Table ofContents

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**(MarkOne)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                               |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                       |
| **OR**     |
| ** ** | ** **                                                                                                                                       |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2008** |
| ** ** | ** **                                                                                                                                       |
| **OR**     |
| ** ** | ** **                                                                                                                                       |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                          |
| ** ** | ** **                                                                                                                                       |
| **OR**     |
| ** ** | ** **                                                                                                                                       |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                       |

 

Dateof event requiring this shell company report . . . . . . . . . . . . . . . . ... .

 

**For the transition period from                      to                        **

 

Commissionfile number  001-32692

 
| **Patni Computer Systems Limited**                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                                                        |
|                                                                                                                                                                          |
| **Not applicable**                                                                                                                                                            |
| (Translation of Registrant’s name into English)                                                                                                                          |
|                                                                                                                                                                          |
| **Republic of India**                                                                                                                                                         |
| (Jurisdiction of incorporation or organization)                                                                                                                               |
|                                                                                                                                                                          |
| **Akruti Softech Park, MIDC Cross Road No.21**

**Andheri (E), Mumbai 400 093, India**

**+91 22 6693 0500**                                                                  |
| (Address of principal executive offices)                                                                                                                                      |
|                                                                                                                                                                          |
| **Surjeet Singh, Chief Financial Officer, +91 22  6693 0500, surjeet.singh@patni.com**

**Akruti Softech Park, MIDC, Cross Road No. 21,  Andheri (E), Mumbai 400 093, India** |
| (Name, Telephone, E-mail and/or Facsimile number and Address of  Company Contact Person)                                                                                      |

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.

 

| Title of each  class                                                                                                                   |   | Name of each  exchange on which registered |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|
| American Depositary Shares, each representing two equity shares, par  value Rs. 2 per share. Equity shares, par value Rs. 2 per share* |   | New York Stock Exchange                    |

 

----

*Not for trading but only in connection with Registration of the ADSs 

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.

 
| **None**         |
|------------------|
| (Title of Class) |
|             |
| ** **       |
| (Title of Class) |

 

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Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 
| **Not applicable** |
|--------------------|
| (Title of Class)   |

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.
|   | Equity  shares:   128,105,007 |
|--------|-----------------------------------------|
|   |                                    |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

o Yes   x No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes   x No

 

Note— Checking the box above will not relieve any registrant required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 from their obligations under those Sections.

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes   o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).

o Yes   o No

 

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

 

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S. GAAP x |   | International Financial Reporting Standards as issued  by the International Accounting Standards Board o |   | Other o |
|-------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

o Item 17   x Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

(APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.

 

o Yes   o No

 

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**TABLE OF CONTENTS**

 
| PART - I |                                                                          |   |
|---------------|-------------------------------------------------------------------------------|--------|
| ITEM 1.       | IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISERS                        | 4      |
| ITEM 2.       | OFFER STATISTICS AND  EXPECTED TIMETABLE                                      | 4      |
| ITEM 3.       | KEY INFORMATION                                                               | 4      |
| ITEM 4.       | INFORMATION ON  THE COMPANY                                                   | 19     |
| ITEM 4A.      | UNRESOLVED  STAFF COMMENTS                                                    | 38     |
| ITEM 5.       | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 | 38     |
| ITEM 6.       | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   | 58     |
| ITEM 7.       | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 68     |
| ITEM 8.       | FINANCIAL  INFORMATION                                                        | 71     |
| ITEM 9.       | THE OFFER AND  LISTING                                                        | 71     |
| ITEM 10.      | ADDITIONAL  INFORMATION                                                       | 75     |
| ITEM 11.      | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 94     |
| ITEM 12.      | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 94     |
|          |                                                                          |   |
| PART II  |                                                                          |   |
|          |                                                                          |   |
| ITEM 13.      | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              | 94     |
| ITEM 14.      | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 94     |
| ITEM 15.      | CONTROLS AND  PROCEDURES                                                      | 95     |
|          |                                                                          |   |
| ITEM 16A.     | AUDIT  COMMITTEE FINANCIAL EXPERT                                             | 98     |
| ITEM 16B.     | CODE OF ETHICS                                                                | 98     |
| ITEM 16C.     | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       | 98     |
| ITEM 16D.     | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 99     |
| ITEM 16E.     | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES        | 99     |
| ITEM 16F      | CHANGE IN  REGISTRANT’S CERTIFYING ACCOUNTANT                            | 99     |
|          |                                                                          |   |
| ITEM 16G      | CORPORATE  GOVERNANCE                                                         | 99     |
|          |                                                                          |   |
| PART III |                                                                          |   |
|          |                                                                          |   |
| ITEM 17.      | FINANCIAL  STATEMENTS                                                         | 104    |
| ITEM 18.      | FINANCIAL  STATEMENTS                                                         | 104    |
| ITEM 19.      | EXHIBITS                                                                      | 105    |

 

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**CURRENCYOF PRESENTATION AND CERTAIN DEFINED TERMS**

** **

Unless otherwise stated in this Annual Report orunless the context otherwise requires, references in this Annual Report on Form 20-F,or “Annual Report” to:

 

·  “we,” “us,”, “our”, “our company” and “Patni”are to Patni Computer Systems Limited and its consolidated subsidiaries;

 

·  “India” are to the Republic of India;

 

·  “Japanese Yen” and “JPY” are to the legalcurrency of Japan; and allreferences to

 

·  “Euro” are tothe legal currency of the European Union;

 

·  “AUD” are tothe legal currency of the Commonwealth of Australia;

 

·  “GBP” are tothe legal currency of the United Kingdom of Great Britain and Northern Ireland;

 

·  “Indian rupees,” “rupees” and  “Rs.” are to the legal currency ofIndia and all references to “U.S. dollars,” “dollars” or “US $”or “$” are to the legal currency of the United States; and

 

·  a particular “fiscal” year are to our fiscalyear ended December 31 of such year.

 

Thefinancial statements have been prepared using U.S. dollars as the reportingcurrency. In addition, for your convenience, this Annual Report containstranslations of certain Indian rupee amounts into U.S. dollars amounts whichshould not be construed as a representation that those Indian rupee or U.S.dollar amounts could have been, or could be, converted into U.S. dollars or Indian rupees, as the casemay be, at any particular rate, the rate stated below, or at all.

 

Exceptas otherwise stated in this Annual Report, all translations from Indian rupeesto U.S. dollars contained in this Annual Report have been based on rate byFederal Reserve Board of New York on December 31, 2008 in Indian rupeeswas Rs. 48.58 per $ 1.00.

 

Informationcontained in our websites, including our corporate website, www.patni.com, isnot part of this Annual Report.

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

** **

This Annual Report contains forward-lookingstatements. The forward-looking statements are contained principally in thesections entitled “Key Information—Risk Factors,” “Information on the Company,”and “Operating and Financial Review and Prospects”. These statements involveknown and unknown risks, uncertainties and other factors which may cause ouractual results, performance or achievements to be materially different from anyfuture results, performance or achievements expressed or implied by theforward-looking statements. Forward-looking statements include statementsabout:

 

·  our ability to attract and retain clients;

 

·  the anticipated benefits and risks associatedwith our business strategy, including those relating to our current and futureservice offerings;

 

·  our future operating results;

 

·  the anticipated benefits and risks of ourstrategic customer relationships and acquisitions;

 

·  the anticipated size or trends of the marketsegments in which we compete and the anticipated competition in those markets;

 

·  government regulation and the outcome of anytax, legal or regulatory review, action or litigation; and

 

·  our future capital requirements and ourability to satisfy our capital needs.

 

Insome cases, you can identify forward-looking statements by terminology such as“may,” “will,” “could,” “should,” “expect,” “plan,” “intend,” “anticipate,”“believe,” “estimate,” “predict,” “potential” or “continue,” the negative ofsuch terms or other comparable terminology. These statements are onlypredictions. Actual events or results may differ materially. In evaluatingthese statements, you should specifically consider various factors, includingthe risks outlined in “Item 3.D. Key Information—Risk Factors”. These factorsmay cause our actual results to differ materially from any forward-lookingstatement. Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievement.

 

Forward-lookingstatements speak only as of the date they are made. Other than required by law,we do not undertake any obligation to update them in light of new informationor future developments.

 

ThisAnnual Report includes statistical data about the IT industry that comes frominformation published by sources including Gartner, Inc., or Gartner, a provider of market information andstrategic information for the IT industry, and the National Association ofSoftware and Service Companies, or NASSCOM, an industry trade group.

 

3

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Thistype of data represents only the estimates of Gartner, NASSCOM and othersources of industry data. In addition, although we believe that data from thesesources is generally reliable, this type of data is inherently imprecise. Wecaution you not to place undue reliance on this data.

 

**PART I**

** **

**ITEM 1. IDENTITY OF DIRECTORS, SENIORMANAGEMENT AND ADVISORS**

** **

Notapplicable.

 

**ITEM 2. OFFER STATISTICS AND EXPECTEDTIMETABLE**

** **

Notapplicable.

 

**ITEM 3. KEY INFORMATION**

** **

**3.A.Selected financial data**

** **

*Theselected consolidated historical financial data set forth below should be readin conjunction with our consolidated financial statements, the notes to thosestatements and “Item 5. Operating and Financial Review and Prospects” includedelsewhere in this Annual Report. The selected data presented below under thecaptions “Statement of Income Data”, “Balance Sheet Data” and “Cash Flow Data”for, and as of the end of, each of the years in the five-year period ended December 31,2008, are derived from our audited consolidated financial statements (exceptfor cash dividend per equity share) and have been prepared and presented inaccordance with U.S. GAAP.  Theconsolidated financial statements as of December 31, 2007 and 2008, and for each of the years in the three-year period ended December 31,2008, and the audit report thereon, are included elsewhere in this AnnualReport. Historical results are not necessarily indicative of the results to beexpected for any future period.*

* *
| ** **                                                                     | ** ** | **Fiscal Year ended December 31,**                  | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                                     | ** ** | **(in thousands, except share data and per share)** | ** ** |
| Statement of Income Data                                                       |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Net Revenues                                                                   |       | $                                                                       | 326,582    |   | $ | 450,332 |   | $ | 578,851 |   | $ | 662,912 |   | $ | 718,884 |   |
| Cost of revenues                                                               |       | 205,439                                                                 |       | 292,456 |   | 373,966 |   | 450,085 |   | 491,266 |   |
|                                                                           |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Gross Profit                                                                   |       | $                                                                       | 121,143    |   | $ | 157,876 |   | $ | 204,885 |   | $ | 212,827 |   | $ | 227,618 |   |
| Selling, general and administrative                                            |       | 57,722                                                                  |       | 85,906 |   | 106,472 |   | 116,260 |   | 131,056 |   |
| Provision for doubtful debts and advances                                      |       | 496                                                                     |       | (152 | ) | 1,191 |   | 1,182 |   | 1,626 |   |
| Foreign exchange (gain) loss, net                                              |       | 2,082                                                                   |       | 1,693 |   | 2,748 |   | (23,351 | ) | 18,359 |   |
|                                                                           |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Operating Income                                                               |       | $                                                                       | 60,843     |   | $ | 70,429 |   | $ | 94,474 |   | $ | 118,736 |   | $ | 76,577 |   |
|                                                                           |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Other Income / (Expense)                                                       |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Interest and dividend income                                                   |       | 4,223                                                                   |       | 4,190 |   | 10,088 |   | 12,540 |   | 13,002 |   |
| Interest expense                                                               |       | (2,083                                                                  | )          | (2,044 | ) | (2,840 | ) | (3,592 | ) | (1,744 | ) |
| Interest expense reversed                                                      |       | —                                                                  |       | — |   | — |   | — |   | 6,497 |   |
| Gain on sale of investments, net                                               |       | 144                                                                     |       | 1,128 |   | 1,679 |   | 6,370 |   | 9,732 |   |
| Other income (expenses), net                                                   |       | (3,693                                                                  | )          | 966 |   | 3,541 |   | 1,706 |   | 2,561 |   |
|                                                                           |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Income before income taxes                                                     |       | $                                                                       | 59,434     |   | $ | 74,669 |   | $ | 106,942 |   | $ | 135,760 |   | $ | 106,625 |   |
|                                                                           |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Income taxes                                                                   |       | 12,886                                                                  |       | 13,802 |   | 47,692 |   | 21,784 |   | 5,204 |   |
|                                                                           |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Net income                                                                     |       | $                                                                       | 46,548     |   | $ | 60,867 |   | $ | 59,250 |   | $ | 113,976 |   | $ | 101,421 |   |
| Earnings per share, basic & diluted                                   |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Basic                                                                          |       | $                                                                       | 0.38       |   | $ | 0.48 |   | $ | 0.43 |   | $ | 0.82 |   | $ | 0.75 |   |
| Diluted                                                                        |       | $                                                                       | 0.38       |   | $ | 0.48 |   | $ | 0.43 |   | $ | 0.82 |   | $ | 0.75 |   |
| Weighted average number of common shares used in computing earnings  per share |       |                                                                    |       |   |   |   |   |   |   |   |   |
| —Basic                                                                    |       | 123,066,042                                                             |       | 125,736,592 |   | 137,957,477 |   | 138,660,785 |   | 135,590,677 |   |
| —Diluted                                                                  |       | 124,084,992                                                             |       | 127,457,632 |   | 138,904,860 |   | 139,569,933 |   | 135,760,422 |   |
| Cash dividend per equity share                                                 |       | $                                                                       | 0.025      |   | $ | 0.046 |   | $ | 0.057 |   | $ | 0.086 |   | $ | 0.082 |   |

 

4

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| ** **                      | ** ** | **At December 31,** | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **(in thousands)**       | ** ** |
| Balance Sheet Data              |       |                          |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents       |       | $                             | 77,143     |   | $ | 148,820 |   | $ | 46,510 |   | $ | 32,626 |   | $ | 60,138 |   |
| Investments in securities       |       | 85,623                        |       | 141,776 |   | 246,016 |   | 301,152 |   | 248,299 |   |
| Total assets                    |       | 373,063                       |       | 553,886 |   | 640,341 |   | 856,226 |   | 765,342 |   |
| Capital lease obligations       |       | 657                           |       | 706 |   | 692 |   | 604 |   | 360 |   |
| Total shareholders’ equity |       | 273,227                       |       | 439,029 |   | 508,593 |   | 680,964 |   | 570,956 |   |
|                                 |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **Fiscal Year ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **(in thousands)**                 | ** ** |
| Cash Flow Data                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Net cash provided by / (used in): |       |                                    |       |   |   |   |   |   |   |   |   |
| Operating activities              |       | $                                       | 47,792     |   | $ | 73,058 |   | $ | 59,091 |   | $ | 111,272 |   | $ | 149,343 |   |
| Investing activities              |       | (85,484                                 | )          | (111,750 | ) | (155,426 | ) | (130,036 | ) | (35,531 | ) |
| Financing activities              |       | 61,423                                  |       | 111,875 |   | (7,106 | ) | (8,682 | ) | (64,589 | ) |
| Capital expenditures              |       | (21,591                                 | )          | (53,282 | ) | (48,620 | ) | (61,891 | ) | (43,362 | ) |
|                                   |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Exchangerates**

** **

Fluctuationsin the exchange rate between the Indian rupee and the U.S. dollar will affectthe U.S. dollar equivalent of the Indian rupee price of our equity shares onthe Indian Stock Exchanges and, as a result, will likely affect the marketprice of the American Depository Shares, or ADSs, in the United States, andvice versa. Such fluctuations will also affect the U.S. dollar conversion bythe depositary of any cash dividends paid in Indian rupees on our equity sharesrepresented by the ADSs.

 

Thefollowing table sets forth, for the fiscal years indicated, informationconcerning the number of Indian rupees for which one U.S. dollar could beexchanged based on the average rate published by the Federal Reserve Board ofNew York in Indian rupees.

 
| **Year**                           | ** ** | **Average** | ** ** | **High** | ** ** | **Low** | ** ** | **Period-End** | ** ** |
|------------------------------------|------------|-------------|------------|----------|------------|---------|------------|----------------|------------|
| 2004                               |       | 45.26       |       | 46.45    |       | 43.27   |       | 43.27          |       |
| 2005                               |       | 44.00       |       | 46.26    |       | 43.05   |       | 44.95          |       |
| 2006                               |       | 45.19       |       | 46.83    |       | 43.89   |       | 44.11          |       |
| 2007                               |       | 41.19       |       | 44.49    |       | 38.48   |       | 39.41          |       |
| 2008                               |       | 43.39       |       | 50.12    |       | 39.12   |       | 48.58          |       |
| 2009 (through June 12,  2009) |       | 49.34       |       | 51.96    |       | 46.78   |       | 47.60          |       |

 

The following table sets forth the high and lowexchange rates for the previous six months in Indian rupees  are based the rates published by the Federal ReserveBoard of New York:

 
| ** **                                  | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------|------------|----------|------------|---------|------------|
| December 2008                          |       | 50.05    |       | 46.74   |       |
| January 2009                           |       | 49.07    |       | 48.25   |       |
| February 2009                          |       | 50.88    |       | 48.37   |       |
| March 2009                             |       | 51.96    |       | 50.21   |       |
| April 2009                             |       | 50.48    |       | 49.55   |       |
| May 2009                               |       | 49.75    |       | 46.95   |       |
| June 2009 (through June 12, 2009) |       | 47.60    |       | 46.78   |       |

 

On June 12, 2009 the rate published by the Federal Reserve Board of NewYork was Rs. 47.60 per $ 1.

 

**3.B. Capitalization and indebtedness**

** **

Notapplicable.

 

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**3.C.Reasons for the offer and use of proceeds**

** **

Notapplicable.

 

**3.D.Risk factors**

** **

*Investors should carefully consider all of theinformation set forth in this Annual Report and the following risk factors thataffect us and our industry. The risks below are not the only ones we face.Additional risks not currently known to us or that we presently deem immaterialmay also affect our business operations. Our business, financial condition orresults of operations could be materially or adversely affected by any of theserisks. This Annual Report also contains forward-looking statements that involverisks and uncertainties. Our results could materially differ from thoseanticipated in these forward-looking statements as a result of certain factors,including the risks we face as described below and elsewhere. See “Special NoteRegarding Forward-Looking Statements.”*

* *

**Risks Related to our Operations**

** **

***Our revenues are highlydependent on a limited number of clients and the loss of any one of our majorclients could adversely affect our revenues.***

*** ***

Wederive a significant portion of our revenues from a limited number of clientsin a few select industries. In 2006, 2007 and 2008 our largest client, GeneralElectric, accounted for, 14.6%  11.8% and 10.7% of our revenues and our second largest client accounted for9.6% , 9.1%  and 9.8% of our revenues. In2006, 2007 and 2008, our top ten clients accounted for 53.1%, 47.6% and 45.6% of our revenues. Asa result of our reliance on a limited number of clients, we may face pricingand other competitive pressures. The volume of work performed for specificclients is likely to vary from year to year, especially since we are not the exclusiveexternal service provider for our clients. In addition, there are a number offactors, other than our performance, that could cause the loss of a client andthat may not be predictable. For example, our clients may decide to reducespending on IT services or sourcing from us due to a challenging economicenvironment and other factors, internal and external, relating to theirbusiness such as restructuring or supplier rationalizations. The loss of anyone of our major clients, a decrease in the volume of work they outsource to usor a decrease in the price at which we sell our services to them couldadversely affect our revenues.

 

***Our client contracts,including those with our two largest customers, typically can be terminatedwithout cause and with little or no notice or penalty, which could negativelyimpact our revenues and profitability.***

*** ***

Ourclients typically retain us through non-exclusive master services agreements,or MSAs. Most of our client project contracts, including those that are on afixed-price and fixed-price service level agreement, or SLA, basis, can beterminated with or without cause, with 0 to 90 days notice and withouttermination-related penalties. Our MSAs typically do not include any commitmentby our clients to give us a specific volume of business or future work.Additionally, certain of our MSAs do not require the client to make paymentsfor any services or work product reasonably deemed unacceptable to the client.Our business is dependent on the decisions and actions of our clients, many ofwhich are outside our control, which might result in the termination of aproject or the loss of a client and we could face liabilities as a result ofsuch termination. Our clients may demand price reductions, change theiroutsourcing strategy by limiting the number of suppliers they use, moving morework in-house or to our competitors or replacing their existing software withpackaged software supported by licensors. Any of these decisions or actionscould adversely affect our revenues and profitability.

 

***Our revenues are highlydependent on clients located in the United States. Economic slowdowns orfactors that affect the economic health of the United States may adverselyaffect our business.***

*** ***

In2006, 2007 and 2008, approximately 80.8% , 77.9% and 75.9% of our revenues were derived from clients locatedin the United States. The economic slowdown in the United States witnessedduring the fourth quarter of 2008 andthe first quarter of 2009, may result in our clients reducing orpostponing their technology spending significantly, which may in turn lower thedemand for our services.

 

***Our clients operate in a limitednumber of industries. Factors that adversely affect these industries or ITspending by companies within these industries may adversely affect ourbusiness.***

 

Wederive a large proportion of our revenues from clients which operate in alimited number of industries. In 2006, 2007 and 2008, we derived 23.2%, 23.6%and 24.7% of our revenues from the insurance industry, 21.7% , 23.8% and 25.1% of our revenues fromthe manufacturing industry, 18.9% , 13.4% and 12.6% of our revenues from thecommunications, media and entertainment industry, and 15.3% , 14.1% and 12.8%of our revenues from the financial services industry, respectively. The ongoing crisis in the financial andcredit markets, particularly, in the United States, has led to a significantchange in the financial services industry, with the United States federalgovernment and other national governments being forced to take over or providefinancial support to leading financial institutions and with leading investmentbanks going bankrupt or being forced to sell themselves in distressedcircumstances. Significant changes in the financial services industry or any ofthe other industries on which we focus, or a significant consolidation in anysuch industry, may reduce the demand for our services and negatively affect ourrevenues and profitability. Any significant decrease in IT servicesspending by clients in these

 

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industriesor other industries from which we derive significant revenues in the future mayreduce the demand for our services. Further, any significant decrease in thegrowth of the insurance, manufacturing, financial services or communications,media and entertainment industries, or significant consolidation in thoseindustries, or any decrease in growth or consolidation in other industrysegments in which we operate, may reduce the demand for our services.

 

***The******ongoing************financial crisis could negatively affect our business,results of operations and financial condition****.*

 

Theglobal financial crisisaffecting the financial markets and banking industry has resulted in atightening in the credit markets ,lower consumer and business spending; lower consumer networth;  low level of liquidity in many financialmarkets; and extreme volatility in credit, fixed income and equity markets. The economic outlook for 2009 has worsenedsignificantly and it appears the global economic recession will continue forsome time. This situation hasaffected the budgeting and purchasing behavior of our customers.  Manycustomers have delayed or reduced technology purchases. This has resulted in reductions in sales ofour services, longer sales cycles, slower adoption of new technologies andincreased price competition. If globaleconomic and market conditions do not improve, or continue to deteriorate, itmay have a material adverse effect on our business, operating results andfinancial condition.

 

***We face intensecompetition for employees in our market. Our success depends in large part uponour highly skilled software professionals and our ability to attract and retainthese personnel.***

*** ***

Ourability to execute projects and to obtain new clients depends largely on ourability to attract, train, motivate and retain highly-skilled softwareprofessionals, particularly project managers and other mid-level professionals. Our attrition rates were 28.5% ,26.5% and 20.0%  in 2006,  2007 and 2008. We define our attrition rateas the ratio of the number of employees that have left us during a definedperiod to the average number of employees that are on our payroll during suchperiod.

 

Weinvest in training the professionals that we hire to perform the services weprovide. These professionals are often targeted by the lateral recruitmentefforts of our competitors. If we cannot hire and retain additional qualifiedpersonnel, our ability to bid on and obtain new projects may be impaired andour revenues could decline. In addition, we may not be able to expand ourbusiness effectively. We believe that there is significant worldwidecompetition for software professionals with the skills necessary to perform theservices we offer, including from non-Indian, international service providerssuch as Accenture Limited, or Accenture, and International Business MachinesCorporation, or IBM. Additionally, we may not be able to redeploy and retrainour software professionals to keep pace with continuing changes in technology,evolving standards and changing client preferences.

 

***Our revenues, expensesand profits are difficult to predict and can vary significantly from quarter toquarter. This could cause the market value of our equity shares and the ADSs todecline.***

*** ***

Ourquarterly operating results may vary significantly from quarter to quarter.Therefore, we believe that period-to-period comparisons of our results ofoperations are not necessarily meaningful and should not be relied upon as anindication of our future performance. It is possible that in the future some ofour quarterly results of operations may be below the expectations of marketanalysts and our investors, which could lead to a significant decline of themarket value of our equity shares and the ADSs.

 

As a large part of any quarter’s revenues arederived from existing customers, revenue growth can vary due to project startand stops and customer-specific situations. Operating income variation is dueto various factors such as changes in compensation, which are typicallyeffected in the second quarter and reduce our operating margin in such quarter;changes in our use of onsite subcontractors, with higher usage in any quarterleading to lower operating income; changes in the ratio of onsite and offshoreservices, with higher offshore revenues enhancing the particular quarter’soperating income; changes in utilization of resources, with lower utilizationleading to reduction in operating income; and changes in foreign exchangerates. We also experience variations in immigration costs.

 

Factors which affect the fluctuation of ourrevenues, expenses and profits include:

 

·       variations,expected or unexpected, in the duration, size, timing and scope of ourprojects, particularly with our major clients;

 

·       changesin our pricing policies or those of our clients or competitors;

 

·       theproportion of services that we perform in our development centers in India asopposed to outside India;

 

·       theeffect of seasonal hiring patterns, unanticipated attrition and the timerequired to train and productively utilize our new employees, particularlysoftware professionals;

 

·       annualincreases in compensation of our employees;

 

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·       thesize and timing of expansion of our facilities;

 

·       unanticipatedcancellations, non-renewal of our contracts by our clients, contractterminations or deferrals of projects; and

 

·       changesin our employee utilization rate, which is affected by various factors.

 

A significant part of our expenses, particularlythose related to personnel and facilities, are fixed in advance of anyparticular quarter. As a result, unanticipated variations in the number andtiming of our projects or employee utilization rates may cause significantvariations in our operating results in any particular quarter. There are also anumber of factors other than our performance that are not within our controlthat could cause fluctuations in our operating results from quarter to quarter.These include:

 

·       theduration of tax holidays or exemptions and the availability of other Governmentof India incentives;

 

·       theoutcome of any tax, legal or regulatory review, action or litigation;

 

·       currencyexchange rate fluctuations, particularly when the rupee appreciates in valueagainst the U.S. dollar since the majority of our revenues are in U.S. dollarsand a significant part of our expenses are in rupees; and

 

·       other generaleconomic factors.

 

***Consolidation in the industries that we servecould adversely affect our business.***

*** ***

***Companies in the industries that we serve may seek to achieve economiesof scale and other synergies by combining with or acquiring other companies. Iftwo or more of our current clients merge or consolidate and combine theiroperations, it may decrease the amount of work that we perform for theseclients. If one of our current clients merges or consolidates with a companythat relies on another provider for its consulting, systems integration andtechnology, or outsourcing services, we may lose work from that client or losethe opportunity to gain additional work. The increased market power of largercompanies could also increase pricing and competitive pressures on us. Any ofthese possible results of industry consolidation could adversely affect ourbusiness.***

*** ***

***Our earnings may beadversely affected if we receive an adverse determination resulting from apending U.S. Internal Revenue Service tax review of our U.S. operations.***

*** ***

We face challenges from domestic and foreign tax authorities regardingthe amount of current taxes due. These challenges include questions regardingthe timing and amount of deductions and the allocation of income among varioustax jurisdictions. To the extent we are able to prevail in matters for whichaccruals have been established or are required to pay amounts in excess of suchaccruals, our effective tax rate in a given financial statement period may bematerially affected. During the year ended December 31, 2008, the U.S. Internal Revenue Service (“IRS”) completed its assessment of tax returns for the years ended December 31, 2003 and 2004 ofPatni Americas, Inc. andfor the years ended March 31, 2003, 2004 and 2005 of our U.S. branch. Based on the completionof assessment of these years, we reviewed the adequacy of the previouslyestablished tax exposure reserves with respect to these years and re-measuredthe established tax positions for the latter years based on those tax assessments. As a result, we made adjustments totaling to $ 18.2 millionto our income statement for the year ended December 31, 2008. See “Item 5A- Operating and FinancialReview and Prospects - Operating Results — Taxes”.

 

As the IRS review for 2005 through 2006 began in thelast quarter of 2008, we do not anticipate that the total tax liability willchange significantly due to the settlement of audits or the expiration ofstatute of limitations prior to December 31, 2009. 

 

***We operate in a highlycompetitive environment and this competitive pressure on our business is likelyto continue.***

*** ***

***We operatein a highly competitive environment and this competitive pressure on ourbusiness is likely to continue. The market for IT services is rapidly evolvingand highly competitive. We expect that competition will continue to intensify.We face competition or competitive pressure from:***

*** ***

·       IndianIT services companies, such as Tata Consultancy Services Limited, InfosysTechnologies Limited, Wipro Limited and HCL Technologies Limited;

 

·       internationalIT services companies, such as Accenture, Cognizant Technology Solutions,Computer Sciences Corporation, Sapient Corporation and Electronic Data Systems;

 

·       divisionsof large multinational technology firms such as IBM, and Hewlett-PackardCompany, or Hewlett-Packard;

 

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·       in-houseIT departments of large corporations;

 

·       otherinternational, national, regional and local firms from a variety of marketsegments, including major international accounting firms, systems consultingand implementation firms, applications software firms, service groups ofcomputer equipment companies, general management consulting firms, programmingcompanies and temporary staffing firms;

 

·       offshoreservice providers in other countries with low wage costs such as China and thePhilippines, and countries in Eastern Europe and Latin America; and

 

·       involvementof third party intermediaries who negotiate IT services and outsourcingcontracts on behalf of their clients.

 

Anumber of our international competitors haveset**up operations in India. Further, anumber of our international competitors with existing operations in India have ramped up their presence asoffshore operations in India have become an important element of their deliverystrategy.

 

Many of our competitors have significantlygreater financial, technical and marketing resources and generate greaterrevenues than we do. Clients may prefer vendors that have delivery centerslocated globally or are based in countries that are more cost-competitive thanIndia. Therefore, we cannot assure you that we will be able to retain ourclients while competing against such competitors. We believe that our abilityto compete also depends in part on a number of factors beyond our control,including the ability of our competitors to attract, train, motivate and retainhighly skilled technical employees, the price at which our competitors offercomparable services and the extent of our competitors’ responsiveness to clientneeds.

 

***Any inability to manageour growth could disrupt our business and reduce our profitability.***

*** ***

Ourrevenues have grown at a compound annual growth rate, or CAGR, of 21.8% from $ 326.6 million in 2004 to $ 718.9 million in 2008. The totalnumber of our employees has grown from 9,661 as of December 31, 2004 to14,894 as of December 31, 2008.

 

Our operations have also expanded through thedevelopment, enhancement and acquisition of new service offerings and industryexpertise, and the broadening of our geographic presence. Specifically, we:

 

·       augmentedour offerings in our service lines in business process outsourcing, productengineering, infrastructure management services and quality assurance;

 

·       gainedexpertise and operations in the provision of services to clients in thecommunications, media and utilities industry through our acquisition of PatniTelecom Solutions, Inc., orPatni Telecom (formerly Cymbal Corporation, or Cymbal) and Logan OrvissInternational, or Logan Orviss;

 

·       expandedour expertise and market specific services in the life sciences practicethrough our acquisition of Patni Life Sciences Inc. (formerly TaratecDevelopment Corporation, or Taratec);

 

·       expandedour expertise and operations in our product engineering technology practices;

 

·       enhancedour operations in Europe and Asia; and

 

·       expandedour facilities in India.

 

We expect our future growth to place significantdemands on both our management and our resources. This will require us tocontinuously evolve and improve our operational, financial and internalcontrols across the organization. In particular, continued expansion increasesthe challenges we face in:

 

·       recruiting,training and retaining sufficient skilled technical, sales and managementpersonnel;

 

·       adheringto our high quality and process execution standards;

 

·       maintaininghigh levels of client satisfaction;

 

·       creatingand managing economies of scale;

 

·       managinga larger number of clients in a greater number of industry sectors;

 

·       integratingexpanded operations while preserving our culture, values and entrepreneurialenvironment; and

 

·       developingand improving our internal administrative infrastructure, particularly ourfinancial, operational, communications and other internal systems.

 

Anyinability to manage our growth may have an adverse effect on our business,results of operations and financial condition.

 

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***We may facedifficulties in providing services within our industry and technologypractices, offering new and existing service lines and managing increasinglylarge and complex projects, which could lead to clients discontinuing theirwork with us.***

*** ***

Wehave been expanding the nature and scope of our engagements by extending thebreadth of our practices and the services we offer. The success of our newpractices and service offerings is dependent, in part, upon demand for suchservices by our existing and new clients and our ability to meet this demand ina cost-competitive and effective manner. We cannot be certain that we will beable to attract existing and new clients for such new services or effectivelymeet our clients’ needs.

 

Weintend for the increased breadth of our practices and service offerings toresult in larger and more complex projects for our clients. To achieve thisresult, we need to establish closer relationships with our clients and developa thorough understanding of their operations. Our ability to establish suchrelationships will depend on the proficiency of our management personnel,software professionals and, if necessary subcontractors, as well as othercompetitive factors such as our performance and delivery capability. Larger andmore complex projects may involve multiple engagements or stages, and there isa risk that a client may choose not to retain us for additional stages or maycancel or delay additional planned engagements. Such cancellations or delaysmake it difficult to plan for project resource requirements, and failure toplan appropriately may have a negative impact on our business, results ofoperations and financial condition.

 

***Our business willsuffer if we fail to keep pace with the rapid changes in technology in theindustries on which we focus. We need to anticipate and develop new servicesand enhance existing services in order to keep our clients satisfied.***

*** ***

TheIT services market is characterized by rapid technological changes, evolvingindustry standards, changing client preferences and new product and serviceintroductions. Our future success will depend on our ability to anticipatethese advances and develop new service offerings to meet client needs. We maynot be successful in anticipating or responding to these advances on a timelybasis or, if we do respond, the services or technologies we develop may not besuccessful in the marketplace. Furthermore, services or technologies that aredeveloped by our competitors may render our services non-competitive orobsolete.

 

***We have undertaken andmay continue to undertake strategic acquisitions, which may prove to bedifficult to integrate and manage or may not be successful, and may result inincreased expenses or write-offs.***

*** ***

Wehave pursued and may continue to pursue strategic acquisition opportunities toenhance our capabilities and address gaps in industry expertise, technicalexpertise and geographic coverage. It is possible that we may not identifysuitable acquisition or investment candidates or joint venture partners, or ifwe do identify suitable candidates or partners, we may not complete thosetransactions on terms commercially acceptable to us or at all. The inability toidentify suitable acquisition targets or investments or joint ventures or theinability to complete such transactions may adversely affect ourcompetitiveness and our growth prospects.

 

Ifwe acquire another company, we could have difficulty in assimilating suchcompany’s personnel, operations, products, services, technology and softwareinto our operations. In addition, the key personnel of the acquired company maydecide not to work with us. These difficulties could disrupt our ongoingbusiness, distract our management and employees and increase our expenses.Further, any such acquisition, merger or joint venture that we attempt, whetheror not completed, or any media reports or rumors with respect to any suchtransactions, may adversely affect the value of our equity shares and the ADSs.

 

***We are investingsubstantial cash assets in new facilities and physical infrastructure, and ourprofitability could be reduced if our business does not grow proportionately.***

*** ***

Weexpect to invest approximately $ 15 million to $ 20 million in capitalexpenditures in 2009.Most of the new spending will be for construction of new facilities andphysical infrastructure. However, we may not receive the benefits that weexpect from our investment in these facilities. Further, we may encounter costoverruns or project delays in connection with new facilities. These expansionswill increase our fixed costs. If we are unable to grow our business andrevenues proportionately, our profitability will be reduced.

 

***We are subject to risksarising from exchange rate fluctuations.***

*** ***

Althoughour functional currency is the Indian rupee, we transact a significant portionof our business in several other currencies, particularly the U.S. dollar. Ourexchange rate risk primarily arises from our foreign currency revenues,receivables, payables and other foreign currency assets and liabilities. Weexpect that a majority of our revenues will continue to be generated in U.S.dollars for the foreseeable future. In 2006, 2007 and 2008  our dollar denominated revenues represented87.1%, 82.9% and 80.7% of ourtotal revenues respectively.

 

Asignificant portion of our expenses, comprising the cost of revenues andselling, marketing and general administrative expenses, are and will continueto be denominated and incurred in Indian rupees. In 2006, 2007, and 2008 rupeecosts represented 37.0%, 42% and 40.8% of these cost of revenues and selling,marketing and general administrative expenses. Therefore, changes in theexchange rate between the rupee and other currencies, especially with respectto the U.S. dollar, may have a material adverse effect on our revenues, otherincome, cost of

 

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services,operating costs and net income, which may in turn have a negative impact on ourbusiness, operating results and financial condition. On December 31, 2008,the exchange rate per U.S. dollar was Rs. 48.58 compared to Rs. 39.41 on December 31,2007 and Rs. 44.11 on December 31, 2006. On June 12, 2009  the exchange rate per US $ was Rs. 47.60. The exchange rate between the rupee and the dollar haschanged substantially in recent years and may fluctuate substantially in thefuture.

 

Wehave sought to reduce the effect of exchange rate fluctuations on our operatingresults by purchasing derivative instruments such as foreign exchange forwardcontracts, purchased options and net written options. As of December 31,2008, we had outstanding forward contracts in the amount of $ 285.4 million, JPY 400.0 million ($ 4.4 million), AUD 1.0 million ($ 0.7 million) and GBP 1.5 million ($ 2.2 million), outstanding writtenoptions of GBP 0.9 million ($ 1.3 million), Euro 1.6 million ($ 2.2million) and JPY 150 million ($ 1.7million ), outstanding currency purchased options in the amount of $ 27.0 million, outstanding currency purchased options, net sell in the amountof $ 61.3 million andoutstanding currency written options in the amount of $ 21.0 million. We have increased our foreign currency hedgingactivity given the recent volatility in the value of the Indian rupee againstthe U.S. dollar. However, we may not be able to purchase contracts to insulateourselves adequately from foreign currency exchange risks. In addition, anysuch contracts may not perform effectively as a hedging mechanism.or we mayincur losses in such derivative instruments which may adversely affect ourprofits in a quarter or a financial year. In 2006 and 2008 we had a net foreign exchange loss of $ 2.7 million and$ 18.4 million and in 2007 we had a net foreign exchange gain of $ 23.4million.  See “Item 11.Quantitative andQualitative Disclosures about Market Risk — Components of Market Risk -Exchange Rate Risk”.

 

***Our success depends in large part upon our senior management and keypersonnel and our ability to attract and retain them.***

 

Weare highly dependent on our Chairman, Chief Executive Officer, Chief FinancialOfficer and other members of the executive leadership team. We have recently experienced a change in oursenior management with Mr. Narendra K. Patni no longer continuing as theChief Executive Officer and being replaced by Mr. Jeya Kumar in February 2009.Our future performance will be dependent upon the continued service ofthese persons. We do not maintain key man life insurance for any of the seniormembers of our management team or other key personnel. Competition for seniormanagement in our industry is intense, and we may not be able to retain suchsenior management personnel or attract and retain new senior managementpersonnel in the future. The loss of any of the members of our seniormanagement or other key personnel may adversely affect our business.

 

***Our revenues could besignificantly affected if the governments in the United States or othercountries in which our customers are based restrict companies from outsourcingwork to non-domestic corporations.***

*** ***

Offshoreoutsourcing has become a politically sensitive topic in the United States andEurope due to its perceived association with the loss of jobs in suchcountries. In the United States, inparticular, there has been increasing political and media attention on theseissues following the growth of offshore outsourcing. Current orprospective clients may elect to perform services we offer or themselves may bediscouraged from transferring these services to offshore providers to avoid anynegative perception that may be associated with using an offshore provider.These trends could harm our ability to compete effectively with competitorsthat operate primarily out of facilities located in the United States. Avariety of U.S. federal and state legislation has been proposed that, ifenacted, could restrict or discourage U.S. companies from outsourcing theirservices to companies outside the United States. In addition, it is possiblethat legislation could be adopted that would restrict U.S. private sectorcompanies that have federal or state government contracts from outsourcingtheir services to offshore service providers. Because most of our clients arelocated in the United States, any expansion of existing laws or the enactmentof new legislation restricting offshore outsourcing by U.S. companies couldadversely impact our ability to do business.

 

***Our inability tocomplete fixed-price contracts within budget and at the required level ofperformance could reduce our revenues and profitability.***

*** ***

Wederived 35.2% , 32.4% and 36.0% of our revenues from fixed-price contracts in 2006, 2007 and 2008. We bear the risk of cost overruns, completion delays and wageinflation in connection with all fixed-price projects, any of which may resultin a decrease in our margins from work performed on fixed-price contracts. Ourrevenues from fixed-price contracts also include revenues from fixed-priceSLAs, which are conditioned upon our meeting predetermined performance levels.Any failure to meet such performance levels could result in a reduction in ourrevenues. Any failure to accurately estimate the resources and time requiredfor a project or any failure to complete our contractual obligations at thecommitted performance level could adversely affect our revenues andprofitability.

 

***Our ability to expandour business and procure new contracts or enter into beneficial businessarrangements may be affected by non-competition clauses in our agreements withexisting clients or business partners.***

*** ***

Certainof our existing MSAs and other agreements have non-competition clauses, whichrestrict us from providing services to competitors of our existing clients orentering new markets where a business partner may already have a presence. Manyof our MSAs contain clauses that restrict our employees working for aparticular

 

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clientfrom providing services to a competitor of that client. Such clauses mayrestrict our ability to offer services to clients in a specific industry inwhich we have acquired expertise and may adversely affect our business andgrowth.

 

***We may be liable to ourclients for damages caused by system failures or breaches of securityobligations.***

*** ***

Manyof our contracts involve projects that are critical to the operations of ourclients’ businesses. Further, our client contracts may require us to complywith certain security obligations including maintaining network security andback-up data, ensuring our network is virus free and verifying the integrity ofemployees that work with our clients by conducting background checks. Anyfailure in a client’s system or breach of security relating to the services weprovide to the client could damage our reputation or result in a claim forsubstantial damages against us. We cannot assure you that any limitations ofliability set forth in our service contracts will be enforceable in all instancesor will otherwise protect us from liability for damages in the event of a claimfor breach of our obligations. Our insurance coverage may not be sufficient forall such claims or damages and additional insurance coverage may not beavailable in the future on reasonable terms or in amounts sufficient to coverlarge claims. Successful assertions of one or more large claims against uscould have a significant adverse effect on our business, results of operationsand financial condition.

 

***Our clients’ proprietaryrights may be misappropriated by our employees or subcontractors in violationof applicable confidentiality agreements.***

*** ***

Werequire our employees and subcontractors to enter into non-disclosurearrangements to limit access to and distribution of our clients’ intellectualproperty and other confidential information as well as our own. We can give noassurance that the steps taken by us in this regard will be adequate to enforceour clients’ intellectual property rights. If our clients’ proprietary rightsare misappropriated by our employees or our subcontractors or their employees,in violation of any applicable confidentiality agreements or otherwise, ourclients may consider us liable for that act and seek damages and compensationfrom us.

 

***We may be subject tothird party claims of intellectual property infringement.***

*** ***

Althoughthere are currently no material pending or threatened intellectual propertyclaims against us, infringement claims may be asserted against us in thefuture. Our contracts contain broad indemnity clauses, and under most of ourcontracts, we are required to provide specific indemnity relating to thirdparty intellectual property rights infringement. In some instances, the amountof these indemnities may be greater than the revenues we receive from theclient. If we become liable to third parties for infringing their intellectualproperty rights, we could be required to pay a substantial damage award and beforced to develop non-infringing technology, obtain a license or cease sellingthe applications or products that contain the infringing technology. We may beunable to develop non-infringing technology or to obtain a license oncommercially reasonable terms, or at all. We may also be required to change ourmethodologies so as not to use the infringed intellectual property, which maynot be technically or commercially feasible and may cause us to expendsignificant resources. Any claims or litigation in this area, irrespective ofthe outcome, could be time-consuming and costly and/or injure our reputation.

 

Asthe number of patents, copyrights and other intellectual property rights in ourindustry increases, we believe that companies in our industry will face morefrequent infringement claims. Defending against these claims, even if notmeritorious, could be expensive and divert our attention and resources fromoperating our Company.

 

***We have a limitedability to protect our intellectual property rights, and unauthorized partiesmay infringe upon or misappropriate our intellectual property.***

*** ***

Werely on a combination of copyright, trademark and design laws, confidentialityprocedures and contractual provisions to protect our intellectual property,including our brand identity. However, the laws of India may not protectintellectual property rights to the same extent as laws in the United States.Therefore, our efforts to protect our intellectual property may not be adequateand we may not be able to detect unauthorized use or take appropriate andtimely steps to enforce our intellectual property rights. Our competitors mayindependently develop proprietary methodologies similar to ours or duplicateour products or services. Unauthorized parties may infringe upon ormisappropriate our services or proprietary information. The misappropriation orduplication of our intellectual property could disrupt our ongoing business,distract our management and employees, reduce our revenues and increase ourexpenses. We may need to litigate to enforce our intellectual property rightsor to determine the validity and scope of the proprietary rights of others. Anysuch litigation could be time consuming and costly and the outcome of any suchlitigation cannot be guaranteed. For more information regarding ourintellectual property, see “Item 4.B. Information on the Company — BusinessOverview - Intellectual Property.”

 

**RisksRelated to Investments in Indian Companies and International OperationsGenerally.**

** **

Weare incorporated in India and a substantial portion of our assets and ouremployees are located in India. Consequently, our financial performance and themarket price of our ADSs will be affected by changes in exchange rates andcontrols, interest rates, Government of India policies, including taxationpolicies, as well as political, social and economic developments affectingIndia.

