and to the best of our information and according to the explanations given to us, theaccompanying financial statements

a. give the information required by the Indian Companies Act, 1956 ('the Act'), in the manner sorequired; and

b. give a true and fair view of the state of affairs of MILLENIUM TELECOM LTD at 31ST March2006 and of its profit for the year then ended and have been prepared in accordance with theaccounting standards referred to in Section 211(3C) of the Act.

Further, the balance sheet and the related statement of profit and loss are in agreement with thebooks of account and, in our opinion, the Company has maintained proper books of account asrequired by law in so far as it appears from our examination of those books.

4. On the basis of the information and explanations given to us, and the representations obtained by theCompany, as on 31st March 2006 none of the directors are disqualified from being appointed asdirectors in terms of section 274(1)(g) of the Act.

a. We have also examined the matters specified in paragraphs 4 and 5 of the Companies (Auditor'sReport) Order, 2003 for the year ended 31ST March 2006 as they relate to the Company. Ourreport thereon is annexed.

FOR KAPADIA & BIRADERCHARTERED ACCOUNTANTS

Place : Mumbai (E.S. Birader) (M No 010024)Dated : 01/07/2006 PARTNER

110

MTNLANNEXURE TO THE AUDITORS REPORT

(i) a) The company is maintaining proper records showing full particulars, including quantitative detailsand situation of fixed assets.

b) The fixed assets have been physically verified by the management during the year in accordancewith a phased programme of verification which, in our opinion, is reasonable having regard to thesize of the company and the nature of its assets. No material discrepancies were noticed on suchverification.

c) As per the information and explanation given to us on our enquiries the disposal of assets duringthe year was not substantial so as to have an impact on the operations of the company, or affectits going concern.

(ii) As the company is not dealing in any goods. Accordingly clause 4 (ii)(a) to (c) does not apply to thecompany.

(iii) As per the information given to us, the company has neither granted any loans, secured or unsecuredto companies, firms or other parties covered in the register maintained under section 301 of theCompanies Act, 1956 ('the Act').Accordingly, clauses (iii)(a)(b)(c) and (d) of paragraph 4 of the Orderare not applicable to the Company.e) The company has received unsecured interest free loan from its holding company MTNL, the

outstanding balance as on 31st March, 2006 is Rs 230,816/-. As per the explanations given to usby management, the company has maintained register under section 301 of the Companies Act,1956 which is kept at Delhi office and not produced before us.

f) The company has received unsecured interest free loan from its holding company MTNL, thereforerate of interest & other terms & conditions does not apply

g) As the company has received unsecured interest free loan from its holding company MTNL,therefore there is no repayment schedule, no interest payable. These loans are payable on demandso there is no overdue amount.

iv In our opinion and according to the information and explanations given to us, there are adequateinternal control procedures commensurate with the size of the Company and the nature of its business,for the purchase of fixed assets and for the sale of goods. During the course of our audit, no majorweakness has been noticed in the internal controls in these areas

v a. In our opinion and according to the information and explanations given to us, the contracts orarrangements, that needed to be entered into the register maintained under section 301 of thecompanies act, 1956. Have been entered in the register and the register is maintained by thecompany at his Delhi office and the register is not produced before us

b. In our opinion and according to the information and explanations given to us, the contracts orarrangements referred to in Section 301 of the Act and exceeding the value of five lakh rupees inrespect of any party during the year have been made at prices which are reasonable havingregard to prevailing market prices at the relevant time and other relevant circumstances.

vi As per the explanations given to us, the Company has not accepted any deposits from public.

vii The Company has no formal internal audit system. However, its control procedures ensure reasonableinternal checking of its financial & other records.

viii To the best of our knowledge and as explained, the Central Government has not prescribed themaintenance of cost records under clause (d) of sub-section (1) of section 209 of the Companies Act,1956 for the products of the Company.

111

MTNLix a. According to the information and explanations given to us by the management Provident fund,

Investor Education and Protection Fund, Employee's State Insurance, Sales tax, Wealth Tax,Customs Duty, Excise Duty, Cess are not applicable.

b. According to the information and explanations given to us, the amount of Rs. 168/- was payablein respect of Income Tax (TDS deducted from Contractors), Service Tax were in arrears, as at31st March 2006 for a period of more than six months from the date they became payable.

x According to the records of the Company examined by us and the information and explanation givento us by the management, the company has no accumulated losses and has not incurred any cashloss during the financial year covered by our audit or in the immediately preceding financial year.

xi According to the records of the Company examined by us and the information and explanation givento us by the management, the Company has not defaulted in repayment of dues to any financialinstitution or bank or debenture holders as at the balance sheet date

xii As per the explanations given to us by management, the company has not granted any loans andadvances on the basis of security by way of pledge of shares, debentures and other securities.Therefore maintaining of adequate documents and records is not applicable.

xiii The Company is not a chit fund company so the clause (xiii) of paragraph 4 & sub-clauses (a) to (d)of clause xiii of second part of paragraph 4 of the Order does not apply.

xiv As per information and explained to us, the Company has not dealt /trade in securities or debenturesduring the year. The Company's surplus funds are invested in Bank Fixed deposit of which properrecords have been maintained and timely entries have been made therein. This Fixed deposit washeld by the Company in its own name.

xv As per the information and explanation given to us, the company has not given any guarantee forloans taken by others.

xvi As per the information given to us and from verification of records, the Company has not obtainedany term loans.

xvii As per the information given to us, the company has not taken any term loans. Accordingly thisclause (xvii) of paragraph 4 of this Order does not apply.

xviii As per the information and explanation given to us, the Company has not made any preferentialallotment of shares, during the year, to parties and Companies covered in the register maintainedunder Section 301 of the Companies Act, 1956.

xix As per the information and explanation given to us and the records verified by us for the period underconcerned the Company has not issued any debentures.

xx The company in the recent past has not raised any money by public issue.

xxi As per the information and explanation given to us and in our opinion, considering the size and natureof the company's operations, no fraud of material significance has been noticed or reported on or bythe company during the year to which our Audit report is related.