 

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***Immigrationrestrictions could limit our ability to expand our operations in the UnitedStates. We derive a high proportion of our revenues from clients located in theUnited States which may be affected materially by such restrictions.***

*** ***

***Most ofour employees are Indian nationals. The ability of our software professionalsto work in the United States, Europe and in other countries depends on ourability to obtain necessary visas and work permits. At present, majority of oursoftware professionals in the United States hold H-1B visas, a temporary visawhich allows the employee to remain in the United States while he or sheremains an employee of the sponsoring firm, and L-1 visas, an intra companytransfer visa allowing managers and executives or employees with specializedknowledge to stay in the United States only temporarily.***

*** ***

***An H-1Bvisa may be granted to certain categories of persons in several “specialtyoccupations” including software professionals such as our employees, so long astheir compensation meets annually adjusted minimums. Those adjustments mayforce increases in the salaries we pay to our employees with H-1B visas,resulting in lower profit margins. Although there is currently no limit to newL-1 visas, there is a limit to the aggregate number of new H-1B visas that maybe approved by the United States government in any fiscal year. We believe thatthe demand for H-1B visas will continue to be high. Further, the United Statesgovernment has increased the level of scrutiny in granting visas. This may leadto limits on the number of L-1 visas granted. The U.S. immigration laws alsorequire us to comply with other legal requirements including those relating todisplacement and secondary displacement of U.S. workers and recruiting andhiring of U.S. workers, as a condition to obtaining or maintaining work visasfor our software professionals working in the United States.***

*** ***

***Immigrationlaws in the United States and in other countries are subject to legislativechange, as well as to variations in standards of application and enforcementdue to political forces and economic conditions. It is difficult to predict thepolitical and economic events that could affect immigration laws, or therestrictive impact they could have on obtaining or monitoring work visas forour software professionals. Our reliance on work visas for a significant numberof software professionals makes us particularly vulnerable to such changes andvariations. As a result, we may not be able to obtain a sufficient number ofvisas for our software professionals or may encounter delays or additionalcosts in obtaining or maintaining such visas.***

*** ***

***Wage pressures in Indiamay prevent us from sustaining our competitive advantage and may reduce ourprofit margins.***

*** ***

Wagecosts in India have historically been significantly lower than wage costs inthe United States and Europe for comparably skilled professionals, which hasbeen one of our competitive strengths. However, wage increases in India mayprevent us from sustaining this competitive advantage and may negatively affectour profit margins**.**

 

***Clients may seek toreduce their dependence on India for outsourced IT services or take advantageof the services provided in countries with labor costs similar to or lower thanIndia.***

*** ***

Clientswho presently outsource a significant proportion of their IT servicesrequirements to vendors in India may, for various reasons, including todiversify geographic risk, seek to reduce their dependence on one country. Weexpect that future competition will increasingly include firms with operationsin other countries, especially those countries with labor costs similar to orlower than India, such as China, the Philippines and countries in EasternEurope. Since wage costs in our industry in India are increasing, our abilityto compete effectively will become increasingly dependent on our reputation,the quality of our services and our expertise in specific industries.

 

***Our net income would decrease ifthe Government of India reduces or withdraws tax benefits and other incentivesit currently provides to us or otherwise increases our effective tax rate.***

 

Presently,we benefit from the tax holidays given by the Government of India for theexport of IT services from specially designated software technology parks andspecial economic zones in India. As a result of these incentives, which includea 10 year tax holiday from Indian corporate income taxes for the operation ofmost of our Indian facilities, our operations have been subject to relativelylow tax liabilities. The tax benefits available for some of our facilities haveexpired and certain others will expire upon completion of 10 years fromcommencement of business of the eligible undertaking. However the tax holiday for the export of IT services will expire on March 31,2010.

 

InDecember 2006,  we received a demand notice from theIndian Income Tax department for approximately Rs. 630.17 million, including an interest demand of approximately Rs. 186.85 million ($ 12.9 million including an interestdemand of approximately $ 3.8million) for the assessment year 2004-05. The tax demand was mainly on accountof disallowance of deduction claimed by us under Section 10A of the Indian Income Tax Act, 1961, as amended, or the Indian Income Tax Act, inrespect of profits earned by its various eligible undertakings. Section 10Aof the Indian Income Tax Actexempts the profits earned by an undertaking for the export of computersoftware upon the fulfillment of certain conditions. One of the conditions isthat the unit should not have been formed by the splitting up of an existingbusiness. We had expanded our software development business whereas the Indian Income Tax department contendsthat the business of the new units is comprised of business transferred fromexisting units by splitting them. Inconsultation with our taxadvisers, we filed an appeal in January 2007challenging the disallowance.

 

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Oneof the requirements under the Indian Income Tax Rules to proceed with anappeal is to deposit, either immediately or through monthly installments, a sumequivalent to 50% of the amount that is under appeal. Until March 31,2008, we deposited a sum of Rs.310.28 million ($7.2 million). Considering the facts and nature ofdisallowances and based on the advice given by our legal counsel, managementconsidered that the disallowance was not tenable and, therefore was confidentof a favorable outcome in appeal proceedings and hence no provision for suchincome tax demand was considered necessary..

 

Subsequently,in February 2008, we received an order from the Commissioner of Income Tax (CIT) (Appeals) in favorof the Company by allowing the claim under Section 10A of the Indian Income Tax Act. TheCompany received the refund of the taxes paid after adjustment of the newdemand for the assessment year 2002-03 as explained below.

 

InDecember 2007, the Company received another demand, for Rs. 261.70 millionincluding an interest demand of approximately Rs. 139.88 million ($5.3 million including an interest demand ofapproximately $2.9 million) for the assessment year 2002-03. The new demandrelated to the same issue of disallowance of tax benefits under Section 10A of the Indian Income Tax Act. In theopinion of management, and based on advice received, the demand was consideredas not tenable against us and we filed an appeal with the appellate authority.

 

Subsequently,in March 2008, we received an order from the CIT (Appeals) in our favorallowing the claim under Section 10A of the Indian Income Tax Act.  UntilMarch 2008 an aggregate amount ofRs. 261.70 million ($6.1million) along with interest has also been received as refund.

 

TheIndian Income tax department has appealed against the CIT (Appeal’s) order inrespect of the assessment years 2002-03 and 2004-05 in the Indian Income Tax Appellate Tribunal.

 

InDecember 2008 we received a demandof approximately Rs 458.66 million for the assessment year 2003-04 including an interest demand of Rs. 258.64 million ($9.4 million including an interestdemand of approximately $5.3 million) and another demand in January 2009 of approximately Rs. 1,131.76 million for the assessment year 2005-06 including aninterest demand of approximately Rs.421.97 million ($23.2 million including an interest demand of approximately$8.7 million). These new demandsconcern the same issue of disallowance of tax benefits under Section 10A of the Indian Income Tax Act. We havefiled an appeal and a stay of demand has been granted until June 30, 2009. Additionally, we havedeposited with the Indian incometax authorities Rs. 209 million ($4.1 million) as deposit relatingto the demands received in December 2008. We consider these demandsas not tenable against us and, therefore, no provision for this tax contingencyhas been established.

 

Further,provisions of the Indian IncomeTax Act of India are amended on an annual basis by enactment of the FinanceAct. The Finance Act, 2008 has extended the scope of service tax to cover softwaredevelopment and this will not increase our operating expenses, since we recover this from our customers.

 

Inaddition, we may also be subject to changes in taxation resulting from theactions of applicable income tax authorities in India or from Indian tax lawsthat may be enacted in the future.For example, we may incur increased tax liability as a result of adetermination by applicable income tax authorities that the transfer priceapplied to transactions involving our subsidiaries and the Company was not appropriate.

 

Any increases in oureffective tax rate as a result of the expiration of tax benefits we currentlyenjoy, changes in applicable tax laws or the actions of applicable income taxor other regulatory authorities could materially reduce our profitability. Formore information, see “Item 5.A. Operating and Financial Review andProspects—Operating Results — Taxes.

 

***Any disruption in thesupply of power, IT infrastructure and telecommunications lines to ourfacilities could disrupt our business process or subject us to additionalcosts.***

*** ***

Anydisruption in basic infrastructure, including the supply of power, couldnegatively impact our ability to provide timely or adequate services to ourclients. We rely on a number of telecommunications service and otherinfrastructure providers to maintain communications between our variousfacilities in India and our clients’ operations in the United States andelsewhere. Telecommunications networks are subject to failures and periods ofservice disruption which can adversely affect our ability to maintain activevoice and data communications among our facilities and with our clients. Suchdisruptions may cause harm to our clients’ business. We do not maintainbusiness interruption insurance and may not be covered for any claims ordamages if the supply of power, IT infrastructure or telecommunications linesis disrupted. This could disrupt our business process or subject us toadditional costs.

 

***Anti-takeoverprovisions under Indian law could prevent or deter an entity from acquiringcontrol of us.***

*** ***

Indiantakeover regulations contain certain provisions that may delay, deter orprevent a future takeover or change in control of us. These provisions maydiscourage a third party from attempting to take control of our Company, even if a change in controlwould result in the purchase of ADSs at a premium to the market price or wouldotherwise be beneficial to our ADS holders. See “Item 10. B. AdditionalInformation —Takeover Code.”

 

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***There arecertain differences in shareholder rights and protections between the laws ofIndia and the United States and between governance standards for a U.S. publiccompany and a foreign private issuer such as us.***

 

Weare incorporated in India and investors should be aware that there are certaindifferences in shareholder rights and protections under the laws of India and the United States. There are alsocertain differences in the governance standards for a U.S. company and thoseapplicable to a foreign private issuer such as us. A U.S. investor shouldconsider such differences in shareholder rights and governance.

 

***In certain circumstances, our ability toacquire companies organized outside India may require the approval of theGovernment of India and/or the Reserve Bank of India and we may fail to obtainsuch approvals in a timely manner or at all.***

*** ***

Aspart of our strategy, we intend to acquire companies, in India or abroad, whichhave a synergistic fit with our operations.

 

Subjectto compliance with certain Indian laws and regulations, including Indianexchange control laws and regulations, we are permitted:

 

·       tomake overseas direct investments in a joint venture or wholly-owned subsidiaryoutside India of up to 400% of our net worth as of the date of our last auditedbalance sheet;

 

·       to make investments in an overseas joint venture or wholly-ownedsubsidiary engaged in a bona fide business activity; and

 

·       tomake overseas direct investments, without limits on net worth, in any foreignsecurity from the proceeds of an international offering of ADRs or GlobalDepository Receipts, or GDRs, or from the account balances held in our exchangeearner’s foreign currency bank accounts; and.

 

Incertain other cases, we are required to obtain the approval of the Reserve Bankof India to acquire shares of a foreign company for cash consideration orthrough a share swap transactions (subject to certain exceptions for an exchangeof ADRs or GDRs).

 

In certain circumstances, we may not be able tomeet the Indian regulatory requirements with respect to certain acquisitions offoreign companies and may require the prior approval of the Reserve Bank ofIndia and/or the Government of India to consummate acquisitions of such foreigncompanies. We may not be able to obtain some or all of these approvals in atimely manner or at all, and thereby may be impeded in our efforts to acquirecompanies organized outside India. This inability may limit our growth, renderus uncompetitive relative to our competitors and adversely affect our business,revenues and profitability.

 

***You may have difficulty enforcing anyjudgment obtained in the United States against us or our directors or executiveofficers in India***.

*** ***

Weare incorporated under the laws of India and many of our directors andexecutive officers reside outside the United States. Furthermore, most of ourassets and the assets of our directors and executive officers are locatedoutside the United States. As a result, you may be unable to:

 

·       effectservice of process upon us or our directors and executive officers; or

 

·       enforcejudgments obtained in the United States courts against us or such persons inthe United States, including judgments predicated upon the civil liabilityprovisions of the federal securities laws of the United States.

 

TheUnited States and India do not currently have a treaty providing for reciprocalrecognition and enforcement of judgments (other than arbitration awards) incivil and commercial matters.

 

***Incidents such as terrorist attacks andother acts of violence or war involving India, the United States, and othercountries could adversely affect the financial markets, result in loss ofclient confidence, and adversely affect our business, results of operations andfinancial condition.***

 

Incidentssuch as the terrorist attacks that haveoccurred in India, theUnited States, and other countries and other acts of violence or war, includingthose involving India, the United States or other countries, may adverselyaffect global equity markets and economic growth. These acts may also result ina loss of business confidence and have other consequences that could adverselyaffect our business, results of operations and financial condition. Traveladvisories, reluctance to travel and increased visa scrutiny for travelers as aresult of such attacks may have an adverse impact on our ability to operateeffectively. Any of these events could adversely affect client confidence inIndia as an outsourcing base.

 

***Regional conflicts in South Asia couldadversely affect the Indian economy, disrupt our operations and cause ourbusiness to suffer.***

*** ***

SouthAsia has, from time to time, experienced instances of civil unrest andhostilities among neighboring countries, such as between India and Pakistan and even within the country. There have been militaryconfrontations 

 

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alongthe India-Pakistan border from time totime. The potential for hostilities between the two countries is highdue to past terrorist incidents in India,and troop mobilizations along the border, and the geopolitical situation in theregion. Military activity or terrorist attacks in the future could influencethe Indian economy by disrupting communications and making travel moredifficult. Political tensions could increase the perception that investments inIndian companies involve a higher degree of risk than companies in othercountries such as the United States. This, in turn, could have a materialadverse effect on the market for securities of Indian companies, including ourequity shares and our ADSs, and on the market for our services.

 

***Our performance is linked to the stabilityof policies and the political situation in India.***

*** ***

The role of the Indian central and stategovernments in the Indian economy and their effect on producers, consumers andregulators has remained significant over the years. Since 1991, successivegovernments of India have pursued policies of economic liberalization,including significantly relaxing restrictions on the private sector. Thepresent Government of India, which has been recently elected again thatconcluded in May 2009, had taken initiatives that continue to support theeconomic liberalization policies pursued by previous governments. We cannotassure you that these liberalization policies will continue in the future .Therate of economic liberalization could change, and specific laws and policiesaffecting technology companies, foreign investment, currency exchange rates andother matters affecting investment in our securities could change as well. Asignificant change in India’s economic liberalization and deregulation policiescould adversely affect business and economic conditions in India generally, andour business in particular.

 

***We are vulnerable to natural disastersthat could severely disrupt the normal operation of our business and adverselyaffect our earnings.***

 

Indiais susceptible to natural disasters, including tsunamis, floods andearthquakes. On December 26, 2004, southeast Asia, including the eastern coastof India, experienced a tsunami that caused significant loss of life andproperty damage. While our facilities were not damaged, the tsunami struckChennai and other areas in which we operate. Substantially all of ourfacilities and IT professionals are located in India including Mumbai, whichhas also experienced heavy flooding in recent years. If our facilities aredamaged by a tsunami, flood, earthquake or other natural disaster, our globaldelivery capability could be interrupted or delayed significantly. Although wemaintain comprehensive natural perils insurance up to policy limits ourinsurance coverage may not be sufficient to cover all of our potential losses.In addition, disaster management facilities in India may not be adequate toprotect against potential losses. As a result, a natural disaster in India couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

***Compliance with new and changing corporategovernance and public disclosure requirements adds uncertainty to ourcompliance policies and increases our costs of compliance.***

 

Laws,regulations and standards relating to accounting, corporate governance andpublic disclosure, new SEC regulations, NYSE rules, Securities and ExchangeBoard of India rules, and Indian stock exchanges’listing regulations are subject to change and can create uncertainty forcompanies like ours. New or changed laws, regulations and standards could lackspecificity or be subject to varying interpretations. Their application inpractice may evolve over time as new guidance is provided by regulatory andgoverning bodies. This could result in continuing uncertainty regardingcompliance matters and higher costs of compliance as a result of ongoingrevisions to such governance standards.

 

Inparticular, continuing compliance with Section404 of the Sarbanes-Oxley Act of 2002 and the related regulationsregarding our required assessment of our internal controls over financialreporting requires the commitment of significant financial and managerialresources and our external auditors’ independent assessment of the internalcontrols over financial reporting.

 

Weseek to maintain high standardsof corporate governance and public disclosure, and our efforts to comply withevolving laws, regulations and standards in this regard have resulted in, andare likely to continue to result in, increased general and administrativeexpenses.

 

**RisksRelating to Our ADSs and our Trading Market**

 

***Sales and issuances of our equity sharesor ADSs may adversely affect the market price of the ADSs and our equityshares.***

 

Salesof a substantial number of equity shares, including sales by our insiders, intothe public market, whether on the Indian stock exchanges or into the UnitedStates by issuances of ADSs, or the perception that such sales may occur, couldadversely affect the market price of the ADSs and our equity shares or ourability to raise capital through an offering of our securities. In the future,we may also sponsor the sale of shares currently held by some of ourshareholders, or issue new shares. We can make no prediction as to the timingof any such sales or the effect, if any, that future sales of our equityshares, or the availability of our equity shares for future sale, will have onthe market price of our equity shares or ADSs prevailing from time to time. Inaddition, we have adopted an employee stock option plan as a means to rewardand motivate our employees. You may experience dilution of your shareholding tothe extent that we make future equity offerings or issue equity shares pursuantto the exercise of stock options under our employee stock option plan.

 

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***We have controlling shareholders who havethe ability to exercise significant control over us, and whose interests mayconflict with the interests of our other shareholders.***

 

Mr.Narendra K. Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni, together withtheir families and entities controlled by them, and General Atlantic MauritiusLimited, or General Atlantic, own 16.16%, 15.87%, 16.35% and 17.89% of our outstanding equity shares,respectively, as of June 12, 2009.

 

OurArticles of Association confer certain rights on our controlling shareholdersrelating to our governance, including representation on our Board of Directorsand an ability to adjourn a shareholder or Board of Directors meeting for lackof quorum if their representative is not present at the first such meeting. Inaddition, our Articles of Association can only be amended if members holdingnot less than 75% of our equity shares (and who are entitled to vote) castvotes in favor of such amendments and such votes include the favorable votes ofeach of the controlling shareholders, so long as the respective groups hold atleast 10% of our equity shares and vote on such amendment. Pursuant to theterms of our Articles of Association, Mr. Narendra K. Patni is the permanentChairman of our Board, with a casting vote in the event of a tie.

 

Pursuantto an employment agreement between our U.S. subsidiary, Patni Americas, Inc.,(formerly Patni Computer Systems, Inc.) and Mr. Narendra K Patni, Mr. NarendraK Patni served as the Chief Executive Officer of our U.S. subsidiary PatniAmericas, Inc and pursuant to  theconsultancy agreement between our U.S. subsidiary and us, Mr. Narendra K. Patniwas seconded as our Chief Executive Officer. The aforesaid employment agreementwith Mr. Narendra K. Patni had an initial term expiring on December 31, 2008which, now, has been extended until December 31, 2013 unless sooner terminatedearlier pursuant to the Employment Agreement amendment dated February 20, 2009. While Mr. Narendra K Patni has ceased tobe our Chief Executive Officer since February 20 2009, he continues to be ourChairman. In addition, our Board of Directors had approved the extension of theconsultancy agreement to December 31, 2010. Pursuant to the ConsultancyAgreement amendment dated February 20, 2009, the consultancy agreement with Patni Americas Inc can be terminatedonly  on or after December 31, 2010 (upongiving one month’s written notice to Patni Americas Inc) and such terminationwill take effect on the expiration of such period of notice.

 

Mr. Gajendra K. Patni and Mr. Ashok K. Patni,together with their family members, have management control of certaincompanies, which include PCS Technology Limited, PCS International Limited, PCSCullinet Private Limited, PCS Finance Private Limited and Ashoka ComputerSystems Private Limited. We have not entered into any non-solicitation ornon-compete agreements with any of these companies. While these companiescurrently are not competing with us to a material extent, we cannot assure youthat in the future they may not compete with us, may not solicit our employeesor otherwise have interests that may not conflict with ours.

 

Eachof the four controlling shareholders has the right to appoint one director toour Board of Directors so long as such controlling shareholder holds 5% or moreof our equity shares. In addition, Mr. Arun Duggal and Mr. Louis T. van denBoog, two of our directors, formerly served as special advisors to GeneralAtlantic.

 

Accordingly,our controlling shareholders have the ability to exercise significant influenceover our management, including over matters requiring shareholder approval orapproval by our Board of Directors. This could delay, defer or prevent a changein control, impede a merger, consolidation, take-over or other businesscombination involving us, or discourage a potential acquirer from making atender offer or otherwise attempting to obtain control of us.

 

Certainof our shareholders also have certain additional rights with respect to SECregistration for resale of our equity shares. See “Item 7.B. Related party transactions—Registration Rights Agreement.”

 

***Trading suspensions and closures at theIndian stock exchanges may adversely affect the trading price of ADSs.***

 

Ourequity shares are listed and traded in India on the Indian stock exchanges. Theregulation and monitoring of Indian securities markets and the activities ofinvestors, brokers and other participants differ, in some cases significantly,from those in the United States. Indian stock exchanges have in the pastexperienced problems, including temporary exchange closures, broker defaults,settlement delays and strikes by brokerage firm employees, which, if continuingor recurring, could affect the market price and liquidity of the securities ofIndian companies, including our equity shares and ADSs, in both domestic andinternational markets.

 

Thetwo Indian stock exchanges on which our equity shares are listed, the Bombay Stock Exchange Limited andthe National Stock Exchange of India Limited, also have a specific price bandfor each security listed. When a price fluctuation exceeds the specific limitsof the price band, trading of the security is stopped for that trading session.Such price volatility controls and the specific price bands are decided by eachindividual exchange and may differ from exchange to exchange. A closure of ortrading stoppage on the Indian Stock Exchanges could adversely affect thetrading price of the ADSs.

 

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***Exchange rate fluctuations between thedollar and the rupee will affect the value of the ADSs.***

 

Fluctuationsin the exchange rate between the rupee and the dollar will affect the dollarvalue of any cash dividends paid in rupees on our equity shares represented bythe ADSs. In addition, these fluctuations will affect the dollar equivalent ofthe rupee price of our equity shares on the Indian Stock Exchanges and, as aresult, the prices of our ADSs in the United States, as well as the dollarvalue of the proceeds a holder would receive upon the sale in India of anyequity shares withdrawn from the depositary under the deposit agreement.Holders may not be able to convert rupee proceeds into dollars or any othercurrency, and there is no guarantee of the rate at which any such conversionwill occur, if at all.

 

***Indian law imposes certain restrictionsthat limit a holder’s ability to transfer the shares obtained upon surrender ofADSs and repatriate the proceeds of such transfer, which may cause our ADSs totrade at a premium or a discount to the market price of our equity shares.***

 

Under certain circumstances, the Reserve Bank of India must approve thesale of equity shares underlying ADSs by a non-resident of India to a residentof India. The Reserve Bank of India has given general permission to effectsales of existing shares or convertible debentures of an Indian company by aresident to a non-resident, subject to certain conditions, including the priceat which the shares may be sold. Additionally, except under certain limitedcircumstances, if an investor seeks to convert the rupee proceeds from a saleof equity shares in India into foreign currency, approval from the Reserve Bankof India will have to be obtained for each such transaction. Required approvalfrom the Reserve Bank of India or any other government agency may not beobtained on terms favorable to a non-resident investor or at all.

 

***An investor in our ADSs may not be able toexercise preemptive rights for additional equity shares and may thereby sufferdilution of its equity interest in us.***

 

Underthe Indian Companies Act, 1956, or theIndian Companies Act, a company incorporated in India must offer its holders ofequity shares preemptive rights to subscribe and pay for a proportionate numberof shares to maintain their existing ownership percentages prior to theissuance of any new shares, unless such preemptive rights have been waived byholders of three-fourths of the shares voting on the resolution to waive suchrights. A holder of ADSs may be unable to exercise preemptive rights for equityshares underlying ADSs unless a registration statement under the Securities Actis effective with respect to such rights or an exemption from the registrationrequirements of the Securities Act is available. We are not obligated toprepare and file such a registration statement and our decision to do so willdepend on the costs and potential liabilities associated with any suchregistration statement, as well as the perceived benefits of enabling theholders of ADSs to exercise their preemptive rights, and any other factors weconsider appropriate at the time. We cannot assure you that we would file aregistration statement under these circumstances. If we issue any suchsecurities in the future, such securities may be issued to the depositary,which may sell such securities for the benefit of the holders of the ADSs.There can be no assurance as to the value, if any, the depositary would receiveupon the sale of such securities. To the extent that a holder of ADSs is unable to exercise preemptiverights granted in respect of the equity shares represented by the ADSs, hisproportional interest in us would be reduced.

 

***Holders of ADSs may be restricted in theirability to exercise voting rights.***

 

Atour request, the depositary will mail the holders of ADSs any notice of a shareholder meeting received from ustogether with information explaining how to instruct the depositary to exercisethe voting rights of our shares represented by the ADSs. If the depositaryreceives voting instructions from the holders in time, relating to matters thathave been forwarded to them, it will endeavor to vote the shares represented bythe ADSs in accordance with such voting instructions. However, the ability of thedepositary to carry out voting instructions may be limited by practical andlegal limitations and the terms of the securities on deposit. We cannot assurethat the holders will receive voting materials in time to enable them to returnvoting instructions to the depositary in a timely manner. Shares for which novoting instructions have been received will be voted by our management. Theremay be other communications, notices or offerings that we only make to holdersof our shares, which will not be forwarded to holders of ADSs. Accordingly, theholders of ADSs may not be able to participate in all offerings, transactionsor votes that are made available to holders of our shares.

 

***An active or liquid trading market for ourADSs is not assured.***

*** ***

Anactive, liquid trading market for our ADSs may not be maintained in the longterm.  We cannot predict the extent towhich an active, liquid public trading market for our ADSs will continue.  If there is no longer any active tradingmarket for our ADSs, or if we fail to meet eligibility requirements, we may berequired to delist from the NYSE, which could adversely affect the price of ourADSs and, potentially, our equity shares.  Although holders of ADSs are entitled to withdraw the equity shares underlying ourADSs from our Depositary at any time, there is no public market for our equityshares in the United States.

 

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**ITEM 4. INFORMATION ON THE COMPANY**

 

**4.A.History and development of the Company**

 

Wewere incorporated as Patni Computer Systems Private Limited on February 10,1978 under the Indian Companies Act. We are registered with the Registrar ofCompanies, Pune, Maharashtra, India. Our company registration number is11-020127 (CIN L72200MH1978PLC020127). In 1988, since our turnover exceededprescribed limits under the then-applicable Section 43A of the Indian CompaniesAct, we became a deemed public company and subsequently on April 15, 1991 wewere converted into a private limited company. In 1995 we once again became adeemed public company and upon the deletion of Section 43A from the IndianCompanies Act, we were converted to a private limited company on June 27, 2002.We were again converted to a public limited company on September 18, 2003 andchanged our name to Patni Computer Systems Limited. Our registered office islocated at S-1A Irani Market Compound, Yerawada, Pune 411 006, Maharashtra,India and the telephone number of our registered office is +91 20 2669 3457.

 

Theoriginal activities of the Company were computer time rental, the resale ofimported computer hardware, and software exports. In 1981, we promoted PCS DataProducts (Private) Limited, or PCSDP, for the sale and marketing of computerequipment and hardware maintenance. In 1987, we formed PCS Data General India,or PCSDG, a joint venture with The Data General Corporation, U.S.A., for the manufacture andmaintenance of computer hardware. In 1994, the name of PCSDP was changed to PCSIndustries Limited, or PCSIL, and PCSDG was merged into PCSIL. Since 1994, wehave been entirely focused on software exports. In 1999, the shares of PCSILheld by us and other non-operating assets were de-merged into other groupcompanies and our Company emerged as a focused IT services company.

 

Ourcorporate headquarters are located at Akruti Softech Park, MIDC Cross Road No. 21,Andheri East, Mumbai 400 093, India, and our North American headquarters arelocated at One Broadway Cambridge, MA 02142. General Atlantic made asignificant investment in our company in 2002. To enhance our domain expertisein financial services and communications, media and entertainment, we madeselective acquisitions such as Patni Telecom (formerly  Cymbal), which we acquired in November 2004.We completed our initial public offering of equity shares in India in February 2004and our initial offering of ADSs listed on the New York Stock Exchange in December2005. In 2007, we acquired LoganOrviss International, a Europeanbased telecommunicationsconsulting company, and Patni Life Sciences, Inc. (formerly TaratecDevelopment Corporation), a U.S. based life sciences consulting company to widen our telecommunicationsand life sciences expertise, respectively. In addition, we acquired from one of our majorcustomers  the world wide rights for asoftware proprietaryintellectual property right that enables communication service providers tooffer customer management, retail point-of- sales and billing services for a variety of products and services.

 

InFebruary 2008, our Board of Directors approved a proposal to repurchase fully paid equity shares of up to 10% of the paid up capitaland free reserves, at a maximum price of Rs. 325 per equity share, for anaggregate amount of up to Rs.2,370 million ($ 53 million) in accordance with the provisions of Sections 77A, 77AA, 77B and otherapplicable provisions of the Indian Companies Act, 1956 and the provisions of the Securities and Exchange Board ofIndia (Buy-back of Securities) Regulations, 1998, or the (“Buy Back Regulations”), for which necessary publicannouncements were made on April 2,2008.

 

Wecommenced the repurchase of shares on July 10, 2008. Our Board of Directors declared closure of the buy back offer on October23, 2008. Subsequent to the share repurchase, such shares are requiredto be extinguished as per the requirements of Section 77A of the Indian Companies Act. 1956.

 

Duringthe year ended December 31, 2008, we repurchased a total of 10,957,082 equityshares through the Bombay Stock Exchange Limited and the National Stock Exchange of India Limited for an aggregate consideration of Rs. 2,370million ($ 53 million), which was 100% of the amount authorized for such buy back. Subsequently, we extinguished the equity shares so bought back by us.

 

Our retainedearnings include profits aggregating Rs. 21.91 million ($0.45 million) set aside as CapitalRedemption Reserve  as required by theIndian Companies Act, 1956 pursuant to the repurchase which can be utilized only for the purpose ofissuing fully paid bonus shares of the Company.

 

Ourcapital expenditures for 2006,2007 and 2008 was  $53.4 million, $59.8 million and $40 million, respectively. These capital expenditures were primarily to finance theexpansion of our existing facilities as well as theconstruction / purchase of new facilities in India. We anticipate capitalexpenditures of between approximately $ 15 million and $ 20million in 2009, principally to finance the construction of our new facilitiesin Noida, Pune, Hinjewadi,Airoli - Navi Mumbai,  Gandhinagar and other facilities and physicalinfrastructure in India*.*We areobliged to make certain capitalexpenditures under a number of contracts relating to this expansion. Estimated amountsremaining to be executed on such contracts (net of advances), aggregatedapproximately $ 50.1 million at December31, 2008 to be spread over a 3year period. We currentlyintend to finance our planned capital expenditure entirely from existing cashand cash equivalents  and funds generatedfrom operations.

 

**4.B.Business overview**

 

Weare a leading Indian provider of information technology services. We deliver acomprehensive range of IT services through globally integrated onsite andoffshore delivery locations primarily in India, which we call our globaldelivery model. We offer our services to customers through industry-focusedpractices, including insurance, manufacturing, financial services andcommunications, media and entertainment, and through technology-focused 

 

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practices.Within these practices, our service lines include application development,application maintenance and support, packaged software implementation,infrastructure management services, product engineering services, businessprocess outsourcing and quality assurance services.

 

Wehave in-depth knowledge in our industry and technology practices. Insurance,manufacturing, communications, media and entertainment and financial servicesaccounted for 23.2%, 21.7%, 18.9% and 15.3% in 2006, 23.6%, 23.8%, 13.4% and14.1% in 2007 and 24.7%, 25.1%,12.6% and 12.8% in 2008.  We also have knowledge, experience and agrowing presence in other industries including retail, energy and utilities,logistics and transportation and life sciences. Our technology practices offerresearch, design and development services for product engineering. Through ourdedicated sales and management teams in each of our industry and technologypractices, we believe we are able to provide better client service, effectivelycross-sell services to our existing clients and develop new clientrelationships.

 

Wehave a track record of successfully developing and managing large, long-termclient relationships with some of the world’s largest and best known companies.Our customer base has increased significantly from 170 clients as of December 31,2004 to 331 clients as of December 31, 2008. Several of our key executives arelocated in our client geographies to better develop and maintain clientrelationships at senior levels. Repeat business accounted for  91.5% in 2006, 92.4% in 2007 and 93.0% in2008.

 

Ourrevenues grew from $ 326.6 millionin 2004 to $ 718.9 million in2008, representing a CAGR of 21.8%.Our net income grew from $ 46.5million in 2004 to $ 101.4 millionin 2008, representing a CAGR of 21.5%. Our total number of employees was 9,661**as of December31, 2004 and 14,894 as of December 31, 2008. We are investing in new high-techfacilities, which we refer to as “knowledge parks”, designed for expanding ouroperations and training our employees. We have237 sales and marketing personnel supported by dedicated industry specialistsin 27 sales offices around the globe,including North America, Europe, Japan and the rest of the Asia-Pacific region.

 

Wehave a highly qualified management team with a broad range of experience in theIT industry. Our Chairman   ( previously also our Chief Executive Officer) isan entrepreneur and engineer who has been in this industry for over 30 yearsand has led us from our inception in 1978. Most of our senior management hasworked as a team with us for over 20 years. We use our competitive recruitmentprogram to select the best talent from India’s premier engineeringinstitutions.

 

***Industry Structure and Developments****(Source: Global Markets and IT outsourcing overview from Gartner on Outsourcing2008- 2009 Report and Indian IT Industry overview from   NASSCOM Strategic Review Report 2009)*

 

***Global Markets Overview***

 

Aswe entered 2008,there were signs of economicfragility in the U.S. and Europe, were apparent, but the crises that began in October 2008 has greatly increased the level of economic uncertainty. The resultant recession has been feltacross the geographies and industries.

 

The overarching theme ofglobal economic uncertainty has become so widespread and the path to economicrecovery so obscured that “cautiously optimistic” is the most hopeful positionmost organizations are mustering in these times.

 

The immediate question thathovers over the financial services sector at the end of 2008 is how quicklycredit will loosen up to stimulate recovery*.*Thepessimistic view is that outsourcing market will also likely be impacted in the short and medium  term time frames. Infact, most of the Indian outsourcing companies have seen significant decline in revenue growth in the last couple of quarters in 2008.

 

Customers have reduceddiscretionary expenditure to alarge extent and the decision cycles have become longer and elongated.

 

In the current scenario, the outsourcingmarket represents a dichotomy: on the downside, organizations’ outsourcing strategies may negatively impact marketgrowth, but at the same time, the upside is that outsourcing can helporganizations to work through financial and competitive challenges. There is potential for outsourcing toaddress immediate cost pressures as well as long-term recovery goals.

 

***IT Outsourcing Outlook***

 

Based on the currenteconomic uncertainty, IT budgets  are expected to be carefullyscrutinized, customers are seeking waysto reduce costs and/ or supplement their IT staff, which may result in opportunities for global outsourcing together with cost constraints.

 

·                  Many organizations that havesuccessfully used offshore sourcing for cost-benefits will be looking for thenext level of benefit. This opens opportunities for service providers tointroduce higher levels of operational effectiveness that incrementally addvalue through globally delivered service relationships.

 

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·                  Global deliverywill be considered by more organizations that have never outsourced before.Those using offshore/global delivery mayincrease the levels and types of services work being done offshore.

 

·                  In the shortterm, it is expected that pricingpressures will increase,Price competition for deals, particularly for standardized IT outsourcing (ITO)services, may be fierce. In somecases, buyers will be lured by “lowball” pricing from providers trying tomake quarterly revenue goals or build market share. In other cases, providerswill be “forced” to accept low margins for revenuegrowth, and buyers will make decisions based on who will promise the lowestcost. In either scenario for the next two years the provider’scost to deliver may exceedrevenue and service quality may bedegraded.

 

While the 2009 outlook forglobal technology related spending is affected by the recessionary environment,a rebound is expected from 2010 onwards. Worldwide adoption of outsourcing isalso expected to rise significantly in the coming years.

 

***Indian IT Industry Outlook***

 

Strong fundamentals of alarge talent pool, sustained cost competitiveness and an enabling businessenvironment have helped established India as the preferred sourcingdestination. Superior delivery model has ensured India remains the distinctleader in the global sourcing arena.

 

Indian IT-BPO grew 33% in fiscal year 2008 and reached $64 billion in aggregative revenue,thus revalidating it’s strong fundamentals, despite strong concerns of slowing U.S. economy and supply constraints.IT-BPO export reached $40.9 billion in the year 2008 against $31.8 billion in the fiscal year2007, i.e., it has grown28%. Software and service export reached $40.4 billion, contributing nearly 63% of the overall IT-BPOaggregate revenue.

 

As a proportion of nationalGDP, the Indian technology sector revenue has grown from 1.2% in 1998 to 5.5%in 2008. Net value added by the sector to the economy was estimated at 3.3 –3.9% for fiscal year 2008.

 

 

*Source:  NASSCOM Fact sheet*

 

The export revenues are estimated to gross US$ 47 billion in fiscalyear 2009, accounting for 66%of the total IT-BPO industry revenues.Cross currency movement during the year, led by the strengthening (andhigh volatility) of the U.S.dollar versus some of the major invoicing currencies (Euro, GBP), suppressed volume growth in theEuropean market by approximately 2.2% at an industry level. Software andservices exports (including BPO) are expected to account for over 99% of total exports, employing over1.76 million employees.

 

While the U.S. with a 60% share remains the largest export market for Indian IT-BPOservices, incremental growth is being driven by the European market, with the U.K. and Continental Europegrowing by a CAGR of 41.4% and51.4% in the period of fiscal years 2004 to 2008.

 

The industry’s verticalmarket exposure is also well diversified across several mature and emergingsectors. banking, financial servicesand insurance (BFSI) remains thelargest vertical market for Indian IT exports, followed by high technology and  telecommunications. These sectorstogether accounted for nearly61% of the Indian IT-BPO exports in fiscalyear 2008  Manufacturing and Retail sectors contributed  25% ofthe aggregate exports in fiscal year2008. Other key segments include media,healthcare, airlines, transportation and utilities.

 

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Key global sourcing driverswill continue to be cost, access to talent, business improvements, increasingspeed-to-market and access to emerging markets. The future outlook for allthese drivers is positive, leading to increased momentum for global sourcing.The focus on cost reduction is expected to increase, keeping in mind the currentrecessionary environment.

 

Environmental considerationssuch as climate change, global warming, social responsibilities, and complianceissues add to increased pressure on margins, whichcan be offset by increasing global sourcing to keep tabs on spiraling costs.

 

Sustained demand, robustfundamentals and a supportive business environment will help realize the significant potential theIT-BPO industry offers, both for exports and the domestic market. The industrycan achieve an export target of $60-62 billion by FY 2011, employing 2.5-3 million professionals directly andcontributing substantially to the socio-economic development of the country.The size of the opportunity in hand can be gauged from the fact that Indiacurrently accounts for just over 4%of worldwide technology related spend. Additionally, growth in global sourcingis estimated to be almost four times that of technology related spend. Indiacurrently generates the bulk of its IT-BPO revenues from the U.S. and the BFSI sector, while accountingfor a miniscule part of technology spend in other geographies and verticals.India, with its fundamental advantages can capture a large share of theopportunities available. However, in order to achieve this goal, the keystakeholders need to work in tandem.

 

The Indian IT-BPO industry isnow at a critical point in its evolution. Behind it stands a decade of stellarperformance which has left a deep imprint on the Indian economic and sociallandscape. Moving forward, it faces a transforming macro-economic environment,rapidly changing customers and needs, evolving services and business models,and rising stakeholder (employees, investors) aspirations. These forces areexpected to redefine the nature of demand and supply for the industry, and alsoredefine the strategic imperatives for businesses in 2009.

 

***Our Delivery Model***

 

Weaddress our clients’ needs with our global delivery model, through which weallocate resources in a cost-efficient manner using a combination of onsiteclient locations in North America, Europe and Asia and offshore locations in India. We believe anintegral part of our delivery is our industry knowledge, which we refer to asour domain expertise.

 

Werefer to our own industry experts, business analysts and solutions architectswho are located primarily onsite with the client as our “domain wedge”. Theseexperts are supported by additional personnel who provide technical servicesonsite on a temporary basis, and by our trained professionals located normallyat one or more of our nine offshore centers in India. Typically, at the initialstage of a project, we provide services through our onsite industry andtechnology experts and our transient onsite delivery personnel. By applying ourdomain wedge approach, we deliver solutions that can be structured to scale tosuit our clients’ needs. In certain cases we provide dedicated offshoredevelopment centers, set up for a particular client. Through these offshoredevelopment centers we integrate our clients’ processes and methodologies andbelieve we are better positioned to provide comprehensive and long-termsupport. We maximize the cost efficiency of our service offerings by increasingthe offshore portion of the work as the client relationship matures. Tocomplement our domain wedge, we have aligned a majority of our sales andmarketing teams to focus on specific industry sectors.

 

***Our Competitive Strengths***

 

Webelieve our competitive strengths enable us to deliver high-quality, efficientand scalable services. These strengths include:

 

***Focused IndustryExpertise***

 

Weconcentrate on industries where we believe we can generate sustained revenuegrowth, such as insurance, manufacturing, financial services andcommunications, media and entertainment. Through our extensive experience inthese industries, we provide solutions that respond to technological challengesfaced by our clients. We also focus on technology practices, specifically inproduct engineering services.

 

***Successful ClientRelationships***

 

Wehave demonstrated the ability to build and manage our client relationships. Our long-term relationships typicallydevelop from performing discrete projects to providing multiple serviceofferings spread across the client’s businesses. Through our flexible approach,we believe we offer services that respond to our clients’ needs irrespective oftheir size. By leveraging our industry experience with our project managementcapabilities and breadth of technical expertise, we solidify and expand ourclient relationships.

 

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***Extensive Suite of ITServices***

 

Weprovide a comprehensive range of IT services, including applicationdevelopment, application maintenance and support, packaged softwareimplementation, infrastructure management services, product engineering,business process outsourcing and quality assurance services. Our knowledge andexperience span multiple computing platforms and technologies, which enable usto address a range of business needs and to function as a virtual extension ofour clients’ IT departments. We offer a broad spectrum of services in selectindustry sectors, which we leverage to capitalize on opportunities throughoutour clients’ organizations.

 

***Delivery andOperational Excellence***

 

Throughour mature global delivery model, we deliver high quality and cost-effective ITservices from multiple locations in a reduced timeframe. We vary thecomposition of our employee resource pool, in terms of seniority and location,to maximize our productivity and efficiency. Our processes and methodologieshave achieved Capability Maturity Model Integrated (CMMi) Level 5, the highestattainable certification. We use project management tools to deliver servicesto client specifications in a timely and reliable manner while maintaining ahigh level of client satisfaction.

 

***Highly-skilledProfessionals***

 

Wehave a highly qualified management team with a broad range of experience in theIT industry. Our Chairman(previously also our ChiefExecutive Officer) is an entrepreneur and engineer who has been in the ITindustry for over 30 years and has led us from our inception in 1978. Most ofour senior management team has worked as a team for over 20 years. We use ourcompetitive recruitment program to select the best talent from India’s premierengineering institutions.

 

**OurStrategy**

 

Weseek to further enhance our position as a leading Indian provider of integratedIT services and solutions through our global delivery model. To achieve this weintend to:

 

***Penetrate and GrowStrategic Client Accounts***

 

Wehave achieved strong revenue growth by focusing on select, long-term customerrelationships which we call strategic accounts. We aim to expand the scope ofour client relationships by leveraging our focused industry sector expertisewith delivery excellence, responsive engagement models and breadth of services.We intend to focus on adding new strategic clients and further penetrating ourexisting customer relationships. We address the needs of our larger strategicrelationships through dedicated account managers who have responsibility forincreasing the size and scope of our service offerings to such clients. We aimto strengthen our sales and marketing teams, a majority of which are aligned to focus on specificindustries.

 

***Strengthen and Broadenour Industry Expertise***

 

Weintend to strengthen our understanding of key industries by investing in astrong base of industry experts, business analysts and solutions architects aswell as considering select fromtargeted acquisitions. We believe that we can add more value than a generalservice provider because we understand the specific industry requirements ofour clients.

 

***Strengthen and Broadenour Service Lines***

 

Weaim to deepen our existing client relationships through new and morecomprehensive service lines. In recent years we have added new capabilities inline with our growth and customer needs. We continually explore new initiativesthrough our internal centers of excellence, which focus on innovation inspecific technology platforms or services. For example, we added qualityassurance services as a new service line, and developed increased capabilitiessuch as business intelligence, database administration and legacy systemmodernization in other service lines.

 

***Optimize and ExpandDelivery Capability***

 

Weare committed to enhancing our processes and methodologies by investing inproject management tools that improve our efficiency. We aim to develop newproductivity tools, refine our software engineering techniques and maximizereuse of our processes. For example, we use automation testing to increase theefficiency of our project methodologies and for process management, defecttracking, audit management and contract management. We also apply thiscommitment to our infrastructure and we are constructing new knowledge parkcampuses in India to provide world-class infrastructure, high standards ofquality and secure delivery.

 

***Build our BrandGlobally***

*** ***

Whileour “Patni” brand is an established and recognized brand in India, we intend toincrease recognition of our brand elsewhere in our client markets. We seek toachieve this through targeted analyst outreach programs, 

 

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tradeshows, white papers, sponsorships, workshops, road shows, speaking engagementsand global public relations management. We believe that a stronger brand willfacilitate our ability to gain new clients and to attract and retain talentedprofessionals.

 

***Pursue StrategicAcquisitions***

 

We seek to pursue selective strategicacquisitions to augment our capabilities and to address gaps in industryexpertise, technical expertise, service lines and geographic coverage. We willcontinue to consider and seek acquisition opportunities which considerablywiden our industry and technology practices.

 

**Industry Practices, Technology Practices andService Lines**

 

Weoffer our services to customers through industry practices in insurance,manufacturing, financial services and communications, media and entertainment,as well as in other industries. We also have technology practices that offerservices in product engineering and for Independent Software Vendors, or ISVs. Our industry practices andtechnology practices are complemented by our service lines, which we develop inresponse to client requirements and technology life cycles. Our service linesinclude application development, application maintenance and support, packagedsoftware implementation, infrastructure management services, productengineering, business process outsourcing and quality assurance services.

 

**IndustryPractices**

 

***Insurance***

 

Weoffer a range of integrated services to global insurance companies. Ourindustry experts employ their knowledge in all stages of the insurance businesscycle, from underwriting to compliance. Our offerings include a broad spectrumof services to insurance carriers including life and health, property andcasualty and reinsurance companies. The IT services we provide span severalfunctions, including sales and marketing, distribution, policy services,claims, compliance, accounting and reinsurance. In May 2008, we launched a customizable solution framework for thedevelopment or modernization of insurance business applications. Ourcore services include:

 

·       systemsconsolidation and integration of mergers and acquisitions;

 

·       policyadministration conversions;

 

·       developmentof frameworks that reduce the cycle time and cost for policy issue and claimhandling;

 

·       newproduct (life and retirement) introductions;

 

·       batchsystem optimization;

 

·       datamining;

 

·       developmentof business intelligence applications; and

 

·       legacysupport of several applications.

 

Weare a member of global insurance industry organizations such as Life OfficeManagement Association, or LOMA, the Association for Cooperative Research andDevelopment, or ACORD, and the Insurance and Accounting Systems Association.Several of our business analysts are LOMA certified and certified by theAmerican Institute for Chartered Property and Casualty Underwriters.

 

***Manufacturing***

 

Ourmanufacturing practice offers IT and business process outsourcing services thatsupport the purchase, sales, production, engineering, finance, human resourcesand legal functions of a manufacturing company. Within the manufacturingindustry, the sectors we service include consumer goods and durables,electronics, engineering, food and beverages, personal care products, paper,rubber products, life sciences and pharmaceuticals. To businesses in thesesectors, we provide IT services in the following areas:

 

·       supplychain management;

 

·       demandchain management;

 

·       manufacturingapplications and core manufacturing systems (including package implementation);

 

·       datawarehousing; and

 

·       businessintelligence.

 

A significantportion of the services we provide to our customers in our manufacturingpractice include implementation, customization and support of ERP platformsused by our customers

 

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From January 1, 2009, we have renamed ourmanufacturing segment as manufacturing,retail and distribution. Thispractice now includes clients in the retail, logistics and transportationindustry, described below under the caption “Other Industries”.

 

***FinancialServices***

 

Our financial servicesbusiness unit focuses on customers in the banking, diversified financialservices and securities business segments. We provide consulting and softwareservices including BPO (business process outsourcing) for consumer andcorporate banking, treasury and risk management, mutual funds, investmentmanagement and securities. Our services to these business areas include:

 

·                  architecture design;

 

·                  application integration and development;

 

·                  information security assessments;

 

·                  legacy system maintenance;

 

·                  business intelligence;

 

·                  customer relationship management;

 

·                  mutual funds and benefits administration;

 

·                  portfolio accounting and reporting;

 

·                  stock exchange and brokerage house solutions;and

 

***·***                  business process outsourcing.

 

***Communications,Media and Entertainment***

 

Our communications, media and entertainmentpractice provides domain expertise in a wide spectrum of IT operations andbusiness support systems used by telecommunications service providers acrossvarious segments including mobile, wireline, cable, broadband and media. Wehave expertise particularly in the newer business models that are emerging inthese markets such as mobile virtual network operations or integratedvoice/data/entertainment content services over broadband and 3G networks. In May 2008, we launched Patni atomsTM a market-ready offering forcommunications service providers to set up core customer- and partner-facingbusiness processes under one consolidated operational model.

 

Ourtelecommunications experts provide solutions that combine a wide variety ofservices including:

 

·       ITstrategy;

 

·       systemconsulting and design;

 

·       applicationdevelopment;

 

·       implementationand maintenance;

 

·       qualityassurance;

 

·       newproduct development and launch;

 

·       infrastructuremanagement services;

 

·       businessprocess outsourcing; and

 

·       IToutsourcing.

 

Theservices we provide within the media and entertainment industry and televisionbroadcasting include broadcast station management and automation applications,and traffic and billing systems. Our services for publishing companies covercontent layout software and search systems. Our services for online gaming andcasinos primarily involve accounts management.

 

In2007, we renamed our telecommunications practice as communications, media andentertainment.

 

FromJanuary 1, 2009, we renamed ourcommunications, media and entertainment practice as communications, media and utilities. It now includes clients in the energy and utilities industries, asdescribed below under the caption “Other Industries”.

 

***Other Industries***

 

Inaddition, we offer services to clients in the following industries:

 

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*Retail*

 

Our experience in the retail practice includesdevelopment, support and testing of applications for specialty and hi- techretailers and grocery chains. We also offer services such as PCI compliance,development of multi-channel retail solutions and solutions around point ofsale systems.

 

*Energy & Utilities*

 

Our experience in the energy and utilitiesindustry includes development, integration and testing of customer billing,meter process automation and smart meter programs for electric and waterutility customers. In addition, we also offer geographic information systemsand related services.

 

*Logistics & Transportation*

 

We provide services to road, air and railtransportation companies covering operational applications such as fleetmanagement, revenue accounting, reservations and flight operations. Apart fromthese, we also provide solutions to the logistic companies in areas such aswarehouse management applications, supply chain and route optimization.

 

From January 1, 2009, retail, logisticsand transportation has been merged with underthe manufacturing industrypractice and energy and utilities has been merged with under the communications, media andentertainment industry practice.

 

**TechnologyPractices**

 

***Product Engineering***

 

***Our productengineering services practice provides services for product engineering,product life cycle support and research and development outsourcing space, witha specialized team of over***2,600 engineers focused to service a varietyof technology sectors,such as medical electronics and lifesciences, storage networks and computing, industrial automation, automotive,consumer electronics, mobile, wireless and telecom, enterprise platformsoftware (ISV) and semiconductors.

 

Ourproduct engineering practice services all the segments from applicationsoftware, embedded hardware, embedded software engineering to computer aidedengineering (Electro-mechanical) areas. Our product engineering services assistseveral fortune 500 product companies to bring new products quickly to the market by providing high quality, robust,domain backed complex software/hardware development services fromoffshore/nearshore.

 

Ourservices provide support to our clients in the development of their products inthe following areas:

 

·     *Software*

 

·            Shrink wrapped and platform vendors

 

·            System software

 

·            Application framework vendors

 

·            ASP (Active server pages), VerticalISV

 

·     *Electronics*

 

·            Embedded software

 

·            Hardware design

 

·            Very large scale integration (VLSI)/ Field programmable gate arrays (FPGA) design

 

·            Packaging (Computer Aided Design /Computer Aided Manufacturing)

 

·     *Mechanical/Electro-Mechanical*

 

·            Product life cycle management /Product data management

 

·            Computer aided engineering/ Computeraided design / Computer aided manufacturing

 

FromJanuary 1, 2007, we combined our ISV and product engineering technologypractices into a single segment.

 

**Service Lines**

 

***Application Development***

 

Wecustom design, develop and implement software solutions for a variety of clientneeds. We offer services across the software development lifecycle, includingrequirements analysis, design, implementation, integration and 

 

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testingfor our projects. We typically perform application design, implementation andtesting primarily in our offshore delivery centers located in India, whilerequirements analysis, transition planning, user training and deployment areperformed at our clients’ sites. In specific situations, we may work jointlywith our clients’ teams. Our projects range from single-platform, single-sitesystems to multi-platform, multiple-site systems and typically include newdevelopment and/or significant functional enhancements to existing softwareapplications. We have developed expertise in mainframe, client-server andinternet technologies and on emerging platforms such as .NET and J2EE.

 

***Application Maintenanceand Support***

 

Ourapplication maintenance and support services include performance optimizationand system modification, product and system support, preventive maintenance andmigration to newer technologies and platforms. We perform most of ourmaintenance and re-engineering assignments at our offshore delivery centerslocated in India. In addition, we maintain small teams at our clients’ premisesto coordinate support functions. We perform diagnostics to assess offshoreoutsourcing potential and prepare a customized offshore road-map. We share thebenefits of our continuous improvement initiatives to reduce recurringmaintenance costs for our clients. Our application maintenance projects aretypically long-term in nature.

 

***Packaged SoftwareImplementation***

 

Weassess, evaluate, implement and maintain packaged software developed by globalvendors in the areas of enterprise resource planning, customer relationshipmanagement or CRM, supply chain management, business intelligence andenterprise application integration. Our offerings comprise:

 

·       consultingservices, which include functional and technical assessment, architecture andtechnology consulting and training;

 

·       implementationservices, which include product implementation and rollout;

 

·       applicationcare services, which include post-implementation support, productcustomization, interface development and version upgrade; and

 

·  functional extensions and integration ofdiverse enterprise applications.

 

***InfrastructureManagement Services***

 

Weoffer full support services of the IT infrastructure and remote managedservices of applications, network and hardware infrastructure for our clients.These services are delivered both at customer locations and from our offshorefacilities located in India. We specialize in mainframe and client-server operatingsystems, a wide range of data and voice networks, enterprise managementsystems, infrastructure products from well-known vendors, web-server products,network security products, disaster recovery and business continuitymanagement. From our network operations center in India we have the facility,hardware and technology to deliver remote managed services to our customers.Our service offerings address several managed services configurations such astraditional, integrated and automated remote monitoring, and management andreporting for enterprise-wide infrastructure environments including hardware,communications and software environments.

 

***Product EngineeringServices***

 

Ourproduct engineering services support the various industry requirements of multipledisciplines such as utilities, manufacturing, insurance, banking and finance.Our primary product engineering services include engineering design andmodeling, electronic design, embedded software development, product lifecyclemanagement which includes re-engineering, maintenance and sustenance of legacyproducts, testing and migrations to new technologies. We offer these servicesto clients in industry sectors such as consumer electronics, automotive,medical electronics, industrial automation, office automation, handheld/mobiledevice manufacturing and semiconductor manufacturing. Our technology expertisespans multiple computing languages including assembly language for variousmicro-controllers and processors, real-time operating systems, various computeraided design and manufacturing platforms, GIS platforms, communicationprotocols and digital signal processing. We also offer document conversionservices and GIS services especially to our customers in the utilitiesindustry.

 

***Business ProcessOutsourcing***

 

Westarted offering business process outsourcing services in 2002. Since then wehave been enhancing our expertise and concentrating on transaction processingfor our insurance, financial services and telecommunication clients andadministrative processes in the areas of finance and accounting, paymentprocessing, human resource management and technical help-desks.

 

***Quality AssuranceServices***

 

Ourquality assurance services include functional testing, test automation,performance testing, remote testing and test process consultancy. Apart fromtesting custom-built applications, we have experience in testing operating 

 

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systems,utilities, specialized application servers and middleware products. Withrespect to automation, we have partnerships with leading vendors and expertisein leading commercial and open source tools.

 

**Qualityand Project Management**

 

Whilequality always has been an integral part of our operations at Patni, we becameformally certified and assessed for quality models in 1995. We started with ISO9000-1994, underwent SEI-CMM level 4 and 5 assessments and as of today are ISO 9001-2000certified and are assessed for P-CMM Level 3 and SEI-CMMi Level 5. ISO 9001 isan international standard for quality management systems maintained by theInternational Organization forStandardization. The Capability Maturity Model (CMM) is a method for evaluatingthe quality of a company’s management and software engineering practices, withLevel 5 being the highest attainable certification. The CMM was developed bythe Software Engineering Institute (SEI) at Carnegie Mellon University. TheSoftware Engineering Institute subsequently released a revised version known asthe Capability Maturity Model Integration (CMMi). We have been using the SixSigma Program to implement process changes including the above. We continuouslystrive to better our quality management system with the help of industry bestpractices and research findings. Our quality management system involves thereview and continuous improvement of software development and relatedprocesses, testing of work products and regular internal and external qualityaudits. We apply sophisticated project management and solution deploymentmethodologies that we have developed to help ensure timely, consistent andaccurate delivery of IT solutions to our clients. In 2008 we have received thefollowing recognitions:

 

·                  Gold Certified PartnerStatus in the Microsoft Partner Program

 

·                  SAP-ERP Implementationfor a temple trust was recognized as the “Best IT Implementation 2008” in the “MostInnovative Category” by PC Quest Magazine]

 

·                  Listedas a ‘NeoIT 2008 Global Services 100 Company’.

 

·                  Listedas an ‘IAOP 2008 GlobalOutsourcing 100 Company’.

 

·                  Rankedamongst the ‘Top 10 Insurance Technology Vendors’ and 35th amongst the ‘toptechnology providers for financial institutions’ in the ‘FinTech 100 - 2008’list.

 

·                  Listedamong ‘India’s Top ITes & BPO Companies – 2008’, by Dun & Bradstreet.

 

·                  Listedamong Top 10 in ‘F&A BPO Competitive Landscape of Up-and-Coming Players –2008’, by Gartner, Inc.

 

·                  Listedin the ‘Black Book of Outsourcing – 2008’:

 

·                    Rankedamong Top 5 ‘Health Insurance BPO Providers’

 

·                    Rankedamong Top 10 ‘Total Benefits Administration Providers’

 

·                    Rankedamong Top 15 ‘Insurance Industry Vendors offering Comprehensive End-to-end BPOServices’.

 

***Centersof Excellence***

 

Wehave developed internal “centers of excellence” to create expertise in emergingtechnologies. We currently have centers of excellence that focus on middlewareintegration, legacy systems modernization, business intelligence, RFID, processconsulting and service oriented architectures based on technologies such asJ2EE and .NET. For example, we use our center of excellence on legacy systemsmodernization to develop solutions for our clients who want to maintain theircurrent business-critical systems but at the same time want to utilize thelatest technologies for new systems. We partner with leading technology vendorssuch as IBM and Microsoft to implement technology solutions soon after they aremade available in the market.

 

**Salesand Marketing**

 

Oursales teams use a multi-pronged approach to market our services. They targetcertain industries and service lines through focused sales executives,geographies through regional sales executives and large clients throughdedicated account managers. We have aligned a majority of our sales andmarketing teams to focus on specific industries. In addition to our salesexecutives, we have industry experts and solution architects who complement oursales efforts by providing specific industry and service line expertise. Oursales efforts are also supported by our marketing professionals, who assist inbrand-building and tracking our expertise. Our senior management and dedicatedaccount managers are actively involved in managing client relationships andbusiness development through targeted interaction with multiple contactsthroughout our clients’ organizations. We aim to develop our clientrelationships into partnerships by working closely with our clients’ managersand senior executives to formulate and execute an offshore outsourcing strategy,implement engagement models that suit their particular challenges and explorenew service lines.

 

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We undertake detailed periodic reviews toidentify existing and prospective clients that we believe can develop intolarge, strategic clients. We intend to focus on adding more strategic accounts,which we define as those who provide $ 5.0million or more in annual revenues or those with whom we believe we have thepotential to achieve such annual revenue amounts over a 24 to 30 month period.For each strategic client, a senior executive is identified and charged withmanaging the overall client relationship and leading periodic reviews with theclient.

 

Wehave 27 sales offices across NorthAmerica, Europe, Japan and therest of the Asia-Pacific region and 237 sales and marketing personnel who aresupported by dedicated industry specialists. We set targets for our salespersonnel at the beginning of each year, which are subject to periodic reviews.In addition to a base salary, our compensation package for sales personnelincludes an incentive-based compensation plan driven by achievement of theprescribed sales targets.

 

Oursales and marketing professionals help promote the “Patni” brand throughtargeted analyst outreach programs, trade shows, white papers, sponsorships,workshops, road shows, speaking engagements and global public relationsmanagement. We believe that a stronger brand will facilitate our ability togain new clients and to attract and retain talented professionals.

 

Duringthe year 2008, we received the ‘2008 Marketing Excellence – Diamond Award’ byITSMA as a recognition of our efforts in strengthening customer relationships.

 

**Clients**

 

Wemarket our services to clients located in the United States, Europe, India,Japan, the rest of the Asia-Pacific region (excluding Japan and India) and therest of the world. A significant proportion of our revenues is derived fromclients located in the United States, as illustrated in the table below:

 
| ** **                               | ** ** | **Fiscal year ended   December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2008** | ** ** |
| United States                            |       | 80.8                                 | %          | 77.9 | % | 75.9 | % |
| Europe                                   |       | 11.6                                 | %          | 14.7 | % | 15.7 | % |
| India                                    |       | 0.4                                  | %          | 0.8 | % | 0.9 | % |
| Japan                                    |       | 3.8                                  | %          | 3.0 | % | 3.5 | % |
| Asia-Pacific (excluding Japan and India) |       | 1.9                                  | %          | 1.9 | % | 2.3 | % |
| Rest of the World                        |       | 1.5                                  | %          | 1.7 | % | 1.7 | % |
| Total                                    |       | 100.0                                | %          | 100.0 | % | 100.0 | % |

 

Further,a significant proportion of our revenues has been derived historically from theinsurance, manufacturing, financial services, communications, media and entertainment industries, asillustrated in the table below. We also derive a small proportion of ourrevenues from clients in other industries, which until 2008 included retail, energy and utilities, logistics andtransportation and from our technology practices, product engineering.

 
| ** **                                 | ** ** | **Fiscal year ended  December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Insurance                                  |       | 23.2                                | %          | 23.6 | % | 24.7 | % |
| Manufacturing (1)                          |       | 21.7                                | %          | 23.8 | % | 25.1 | % |
| Financial Services                         |       | 15.3                                | %          | 14.1 | % | 12.8 | % |
| Communications, Media and Entertainment(2) |       | 18.9                                | %          | 13.4 | % | 12.6 | % |
| Product Engineering                        |       | 14.2                                | %          | 16.7 | % | 15.7 | % |
| Others (3)                                 |       | 6.7                                 | %          | 8.4 | % | 9.1 | % |
| Total                                      |       | 100.0                               | %          | 100.0 | % | 100.0 | % |

 

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.

(1)       From January 1, 2009, we have renamed ourmanufacturing segment industry practiceas manufacturing, retail and distribution.

 

(2)       From January 1, 2009, we have renamed our communications, media and entertainment practiceas communications, media andutilities.

 

(3)       From January 1, 2009, retail, logistics and transportation has beenmerged with the manufacturing industry practice and energy andutilities has been merged with the communications,media and entertainment industrypractice.

 

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Althoughwe believe we have successfully diversified our client base over the past threeyears, significant proportion of our revenues are derived from a small numberof clients, as illustrated in the table below:

 
| ** **           | ** ** | **Fiscal year ended  December 31,** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| General Electric     |       | 14.6                                | %          | 11.8 | % | 10.7 | % |
| State Farm Insurance |       | 9.6                                 | %          | 9.1 | % | 9.8 | % |
| Top 5 Clients        |       | 37.1                                | %          | 34.8 | % | 32.7 | % |
| Top 10 Clients       |       | 53.1                                | %          | 47.6 | % | 45.6 | % |

 

Thefollowing table illustrates a breakdown of our largest clients by revenuecategories on a cumulative basis:

 
| ** **                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| No. of $ 1 million + clients  |       | 74       |       | 84       |       | 92       |       |
| No. of $ 5 million + clients  |       | 26       |       | 31       |       | 30       |       |
| No. of $ 10 million + clients |       | 13       |       | 14       |       | 19       |       |
| No. of $ 25 million + clients |       | 3        |       | 5        |       | 5        |       |
| No. of $ 50 million + clients |       | 2        |       | 2        |       | 2        |       |

 

***The General Electric Association***

 

***Our association with GeneralElectric commenced in 1990. We provide IT services to a majority of entitieswithin the General Electric group of companies. For these businesses, weprovide services in the areas of multi-year application support, new programdevelopment, infrastructure management, business intelligence solutions andsoftware package implementation and business process outsourcing.***

 

***Our engagement model withGeneral Electric includes a dedicated offshore development center, integratedtelecommunications networks, quality program targets and highly integratedprogram management and reporting.  Mostprojects are on the basis of fixed-price SLAs and fixed-price developmentengagements and are bid for on a competitive basis against other third-party ITservice providers.  Our pricing for theseprojects is based on our cost and margin expectations for completing theproject, which is the same basis on which we bid for fixed price projects withother customers. Our largest General Electric engagement within the GeneralElectric group of companies is with GE Infrastructure followed by GE Money.***

 

***On August 3, 2006, weentered into a new master Information Technology Services Agreement withGeneral Electric, with a term from January 1, 2007 to December 31, 2009. Theterms of this agreement generally reflect the provisions described below under “ContractualArrangements”.***

 

***Contractual Arrangements***

 

Weenter into non-exclusive MSAs with clients that typically have a specified termand contain general rights and obligations governing our relationship with theclient. The MSAs specify the broad scope of work and typically do not includeany commitment by the client to give us a specific volume of business or futurework. For each work assignment, the client and we enter into separate workorders with the client thatspecify the types of services we are required to provide to the client, theperformance levels and the price terms. Although some of our MSAs contain thebilling rates for time and materials work orders, for most of the services weprovide, whether on a time and materials basis or on a fixed-price basis, theseparately agreed work order contains the specific pricing and other commercialterms.

 

Mostof our MSAs, including the MSAs with our two largest customers, can beterminated with or without cause, with 0 to 90 days notice and withouttermination-related penalties. The MSAs typically contain terms that:

 

·       requireus to provide various representations and warranties, including those relatingto the services we perform;

 

·       requireus to maintain confidentiality relating to the client and the contract, ****including compliance withvarious laws relating to privacy and data protection****;

 

·       requireus to protect the intellectual property of our clients;

 

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·       requireus to comply with certain security obligations, including maintaining networksecurity and back-up data, ensuring our network is virus free and verifying theintegrity of employees who workwith our clients by conducting background checks;

 

·       requireus to indemnify the client, including for third party intellectual propertyinfringement;

 

·       limitthe liabilities of both parties under the contract; and

 

·       providefor reciprocal non-solicitation of employees by our clients and us.

 

TheMSAs typically do not stipulate that we are the preferred supplier for thecustomer and do not provide that we are entitled to any minimum amount of workor revenues from the customer.

 

**Competition**

** **

***Themarket for IT services is rapidly evolving and highly competitive. We expectthat competition will continue to intensify. We face competition or competitivepressure from:***

*** ***

·       IndianIT services companies, such as, Tata Consultancy Services Limited, InfosysTechnologies Limited, Wipro Limited, and HCL Technologies Limited;

 

·       internationalIT services companies, such as Accenture, Cognizant Technology Solutions,Computer Sciences Corporation, Sapient Corporation and Electronic Data Systems;

 

·       divisionsof large multinational technology firms such as IBM, and Hewlett-PackardCompany, or Hewlett-Packard;

 

·       in-houseIT departments of large corporations;

 

·       otherinternational, national, regional and local firms from a variety of marketsegments, including major international accounting firms, systems consultingand implementation firms, applications software firms, service groups ofcomputer equipment companies, general management consulting firms, programmingcompanies and temporary staffing firms;

 

·       offshoreservice providers in other countries with low wage costs such as China and thePhilippines, and countries in Eastern Europe and Latin America; and

 

·       involvementof third party intermediaries who negotiate IT services and outsourcingcontracts on behalf of their clients.

 

Anumber of our international competitors are setting have set**up**operationsin India.**Further, a number of our internationalcompetitors with existing operations in India have ramped up**their presenceas offshore operations in India have become an important element of theirdelivery strategy.

 

Webelieve that price alone is not a sustainable competitive advantage in anenvironment where IT solutions are becoming increasingly critical to clients’core corporate strategy. We have therefore built our competitive position onour ability to leverage our industry specific knowledge and experience in abroad range of IT services, to manage and maintain large client relationships,to continually monitor and improve our delivery excellence and to attract andretain highly-skilled software professionals.

 

**Innovation**

** **

Webelieve innovation should be institutionalized so as to ensure our ability tohelp clients meet emerging challenges. We have two groups involved in ourresearch and development activity initiatives, the product and technologyinitiatives group and the delivery innovation group. We also have a businessanalysis group that serves as a channel between our clients and our innovationgroups to provide analysis on the trends in client requirements and evolvingneeds.

 

***Service and TechnologyInitiatives***

*** ***

Theproduct and technology initiatives group is focused on applied research anddevelopment initiatives and employs emerging technologies to create newtechnology service offerings. The group has established systems to harnesstalent among our employees by providing a shared framework for idea generation.The group is responsible for identifying, evaluating and incubating newtechnology service offerings and later converting relevant technology offeringsinto centers of excellence. The current focus areas of the group includeservice oriented architectures and their usage in building next generationapplications, mobile computing and its applications, usage of RFID technologiesand legacy systems modernization.

 

***Delivery Innovation***

*** ***

Ourdelivery innovation group is focused on providing operational excellence andserving our customers in the most efficient manner. This group’s activitiesinclude developing best practices and refining our methodologies, tools

 

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andtechniques used in the software engineering and project management activities,improving estimation processes and adopting new technologies for improvingproductivity. The delivery innovation group consists of professionals who areexperts in process improvement and automation and who also act as a resourcecenter for our nascent service lines such as our quality assurance services.

 

**Human Resources**

 

Weemployed 12,804, 14,945 and 14,894 employees as of December 31, 2006, 2007and 2008, respectively.  Out of 14,894employees, 11,555 were software professionals. Of these software professionals, 2,668 employees werecategorized as onsite and 8,887 as offshore. The geographic breakdown for ouremployees as of December 31, 2008 wasas follows:

 
| **Headcount as of****December 31,****2008** | ** ** | **Number of Employees** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| India                                            |       | 11,928                  |       |
| North America                                    |       | 2,352                   |       |
| Rest of the World                                |       | 614                     |       |
| Total                                            |       | 14,894                  |       |

 

Westrongly believe that our ability to maintain and continue our growth dependsto a large extent on our strength in attracting, developing, motivating andretaining the talent. We operate in seven major cities in India, which enablesus to recruit technology professionals from different parts of the country. Thekey elements of our human resource management strategy include recruitment,learning and development, compensation and retention.

 

***Recruitment***

 

Ourhiring plan is driven by annual budgets, business requirements and also basedon business forecasting andbusiness plans for next couple of years. Manning and wage bills are tracked on a regular basis through various MISreports by management. We recruit talent from premier universities, collegesand institutes in India, including the Indian Institutes of Technology, knownas IITs, National Institutes ofTechnology or NITs (formerly,RECs), and Indian Institutes of Management (IIMs). For our offshorefacilities located in India, our campus recruiting team visited over 130campuses in 2008.  Software candidatesare put through a series of tests and interviews such as Aptitude, Technical,Language Proficiency & Psychometrics Test followed by Technical &Behavioral Interview as a part of selection process. We have a similarcompetitive recruitment program in place for our lateral hires. All new hiresare inducted into our organization through a structured orientation program,which involves extensive training as well as mentoring.  We have a strong competitive hiring processin place which is ably supported by a highlyskilled global hiring team to attract talent globally.

 

Oursoftware employees are highly-skilled and have diverse educational backgrounds.As of December 31, 2008, graduate engineers comprised 66.23%, postgraduate engineers comprised 4.77%, employees with master’s degrees in computerapplications or computer management comprised 13.41% and employees with mastersin business administration and equivalent qualifications comprised 3.88% of oursoftware professionals. Other degrees comprised 11.71% of our softwareprofessionals.

 

Webelieve that we have a balanced mix of experience with approximately 41.25%,31.23% and 27.52% of our software professionals with work experience of lessthan 3 years, 3 to 6 years and over 6 years, respectively, as ofDecember 31, 2008.

 

***Learning and Development***

 

Weare committed to invest in employee development through various traininginitiatives on a continuous basis to enhance the capabilities of our employees.As a part of our Business Strategy, to pursue the above objective we havecreated a new function known as GRiT (Global Resources in Technology) on January 1, 2008. The principal mandate of thisinitiative is to enhance the technical skills of our employees by aligning themalong multiple lines of technology, making them undergorigorous training programs andthereafter taking level wise certification courses to provide significant competency enhancementopportunities to all employees. Inaddition, 53 employees have graduated in the year 2008 from ourcollaboration with BITS Pilani to provide a Masters Degree to ourSoftware Engineers. We also havea transparent evaluation system for tracking performance and identifying potentialthat

 

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resultsin individual development plans or IDPs that help build capabilities andrecognize preferences of our employees.

 

Weoffer our employees multiple avenues and choices for personal and professionalgrowth, including several distinct career paths. Our innovative program, “LeadershipExcellence at Patni”, communicates leadership attributes and helps us toidentify and develop future leaders necessary for our growth. Our trainingplans are personalized and address both technical and soft-skill requirements.For each software professional, we plan a minimum of 10 working days oftraining per year.

 

***Compensation***

 

Consideringthe demand-supply gap in the talent pool, it is vital to align over all ourcompensation strategy in line with market. We have a developed robust model tomap our compensation to market benchmarks systematically to arrive at a competitivepay and benefit structure.  The salariesand benefits offered to our software professionals’ are competitive in theindustry. We revise our compensation packages annually based on industrybenchmarks, role criticality and individual performance. We made ourcompensation more attractive for both existing employees and prospective newhires by introducing special project incentives / skill / performance basedincentives in addition to the regular salaries. Senior employees are offeredvariable compensation depending upon attainment of pre-defined quarterlyobjectives. We also grant stock options to our senior employees to nurture thespirit of ownership and commitment towards the company. For more information onthe terms of the stock option plan, see item “Item 6.E. Directors, Senior Management and Employees — Share Ownership —Employee Stock Option Plan.”

 

***Retention***

 

Itis imperative to retain talent and critical resources to stay competitive inour business. We seek toattract, nurture and retain employees with a strong focus on skill development;role enhancement and higher employee interaction. Our human resources philosophy revolves around providing acomprehensive development “Employee Experience” to the employees that beginswhen a new recruit joins the company untilthe time he leaves. We endeavor to create a long lasting impression and to seek to enhance the employee connectacross the Company. Some of ourkey human resources initiatives aim to attract and retain the talent are Just Joined, FOUR, Fresh Eyes and E-induction for new employees andPatni Explorer, Knowledge Management, eDude, Assessment Centers, Leadershipexcellence at Patni (LEAP), specializeddevelopment programs such as executive management programs and MS (collaborative) programmes in software engineering from BITS, Pilani for the existing employees.These above mentionedinitiatives have been well receivedand appreciated by our employeesacross the levels. In addition, wehave also initiated activities, such ase-Care, skip level meets and communication meets with seniormanagement to promote two-way transparent communications between management andthe other employees. Some of our HR practices, include rewards and recognition suchas the Appreciation Board, valuablecontribution awards, “pat on theback” awards and Employee touchpoint, which all form a part of our HR retention strategy. We seek to implement human resourcepractices and policies in line with the market best practices to make it moreemployee friendly and strong retention tool.

 

Wehave won recently two awards at the “World HRD Congress” in the regional roundheld at Pune under the “Employer Branding Category” for:

 

·                  InnovationRetention Strategy

·                  ManagingHealth at Work

 

In addition, we have also won the ‘Smart Workplace Award 2008’ instituted byEconomic Times in association with Intel and Acer.

 

Noneof our employees are represented by a union. We believe we have positiverelations with our employees.

 

**Seasonality**

** **

OurIT services business is not affected by seasonality.

 

**GovernmentRegulation**

** **

**Regulationof our business by the Indian government affects our business in several ways.Currently, we**benefit from tax holidays given by the Government of India for the exportof IT services from specially designated software technology parks, or STPIs,and special economic zones, or SEZs, in India. These tax incentives currentlyinclude a 10-year holiday from the payment of Indian corporate income tax forthe operations of most of our Indian facilities. As a result of this taxincentive, a substantial portion of our pre-tax income has not been subject tosignificant tax in recent years.

** **

InDecember 2006, we received a demand notice from the Indian Income Taxdepartment for approximately Rs.630.17 million, including an interest demand of approximately Rs. 186.85 million ($ 12.9 million including an

 

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interestdemand of approximately $ 3.8million)for the assessment year 2004-05. The tax demand was mainly on accountof disallowance of deduction claimed by us under Section 10A of the Indian Income Tax Act, 1961, inrespect of profits earned by its various eligible undertakings. Section 10Aof the Indian Income Tax Actexempts the profits earned by an undertaking for the export of computersoftware upon the fulfillment of certain conditions. One of the conditions isthat the unit should not have been formed by the splitting up of an existingbusiness. We had only expanded its software development business whereas the Indian Income Tax department contendsthat the business of the new units is comprised of business transferred fromexisting units by splitting them.  In consultation with our tax advisers, we filed an appeal in January 2007challenging the disallowance.

 

Oneof the requirements under the Indian Income Tax Rules to proceed with anappeal is to deposit, either immediately or through monthly installments, a sumequivalent to 50% of the amount that is under appeal. Until March 31,2008, the Company deposited a sum of Rs.310.28 million ($7.2 million). Considering the facts and nature ofdisallowances and based on the advice given by the Company’s legal counsel,management considered that the disallowance was not tenable and, therefore wasconfident of a favorable outcome in appeal proceedings and hence no provisionfor such income tax demand was considered necessary.

 

Subsequently,in February 2008, we received an order from the Commissioner Income Tax(CIT) (Appeals) in favor of the Company by allowing the claim under Section 10A of the Indian Income Tax Act. Wereceived the refund of the taxes paid after adjustment of the new demand forthe assessment year 2002-03 as explained above below.

 

InDecember 2007, we received another demand, for Rs. 261.70 millionincluding an interest demand of approximately Rs. 139.88 million ($5.3 million including an interest demand ofapproximately $2.9 million)  for the assessment year 2002-03.  The new demand related to the same issue ofdisallowance of tax benefits under Section 10A of the Indian Income Tax Act. In our opinion, and based on advicereceived, the demand was considered as not tenable against us and we have filedan appeal with the appellate authority.

 

Subsequently,in March 2008, we received an order from the CIT (Appeals) in our favor byallowing the claim under Section 10A of the Indian Income Tax Act. Until March 2008, an aggregate amount of Rs. 261.70 million ($ 6.1 million) alongwith interest has also been received as refund.

 

TheIndian Income tax department has appealed against the CIT (Appeal’s) order inrespect of the assessment years 2002-03 and 2004-05 in the Indian Income Tax Appellate Tribunal.

 

InDecember 2008, we received an another demand of approximately Rs. 458.66 million for the assessment year 2003-04 including aninterest demand of Rs. 258.64million ($9.4 million includingan interest demand of approximately $5.3 million) and another demand in January 2009of approximately Rs. 1,131.76million for the assessment year2005-06 including an interest demand of approximately Rs.421.97 million ($23.2 million including an interest demand ofapproximately $8.7 million).These new demands concerns the same issue of disallowance of tax benefits underSection 10A. of the Indian IncomeTax Act. We have filed an appeal and a stay of demand has been granted until June 30, 2009.  Additionally, we have deposited with the Indian income tax authorities Rs. 209 million ($ 4.1million)as deposit relating to thedemands received in December 2008. We consider these demands as not tenable against us and, therefore, noprovision for this tax contingency has been established.

 

Theaggregate benefit of these tax holidays and deductions with respect to our netincome was $25.3 million, $28.9 million and $27.3 million for 2006, 2007 and2008, respectively. Our currenttax holidays for STPI units expire in stages by 2010 and our partial taxableincome deduction for profits derived from exported IT services expired in March 2005.The tax benefits available for some of our facilities have expired and certainothers will expire upon completion of 10 years, however the tax holiday for theexport of IT service will expire on March 31, 2010. Consequently, weexpect our effective tax rate to increase.

 

Weare also subject to other government regulations, including those relating toacquisition of foreign securities, raising capital outside India and conversionof our equity shares into ADSs.

 

Pleasesee “Item 10. Additional Information”, as well as “Item 3. D. KeyInformation—Risk Factors” for additional information on the effects ofgovernmental regulation of our business.

 

**IntellectualProperty**

** **

We rely on a combination ofcopyright, trademark and design laws, confidentiality procedures andcontractual provisions to protect our intellectual property, including ourbrand identity. We currently do not have any patents. We have registered ourtrademark and service mark “Patni”in the U.S., U.K., Germany, Sweden, Japan, Singapore, Korea, Australia, Canada, theNetherlands and in Class 9 ,16 and 42 in India and have applied toregister our trademark and/or service mark in China . We also have22 trademarks registered and 27trademarks pending for registration in India and we have 1 trademark pendingfor registration in each of the U.S.and Europe .Additionally, we have3 registered copyrights in India.

 

Therecan be no assurance that our applications will be successful or that ourefforts to protect our intellectual property will be adequate.

 

Werequire our employees and subcontractors to enter into non-disclosurearrangements to limit access to and distribution of our clients’ proprietaryand confidential information as well as our own. Generally we are responsible

 

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toour clients for complying with certain security obligations includingmaintaining network security, backing-up data, ensuring our network is virusfree and verifying the integrity of those employees that work with our clientsby conducting background checks. Therecan be no assurance that we will be able to comply with all suchobligations without incurring any liability.

 

Inaddition, the terms of our client contracts often impose particularconfidentiality and security standards. We have independently established asystem of security measures to protect our computer systems from securitybreaches and computer viruses that may attempt to gain access to ourcommunications network. We have deployed advanced technology and process-basedmethods to ensure a high level of security and we continually monitor suchtechnologies to ensure that we maintain such levels consistently. Some of thesecomponents include clustered and multilevel firewalls, intrusion detectionmechanisms, vulnerability assessments, content filtering, antivirus softwareand access control mechanisms. We use encryption techniques as required. Wecontrol and limit access to client-specific project areas.

 

Althoughwe believe that our intellectual property rights do not infringe on theintellectual property rights of any other party, infringement claims may beasserted against us in the future. There are currently no material pending orthreatened intellectual property claims against us.

 

**4.C.Organizational structure**

** **

We have the following direct and indirectsubsidiaries as of December 31, 2008, all of which are wholly-owned:

 
| **Name**                                                          | ** ** | **Country of Incorporation** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------|------------|
| Patni Americas, Inc.  (formerly Patni Computer Systems Inc.) |       | USA                                    |       |
| Patni  Computer Systems (UK) Limited                              |       | UK                                     |       |
| Patni Computer Systems GmbH                                       |       | Germany                                |       |
| Patni Telecom Solutions, Inc. (1)                            |       | USA                                    |       |
| Patni Telecom Solutions  Private Limited (2)                      |       | India                                  |       |
| Patni Telecom Solutions  (UK) Limited (2)                         |       | UK                                     |       |
| Patni Life Sciences, Inc. (1)                                |       | USA                                    |       |
| Patni  Computer Systems Brasil Ltda                               |       | Brazil                                 |       |
| Patni Computer Systems  (Czech) s.r.o (3)                         |       | Czech Republic                         |       |
| PCS Computer  Systems Mexico, SA                                  |       | Mexico                                 |       |

 

----

(1)Owned through Patni Americas, Inc.(formerly Patni Computer Systems, Inc.).

(2)Wholly-owned subsidiary of Patni Telecom Solutions, Inc.

(3)Wholly -owned subsidiary ofPatni Computer Systems (UK) Limited.

 

**4.D.Property, plant and equipment**

** **

Akey component of our global delivery model is the telecommunication linkagesbetween client sites and our sites and between our distributed sites in India.We have designed a global network architecture which provides clientconnectivity, offshore development center connectivity and internetconnectivity. This network provides seamless access and uses high availabilitynetworks and advanced routing protocols for redundancy and availability.Although we rely on third parties, such as telecommunications providers andinternet service providers to provide such services, we ensure that we havemultiple service providers using multiple routes and media to attain highlevels of redundancy, availability and performance. We have dedicated teams tomonitor the operations of our network operations 24 hours a day and sevendays a week. We use encryption techniques for confidentiality of data asrequired.

 

Ourprincipal executive offices are located at Mumbai, India. Our North Americanheadquarters are located in Cambridge, Massachusetts. These facilities are usedprimarily for management functions and support functions such as sales,marketing and general administration.

 

Wehave state-of-the-art facilities in nine locations in India where our technicalstaff is located and which serve as our primary delivery centers. We also haveimaging centers and distribution centers in the United States and in the UnitedKingdom for handling the digital processing of documents.

 

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Our locations in India are as follows (as at December 31,2008):

 
| **No.** | ** ** | **Property**    | ** ** | **Square Feet** | ** ** | **Industry/Technology Practices Covered/Services Provided**                                                                      | ** ** |
|---------|------------|-----------------|------------|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1.      |       | Mumbai          |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 130,474              |       |                                                                                                                                            |       |
|    |       | Leased          |       | 53,174               |       |                                                                                                                                            |       |
|    |       | Total Mumbai    |       | 183,648              |       | Manufacturing,  Financial Services, ISV, Other, Product Engineering Services                                                                    |       |
| 2.      |       | Pune            |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 75,477               |       |                                                                                                                                            |       |
|    |       | Leased          |       | 232,473              |       |                                                                                                                                            |       |
|    |       | Total Pune      |       | 307,950              |       | Insurance,  Manufacturing, Communications, media and entertainment, ISV, Other,  Enterprise Application Systems, Enterprise Systems Development |       |
|    |
| 3.      |       | Gandhi Nagar    |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 37,000               |       | Insurance,  ISV, Other                                                                                                                          |       |
| 4.      |       | Chennai         |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 148,000              |       | Financial  Services, Manufacturing                                                                                                              |       |
| 5.      |       | Noida           |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 430,000              |       |                                                                                                                                            |       |
|    |       | Leased          |       | 143,000              |       | Financial  Services, BPO                                                                                                                        |       |
|    |       | Total Noida     |       | 573,000              |       |                                                                                                                                            |       |
| 6.      |       | Hyderabad       |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 8,497                |       |                                                                                                                                            |       |
|    |       | Leased          |       | 106,988              |       |                                                                                                                                            |       |
|    |       | Total Hyderabad |       | 115,485              |       | Communications,  media and entertainment                                                                                                        |       |
| 7.      |       | Bangalore       |       |                 |       |                                                                                                                                            |       |
|    |       | Leased          |       | 114,300              |       | Manufacturing,  Product Engineering Services                                                                                                    |       |
| 8.      |       | Thane           |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 91,159               |       |                                                                                                                                            |       |
|    |       | Leased          |       | 176,252              |       |                                                                                                                                            |       |
|    |       | Total Thane     |       | 267,411              |       | Insurance,  Manufacturing, Financial Services, Enterprise Application Systems                                                                   |       |
| 9.      |       | Airoli          |       |                 |       |                                                                                                                                            |       |
|    |       | Owned           |       | 462,845              |       | Enterprise  Application Systems, Product Engineering Services, Financial Services, Others                                                       |       |
|    |       |            |       |                 |       |                                                                                                                                            |       |
|    |       | Total           |       | 2,209,639            |       |                                                                                                                                            |       |

 

Wecurrently have capacity for approximately 21,500professionals at these facilities. As of December 31, 2008, we had used approximately 60 % of ourexisting office space in our operations.

 

Mostof our global branch offices located outside of India are used for sales andmarketing.

 

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We have 27 sales and marketing offices locatedin the following locations:

 

 

In keeping with our plans for expansion,we have constructed new facilities in India, which includes three knowledgeparks in Chennai, Navi Mumbai and Noida. These knowledge parks havestate-of-the-art infrastructure with extensive workspace and trainingfacilities and a modular design for ease of segregation of dedicated projectswith ability to provide scale and service to clients from one location.

 

The Navi Mumbai, and Chennai facilities are expected to accommodate up to 14,000and 10,000 engineers, respectively, when completed. We estimate that we mayspend an aggregate of approximately $ 140million to complete these two projects. Phase Iof the Navi Mumbai facility, having a capacity of 4,300 seats, is complete andoccupied. Phase I of the Chennai facility, having a capacity of 1,200 seats, is complete and partiallyoccupied.

 

 The Noida SEZfacility is expected toaccommodate 3,200 Seats oncompletion.  The Noida SEZ has completed 1,200 seats and is partially occupied.

 

As of December 31, 2008, we had spentapproximately $ 111 millionon the knowledge parks. The estimated amounts(net of advances) remaining to be executed on contracts in relation to capitalexpenditure for the construction of various facilities, aggregatedapproximately to $ 50.1 million as of December 31, 2008 which will beexecuted over 3 years. Weanticipate that expenditures for our expansion plans will total approximately $15 to 20 million in 2009.

 

Incontinuation of our policy to have our own campus operations, we have acquired land in Pune, Hyderabad and Kolkata inaddition to our campuses in Mumbai Chennai and Noida. These facilities when fully built, are expected to have a seatingcapacity for approximately 25,000 professionals.

 

Forthe Chennai facility, we have entered into a lease dated September 30,2004 with the State Industrial Promotion Corporation of Tamil Nadu, or SIPCOT.We have acquired 18.75 acres of land near Chennai for a lease term of99 years to establish a project in connection with software developmentand support services. According to the terms of the agreement, we requireSIPCOT’s prior approval for any change in the composition of our Board ofDirectors that causes a change in ownership or management. Further, for the Mumbai facility wehave entered into license agreements dated February 10, 2005, with theMaharashtra Industrial Development Corporation, or MIDC. We have been grantedlicenses to construct facilities over 50 acres of land in a phased manner inNavi Mumbai. Our occupation of the land is subject to entering into a leaseagreement with a term of 95 years. We have currently entered into leaseagreements for 15 acres and will soon be entering into lease agreements for 25 acres. This land mayonly be used for activities related to the information technology industry.

 

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**ITEM 4A. UNRESOLVED STAFF COMMENTS**

** **

None

 

**ITEM 5. OPERATING AND FINANCIAL REVIEW ANDPROSPECTS**

** **

Thefollowing discussion of ourfinancial condition and results of operations of our company should be read inconjunction with the financial statements and the related notes includedelsewhere in this document. This discussion contains forward-looking statementsthat involve risks and uncertainties. For additional information regardingthese risks and uncertainties, please see “Item 3.D.  Key Information—Risk Factors.”

 

**Overview**

** **

Weare a leading Indian provider of information technology services. We deliver acomprehensive range of IT services through globally integrated onsite andoffshore delivery locations primarily in India, which we call our globaldelivery model. We offer our services to customers through industry-focusedpractices, including insurance, manufacturing, communications, media andentertainment and financial services, and through technology-focused practices.Within these practices, our service lines include application development,application maintenance and support, packaged software implementation,infrastructure management services, product engineering services, businessprocess outsourcing and quality assurance services.