FOR KAPADIA & BIRADERCHARTERED ACCOUNTANTS

Place: Mumbai (E.S. Birader) (M No 010024)Dated: 01/07/06 PARTNER

112


BALANCE SHEET AS AT 31st MARCH 2006SCHEDULE AS AT 31.3.2006 AS AT 31. 3 2005

NO. AMOUNT IN RS. AMOUNT IN RS.

I. SOURCES OF FUNDS :1. SHAREHOLDERS' FUNDS

(a) Share Capital A 28,758,800 28,758,800(b) Reserves & Surplus B 24,448,296 23,845,757

53,207,096 52,604,5572. LOAN FUNDS :

(a) Unsecured Loan C 230,816 230,816230,816 230,816

TOTAL 53,437,912 52,835,373II. APPLICATION OF FUNDS :1. FIXED ASSETS D

(a) Gross Block 3,283,721 3,503,444(b) Less : Depreciation 1,316,685 1,021,346(c) Net Block 1,967,036 2,482,098

2. CURRENT ASSETS, LOANS AND ADVANCES :(a) Sundry Debtors E 13,911,366 46,679,956(b) Cash and Bank Balances F 37,982,566 10,323,915(c) Other Current Assets G 2,708,885 1,457,350(d) Loans & Advances H 1,318,827 857,155

55,921,644 59,318,376

Less: Current Liabilities & Provisions(a) Liabilities I 3,999,441 9,580,386(b) Provisions J 1,452,939 1,387,939

5,452,380 10,968,325NET CURRENT ASSETS 50,469,264 48,350,051

3. Miscellaneous Expenditure K 1,001,612 2,003,224 (to the extent not written off or adjusted)

1,001,612 2,003,224TOTAL 53,437,912 52,835,373

Accounting Policies & Notes forming part of Accounts R

(Mr. S.C. Ahuja) (Mr. Aloke Kaul) (Ms. Anita Soni) (Mr. R.S.P Sinha)Company Secretary Chief Operating Officer Director Chairman

AS PER OUR ATTACHED REPORT OF EVEN DATE

For M/s Kapadia & BiradarChartered AccountantsMr. BiradarPartnerPLACE : MUMBAIDATED : 01/07/06

113


PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH 2006SCHEDULE FOR THE YEAR FOR THE YEAR

NO. ENDED 31.3.2006 ENDED 31.3.2005 (RUPEES) (RUPEES)

INCOMEIncome from Operation L - 12,940,000Other Income M 2,357,515 271,447

TOTAL 2,357,515 13,211,447

EXPENDITUREDirect Expenses N - 687,074Employees Remuneration & Benefits O (1000) 798,785Administrative, Operating & Other Expenses P 1,290,630 4,229,987Depreciation D 400,346 433,329

TOTAL 1,689,976 6,149,174

NET PROFIT/(LOSS) BEFORE TAXATION 667,539 7,062,273Provision for Taxation

- Deferred Tax Asset - 54,298 - Current tax 65,000 560,000

602,539 6,556,571Prior Period Adjustments - -Balance carried to Balance Sheet 602,539 6,556,571Accounting Policies & Notes forming part of Accounts Q

(Mr. S.C. Ahuja) (Mr. Aloke Kaul) (Ms. Anita Soni) (Mr. R.S.P Sinha)Company Secretary Chief Operating Officer Director Chairman

AS PER OUR ATTACHED REPORT OF EVEN DATE

for M/S KAPADIA & BIRADARChartered Accountants

Mr. BiradarPartner

PLACE : MUMBAIDATED : 01/07/06

114

MTNLSCHEDULES ANNEXED TO AND FORMING PART OF THE ACCOUNTS

SCHEDULE-A

SHARE CAPITAL

AS AT 31.03.2006 AS AT 31.03.2005 (RUPEES) (RUPEES)

AUTHORISED100000000 Equity Shares of Rs. 10/- each 1,000,000,000 1,000,000,000

ISSUED,SUBSCRIBED & PAIDUP CAPITAL28,75,880 Equity Shares (P.Y. 28,75,880) of Rs. 10/- each 28,758,800 10,017,000(All shares held by of Mahanagar Telephone Nigam Ltd andthe holding company and its nominees)

TOTAL 28,758,800 10,017,000

SCHEDULE-B

RESERVES & SURPLUS

AS AT AS AT 31.3.2006 31. 3.2005

(Rs.) (Rs.)

Revenue Reserve 995,181 995,181Profit and Loss Appropriation AccountOpening Balance 22,850,576Add: Current year's profit 602,539 23,453,115 22,850,576

TOTAL 24,448,296 23,845,757

SCHEDULE-C

UNSECURED LOAN

AS AT AS AT 31.3.2006 31. 3.2005 (Rupees) (Rupees)

Loan from Holding CompanyMTNL,Corporate Office 230,816 230,816

TOTAL 230,816 230,816

115

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116

MTNLSCHEDULE -E

SUNDRY DEBTORS

AS AT AS AT 31.3.2006 31. 3 2005(RUPEES) (RUPEES)

Outstanding for a period exceeding six months-Unsecured Considered Good 13,911,366 39,759,396Other Debts-Unsecured Considered Good - 6,920,560TOTAL 13,911,366 46,679,956

SCHEDULE-F

CASH & BANK BALANCES


Cash in Hand - -Balance with Scheduled Banks- In Current Account 1,881,713 2,223,062- In Deposit Account 36,000,000 8,000,000Balance with Non-Scheduled Banks- In Current Account 100,853 100,853TOTAL 37,982,566 10,323,915

SCHEDULE-G

OTHER CURRENT ASSETS


Telephone Deposit - 246Prepaid Expenses 13,186 8,000Receivable from MTNL, Delhi 56,047 -Receivable from MTNL, Mumbai 118,166 -Deferred Tax Asset 1,208,610 1,208,610Interest Accrued on FD with Bank 1,312,876 240,494

TOTAL 2,708,885 1,457,350

117

MTNLSCHEDULE-H

LOANS & ADVANCES (Unsecured)

AS AT AS AT 31.3.2006 31. 3 2005

(Rs.) (Rs.)

Income Tax Paid (A.Y. 2005-06) 857,155 857,155Income Tax Paid (A.Y. 2006-07) 351,885 -TDS RECOVERED BY BANK - 090402 109,787

TOTAL 1,318,827 857,155

SCHEDULE-ICURRENT LIABILITIES

AS AT AS AT 31.3.2006 31. 3 2005

(Rs.) (Rs.)

Outstanding Expenses 61,732 64,718Outstanding Salary - 20,344Earnest Money Deposit - 131600 1,018,591MTNL 2,013,313 6,366,529Profession Tax Payable - 200TDS Payable 168 -Service Tax Payable 779,119 3,007,327Sundry Creditors 126,518 121,268TOTAL 3,999,441 9,580,386

SCHEDULE-JPROVISIONS

AS AT AS AT 31.3.2006 31. 3 2005

(Rs.) (Rs.)

Provision for Taxation 625,000 560,000Provision for Direct Expenses 827,939 827,939

TOTAL 1,452,939 1,387,939

118

MTNLSCHEDULE-K

MISCELLANEOUS EXPENDITURE

AS AT AS AT 31.3.2006 31. 3 2005

(Rs.) (Rs.)

Preliminary Expenses to the extent not w/offRegistration Fees 601,592 1,203,184Stamp duty 400,020 800,040

TOTAL 1,001,612 2,003,224

SCHEDULE-L

INCOME FROM OPERATIONS

FOR THE YEAR FOR THE YEARENDED 31.3.2006 ENDED 31.3.2005

(Rs.) (Rs.)

Income from e-Tendering Services - 12,940,000

TOTAL - 12,940,000

SCHEDULE-MOTHER INCOME


(Rs.) (Rs.)

Interest on FD with Bank 1,325,515 110,000

Miscellaneous Income 1,032,000 161,447

TOTAL 2,357,515 271,447

119

MTNLSCHEDULE-NDIRECT EXPENSES


(Rs.) (Rs.)

Website Hosting Charges - 315,167Website Maintenance Charges - 95,667Domain Expenses - 1,100Internet Bandwidth Charges - 275,140

TOTAL - 687,074

SCHEDULE-OEMPLOYEES REMUNERATION & BENEFITS


(Rs.) (Rs.)

Salary to Staff - 569,128Dearness Allowance - 90,488City Compensatory Allowance - 5,149House Rent Allowance - 55,345Travelling Allowance - 12,871Medical Expenses (1000) 36,888Ohters - 20,882Leave Salary - 8,034TOTAL (1000) 798,785

120

MTNLSCHEDULE-PADMINISTRATIVE, OPERATING & OTHER EXPENSES


(Rs.) (Rs.)

Advertisement/Business Promotion Expenses - 214,560Auditors remuneration 61,732 64,610Bank Charges & Commission 12,799 111,639Newspaper, Books & Periodicals - 26,177Computer Expenses - -Conveyance 6,722 6,400House Keeping Expenses 3,000 18,000Internet Expenses - 25,000Insurance charges 10,634 11,320Postage & Courier - 24,662Professional & Legal Charges 3,900 53,528Membership Fees - 29,900Miscellaneous Expenses 1,028 30,714Printing & Stationery 11,512 81,832Preliminary Expenses W/off 1,001,612 1,001,612Rent - 2,088,720Repairs & Maintainance 2,421 19,065Refreshment Expenses 12,603 9,595Seminar & Training Expenses 2,950 10,750Travelling Expenses 132,685 26,944Telephone Expenses 4,082 135,486Vehicle Hire Expenses - 135,323Vehicle Running & Maintenance Expenses - 2,073Wages to Temporary Staff 22,950 102,077TOTAL 1,290,630 4,229,987

121

MTNLSCHEDULE-R - PART - ASIGNIFICANT ACCOUNTING POLICIES

1. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS :The financial statements are prepared under the historical cost convention, on the basis of goingconcern and in accordance with generally accepted accounting principles in India and as per theprovisions of the Companies Act, 1956.

2. FIXED ASSETS:Fixed assets are stated at cost (Gross block) less accumulated depreciation.

3. DEPRECIATION:Depreciation on fixed assets has been provided on straight-line method at the rates and in the mannerprescribed in schedule XIV to the Companies Act, 1956.