 

Ourrevenues grew from $ 326.6million in 2004 to $ 718.9 millionin 2008, representing a CAGR of 21.8%. Our net income grew from $ 46.5 million in 2004 to $ 101.4 million in 2008,representing a CAGR of 21.5%. Our total number of employees was 9,661 as of December 31,2004 and 14,894 as of December 31, 2008. We are investing in new high-techfacilities, which we refer to as “knowledge parks”, designed for expanding ouroperations and training our employees. As of December 31, 2008, we had 237 sales and marketing personnel supportedby dedicated industry specialists in 23sales offices around the globe, including North America, Europe, Japan and therest of the Asia-Pacific region.

 

Ourindustry segments comprise of financial services, insurance services,manufacturing companies, communications, media and entertainment, technologyservices and others such as energy and utilities, retail, and logistics and transportation. Weevaluate segment performance and allocate resources based on revenue growth. Wecategorize revenue in relation to segments based on items that are individuallyidentifiable with that segment. Costs are not specifically allocable toindividual segments as the underlying resources and services are usedinterchangeably. Fixed assets used in our business or liabilities contractedhave not been identified with any of the reportable segments, as the fixedassets and services are used interchangeably between segments.

 

Ourmanagement evaluates our results of operations by examining financial andoperating data in a variety of categories, including our industry andtechnology practices, onsite and offshore revenues, type of contract, type ofcustomer and geographic region. We manage and market our business according toour industry and technology practices.

 

Wehave also developed technology practices that offers research, design anddevelopment services for product engineering and to ISVs. Our service linessupport both our industry and technology practices. We do not, however, treatour service lines as separate components of our business for financialreporting purposes.

 

**5.A.Operating results**

** **

**Revenues**

** **

Wediscuss below the components of our IT service revenues by onsite and offshorerevenues, industry and technology practice, contract type, customer type andcustomer geography.

 

***Onsiteand Offshore Revenues***

** **

Wederive revenues from the provision of services offshore and onsite. Offshorerevenues consist of revenues from IT services work conducted in India. Onsiterevenues consist of revenues from IT services work conducted at clients’premises outside India or from our limited number of premises outside India.Although a substantial portion of our software personnel are located at ouroffshore locations, our customers generally pay higher charges for onsite work,which is consistent with our industry practice.

 

Wehave not experienced significant changes in our prices since 2002, whetheronsite or offshore, principally due to increased competition for IT outsourcingservices. Some of our larger customers receive reduced pricing through volumediscounts. In order to provide competitive pricing to our customers, we haveendeavored to shift the delivery of our services from onsite locations to lowcosting offshore delivery centers.

 

Asof December 31, 2007, 12,011 of 14,945 total employees were located inIndia and as of December 31, 2008, 11,928 of 14,894 total employees werelocated in India. Our overall employee numbers increase as we add employees forboth onsite and offshore work. We measure our service efforts that can bebilled to clients in units of

 

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billedperson-months. The number of offshore billed person-months has increased as apercentage of total billed person-months from 69.6% in 2007 to 71.2% in 2008.

 

To some extent, the onsite/offshore breakdown bybilled person-month varies by industry and technology practices as isillustrated in the table below. For example, insurance and communications,media and entertainment employ a higher level of onsite personnel than otherindustry and technology practices. Within our industry and technologypractices, our offshore and onsite breakdown by billed person-month is asfollows:

 
| ** **                                 | ** ** | **Year ended December********31, 2007** | ** ** | ** **                            | ** ** | **Year ended December********31, 2008** | ** ** | ** **                          | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **Onsite  Billed  Person-  months**                    | ** ** | **Offshore  Billed  Person-  months** | ** ** | **Total**                                              | ** ** | **Onsite  Billed  Person-  months** | ** ** | **Offshore  Billed  Person-  months** | ** ** | **Total** | ** ** |
| Financial Services                         |       | 4,790                                                  |       | 16,379                                |       | 21,169                                                 |       | 3,996                               |       | 15,643 |   | 19,639 |   |
| Insurance                                  |       | 9,170                                                  |       | 16,530                                |       | 25,700                                                 |       | 9,960                               |       | 19,717 |   | 29,677 |   |
| Manufacturing (1)                          |       | 8,334                                                  |       | 18,640                                |       | 26,974                                                 |       | 8,371                               |       | 20,876 |   | 29,246 |   |
| Communications, Media and Entertainment(2) |       | 4,176                                                  |       | 3,646                                 |       | 7,822                                                  |       | 3,980                               |       | 4,557 |   | 8,538 |   |
| Product Engineering                        |       | 4,787                                                  |       | 18,498                                |       | 23,285                                                 |       | 4,679                               |       | 17,845 |   | 22,524 |   |
| Others (3)                                 |       | 3,268                                                  |       | 5,294                                 |       | 8,562                                                  |       | 3,645                               |       | 6,957 |   | 10,602 |   |
| Total                                      |       | 34,525                                                 |       | 78,987                                |       | 113,512                                                |       | 34,631                              |       | 85,595 |   | 120,226 |   |

 

----

(1) From January 1, 2009, we have renamed ourmanufacturing segment industry practiceas manufacturing, retail and distribution.

(2) FromJanuary 1, 2009, we have renamed our communications, mediaand entertainment practice as communications, media and utilities.

(3) FromJanuary 1, 2009, retail , logistics and transportation has beenmerged with the manufacturing industry practice and energy andutilities has been merged with the communications, media and entertainment practice.

 

Certainof our service lines, such as product engineering services and business processoutsourcing, employ a greater level of offshore personnel, whereas our packagedsoftware implementation service line utilizes a larger portion of onsite workcompared to most of our other service lines.

 

Since2004, we have seen a trend towards greater use of offshore services, which haspositively affected our profitability. Services performed at a client site orour premises located outside India typically generate higher revenues per employee,but at a lower gross margin, than the same services performed at our facilitiesin India. These differences are attributable to the higher billing ratesgetting compensated by higher average cost of labor in the United States andother countries in which work is performed as compared to India. Accordingly,although offshore work (measured by billed person-months) is expected toincrease, we do not expect that the mix of our onsite and offshore revenueswill change significantly in the near future.

 

Theabove measurement of work does not reflect the actual revenues derived by usduring the relevant period and you are cautioned not to estimate revenues in aparticular period on the basis of these offshore and onsite billedperson-months during such period.

 

***Revenues by IndustrySegments***

*** ***

Ouroperations pertain to provision of IT services and solutions to customersbelonging to various industries such as insurance, manufacturing and financialservices and also to technology practices. Accordingly, revenues representedalong industry classes comprise the principal basis of segmental information.

 

Wederive a significant proportion of our revenues from clients in the insurance,manufacturing, communications, media and entertainment and financial services industries. We also provideservices to clients in other industries, including retail, energy and utilitiesand logistics and transportation. In addition, we market our services toclients through our technology practices, comprising our product engineeringpractice. The following table indicates the breakdown of our revenues by ourindustry and technology practices:

 

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Industry Segments

 
| ** **                                 | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| *Industry Practice*                        |       |                                       |       |   |   |   |   |
| Insurance                                  |       | 23.2                                       | %          | 23.6 | % | 24.7 | % |
| Manufacturing (1)                          |       | 21.7                                       | %          | 23.8 | % | 25.1 | % |
| Financial Services                         |       | 15.3                                       | %          | 14.1 | % | 12.8 | % |
| Communications, Media and Entertainment(2) |       | 18.9                                       | %          | 13.4 | % | 12.6 | % |
| Others (3)                                 |       | 6.7                                        | %          | 8.4 | % | 9.1 | % |
| *Technology Practice*                      |       |                                       |       |   |   |   |   |
| Product Engineering                        |       | 14.2                                       | %          | 16.7 | % | 15.7 | % |
| Total                                      |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

----

(1) From January 1, 2009, we have renamed ourmanufacturing segment industry practiceas manufacturing, retail and distribution.

(2) From January 1, 2009, we have renamed our communications, media and entertainment practiceas communications , media andutilities.

(3) From January 1, 2009, retail , logistics and transportation has beenmerged with the manufacturing industry practice and energy andutilities has been merged with the communications, media and entertainment industrypractice.

 

***Revenues by ContractType***

*** ***

Ourrevenues are recorded either on a time-and-material, or T&M, basis or afixed-price basis. The following table shows our revenues by contract type:

 
| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Time-and-Material |       | 64.8                                       | %          | 67.6 | % | 64.0 | % |
| Fixed Price       |       | 35.2                                       | %          | 32.4 | % | 36.0 | % |
| Total             |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

Althoughwe seek to use our software engineering processes and past project experienceto reduce the risks associated with estimating, planning and performingfixed-price projects, we bear the risk of cost overruns and completion delaysin connection with fixed-priced contracts. Accordingly, we believe that we beara greater amount of risk from our fixed-price contracts than from our T&Mcontracts.

 

Alarge proportion of our revenues from fixed-price contracts are fromfixed-price SLAs. A large proportion of our fixed-price SLAs are applicationmaintenance and support projects, as to which work and cost estimates have beenfairly predictable. Our revenues from fixed-price SLAs were 24.4%, 22.2% and22.7% in 2006, 2007 and 2008,respectively.

 

Revenuewith respect to T&M contracts are recognized in the period that theservices are performed. Revenue with respect to fixed-price SLA contracts arerecognized ratably over the term of maintenance. Revenue with respect to otherfixed-price contracts is recognized on a percentage of completion basis,measured by the percentage of costs incurred to date compared to the estimatedtotal costs for each contract. See “Critical Accounting Policies—RevenueRecognition” below.

 

***Revenues by TopCustomers***

*** ***

Asillustrated in the table below, a significant proportion of our revenues arederived from a small number of clients. In recent years, however, we havediversified our client revenues as a result of various initiatives, includingour addition of new strategic clients, our focus on additional industry practices,our development of technology practices and our expansion of the range ofservice lines we offer. As of December 31, 2008, we had 92 clients, eachof whom generated revenues of $ 1.0 millionor more, compared to 84 in 2007 and 74 in 2006. We expect that this trendtoward greater client diversification will continue.

 
| ** **           | ** ** | **Year ended   December 31,** | ** ** |
|----------------------|------------|----------------------------------------------|------------|
| ** **           | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2008** | ** ** |
| General Electric     |       | 14.6                                         | %          | 11.8 | % | 10.7 | % |
| State Farm Insurance |       | 9.6                                          | %          | 9.1 | % | 9.8 | % |
| Top 5 Clients        |       | 37.1                                         | %          | 34.8 | % | 32.7 | % |
| Top 10 Clients       |       | 53.1                                         | %          | 47.6 | % | 45.6 | % |

 

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***Revenues by New andExisting Customers***

*** ***

Repeatbusiness accounted for 91.5%, 92.4% and 93.0% of our revenues in, 2006, 2007and 2008. Each customer is treated as a new customer for the quarter in which it first starts business withus and continues to remain as a new customer for the four succeeding quarters.The revenues in any quarter from customers other than new customers are termedas repeat business. We provide services to our largest client, GeneralElectric, in a number of industries, including financial services, insuranceand manufacturing.

 

The following table indicates the breakdown ofrevenues we derive from new customers and existing customers.

 
| ** **                                 | ** ** | **Year ended December 31, 2008** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **Existing  Customers**                              | ** ** | **New  Customers** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **($ in millions)**                        | ** ** |
| Industry Practice                          |       |                                                 |       |   |   |   |   |
| Insurance                                  |       | 175.0                                                |       | 2.3 |   | 177.3 |   |
| Manufacturing (1)                          |       | 174.0                                                |       | 6.5 |   | 180.5 |   |
| Financial Services                         |       | 88.2                                                 |       | 3.4 |   | 91.7 |   |
| Communications, Media and Entertainment(2) |       | 64.5                                                 |       | 25.7 |   | 90.2 |   |
| Other Industries (3)                       |       | 61.2                                                 |       | 5.2 |   | 66.4 |   |
| Technology Practice                        |       |                                                 |       |   |   |   |   |
| Product Engineering                        |       | 105.6                                                |       | 7.2 |   | 112.8 |   |
| Total                                      |       | $                                                    | 668.5      |   | $ | 50.4 |   | $ | 718.9 |   |
|                                            |            |                                                      |            |  |  |  |  |  |  |  |

 

----

(1) From January 1, 2009, we have renamed ourmanufacturing segment industry practiceas manufacturing, retail and distribution.

(2) From January 1, 2009, we have renamed our communications, media and entertainment practiceas communications , media andutilities.

(3) From January 1, 2009, retail , logistics and transportation has beenmerged with the manufacturing industry practice and energy andutilities has been merged with the communications, media and entertainment industrypractice.

 

Althoughwe engage in one-time projects in some service lines, the majority of ourprojects are recurring in nature. Work done in product engineering services andpackaged software implementation services, however, tends to be more fornon-recurring projects.

 

***Revenues by Geography***

*** ***

We record our revenue based on the location of our clients rather thanaccording to the location where our services are provided. We classify ourrevenues into six geographicsegments: the United States, Europe, India, Japan, Asia-Pacific (excluding Japan and India) and Others. As thetable below illustrates, a significant proportion of our revenues is derivedfrom clients located in the United States. We expect that a substantialmajority of our revenues will continue to be derived from clients located inthe United States. We categorize revenues geographically based on the locationof the specific client entity for which the project has been executed,irrespective of the location at which the invoice is rendered or whether thework for a specific client entity is performed onsite or from our offshoredelivery centers in India.

 
| ** **                                | ** ** | **Year ended  December 31** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2008** | ** ** |
| United States                             |       | 80.8                             | %          | 77.9 | % | 75.9 | % |
| Europe                                    |       | 11.6                             | %          | 14.7 | % | 15.7 | % |
| India                                     |       | 0.4                              | %          | 0.8 | % | 0.9 | % |
| Japan                                     |       | 3.8                              | %          | 3.0 | % | 3.5 | % |
| Asia-Pacific (excluding  Japan and India) |       | 1.9                              | %          | 1.9 | % | 2.3 | % |
| Rest of the World                         |       | 1.5                              | %          | 1.7 | % | 1.7 | % |
| Total                                     |       | 100.0                            | %          | 100.0 | % | 100.0 | % |

 

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Wehave experienced revenue growth in the European market. Revenues in Europe haveincreased from $ 67.3 million in2006 to $ 97.7 million in2007 and were at $ 112.6 millionin 2008.

 

**Expenses**

** **

***Cost of Revenues***

*** ***

Costof revenues represented 64.6%, 67.9% and 68.3% of our revenues in 2006, 2007and 2008. Our cost of revenues largely consists of costs relating to oursoftware professionals, including salary and other compensation and benefitsexpenses, travel expenses, immigration expenses, data communications expenses,computer and software expenses and depreciation. Cost of revenues also includesthe cost of subcontractors.

 

Theprincipal component of our cost of revenues is the salary cost of our softwareprofessionals. A majority of our software professionals are located in India.However, because labor costs in the IT services industry in India havehistorically been significantly lower than in the United States and othercountries where our customers are located, a majority of our compensation costsrelate to salaries of software professionals located in the United States andthose other countries. We seekto maintain salary levels in accordance with prevailing trends in our industry.

 

Wehire subcontractors on a limited basis from time to time. We use subcontractorsacross our industry practices and service lines. The use of subcontractors ismore prevalent in service lines that have a larger onsite element, such aspackaged software implementation and infrastructure management services. Weexpect to continue to incur subcontractor costs principally to service specifictechnical requirements of some of our clients in a timely manner.

 

Theutilization rates of our software professionals also affect our gross profits.We define employee utilization as the proportion of total billed person-monthsto total available person-months, including employees in training and holidayand vacation time, and excluding support personnel. We manage utilization bymonitoring project requirements and timetables. The number of softwareprofessionals assigned to a project varies according to the size, complexity,duration, and demands of the project. Our utilization rates for the years endedDecember 31, 2006, 2007 and 2008 were 71.4%, 72.4% and 72.1%. We try to minimize the cost impact ofunutilized capacity by ensuring that a majority of our unutilized capacity isattributable to software professionals based in India.

 

Weincur immigration costs due to the onsite component of work performed onprojects. We expect immigration expenses to increase due to increases in visafiling costs generally commensurate with our growth and increases in visafiling fees in the United States. We expense costs related to immigration asincurred.

 

Wedo not expect to incur borrowing costs to finance the addition of planned newfacilities and physical infrastructure, including our knowledge parks in India.These new facilities will increase our depreciation expenses. However, weexpect that the increased depreciation will largely be offset by reduced rentalcosts resulting from a shift from existing rental facilities to the newfacilities. These new facilities will provide a consolidated location for ourexisting employees and new employees as we expand our service offerings.

 

***Selling, General andAdministrative Expenses***

*** ***

Selling,general and administrative expenses consist primarily of costs relating topersonnel other than software professionals, including salary and othercompensation and benefits expense, depreciation, sales and marketing expenses,telecommunication expenses, office expenses and traveling expenses. Selling,general and administrative expenses also includes legal and other professionalfees and other miscellaneous administrative costs.

 

Selling,general and administrative expenses represented 18.6%, 17.7% and 18.5% of our revenues in 2006, 2007 and2008, respectively. Theseexpenses comprise an important element of our sales strategy, as we seek toensure that senior management personnel are based in client locations andcontinue to invest in developing our sales and marketing presence in keymarkets. We expect selling, general and administrative expenses to continue atcurrent levels as a proportion of revenues. We continue to invest in sales andmarketing and in building brand awareness, leading to a slight increase insales and marketing expenses as a proportion of revenues. We have started totransfer a larger part of our general and administrative expenses offshore toIndia as the scale of our operations increases. We expect to achieve improvedefficiencies in general and administrative expenses as a result of thistransfer and economies of scale resulting from our recent growth. Accordingly,we expect our increased selling expenses to be partially offset by a decreasein our general and administrative expenses.

 

**ForeignCurrency Translation and Foreign Exchange Regulations**

** **

Ourconsolidated financial statements are reported in U.S. dollars. Our functionalcurrency is the rupee, though the functional currency of our subsidiaries isthe currency of the country in which the subsidiary is located. A substantialportion of our revenues is generated in dollars while a portion of our expensesare incurred in rupees and we expect that this will continue for theforeseeable future. Consequently, our results of operations will be affected tothe extent the rupee fluctuates against the dollar.

 

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Weseek to mitigate the effect of exchange rate fluctuation on our operatingresults by purchasing foreign exchange forward and option contracts. However,these activities do not entirely mitigate the effects of exchange ratefluctuations. Effective May 2004, we designated certain forward and optioncontracts as cash flow hedges in accordance with SFAS 133, *Accounting for Derivative Instruments and HedgingActivities*. We defer changes in fair value of designated cash flowhedges and record them as a component of accumulated other comprehensive incomeuntil the hedged transactions occur, at which time we recognize the gain/lossin our consolidated statements of income. For details on forward and optionscontracts outstanding as of December 31, 2008 and 2007 See “Item11.Quantitative and Qualitative Disclosures about Market Risk — Exchange RateRisk”.

 

Thetranslation of the rupee, GBPand Euro into U.S. dollars is performed for balance sheet accounts using theexchange rate in effect at the balance sheet date and for revenues and expenseaccounts using the exchange rate prevailing on the date of those transactions.

 

Underthe Foreign Exchange Management Act, 1999, or FEMA, as amended, an Indian company is required to take allreasonable steps to realize and repatriate into India all foreign exchangeearned by the company outside India, in accordance with the rules specifiedby the Reserve Bank of India, or the RBI. The FEMA also imposes certainrestrictions on capital account transactions by Indian companies. Theseregulations do not significantly affect our operations at present.

 

**Accounts Receivable and Unbilled Revenue**

** **

The key performance indicator used by us forcollecting cash from our customers is adjusted days of sales outstanding(ADSO). We analyze and compute our adjusted days of sales outstanding based onboth billed revenue (accounts receivable) and unbilled revenue for eachrelevant period. Unbilled revenue represents “cost and estimated earnings inexcess of billings on uncompleted contracts, net of billings in excess of costand estimated earnings on uncompleted projects”. We define our adjusted days ofsales outstanding as the ratio of accounts receivable plus unbilled revenue atyear-end to revenues in a year, multiplied by 365. The table below sets out thethree year trend of the days of sales outstanding along with unbilled revenue:

 
| ** **               | ** ** | **2006**                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|--------------------------|------------|-------------------------------|------------|----------|------------|----------|------------|
| ** **               | ** ** | **($ in millions)** | ** ** |
| Account Receivables      |       | 115.6                         |       | 136.4    |       | 111.8    |       |
| Unbilled Revenue (UBR)   |       | 19.5                          |       | 28.9     |       | 24.7     |       |
| DSO including UBR (days) |       | 85                            |       | 91       |       | 69       |       |

 

TheADSO for the year ended December 31, 2008 has reduced to 69 days, which ismainly due to the additional efforts made by the management on timelycollections from the customers due to the credit crisis prevailing in theglobal markets.  The following tablepresents a profile of our accounts receivable, net of reserves in terms of days for which accounts receivable have beenoutstanding:

 
| ** **     | ** ** | **2006**                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------|------------|-------------------------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **($ in millions)** | ** ** |
| Period in days |       |                          |       |     |       |     |       |
| 0-90           |       | 105.9                         |       | 116.1    |       | 102.7    |       |
| 91-180         |       | 8.6                           |       | 17.2     |       | 6.7      |       |
| More than 180  |       | 1.1                           |       | 3.1      |       | 2.4      |       |
| Total          |       | 115.6                         |       | 136.4    |       | 111.8    |       |

 

In2006, 2007 and 2008, provision of doubtful debts and advances was $ 1.2 million, $ 1.2 million and $ 1.6 million, respectively.  We expectto continue to have low levels of provisions for doubtful debts.

 

**Taxes**

** **

Asan Indian company, we are a tax resident of India and are therefore subject toIndian income taxes on our global income. Our net income earned from providingservices outside India is subject to tax in the country where we perform thework. Most of our tax paid in countries other than India can be applied as acredit against our Indian tax liability to the extent that the same income issubject to tax in India.

 

Currently,we benefit from tax holidays given by the Government of India for the export ofIT services from specially designated software technology parks, or STPIs, andspecial economic zones, or SEZs, in India. The tax incentives currently include a 10-year holiday from the payment ofIndian corporate income tax for the operations of most of our Indianfacilities. As a result of these tax incentives, a substantial portion of ourpre-tax income has not been subject to significant tax in recent years. Theaggregate benefit of this tax holiday with respect to our net income was $ 25.3 million, $ 28.9 million and $ 27.3 million for 2006, 2007 and 2008, respectively. The tax benefitsavailable for some of our facilities on account of tax holidays have expiredand certain others will expire upon

 

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completionof 10 years, however the tax holiday for the export of IT services will expire on March 31,2010. Consequently, we expect our effective tax rate to increase.

 

InDecember 2006, we received a demand notice from the Indian Income Taxdepartment for approximately Rs.630.17 million, including an interest demand of approximately Rs. 186.85 million ($ 12.9 million including an interest demandof approximately $ 3.8 million)for the assessment year 2004-05. The tax demand was mainly on account ofdisallowance of deduction claimed by us under Section 10A of the Indian Income Tax Act, 1961, inrespect of profits earned by its various eligible undertakings. Section 10Aof the Indian Income Tax Actexempts the profits earned by an undertaking for the export of computersoftware upon the fulfillment of certain conditions. One of the conditions isthat the unit should not have been formed by the splitting up of an existingbusiness. We have only expanded our software development business whereas the Indian Income Tax department contendsthat the business of the new units is comprised of business transferred fromexisting units by splitting them. In consultationwith its our tax advisers, we filed an appeal in January 2007challenging the disallowance.

 

Oneof the requirements under the Indian Income Tax Rules to proceed with anappeal is to deposit, either immediately or through monthly installments, a sumequivalent to 50% of the amount that is under appeal. Until March 31,2008, the Company deposited a sum of Rs.310.28 million ($ 7.2 million).Considering the facts and nature of disallowances and based on the advice givenby our legal counsel, management considered that the disallowance was nottenableand, therefore was confident of a favorable outcome in appeal proceedings andhence no provision for such income tax demand was considered necessary.

 

Subsequently,in February 2008, the Company received an order from the CommissionerIncome Tax (CIT) (Appeals) in our favor by allowing the claim under Section 10A of the Indian Income Tax Act. Wereceived a refund of the taxes paid after adjustment of the new demand for theassessment year 2002-03 as explained above below.

 

InDecember 2007, we received another demand, for Rs. 261.70 million includingan interest demand of approximately Rs.139.88 million ($ 5.3 million including an interest demand of approximately $2.8 million) for the assessment year 2002-03. The new demand related to the same issue of disallowance of tax benefitsunder Section 10A of the IndianIncome Tax Act. In the opinion of management, and based on advicereceived, the demand was considered as not tenable against us and we have filedan appeal with the appellate authority.

 

Subsequently,in March 2008, we received an order from the CIT (Appeals) in our favor byallowing the claim under Section 10A of the Indian Income Tax Act. Until March 2008 an aggregate amount of Rs. 261.70 million ($ 6.1 million) alongwith interest has also been received as refund.

 

TheIndian Income tax department has appealed against the CIT (Appeal’s) order inrespect of the assessment years 2002-03 and 2004-05 in the Indian Income Tax Appellate Tribunal.

 

InDecember 2008, we received a demand of approximately Rs. 458.66 million for the assessment year 2003-04 including aninterest demand of Rs. 258.64million ($ 9.4 million includingan interest demand of approximately $ 5.3 million) and another demand in January 2009of approximately Rs. 1,131.76million for the assessment year2005-06 including an interest demand of approximately Rs. 421.97 million ($ 23.2 million including an interest demand ofapproximately $ 8.7 million). These new demands concerns the same issue ofdisallowance of tax benefits under Section 10A of the Indian Income Tax Act. . We have filed an appeal and astay of demand has been granted untilJune 30, 2009.  Additionally we havedeposited with the Indian Income Taxauthorities Rs. 209 million ( $ 4.1million) as deposit relating to the demands received in December 2008.. We consider these demands as not tenable against us and, therefore, noprovision for this tax contingency has been established.

 

Theprovisions of the Indian IncomeTax Act of India are amended on an annual basis by enactment of the FinanceAct. The Finance Act, 2008 has not changed the effective tax rate of33.99%.  The Finance Act, 2008 hasincreased the short term Capital Gain tax from 10% to 15%.  The Finance Act, 2008 has also extended thescope of service tax to cover asset management services provided bystock/commodity exchanges and clearing houses, right to use goods anddevelopment of customizedsoftware. These changes have no impact on our operating expenses.

 

Inaddition, we may also be subject to changes in taxation resulting from theactions of applicable income tax authorities in India or from Indian tax lawsthat may be enacted in the future.For example, we may incur increased tax liability as a result of adetermination by applicable income tax authorities that the transfer priceapplied to transactions involving our subsidiaries and the Company was not appropriate.

 

Anyincreases in our effective tax rate, as a result of the expiration of taxbenefits we currently enjoy, changes in applicable tax laws or the actions ofapplicable income tax or other regulatory authorities could materially reduceour profitability.

 

In connection with a review of various tax aspectsrelating to our international operations, during 2006, we reached a settlementwith the IRS, relating to our tax returns for our U.S. operations for 2001 and 2002. The IRS has also commenced, butnot yet completed, a tax review of our U.S. operations for the years 2003through 2005. Pursuant to the settlement, we revised our tax provisions for2001 and 2002 and recomputed our tax provision for 2003, 2004 and 2005. Thisrevision, representing changes in estimates, has resulted in an additionalcharge of approximately $ 14.1million in our financial statements for the year ended December 31, 2006.Additionally, a consequential interest and deferred tax charge in an amount of$ 6.0 million has been accruedin our financial statements for the year ended December 31, 2006 and $ 1.7 million for the year ended December 31,2007.

 

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Our total income tax liability for the year ended December 31,2006 was $ 47.7 million, ofwhich $ 30.3 million resultedfrom provisioning due to reassessment of our payroll and corporate taxobligations for our international operations.

 

During the year ended December 31, 2008, the USInternal Revenue Service (“IRS”) completed its assessment of tax returns forthe years ended 2003 and 2004 of Patni Americas Inc. and for the years ended March 31,2003, 2004 and 2005 of our U.S.branch. Based on the completion of assessment of these years, we reviewed theadequacy of the previously established tax exposure reserves with respect tothese years and re-measured the established tax positions for the latter yearsbased these tax assessments . As aresult, the following amounts have been included in the income statementfor the fiscal year ended December 31, 2008 as a change in estimate :

 
| Reduction of  accrual for payroll taxes(1) |   | $           |  (2,769,567  | ) |
|--------------------------------------------|--------|-------------|-------------------|---|
| Reduction in  interest expenses(2)         |   | (6,497,329  | )                 |
| Increase in  interest expense              |   | 560,507     |              |
| Reduction in  other expense (3)            |   | (1,092,687  | )                 |
| Reduction in  income taxes — current  |   | (12,496,744 | )                 |
| Increase in  income taxes — deferred  |   | 4,112,604   |              |
|                                       |   | $           |  (18,183,216 | ) |

 

----

(1)            Included under cost-of revenues.

(2)            Included under interest expense reserved.

(3)            Included under other income/expense.

 

As the IRS review for 2005 through 2006 began in thelast quarter of 2008, we cannot currently assess whether this review may resultin an increase or decrease intax liability.

 

**Taratec Acquisition**

 

OnJuly 23, 2007, we acquired a 100% equity interest in Taratec which hasbeen named as Patni Life Sciences Inc. Taratec is a leading consulting companyin the life sciences industry providing integrated business, informationtechnology, and regulatory compliance products and services. We paid an initialpurchase price of approximately $ 15.7million, including expenses, of which $ 8.3 million has been accounted for as goodwill and $ 1.7 million has been accountedfor as customer related intangibles. Theterms of the purchase also provide for payment of contingent consideration toall of the selling shareholders, payable over a three year period endingon June 30, 2010, and calculated based on the achievement ofspecified revenue and margin targets. The contingent consideration is payablein cash and cannot exceed $ 13.2million. Further, as a part of the acquisition, we initiated an incentive planlinked to revenues and margins, for certain specific employees of Taratec andPatni. The incentive payments under this plan will not exceed $ 3.5 million over the next three years through June 2010. Since theincentive payments are linked to continuing employment, the payments under theplan are recognized as compensation for post acquisition services. Accordingly,$ 156,974 and $ 17,867 have been recorded as cost of revenues and selling, general and administrative expenses, respectively, for the year ended December 31,2007. Based on the assessment of revenue targets achieved for the year ended June 30, 2008 and to be achieved for the yearended June 30, 2009 our management has concluded that noamount is required to be accrued as compensation cost for these employees forthe year ended December 31, 2008.

 

**LoganOrviss Acquisition**

 

OnJuly 2, 2007, we acquired the business and assets of Logan Orviss, anEuropean telecommunications consulting services company. We paid an initialpurchase price of approximately $ 8.6million, including expenses, of which $ 6.5 million has been accounted for as goodwill and $ 2.1 million has been accountedfor as customer related intangibles. Further,as a part of the acquisition, weinitiated an incentive plan linked to revenues for certain specific employees.Accordingly, $ 22,664 and $222,690 have been recorded as costof revenues and selling, generaland administrative expenses,respectively, for the year endedDecember 31, 2007. During 2008,based on the assessment of revenue targets achieved for the year ended June 30, 2008, $ 117,108 has been recorded as selling, general and administrative expenses for theseemployees.  Further, based on theassessment of revenue targets to be achieved for the year ended June 30,2009, an additional amount of $ 62,510has been recorded as selling,general and administrative expenses for these employees for the year ended December 31,2008. Our management estimates are that incentive payments under thisplan will not exceed $ 13.08million through June 2010.

 

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**PurchasedIntellectual Property**

 

In 2007, we through our wholly owned subsidiary,Patni Americas, Inc.USA, acquired from one of our major customers, theworldwide rights for a software proprietary intellectual property rights, orthe IPR, that enables communication service providers to offer customermanagement, retail point-of-sale and billing services for a variety of productsand services. The cost of acquisition of the IPR amounting to $ 20.3 million(GBP 10 million) has been capitalized as an intangible asset and is beingamortized over a period of ten years. We intend to use this intellectualproperty for the purposes of software licensing, provision of reusable IP-ledIT services, managed services and provision of hosted or software-as-a-servicesolutions. A royalty of 5% is payable to the seller on such sales.

 

During 2008, we carried out an impairment test forthe purchased IPR in accordance with FAS 144 *Accounting for the Impairment or Disposal of Long-Lived Assets*(“FAS144”).  For purposes of FAS144, *impairment* is the conditionthat exists when the carrying amount of a long-lived asset (asset group)exceeds its fair value. An impairment loss shall be recognized only if thecarrying amount of a long-lived asset (asset group) is not recoverable andexceeds its fair value. The carrying amount of a long-lived asset (asset group)is not recoverable if it exceeds the sum of the undiscounted cash flowsexpected to result from the use and eventual disposition of the asset (assetgroup). Based on the results of therecoverability test, the sum of the undiscounted cash flows of IPR expected toresult from its use exceeded the carrying amount as at December 31, 2008.We estimated these undiscounted future cash flows that are directly associatedwith and are expected to arise as a direct result of using the IPR consideringcurrent prevailing economic conditions.  Additionally, a valuation reportprovided by an external valuer assessed the fair value of the IPR at $14.5- 16million (GBP 10-11 million) which was lower than the carrying value of theasset. Even though this valuation report provided a value of $ $14.5- 16million which is less than the carrying value, we concluded that under FAS 144,no impairment charge should be recognized as at December 31, 2008, as theundiscounted cash flows expected to be received from the continuing use of IPRexceeded its carrying value as stated above.

 

***Expansion Plans***

*** ***

Weoperate through our facilities located in various parts of India. In the recentpast we have acquired facilities to support our growth. In keeping with ourplans for expansion, we have constructed new facilities in India, whichincludes three knowledge parks in Chennai, Navi Mumbai and Noida. Theseknowledge parks will have state-of-the-art infrastructure with extensiveworkspace and training facilities and a modular design for ease of segregationof dedicated projects with the ability to provide scale and service to clientsfrom one location. The Navi Mumbai, Chennai and Noida facilities are expectedto accommodate up to 14,000,10,000 and 3,200engineers, respectively, when completed.

 

Phase1 of the Navi Mumbai facility witha capacity of 4,300 seats, is complete and occupied. Phase I of Chennaifacility with a capacity of1,200 seats, is complete and partially occupied, while 1,200 seats of Noida facility have been completed and are partially occupied.

 

See“Item 4.D. Information on the Company—Property,plant and equipment.”

 

**Buyback of Shares**

 

InFebruary 2008, our Board of Directors approved a proposal to repurchasefully paid equity shares to the extent of10% of the paid up capital and free reserves, at a maximum price of Rs. 325 perequity share, for an aggregate amount ofRs. 2,370 million ($53 million) in accordance with the provisions of Sections 77A, 77AA, 77B and otherapplicable provisions of the Indian Companies Act, 1956 and the provisions ofSecurities and Exchange Board of India (Buy-back of Securities) Regulations, 1998 the (“Buy Back Regulations”), forwhich necessary public announcements were made on April 2, 2008.

 

Wecommenced the repurchase of shares on July 10, 2008. Our Board of Directors declared closure of the buy back offer on October 23,2008. Subsequent to the share repurchase, such shares are required to beextinguished as per the requirements of Section 77A of the Indian Companies Act, 1956.

 

Duringthe year ended December 31, 2008, we repurchased a total of 10,957,082equity shares through the Bombay Stock Exchange and the National Stock Exchangeof India Limited for anaggregate consideration of Rs. 2,370 million ($ 53 million) whichwas 100% of the amount authorizedfor such buy back. Subsequently,we extinguished the equityshares so bought back by us.

 

Our retainedearnings include profits aggregating Rs. 21.9 million ($ 0.4 million) set aside as Capital Redemption Reserve as requiredby the Indian Companies Act, 1956 pursuant to the repurchase which can be utilized by us only for the purpose ofissuing fully paid bonus shares.

 

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***Results of Operations***

 

***The following table sets forth certain financialinformation as a percentage of revenues, calculated from our consolidatedfinancia******l******statement******s :***

 
| *** ***                                       | *** *** | ***Year ended December 31******,*** | *** *** |
|----------------------------------------------------|--------------|------------------------------------------|--------------|
| *** ***                                       | *** *** | ***2006***                               | *** *** | ***2007*** | *** *** | ***2008*** | *** *** |
| ***Revenues***                                     | *** *** | ***100***                                | ***%***      | ***100*** | ***%*** | ***100*** | ***%*** |
| ***Cost of revenues***                             | *** *** | ***64.6***                               | ***%***      | ***67.9*** | ***%*** | ***68.3*** | ***%*** |
| ***Gross  profit***                                | *** *** | ***35.4***                               | ***%***      | ***32.1*** | ***%*** | ***31.7*** | ***%*** |
| ***Selling, general and administrative expenses*** | *** *** | ***18.6***                               | ***%***      | ***17.7*** | ***%*** | ***18.5*** | ***%*** |
| ***Foreign exchange (gain)/loss, net***            | *** *** | ***0.5***                                | ***%***      | ***(3.5*** | ***)%*** | ***2.5*** | ***%*** |
| ***Operating  income***                            | *** *** | ***16.3***                               | ***%***      | ***17.9*** | ***%*** | ***10.7*** | ***%*** |
| ***Interest and dividend income***                 | *** *** | ***1.7***                                | ***%***      | ***1.9*** | ***%*** | ***1.8*** | ***%*** |
| ***Interest expense***                             | *** *** | ***(0.5***                               | ***)%***     | ***(0.5*** | ***)%*** | ***(0.2*** | ***)%*** |
| ***Interest expense reversed***                    | *** *** | ***—***                             | *** *** | ***—*** | *** *** | ***0.9*** | ***%*** |
| ***Gain on sale of investments, net***             | *** *** | ***0.3***                                | ***%***      | ***1*** | ***%*** | ***1.******3*** | ***%*** |
| ***Other income (expense), net***                  | *** *** | ***0.6***                                | ***%***      | ***0.3*** | ***%*** | ***0.******3*** | ***%*** |
| ***Income  before income taxes***                  | *** *** | ***18.4***                               | ***%***      | ***20.6*** | ***%*** | ***14.8*** | ***%*** |
| ***Income taxes***                                 | *** *** | ***8.2***                                | ***%***      | ***3.3*** | ***%*** | ***0.7*** | ***%*** |
| ***Net  income***                                  | *** *** | ***10.2***                               | ***%***      | ***17.3*** | ***%*** | ***14.1*** | ***%*** |

 

***Year Ended December 31,2008 Compared to Year Ended December 31, 2007***

 

***Revenues***

 

***Ourrevenues were $ 718.9 million in 2008, representing an increase of 8.4% fromrevenues of $ 662.9 million in 2007. Revenues from existing customerscontributed $668.5 million and new customers contributed $ 50.4 million toour revenues. This represented an increase of 9.1% in revenues from existingcustomers and increase of 0.1% in revenues from new customers compared to 2007.Growth in revenues from our existing operations was attributable to an increaseof 5.9 % in the total billed person-months from work performed at both ouroffshore and onsite locations. Onsite work measured in billed-person monthsincreased by 0.3 % in 2008 compared to 2007, while offshore work increased 8.4%over the same period. We increased our client relationships to 331 as of December 31,2008 from 318 as of December 31, 2007. In addition, the total number ofclients that individually accounted for over $ 1.0 million in annual revenuesincreased to 92 as of December 31, 2008 from 84 as of December 31,2007.***

 

***During2008, our revenues from T&M projects increased by 2.7% over revenues in2007, while revenues from fixed price contracts increased by 20.5% over thesame period.  T&M projects accounted for 64.0% of our revenues in2008, compared to 67.6% in 2007,and 48.7% of our new business was billed on aT&M basis.***

 

***Ourclient concentration, as measured by the proportion of revenue generated fromour top ten clients, decreased to 45.6% in 2008 from 47.6% in 2007. GeneralElectric, our largest client, contributed 10.7% of our revenues in 2008, comparedto 11.8% in 2007.***

 

***During 2008, clients in the insurance,manufacturing, product engineering services and financial services industriescontinued to contribute a large proportion of our revenues. Revenues fromclients in these industries in 2008 increased by 13.2%, 14.6%, 1.6% anddecreased by 2.2% as compared to 2007 and contributed 24.7%, 25.1%, 15.7% and12.8% to overall revenues, respectively. Our other industry practices includingcommunications, media and entertainment contributed 21.7% and 21.8% of ourrevenues in 2008 and 2007.***

 

***During 2008, we continued to derive asignificant proportion of our revenues from clients located in the UnitedStates. In 2008 and 2007, we derived 75.9% and 77.9% of our revenues fromclients located in the United States.***

 

***Costof revenues***

 

***Our cost of revenues was $************491.3 million in 2008, representing an increase of******9.18% from $ 450 million in 2007.Cost of revenues represented 68.3% and 67.9% of our revenues in 2008 and 2007.Out of the net increase of $ 41.3 million in cost of revenues, $ 26.4 millionwas attributable to salary expenses*** which was partly compensated by reversalof $ 2.7 million on payroll andrelated taxes as a result of thecompletion of assessment by the IRS and the remaining increase was mainly due to a ***$13.35 million increase insubcontractor costs.  Rupee depreciationalso had a positive impact leading to reduction in the cost of revenues in 2008as compared to 2007******.***

 

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***Grossprofit***

 

***Our gross profit for 2008 was $ 227.6million, representing an increase of 6.9% from $ 212.8 million in 2007. Grossprofit as a percentage of our revenues decreased to 31.7% in 2008 from 32.1% in2007.***

 

***Selling,general and administrative expenses***

 

***During2008, our selling, general and administrative expenses were $ 131.1 million,representing an increase of 12.7% from $ 116.3 million in 2007 and our selling,general and administrative expenses as a percentage of our revenues increasedto 18.3% in 2008 from 17.5% in 2007.***

 

***During2008, our sales and marketing expenses were $ 52.5 million, representing anincrease of 14.7% from $ 45.8 million in 2007. Personnel costs increasedby $ 4.7 million due to the addition to sales and marketing personnel mainly inthe European region to strengthen our European business operations and highercompensation costs resulting from salary increases. Other selling and marketingcosts increased by $ 2.19 million. We believe that our investment in sellingand marketing expenses has contributed to the growth and diversification of ourclient revenues.***

 

***Ourgeneral and administrative expenses were $ 78.5 million in 2008, representingan increase of 11.5% from $ 70.5 million in 2007. Personnel costsincreased in 2008 by $ 4.6 million due to the addition of general andadministrative personnel and annual salary revisions. Other general andadministrative charges increased by $ 4.2 million.***

 

***Foreign exchange gain/loss***

 

***In 2008, we had a foreignexchange loss of $ 18.4 million as against a gain of $ 23.4 million in2007. The year-end exchange rate in rupees per U.S dollar for 2007 was 39.41 ascompared to 48.58 in 2008 resulting in a 23% depreciation during the year - endin percentage terms. Our dollar-denominated receivables continued to be hedged.***Mark-to-market of foreign exchange contracts and revaluation of debtorsresulted in a net foreign exchange loss.

 

***Operating income***

 

***As apercentage of revenues, operating income decreased to 10.7% in 2008 from 17.9%in 2007. Our operating income was $ 76.58 million in 2008, representing adecrease of 35.5% from $ 118.7 million in 2007 which is mainly due to aforeign exchange loss of $ 18.4 million on account of rupee depreciationas mentioned above as compared to a foreign exchange gain of $ 23.4 million in2007. For the year ended December 31, 2008 every percentage point changein the exchange rate between the rupee and U.S. dollar, has affected ouroperating margins by approximately 0.3% to 0.35%. The exchange rate between therupee and dollar has fluctuated substantially in the recent years and maycontinue to do so in future. We are unable to predict the impact that futurefluctuations may have on our operating margins.***

 

***Other income (expense)***

 

***Other income (expense), reflects interest anddividend income, interest expense, interest expense reversed, net gain on saleof investments and other income or expense, net. In 2008, our gain on sale ofinvestments was $ 9.7 million as compared to $6.4 million in 2007. In2008, our interest and dividend income were $ 13.0 million as compared to$ 12.5 million in 2007. In 2008 we had an interest expense reversal of $ 6.5million as a result of the completion of assessment by the IRS.***Our other income (expense), net was $ 2.6 millionin 2008, as compared to $ 1.75 million in 2007 resulting in net increase of $0.9 million.