4. AMORTIZATIONPreliminary Expenses is being written off over a period of five years.

5. INCOME RECOGNITION:All incomes have been recognized on accrual basis. Interest on deposit with banks is recognized onday-to-day basis. Except Performance bank guarantee invoked in case of M/s. SISL (Rs. 10,32,000/-)

6. FOREIGN CURRENCY TRANSACTIONS:The company have received Bid Security Amount from M/s Datawave Limited & M/s Axicom amountingto $11500 each in connection with preparation of Project Reports & Business Plan for Lay SubmarineCables Connecting India to South East Asia and Middle East

7. PROVISION FOR CURRENT & DEFERRED TAX:Provision for current tax has been made on the basis of estimated taxable income for the currentaccounting year in accordance with the Income Tax Act, 1961. Deferred tax resulting from timingdifferences between the book and the taxable profits for the year is accounted for, using the tax rates& the laws that have been substantively enacted as of the balance sheet date. Deferred tax assets isrecognized and carried forward only to the extent there is reasonable certainty that this would berealized in future.

8. RETIREMENT BENEFITS:No provision for retirement benefits has been made since all employees are on contract basis.

(Mr. S.C. Ahuja) (Mr. Aloke Kaul) (Ms.Anita Soni) (Mr. R.S.P Sinha)Company Secretary Chief Operating Officer Director (Finance) Chairman &

Managing Directorfor M/s Kapadia & BiradarChartered Accountants

Mr. BiradarPartner

PLACE: MUMBAIDATED : 01/07/06

122

MTNLSCHEDULE-R - PART - B

NOTES TO ACCOUNTS

1. In the opinion of Board of Directors, current assets, loans & advances, have value on realization inthe ordinary course of the business at least equal to the amounts at which they are stated andprovision for all known liabilities has been made in the accounts.

2. The entire equity share of the Company is held by Mahanagar Telephone Nigam Ltd, the holdingcompany & its nominees.

3. Contingent liabilities include Guarantee given by Banks of Rs. 2.00 crores.

4. Payment to Auditors includeCurrent year Previous Year

a) Audit Fees Rs. 30,000/- Rs. 30,000/-

b) Certification Fees Rs. 25,000/- Rs. 25,000/-

c) Service Tax Rs. 6,732/- Rs. 5,610/-

d) Out of pocket expenses Rs. 4,000/-

5. No payments to Creditors include payment to Small Scale Industries.

6. Unsecured Loans include amount due to holding company.

7. Related Party Disclosures as per AS 18:

a) Name of the related party : MTNL

b) Description of the relationship : Holding Company

c) Description of the transaction

i) Sales to MTNL

ii) Unsecured Loan from MTNL

iii) Rent payable to MTNL

d) Volume of the transactions in monetary terms

i) Expenses incurred by MTNL on our behalf : Rs. 1,33,185/-

a) Sundry Debtas : Rs. 1,36,37,395/-

b) Other Currest Assets : Rs. 1,74,213/-

ii) Due to MTNL : Rs. 20,13,313

iii) Unsecured Corn from MTNL : Rs. 2,30,816

e) Outstanding item pertaining to related parties as at the balance sheet date.

i) Due from MTNL : Rs

123

MTNL8. The Computation of Earnings per share

Net Profit/ (Loss) for the year including provision fortaxation in Rs. : 6,67,539/-

Average number of equity shares : 28,75,880

Basic & Diluted EPS in Rs. : 0.23/-

9. Previous years figures have been recast & regrouped wherever necessary.


Managing Director

for M/s Kapadia & BiradarChartered Accountants

Mr. BiradarPartner


124


CASH FLOW STATEMENT

AS AT AS AT 31.3.2006 31.3.2005

(RUPEES) (RUPEES)

CASH FLOW FROM OPERATING ACTIVITIESNet Profit before tax and extraordinary items 667,539 7,062,273Adjustment for non cash items/items to be disclosed seperately:Interest Income (1,325,515) (110,000)Amortisation 1,001,612 1,001,612Depreciation 400,346 433,329OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 743,982 8,387,214INCREASE IN WORKING CAPITAL 27,182,705 (913,654)CASH GENERATED FROM OPERATIONS 27,926,687 7,473,560Income Tax refund received - 449,656Income Tax paid 351,885 857,155NET CASH FLOW FROM OPERRATING ACTIVITIES (A) 27,574,802 7,066,061CASH FLOW FROM INVESTING ACTIVITIES:Purchase of Fixed Assets 3,450 (137,280)Sale of Fixed Assets 118,166 56,047Interest received - -NET CASH FLOW FROM INVESTING ACTIVITIES (B) 121,616 (81,233)CASH FLOW FROM FINANCE ACTIVITIES:Proceeds from Issue of Share Capital - -Unsecured Loan taken - 105,610Repayment of Unsecred Loan - -NET CASH FROM FINANCING ACTIVITIES (C) - 105,610NET INCREASEASE IN CASH AND CASH EQUIVALENT (A+B+C) 27,696,418 7,090,438CASH AND CASH EQUIVALENTS AS AT 1st April, 2005 3,233,477 3,233,477(OPENING BALANCE)CASH AND CASH EQUIVALENTS AS AT 31st March, 2006 30,929,895 10,323,915(CLOSING BALANCE)


Managing Directorfor M/s Kapadia & BiradarChartered Accountants

Mr. BiradarPartner


125

MTNL

ANNEXURE TO DIRECTORS' REPORT

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OFFICE OF THEDIRECTOR GENERAL OF AUDIT, POST AND TELECOMMUNICATIONS

Sham Nath Marg (Near Old Secretariat) Delhi-110 054

ConfidentialNo Report-II/MTL/A/cs/2005-06/599

Date : 17 August 2006

To,The Chairman,Millennium Telecom Limited,Mumbai.

Subject : Comments of the Comptroller & Auditor General of India under Section 619 (4) of theCompanies Act, 1956 on the accounts of Millennium Telecom Limited for the year31st March 2006.

Sir,

I am to forward herewith 'Nil Comments' certificate under Section 619(4) of the Companies Act, 1956on the annual accounts of Millennium Telecom Limited for the year ended 31st March 2006 for informationand further necessary action.

Kindly acknowledge receipt.

Yours faithfully,

Sd/-(VIKRAM CHANDRA)


lR;eso t;rs

126

MTNLMAHANAGAR TELEPHONE (MAURITIUS) LTD.

DIRECTOR’s REPORTThe directors are pleased to present their report and audited financial statements of the company for theyear ended 31 March 2006

REVIEW OF BUSINESS

The principal activity of the company is to provide telecommunication services.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF FINANCIAL STATEMENTS

Company law requires the directors to prepare financial statements for each financial year, which give atrue and fair view of the state of affairs and of the profit or loss of the company. In preparing thosefinancial statements, the directors have:

• selected suitable accounting policies and then applied them consistently;

• made judgements and estimates that are reasonable and prudent;

• stated whether International Financial Reporting Standards have been followed, subject to any materialdepartures disclosed and explained in the financial statements; and

• prepared the financial statements on the going concern basis.

The directors are responsible for keeping proper accounting records, which disclose with reasonable accuracyat any time the financial position of the company and to enable them to ensure that the financial statementscomply with the Companies Act 2001 of the Republic of Mauritius. They are also responsible for safeguardingthe assets of the company and hence for taking reasonable steps for the prevention and detection of fraudand other irregularities.

On behalf of the board

KULDIP SINGH(Director)

Date : 22/7/2006

127


Auditors’ report to the shareholders of Mahanagar Telephone (Mauritius) Ltd.We have audited the financial statements of Mahanagar Telephone (Mauritius) Ltd (the "company") for theyear ended 31 March 2006 set out on pages 4 to 15.This report is made solely to the company's shareholder in accordance with section 205 of the CompaniesAct 2001. Our audit work has been undertaken so that we might state to the company's shareholder thosematters we are required to state in an auditors' report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other than the company and thecompany's shareholder for our audit work, for this report, or for the opinions we have formed.

Directors’ ResponsibilitiesThe directors are responsible for the preparation of financial statements which comply with the CompaniesAct 2001 and International Financial Reporting Standards. They are also responsible for safeguarding theassets of the company and hence for taking reasonable steps for the prevention and detection of fraudand other irregularities.

Auditors’ ResponsibilitesIt is our responsibility to form an independent opinion, based on our audit, on those financial statementsand to report our opinion to you.

Basis of opinionWe conducted our audit in accordance with International Standards on Auditing. An audit includesexamination, on a test basis, of evidence relevant to the amounts and disclosures in the financialstatements. It also includes an assessment of the significant estimates and judgements made by directorsin the preparation of financial statements, and of whether the accounting policies are appropriate to thecompany's circumstances, consistently applied and adequately disclosed.We planned and performed our audit so as to obtain all the information and explanations which we considerednecessary in order to provide us with sufficient evidence to give reasonable assurance that the financialstatements are free from material misstatements. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. We believe that our audit providesa reasonable basis for our opinion. We have no relationship with, or interests in the company other than inour capacities as auditors and tax advisors.

OpinionWe have obtained all the information and explanations that we have required.In our opinion :• proper accounting records have been kept by the company as far as it appears from our examination

of those records; and• the financial statements give a true and fair view of the financial position of the company as at 31

March 2006, and of the results of its operations and cash flows for the year then ended, and complywith the Companies Act 2001 and International Financial Reporting Standards.

KPMG J.P. Ramhotar, FCCAPublic Accountants Signing Partner

Port LouisDate : 22 July, 2006

128


Income statementfor the year ended 31st March 2006

Note 2006 2005Rs Rs

Revenue 28,777,092 -

Cost of sales (20,897,584) -

Gross profit 7,879,508 -

Other income - 134,159

Personnel expenses (3,286,757) (2,431,947)

Licence fee (13,146,450) (41,500,000)

Administrative, operating and marketing expenses 3 (11,797,646) (4,813,747)

Depreciation (201,078) (23,740)

Net finance income 4 2,715,474 417,701

Loss before taxation 5 (17,836,949) (48,217,574)

Taxation 6 4,416,146 12,078,340

Net loss for the year (13,420,803) (36,139,234)

129


Balance sheetas at 31st March 2006

Note 2006 2005Rs Rs

ASSETSNon-current assetsProperty, plant and equipment 7 3,063,446 712,352Intangible asset 8 157,478,783 -Deferred tax assets 9 16,494,486 12,078,340

177,036,715 12,790,692Current assetsTrade and other receivables 10 36,115,650 20,177,090Cash and cash equivalents 38,481,747 71,827,294

74,597,397 92,004,384Total assets 251,634,112 104,795,076EQUITY AND LIABILITIESCapital and reservesStated capital 11 269,255,262 140,849,310Accumulated losses (49,560,037) (36,139,234)

Total equity 219,695,225 104,710,076

Current liabilitiesTrade and other payables 12 31,938,887 85,000Total equity and liabilities 251,634,112 104,795,076

Approved by the Board on 21/07/06

(KULDIP SINGH) (R.S.P. SINHA)Director Diector

130


Statement of Changes in equityfor the year ended 31st March 2006

Stated Accumulated TotalCapital losses

Rs. Rs. Rs.

At 14 November 2003 - - -

Issue of share capital 140,849,310 - 140,849,310

Net loss for the period - (36,139,234) (36,139,234)

At 31 March 2005 140,849,310 (36,139,234) 104,710,076

Issue of share capital 128,405,952 - 128,405,952

Net loss for the year - (13,420,803) (13,420,803)

At 31 March 2006 269,255,262 (49,560,037) 219,695,225

131


Cash flow statmentfor the year ended 31st March 2006

2006 2005 Rs. Rs.