 

***Income taxes***

 

***We made a provision of $ 5.2million for income taxes in 2008, representing a decrease of 76.1% from $ 21.8million in 2007 due to reversal of $ 8.4 million on account of as a result ofthe completion of assessment by the IRS for previous tax periods (See “Taxes”above). Our effective tax rate was 14.0%***excluding the impact ofchange in estimates as a result of the ***completion of assessment by the IRS***)***in 2008 compared to 16.0%.in 2007.***

 

***Net income***

 

***Our net income was $ 101.4million in 2008, representing a decrease of 11% from $ 114 million in2007. As a percentage of our revenues, net income decreased to 14.1% in 2008from 17.2% in 2007. The decrease in the net income is mainly due to the reasonsexplained above.***

 

***Year Ended December 31,2007 Compared to Year Ended December 31, 2006***

 

***Revenues***

 

***Our revenues were $ 662.9 millionin 2007, representing an increase of 14.5% from revenues of $ 578.9 million in2006. Revenues from existing customers contributed $612.6 million and newcustomers contributed $ 50.3 million to our revenues. This represented anincrease of 15.6% in revenues from existing customers and increase of 2.6% inrevenues from new customers compared to 2006. Growth in revenues from ourexisting operations was***

*** ***

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*** ***

***attributable to an increase of 18.1% in the total billed person-months from work performed at both our offshoreand onsite locations. Onsite work measured in billed-person months increased7.7 % in 2007 compared to 2006, while offshore work increased 23.3% over thesame period. We increased our client relationships to 318 as of December 31,2007 from 239 as of December 31, 2006. In addition, the total number ofclients that individually accounted for over $ 1.0 million in annual revenuesincreased to 84 as of December 31, 2007 from 74 as of December 31,2006.***

 

***During2007, our revenues from T&M projects increased by 19.6% over revenues in2006, while revenues from fixed price contracts increased by 5.2% over the sameperiod.  T&M projects accounted for67.6% of our revenues in 2007, compared to 64.8% in 2006, 65.4% of our newbusiness was billed on a T&M basis.***

 

***Our client concentration, as measured bythe proportion of revenue generated from our top ten clients, decreased to47.3% in 2007 from 53.1% in 2006. General Electric, our largest client,contributed 11.8% of our revenues in 2007, compared to 14.6% in 2006.***

 

***During 2007, clients in the insurance,manufacturing, product engineering services and financial services industriescontinued to contribute a large proportion of our revenues. Revenues fromclients in these industries in 2007 increased by 16.4%, 25.5%, 34.7% and 6.1%as compared to 2006 and contributed 23.6%, 23.8%, 16.7% and 14.1% to overallrevenues, respectively. Our other industry practices including communications,media and entertainment contributed 21.7% and 25.6% of our revenues in 2007 and2006. Until December 31, 2006, we reported product engineering servicesand ISV as separate industry segments. The product engineering servicesbusiness is primarily related to embedded technology services for products andthe ISV unit provided the user interface for these products. Both thesesegments form part of technology services. Effective January 1, 2007, wehave combined these two business segments with the primary focus on thefollowing synergies (i) demand for providing end-to-end solutions fromproduct engineering clients. (ii) leveraging the domain skills andplatform skills to provide end-to-end solutions.***

 

***During 2007, we continued to derive asignificant proportion of our revenues from clients located in the UnitedStates. In 2007 and 2006, we derived 77.9% and 80.8% of our revenues fromclients located in the United States. Revenues from these clients grew by 10.4%in 2007, while revenues from clients in other regions grew by 32% in the sameperiod.***

 

***Costof revenues***

 

Our cost of revenues was $450 million in 2007, representing an increase of 20.3% from $ 374 million in2006. Cost of revenues represented 67.9% and 64.6% of our revenues in 2007 and2006. Out of the increase of $ 76 million in cost of revenues, $ 59million was attributable to wage costs, $ 7.1 million to travel costs,$ 1.2 million to data-link charges, $ 1.4 million to electricity costof Airoli, $ 1.4 million to rent charges, $ 0.5 million on account ofamortization of purchased intangible asset, and $ 4 million due todepreciation charged on assets. Wage costs increased by $ 59 million dueto an increase in headcount of software professionals, annual salary revisionsand reversal of $ 9.0 million in 2006, payroll and related taxes in 2006for our international operations arising on reassessment of certain wages paid,and short-term benefits given to our employees when working outside India.Expansion of our facilities and capital expenditure incurred with respect tounits such as Airoli led to an increase in depreciation cost and other relatedcost. The rupee appreciation also had an impact on the higher cost of revenuesin 2007 as compared to 2006 with the rupee appreciating by approximately 11% ascompared to 2006.

 

***Grossprofit***

 

***Our gross profit for 2007 was $ 212.8million, representing an increase of 3.9% from $ 204.9 million in 2006. Grossprofit as a percentage of our revenues decreased to 32.1% in 2007 from 35.4% in2006 reflecting a higher increase in cost of revenues as compared to increasein revenues mainly on account of increase in wage cost and rupee appreciation.***

 

***Selling,general and administrative expenses***

 

***During2007, our selling, general and administrative expenses were $ 116.3 million,representing an increase of 9.2% from $ 106.5 million in 2006. During 2007, ourselling, general and administrative expenses as a percentage of our revenuesdecreased to 17.5% from 18.4% in 2006.***

 

***During2007, our sales and marketing expenses were $ 45.8 million, representing anincrease of 6.3% from $ 43.1 million in 2006. Personnel costs increased by$ 2.9 million due to the addition to sales and marketing personnel and highercompensation costs resulting from salary increases. Other selling and marketingcosts increased by $ 0.2 million. We believe that our investment in selling andmarketing expenses has contributed to the growth and diversification of ourclient revenues.***

 

***Ourgeneral and administrative expenses were $ 70.5 million in 2007, representingan increase of 10.5% from $ 63.8 million in 2006. Personnel costs increased in2007 by $ 4  million due to the addition of general and administrativepersonnel and annual salary revisions, directors’ remuneration increased by $2.3 million on account of termination payments to two of our executivedirectors, resulting from the termination of their employment with us. Othergeneral and administrative charges increased by $ 0.4 million.***

 

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***Foreign exchange gain/loss******:******In 2007, we had a foreign exchange gainof $ 23.4 million as against a loss of US $ 2.7 million in 2006, as ourdollar-denominated receivables continued to be hedged to a significant level.***Markto market of foreign exchange contracts and revaluation of debtors resulted ina net foreign exchange gain.

 

***Operating income:****** ******Our operating income was $ 118.7 millionin 2007, representing an increase of 25.6% from $ 94.5 million in 2006 which ismainly due to a foreign exchange gain of $ 23.4million on account of rupeeappreciation. As a percentage of revenues, operating income increased to 17.9%in 2007 from 16.3% in 2006 .***

 

***Other income (expense):************Other income (expense) reflects interestand dividend income, interest expense, net gain on sale of investments andother income or expense. Our other income (expense), net was $17 million in2007, increasing 36% from income of $12.5 million in 2006 resulting in netincrease of $ 4.5 million. In 2007, our gain on sale of investments was $ 6.4million as compared to $ 1.7 million in 2006. In 2007, our interest anddividend income were $ 12.5 million as compared to $ 10.1 million in 2006.***

 

***Income taxes:************We made a provision of $ 21.8 million forincome taxes in 2007, representing a decrease of 54.3% from $ 47.7 million in2006. Our effective tax rate was 16.1% in 2007 compared to 16.2%***(excludingthe impact of change in estimates on account of the IRS settlement) ***in 2006. The 2006 income taxesincludes $ 30.3 million provision recognized as a result of reassessment of ourpayroll and corporate tax obligations for our international operations.***

 

***Net income******:  Our net income was $ 114 million in 2007,representing an increase of 92.2% from $ 59.3 million in 2006. As apercentage of our revenues, net income increased to 17.2% in 2007 from 10.2% in2006. The increase in the net income is mainly on account of reasons explainedabove.***

 

**5.B.Liquidity and Capital Resources**

 

Our operations and our growth have been financedby cash generated from operations and from the proceeds of sales of equityshares.

 

We invest in units of mutual funds either in ‘openended’ schemes or in ‘fixed maturity plans’. While the investments in ‘openended’ mutual fund units can be sold any time without exit fees, theinvestments in units of ‘fixed maturity plan’ can be sold subject to an exitfee of approximately 1%- to 2%.We have categorized our investments in units of mutual fund schemes as ‘liquid mutual fund units’ and ‘fixedmaturity plans’ classified as ‘availablefor sale’ investments in our consolidated financial statements.

 

As of December 31, 2008,we had $ 60.1 million in cashand cash equivalents, $ 152.9million invested in units of liquid mutual funds, $ 90.6 million invested in units of mutual fund (fixed maturity plans) and $ 2.1 million invested inother investments. As of December 31, 2007 we had $ 32.6 million in cash and cash equivalents, $ 138.4 million invested in units ofliquid mutual funds, $ 143.1million invested in units of mutual fund (fixed maturity plans) and $ 16.3 million invested inother investments. As of December 31, 2008 and 2007, we have not incurredany exit fees on investments in mutual fund units of fixed maturity plans.

 

Ourworking capital (comprising current assets excluding cash and cash equivalentsand investments less current liabilities) as at December 31, 2008 and at December 31, 2007 was $ 18.4 million and $ 90.7 million, respectively. Ourworking capital is sufficient to meet our present requirements. We had nooutstanding bank borrowings or long-term debt as of such date. Net cashprovided by operating activities was $ 149.3million, $ 111.3.0 million,and $ 59.1 million in the yearsended December 31, 2008, 2007 and 2006, respectively. The adjustments for the year ended December 31,2008, to reconcile the $ 101million net income to net cash provided by operating activities, consistedprimarily of depreciation and amortization of intangible expense of $ 27.7 million and deferred taxcredit of $ 9.2 million and gainfrom sale of investments of $ 9.7 million. The adjustments for the year ended December 31,2007, to reconcile the $ 114million net income to net cash provided by operating activities, consistedprimarily of depreciation expense of $ 25.0million and deferred tax credit of $ 10.1million and gain from sale of investments of $ 6.4 million. The adjustments forthe year ended December 31, 2006, to reconcile the $ 59.3 million net income to net cashprovided by operating activities, consisted primarily of depreciation expenseof $ 19.6 million and gain fromsale of investments of $ 1.7million. The increase in depreciation was due to an increase in investment inproperty, plant and equipment to develop and expand our existing as well as newfacilities**The net asset base was $ 164.8 million, $ 188.3 million and $ 131.0 in the years ended December 31,2008, 2007 and 2006,respectively. Provision for bad debts was $ 1.6 million, $ 1.2million and $ 1.2 million forthe year ended December 31, 2008, 2007 and 2006, respectively.

 

Adjusteddays of sales outstanding reduced to 69 days in the year ended December 31,2008 as compared to 91 days in the year ended December 31, 2007 and it was85 days in the year ended December 31, 2006. Net accounts receivable andcost and estimated earnings in excess of billings on uncompleted contractsdecreased by $ 6.7 million for the year ended December 31, 2008 andincreased by $ 21.8 million in2007 and $ 36.3 million in 2006.

 

Currentassets and other assets decreased by $ 19.3million for the year ended December 31, 2008 and increased by $ 20.4 million for the year ended December 31,2007 and by $ 1.3 million forthe year ended December 31, 2006. Cash inflows for the year ended December 31,2008 were mainly on account of refund of $  6.8 million in respect of deposit with tax authorities, and$ 13.2 million on account ofsettlement of derivative 

 

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contracts. Cash outflows for the year ended December 31,2007 were $ 6.8 million in respect of deposit placed with tax authorities inIndia, $ 10.2 million inderivative contracts and cash inflows for the year ended December 31, 2007was mainly on account of the $ 0.9million in gratuity asset. Cash outflows for the year ended December 31,2006 were $ 1.4 million inleasehold land, $ 0.1 million inprepaid expenses, and $ 1.2million in foreign exchange advances and cash inflows for the year ended December 31, 2006were $ 1.2 million in deferredcost and revenue and $ 0.2million in advances to vendors.

 

Accountspayable and accrued expenses increased by $ 8.5 million for the year ended December 31, 2008, comparedto an increase of $ 6.3 millionin 2007 and $ 20.3 million in2006. The increase in 2008 is due to increase in accruals related to employeerelated expenses of $ 4.9million, $ 4.6 million inaccrued expenses and reduction of $ 1million in trade accounts payable.

 

Our billings in excess of costs and estimatedearnings on uncompleted contracts, which represent billings in excess ofrevenues that are recognized, increased by $ 3.1 million, $ 0.06and $ 0.9 million in the yearended December 31, 2008, 2007 and 2006, respectively.

 

Taxespaid were $ 39.9 million, $ 29.5 million and $ 17.0 million as against a taxprovision of $ 43.3 million, $ 31.9 million and $14.4 millionfor the years ended December 31, 2006, 2007 and 2008, respectively.

 

Othercurrent liabilities and other liabilities increased by $ 4.4 million during the year ended December 31, 2008. Theincrease in the year ended December 31, 2008 resulted from increase of $ 7.0 million in derivativeliabilities, $ 2.8 millionincrease in leave encashment provision, $ 1.9 million increase in sales discounts,$ 2.6 million increase instatutory liabilities for tax deducted at source on payroll and Value Added Tax(VAT) payments,  $ 1.4 million increase in provision for pension and reduction of $11.2 million in other liabilities on account of reversal of payroll and relatedtaxes, interest and penalty dueto completion of assessment by the IRS for years 2003 and 2004. Other currentliabilities and other liabilities increased by $ 8.2 million during the year ended December 31, 2007. Theincrease in the year ended December 31, 2007 resulted from increase of $ 2.1 million in leave encashmentprovision, $ 2.2 millionincrease in deferred revenue, $ 2.7million increase in other liabilities on account of advance received on sale offurniture at India (Vashi) location, $ 1.0million increase in advance from customer and $ 1.9 million decrease in other current liabilities. Other currentliabilities and other liabilities decreased by $ 16.0 million during the year ended December 31, 2006. Thedecrease in the year ended December 31, 2006 resulted from a $ 6.7 million in derivative contracts,$ 14.6 million payroll andrelated tax liability on account of payment and liability reversal and anincrease of $ 2.0 million leaveencashment provision, $ 0.9million increase in sales discount, $ 0.2million increase in warranty provision, $ 1.7 million increase in pension benefit and $ 0.5 million increase in other currentliabilities.

 

Thechanges in the operating activities is in line with the growth in our revenuesand volume of operations.

 

Netcash used in investing activities was $ 35.5 million for the year ended December 31, 2008, $ 130.0 million for 2007 and $ 155.4 million for 2006. Net cash usedin the acquisition of property, plant and equipment for the years ended December 31,2008, 2007 and 2006 was $ 43.36million, $ 61.9 million and $ 48.5 million, respectively. In 2008, 2007 and 2006 cash outflow was highermainly on account of the purchases of new facilities and expansion of ourexisting facilities. Net sale of investment securities were $ 4.0 million for the year ended December 31,2008 as against net purchases of investment securities of $ 14.8 million and $ 94.5 million for the year ended December 31,2007 and 2006, respectively.Additional purchase consideration to Cymbal shareholders amounted to $ 12.4 million and $ 12.2 million for the year ended December 31,2007 and 2006, respectively. Netcash used in investing activities in 2007 included $ 21.4 million for the acquisition of Logan Orviss and Taratec, netof cash acquired and $ 20.4million for acquisition of technology related intangibles from one of our majorcustomers.

 

Netcash used in financing activities was $ 64.6 million, $ 8.7million and $ 7.1 million forthe years ended December 31, 2008, 2007 and 2006, respectively. We spent $ 53.1 million on purchase of commonstock and paid $ 11.4 million asdividends, including dividend tax, on our equity shares in the year ended December 31,2008. We received proceeds of $ 0.2million from our employee stock option plan during the year ended December 31,2008. We paid $ 11.9 million individends, including dividend tax, on our equity shares in the year ended December 31,2007. We received proceeds of $ 3.2million from our employee stock option plan during the year ended December 31,2007. We paid $ 8.6 million individends, including dividend tax, on our equity shares in the year ended December 31,2006. We received net proceeds of $ 117.8million**from our initialoffering of ADSs and our employee stock option plan during the year ended December 31,2006.

 

Weanticipate capital expenditures of between approximately $ 15 million to $ 20 million in 2009, principally tofinance the construction of our new knowledge park facilities in Pune and Noidaand other facilities and physical infrastructure in India. Estimated amounts remaining to be executed on suchcontracts (net of advances), aggregated approximately to $ 50.1 million at December 31,2008 to be spent over a 3 year period. See ‘‘Item 4.D. Information onthe Company—Property, plant and equipment.’’ We believe that existing cash andcash equivalents and funds generated from operations will be sufficient to meetthese requirements. However, we may significantly alter our proposed capitalexpenditures plans and, accordingly, may require additional financing to meetour requirements. We believe that a sustained reduction in IT spending, alonger sales cycle or an economic downturn in any of the various industrysegments in which we operate, or a combination of these events, could result ina decline in our revenues and adversely affect our liquidity and capitalresources.

 

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**5.C.Research and development, patents and licenses, etc.**

 

Researchand development expenditures for the years ended December 31, 2006, 2007 and 2008 were $ 2.1million ,$ 2.1 million and $ 1.7 million respectively . For a description of our research anddevelopment initiatives, see “Item 4.B. Information on theCompany—Business Overview - Innovation.”

 

**5.D.Trend information**

 

Otherthan as described in “Item 3.D. Key information—Risk Factors” “Item 4.Information on the Company” and “Item 5. Operating and Financial Review andProspects” and elsewhere in this Annual Report, to our knowledge there are noknown trends or uncertainties that have or had or are expected to have amaterial adverse impact on our revenues or income from continuing operations orprofitability or liquidity or capital resources, or that could cause reportedfinancial information not necessarily indicative of future operating results orfinancial condition.

 

**5.E.Off-balance sheet arrangements**

 

Wecurrently do not engage in any off-balance sheet arrangements.

 

**5.F.Tabular disclosure of contractual obligations**

 

The following table sets forth our contractualobligations and commercial commitments to make future payments as of December 31,2008. The following table excludes our accounts payable, accrued operatingexpenses and other current liabilities which are payable in the normal courseof operations.

 
| ** **                       | ** ** | **Payments due as of December 31, 2008** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Total**                                                              | ** ** | **Within  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                       | ** ** | **(in millions)**                                                 | ** ** |
| Capital (Finance) Leases         |       | $                                                                      | 0.4        |   | $ | 0.2 |   | $ | 0.2 |   | $ | 0.0 |   | — |   |
| Operating Leases                 |       | $                                                                      | 26.5       |   | $ | 9.9 |   | $ | 12.0 |   | $ | 4.6 |   | $ | 0.0 |   |
| Capital Commitment               |       | $                                                                      | 50.1       |   | $ | 19.5 |   | $ | 30.6 |   | — |   | — |   |
| Total Contractual Obligations(1) |       | $                                                                      | 77.0       |   | $ | 29.6 |   | $ | 42..8 |   | $ | 4.6 |   | $ | 0.0 |   |

 

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(1)  Inaddition, pursuant to our agreement with Patni Life Sciences Inc. (formerlyTaratec), we agreed to pay up to $ 13.2 millionas contingent consideration over a three year period ending on June 30,2010.

 

**5.G.Safe Harbor**

 

ThisAnnual Report contains forward-looking statements. See the section entitled “SpecialNote regarding Forward Looking Statements.”

 

**RecentlyAdopted and Issued Accounting Pronouncements under U.S. GAAP**

 

In September 2006, the Financial AccountingStandards Board, or the FASB issued Statement of Financial Accounting Standard(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157establishes a common definition for fair value to be applied to U.S. GAAPrequiring use of fair value, establishes a framework for measuring fair value,and expands disclosure about such fair value measurements. SFAS No. 157 iseffective for financial assets and financial liabilities for fiscal years beginningafter November 15, 2007. Issued in February 2008, FSP 157-1 “Applicationof FASB Statement No. 157 to FASB Statement No. 13 and OtherAccounting Pronouncements That Address Fair Value Measurements for Purposes ofLease Classification or Measurement under Statement 13” removed leasingtransactions accounted for under Statement 13 and related guidance from thescope of SFAS No. 157. FSP 157-2 “Partial Deferral of the Effective Dateof Statement 157” (“FSP 157-2”), deferred the effective date of SFAS No. 157for all nonfinancial assets and nonfinancial liabilities to fiscal yearsbeginning after November 15, 2008.

 

The implementation of SFAS No. 157 forfinancial assets and financial liabilities, effective January 1, 2008, didnot have a material impact our consolidated financial position and results ofoperations. We are currently assessing the impact of SFAS No. 157 fornonfinancial assets and nonfinancial liabilities on its consolidated financialposition and results of operations.

 

SFAS No. 157, defines fair value as the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date (exitprice). SFAS No. 157 classifies the inputs used to measure fair value intothe following hierarchy:

 

Level 1: Unadjusted quoted market prices in activemarket.

 

Level 2: Unadjusted quoted prices in active marketsfor similar assets or liabilities or

 

Unadjusted quoted prices for identical or similarassets or liabilities in markets that are not active or

 

Inputs other than quoted prices that are observablefor the asset or liability.

 

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Level 3: Unobservable inputs used for measuring theassets or liability.

 

In accordance with SFAS 157 the following table setsout the fair value hierarchy for our financial assets (Investments andDerivative instruments) measured at fair value on a recurring basis as of December 31,2008:

 
| ** **                             | ** ** | **Level  1** | ** ** | **Level  2** | ** **  | **Level  3** | ** ** |
|----------------------------------------|------------|--------------|------------|--------------|-------------|--------------|------------|
| Assets :                               |       |         |       |         |        |         |       |
| Liquid mutual funds                    |       | —       |       | $            | 152,904,732 |         | —     |   |
| Fixed maturity plan                    |       | —       |       | $            | 90,550,521  |         | —     |   |
| Other investments                      |       | 2,024,878    |       | —       |        | 49,638       |       |
| Liabilities :                          |       |         |       |         |        |         |       |
| Foreign currency exchange  derivatives |       | —       |       | $            | 38,417,603  |         | —     |   |

 

Investment categorized as Level 3 at January 1,2008 consisted principally of investment in unquoted equity securities at costof $ 750,000. An impairment loss of $ 706,277 has been recognized during theyear. There have been no sales during the year in this category.

 

In February 2007, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 159 (“SFAS 159”), “The FairValue Option for Financial Assets and Financial Liabilities”. Under SFAS 159,companies may elect to measure certain financial instruments and certain otheritems at fair value. The standard requires that unrealized gains and losses onitems for which the fair value option has been elected be reported in earnings.SFAS 159 was effective for the Company beginning in the first quarter of fiscal2008. We have not elected to use fair value measurements under SFAS No.159 withrespect to any eligible instruments.

 

In December 2007, the FASB issued FASBStatement No. 141R, Business Combinations (Statement 141R) and FASBStatement No. 160, Non controlling Interests in Consolidated FinancialStatements — an amendment to ARB No. 51 (Statement 160). Statements 141Rand 160 require most identifiable assets, liabilities, non-controllinginterests, and goodwill acquired in a business combination to be recorded at “fullfair value” and require non-controlling interests (previously referred to asminority interests) to be reported as a component of equity, which changes theaccounting for transactions with non-controlling interest holders. BothStatements are effective for periods beginning on or after December 15,2008, and earlier adoption is prohibited. Statement 141R will be applied tobusiness combinations occurring after the effective date. Statement 160 will beapplied prospectively to all non-controlling interests, including any thatarose before the effective date. We are currently evaluating the impact ofadopting Statement 141R and Statement 160 on its results of operations andfinancial position.

 

In April 2008, the FASB issued FASB StaffPosition (FSP) FAS 142-3 , Determination of the Useful Life of IntangibleAssets . FSP FAS 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under FASB Statement No. 142, Goodwilland Other Intangible Assets. FSP FAS 142-3 is effective for fiscal yearsbeginning after December 15, 2008 and early adoption is prohibited. We arecurrently evaluating the impact of the same pending adoption of FSP FAS 142-3on our consolidated financial statements.

 

The Financial Accounting Standards Board (“FASB”)issued SFAS No. 161 Disclosure about Derivative Instruments and Hedgingactivities - An amendment to SFAS No 133 (“SFAS 161”) in March 2008.Statement 161 requires increased quantitative, qualitative and credit-riskdisclosures. Quantitative disclosures should include information (in a tabularformat) about the fair value of the derivative instruments, including gains andlosses, and should contain more detailed information about the location of thederivative instrument in the entity’s financial statements. Credit-riskdisclosures should include information about the existence and nature ofcredit-risk related contingent features included in derivative instruments.Credit risk related contingent features can be defined as those that requireentities upon the occurrence of a credit event to settle derivative instrumentsor to post collateral. We will be required to adopt this new standardprospectively, for fiscal years, and interim periods within those fiscal years,beginning on or after November 15, 2008. The implementation of Statement161 effective January 1, 2009, did not have a material impact on ourconsolidated financial position and results of operations.

 

In December 2008, the FASB issued FSP FAS132(R)-1, Employer’s Disclosures about Postretirement Benefit Plan Assets (“FSPFAS 132(R)-1”).  The FSP requiresenhanced disclosures about plan assets currently required by SFAS No. 132(revised 2003), Employer’s Disclosures about Pensions and Other PostretirementBenefits.  FSP FAS 

 

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132(R)-1 requires more detailed disclosures aboutemployers’ plan assets, including employers’ investment strategies, majorcategories of plan assets, concentrations of risk within plan assets, andvaluation techniques used to measure the fair value of plan assets. FSP FAS132(R)-1 is effective for fiscal years ending after December 15, 2009, andearly adoption is permitted. We are currently assessing the impact of this FSPon our financial statement disclosures.

 

**CriticalAccounting Policies**

 

We consider the policies discussed below to becritical to an understanding of our financial statements as their applicationplaces the most significant demands on management’s judgment, with financialreporting results relying on estimates about the effect of matters that areinherently uncertain. Specific risks for these critical accounting policies aredescribed in the following paragraphs. For these policies, future events maynot develop as forecast, and estimates may require revision.

 

***Estimates***

 

We prepare financial statements in conformity withU.S. GAAP, which requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of contingent assets andliabilities on the date of the financial statements and the reported amounts ofrevenues and expenses during the financial reporting period. We primarily makeestimates related to contract costs expected to be incurred to completedevelopment of software, allowances for doubtful accounts receivable, our futureobligations under employee retirement and benefit plans, useful lives ofproperty, plant and equipment, deferred tax assets and liabilities andprovisions for contingencies and litigation.

 

We continually evaluate these estimates andassumptions based on the most recently available information, our ownhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from thoseestimates. Changes in estimates are reflected in the financial statements inthe period in which changes are made and, if material, their effects aredisclosed in the notes to the consolidated financial statements.

 

***Revenue Recognition***

 

We recognize revenues by following specific andapplicable accounting guidelines for measuring revenue. These guidelinesrequire us to make certain judgments that affect recognized and unrecognizedrevenue. Judgments involve the method of recognizing revenue, costs and timerequired to complete projects for our clients etc.

 

We are in the software services business and, to alesser extent, in business process outsourcing. Our revenues from softwareservices are derived by providing the following services:

 

·     customapplication development;

 

·     applicationmaintenance and support;

 

·     packagedsoftware implementation;

 

·     infrastructuremanagement services;

 

·     productengineering;

 

·     businessprocess outsourcing; and

 

·     qualityassurance services.

 

***Software Services***

 

We derive our revenues primarily from softwareservices. Revenue is recognized when there is persuasive evidence of acontractual arrangement with customers, the sales price is fixed ordeterminable and collectibility is reasonably assured. Our software servicescontracts are either on a fixed-price, fixed time frame or on a time andmaterial basis. Currently a majority of revenues are derived on time andmaterial contracts. Revenues earned from services performed on a time andmaterial basis are recognized as the related services are performed. Our 

 

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fixed-price contracts include applicationmaintenance and support services, on which revenue is recognized ratably overthe term of maintenance. Our other fixed-price contracts are recognized on apercentage of completion basis.

 

Guidance has been drawn from paragraph 95 ofStatement of Position (‘‘SOP’’) 97-2, “Software Revenue Recognition” to accountfor revenue from fixed price arrangements for software development and relatedservices in conformity with *SOP-81-1 (“Accountingfor Performance of Construction—Type and Certain Production—Type Contracts”)*.The input method has been used because management considers this to be the bestavailable measure of progress on these contracts as there is a directrelationship between input and productivity.

 

We review the estimated revenues and estimated costson each project at the end of each reporting period. Any revisions to existingestimates are made when required by management having the relevant authority.As part of the review process, management regularly compares and analyzes theactual costs and the estimate of costs to complete the projects to the originalestimated costs and the total contract price with revisions to estimatesreflected in the period in which changes become known. As a policy, provisionsfor estimated losses on such engagements will be made during the period inwhich a loss becomes probable and can be reasonably estimated.

 

We charge direct and incremental contractorigination and set up costs incurred in connection with applicationmaintenance and support services to expense as incurred. We defer these costsonly in situations where there is a contractual arrangement establishing acustomer relationship for a specific period. The costs to be deferred arelimited to the extent of future contractual revenues. Further, we defer andrecognize revenue attributable to set up activities over the periods that therelated fees are earned, as services performed during such periods do notresult in separate earnings process.

 

We generally provide our clients with a one- tothree-month warranty as post-sale support. Costs associated with such servicesare accrued based on management’s estimates and historical data at the timerelated revenues are recorded. We use our past experience relating to actualwarranty costs incurred on similar kinds of projects in order to estimatefuture warranty costs.

 

We grant volume discounts to certain customers,which are computed based on a pre-determined percentage of the total revenuesfrom those customers during a specified period, pursuant to the terms of thecontract. These discounts are earned only after the customer has generated aspecified cumulative level of revenues in the specified period. We reportrevenue net of discounts offered to the customers.

 

We estimate the total number of customers that willultimately earn these discounts, based on which a portion of the revenue on therelated transactions is allocated to the services that will be delivered in thefuture.

 

Historically, changes in estimates of warranty costsand volume discounts have not had a material impact on our financialstatements.

 

We include reimbursement of out-of-pocket expensesreceived from customers as part of revenues in accordance with EITF 01-14 “IncomeStatement Characterization of Reimbursements Received for ‘Out of Pocket’Expenses Incurred”.

 

We report taxes assessed by governmental authoritiesdirectly imposed on revenue producing transactions on a net basis. Thisdisclosure is provided as per EITF 06-03 on “How taxes collected by thecustomers and remitted to governmental authorities should be presented to theIncome Statement.

 

***Business Process Outsourcing***

 

Revenues from business process outsourcing servicesare derived from both time-based and transaction-priced contracts. Revenue isrecognized as the related services are performed, in accordance with thespecific terms of the contracts with the customer.

 

***Business Combinations, Goodwill and Intangible Assets***

 

We account for business combinations in accordancewith SFAS 141, *Business Combinations*,which requires that the purchase method of accounting be used for all businesscombinations. SFAS 141 requires intangible assets acquired in a businesscombination to be recognized and reported separately from goodwill. Accountingfor contingent consideration based on earnings or other performance measures isa matter of judgment that depends on the relevant facts and circumstances. Ifthe substance of the contingent consideration is to provide compensation forservices, use of property, or profit sharing, we account for the additionalconsideration as an expense of the appropriate period. Otherwise, theadditional consideration paid is recorded as an additional cost of the acquiredbusiness.

 

Goodwill represents the cost of the acquiredbusinesses in excess of the fair value of identifiable tangible and intangiblenet assets purchased. We generally seek the assistance of independent valuationexperts in determining 

 

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the fair value of the identifiable tangible andintangible net assets of the acquired business. We assign all the assets andliabilities of the acquired business, including goodwill, to reporting units inaccordance with SFAS 142, *Goodwill and*

 

***Other Intangible Assets*****.**

 

We test goodwill for impairment at least on anannual basis. In this process, we rely on a number of factors includingoperating results, business plans and future cash flows. Recoverability ofgoodwill is evaluated using a two-step process. The first step involves acomparison of the fair value of a reporting unit with its carrying value.  The fair value of a reporting unit isdetermined using the income approach. If the carrying value of the reportingunit exceeds its fair value, the second step of the process involves acomparison of the implied fair value and carrying value of the goodwill of thatreporting unit. The implied fair value of goodwill is determined in the samemanner as the amount of goodwill recognized in a business combination. If thecarrying value of the goodwill of a reporting unit exceeds the fair value ofthat goodwill, an impairment loss is recognized in an amount equal to theexcess. Goodwill of a reporting unit will be tested for impairment betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of the reporting unit below its carrying amount.

 

We amortize intangible assets over their respectiveindividual estimated useful lives in proportion to the economic benefitsconsumed in each period. Our estimates of the useful lives of identifiedintangible assets are based on a number of factors including the effects ofobsolescence, demand, competition, and other economic factors (such as thestability of the industry, and known technological advances), and the level ofmaintenance expenditures required to obtain the expected future cash flows fromthe asset.

 

We evaluate intangible assets for recoverabilitywhenever events or changes in circumstances indicate that their carryingamounts may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset. If such assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying value of the assets exceeds the fair value ofthe assets.

 

In evaluating goodwill and intangible assets forimpairment, we may seek the assistance of independent valuation experts,perform internal valuation analyses and consider other information that ispublicly available. The results of our evaluation may be dependent on a numberof factors including estimates of future market growth and trends, forecastedrevenue and costs, discount rates and other variables. While we use assumptionswhich we believe are fair and reasonable, future results may differ from theestimates arrived at using the assumptions.

 

***Income Taxes***

 

As part of our financial reporting process, we arerequired to estimate our liability for income taxes in each of the taxjurisdictions in which we operate. This process requires us to estimate ouractual current tax exposure together with an assessment of temporarydifferences resulting from differing treatment of items, such as depreciationon property, plant and equipment, for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedwithin our balance sheet.

 

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss carry forwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities ofchanges in tax rates is recognized in results of operations in the period thatincludes the enactment date. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and to theextent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish a valuation allowance or increase thisallowance in a period, we must include an expense within the tax provision inthe statement of operations.

 

Our deferred tax liabilities mainly arise fromtaxable basis differences in intangible assets and undistributed earnings ofbranch, property, plant and equipment, unrecognized gain in available for salesecurities and costs and estimated earnings in excess of billings on completedcontracts. Our deferred tax assets comprise assets arising from our accruedexpenses, provisions for doubtful accounts receivable and from ultimaterealization of the tax asset that may be dependent on the availability offuture capital gains. We assess the likelihood that our deferred tax assetswill be recovered from future taxable income. This assessment takes intoconsideration tax planning strategies, including levels of historical taxableincome and assumptions regarding the availability and character of futuretaxable income over the periods in which the deferred tax assets aredeductible. We believe it is more likely than not that we will realize thebenefits of those deductible differences as of December 31, 2008 in thefuture. The ultimate amount of deferred tax assets realized may be materiallydifferent from those recorded, as influenced by potential changes in income taxlaws in the tax jurisdictions where we operate, or future changes in operatingresults.

 

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To the extent webelieve that realization of a deferred tax asset is not likely, we establish avaluation allowance or increase this allowance in an accounting period andinclude an expense within the tax provision in our statements of income. Thenet change in valuation allowance in the year 2008 is mainly on account ofreversal of valuation allowance recognized in prior years for deferred taxasset recorded  on business loss carryforwards of Japan operation, aggregating to $ 501,719.

 

We account for uncertainty in income taxes in thefinancial statements in accordance with FIN 48, Accounting for Uncertainty inIncome Taxes - an interpretation of FASB Statement No. 109, Accounting forIncome Taxes. The accounting and disclosures of tax positions taken or expectedto be taken on a tax return are based on the recognition threshold andmeasurement attribute as prescribed by FIN 48. We recognize interest andpenalties related to uncertain tax positions in other (expense) / income.

 

***Stock-based compensation***

 

We adopted SFAS 123R, “Share-Based Payment” (SFAS123R) effective January 1, 2006. This statement requires compensation expenserelating to share-based payments to be recognized in net income using  a fair value measurement method. Under thefair value method, the estimated fair value of awards is charged to income on an accelerated basis over the requisiteservice period, which is generally the vesting period. We elected the modifiedprospective method as prescribed in SFAS 123R and, therefore, prior periodswere not restated. Under the modified prospective method, SFAS 123R was applied to new awards granted afterthe time of adoption, as well as to the unvested portion of previously grantedequity-based awards for which the requisite service had not been rendered as ofJanuary 1, 2006. We granted stock options under the ‘Patni ESOP 2003’ -Revised2006.

 

The fair value of each option is estimated on thedate of grant using the Black-Scholes model.

 

Prior to the adoption of SFAS 123R, we were requiredto record benefits associated with the tax deductions in excess of recognizedcompensation cost as an operating cash flow. However SFAS 123R requires thatsuch benefits be recorded as a financing cash inflow.

 

Effective April 1, 2007, an amendment has been madeto Income Tax Act  subjecting specifiedsecurities allotted or transferred by an employer to its employees to FringeBenefit Tax (FBT). The liability to pay FBT by the employer arises at the timeof allotment of the securities, consequent to exercise of option by theemployees and is calculated on the difference between the fair value of theunderlying share on the date of vesting and the exercise price paid by the employeebased on the corporate tax rate. The FBT arising from such allotment ofspecified option is collectible from employees, which is considered as akin toa reset in the terms of the ESOP Plan as it would reduce the ultimate benefitto the employee, by way of increase in exercise price and hence is recognizedas additional paid-in-capital.

 

***Derivatives and Hedge Accounting***

 

We enter into forward foreign exchangecontracts/option contracts (derivatives) to mitigate the risk of changes inforeign exchange rates on inter company and end customer accounts receivableand forecasted sales transactions denominated in foreign currencies. Thestrategy also includes entering into short — term foreign forward foreignexchange contracts which are replaced with successive new contracts up to theperiod in which the forecasted transactions are expected to occur (roll —overhedging). Upon completion of the formal documentation and testing foreffectiveness, we designate the forward and option contracts which meet the hedgingcriteria, as cash flows hedges. Changes in the derivative fair values that aredesignated, effective and qualify as cash flow hedges, are deferred andrecorded as a component of accumulated other comprehensive income until thehedged transactions occur and are then recognized in the consolidatedstatements of income. Changes in fair value for derivatives not designated ashedging instruments and ineffective portion of the hedging instruments arerecognized in consolidated statements of income in the current period.

 

In respect of derivatives designated as hedges, weformally document all relationships between hedging instruments and hedgeditems, as well as its risk management objective and strategy for undertakingvarious hedge transactions. We also formally assesses, both at the inception ofthe hedge and on an ongoing basis, whether each derivative is highly effectivein offsetting changes in fair values or cash flows of the hedged item. If it isdetermined that a derivative is not highly effective as a hedge, or if aderivative ceases to be a highly effective hedge, we will, prospectively,discontinue hedge accounting with respect to that derivative. The derivatives,which do not qualify for hedge accounting, are accordingly, recognized at fairvalue with gains or losses included in foreign exchange (gain)/loss in theconsolidated statements of income.

 

Hedge ineffectiveness could result from forecastedtransactions not happening in the same amounts or in the same periods asforecasted or changes in the counterparty credit rating. Further, change in thebasis of designating forward contracts as hedges of forecasted transactionscould alter the proportion of forward contracts which are ineffective ashedges. Hedge ineffectiveness increases volatility of the consolidatedstatements of income since the 

 

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changes in fair value of an ineffective portion offorward contracts is immediately recognized in the consolidated statements ofincome.

 

As of December 31, 2008, there were no gains orlosses on derivative transactions or portions thereof that were eitherineffective as hedges, excluded from the assessment of hedge effectiveness, orassociated with an underlying exposure that did not occur.

 

***Commitments and Contingencies***

 

Liabilities for loss contingencies arising fromclaims, assessments, litigations, fines and penalties and other sources arerecorded when it is probable that a liability has been incurred and the amountof the assessment and/or remediation can be reasonably estimated.

 

**ITEM 6. DIRECTORS, SENIOR MANAGEMENT ANDEMPLOYEES**

** **

**6.A.Directors and senior management**

** **

The following table sets forth details regardingour Board of Directors and executive officers:

 
| **Name**                             | ** ** | **Age** | ** ** | **Position**                                                                                                    |
|--------------------------------------|------------|---------|------------|-----------------------------------------------------------------------------------------------------------------|
| Mr.  Narendra K. Patni(1)(2)(3)(8)   |       | 67      |       | Director  (Chairman)                                                                                            |
| Mr.  Louis T. van den Boog (9)(10)   |       | 55      |       | Director                                                                                                        |
| Mr.  Gajendra K. Patni(1)(4)         |       | 68      |       | Director                                                                                                        |
| Mr.  Ashok K. Patni(1)(5)            |       | 57      |       | Director                                                                                                        |
| Dr.  Michael A. Cusumano(7)(11)      |       | 54      |       | Director                                                                                                        |
| Mr.  Arun Duggal(12)                 |       | 62      |       | Director                                                                                                        |
| Mr.  William O. Grabe(6)(10)(13)     |       | 71      |       | Director                                                                                                        |
| Mr.  Arun Maira (7)(10)(11)          |       | 65      |       | Director                                                                                                        |
| Mr.  Pradip Shah(12)                 |       | 56      |       | Director                                                                                                        |
| Mr.  Ramesh Venkateswaran(7)(11)(12) |       | 56      |       | Director                                                                                                        |
| Mr.  Abhay Havaldar (13)             |       | 47      |       | Alternate  Director                                                                                             |
| Mr.  Jeya Kumar (14)                 |       | 54      |       | Chief  Executive Officer                                                                                        |
| Mr.  Surjeet Singh                   |       | 41      |       | Chief  Financial Officer                                                                                        |
| Mr.  Satish M. Joshi                 |       | 53      |       | Executive  Vice President - Global Head —  Horizontal Solutions & Delivery, and Global Technology Head |
| Mr.  Vijay P. Khare                  |       | 51      |       | Executive  Vice President and Chief Delivery Officer and Chief Administrative Officer                           |
| Mr. Rajesh Padmanabhan               |       | 46      |       | Executive Vice President  and Global Head of Human Resources                                                    |
| Mr. Brian Stones                     |       | 57      |       | Executive Vice President  Regional Head — EMEA                                                             |
| Mr. Sunil Chitale                    |       | 45      |       | Executive Vice President and Global Head — Industry Solutions &  Delivery                              |
| Mr. Ajay Chamania                    |       | 46      |       | Executive Vice-President  and Global Head of the Product Engineering Services                                   |
| Mr. Anirudh Patni                    |       | 33      |       | Senior Vice — President  Strategy & Corporate Development                                              |
| Mr. Ajit Yadav                       |       | 54      |       | Executive Vice — President  and General Counsel                                                            |
| Mr Manish Soman (15)                 |       | 40      |       | Executive Vice President  and Chief of Operations                                                               |
| Mr. Neeraj Gupta (16)                |       | 41      |       | Executive Vice President  and Global Head of Sales and Marketing                                                |
| Mr. Russel Boekenkroeger  (17)       |       | 63      |       | Executive Vice President                                                                                        |
| Mr. Mrinal R. Sattawala  (18)        |       | 54      |       | Advisor                                                                                                         |

 

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(1)                   Mr.Narendra K. Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni are brothers.  Mr. AnirudhK. Patni is the son of Mr. Narendra K. Patni.

(2)                   Mr.Narendra K. Patni ceased to be our ChiefExecutive Officer with effect fromFebruary 20, 2009 and continuesto be the Chairman of the Board/Company. He is also a Chairman of Nominatingand Corporate Governance committee.

(3)                   Mr.Narendra K. Patni is the nominee of the NKP Group.

(4)                   Mr.Gajendra K. Patni is the nominee of the GKP Group.

(5)                   Mr.Ashok K. Patni is the nominee of the AKP Group.

(6)                   Mr.Grabe is the nominee for General Atlantic.

(7)                   Memberof the Nominating and Corporate Governance committee.

(8)                   Permanentinvitee of the Compensation and Remuneration committee.

 

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(9)                   Mr.  Louis T. van den Boog resigned as ExecutiveDirector with effect from 20th February 20, 2009 and continues to be a  Non-Executive Director onthe Board of the Company.

(10)             Member of the Shareholder/Investor Grievances committee.

(11)             Member of the Compensationand Remuneration committee.

(12)             Memberof the Audit committee.

(13)             OurArticles of Association provide that the board can appoint an alternatedirector pursuant to the provisions of the Indian Companies Act. Mr. AbhayHavaldar is presently the alternate director to Mr. William O. Grabe.

(14)             Mr.Jeya Kumar is appointed as Chief Executive Officer of the Company  witheffect from February 20,2009.

(15)             Mr.Manish Soman is appointed as Executive Vice President and Chief of Operationswith effect from June 4, 2009

(16)             Mr.Neeraj Gupta resigned as an Executive Vice President and Global Head of Salesand Marketing  with effect from February 12, 2009

(17)             Mr.Russel Boekenkroeger, Executive Vice President has left the Company  with effectfrom December 31, 2008.

(18)             Mr. Mrinal Sattawala has leftthe Company with effect from December31, 2008.

 

**Boardof Directors**

** **

***Mr. Narendra K. Patni,***Chairman, is one of the founders of our company. Mr. Patni has a Master’sdegree in Electrical Engineering from the Massachusetts Institute ofTechnology, or MIT, and a Master’s degree in Management from the Sloan Schoolof Management at MIT. He also has a Bachelor’s degree in Electrical Engineeringfrom IIT, Roorkee. As an entrepreneur, he has played an integral role in thedevelopment of the Indian IT industry through his various ventures. Mr. Patniwas instrumental in initiating the offshore outsourcing business model for thesoftware industry. Prior to founding his first company, Data Conversion Inc.(now our U.S. subsidiary Patni Americas, Inc.) in 1972, he was President andDirector of the Forrester Consulting Group and was previously with the U.S.Trust Company of New York and was a consultant to Arthur D. Little, Inc.

 

Mr.Patni ceased to be Chief Executive Officer of the Company with effect from February 20, 2009 and continues to be theChairman of the Board/Company. Mr. Patni as a nominee of the NKP Group, is notrequired to retire by rotation from theBoard.

 

***Mr. Louis T. van den Boog,*** has been adirector since March, 2005.  Mr. van denBoog was appointed as an Executive Director with effect from April 29, 2008 andsaid appointment was approved by the shareholders at their meeting and  also by the Central Government as requiredunder Section 269 of the Indian Companies Act, and other applicable provisions.Mr. van den Boog resigned as an Executive Director with effect from February 20,2009 and continues to be aNon-Executive Director on the Board of the Company.

 

Mr.van den Boog has a Master’s degree in Business Economics and in PublicAccounting from the Free University in Amsterdam. Mr. van den Boog is an ITindustry veteran with approximately 20 years experience in the softwareindustry, as well as extensive experience in mergers and acquisitions, publicofferings and private equity and venture capital fundings. Mr. van den Boog hassupported a series of European and U.S. portfolio companies, in particular as adirector of Global Collect B. V., Human inference B. V., Vallstein Beheer B.V.and Purple Labs S. A. . Mr. van den Boog was previously with Oracle Corporationwhere he helped to build the European operations of the company. Mr. van denBoog is a former special advisor to General Atlantic. See “Relationship withGeneral Atlantic” below.

 

***Mr. Gajendra K. Patni,***Director, is one of the founders of our company. Mr. Patni has a ChemicalEngineering background and has over 35 years of experience in finance, banking,legal and personnel functions. He has contributed significantly in the past to thegrowth of the computer rental business of our company, which led to theformation of PCS Data Products (PCSDP) in 1981, and PCS Data General (PCSDG) in1987. These companies were merged to form what is now PCS Technology Limited in1994. Mr. Patni is a Chairman of PCS Technology Limited. Previously he was theManaging Director of Industrial Oxygen Company Limited. Mr. Patni as a nomineeof the GKP Group, is not required to retire by rotation.

 

***Mr. Ashok K. Patni******,***  Director, is one of the founders of ourcompany. Mr. Patni is a Mechanical Engineer from IIT, Mumbai. Mr. Patni hasover 22 years of experience in computer hardware and systems software. Mr. Patnihas contributed significantly in the past to the growth of the hardwarebusiness of our company which led to the formation of PCSDP in 1981, and PCSDGin 1987. These companies were merged to form what is now PCS Technology Limitedin 1994. He is a Vice Chairman of PCS Technology Limited. Mr. Patni as anominee of the AKP Group, is not required to retire by rotation.