Operating activities

Loss before taxation (17,836,949) (48,217,574)Adjustments for:Depreciation 201,078 23,740Interest received (1,732,537) (85,283)

Operating loss before working capital changes (19,368,408) (48,279,117)Increase in trade and other receivables (15,938,560) (20,177,090)Increase in trade and other payables 31,853,887 85,000

Cash used in operations (3,453,081) (68,371,207)Interest received 1,732,537 85,283

Cash used in operating activities (1,720,544) (68,285,924)

Investing activitiesPurchase of property, plant and equipment (2,552,172) (736,092)Addition to intangible assets (157,478,783) -

Cash used in investing activities (160,030,955) (736,092)

Financing activitiesIssue of share capital 128,405,952 140,849,310

Cash flows from financing activities 128,405,952 140,849,310

(Decrease)/increase in cash and cash equivalents (33,345,547) 71,827,294Cash and cash equivalents at beginning of year 71,827,294 -

Cash and cash equivalents at end of year 38,481,747 71,827,294

132


Notes to and forming part of the financial statementsfor the year ended 31st March 2006

1. GENERAL INFORMATIONMahanagar Telephone (Mauritius) Ltd (the "company") is a private limited company incorporated on14 November 2003 and domiciled in Mauritius. The address of the registered office is MTML Tower,30 Dr Eugene Laurent Street, Port Louis. The main activity of the company is to providetelecommunication services.

2. ACCOUNTING POLICIESThe principal accounting policies adopted by the company are as follows:

(a) Basis of accountingThe financial statements have been prepared under the historical cost convention and in accordancewith International Financial Reporting Standards ("IFRS"). The preparation of financial statementsin conformity with IFRS requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates The financial statementsare presented in Mauritian rupee (Rs).

(b) Revenue recognitionRevenue relates to telephone services, data communication services, phone cards and othercorollary services Revenue is recognised on an accrual basis and is net of discount. Internationalrevenue is derived from outgoing calls from Mauritius and from payments by foreign networkoperators for calls and other traffic that originate outside Mauritius but which use the company'snetwork. The company pays a proportion of the international traffic revenue it collects from itscustomers to transit and destination network operators. These revenues and costs are statedgross in the financial statements. Amount payable and receivable from the same foreign networkoperators are shown net in the balance sheet where a right of set off exists.

(c) Operating leasesPayments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

(d) Net finance incomeNet finance income comprises interest income and foreign exchange gains and losses that arerecognised in the income statement.

(e) TaxationIncome tax on the loss for the period comprises current and deferred tax. Current tax is theexpected tax payable on the taxable income for the period, using tax rates enacted at the balancesheet date. Deferred tax is provided using the balance sheet liability method, providing for temporarydifferences between the carrying amounts of assets and liabilities for financial reporting purposesand the amounts used for taxation purposes. The amount of deferred tax provided is based on theexpected manner of realised or settlement of the carrying amount of assets and liabilities, usingtax rates enacted at the balance sheet date. A deferred tax asset is recognised only to the extentthat it is probable that future taxable profits will be available against which the asset can berealised. Deferred tax assets are reduced to the extent that it is no longer probable that therelated tax benefit will be realised.

133

MTNL(f) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.Cost includes all costs directly attributable to bringing the assets to working condition for their intendeduse.Depreciation is calculated to write off the cost of the assets on a straight line basis over the expecteduseful lives of such assets. Additions during the year bear a due proportion of the annual depreciationcharge. The annual depreciation rates used for the purpose are as follows:

Computer equipment - 16.21%Furniture, fixtures and fittings - 6.33%Office equipment - 4.75%Motor vehicles - 10.00%

(g) Work-in ProgressWork in progress comprises development costs associated with survey,design, planning, engineering,supply, installation, testing, commissioning and making over the complete network based on a hybridof CDMA 2000 1x and 1x EV-DO technology. Other development expenditure is recognised in theincome statement as an expense as incurred. Once the project is completed and fully operational thecapitalised expenditure will be depneciated in a straight line basic over the estimated useful life.

(h) Trade and other receivablesTrade and other receivables are stated at cost less impairment losses.

(i) Cash and cash equivalentsCash and cash equivalents comprise cash at bank and in hand.

(j) Trade and other payablesTrade and other payables are stated at cost.

(k) Foreign currenciesTransactions in foreign currencies are translated to Mauritian rupee at the exchange rate ruling at thedate of transaction. Monetary assets and liabilities denominated in foreign currencies are translated atthe exchange rate ruling at the balance sheet date and gains or losses on translation are recognised inthe income statement.

(l) ImpairmentThe carrying amounts of the company's assets are reviewed at each balance sheet date to determinewhether there is any indication of impairment. If any such indication exists, the asset's recoverableamount is estimated. An impairment loss is recognised whenever the carrying amount of an assetexceeds its recoverable amount. Impairment losses are recognised in the income statement in theperiod in which the impairment is identified.

(m) Related partiesFor the purposes of these financial statements, parties are considered to be related to the company ifthey have the ability, directly or indirectly, to control the company or exercise significant influenceover the company in making financial and operating decisions, or vice versa, or where the company issubject to common control or common significant influence. Related parties may be individuals orother entities.

(n) ProvisionsA provision is recognised in the balance sheet when the company has a legal or constructive obligationas a result of a past event, and it is probable that an outflow of economic benefits will be required tosettle the obligation.

134

MTNL3. ADMINISTRATIVE, OPERATING AND MARKETING EXPENSES

2006 2005Rs Rs

Administrative expenses 8,360,821 4,555,042Operating expenses - 43,968Marketing expenses 3,436,825 214,737

11,797,646 4,813,747

4. NET FINANCE INCOME2006 2005

Rs RsInterest income 1,732,537 85,283Net foreign exchange gain 982,937 332,418

2,715,474 417,701

5. LOSS BEFORE TAXATION2006 2005

Rs RsLoss before taxation is stated after charging:Depreciation 201,078 23,740Rental payments 995,399 2,121,996Personnel expenses 3,286,757 2,421,947

6. TaxationThe company is liable to income tax at a rate of 25% on its profit as adjusted for tax purposes.

2006 2005Rs Rs

Current tax charge - -Deferred tax charge (note 9) (4,416,146) (12,078,340)Total tax expense in income statement (4,416,146) (12,078,340)Reconciliation of effective taxationLoss before taxation (17,836,949) (48,217,574)Income tax at 25% (4,459,237) (12,054,394)Non-allowable expenses 63,034 22,060Investment allowance (18,277) (46,006)Under provision in deferred tax previous year (1,666) -

(4,416,146) (12,078,340)

At 31 March 2006, the company had accumulated tax losses amounting to Rs 66,702,596 (2005 -Rs 48,542,962).

135

MTNL7. PROPERTY, PLANT AND EQUIPMENT

Computer Furniture, Office Motor Totalequipment fixtures equipment vehicles

and fittingsRs Rs Rs Rs Rs

CostAt 1 April 2005 218,034 415,131 102,927 - 736,092Additions 123,049 107,072 62,313 2,259,738 2,552,172At 31 March 2006 341,083 522,203 165,240 2,259,738 3,288,264DepreciationAt 1 April 2005 11,960 8,228 3,552 - 23,740Charge for the year 42,739 30,201 6,485 121,653 201,078At 31 March 2006 54,699 38,429 10,037 121,653 224,818Net book valueAt 31 March 2006 286,384 483,774 155,203 2,138,085 3,063,446At 31 March 2005 206,074 406,903 99,375 - 712,352

8. WORK IN PROGRESS

Work in progress comprises development casts associated with survey, design, planning, engineering,supply, instaleatein, testing, commissioning and making over the complete network based on a hybrid of CDMA2000 1x and 1x EV-DO technology. No depreciation has been charged for the year ended 31st March, 2006 asthe asset is not fully operational in the manner intended by management. However, in agreement with thecentractor, part of the asset was used to generate income.

9. DEFERRED TAX ASSETS2006 2005

Rs RsAt beginning of year 12,078,340 -Movement during the year (note 6) 4,416,146 12,078,340At end of year 16,494,486 12,078,340Deferred tax assets are analysed as follows:Accelerated capital allowances (181,163) (57,401)Tax losses 16,675,649 12,135,741

16,494,486 12,078,340

10. TRADE AND OTHER RECEIVABLES2006 2005

Rs Rs

Trade receivables 7,966,570 -Other receivables and prepayments 28,149,080 20,177,090

36,115,650 20,177,090

136

MTNL11. STATED CAPITAL

2006 2005Rs Rs

Ordinary shares of no par value 269,255,262 140,849,310

12. TRADE AND OTHER PAYABLES2006 2005

Rs Rs

Trade creditors 12,257,749 -Other creditors 19,681,138 85,000

31,938,887 85,000

13. RELATED PARTY TRANSACTIONSThe company had the following transactions with related parties

2006 2005Rs Rs

Directors fees 15,000 17,300

Remuneration and other short term benefits to keymanagement personnel

All related party transactions are priced on commercial terms and conditions.

14. COMMITMENTS(a) Operating leases

Leases as lesseeThe future aggregate minimum lease payments under non-cancellable operating leases are as follows:

BTS sites Buildings TotalRs Rs Rs

Less than one year 4,488,000 3,248,592 7,676,592Between one year and five years 17,952,000 11,098,368 29,050,368Over five years 19,218,000 8,323,776 27,541,776

41,658,000 22,670,736 64,268,736

(b) Capital commitments

Capital expenditure contracted for Rs. 482,310,059

(c) Bank guaranteeThere is a contingent liability not provided for in the accounts in respect of guarantees given to thirdparties amounting to Rs 7,260,000 (2005 : Rs 240,000).

137

MTNL15. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS

Fair value

The carrying amounts of the company's financial assets and liabilities approximate their fair values.

Associated risksThe company's activities expose it to various types of risk in the normal course of its business. Thefollowing summary is not intended to be comprehensive summary of all risks.

Credit riskAt balance sheet date there was not significant concentrations of credit risk. The maximum exposure tocredit risk is represented by the carrying amount of each financial asset in the balance sheet.

Currency riskThe company is exposed to foreign currency risk on its transactions that are denominated in currenciesother than Mauritian rupee.

Interest rate riskThe company's income and operating cash flows are substantially independent of changes in marketinterest rates. The company's only significant interest earning financial asset is cash at bank. Interestincome may fluctuate in amount, in particular due to changes in interest rates.

16. HOLDING COMPANYThe holding company is Mahanagar Telephone Nigam Ltd, a Government of India Enterprise.

MAHANAGAR TELEPHONE (MAURITIUS) LTD.

Secretary’s certificate

In accordance with section 166 (d) of the Companies Act 2001 we certify that, to the best of our knowledgeand belief, the company has filed with the Registrar of Companies, all such returns as are required of thecompany under the Companies Act 2001.