 

***Dr. Michael A. Cusumano***has been a director since April, 2004. Dr. Cusumano has a B.A. degree fromPrinceton University and a PhD from Harvard University. Dr. Cusumano completeda postdoctoral fellowship in 

 

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Productionand Operations Management at the Harvard Business School. He has twice been aFulbright Fellow as well as a Japan Foundation Fellow at the University ofTokyo, and is recipient of the Clarendon Lectures in Management award at OxfordUniversity. Dr. Cusumano is the Sloan Management Review Distinguished Professorat MIT’s Sloan School of Management. He is also a director of Eliza Corporation,a specialist in speech recognition software applications, focused onhealthcare. He serves on the advisory boards of FixStars Corp. , a Japanesedeveloper of high-performance computing applications, and H-5 Technologies, aspecialist in digital search technology. He has consulted for more than 50major companies around the world and advises several other startup softwarecompanies. He is the author or co-author of eight books. Dr. Cusumano’s term ofoffice expires in 2010 but he is eligible for reappointment.

 

***Mr. Arun Duggal***has been a director since November, 2003. Mr. Duggal has a Bachelor’s degree inMechanical Engineering from IIT, Delhi, and a post graduate diploma inmanagement from IIM, Ahmedabad. Mr. Duggal is an experienced international Bankeradvising Corporations on Financial Strategy, M&A and Capital Raisingareas.  He has been an InternationalAdvisor to a number of Corporations, major Financial Institutions and PrivateEquity firms.

 

He is Chairmanof Board of Directors of Shriram Transport Finance Company, Shriram PropertiesLtd, Shriram City Union Finance Ltd., and Shriram EPC Limited. He is a Chairmanand CEO of Tanglewood Financial Advisors (P) Limited and Blackstone InvestmentCompany (P) Limited. He is on the Board of Directors of various Public LimitedCompanies which include Mortice Limited, Manipal Acunova Limited, ZuariIndustries, Info Edge (India), Dish TV India Limited., Mundra Port & SEZLimited.

 

In addition, Mr.Duggal is a former special advisor to General Atlantic. See “Relationship withGeneral Atlantic” below. Mr. Duggal’s term of office expires in 2012, but he iseligible for reappointment.

 

***Mr. William O. Grabe***has been a director since September, 2002. Mr. Grabe has a BS degree inEngineering from New York University and an MBA from the University ofCalifornia, Los Angeles. Since 1992, Mr. Grabe has been a managing director atGeneral Atlantic LLC, a worldwide private equity firm. Prior to that, he was aVice President of IBM and held various positions, the last of which was head,North America Sales and Marketing. He is a Director of various companiesincluding Compuware Corporation, Gartner, Infotech Enterprises Limited, AKQA,Actinium Pharmaceuticals Inc. and Lenovo Group Company. General Atlantic is oneof our principal shareholders, with a shareholding of 17.89%. See “Item 7.Major Shareholders and Related Party Transactions” and “Relationship withGeneral Atlantic” below. Mr. Grabe’s term of office expires in 2011, but he iseligible for reappointment.

 

***Mr.Arun Maira*** has been adirector since June, 2006. Mr. Maira received his bachelors and masters degreesin Physics from St. Stephen’s College, Delhi University. He worked for 25 yearsin several senior positions in the Tata Group, India’s premier industrial conglomerate.His directorships in other companies include Tata Chemicals Limited, AdityaBirla Nuvo Limited, Hero Honda Motors Limited, Mahindra Ugine Steel CompanyLimited and Godrej Industries Limited. Prior to joining Boston Consulting Groupin India, he worked in the USA with Arthur D. Little, the internationalconsulting company, for 10 years where he served as Leader of its GlobalOrganisation Practice and Managing Director of Innovation Associates, itssubsidiary. Mr. Maira’s term of office expires in 2009 and he seeksre-appointment at ensuing Annual General Meeting to be held on June 25, 2009.

 

***Mr. Pradip Shah***has been a director since November, 2003. Mr. Shah is a Chartered Accountant,has an MBA from the Harvard Graduate School of Business and a degree from TheInstitute of Cost and Works Accountants of India. Mr. Shah was responsible forintroducing credit ratings in India and is a founder of CRISIL Limited.

 

Mr. Shah iscurrently the Chairman of the Board at IndAsia Fund Advisors Private Limitedand Sonata Software Limited. His directorships in other companies include AMPIndAsia Fund Advisors (Mauritius) Limited, Asset Reconstruction Company (India)Limited, BASF India Limited,  Godrej &Boyce Mfg Limited, Hardy Oil & Gas Limited, Kansai Nerolac Paints Limited,KSB Pumps Limited, Mukand Limited, Panasonic Energy India Co. Limited, PfizerLimited, Shah Foods Limited, Supra Advisors (BVI) Limited (British VirginIslands),  Tata Investment CorporationLimited, Wartsila India Limited and Grindwell Norton Limited .Mr. Shah’s termof office expires in 2009 and he seeks re-appointment at ensuing Annual GeneralMeeting to be held on June 25, 2009.

 

***Mr. Ramesh Venkateswaran***has been a director since November, 2003. Mr. Venkateswaran has a Bachelor’sdegree in Mechanical Engineering from IIT, Mumbai and a post graduate diplomain management from IIM, Bangalore. Mr. Venkateswaran is a Management Consultantand is currently the Managing Director of Almak Management Services PrivateLimited. He is a visiting professor of Marketing at the Indian Institute ofManagement, Bangalore. He is also a founder member of a non profitorganization, “Vishwas.” Mr. Venkateswaran’s term of office expires in 2010,but he is eligible for reappointment.

 

***Mr. Abhay Havaldar*** has been acting as an AlternateDirector to Mr. William O. Grabe since 2002. Mr.. William Grabe is theNominee Director of General Atlantic, one of our largest shareholders. Mr Grabeis not a full time resident of India and therefore would not be able to attendall the board meetings of the Company which are held in India. Hence, on therequest of Mr. Grabe, Mr. Abhay Havaldar has been appointed as an AlternateDirector to act for Mr. Grabe during his absence at the board meetings of theCompany.  Mr. Havaldar holds a Bachelorsdegree in electrical engineering from the University of Bombay and a Masters in Management degree from the Sloan Fellow program at the LondonBusiness School.

 

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Mr. Havaldar is aManaging Director at General Atlantic LLC, a worldwide private equity firm,where he has worked since 2002. Mr. Havaldar established General Atlantic’sIndia office in 2002 and remains based in Mumbai, India where he leads GeneralAtlantic’s South East Asia investment initiatives with a focus on FinancialServices and Enterprise Solutions. He currently serves as a Director on theboard of Jubilant Organosys Limitedand IBS Software Services PrivateLimited..Prior to this, Mr. Havaldar started his career with TATA andheld operating management responsibilities at TATA Infotech and HCLInfosystems.

 

Mr. Havaldar hasbeen an investor in Indian businesses since 1996, as a partner at DraperInternational and Connect Capital. He is a Charter Member of The IndusEntrepreneurs (TIE) and a Board member of Society for Innovation andEntrepreneurship (SINE). General Atlantic is one of our principal shareholders,with a shareholding of 17.89%.  See “Relationship with General Atlantic” below and “Item 7 Major Shareholders and Related Party Transactions”.

 

Formore information on our Board of Directors, please see “Item 10.B. AdditionalInformation—Board of Directors.”

 

***ExecutiveOfficers***

 

***Mr. Jeya Kumar******, isour Chief Executive Officer with effect from February 20, 2009.*********Mr.Kumar has a Masters of Business degree from Curtin University, Australia;Bachelors of Business degree from the Royal Melbourne Institute of Technology,Australia; and postgraduate diplomas in Computer Science, Management Studiesand Marketing Management. He has also attended the Advanced Management Programat Oxford University. His responsibilities mainly include driving the company’sglobal operations; and defining and executing the company’s long-term strategyfocused on growth, profitability, and customer & operational excellencethroughout Patni’s value chain. Mr. Kumar was the CEO of MphasiS Limited andhas more than 25 years of global experience spanning several geographies. Priorto MphasiS, he was Senior Vice-President of Sun Microsystems and a member ofSun’s Executive Management Group (EMG). Notably, he was the first Asia-Pacificemployee in the company’s history to become a member of Sun’s EMG. At Sun, ashead of a $ 5 billion-a-yearServices business, Mr. Kumar was responsible for the business unit’s financialperformance, strategy, marketing, portfolio management, in-market management,product engineering, technology development, M&A and channels in more than120 countries. He has also held various management and executive positions withglobal firms including Apple Computers Inc. and National Semi-ConductorCorporation. During the course of his extensive career, he has undertakenassignments in Singapore, Japan, Australia, United States, Mexico, Holland andthe United Kingdom.

 

***Mr. Surjeet******Singh*****is our ChiefFinancial Officer since July 2006.  Mr. Singhis a graduate from Harvard Business School (Advanced Management Programme),holds a B.S. in Finance and Accounting from the University of Pune and is afellow of the Institute of Costs and Works Accountants, India and AICPA, USA.He is responsible for overall financial strategy, financial operations &compliances of the Company on a global basis. He is chartered with managing theongoing business planning and review process, ensuring a balanced portfolio forfinancial and other resource allocation (s), and maintaining the highest levelof integrity and transparency in the company operations to help maximizesustainable long-term shareholder value. Earlier, and in addition, he hasmanaged and provided oversight to M&A and global business operationsfunctions. During this time, he led various initiatives to help streamline theoperational parameters and drive operational excellence in many areas,including internal systems, supply chain, overall cost . Prior to joiningPatni,, he was the CFO at Cymbal which he co-founded and which has since beenacquired by Patni. In all, Mr. Singh has around two decades of multi-industryglobal experience holding senior management positions in leading finance,business planning and global supply chain functions. He has a successful trackrecord of building finance as a key business enabler, and fosteringcollaboration in large and mid-sized culturally diverse, global and matrixed organizations.

 

***Mr. Satish M. Joshi*******is our ExecutiveVice President and Global Head —Horizontal Solutions & Delivery, and Global Technology Head and hehas been with Patni for over 25 years. Mr. Joshi has a Bachelor’s degree inElectrical Engineering and a Master’s degree in Computer Science from IIT,Mumbai. As Global Head of Horizontal Solutions & Delivery, he oversees theEnterprise Application Solutions, Customer Dynamics and Intelligence, BusinessProcess Outsourcing, and Infrastructure Management Services horizontal businessunits, besides the Verification & Validation Center of Excellence. Prior toPatni, Mr. Joshi worked with the Tata Institute of Fundamental Research inareas such as concurrent programming languages, storage techniques for largedatabases, compiler optimization and data communication networks.

 

***Mr. Vijay P. Khare***is our Executive Vice President and Global Head of Delivery Excellence with responsibilityfor Global Delivery Infrastructure, Process, Excellence and Innovation and hehas been employed with Patni for about 30 years. Mr. Khare has a Bachelor’sdegree in Engineering from the Regional Engineering College, Nagpur and aMasters degree in Computer Science from IIT, Mumbai In this role, he overseesthe Product & Technology Initiatives (PTI), Global Resources in Technology(GRiT), Patni Academy for Competency Development (PACE), Quality and DeliveryInnovation (QDI) and the Global PMO group. Mr. Khare began his career withPatni in 1980 as a software developer and has previously held senior positionsin various functional roles such as HR Head, Global Delivery Co-ordinator andSBU Head. From 1995 to 2000, he oversaw the growth of the Offshore DevelopmentCenter for Patni’s largest customer to more than 1000 FTEs.

 

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***Mr. Rajesh Padmanabhan*** is ourExecutive Vice-President and Global Head Human Resources. Mr. Padmanabhan hasMaster’s degrees in management specializing in human resources and finance. Hisresponsibilities include spearheading Patni’s human capital initiativesglobally including the strategic direction and focus for employee management. Mr.Padmanabhan has over 22 years of diverse industry experience in systems, finance,business and global human resources in IT, hospitality, financial services andmanufacturing. He is well-versed with global HR operations and has managedmulti-cultural work forces in a few countries. Prior to joining Patni, Mr. Padmanabhanwas Executive Vice-President with the Oberoi group responsible for group humanresources and the Oberoi Centre for learning and development. He has alsoworked as Global Head of Human Capital for Essel Propack and with the ICICIgroup in different roles in systems, corporate banking, leasing and humanresources.

 

***Mr. Brian Stones*****i**s our ExecutiveVice President-,Regional Head — EMEA. Mr. Stones has honours degrees inEconomics and Business Science. He is responsible for Patni’s operations in theEurope, Middle East and Africa (EMEA). He has over 28 years internationalbusiness experience and has held leadership positions in organizations in theUnited States and Europe. Prior to joining Patni, Mr. Stones was responsible for ACS Inc.’s business operation in Europe, andwas formerly a Senior Partner at Ernst & Young, most notably as the Leaderof the Global Client Consulting business in Europe. Mr. Stones has avery successful track record in direct and indirect sales, global accountmanagement and general business management in IT services, consulting andoutsourcing.

 

***Mr. Sunil Chitale************is our***ExecutiveVice-President and Global Head — Industry Solutions & Delivery. Mr.Chitale has a Bachelor’s degree from Institute of Technology, Banaras Hindu University, India. He is responsiblefor ‘Industry Solutions & Delivery’ to Patni’s customers in various domainsincluding High-Tech & Electronics; CPG & Retail; Distribution;Transportation & Logistics; Pharmaceuticals & Life Sciences;Communications, Media & Utilities. Mr. Chitale began his career with Patniin 1985 and has experience in managing large relationship portfolios. He hashelped several customers in leveraging the global delivery model througheffective use of domain, consulting and technology in a managed services mode.

 

***Mr. Ajay Chamania*** is our Executive Vice-President and Global Head of the ProductEngineering Services business. Mr. Chamania has a Bachelor’s degree inElectronics & Telecommunication from National Institute of Technology,Bhopal, India. Mr. Chamania began his career with Patni in 1986 and at Patni isresponsible for the organization’s footprint in Product Engineering practicescatering to Storage, Automotives, Medical Devices, Industrial Automation,Consumer Electronics and ISV product domains. Over the last two decades he hasbeen instrumental in establishing and managing some large engineeringengagements for leading global technology companies. Since 2001, he has beenactively involved in Patni’s R&D and embedded technology business and hasplayed an instrumental role in building and transforming it into a robust andsuccessful Product Engineering Services business unit for the Company.

 

***Mr. Anirudh Patni*** is our SeniorVice-President — Strategy & Corporate Development.  Mr. Patni has an MBA in Finance, Strategy andEntrepreneurial Management from the Wharton School at the University ofPennsylvania; and Bachelor’s degrees in Electrical Engineering, ComputerScience and Management Science — all from the Massachusetts Institute ofTechnology. He is responsible for Strategy & Corporate Development. He hasbeen intimately involved in the growth and development of the company,including its private equity placements, IPO, and M&A transactions. Hiscurrent responsibilities include defining overall corporate strategy andworking with business units to define and execute strategic initiatives, bothorganic and inorganic. He has over 10 years of leadership experience, and hisbackground includes strategy consulting, private equity and M&A. Prior tojoining Patni, Mr. Patni was a consultant at McKinsey and Company in New York,London and New Delhi. At McKinsey, he worked in the area of long-term corporatestrategy for some of the world’s largest companies, and in new businessformation across a number of key industry verticals.

 

***Mr. Ajit Yadav*** is ourExecutive Vice-President & General Counsel. Mr. Yadav is an IndianAttorney, Company Secretary and a Solicitor of England & Wales. Hisresponsibilities include responsibilities for handling legal and complianceissues for all businesses of Patni on a global basis. Mr. Yadav carries withhim varied and vast experience in the areas of Corporate Laws, M&A,indirect taxes and IPRs, having worked in senior positions at Hindustan LeverLtd. (Unilever, India) for many years, followed by Ranbaxy Labs Ltd. for fiveyears where he supported Ranbaxy’s aggressively growing international businessfor all legal services with specific focus on M&A, IPRs and CorporateGovernance issues. Prior to Patni, Mr. Yadav had worked for six years withPepsiCo, South Asia as Executive Director (Legal) and a member of itsManagement Committee. Mr. Yadav has thus held senior leadership positions inlarge businesses and has helped companies drive their businesses using law asan enabler for providing efficient business solutions. He started hisprofessional career by joining the Government of India through IAS (Allied)services and worked for the Government for sometime before moving to theprivate sector.

 

***Mr. Manish Soman******is our Executive Vice — Presidentand Chief of Operations with effect from June 4, 2009.  Mr. Soman is a graduate in Computer Scienceand has a master’s degree in Business Administration from the Pune University.He is responsible for overseeing Sales Operations, Administration, Real Estate,Travel, Security, Location Management, Enterprise Resource Planning, EnterpriseRisk Management, Business Continuity Planning, and the CIO function.  Mr. Soman has 18 years of varied industryexperience. Prior to joining Patni, he was Senior***

*** ***

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***Vice-President& Business Leader (Software) at Genpact, where he was responsible for ITdelivery integrated with BPO offerings and Professional Services across sixindustry verticals. Prior to Genpact, he was with organizations like 3DISystems, Washington Mutual, Software Management Consultants Inc, Tata UnisysLtd., and Deloitte — where he was CEO & MD of the India operations.***

 

***Mr. Neeraj Gupta******,*** was our Executive Vice-Presidentand with effect from June 2008, was appointed as Global Head of Salesand Marketing. He has been withPatni since November 2004. Mr. Gupta has a Bachelor’s degree in Electronics &Communications Engineering from Punjab Engineering College, India and a Master’sdegree in Electrical Engineering from the University of Alabama, USA. Hisresponsibilities includes overseeing the Sales and Marketing operations , Telecom and Growth Industry businessunits. Mr. Gupta has had over 15 years of proven leadership experience,including managing product management, professional services and engineeringteams at various leading technology companies including Octel Communications,Lucent Technologies, Genesys Telecom, and Alcatel. Previously, he was ChiefExecutive Officer of Patni Telecom (formerly Cymbal), a U.S.- based IT services Company, which he led from start-up tosuccessful exit. Mr. Gupta resigned as Executive Vice President and Global Headof Sales and Marketing of the Company witheffect from February 12,2009.

 

***Mr. RussellBoekenkroeger*** was our Executive Vice President andhas been with Patni for fouryears. Mr. Boekenkroeger has a Bachelor’s degree in Government from Franklin &Marshall College, a Master’s degree in Urban and Regional Planning and a Master’sdegree in Civil Engineering from the University of Pittsburgh. He was responsible for the RegionalOperations of the U.S. and for merger & acquisition activities.Additionally, he oversees wasresponsible for overseeing the Product Engineering Services businessunit besides the Engineering Services center of excellence. He has over 25years of experience in managing large global product development organizations,shared services operations, international business and product marketing whileserving in a variety of executive management positions at Computervision, PrimeComputer and PTC. He has also served as an advisor to companies from a widerange of industries around the world, on business and technology matters. Mr. Boekenkroeger,Executive Vice President has left the Company with effect from December 31,2008.

 

***Mr. Mrinal R. Sattawala*******has been our Advisor since June 2008. Prior to this, he wasdesignated as our Chief Operating Officer and Global Sales and MarketingCoordinator and was with Patnifor 20 years. As the Chief Operating Officer, he was directly responsible forthe Sales and Operations of the Europe and APAC regions, besides overseeingGlobal Sales & Marketing, and the Insurance and Financial Services businessunits until May 2008 . Mr. Sattawala is an electrical engineer from IIT,Mumbai, and he also received his MBA in 1979 from MacMaster University, Canada.Mr. Sattawala has over 26 years of experience in the IT industry. Prior toPatni, Mr. Sattawala worked with Computer Maintenance Corporation and the ICIgroup of companies in India. Mr. Sattawala has left the Company with effect from December 31, 2008.

 

Duringfiscal 2008, the aggregate annual compensation paid or payable by us and oursubsidiaries to our executive directors and executive officers wasapproximately $ 9,881,140 ;including Mr. N. K. Patni $ 1,653,303; Mr. Louis T. van den Boog $ 919,745;  Mr. Surjeet Singh $ 996,601 ;  Mr. Neeraj Gupta$ 709,560 ; Mr. S. M. JoshiRs.13,070,604  ($ 301,152 ); Mr. V. P. Khare Rs .13,050,439 ($ 300,687); Mr. Brian Stones - £ 440,202 ($ 812,740)  ; Mr. AjayChamania Rs. 10,607,561 ($ 244,402); Mr. Sunil Chitale Rs. 9,042,335 ($ 208,339); Mr. Rajesh Padmanabhan - Rs.11,795,557 ($ 271,774); Mr.Ajit Yadav Rs. 10,535,418 ($ 242,752); Mr. Anirudh Patni $ 333,360; Mr. Mrinal Sattawala $ 2,023,095; and Mr. RusselBoekenkroeger $ 863,630 . Inaddition to receiving annual base compensation, some members of our executivemanagement, under Indian laws and regulations, are eligible for grants underthe Employee Stock Option Plan (described below).

 

Ourindependent directors on the board are each entitled to $ 40,000 annually in addition to actualboarding and lodging expenses and sitting fees for attending board andcommittee meetings.

 

In addition to abovementioned commission,following are entitled for an annual commission as under:

a) The Chairman of the Audit Committee: $ 10,000 per annum

b) Members of the Audit Committee: $ 5,000 per annum

c) The Chairman of Compensation &Remuneration Committee: $ 5,000 per annum

d) The Chairman of Shareholders’/Investors’Grievance Committee: $ 5,000 perannum.

 

TheBoard of Directors of the Company, at its meeting held on 11 February 2009, hadappointed Mr. Jeya Kumar as ‘Chief Executive Officer’ with effect from 20 February2009 for the period of five years pursuant to the provisions of the CompaniesAct, 1956. The said appointment is further subject to the approval of Membersat the ensuing Annual General Meeting and also subject to approvals of thestatutory authorities including Central Government under Section 269 of theCompanies Act, 1956 and other applicable provisions.

 

TheCompany proposes to enter into an agreement with Mr. Jeya Kumar that provide for,inter alia, monthly salary, Annual Variable Compensation, one time joiningbonus, equity compensation and benefits including, leave 

 

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encashment,club membership, medical/insurance reimbursements and gratuity contributions.The said agreement may terminate by three months’ notice from either side.However, the Company, at its discretion, may choose to terminate it earlier bysubstituting the notice period by payment of salary in lieu of the noticeperiod.

 

JeyaKumar is eligible for an annual base (fixed) salary in Indian Rupees equivalentto Singapore $ 1,252,000 per annum payable monthly. In addition, he is eligiblefor a sign-on-bonus of Indian Rupees equivalent to Singapore $ 133,000 within15 days from the date of his assuming the office of CEO. He will also be eligiblefor Annual Variable Compensation upto a maximum target amount being the IndianRupee equivalent of Singapore $ 2,000,000 subject to Mr. Jeya Kumar meetingcertain corporate and individual performance goals / targets / MBO as set andapproved by the Compensation and Remuneration Committee and/or the Board. Otherbenefits / expenses, inter alia, include a Housing allowance of maximum ofRupees equivalent of Singapore $ 14,700 per month upon Mr. Jeya Kumar’srelocation to the Company, a suitable car in accordance with Company’s rules andpolicies; all maintenance costs, fuel, cost of employing a personal driver,road tax and insurance will be borne by the Company, membership of club atMumbai and the Company will pay the requisite fees, first class air travel andaccommodation costs incurred for business purpose, in accordance with Company’srules and policy and other benefits as per rules of the Company . The stockoptions granted to Mr. Jeya Kumar are described in “Item 6B : “Compensation -Options”.

 

**ServiceAgreements**

** **

Mr.Narendra K. Patni is our Chairman. Formerly, he was appointed as the Presidentand Chief Executive Officer of Patni Americas Inc. (formerly Patni ComputerSystems, Inc.), pursuant to an employment agreement between the Company andPatni Computer Systems, Inc. dated December 1, 2000, and as amended on August 29,2003 and September 24, 2008. The aforesaid employment agreement with Mr. NarendraK. Patni had an initial term expiring on December 31, 2008.  However, pursuant to the third Amendment tothe employment agreement dated February 20, 2009, the said term has beenextended until December 31, 2013unless terminated earlier in pursuance of the said agreement. He ceased to beour Chief Executive Officer (CEO).witheffect from February 20, 2009.However, he continues to be our Chairman. Mr. Patni’s annual base salary underthe agreement is $ 974,358 (lessapplicable taxes and withholdings) for the first year of the term, after whichtime it is increased by 10% of the then current annual base salary per year. Mr.Patni does not receive a separate fee for attending board meetings. The agreement can be terminated bythe Board of Directors at any time after January 1, 2009, effective no lessthan thirty (30) days following written notice of such termination.  In the event of termination, Mr. Patni isentitled to a lump sum severance payment equal to amount of Base Salary (at therate in effect as of the date of separation from service) he would have earnedhad he remained employed by the Company under this Agreement through December 31,2013 .

 

Wehad entered into a consultancy agreement with Patni Americas, Inc. (formerlyPatni Computer Systems, Inc.) dated October 24, 2000, and as amended on August 19,2003, pursuant to which Mr. Narendra K. Patni was seconded to us to act as ourCEO. Pursuant to the Consultancy Agreement amendment dated February 20, 2009,the consultancy agreement with Patni Americas Inc can be terminated only on orafter December 31, 2010 (upon giving one month’s written notice to PatniAmericas Inc) and such termination will take effect on the expiration of suchperiod of notice.

 

WhileMr. Narendra K Patni has ceased to be our Chief Executive Officer since February20, 2009, he continues to be our Chairman.

 

**Relationshipwith General Atlantic**

** **

Our largest shareholder isGeneral Atlantic Mauritius Limited, a Mauritius company formed by GeneralAtlantic LLC, or General Atlantic, for purposes of this section. GeneralAtlantic is a private equity firm that focuses on the information technology,process outsourcing and communications industries.

 

One of our directors, Mr. William O. Grabe, has been a managing directorof General Atlantic since 1992. In addition, Mr. Arun Duggal and Mr. LouisT. van den Boog were the former special advisors to General Atlantic. Specialadvisors are persons with industry and/or geographic expertise that provide, on a part-time basis, a range ofadvisory services to General Atlantic in different parts of the world. Theseservices range from identifying new investment opportunities to assisting inthe preparation of investment proposals, serving on the boards of portfoliocompanies and providing strategic advice to such portfolio companies. Specialadvisors are not directors, managing directors, general partners, executiveofficers or employees of General Atlantic or any of its affiliates, and do nothave any other formal association with General Atlantic, except that they enterinto consulting agreements with General Atlantic under which they receive acash retainer and/or are granted the right to co-invest in one or more of theGeneral Atlantic investment vehicles.

 

Mr. Arun Duggal served as aspecial advisor from October 2003 to December 2005. He received an annual cashretainer of $ 150,000 and hadthe right to invest as a limited partner in various General Atlantic investmentvehicles.

 

Mr. Louis T. van den Boogserved as a special advisor from 1996 to 2004. Pursuant to past co-investmentrights, Mr. Louis T. van den Boog invested in various General Atlanticinvestment vehicles, including one that is an 

 

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investor in General AtlanticMauritius Limited, as a result of which he has an approximate 0.2% ownershipinterest in General Atlantic Mauritius Limited. General Atlantic loaned certainamounts to Mr. Louis T. van den Boog for purposes of such investments, of whichthe amount outstanding was repaid in 2007.

 

We have no financial or otherobligations in respect of the status of Mr. Duggal or Mr. van den Boog, formerspecial advisors, and General Atlantic has informed us that no compensation,loans or investment opportunities provided to these individuals are related inany way to our operating or financial performance or the value of our equityshares or ADSs.

 

**ProvidentFund**

** **

All of our eligible employeesreceive provident fund benefits through a defined contribution plan in whichboth the employee and employer make monthly contributions to the plan at therate of 12% each of the covered employee’s defined portion of salary. We haveno further obligations under the plan beyond the monthly contribution. Wecontribute to the Provident Fund Plan maintained by the Government of India. Wecontributed $ 3,895,116, $4,145,932 and $ 4,251,292  to the Provident Fund Plan in 2006, 2007 and2008.

 

**Benefits**

 

In 2008, we providedapproximately $ 0.7 million as compared to $ 0.8 million in 2007for pension, retirement or similar benefits to our directors and executiveofficers.

 

**Options**

** **

Set forth below is information concerningoptions granted to directors and executive officers. The term of stock optionsgranted to our directors and executive officers will expire on completion offive years from the date of vesting. As of June 12, 2009, our directors andexecutive officers as a group (directly and indirectly) were granted optionsunder our Employee Stock Option Plan to exercise 3,603,500 Equity linkedoptions, 946,000 Equity linked — Restricted Stock Units (RSU’s) and 25,000 ADRlinked options representing less than 1% of our share capital on the followingterms:

 
| **Name**             | ** ** | **Exercise Price Per Share** | ** ** | **Number of Shares under Option**     | ** ** | **Expiration Date**      | ** ** |
|----------------------|------------|------------------------------|------------|---------------------------------------|------------|--------------------------|------------|
| Dr. M. Cusumano      |       | Rs. 254/381/458/455          |       | 20,000/5,000/5,000/5,000              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. A. Duggal        |       | Rs. 254/381/458/455          |       | 20,000/5,000/5,000/5,000              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. P. Shah          |       | Rs. 254/381/458/455          |       | 20,000/5,000/5,000/5,000              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. L.  van den Boog |       | Rs. 381/ 458/455/2           |       | 20,000/5,000/5,000/96,000             | (2)        | 2011/2012/2013/2014      | (2)        |
| Mr. R. Venkateswaran |       | Rs. 254/381/458/455          |       | 20,000/5,000/5,000/5,000              | (1)        | 2010/2011/2012/2013      | (1)        |
| Mr. A. Maira         |       | Rs. 336/455                  |       | 20,000/5,000                          | (8)        | 2012/2013                | (8)        |
| Mr. J. Kumar         |       | Rs. 106/2                    |       | 1,500,000/350,000                     | (11)       | 2015/2016                | (11)       |
| Mr. S. Joshi         |       | Rs. 145/338                  |       | 62,000/100,000                        | (3)        | 2009/2010                | (3)        |
| Mr. V. Khare         |       | Rs. 145/338                  |       | 63,300/100,000                        | (3)        | 2009/2010                | (3)        |
| Mr. S. Singh         |       | Rs. 451/493/336/112/2        |       | 11,000/11,000/150,000/300,000/500,000 | (7)        | 2011/2012/2012/2014/2014 | (7)        |
| Mr. B. Stones        |       | $ 15.09                 |       | 25,000                                | (9)        | 2013                     | (9)        |
| Mr. R. Padmanabhan   |       | Rs. 112                      |       | 50,000                                | (10)       | 2014                     | (10)       |
| Mr. S. Chitale       |       | Rs. 145/338                  |       | 37,200/61,000                         | (3)        | 2009/2010                | (3)        |
| Mr. A. Chamania      |       | Rs. 145/338                  |       | 34,700/55,000                         | (3)        | 2009/2010                | (3)        |
| Mr. A. Yadav         |       | Rs. 331                      |       | 30,000                                | (10)       | 2014                     | (10)       |
| Mr. R. Boekenkroeger |       | Rs. 145/458                  |       | 50,000/100,000                        | (5)        | 2009                     | (5)        |
| Mr. N. Gupta         |       | Rs. 451/493/385              |       | 24,000/11,000/150,000                 | (6)        | 2011/2012/2012           | (6)        |
| Mr. M. Sattawala     |       | Rs. 145/338/376              |       | 58,300(4)/100,000(4)/350,000          | (4)        | 2009                     | (4)        |

 

----

| (1)    | Options  will vest in four equal installments, i.e. 25% each year, and expiry date in  respect of the four grants will be from 2010 to 2013, 2011 to 2014, 2012 to  2015 and 2013 to 2016, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                     |
| (2)    | Options  will vest in four equal installments, i.e. 25% each year, and expiry date in  respect of four grants will be from 2011 to 2014, 2012 to 2015, 2013 to 2016  and 2014 to 2017*, respectively.    |
|   |                                                                                                                                                                                                     |
|   | *The  Compensation and Remuneration Committee, in its absolute discretion, has been  empowered to accelerate the vesting of unvested RSUs.                                                               |
|   |                                                                                                                                                                                                     |
| (3)    | Options  will vest in four equal installments, i.e. 25% each year, and expiry date in  respect of the two grants will be from 2009 to 2012 and 2010 to 2013,  respectively.                              |
|   |                                                                                                                                                                                                     |
| (4)    | All the 350,000 options  granted in May 2006 have been vested in December 2008. The aforesaid options  and also the options granted in October 2004 will expire at the end of  December 2009.            |

 

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| (5)    | In  respect of the first grant, Options will vest in four equal installments,  i.e. 25% each year, and expiry date   will be in December 2009. In respect of the second grant, 50,000  Options will vest in four equal installments, i.e. 25% each year, and expiry  date in respect of these Options will be from 2012 to 2015. In respect of the  balance 50,000 Options, 25,000 Options will vest in April 2009 and remaining  25,000 Options will vest in January 2010 or at the end of the separation  period whichever is earlier (separation   period is from January 1, 2009 to January 31, 2010). These Options  will expire in December 2009. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (6)    | Options  will vest in four equal installments, i.e. 25% each year, and expiry date in  respect of the first grant will be from 2011 to 2014 and for the balance two  grants expiry date will be from 2012 to 2015.                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (7)    | Options  will vest in four equal installments, i.e. 25% each year, and expiry date in  respect of the first three grants will be from 2011 to 2014, 2012 to 2015,  2012 to 2015, and for the balance two grants will be from 2014 to 2017*.                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | *The  Compensation and Remuneration Committee, in its absolute discretion, has been  empowered to accelerate the vesting of unvested RSUs and equity linked  options in certain circumstances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (8)    | Options  will vest in four equal installments, i.e. 25% each year, and expiry date in  respect of two grants will be from 2012 to 2015 and 2013 to 2016,  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (9)    | The  said ADR linked options will vest in four equal instalments, i.e. 25% each  year, and expiry date in respect of the said grant will be from 2013 to 2016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (10)   | Options  will vest in four equal installments, i.e. 25% each year, and expiry date in  respect of the said grant will be from 2014 to 2017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (11)   | In  respect of first grant, options will vest in four equal installments, i.e.  25% each year, and expiry date in respect of the said grant will be from 2015  to 2018. In respect of second grant, the RSUs will vest in two equal installments  i.e. 50% each year and expiry date in respect of the said grant will be from  2015 to 2016*.                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | *As per the terms of his appointment, vesting  of unvested RSUs and equity linked options can be accelerated ob happening of  certain circumstances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

**6.C.Board Practices**

** **

**BoardComposition**

** **

Asper the provisions of the Articles of Association of the Company, our Boardshall be comprised of not less than three directors and not more than tendirectors. Accordingly, our current strength of the Board is ten directors.Further our Articles of Association also provides that Mr. Narendra K. Patni, Mr.Gajendra K. Patni and Mr. Ashok K. Patni, being nominees of the NKP Group, GKPGroup and AKP Group respectively, are permanent directors of the Company.

 

Pursuantto the provisions of the Articles of Association, two thirds of the totalBoard of Directors of the Company will retire by rotation but they are eligiblefor reappointment. Out of this two-thirds,one-third will be retiring at every Annual General Meeting but eligible forre-election can be reappointed at such AGM. Accordingly, Dr. Michael A.Cusumano’s term of office expires in 2010, but he is eligible forreappointment. Mr. Arun Duggal’s term of office expires in 2012, but he iseligible for reappointment. Mr. William O. Grabe’s term of office expires in2011, but he is eligible for reappointment. Mr. Pradip Shah’s term of officeexpires in 2009, but he is eligible for reappointment. Mr. Ramesh Venkateswaran’sterm of office expires in 2010, but he is eligible for reappointment. Mr. ArunMaira’s term of office expires in 2009, but he is eligible for reappointment. Mr.Louis T. van den Boog will ceased to be an Executive Director with effect from February 20, 2009 but he continues to be Non-Executive Director on the Board of theCompany, liable to retire by rotation.Mr. van den Boog’s term of office expires in 2011, but he is eligible forreappointment. For information regarding our board, see “Item 6.B.— Compensation -  “ServiceAgreements” above and “Item 10.B. Additional Information—Board of Directors.”

 

**BoardCommittees**

** **

***Audit Committee***

*** ***

TheAudit Committee comprises Mr. ArunDuggal (Chairman), Mr. Pradip Shah and Mr. Ramesh Venkateswaran. The primaryobjective of the Audit Committee is to monitor and provide effectivesupervision of our financial reporting process with a view towards ensuringaccurate, timely and proper disclosures and the transparency, integrity andquality of financial reporting. Our Audit Committee oversees the work carriedout in the financial reporting process by our management, including theinternal auditors and reviews the processes and safeguards employed by each. Inaddition our Audit Committee has the responsibility of oversight andsupervision over our system of internal control over financial reporting, auditprocess, and process for monitoring the compliance with related laws and regulations.The Audit Committee recommends to our Board of Directors the appointment,reappointment and if required the replacement or removal of our independentauditors and fixation of audit and non-audit fees.

 

***Compensation and RemunerationCommittee***

 

TheCompensation and Remuneration Committee comprises Mr. Ramesh Venkateswaran(Chairman), Dr. Michael Cusumano (Member), Mr. Arun Maira (Member) and Mr. NarendraK. Patni (Permanent invitee). The Committee has overall responsibility forapproving and evaluating compensation plans, policies and programs of the CEOand senior management of the Company.The Committee shall makerecommendations to the Board on Stock Option plans for all employees. The Committee shall also facilitate therecommendation of compensation for Board 

 

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members.

 

***Shareholders’/ Investors’Grievances Committee***

*** ***

TheShareholders’/ Investors’ Grievances Committee comprises Mr. Arun Maira(Chairman), Mr. Louis T. van den Boog and Mr. William O. Grabe (Mr. AbhayHavaldar being the Alternate Director to him ). The Shareholders’/ Investors’Grievances Committee, inter alia, looks into redressal of shareholders’ andinvestors’ complaints, issue of duplicate/split/consolidated sharecertificates, if any.

 

***Nominating & GovernanceCommittee***

 

**The**Nominating & GovernanceCommittee comprises Mr. NarendraK Patni (Chairman), Mr. Ramesh Venkateswaran, Dr. Michael Cusumano and Mr. ArunMaira.  Mr. Patni was appointed as theChairman of the Nominating & Governance Committee with effect from February 11, 2009.The Committee was constituted, inter alia, to develop and recommend to theBoard a set of corporate governance guidelines applicable to the Company and tofacilitate the evaluation of the Board and its committees

** **

**6.D. Employees**

** **

Fora description of our employees, see “Item 4.B. Information on theCompany—Business Overview - Human Resources.”

 

**6.E.Share ownership**

** **

***Forthe total number of equity shares, ADSs and options to purchase equity sharesand ADSs for each director and executive officer as of June 12, 2009, see “Item7. Major Shareholders and Related Party Transactions” and “Item 6.B. Directors,Senior Management and Employees - Compensation—Options”.***

*** ***

**EmployeeStock Option Plan**

** **

OnJune 30, 2003, our shareholders approved an employee stock option plan, whichwas later ratified after our initial public offering in India by ourshareholders at the annual general meeting on June 29, 2004. Under the plan, wemay issue up to 11,142,085 equity shares of Rs. 2 each to our eligible employees and directors and those of oursubsidiaries. The plan is administered by the Compensation and RemunerationCommittee of our Board of Directors As of May 31, 2009, options to purchase ****7,763,777**** equity shares were outstanding.

 

Details regarding various grants to employees anddirectors are mentioned in the below table.

 
| **Description of Grant**                                            | ** ** | **No. of options   granted (including   ADR)** | ** ** | **No. of options   Vested** | ** ** | **Shares allotted   pursuant to exercise  up to June  12,,2009** |
|---------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|------------------------------------------------------------------|
| Grant as on  September 1, 2003 to employees                         |       | 2,743,400                                      |       | 2,743,400                   |       | 1,674,849                                                        |
| Grant as on  July 1, 2004 to certain of our directors               |       | 100,000                                        |       | 100,000                     |       | 10,000                                                           |
| Grant as on  October 1, 2004 to employees                           |       | 2,750,632                                      |       | 2,750,632                   |       | 221,999                                                          |
| Grant as on  April 1, 2005 to employees and directors               |       | 190,000                                        |       | 1,90,000                    |       | 500                                                              |
| Grant as on  October 1, 2005 to employees                           |       | 670,710                                        |       | 503,033                     |       | 2,942                                                            |
| Grant as on  January 2, 2006 to employees                           |       | 288,000                                        |       | 216,000                     |       | —                                                           |
| Grant as on  April 1, 2006 to employees and directors               |       | 345,000                                        |       | 258,750                     |       | —                                                           |
| Grant as on  May 5, 2006 to employee                                |       | 350,000                                        | (1)        | 350,000                     |       | —                                                           |
| Grant as on  Ju1y 1, 2006 to employees and directors                |       | 170,000                                        |       | 127,500                     |       | 5,000                                                            |
| Grant as on  October 3, 2006 to employees                           |       | 840,750                                        |       | 420,375                     |       | —                                                           |
| Grant as on  April 2, 2007 to employees                             |       | 356,000                                        | (2)        | 178,000                     |       | —                                                           |
| Grant as on  April 24, 2007 to directors                            |       | 30,000                                         |       | 15,000                      |       | —                                                           |
| Grant as on  November 26, 2007 to employees                         |       | 25,000                                         | (3)        | 6,250                       |       | —                                                           |
| Grant as on  January 3, 2008 to employees                           |       | 686,400                                        |       | 171,600                     |       | —                                                           |
| Grant as on  January 3, 2008 to employees                           |       | 181,550                                        | (3)        | 45,388                      |       | —                                                           |
| Grant as on November 25, 2008 to employees & Executive Director |       | 946,000                                        | (4)        | —                      |       | —                                                           |
| Grant as on  January 8, 2009 to employees                           |       | 20,000                                         | (3)        | —                      |       | —                                                           |
| Grant as on  March 10, 2009 to employees                            |       | 1,850,000                                      | (5)        | —                      |       | —                                                           |

 

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----

| (1) | Includes  200,000 performance linked options granted to Mr. Mrinal Sattawala. 70,000 performance linked options  were vested as of December 31, 2007. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes  129,000 ADR Linked Options.                                                                                                                 |
| (3) | ADR  Linked Options.                                                                                                                                  |
| (4) | Includes  596,000 RSUs and 350,000 Equity linked Options.                                                                                             |
| (5) | Includes  1,500,000 Equity linked Options and 350,000 RSUs.                                                                                           |

 

Theshareholders of the Company at the annual general meeting held on June 21, 2006had approved an amendment to the Patni ESOP 2003 toenable the Company to issue up to 2,000,000 ADR linked options to the employeesof the Company as well as its subsidiaries. Accordingly, the amended plan,i.e., “Patni ESOP 2003- Revised 2006” cameinto force with effect from June 21, 2006.

 

Alloptions have been granted with an exercise price equal to the fair market valueof the equity shares on the date of grant of the options. All of the options we have granted vest in four equalannual installments beginning one year from the date of grant. The options havea term of five years from the date of vesting during which they can beexercised.

 

Asthe abovementioned options were issued on market prices, due to the recent fallin the market prices in general and the information technology companies sharesin particular, our Board of Directors on April 29, 2008 approved the proposalto modify the option terms of Patni ESOP 2003- Revised 2006 plan by reducingthe number of options granted as well as the exercise price to Rs. 2/- pershare. This proposal required the approval of the shareholders through aspecial resolution in the Annual General Meeting of the Company. Shareholdersapproved the modification at the Annual General Meeting held on June 26, 2008enabling the management tomodify the terms of Patni ESOP 2003- Revised 2006 plan. The modification was deferred initially to comply with the Indianstock exchange regulations which prohibited such modifications during the timewhen a share buy-back offer was in effect. The plan to modify the terms waseventually scrapped due to prevailing market conditions..

 

**ITEM 7. MAJOR SHAREHOLDERS ANDRELATED PARTY TRANSACTIONS**

 

**7.A. Major shareholders**

 

Thefollowing table provides information relating to the beneficial ownership ofour equity shares (directly or in the form of ADSs) as of June 12, 2009 by: ·

 

eachof our directors and executive officers;

 

·     all of our directors and executive officersas a group; and

 

·     each person or group of affiliated personswho is known by us to own beneficially 5% or more of our equity shares.

 

Beneficialownership is determined in accordance with the rules of the U.S. Securities andExchange Commission. In computing the number of shares beneficially owned by aperson and the percentage ownership of that person, equity shares subject tooptions or warrants held by that person that are currently exercisable, or willbecome exercisable within 60 days are deemed outstanding, while the shares arenot deemed outstanding for purposed of computing percentage ownership of anyother person. Unless otherwise indicated in the footnotes below, the personsand entities named in the table have sole voting or investment power withrespect to all shares beneficially owned, subject to community property lawswhere applicable.

 

Thenumber and percentage of shares beneficially owned are based on 128,106,757equity shares outstanding as of June 12, 2009.

 

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| **Directors and Executive  Officers**           | ** ** | **Number of   Equity Shares** | ** ** | **% of   outstanding   equity shares** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|----------------------------------------|------------|
| Mr. Narendra K. Patni(1)                        |       | 20,697,998                    |       | 16.16                                  |       |
| Mr. Gajendra K. Patni(2)                        |       | 20,328,102                    |       | 15.87                                  |       |
| Mr. Ashok K. Patni(3)                           |       | 20,948,102                    |       | 16.09                                  |       |
| Mr. Louis T. van den Boog(5)                    |       | 48,002                        |       | 0.04                                   |       |
| Mr. Mrinal R. Sattawala(6)                      |       | 58,350                        |       | 0.04                                   |       |
| Mr Surjeet Singh (7)                            |       | 37,870                        |       | 0.04                                   |       |
| Mr. Satish M. Joshi                             |       | 17,800                        |       | 0.01                                   |       |
| Mr. Vijay Khare                                 |       | 18,825                        |       | 0.01                                   |       |
| Mr. Ajay Chamania                               |       | 17,300                        |       | 0.01                                   |       |
| Mr. Sunil Chitale                               |       | 6,400                         |       | 0.00                                   |       |
| Mr. Ajit Yadav                                  |       | 900                           |       | 0.00                                   |       |
| All Directors and Executive Officers as a Group |       | 62,179,649                    |       | 48.54                                  |       |
| 5% Shareholders                                 |       |                          |       |                                   |       |
| General Atlantic Mauritius Limited(4)           |       | 22,913,949                    |       | 17.89                                  |       |
| Total                                           |       | 85,093,598                    |       | 66.43                                  |       |

 

----

| (1)    | Includes  equity shares held by Mr. Narendra K. Patni and his relatives and entities  controlled by them including iSolutions Inc., a Massachusetts corporation  wholly-owned by Mrs. Poonam Patni, Mr. Narendra K. Patni’s wife, and Mr.  Anirudh Patni, Mr. Narendra K. Patni’s son.                                                                                                                                                                                                                              |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    | Includes  equity shares held by Mr. Gajendra K. Patni and his family members and  entities controlled by them.                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    | Includes  equity shares held by Mr. Ashok K. Patni and his family members and entities  controlled by them.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (4)    | Includes  20,161,868 ADSs representing 20,161,868 equity shares held by The Bank of New  York as depositary. General Atlantic Mauritius Limited, or General Atlantic,  owns 2,752,081 our equity shares directly (after the ADS offering) and  20,161,868 ADSs, each one of which represents one equity share. General  Atlantic (Mauritius) Limited, or GenPar, controls the management of General  Atlantic by virtue of ownership of a majority of its voting shares. General  Atlantic LLC owns all the shares of GenPar. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5)    | Mr.  van den Boog’s shareholding was acquired through previous co-investment  rights in which Mr. van den Boog invested in various General Atlantic LLC  investment vehicles, including one that is an investor in General Atlantic Mauritius  Limited, as a result of which he has an approximate 0.2% ownership interest  in General Atlantic Mauritius Limited.                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (6)    | Includes  58,300 underlying shares represented by 29,150 ADRs held by Mr. Mrinal  Sattawala.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (7)    | Includes 10,000 underlying shares represented by 5,000 ADRs held by Mr. Surjeet Singh.                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

Except, as otherwisestated above and to the best of our knowledge, we are not owned or controlleddirectly or indirectly by any government or by any other corporation or by anyother natural or legal persons. We are not aware of any arrangement, theconsummation of which may at a subsequent date, result in a change in ourcontrol.

 

Ason June 12, 2009, approximately 99.93% of our equity shares were held in thenames of 42,098 record holders with registered addresses in India. As of June 12,2009, there were 8 U.S. holders of record with registered addresses in the U.S.who accounted for approx 0.04% of our equity shares.

 

**7.B.Related party transactions**

** **

**PatniFamily Companies**

** **

Weenter into various transactions from time to time in the ordinary course of ourbusiness with several companies in which certain of our directors, Mr. NarendraK. Patni, Mr. Gajendra K. Patni and Mr. Ashok K. Patni, are directors and inwhich they and members of their families have substantial shareholdings. Suchtransactions were consummated on terms we believe are equivalent to those thatprevail in arm’s-length transactions.  Mr.Narendra K. Patni does not have any management responsibilities in any of thesecompanies. These companies are:

 
| · | PCS  Technology Limited, or PCSTL, which manufactures computer hardware products  and also offers hardware maintenance services. |
|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                             |
| · | PCS  Cullinet Private Limited, which owns and manages listed and unlisted shares  and units and real estate.                     |
|   |                                                                                                                             |
| · | PCS  Finance Private Limited, which owns and manages listed and unlisted shares  and units and real estate.                      |

 

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| · | Ashoka  Computer Systems Private Limited, which owns and manages listed and unlisted  shares and units and real estate.                                                                             |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                |
| · | PCS  International Limited are  manufacturers, dealers, brokers, distributors, traders and agents in all  commodities.                                                                              |
|   |                                                                                                                                                                                                |
| · | Ravi  and Ashok enterprises which holds investments and also are engaged in  assembling computers, integrating computer systems, providing total software  solutions and act as a service provider. |

 

Thesetransactions have comprised the following:

 
| · | operating  lease payments for residential and commercial property from these companies  and the relatives of our founders, amounting to $ 127,748, $ 93,725 and $82,036 for the years ended December 31, 2006, 2007 and 2008; and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                        |
| · | security  deposits paid by us for operating leases, with amounts outstanding totaling $ 107,203, $ 120,478 and $ 35,857 for  the years ended December 31, 2006, 2007 and 2008.                                               |

 

Wedo not believe that any of these transactions, individually or in theaggregate, have a material effect on our business as a whole.

 

Inaddition, our Audit Committee will, on an ongoing basis, review the terms ofall operating leases entered into between us and any member of the Patni Familyor with any company or entity owned or controlled by any member of the PatniFamily, and will inform management whether or not all such operating leases andrelated arrangements, including payment of security deposits, are for bona fidebusiness purposes and at prevailing market rates; and management will take allsteps to ensure that such operating leases are for bona fide business purposesand at prevailing market rates.

 

***Consultancy Agreement***

*** ***

Wehave entered into a consultancy agreement with Patni Americas, Inc. (formerly known as PatniComputer Systems, Inc.), our U.S.subsidiary, for, among other things, the secondment of Mr. Narendra K. Patni.See “Item 6. B. Directors, Senior Management and Employees—Service Agreements.”

 

**DepositAgreements**

** **

Wehave entered into a deposit agreement with The Bank of New York, or thedepositary, and the owners of and beneficial owners of ADSs dated July 15,2002, pursuant to which we have deposited 20,161,868 equity shares with thedepositary. The depositary has executed and delivered to General Atlantic20,161,868 ADSs representing such equity shares. The holders of ADSs can, atany time, convert their ADSs into equity shares. Under the deposit agreement,we have agreed to pay the fees, reasonable expenses and out-of-pocket chargesof the depositary in accordance with agreements entered into in writing betweenus and the depositary from time to time. ADSs issued under this depositagreement may, when General Atlantic wishes to sell ADSs, be exchanged, subjectto applicable laws, for ADSs under the deposit agreement, which ADSs may be soldsubject to applicable securities laws.

 

Wehave also entered into a deposit agreement with The Bank of New York, or thedepositary, and the owners and holders of ADRs dated December 7, 2005 fordeposit of equity shares of the Company from time to time with the depositaryor with the Custodian as agent of the depositary for the purposes set forth inthis Deposit Agreement, for the creation of ADSs representing the equity sharesso deposited and for the execution and delivery of ADRs evidencing the ADSs.  Each ADS represents two (2) equity shares.

 

**RegistrationRights Agreement**

** **

Wehave entered into a registration rights agreement with General Atlantic,certain General Electric entities, Mr. Ashok K. Patni, Mr. Gajendra K. Patniand certain of their relatives, Mr. Narendra K. Patni and iSolutions Inc. datedJuly 15, 2002. This agreement grants rights with respect to registration of ourequity shares under the Securities Act, certain provisions of which aresummarized below. Subject to limitations provided in the registration rightsagreement and in lock-up agreements that certain of these shareholders havesigned, these shareholders have demand registration rights and may also requireus to file an unlimited number of registration statements on Form F-3 (or theequivalent) under the Securities Act when such form is available for our use.

 

Ifwe propose to register our securities under the Securities Act, theseshareholders will be entitled to notice of the registration and to includetheir shares in the registration provided that the underwriters of thatoffering will have the right to limit the number of their shares included inthe registration. We are required to pay all expenses arising from or incidentto our performance of, or compliance with, the registration rights agreement,other than any underwriters’ discounts and commissions. In addition, we arerequired to bear the fees, disbursements and other charges of one counsel tothese shareholders in connection with any registration in an amount not exceeding$50,000 for the first such registration and $15,000 for any subsequentregistration.

 

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**Loans**

** **

Wegrant personal loans and advances to employees who are not executive officersto meet initial conveyance andliving expenses while on travel. These loans and advances are repayable inequal installments over periods ranging from one to 60 months. Interest onthese loans and advances is charged at 0% to 9%. Loans and advances outstandingas of December 31, 2006, 2007 and 2008were $ 2.7million, $ 3.4 million and $ 1.6million. There are nooutstanding loans to any of our directors or executive officers.

 

**7.C.Interests of experts and counsel**

** **

Notapplicable.

 

**ITEM8. FINANCIAL INFORMATION**

** **

**8.A.Consolidated Statements And Other Financial Information**

** **

Thefollowing financial statements and auditors’ report for fiscal 2008 appearunder Item 18 in this Annual Report:

 

·       Reportof Independent Registered Public Accounting Firm

 

·       ConsolidatedBalance sheets as of December 31, 2007 and 2008

 

·       ConsolidatedStatements of Income for the years ended December 31, 2006, 2007 and 2008

 

·       ConsolidatedStatements of Shareholders’ Equity and Comprehensive Income for the years endedDecember 31, 2006, 2007 and 2008

 

·       ConsolidatedStatements of Cash Flows for the years ended December 31, 2006, 2007 and 2008

 

·       Notesto the Consolidated financial statements

 

**Amountof Export Sales**

** **

For the year ended December 31, 2008, wegenerated $ 712.58 million, or99.12% of our total revenues of$ 718.9 million, from the exportof services out of India.

 

**LegalProceedings**

** **

Certainincome tax related legal proceedings are pending against us. We are alsoinvolved in lawsuits and claims which arise in ordinary course of business.Please see the description of various tax proceedings in the U.S. and Indiaunder the section entitled “Taxes” under Item 5. of this Annual Report. Otherthan as disclosed herein, there are no such matters pending that we expect tobe material in relation to our business.

 

**Dividends**

** **

Wedo not have a stated dividend policy and determine the amount of dividends tobe recommended for approval by the shareholders on a year-by-year basis byreference to our earnings, cash flow, financial condition and other factorsprevailing at the time. We have paid dividends in the past. Although we have nocurrent intention to discontinue dividend payments, we cannot assure you thatany future dividends will be declared or paid or that the amount thereof willnot be decreased.

 

Ownersof ADSs will be entitled to receive dividend payable in respect of the equityshares represented by such ADSs. Cash dividends in respect of the equity sharesrepresented by the ADSs will be paid to the depositary in rupees and, willgenerally be converted by the depositary into U.S. dollars and distributed, netof depositary fees and expenses, to the holders of such ADSs.

 

OurBoard of Directors at its meeting held on February 11, 2009 recommended adividend of 150% of par value, i.e. Rs. 3 per share (approximately $ 0.06) for fiscal 2008, subject toapproval of our shareholders in the Annual General Meeting to be held on June 25,2009.

 

**ITEM 9. THE OFFER AND LISTING**

 

**9.A.Offer and listing details**

** **

Ourequity shares have been listed and traded on the Bombay Stock Exchange Limited,or BSE, and the National Stock Exchange of India Limited, or NSE, since February25, 2004. The prices for equity shares as quoted 

 

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inthe official list of each of the Indian Stock Exchanges are expressed inrupees. Our ADSs evidenced by American Depositary Receipts, or ADRs, are tradedin the United States on the New York Stock Exchange, or NYSE. Our ADSscommenced trading on the NYSE on December 8, 2005. Each ADS represents twoequity shares. The number of our outstanding equity shares (including theunderlying shares for ADSs) as of June 12, 2009 was 128,106,757. As of June 12,2009, there were20,161,868 privately placed ADSs (representing 20,161,868 equity shares) and7,998,414 ADSs outstanding (representing 15,996,828 equity shares).

 

Thetable below sets forth, for the periods indicated, the reported high and lowquoted prices of our shares on the BSE, NSE and the NYSE*: (source www.bseindia.com, www.nse-india.com,www.nyse.com ,www.federalreserve.gov)*

* *
| ** **                         | ** ** | **BSE**    | ** ** | **NSE**   | ** ** | **NYSE**   | ** ** |
|------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                         | ** ** | **High $** | ** ** | **Low $** | ** ** | **High $** | ** ** | **Low $** | ** ** | **High $** | ** ** | **Low $** | ** ** |
|                               |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Year ended                         |       |       |       |      |       |       |       |   |   |   |   |   |   |
| 2008                               |       | 8.55       |       | 2.28      |       | 8.52       |       | 2.28 |   | 16.94 |   | 4.58 |   |
| 2007                               |       | 13.96      |       | 7.62      |       | 14.59      |       | 7.55 |   | 28.30 |   | 14.59 |   |
| 2006                               |       | 11.13      |       | 5.92      |       | 11.12      |       | 5.90 |   | 25.10 |   | 11.81 |   |
| 2005                               |       | 11.59      |       | 7.05      |       | 11.50      |       | 6.98 |   | — |   | — |   |
| 2004                               |       | 9.68       |       | 4.27      |       | 9.63       |       | 4.38 |   | — |   | — |   |
|                               |       |       |       |      |       |       |       |   |   |   |   |   |   |
| 2009                               |       |       |       |      |       |       |       |   |   |   |   |   |   |
| First Quarter                      |       | 2.87       |       | 1.89      |       | 2.85       |       | 1.89 | ] | 6.10 |   | 4.25 |   |
| 2008                               |       |       |       |      |       |       |       |   |   |   |   |   |   |
| First Quarter                      |       | 8.55       |       | 4.65      |       | 8.52       |       | 4.27 |   | 16.94 |   | 9.84 |   |
| Second Quarter                     |       | 6.97       |       | 5.14      |       | 6.96       |       | 5.41 |   | 16.94 |   | 9.84 |   |
| Third Quarter                      |       | 5.87       |       | 3.95      |       | 6.15       |       | 3.87 |   | 11.71 |   | 7.10 |   |
| Fourth Quarter                     |       | 4.18       |       | 2.28      |       | 4.18       |       | 2.28 |   | 8.09 |   | 4.58 |   |
| 2007                               |       |       |       |      |       |       |       |   |   |   |   |   |   |
| First Quarter                      |       | 11.62      |       | 8.41      |       | 11.63      |       | 8.39 |   | 24.89 |   | 19.72 |   |
| Second Quarter                     |       | 13.96      |       | 9.07      |       | 14.59      |       | 8.87 |   | 28.30 |   | 22.33 |   |
| Third Quarter                      |       | 13.52      |       | 8.72      |       | 13.62      |       | 8.75 |   | 26.47 |   | 18.40 |   |
| Fourth Quarter                     |       | 12.85      |       | 7.62      |       | 12.83      |       | 7.55 |   | 25.94 |   | 14.59 |   |
| Month ended                        |       |       |       |      |       |       |       |   |   |   |   |   |   |
| December 2008                      |       | 2.98       |       | 2.55      |       | 3.04       |       | 2.57 |   | 6.45 |   | 5.27 |   |
| January 2009                       |       | 2.93       |       | 2.21      |       | 2.91       |       | 2.23 |   | 6.10 |   | 4.56 |   |
| February 2009                      |       | 2.57       |       | 1.99      |       | 2.58       |       | 1.98 |   | 6.00 |   | 4.43 |   |
| March 2009                         |       | 2.58       |       | 1.84      |       | 2.58       |       | 1.84 |   | 5.69 |   | 4.25 |   |
| April 2009                         |       | 3.42       |       | 2.52      |       | 3.43       |       | 2.50 |   | 8.17 |   | 5.20 |   |
| May 2009                           |       | 4.76       |       | 3.13      |       | 4.78       |       | 3.26 |   | 10.40 |   | 7.13 |   |
| June 2009 (through June  12, 2009) |       | 5.81       |       | 4.22      |       | 5.76       |       | 4.21 |   | 11.94 |   | 9.50 |   |

 

**9.B.Plan of distribution**

** **

Notapplicable.

 

**9.C.Markets**

** **

***TradingPractices and Procedures on the Indian Stock Exchanges***

* *

***Stock ExchangeRegulation***

* *

Thestock exchanges in India are regulated by the Securities and Exchange Board ofIndia, or the SEBI, and the Capital Markets Division, Department ofEconomic Affairs, Ministry of Finance, Capital Markets Division, theGovernment of India under the Securities Contracts (Regulation) Act, 1956, asamended, or the SCRA, and the Securities Contracts (Regulation) Rules, 1957, asamended, or the SCRR. The SCRA and theSCRR, together with the rules, bye-laws and regulations of the respective stockexchanges, regulate the recognition of stock exchanges, the qualifications formembership thereof and the manner in which contracts are entered into andenforced between members of such stock exchanges.

 

Themain objective of the SEBI,pursuant to the Securities and Exchange Board of India Act, 1992, as amended,or the SEBI Act, is to promote the development of and regulate the Indiansecurities markets and protect the interests of investors.  The SEBI Act granted the SEBI the powers to regulate the business of the Indiansecurities markets, including stock exchanges and other financialintermediaries, promote and monitor self-regulatory organizations, prohibit fraudulentand unfair trade practices and insider trading, and regulate substantialacquisitions of shares and takeovers of companies. The SEBI has also issued guidelines concerning minimum disclosurerequirements by public companies, rules and regulations concerning investorprotection, buybacks of securities, employee stock option schemes,stockbrokers, merchant bankers, underwriters, mutual funds, foreigninstitutional investors, credit rating agencies and other capital marketparticipants.

 

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TheSCRA has been amended to include derivatives of securities and units or anyother instruments issued by any collective investment scheme to the investorsin such schemes, in the definition of “securities”. Trading in index-linkedfutures, index-linked options, options on individual securities and futures onindividual securities takes place on the Indian Stock Exchanges. SEBI has alsoset up a committee for the review of Indian securities laws, which has proposeda draft Securities Bill. The draft Securities Bill, if enacted in its presentform may result in a substantial revision in the laws relating to securities inIndia.

 

TheCompanies (Amendment) Act of 2000 amended the Indian Companies Act andincorporated significant provisions relating to securities, options insecurities and equity shares with differential rights. Further, the IndianCompanies Act, as amended, has empoweredthe SEBI to administer provisions in so far as they relate to the issueand transfer of securities, non payment of dividends in the case of listedpublic companies and public companies proposing to get their securities listedand to conduct inspection of a company’s records in respect of matters relatingto the issue and transfer of securities. The power to prosecute the defaultingcompanies in compliance connection withthe said matter has also been vested with the SEBI. The Indian Companies Act has been amended to introducesignificant changes such as allowing book building for public offerings ofsecurities, buy back of securities, compulsory dematerialization of shares inan initial public offering of securities for a sum of Rs. 100 million or more, issue of sweatequity shares, provisions relating to corporate governance, making accountingstandards issued by the Institute of Chartered Accountants of India mandatoryand relaxing restrictions on inter-corporate investment and loans.

 

***Public Issue ofSecurities and Listing***

* *

Underthe Indian Companies Act, a public offering of securities in India must be madeby means of a prospectus, which must contain information specified in theIndian Companies Act and the SEBI (Disclosure and Investor Protection)Guidelines, 2000, as amended, or the SEBI Guidelines, and be filed with theRegistrar of Companies having jurisdiction over the place where a company’sregistered office is situated. A company’s directors and promoters are subjectto civil and criminal liability for misstatements in a prospectus. The IndianCompanies Act also sets forth procedures for the acceptance of subscriptionsand the allotment of securities among subscribers and establishes maximumcommission rates for the sale of securities.

 

SEBIhas issued detailed guidelines concerning disclosures by public companies making a public offering ofsecurities and investor protection. Previously, the Controller of CapitalIssues of the Government of India regulated the prices at which companies couldissue securities. The SEBI Guidelines now permit companies to freely pricetheir issues of securities in an initial pubic offering.

 

Thelisting of securities on recognized Indian stock exchanges is regulated by theIndian Companies Act, the SCRA, the SCRR, the SEBI Act and the listingagreements of the respective stock exchanges. Under the standard terms of stockexchange listing agreements, the governing body of each stock exchange isempowered to suspend trading of or dealing in a listed security for breach ofan issuer’s obligations under such agreement, however the exchange must giveprior notice to the issuer of the intension to delist the securities under theSEBI (Delisting of Securities) Guidelines, 2003. The provisions of SEBI(Delisting of Securities) Guidelines, 2003, which govern voluntary andcompulsory delisting of shares of Indian companies from the stock exchanges. The SEBI has the power to amendlisting agreements and bye-laws of stock exchanges in India.

 

Listed Indiancompanies are required to ensure that the minimum level of public shareholding,on a continuous basis, is 25% of the total issued shares of a particular class,for every such class that is listed. However, companies which (i) have offeredless than 25% (but at least 10%) of the total number of issued shares of aparticular class to the public under Rule 19(2)(b) of the SCRR, or (ii) have atleast 20 million shares of a particular class listed and a marketcapitalization of Rs. 10,000million, are permitted to maintain their minimum public shareholding at 10%.Where the public shareholding in a company is less than 25% or 10%, as the casemay be, the company is only permitted to dilute its public shareholdingpursuant to certain extraordinary events with the prior approval of theconcerned stock exchanges. “Public shareholding” excludes shares held bypromoters and the promoter group as well as shares held by custodians againstwhich depository receipts have been issued overseas.

 

Thestandard listing agreements require an acquirer of a listed company’s shares tocomply with the disclosure and tender offer requirements under the SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997, asamended, or the Takeover Code. For a brief discussion on the disclosure and tenderoffer requirements under the Takeover Code, see “Item 10. AdditionalInformation-Takeover Code” below.

 

Inaddition, a listed company is subject to continuing disclosure requirementspursuant to the terms of its listing agreement with the relevant stockexchange, including the requirement to publish unaudited financial statementson a quarterly basis and to inform stock exchanges immediately of any pricesensitive information.

 

Theshareholders of a listed company and the company itself are also subject tocertain disclosure requirements pursuant to the terms of the Securities andExchange Board of India (Prohibition of Insider Trading) Regulations, 1992, asamended. Pursuant to such requirements, any person holding more than 5% equityshares or voting rights in any listed company must disclose to the company thenumber of equity shares or voting rights held by such person, on becoming sucha holder, within two workingdays of (a) the receipt of intimation of allotment of equity shares or (b) theacquisition or sale of equity shares or voting rights. Additionally, any changein such shareholding or voting rights in excess of 2% (even if such changeresults in the shareholding or voting rights falling below 5%) is required tobe disclosed to the company within twoworking days of (a) the receipt of intimation of 

 

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allotmentof equity shares or (b) the acquisition or sale of equity shares or votingrights, as the case may be. The company is also required to disclose suchinformation received from its shareholders within two days of the receipt of such information to the stock exchangeson which the company’s equity shares are listed.

 

***Indian StockExchanges***

* *

Themajor stock exchanges in India are the BSE and the NSE, which together accountfor a majority of trading volumes of securities in India. The BSE and the NSE together dominate the stockexchanges in India in terms of the number of listed companies, marketcapitalization and trading volumes of securities.

 

Beginning April 1, 2003, the stock exchanges inIndia operate on a trading day plus two, or T+2, rolling settlement system. Atthe end of the T+2 period, obligations are settled with buyers of securitiespaying for and receiving securities, while sellers transfer and receive paymentfor securities. For example, trades executed on a Monday would typically besettled on a Wednesday. In order to contain the risk arising out of thetransactions entered into by the members of various stock exchanges either ontheir own account or on behalf of their clients, the stock exchanges havedesigned risk management procedures, which include compulsory prescribedmargins on the individual broker members, based on their outstanding exposurein the market, as well as stock-specific margins from the members.

 

Torestrict abnormal price volatility, SEBI has instructed stock exchanges toapply the following price bands calculated at the previous day’s closing price(there are no restrictions on price movements of index stocks):

 

*Market Wide CircuitBreakers:*Market widecircuit breakers are applied to the market for movement by 10%, 15% and 20% fortwo prescribed market indices, whichever is breached earlier: the BSE Sensexfor the BSE, or the BSE Sensex, and the Nifty for the NSE, or the NSE Nifty. Ifany of these circuit breaker thresholds are reached, trading in all equity andequity derivatives markets nationwide is halted.

 

*Price Bands:***Price bands arecircuit filters of up to 20% movements either up or down, and are applied tomost securities traded in the markets, excluding securities included in the BSESensex and the NSE Nifty and derivatives products.

 

***The NationalStock Exchange of India Limited***

* *

TheNSE was established by financial institutions and banks to provide nationwideon-line satellite linked screen-based trading facilities with market makers andelectronic clearing and settlement for securities, including Government ofIndia securities, debentures, public sector notes and units. Deliveries fortrades executed “on-market” are exchanged through the National SecuritiesClearing Corporation Limited. The NSE commenced operations in the wholesaledebt market and capital markets in 1994 and in derivatives in 2000. As of May 31, 2009, there were , 1,425 listed companies tradingon the capital markets (equities) segment of the NSE. As of May 31, 2009, the marketcapitalization of the NSE was approximately Rs. 45,646 billion.

 

**TheBombay Stock Exchange Limited**

 

TheBSE, established in 1875, is the oldest stock exchange in India and has evolvedover the years into its present status as the premier stock exchange of India.The BSE switched over to an on-line trading network in May 1995 and hasexpanded this network to over 450 cities in India. Derivatives tradingcommenced on the BSE in 2000. Retail trading in government securities commencedin January 2003. As of April 30,, 2009, the BSE had 1,008members, comprising 175 individual members, 810  Indian companies and 23 ForeignInstitutional Investors, or FIIs. Pursuant to the BSE (Corporatization andDemutualization) Scheme 2005 of SEBI, on August 19, 2005 the BSE wasincorporated as a company under the Indian Companies Act. Only a member of theBSE has the right to trade in the stocks listed on the BSE. As of April 30, 2009 there were 4, 930listed companies trading on the BSE with an estimated total marketcapitalization of Rs.35, 869.79 billion.

 

Tradingon both the NSE and the BSE occurs Monday through Friday between 9:55 a.m. and3:30 p.m.

 

***Derivatives(Future and Options***)

* *

Tradingin derivatives is governed by the SCRA and the SEBI Act. The SCRA was amendedin February 2000 and derivative contracts were included within the term “securities”,as defined by the SCRA. Trading in derivatives in India takes place either onseparate and independent derivatives exchanges or a separate segment of anexisting stock exchange. The derivative exchange or a derivative segment of astock exchange functions as a self regulatory organization under thesupervision of the SEBI.Derivatives products have been introduced in a phased manner in India, startingwith futures contracts in June 2000 and index options, stock options and stockfutures in June 2000, July 2001 and November 2001, respectively.

 

***Depositories***

* *

TheDepositories Act, 1996, as amended, orthe Depositories Act, provides the legal framework for the establishmentof depositories to record ownership details and effectuate transfers in book-entryform. SEBI framed the Securities and Exchange Board of India (Depositories andParticipants) Regulations, 1996, asamended, or the 

 

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Depositories and Participants Regulations, which,among other things, provide for the formulation of such depositories and theregulation of participants, as well as the *inter se* rightsand obligations of the depositories, participants, beneficial owners andissuers.

 

TheNational Securities Depository Limited and Central Depository Services (India)Limited are the two depositories that provide electronic depositoriesfacilities for trading in equity and debt securities in India. SEBI mandates acompany making a public or rights issue or an offer for sale to enter into anagreement with a depositary for dematerialization of securities already issuedor proposed to be issued to the public or existing shareholders. SEBI has alsoprovided that the issue and allotment of shares in initial public offerings,rights offerings or offers for sale shall only be in electronic form.

 

***SecuritiesTransaction Tax***

* *

Therates applicable on taxable securities transactions are specified below:

 
| **Taxable Securities Transaction**                                                                                                                                                                                                                                                                                 | ** ** | **Rate** | ** ** | **Payable by** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------------|------------|
| Purchase of an equity share in a company or a unit  of an equity oriented fund, where: (i) the transaction of such purchase is  entered into on a recognized stock exchange; and (ii) the contract for the  purchase of such share or unit is settled by the actual delivery or transfer  of such share or unit    |       | 0.125    | %          | Purchaser      |       |
| Sale of an equity share in a company or a unit of  an equity oriented fund, where: (i) the transaction of such sale is entered  into on a recognized stock exchange; and (ii) the contract for the sale of  such share or unit is settled by the actual delivery or transfer of such  share or unit                |       | 0.125    | %          | Seller         |       |
| Sale of an equity share in a company or a unit of  an equity oriented fund, where; (i) the transaction of such sale is entered  into on a recognized stock exchange; and (ii) the contract for the sale of  such share or unit is settled otherwise than by the actual delivery or  transfer of such share or unit |       | 0.025    | %          | Seller         |       |
| Sale of derivatives where the transaction of such  sale is entered into on a recognized stock exchange                                                                                                                                                                                                             |       | 0.017    | %          | Seller         |       |
| Sale of a unit of an equity oriented fund to the  Mutual Fund                                                                                                                                                                                                                                                      |       | 0.25     | %          | Seller         |       |

 

Theresponsibility for collection of the securities transaction tax lies with thestock exchange where the purchase of securities takes place. The rates wereapplicable with effect from June 1, 2006.

 

FromApril 1, 2008,SecuritiesTransaction Tax has been prescribed for following transactions:

 
| **Taxable Securities Transaction**                                            | ** ** | **Rate** | ** ** | **Payable by** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------------|------------|
| Sale of an option in Securities (payable on Option  premium)                  |       | 0.017    | %          | Seller         |       |
| Sale of option in securities , where option is exercised on  settlement price |       | 0.125    | %          | Purchaser      |       |
| Sale of futures in securities                                                 |       | 0.017    | %          | Seller         |       |

 

**9.D.Selling Shareholders**

** **

**Notapplicable.**

 

**9.E.Dilution**

** **

Notapplicable.

 

**9.F.Expenses of the Issue**

** **

Notapplicable.

 

**ITEM10. ADDITIONAL INFORMATION**

** **

**10.A. Share Capital**

** **

Not applicable.

 

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**10.B.Memorandum and articles of association**

** **

**None**

** **

**General**

** **

The following description of our equity sharesand the material provisions of our Articles of Association, or Articles, isonly a summary and is qualified in its entirety by our Articles and Memorandumand by the provisions of the Indian Companies Act which governs our affairs,and other applicable provisions of Indian law.

 

Our authorized share capital consists of250,000,000 equity shares with a par value of Rs. 2 each. As of June 12, 2009,128,106,757 equity shares were issued and outstanding and fully paid. On August30, 2003 we effected a one for two stock split in the form of a stock dividend.The equity shares are our only class of share capital. We currently have noconvertible debentures or warrants outstanding. Substantially all of our equityshares are in non-physical form.

 

We use the following terms in our Articles:

 

·       NKPGroup means Mr. Narendra K. Patni, certain of his family members, iSolutions Inc.and certain of their named entities and their respective permitted transfereesand the depository bank;

 

·       GKPGroup means Mr. Gajendra K. Patni, certain of his family members and theirrespective permitted transferees and the depository bank;

 

·       AKPGroup means Mr. Ashok K. Patni, certain of his family members and theirrespective permitted transferees and the depository bank;

 

·       GeneralAtlantic means General Atlantic Mauritius Limited, its successors and permittedassigns and General Atlantic Group means General Atlantic and its permittedtransferees and the depositary bank; and

 

·       Forthe purposes of this document, Significant Shareholder means each of thesegroups.

 

**Registration number and theobjects of the Company**

** **

Our companyregistration number is 11-020127 (CIN L72200MH1978PLC020127). Under ourMemorandum of Association, our main objects include, but are not limited to thefollowing:

 

1.                 To manufacture, purchase, sell or otherwisetransfer, lease, import, export, hire, license, use, dispose off, operate,fabricate, construct, distribute, assemble, design, charter, acquire, market,recondition, work upon or otherwise, generally deal in any electronic,electrical, mechanical and electromechanical product, machine, apparatus,appliance, custom products, merchandise, systems, software procedures,peripheral products, computers, tabulators, data processing machines andsystems and components thereof, electronic calculators, electric andelectromechanical accounting systems, terminal products and systems, machinesfor registering data preparation, recording, perforating, tabulating, sorting,printing, typewriting products which possess an internal intelligence for recognizingand co-relating any type of data or information to be processed recognition andmemory systems, optical scanning machine transmission lines, transmissionequipment, terminals, copying, reproducing and distributing machines, checksigning, protecting and disbursing equipment machines for facsimilereproduction, facsimile transmission and word processions facilities andaccessories and devices of all kinds, and for all purposes and any products andcomponent parts thereof or materials or articles used in connection therewith,and any-all other machinery, appliance, apparatus, devices, materials,substances, business firms and supplies, articles or things of a charactersimilar or analogous to the foregoing, or any of them or connected therewith.

 

2.                 To establish, maintain and conduct trainingschools, courses and programmes in connection with the use, purchase, sale,import, export, license, distribution, design, manufacture or rental of theaforesaid types of machines, apparatus, appliances, systems and merchandise andof the articles required in the use thereof or used in connection therewith.

 

3.                 To carry on the business of developing,improving, designing, marketing, selling and licensing software andprogram-products of any and all description.

 

4.                 To carry on the business of electricians,electrical, electronic engineers and manufacturers of and dealers inelectrical, mechanical, chemical, optical and electronic machines, appliancesand apparatus of every description.

 

5.                 To carry on the business of consultants incomputers, computer-oriented systems all branches of computer science, civil,electrical, electronic, mechanical, chemical, optical, metallurgical and allother branches of engineering.

 

6.                 To carry on the business of consultancyservices related to the preparation and maintenance of accounting, statistical,scientific or mathematical, information and reports, data conversion, dataprocessing, programming, collecting, storing, processing and transmittinginformation and data of every kind and description, systems analysis andmachine services for solving or aiding commercial, industrial, scientific andresearch problems and for all other related business.

 

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7.                 To carry on the business of advisers andconsultants and collaborators on all matters and problems relating to theadministration, organization, finance management, personnel, commencement or expansionof industry and business (including construction of plants and buildingsproduction, purchases, sales marketing, advertisement, publicity, personnelexport and import) and of institutions, concerns, bodies, associations(incorporated and unincorporated), departments and services of the government,public or local authorities, trusts, scientific research and developmentcenters.

 

8.                 To supply and provide, maintain and operate,design any engineering consultancy services applicable over the whole range ofindustry, trade, commerce and agriculture.

 

**Board ofDirectors**

** **

*Election*

* *

The Articles ofAssociation provide that our Board of Directors shall be comprised of not lessthan three directors and not more than ten directors. Eight directors on theBoard shall be appointed as follows:

 

·       three permanent directors nominated by each ofthe AKP Group, the GKP Group and the NKP Group so long as the relevant Groupholds 5% or more of the equity shares;

 

·       one rotating director nominated by GeneralAtlantic, so long as General Atlantic holds 5% or more of the equity shares;and

 

·       four non-permanent independent directors whowill be appointed in accordance with our Articles for a term of three years andeligible for re-election by the shareholders at the annual general meeting.

 

Each director nominatedby a Significant Shareholder shall hold office and may only be removed by thatSignificant Shareholder. Except in the event of the removal of a director for abreach of duty, fraud, bankruptcy or unless contrary to law, all theSignificant Shareholders have agreed in the Articles that the independentdirectors shall not be removed except at a general meeting by the votes ofshareholders (present and voting) holding not less than 51% of the equityshares, which includes the votes of at least three Significant Shareholders ina general meeting and except by a majority of the directors, which includes atleast three nominee directors appointed by the Significant Shareholders.

 

General Atlanticis also entitled to nominate one of the members to each committee of the Boardof Directors, including the Audit Committee, the Compensation Committee andsuch other committees, so long as General Atlantic holds 5% or more of theequity shares.

 

*Notice andQuorum*

* *

Under theArticles, subject to Section 287 of the Indian Companies Act, the quorum for ameeting of the Board of Directors shall be the presence of at least fourdirectors which must include at least one nominee director (or his or heralternate) of each of the AKP Group, the GKP Group, the NKP Group, and GeneralAtlantic (unless the absent nominee director consents in writing to a quorumrequirement being satisfied despite his or her absence). Provided that where atany time the number of interested directors exceeds or is equal to two-thirdsof the total strength, the number of remaining directors, that is to say, thenumber of directors who are not interested, present at the meeting being notless than two, shall be the quorum during such time.

 

If a quorum isnot present on the date the board meeting is convened, it shall automaticallystand adjourned to a date 7 days after the original board meeting. Theadjourned board meeting may be held on such other date and such other place asmay be unanimously agreed by a nominee director of each of the AKP Group, theGKP Group, the NKP Group and General Atlantic. In the event of a quorum onceagain not being available at such an adjourned board meeting, the directorspresent shall constitute the quorum.

 

The Articlesrequire that at least 15 clear days notice be provided for any board meetingunless a shorter notice period is agreed by a majority of the directors.

 

Under ourArticles, Mr. Narendra K. Patni shall be the permanent Chairman of the Board.The Chairman shall preside at all board and shareholder meetings. In theabsence of Mr. Narendra K. Patni at any meeting of the board, a GeneralAtlantic nominee shall preside as Chairman. The Chairman has a casting vote incase of a tie. If for any reason Mr. Narendra K. Patni is unable to continue asthe Chairman, the board shall appoint the Chairman.

 

*InterestedDirectors*

* *

Pursuant to Section300 of the Indian Companies Act, interested directors are not allowed to takepart in the discussion of, or vote on, any contract or arrangement entered intoor to be entered into by or on behalf of the Company if the director is in anyway, directly or indirectly, concerned with or interested in the contract orarrangement. In addition, a director is required to disclose, at a meeting of the board, thenature of his concern or interest under Section 299 of the Indian CompaniesAct.

 

Under Section 297of the Indian Companies Act, the consent of the Board of Directors is requiredwhere a director of the company or his relative, a firm in which such adirector or relative is a partner, any other partner in 

 

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such a firm, or aprivate company of which the director is a member or director, is entering intocertain contracts with the company.

 

*QualifyingShares*

* *

Our directors arenot required to hold any of our equity shares to be qualified to serve on theBoard of Directors.

 

*BorrowingPowers*

* *

Our directorsshall not, except with the consent of the shareholders in a general meeting,borrow moneys, where the moneys to be borrowed together with the moneys alreadyborrowed by the company (apart from temporary loans obtained from the company’sbankers in the ordinary course of business) will exceed the aggregate of ourpaid up capital and the aggregate of all free reserves.

 

*DirectorCompensation*

* *

The Board ofDirectors is entitled to set its remuneration subject to maximum limitsprescribed by Indian law and our Articles. If the number of interesteddirectors exceeds the quorum requirement for board meetings, then theresolution to be passed would be subject to the approval of the shareholders ata general meeting. Normally any resolution of the board regarding an increasein director’s fees is subject to shareholder approval in a general meeting.

 

*Rotationand Retirement*

* *

There is no agelimit for retirement of our directors. Our Articles require two-thirds of ourdirectors to retire by rotation, but they are eligible for re-election.One-third of the directors who are subject to retirement by rotation mustretire at each annual general meeting but can be re -appointed at such annualgeneral meeting. Mr. Narendra K. Patni, Mr. Gajendra K. Patni and Mr. Ashok K.Patni as the respective nominees of the NKP Group, GKP Group and AKP Group arepermanent directors according to our Articles and in that capacity they are not required to retire by rotationlike our other directors.

 

***Dividends***

** **

Under the Indian Companies Act, the Board ofDirectors first recommends the payment of a dividend which is then declared byshareholders in a general meeting. However, the Board of Directors is notobliged to recommend a dividend. Under our Articles and the Indian CompaniesAct, our shareholders may, at the annual general meeting, declare a dividend inan amount less than that recommended by the Board of Directors, but they cannotincrease the amount of the dividendrecommend by the Board of Directors.

 

In India, dividends generally are declared as apercentage of the par value of the company’s equity shares. The dividendrecommended by the directors, if any, and subject to the limitations describedabove, is required to be distributed and paid to shareholders in proportion tothe paid up value of their shares as on the record date that such dividend ispayable within 30 days of the approval by the shareholders at the annualgeneral meeting. Pursuant to the Articles, the directors have discretion todeclare and pay interim dividends without shareholder approval. Under the IndianCompanies Act, dividends can only be paid in cash to the registered shareholderat a record date fixed on or prior to the annual general meeting or to hisorder or his banker’s order. No shareholder is entitled to a dividend while anylien in respect of unpaid calls on any of such shareholder’s shares isoutstanding.

 

The Indian Companies Act provides that anydividends that remain unpaid or unclaimed after the 30-day period referred toabove must be transferred to a special bank account. We transfer any dividendsthat remain unclaimed for seven years from the date of such transfer to anInvestor Education and Protection Fund created by the Indian Government. Theproceeds of such funds are utilized to promote investor’s awareness andprotection of investors’ interests. Following such transfer, such unclaimeddividends cannot be claimed. Neither we nor such fund shall be liable inrespect of amounts transferred to such fund.

 

Under the Indian Companies Act, dividends may bepaid out of profits of a company in the year in which the dividend is declaredor out of the undistributed profits of the previous fiscal years, in eithercase after providing for depreciation. Before declaring a dividend on itsshares, a company is required under the Indian Companies Act to transfer to itsreserves, a certain percentage of its profits for that year, ranging from 2.5%to 10% depending upon the dividend percentage to be declared in such year. TheCompanies (Declaration of Dividend out of Reserves) Rules, 1975 provide that,in the event of inadequacy or absence of profits in any year, a dividend may bedeclared for such year out of the company’s accumulated profits, subject to thefollowing conditions:

 

·       therate of dividend to be declared may not exceed 10% of the company’s paid upcapital or the average of the rate at which dividends were declared by thecompany in the prior five years, whichever is less;

 

·       thetotal amount to be drawn from the accumulated profits earned in the previousyears and transferred to the reserves may not exceed an amount equivalent toone-tenth of the sum of its paid up share capital and free reserves, and theamount so drawn is to be used first to set off the losses incurred in thefiscal year before any dividends in respect of preference or equity shares aredeclared; and

 

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·       thebalance of the reserves after withdrawal shall not fall below 15% of its paidup capital.

 

**Bonus Shares**

** **

In addition to permitting dividends to be paidout of current or retained earnings as described above, the Indian CompaniesAct and our Articles permit us to distribute an amount transferred from thegeneral reserve or surplus in our profit and loss account to shareholders inthe form of bonus shares, which are similar to a stock dividend. The IndianCompanies Act also permits the issue of bonus shares from a securities premiumaccount. Bonus shares are distributed to shareholders in the proportionrecommended by the Board of Directors. Shareholders of record on a fixed recorddate are entitled to receive such bonus shares. Any issue of bonus shares issubject to guidelines issued by the SEBI.

 

The SEBI Guidelines prescribe that no companyshall, pending conversion of convertible securities, issue any shares by way ofbonus unless a similar benefit is extended to the holders of such convertiblesecurities, through reservation of shares in proportion to the convertible partof such convertible securities. The bonus issue shall be made out of freereserves built out of the genuine profits or share premium collected in cashonly. The bonus issue cannot be made unless partly paid-up shares, if any, aremade fully paid-up. Further, for the issue of such bonus shares a companyshould not have defaulted in the payment of interest or principal in respect offixed deposits and interest on existing debentures or principal on redemptionof such debentures. Further, a company should have sufficient reason to believethat it has no outstanding dues in respect of the payment of statutory dues ofthe employees such as contribution to a provident fund, gratuity and bonus. Theissue of bonus shares must be implemented within two months from the dateof approval by the Board of Directors where the decision to issue bonus shareswas taken subject to shareholders’ approval. Where approval of the shareholdersfor capitalization of profits or reserves for making bonus issues is notrequired as per the Articles of Association, the bonus issue must beimplemented within 15 days from the date of approval by the Board ofDirectors.

 

**Consolidation and Subdivision of Shares**

** **

The Indian Companies Act and our Articles permitus to split or combine the par value of our shares, provided such split orcombination is not made in fractions. Shareholders of record on a fixed recorddate are entitled to receive a split or combination.

 

**Pre-emptive Rights and Issue of AdditionalShares**

** **

The Indian Companies Act and our Articles giveshareholders the pre-emptive right to subscribe for new shares in proportion totheir respective existing shareholdings unless otherwise determined by aspecial resolution passed by a general meeting of the shareholders. Thisspecial resolution must be approved by a number of votes which is not less thanthree times the number of votes against the special resolution. The offer mustinclude: (a) the right, exercisable by the shareholders of record, to renounceall the shares offered or any of them in favor of any person; and (b) thenumber of shares offered and the period of the offer, which may not be lessthan 15 days from the date of offer. If the offer is not accepted within thisperiod, it is deemed to have been declined. The Board of Directors isauthorized to distribute any new shares not purchased by the pre-emptive rightsholders in the manner that it deems most beneficial to the company.

 

**Annual General Meeting of Shareholders**

** **

We must convene an annual general meeting ofshareholders within 15 months of the previous annual general meeting or sixmonths after the end of each fiscal year, whichever is earlier, and may convenean extraordinary general meeting of shareholders when necessary or at therequest of a shareholder or shareholders holding at least 10% of our paid upcapital carrying voting rights. Written notice setting out the agenda ofmeeting must be given at least 21 clear days prior to the date of a general meeting to the shareholdersof record. A general meeting may be called after providing a shorter notice ifconsent is received from all shareholders entitled to vote, in the case of anannual general meeting, and from shareholders holding not less than 95% of thepaid-up capital of the company in case of any other general meeting.Shareholders who are registered as such on the date of the general meeting areentitled to attend and vote at the meeting.

 

The annual general meeting of shareholders mustbe held at our registered office or at another place within the city in whichour registered office is situated. Meetings other than annual general meetingsmay be held at any other place if so determined by the Board of Directors.

 

**Quorum**

** **

Our Articles provide that a quorum of a generalmeeting is at least five members present in person who shall include at leastone of the duly authorized representatives of General Atlantic, the NKP Group,the GKP Group and the AKP Group. If a quorum is not present on the date thegeneral meeting is convened, it shall be adjourned to a date 15 days after theoriginal meeting and theshareholders who are present at the adjourned meeting shall constitute thequorum.

 

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**Voting Rights**

** **

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

 

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

 

Ordinary resolutions may be passed by a simplemajority of those present and voting at any general meeting for which therequired period of notice has been given. However, specified resolutions suchas amendments to the Articles and the Memorandum, commencement of a new line ofbusiness, the waiver of the pre-emptive rights for the issue of any new sharesand a reduction of share capital, require that votes cast in favor of theresolution, whether by show of hands or poll, are not less than three times thenumber of votes, if any, cast against the resolution by members so entitled andvoting.