Sd/-For and on behalf ofCompany secretaryExecutive Services Ltd.Peo Ah Man Wond Too Yan

Date: 22/07/2006

MAHANAGAR TELEPHONE (MAURITIUS) LTD.Financial Statements

for the year ended 31 March 2006

The following information does not form part of the audited statutory accounts and is included solely forthe information of management.

138


Income statementfor the year ended 31st March 2006

Note 2006 2005Rs Rs

Revenue 28,777,092 -

Cost of sales 1 (20,897,584) -

Gross profit 7,879,508 -

Other income - 134,159

Personnel expenses 2 (3,286,757) (2,431,947)

Licence fee (13,146,450) (41,500,000)

Administrative, operating and marketing expenses 3 (11,797,646) (4,813,747)

Depreciation (201,078) (23,740)

Net finance income 4 2,715,474 417,701

Loss before taxation (17,836,949) (48,217,574)

139


Appendix to detailed income statement

2006 2005

Rs. Rs.

1. Cost of sales

ICTA special account fee 3,706,986 -

Carrier charges 6,963,176 -

IPLC charges 4,149,518 -

IUC charges 6,077,904 -

20,897,584 -

2. Personnel expenses

Salaries and allowances 2,657,903 2,272,542

Other benefits 628,854 159,405

3,286,757 2,431,947

3. Licence fee

PLMN 2,000,004 18,000,005

PSTN 4,667,004 18,000,005

ILD 1,999,992 5,499,990

Microwave 1,250,102 -

Spectrum 3,229,348 -

13,146,450 41,500,000

4. Administrative, operating and marketing expenses

Administrative expenses

Meeting expenses 88,286 44,747

Directors fees 15,000 17,300

Rental 995,399 2,121,996

Company licence 8,000 8,000

Electricity 44,061 33,618

Water charges 5,478 5,806

Vehicle running expense 300,324 78,277

Vehicle hire charges 954,803 478,917

140

MTNLRepairs and maintenance - mess 185,936 251,987

Office wages - 10,417

Repairs and maintenance - office 353,455 7,162

Overseas travelling expense 286,738 392,495

Conveyance charges of staff 238 1,040

Printing 69,477 10,725

Stationery 127,994 63,494

Communication expenses 695,073 351,038

Bank charges 501,094 167,571

Library books 458 1,380

Newspapers and periodicals 12,319 8,535

Horticulture expenses 17,665 9,738

Computer consumables 59,204 17,638

Professional charges 285,744 216,526

General expenses 127,379 187,587

Entertainment 131,918 47,758

Cuttlery expenses 17,273 12,100

Repairs for office equipment 78,037 -

Commission and brokerage fees 2,356,133 -

Office insurance 74,210 -

Security charges 569,125 -

Medical expenses - 9,190

8,360,821 4,555,042

Operating expenses

Medical expenses - 9,612

Vehicle expenses - 13,000

Printing - 1,200

General expenses - 11,294

Entertainment - 8,862

- 43,968

141

MTNLMarketing expenses

Business promotion expenses 1,039,165 5,175

Gifts 15,449 24,956

Consultant fees 89,250 -

Printing expenses 317,250 -

Publicity and advertisement 1,960,711 184,606

Website development and maintenance 15,000 -

3,436,825 214,737

Total 11,797,646 4,813,747

5. Net finance income

Interest income 1,732,537 85,283

Net foreign exchange gain 982,937 332,418

2,715,474 417,701

142

MTNL

143


Registered Office : Jeevan Bharti, Tower-I, 12th floor,124, Connaught Circus, New Delhi – 110 001

PROXY

NAME FOLIO NO. NO. OF SHARES

DP-Id*................................ Client Id*................................

I /We…………………..... . . . . . . . . . .……………of………....….... . . . . . . . . .…………………in the distr ictof………………………….........……..being member(s) of Mahanagar Telephone Nigam Ltd. hereby appointShri/Smt………………...……………of……....………………in the district of……..………………………..orfailing him/her, Shri/Smt………….......…….of………….......……….in the district of…......…………………asmy/our proxy to attend and vote on my/our behalf at the 20thAnnualGeneralMeeting of the Company to beheld on 26th September 2006 at 11.00 A.M. or any adjournment thereof.

Date…..........…………. Signature…..........………….

Note:1. The proxy need NOT be a member2. The Form signed across the revenue stamp of requisite value should reach the Company’s Registered

Office at least 48 hours before the meeting.

*Applicable in the case of shares held in electronic form.

MAHANAGAR TELEPHONE NIGAM LIMITEDRegistered Office : Jeevan Bharti, Tower-I, 12th floor,

124, Connaught Circus, New Delhi – 110 001

ADMISSION SLIP

NAME FOLIO NO. NO. OF SHARES

DP-Id*................................ Client Id*................................

I hereby record my presence at the 20th Annual General Meeting of Mahanagar Telephone Nigam Ltd.being held at FICCI Golden Jubilee Auditorium, Tansen Marg New Delhi - 110 001 on 26th September2006 At 11.00 A.M..

Signature of Member/Proxy

NAME OF PROXY, IF APPLICABLE (IN BLOCK LETTERS)1. Members/proxies are requested to bring the duly signed Admission Slip to the meeting and hand it

over at the Registration Counter.

*Applicable in the case of shares held in electronic form.

Please note that no gifts of any sort would be distribted at the AGM this year.

Please note that no gifts of any sort would be distribted at the AGM this year.

Documents

Twentieth Annual Report 2005-06 - MTNLmtnl.net.in/Final_Report_2006.pdf · 7 MTNL N O T I C E Notice is hereby given that the Twentieth Annual General Meeting of the members of Mahanagar