 

Further, the Indian Companies Act requirescertain resolutions such as those listed below to be voted on only by a postalballot:

 

·       amendmentsof the memorandum of association to alter the objects of the company;

 

·     and change in the registered office of thecompany under Section 146 of the Indian Companies Act;

 

·       alterationof the articles of association in relation to deletion or insertion ofprovisions defining private company;

 

·       theissue of shares with differential rights with respect to voting, dividend orotherwise;

 

·       thesale of the whole or substantially the whole of an undertaking of the company;

 

·       providingloans, extending guarantees or providing a security in excess of the limitsprescribed under Section 372A of the Indian Companies Act;

 

·       varyingthe rights of the holders of any class of shares or debentures or othersecurities;

 

·       powerto compromise or make arrangement with creditors and members

 

·       theelection of a director by minority shareholders; and

 

·       thebuy-back of shares.

 

While the Indian Companies Act permits a companyto issue shares with differential rights as to dividend, voting or otherwise,it may do so subject to certain conditions specified under the Companies (Issueof Share Capital with Differential Voting Rights) Rules, 2001, some of whichare:

 

·       thecompany should have distributable profits (in terms of Section 205 of theIndian Companies Act) for a period of three financial years immediatelypreceding the year in which it was decided to issue such shares;

 

·       theshares with differential voting rights shall not be in excess of 25% of thetotal issued share capital; and

 

·       thevoting rights of existing shares cannot be altered.

 

Our Articles permit the issue of shares withdifferential voting rights.

 

Our Articles require that certain shareholdersensure that they do not vote for any resolution to vary or modify the terms ofappointment of Mr. Ashok K. Patni and Mr. Gajendra K. Patni. The shareholdersreferred to in this provision are limited to General Atlantic, the AKP Group,the GKP Group and the NKP Group and any of their permitted transferees,permitted assigns or affiliates (as such terms are defined in the Articles).

 

**Register of Shareholders; Record Dates**

** **

We are required to maintain a register ofshareholders at our registered office. The register and index of beneficialowners maintained by a depository under the Depositories Act, 1996 is deemed tobe an index of members and register and index of debenture holders. Werecognize as shareholders only those persons who appear on our register ofshareholders and do not recognize any person holding any share or part of itupon any trust, express, implied or constructive, except as permitted by law.In the case of shares held in physical form, we register transfer of shares onthe register of shareholders upon receiving the share transfer form dulycomplete in all respects accompanied by a share certificate or if there is nocertificate, the letter of allotment in respect of shares to be transferredtogether with duly stamped transfer forms. In respect of electronic transfers,the depositary transfers shares by entering the name of the purchaser in itsbooks as the beneficial owner of the shares. We then enter the name of thedepositary in our records as the registered owner of the shares. The beneficialowner is entitled to all the rights and benefits as well as the liabilitieswith respect to the shares that are held by the depositary.

 

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For the purposes of determining theshareholders, the register may be closed for periods not exceeding 45 days inany one year or 30 days at any one time. Under the listing agreements of theIndian Stock Exchanges, we may, upon at least 15 days’ advance notice to suchstock exchanges, set a record date and/or close the register of shareholders.

 

**Transfer of Shares**

** **

Shares held through depositories are transferredin the form of book entries or in electronic form in accordance with theSecurities and Exchange Board of India (Depositories and Participants)Regulations, 1996. These regulations provide the regime for the functioning ofthe depositories and the participants and set forth the manner in which therecords are to be kept and maintained and the safeguards to be followed in thissystem. Transfers of beneficial ownerships of shares held through a depositaryare exempt from stamp duty. We have entered into an agreement for suchdepositary services with National Securities Depository Limited and the CentralDepository Services (India) Limited.

 

The shares of an Indian public company arefreely transferable, subject to the provisions of the Indian Companies Actpursuant to which if a transfer of shares contravenes the SEBI Act, orregulations made thereunder, or the Sick Industrial Companies (SpecialProvisions) Act, 1985 or any other similar law, the Company Law Board (which isexpected to be replaced by the National Company Law Tribunal) may, on anapplication made by the company, a depositary, a participant, an investor orSEBI, direct a rectification of the register of records. If a company withoutsufficient cause refuses to register a transfer of shares within two monthsfrom the date on which the instrument of transfer is delivered to the company,the transferee may appeal to the Company Law Board seeking to register thetransfer of shares.

 

Pursuant to listing agreements with the IndianStock Exchanges, in the event a company has not effected the transfer of shareswithin one month or where the company has failed to communicate to thetransferee any valid objection to the transfer within the stipulated timeperiod of one month, the company is required to compensate the aggrieved partyfor the opportunity losses caused during the period of delay.

 

Our Articles provide for certain restrictions onthe transfer of shares, including granting power to the Board of Directors torefuse to register or acknowledge transfer of shares or other securities issuedby the Company. However, to theextent that the provisions of the Articles are in conflict with any of theprovisions of the Indian Companies Act, the Indian Companies Act shall prevail.

** **

**Disclosure of Ownership Interest**

** **

Section 187C of the Indian Companies Actrequires beneficial owners of shares of Indian companies who are not holders ofrecord to declare to the company details of the holder of record and the holderof record to declare details of the beneficial owner. Any charge, promissorynote or other collateral agreement created, executed or entered into withrespect to any equity share by its registered owner or any hypothecation by theregistered owner of any equity share shall not be enforceable by the beneficialowner or any person claiming through the beneficial owner if such declarationis not made. Failure by a person to comply with Section 187C will not affectthe company’s obligation to register a transfer of shares or to pay any dividendsto the registered holder of any shares in respect of which the declaration hasnot been made. While it is unclear under Indian law whether Section 187Capplies to holders of ADSs, investors who exchange ADSs for underlying equityshares will be subject to the requirements of Section 187C. Additionally,holders of ADSs may be required to comply with the notification and disclosureobligations pursuant to the provisions of the deposit agreement entered into bysuch holders, the company and the depositary.

 

Any investor who fails to comply with therequirement to make a declaration under Section 187C may be liable for a fineup to Rs. 1,000 for each day such failure continues. Additionally, if we failto comply with the provisions of Section 187C, then we may be liable for a fineof up to Rs. 100 for each day the default continues.

 

**Audit and Annual Report**

** **

A public limited company’s audited financialstatements, the directors’ report and the auditors’ report must be approved atthe annual general meeting. These documents also include certain otherfinancial information, a report on corporate governance and a section onmanagement’s discussion and analysis. These documents need to be made availablefor inspection at the company’s registered office during normal working hoursfor 21 days prior to the annual general meeting.

 

Under the Indian Companies Act, a company mustfile the above documents with the Registrar of Companies within 30 days afterthe date of the annual general meeting. Under the listing agreement, copies ofthe statutory and director’s annual reports, balance sheets and profit and lossaccounts and other special reports are required to be sent to the stockexchanges as soon as they are issued. A company is also required to file withthe stock exchanges a compliance report on a quarterly basis, within 15 daysfrom the end of the quarter incorporating, *inter alia*,the shareholding pattern. The listing agreement also requires companies tofurnish to the stock exchange unaudited quarterly and semi-annual financialresults of operations and publish such information in at least one Englishlanguage newspaper.

 

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**Liquidation Rights**

** **

Subject to the rights of creditors, employeesand the holders of any shares entitled by their terms to preferential repaymentover the equity shares, if any, in the event of our winding-up, the holders ofthe equity shares are entitled to be repaid the amount of paid up capital orcredited as paid up on those equity shares. All surplus assets after paymentsto the employees, statutory creditors, secured and unsecured creditors andholders of any preference shares shall be paid to holders of equity shares inproportion to the amount paid up on such shares at the commencement of thewinding-up.

 

**Buy-back**

** **

Pursuant to Section 77A of the Indian CompaniesAct and the SEBI (Buy Back ofSecurities) Regulations, 1998, as amended, a listed company may buy its equityshares out of its free reserves or securities premium account or the proceedsof any fresh issue of equityshares or other specified securities if so authorized by the articles ofassociation. No buy-back of any kind of shares or other specified securitiescan be made out of the proceeds of an earlier issue of the same kind ofsecurities. If such buy-back constitutes more than 10% of the total paid-upequity capital and free reserves of the company, it shall require the approvalof at least 75% of the shareholders present and voting at a general meeting ofshareholders of such company. A board resolution will constitute sufficientcorporate authorization for a buy-back within the above limit. A company maybuy-back up to 25% of its paid-up equity capital and free reserves providedthat the buy-back of equity shares in any financial year shall not exceed 25%of the paid-up equity capital of a company in that financial year.

 

A company is not permitted to make any furtherissue (including a rights issue) of the same kind of shares or other specifiedsecurities within a period of six months of such buy-back, except by way of abonus issue or in discharge of its existing obligations such as conversion ofwarrants, stock option schemes, sweat equity or conversion of preference sharesor debentures into equity.

 

The buy-back may be (a) from the existingsecurity holders on a proportionate basis through a tender offer; (b) from theopen market through (i) a book-building process or (ii) the stock exchange; (c)from odd-lot holders or (d) by purchasing the securities issued to theemployees pursuant to a stock option plan or similar scheme. Buy-backs throughnegotiated deals, whether on a stock exchange or through spot transactions orthrough any other private arrangements, are not permitted.

 

Any ADS holder may participate in a company’spurchase of its own shares by withdrawing its ADSs from the depositaryfacility, acquiring equity shares upon the withdrawal and selling such sharesback to the company. We cannot guarantee that equity shares offered by an ADSinvestor in any buy-back of shares by us will be accepted by us. The regulatoryapprovals required for ADS holders to participate in a buy-back are notentirely clear, and ADS investors are advised to consult their legal advisorsprior to participating in any buy-back of shares by us, including advicerelated to any related regulatory approvals and tax issues.

 

**Alteration of Shareholder Rights**

** **

Under the Indian Companies Act, and subject to theprovisions of the articles of association of a company and the relevant rules asissued by the Department of Company Affairs, the rights of any class ofshareholders can be altered or varied (i) with the consent in writing of theholders of not less than three-fourths of the issued shares of that class; or (ii)by the special resolution passed at a separate meeting of the holders of theissued shares of that class. In the absence of any such provision in thearticles, such alteration or variation is permitted as long as it is notprohibited by the agreement governing the issue of the shares of that class.Under the Indian Companies Act, the articles may be amended by a specialresolution of the shareholders.

 

Our Articles can be amended if shareholders holdingnot less than 75% of the equity shares (who are entitled to vote) cast votes infavor of each such amendment of the Articles and which shall include thefavorable votes of each of the AKP Group, the GKP Group, the NKP Group andGeneral Atlantic, so long as each of the respective groups hold at least 10% ofthe equity shares and vote on each amendment(s).

 

**Limitation on the Rights to Own Securities**

** **

The limitation on the rights to own securitiesof Indian companies, including the rights of non-resident or foreignshareholders to hold securities, are discussed below in “Item 10.D. AdditionalInformation—Exchange Controls”.

 

**TakeoverCode**

** **

The SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997, asamended, or the Takeover Code, prescribes certain thresholds of securitiesownership or trigger points that give rise to certain obligations thereunder.The Takeover Code requires disclosure of the aggregate shareholding or votingrights in a listed company by any acquirer who acquires shares or voting rightswhich (taken together with shares or voting rights, if any, already held bysuch acquirer) entitle him to more than 5%, 10%, 14%, 54% or 74% of the sharesor voting rights in that company.

 

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The SEBI has recently amended the Takeover Code to make it mandatory forthe promoters and promoter group of listed companies to disclose the creationand enforcement of a pledge on the equity shares held by such persons.

 

The Takeover Codealso requires (unless specifically exempted) the making of an open offer toacquire an additional 20% of the voting capital of a company in the followingcircumstances:

 

(a)          any acquirer, who together with persons acting in concert with suchacquirer, acquires or agrees to acquire 15% or more of the equity shares orvoting rights in the company;

 

(b)         any acquirer who, together with persons acting in concert with suchacquirer, has acquired 15% or more, but less than 55%, of the equity shares orvoting rights in the shares of the company and who acquires additional sharesor voting rights entitling such acquirer to exercise more than 5% of the votingrights in any financial year ending March 31;

 

(c)          any acquirer who, together with persons acting in concert with suchacquirer, has acquired 55% or more, but less than 75%, of the shares or votingrights in the shares of the company (or, where the company concerned hadobtained the initial listing of its shares by making an offer of at least 10%of the issue size to the public pursuant to Rule 19(2)(b) of the SCRR, lessthan 90% of the shares or voting rights in the company) and who acquires anyadditional shares entitling him toexercise voting rights; provided that an acquirer together with persons actingin concert may acquire additional shares or voting rights entitling him to upto 5% voting rights in a company without making a public announcement if (i) theacquisition is made through open market purchase on the stock exchanges and (ii)the post acquisition shareholding of the acquirer and persons acting in concertdoes not exceed 75%.

 

(d)         any acquirer who, together with persons acting in concert with suchacquirer, holds 55% or more, but less than 75%, of the shares or voting rightsof the company (or, where the company concerned had obtained the initiallisting of its shares by making an offer of at least 10% of the issue size tothe public pursuant to Rule 19(2)(b) of the SCRR, less than 90% of the sharesor voting rights in the company), intends to consolidate its holdings whileensuring that the public shareholding in the target company does not fall belowthe minimum level permitted by the listing agreement with the stock exchanges;or

 

(e)          any acquirer who acquires control over the company (directly orindirectly), irrespective of whether there has been any acquisition of sharesor voting rights in the company.

 

However, inthe event a public offer is made pursuant to paragraph (d) above, the minimumsize of the public offer to acquire the voting capital of the target company isrequired to be the lesser of (i) 20% of the voting capital of the company; or (ii)such other lesser percentage of the voting capital of the company as would,assuming full subscription of the offer, enable the acquirer, together withpersons acting in concert with him, to increase his holding to the maximumlevel possible, which is consistent with the target company meeting therequirements of minimum public shareholding as set forth in the listingagreement.

 

Further, if theacquisition of voting capital of a target company made by an acquirer pursuantto a public offer results in the public shareholding in the target companybeing reduced below the minimum level required in the listing agreements withthe stock exchanges for the purpose of continuous listing, the acquirer isrequired to take necessary steps to facilitate compliance of the target companywith the relevant provisions of the listing agreement within the time periodmentioned in the listing agreements.

 

The Takeover Codesets out the contents of the required public announcements as well as theminimum offer price. The minimum offer price depends on whether the shares ofthe company are “frequently” or “infrequently” traded (as defined in theTakeover Code). In case the shares of the company are frequently traded, theoffer price shall be the higher of:

 

·                  the negotiated price under the agreement for the acquisition of sharesin the company;

 

·                  the highest price paid by the acquirer or persons acting in concertwith him for any acquisitions, including through an allotment in a public,preferential or rights issue, during the 26-week period prior to the date ofpublic announcement; and

 

·                  the average of the weekly high and low of theclosing prices of the shares of the company quoted on the stock exchange wherethe shares of the company are most frequently traded during the 26-week periodprior to the date of public announcement, or the average of the daily high andlow of the prices of the shares as quoted on the stock exchange where theshares of the company are most frequently traded during the two weeks precedingthe date of public announcement, whichever is higher.

 

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Specificobligations of the acquirer and the Board of Directors of the target company inthe offer process have also been specified. Acquirers making a public offeralso must deposit in an escrow account a percentage of the total considerationpayable under the public offer, which will be forfeited in the event that theacquirer does not fulfill its obligations.

 

The TakeoverCode, subject to certain conditions specified in the Takeover Code, exemptscertain specified acquisitions from the requirement of making a public offer,including, among others, the acquisition of shares (1) by allotment in a publicissue or a rights issue; (2) by underwriters pursuant to an underwritingagreement; (3) by registered stockbrokers in the ordinary course of business onbehalf of clients; (4) in unlisted companies; (5) pursuant to a scheme ofreconstruction or amalgamation; (6) pursuant to a scheme under Section 18 ofthe Sick Industries Companies (Special Provisions) Act, 1985; (7) resultingfrom, inter se transfers between companies belonging to the same group ofcompanies as defined in the Monopolies and Restrictive Trade Practices Act,1969, as amended or between relatives or between “qualifying promoters” of apublicly listed company or between qualifying Indian promoters and foreigncollaborators who are shareholders; (8) by way of transmission throughinheritance or succession; (9) resulting from transfers by Indian venture capitalfunds or foreign venture capital investors registered with SEBI, to promotersof a venture capital undertaking or venture capital undertaking pursuant to anagreement between such venture capital funds or foreign venture capitalinvestors with such promoters or venture capital undertaking; (10) by theGovernment controlled companies, unless such acquisition is made pursuant to adisinvestment process undertaken by the Government or a state government; (11)change in control by takeover/restoration of the management of the borrowercompany by the secured creditor in terms of the Securitisation andReconstruction of Financial Assets and Enforcement of Security Interest Act,2002; (12) acquisition of shares by a person in exchange of equity shares receivedunder a public offer made under the Takeover Code; and (13) in terms ofguidelines and regulations relating to delisting of securities as specified bySEBI. The Takeover Code does not apply to acquisitions in the ordinary courseof business by public financial institutions either on their own account or asa pledgee. An application may also be filed with the takeover panel seekingexception from the open offer requirements of the Takeover Code. Pursuant to a recent amendment, a listedcompany can apply to the SEBI to waive requirements under the Takeover Code inrelation to an acquisition of a listed company in circumstances where the boardof the listed company has been taken over by the Government of India and thereis a plan for a transparent and competitive process for the operations of thelisted company.

 

In addition, the provisions of the Takeover Coderelating to making of a public offer do not apply to the acquisition ofAmerican Depository Receipts or Global Depository Receipts so long as they arenot converted into equity shares carrying voting rights.

 

**Provisions on Changes in Capital**

** **

Our authorized capital can be altered by anordinary resolution of the shareholders in a general meeting. The additionalissue of equity shares is subject to the pre-emptive rights of theshareholders. In addition, a company may increase its share capital,consolidate its share capital into shares of larger face value than itsexisting shares or sub-divided its shares by reducing their par value, subjectto an ordinary resolution of the shareholders in a general meeting.

 

**Discriminatory Provisions in the Articles**

** **

Other than as stated herein, there are noprovisions in our Articles discriminating against any existing or prospectiveshareholder as a result of such shareholder owning a substantial number ofshares.

 

**10.C.Material Contracts**

** **

Other than described elsewhere in the documentherein, we have not entered into any material contracts in the two yearspreceding the date of this Annual Report, other than contracts entered into inthe ordinary course of business.

 

**10.D.Exchange Controls**

** **

The subscription,purchase and sale of shares of an Indian company are governed by various Indianlaws restricting the issuance of shares by the company to non-residents orsubsequent transfer of shares by or to non-residents. These restrictions havebeen relaxed in recent years. Set forth below is a summary of various forms ofinvestment, and the restrictions applicable to each, including the requirementsunder Indian law applicable to the issue of ADSs.

 

**ForeignDirect Investment**

** **

*Issues bythe Company*

* *

Over a period oftime, the Government of India has relaxed the restrictions on foreigninvestment. Subject to certain conditions, under current regulations, foreigndirect investment in most industry sectors does not require prior approval ofthe Foreign Investment Promotion Board or the Reserve Bank of India, if thepercentage of equity

 

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holding by allforeign investors does not exceed specified industry-specific thresholds. Theseconditions include certain minimum pricing requirements and ownershiprestrictions based on the nature of the foreign investor. Purchases by foreigninvestors of ADSs are treated as direct foreign investment in the equity issuedby Indian companies for such offerings. Foreign investment of up to 100% of ourshare capital is currently permitted in the IT industry.

 

*SubsequentTransfers*

* *

Restrictions forsubsequent transfers of shares of Indian companies between residents andnon-residents were relaxed significantly as of October 2004. The RBI hasgranted general permission to persons resident outside India to transfer sharesand convertible debentures held by them to an Indian resident, subject tocompliance with certain terms and conditions and reporting requirements. As aresult, for a transfer between a resident and a non-resident of securities ofan Indian company in the IT sector, such as ours, no prior approval of eitherthe RBI or the Government of India is required, as long as certain conditionsare met. These conditions include compliance, as applicable, with pricingguidelines, the Takeover Code, and the ownership restrictions based on thenature of the foreign investor. If a sale or purchase is conducted on a stockexchange at prevailing market prices, the pricing guidelines will be deemedsatisfied. For off-market, negotiated transactions, the guidelines require atransaction price based on the prevailing market price.

 

Transfers betweentwo non-residents by way of sale or gifts are not subject to RBI approvals orpricing restrictions.

 

**PortfolioInvestment by Non-Resident Indians**

** **

Investments bypersons of Indian nationality or origin residing outside of India, or NonResident Indians (NRIs), or registered Foreign Institutional Investors, orFIIs, made through a stock exchange are known as portfolio investments, orPortfolio Investments.

 

NRIs are permittedto make Portfolio Investments on favorable tax and other terms under India’sPortfolio Investment Scheme. Under the scheme, an NRI can purchase up to 5% ofthe paid up share capital of an Indian company, subject to the condition thatthe aggregate paid up share capital purchased by all NRIs through PortfolioInvestments does not exceed 10% of the paid up capital of the company. Thislimit may be increased up to 24% by passing a special resolution of itsmembers. We have not obtained shareholder approval for our equity shares to beowned by the NRIs beyond the aforesaid 10% limit. In addition to PortfolioInvestments in Indian companies, NRIs may also make foreign direct investmentsin Indian companies pursuant to the foreign direct investment route discussedabove.

 

Overseascorporate bodies, or OCBs, i.e., entities in which at least 60% is owned byNRIs, were previously permitted to invest on favorable terms under thePortfolio Investment Scheme. With effect from September 16, 2003, OCBs that have availed benefits are nolonger recognized by the RBI as an eligible class of investors in India.  Accordingly, such OCBs will not be eligible to subscribe for ADSs.

 

**Investmentby Foreign Institutional Investors**

** **

Currently, FIIssuch as pension funds, investment trusts, insurance or reinsurance companies,international or multilateral organizations and asset management companies, areeligible to make Portfolio Investments on favorable terms in all the securitiestraded on the primary and secondary markets in India. Investment by FIIs incertain sectors is prohibited.

 

The Securitiesand Exchange Board of India (Foreign Institutional Investors) Regulations, 1995provide that no single FII may hold more than 10% of a company’s total issuedcapital in its own name, and where an FII is investing on behalf of asub-account, the investment on behalf of such sub-account is not permitted toexceed 10% of the total issued capital of the Company.

 

The total holding in an Indian company of allFIIs together with their sub-accounts is subject to a cap of 24% of the totalissued capital of the company, which may be increased up to the percentage ofsectoral cap on FDI in respect of the said company pursuant to a resolution ofthe Board of Directors of the company and the approval of the shareholders ofthe company by a special resolution. For arriving at the ceiling on holdings ofFIIs, investments made by FIIs through ADRs are not included. We have not obtained shareholder approval forour equity shares to be owned by FIIs beyond the aforesaid 24% limit.

 

There isuncertainty under Indian law about the tax regime applicable to FIIs that holdand trade ADSs. FIIs are urged to consult with their Indian legal and taxadvisers about the relationship between the FII guidelines and the ADSs and anyequity shares withdrawn upon surrender of the ADSs.

 

**ADSs**

** **

*Issue ofADSs*

* *

Subject to thefulfillment of certain conditions, including compliance with the Issue ofForeign Currency Convertible Bonds and Ordinary Shares (Through DepositoryReceipt Mechanism) Scheme, 1993, or the 1993 

 

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Regulations, asamended from time to time, Indian companies issuing ADSs are not required toobtain the prior approval of the Ministry of Finance or the Reserve Bank ofIndia (RBI), except in certaincases. An Indian company issuing ADSs must comply with certain reportingrequirements specified by the RBI.

 

The Governmentof India has amended the 1993Regulations to provide a pricing floor for Global Depositary Receipt (whichincludes ADSs) and Foreign Currency Convertible Bond issues. Under the revisedregulations, the offer price of the GDSs/ADSs cannot be less than the averageof the weekly high and low of the closing prices of the shares as quoted on theBSE or the NSE during the two weeks immediately preceding the date of the meeting of the board of directors (ora duly authorized committee of the board) that decides to open the proposedissue.

 

*Fungibilityof ADSs*

 

Asper the directions issued by the RBI on the two-way fungibility of ADSs, aperson resident outside India is permitted to purchase, through a registeredstock broker in India, shares of an Indian company for the purposes ofconverting the same into ADSs, subject, *inter alia*, tothe following conditions:

 

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

·                  the shares ofthe Indian company are purchased on a recognized stock exchange with thepermission of the domestic custodian for the ADSs issued by the Indian companyand such shares are deposited with the custodian after purchase;

·                  the Indiancompany has authorized the custodian to accept shares from non-resident investorsfor reissuance of ADSs;

·                  the number ofshares of the Indian company so purchased does not exceed the ADSs convertedinto underlying shares and shall be subject to sectoral caps, as applicable;and

·                  compliance withthe provisions of the 1993 Regulations.

 

*SponsoredADS Facilities*

 

By notification dated November23, 2002, the RBI has permitted existing shareholders of Indian companies tosell their shares through the issue of ADSs against the block of existingshares of an Indian company, subject to the following conditions:

 

·                  the facility tosell the shares will be available *pari passu*to all categories of shareholders;

·                  the sponsoringcompany whose shareholders propose to divest existing shares in the overseasmarket through the issue of ADSs will give an option to all its shareholdersindicating the number of shares to be divested and the mechanism of determiningthe price under the applicable ADS norms. If the shares offered for divestmentare more than the pre-specified number to be divested, shares would be acceptedfrom the existing shareholders in proportion to their existing shareholdings;

·                  the proposal fordivestment of the shares will have to be approved by a special resolution ofthe shareholders of the Indian company in a general meeting;

·                  the proceeds ofthe ADS issue raised abroad shall be repatriated to India within a period ofone month from the closing of the issue. However, the proceeds of the ADSoffering can also be retained abroad to meet the future foreign exchangerequirements of the company; and

·                  theissue-related expenses in relation to the public issue of ADSs under this schemewill be subject to a ceiling for public issues and private placements of GDSs/ADSs. Issue-related expenses will include underwriting commissions and charges,legal expenses and reimbursable expenses. Issue-related expenses shall bepassed on to shareholders participating in the sponsored issue on a pro-ratabasis. Issue-related expenses beyond the ceiling will require the approval ofthe RBI.

 

The issuer isalso required to furnish a report to the RBI specifying the details of theoffering, including the amount raised through the offering, the number of ADSsissued, the underlying shares offered, the percentage of foreign equity in theissuer represented by the ADSs, details of issue parameters and details ofrepatriation within 30 days of such issue.

 

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*Transfer ofADSs and Surrender of ADSs*

* *

***A person resident outside India may transfer the ADSs heldin Indian companies to another person resident outside India without priorapproval of Government of India or the RBI. Other than mutual funds that maypurchase ADSs subject to terms and conditions specified by the RBI, a personresident in India is not permitted to hold ADSs of an Indian company, except inconnection with the exercise of stock options. An ADS holder is permitted tosurrender the ADSs held by him in an Indian company and to receive theunderlying equity shares under the terms of the deposit agreement.***

*** ***

**10.E.Taxation**

** **

**IndianTaxation**

** **

*General*

* *

The followingsummary is not intended to constitute a complete analysis of the individual taxconsequences to non-resident holders or employees under Indian law for theacquisition, ownership and sale of ADSs and equity shares. This summary isbased on the law and practice of the Indian Income-tax Act, 1961, or Income-TaxAct, including the special tax regime contained in Sections 115AC and 115ACA ofthe Income-tax Act read with the Issue of Foreign Currency Convertible Bondsand Ordinary Shares (through Depositary Receipt Mechanism) Scheme, 1993, asamended on, January 19, 2000, or the Issue of Foreign Currency Convertiblebonds and Ordinary Shares Scheme. The Income-tax Act is amended every year by the Finance Act of therelevant year. Some or all of the tax consequences of Sections 115AC and 115ACAmay be amended or changed by future amendments to the Income-tax Act.

 

**EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS, HER OR ITSOWN TAX ADVISORS WITH RESPECT TO INDIAN AND LOCAL TAX CONSEQUENCES OFACQUIRING, OWNING OR DISPOSING OF EQUITY SHARES OR ADSs.**

** **

***Levy of Income Tax***

*** ***

In India, tax is charged on the basis of theresidential status of a person (under terms of the provisions of the IndianIncome Tax Act) on his/her total income in the previous year, at the rates asspecified in the Finance Act as applicable in the relevant assessment year. Aperiod of 12 months commencing on the first day of April every year is referredto as an Assessment Year. Generally, the Previous Year means the financial yearimmediately preceding the Assessment Year. Tax is paid in the Assessment Yearon income earned in the Previous Year. In general, in the case of a person whois “resident” in India in a previous year, his/her global income is subject totax in India. In the case of a person who is “non-resident” in India, only theincome that is received or deemed to be received in India or the income thataccrues or arises or is deemed to accrue or arise to such person in India issubject to tax in India. In the case of a person who is “not ordinarilyresident” in India, the income chargeable to tax is the same as persons who areresident and ordinarily resident except that the income which accrues or arisesoutside India is not included in his total income unless it is derived from abusiness controlled from India.

 

***Residence***

*** ***

For purposes of the Income-tax Act, anindividual is considered to be a resident of India during any fiscal year if heor she is in India in that year for:

 

182 days or more in a fiscal year

 

OR

 

60 days or more in that fiscal year if theperson has been present in India for 365 days or more in the preceding fouryears.

 

However, where the person concerned is a personof Indian origin, or a person who has left India for employment outside India,the person will be considered a resident of India only when present in Indiafor a period of 182 days in the previous year, even though the person has beenpresent in India for 365 days or more in the preceding four years.

 

An Individual would be considered “notordinarily resident” if he / she is resident in India in a particular PreviousYear but has been a non-resident in India for a period of 9 out of 10 yearsbefore that year, OR has been present in India for 729 days or less in the 7years previous to that year.

 

A company is a resident of India if it isincorporated in India or the control and the management of its affairs issituated wholly in India. Individuals and companies that are not residents ofIndia would be treated as non-residents for purposes of the Income-tax Act.

 

***Taxation ofDistributions***

*** ***

Currently dividend income is exempt from tax forall shareholders (whether resident in India or not). However, the companydeclaring/distributing dividends is required to pay, in addition to corporatetax, a tax on dividends distributed, called dividend distribution tax at therate of 16.995% including a surcharge of 10% on the total amounts

 

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distributed as dividend and an education and aHigher education cess at the rate of 2% and 1%, respectively of such tax and surcharge.

 

Any distributions of additional ADSs or equityshares to resident or non-resident holders will not be subject to Indian tax.

 

***Taxation of CapitalGains***

*** ***

The following is a brief summary of capitalgains taxation of non-resident holders and resident employees relating to thesale of ADSs and equity shares received upon conversion of ADSs. The relevantprovisions are contained mainly in sections 45, 47(vii)(a), 115AC and 115ACA,of the Income-tax Act, in conjunction with the Issue of Foreign CurrencyConvertible Bonds and Ordinary Shares Scheme.

 

Under the Income-tax Act, capital gains can beof two types, “long term capital gain” or “short term capital gain”. Normally,gains arising on the sale of capital assets held for more than 36 months areconsidered long term capital gains and gains arising on the sale of capitalassets held for 36 months or less, are considered short term capital gains.However, gains arising from the sale of a capital asset, being shares held in acompany for more than 12 months (measured from the date of advice by adepositary to a Custodian of the delivery of the shares in exchange for ADS)are considered long term capital gains. Gains arising from the sale of sharesheld for a period of twelve months or less are considered as short term capitalgains.

 

Capital gains are taxed as follows:

 

·       Gainsfrom a sale of ADSs outside India, by a non-resident to another non-residentare not taxable in India.

 

·       Conversionof the ADS into the underlying shares is not taxable in India.

 

Pursuant to Section 115AC of the Income-tax Actread with the provisions of the 1993 Regulations, long term capital gainsrealized on sale of ADSs (not covered above) will be subject to tax at the rateof 10% excluding the applicable general surcharge and education surcharge.Where the beneficial holder of the ADS is an individual the tax shall beincreased by a 10 % general surcharge (if the total income is in excess of Rs.1,000,000 during the previous year) and education cess of 2% and Highereducation cess 1% on tax and general surcharge. Where the beneficial holder isa non-resident company, the above amount of tax shall be increased by a 2.5%general surcharge and 2% and 1% education cess and Higher education cessrespectively. This tax is levied in India by withholding the tax at the aboverates.

 

Any income arising from the transfer of equityshares held as long term capital asset that is subject to securitiestransaction tax, which is effective from October 1, 2004, shall be exempt fromlong term capital gains tax. Any income arising from the transfer of equityshares held as a short term capital asset, that is subject to securitiestransaction tax (effective from October 1, 2004), shall be taxed at a rate of15 % (effective 1st April 1,2008) plus a general surcharge of 10% for individuals having totalincome in excess of Rs. 1,000,000 during the previous year or 2.5% in case offoreign companies, and an additional 2% and 1% education cess and Highereducation cess respectively on tax and surcharge amount.

 

The aforesaid tax rates with respect to capitalgains may be reduced as per the provisions of the double tax avoidanceagreements that India has signed with the home jurisdictions of thenon-resident holders.

 

***Taxation of Business Income***

** **

The income from the transfer of shares held inan Indian company may be characterized as trading income, on the basis ofvarious factors, including the purpose of the holding by the investor, periodof holding, the manner and method of investment and transfer, etc. Where sharesare held under an employee stock option scheme, it is unlikely that the incomefrom transfer of these shares will be characterized as trading income.

 

Where the income is classified as trading orbusiness income, and is found liable to tax in India, non-resident companieswill be taxed in India on the net income at the rate of 40% increased by 2.5%surcharge and 2% and 1% education and Higher education cess respectively.Further, MAT will apply in such cases. Non-residents other than companies orresidents will be taxed at 30% increased by 10% surcharge and 2% and 1%education and Higher education cess respectively, on trading or businessincome.

 

***Minimum Alternate Tax (MAT)***

 

Pursuant to the changes introduced by theFinance Bill, 2007, the corporate shareholders may be subject to a MinimumAlternate Tax (“MAT”). As per the Income-tax Act, if the tax payable by anycompany (including a foreign company) is less than 10 % of its book profits, itwill be required to pay MAT which will be deemed to be 11.33% of such bookprofits, in case of a foreign company.

 

Further, the provisions of MAT will also beapplicable to corporates from the tax year beginning April 1, 2007 claimingdeduction under section 10A and 10B of the Indian Income Tax Act. (which mainlyincludes IT companies) and based on the provisions, corporates will be liableto pay MAT at the rate of 11.33% (including a surcharge of 10% and an educationcess and a Higher education cess at the rate of 2% and 1%, respectively of such tax and surcharge) or tax computed as pernormal provisions, whichever is higher.

 

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***Securities Transaction Tax***

*** ***

The Finance Act, 2004 has introduced certain newprovisions with regard to taxes on the sale and purchase of securities,including equity shares. On and after October 1, 2004, in respect of a sale andpurchase of equity shares entered into on a recognized stock exchange, (i) boththe buyer and seller are required to pay each a Securities Transaction Tax, orSTT at the rate of 0.125% of the transaction value of the securities, if atransaction is a delivery based transaction i.e. the transaction involvesactual delivery or transfer of shares; (ii) the seller of the shares isrequired to pay a STT at the rate of 0.025% of the transaction value of thesecurities, if the transaction is a non-delivery based transaction, i.e. atransaction settled without taking delivery of the shares. The Finance Bill,2008 proposes to impose STT, effective from April 1 2008, with respect to asale and purchase of a derivative in a recognized stock exchange as follows: (i)in case of sale of an option in securities, the seller is required to pay anSTT at the rate of 0.017% of the option premium; (ii)in case of a sale of anoption in securities, where the option is exercised, the buyer is required topay a STT at the rate of 0.125% of the settlement price; and (iii) in case ofsale of futures in securities, the seller is required to pay STT at 0.017%.TheSTT can be set-off against business income tax, in accordance with theprovisions of the Income-tax Act, provided the gains on the transactions aretaxed as business income and not as capital gains.

 

***Mode of Computation ofCapital Gain***

*** ***

Capital gains tax is computed by applying theappropriate tax rate on the difference between the sale price and the purchaseprice of the capital asset. For the purpose of determining the amount ofcapital gains arising from the sale of shares, converted on surrender of the ADS,the cost of acquisition of such shares shall be prevailing price of shares atthe Indian Stock Exchanges, on the date on which the depositary advises theCustodian of the release of such shares on such surrender of the ADS and notthe acquisition cost of the ADS being exchanged*.*According to the 1993 Regulations, a non-resident holder’s holding period forthe purpose of determining the applicable Indian capital gains tax raterelating to equity shares received in exchange for ADSs commences on the dateof the notice of the redemption by the Depositary to the custodian. However,the 1993 Regulations does not address this issue in the case of residentemployees, and it is therefore unclear as to when the holding period for thepurposes of determining capital gains tax commences for such a residentemployee.

 

The 1993 Regulations provides that if the equityshares are sold on a recognized stock exchange in India against payment inIndian rupees, they will no longer be eligible for preferential tax treatment.It is unclear as to whether section 115AC and the 1993 Regulations areapplicable to a non-resident who acquires equity shares outside India from anon-resident holder of equity shares after receipt of the equity shares uponconversion of the ADSs. It is unclear as to whether capital gains derived fromthe sale of subscription rights or other rights by a non-resident holder notentitled to an exemption under a tax treaty will be subject to Indian capitalgains tax. If such subscription rights or other rights are deemed by the Indiantax authorities to be situated within India, the gains realized on the sale ofsuch subscription rights or other rights will be subject to Indian taxation.The capital gains realized on the sale of such subscription rights or otherrights, which will generally be in the nature of short term capital gains, willbe subject to tax at variable rates with a maximum rate of 40% excluding theapplicable general surcharge of 2.5% and education of 2% and Higher educationcess of 1% in case of a foreign company, and 30%, excluding the applicablegeneral surcharge and education and Higher education cess, in case of residentand non-resident employees at the applicable slab rate (10%, 20% or 30%, as thecase may be) and increased by a general surcharge of 10% for individuals havingtotal income in excess of Rs. 1,000,000 plus 2% and 1% education and Highereducation cess respectively on tax and general surcharge. In case of personsother than individuals and companies, the rate of tax would be 30% increased bya 10% surcharge, and a 2% and 1% education and Higher education cessrespectively.

 

***Withholding tax oncapital gains***

*** ***

Any taxable gain realized by a non-resident onthe sale of ADSs or equity shares is to be withheld at the source by the buyer.However, as per the provisions of section 196D(2) of the Income-tax Act, nowithholding tax is required to be deducted from any income by way of capitalgains arising to Foreign Institutional Investors as defined in section 115AD ofthe Income-tax Act on the transfer of securities defined therein, where theinvestment is made under the FII regime.

 

***Buy-back of securities***

*** ***

Indian companies are not subject to any tax onthe buy-back of their shares from its shareholders in accordance with theprovisions of Section 77A of the IndianCompanies Act, 1956. However, the shareholders will be taxed on anyresulting gains. We would be required to deduct tax at source according to thecapital gains tax liability of a non-resident shareholder.

 

***Stamp Duty and TransferTax***

*** ***

Upon issuance of the equity shares underlyingour ADSs, we will be required to pay a stamp duty of 0.1% per share of theissue price of the underlying equity shares. A transfer of ADSs is not subjectto Indian stamp duty. However, in the event that a holder of ADS wishes toenforce its rights under the ADS, and bring the instrument into India for thispurpose, the holder of ADS may be required to pay stamp duty on the ADS at theapplicable rate. 

 

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Shares must be traded in dematerialized form andthe transfer of shares in dematerialized form is currently not subject to stampduty.

 

***Wealth Tax***

*** ***

The holding of the ADSs and the holding ofunderlying equity shares by resident and non-resident holders is not subject toIndian wealth tax. Non-resident holders are advised to consult their own taxadvisors regarding this issue.

 

***Gift Tax and EstateDuty***

*** ***

Currently, there are no gift taxes or estateduties applicable to the gifting or inheritance of ADSs or equity shares.However, these taxes and duties could be restored in the future. Non-residentholders are advised to consult their own tax advisors regarding this issue.

 

***Service tax***

*** ***

Brokerage or commission paid to stock brokers inconnection with the sale or purchase of shares is subject to a service tax of12%, plus education cess of 2% and Higher education cess of 1% on tax. Thestock broker is responsible for collecting the service tax from the shareholderand paying it to the government account.

 

**U.S.Federal Income Tax Considerations**

** **

The following isa discussion of certain material U.S. Federal income tax consequences ofpurchasing, owning and disposing of equity shares and ADSs. This discussiondoes not purport to be a comprehensive description of all of the U.S. taxconsiderations that may be relevant to a particular person’s decision toacquire the equity shares or ADSs including any state, local or non-U.S. taxconsequences of the ownership of the equity shares or ADSs.

 

**EACH HOLDER OF ADSs SHOULDCONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL, STATE, LOCALAND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF EQUITYSHARES AND ADSs IN HIS OR HER PARTICULAR SITUATION.**

** **

This discussionapplies to only to those investors that hold equity shares or ADSs as capitalassets for U.S. tax purposes (generally, for investment). This section does notapply to holders that may be subject to special tax rules, including but notlimited to:

 

·       a dealer in securities or currencies;

 

·       a trader in securities that elects to use amark-to-market method of accounting for your securities holdings;

 

·       a bank, insurance company or other financialinstitution;

 

·       a tax-exempt organization;

 

·       a holder liable for alternative minimum tax;

 

·       a holder that actually or constructively owns10% or more by voting power or value of our stock;

 

·       a holder that holds equity shares or ADSs aspart of a straddle, hedging or conversion transaction; or

 

·       a U.S. holder whose functional currency is notthe U.S. Dollar.

 

This section isbased on the U.S. Internal Revenue Code of 1986, as amended, or the Code, itslegislative history, existing and proposed U.S. Treasury regulations, publishedrulings and other administrative guidance of the U.S. Internal Revenue Serviceand court decisions, all as in effect on the date hereof. These laws aresubject to change or different interpretation by the U.S. Internal RevenueService or a court, possibly on a retroactive basis.

 

You are a “U.S.holder” if you are a beneficial owner of equity shares or ADSs and you are:

 

·       a citizen or resident individual of the UnitedStates;

 

·       a U.S. domestic corporation, or other entitytreated as a domestic corporation for U.S. federal income tax purposes;

 

·       an estate whose income is subject to U.S.Federal income tax regardless of its source; or

 

·       a trust if a U.S. court can exercise primarysupervision over the trust’s administration and one or more U.S. persons areauthorized to control all substantial decisions of the trust.

 

In addition, thisdiscussion is limited to U.S. holders who are not resident in India forpurposes of the DTAT between the United States and India.

 

If a partnership(including for this purpose any entity treated as a partnership for U.S. taxpurposes) is a beneficial owner of the equity shares or ADSs, the U.S. taxtreatment of a partner in the partnership generally will depend on the statusof the partner and the activities of the partnership. A holder of the equityshares or ADSs that is

 

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a partnership andpartners in such a partnership should consult their own tax advisors about theU.S. federal income tax consequences of holding and disposing of the equityshares or ADSs.

 

A “non-U.S.holder” is a beneficial owner of equity shares or ADSs that is not a U.S.person for U.S. Federal income tax purposes.

 

For U.S. Federalincome tax purposes, holders of ADSs will be treated as the owners of equityshares represented by such ADSs.

 

We believe thatwe will not be a passive foreign investment company, or PFIC, for U.S. Federalincome tax purposes for the current taxable year. However, we cannot assure youthat we will not be considered a PFIC in the current or future years. Thedetermination whether or not we are a PFIC is a factual determination that isbased on the types of income we earn and the value of our assets and cannot bemade until the close of the applicable tax year. If we were currently or wereto become a PFIC, U.S. holders of equity shares or ADSs would be subject tospecial rules and a variety of potentially adverse tax consequences under theCode.

 

*Taxation ofDividends*

* *

*U.S. Holders.***Subject to the PFIC rules referred to below,under the U.S. Federal income tax laws, if you are a U.S. holder, you mustinclude in your gross income the gross amount of any dividend paid by us out ofour current or accumulated earnings and profits (as determined for U.S. Federalincome tax purposes). You must include the amount of any Indian tax withheldfrom the dividend payment in this gross amount even though you do not in factreceive it. The dividend is ordinary income that you must include in incomewhen you receive the dividend, actually or constructively. Dividends receivedby an individual taxpayer during taxable years beginning before January 1, 2011will be taxed at a maximum rate of 15%, where certain holding period and otherrequirements are satisfied, if such dividends constitute qualified dividendincome. Qualified dividend income includes dividends paid by a QualifiedForeign Corporation, and we believe that we are, and will continue to be, aQualified Foreign Corporation. Holders of ADSs and equity shares should consulttheir own tax advisors regarding the availability of the reduced dividend taxrate in light of their own particular circumstances. Dividends will not beeligible for the dividends-received deduction generally allowed to U.S.corporations in respect of dividends received from other U.S. corporations.

 

The amount of thedividend distribution that you must include in your income as a U.S. holderwill be the U.S. Dollar value of the Indian rupee payments made, determined atthe spot Indian rupee/U.S. Dollar exchange rate on the date the dividenddistribution is includible in your income, regardless of whether the payment isin fact converted into U.S. Dollars. If the foreign currency received as adividend is not converted into U.S. dollars on the date of receipt, a U.S.Holder will have a basis in the foreign currency equal to its U.S. dollar valueon the date of receipt. Generally, any gain or loss resulting from currencyexchange fluctuations during the period from the date you include the dividendpayment in income to the date you convert the payment into U.S. Dollars will betreated as ordinary income or loss. The gain or loss generally will be incomeor loss from sources within the United States for foreign tax credit limitationpurposes. If we distribute non-cash property as a dividend, you generally willinclude in income an amount equal to the fair market value of the property, inU.S. Dollars, on the date that it is distributed. Subject to certainlimitations, a U.S. holder may be entitled to a credit or deduction against itsU.S. Federal income taxes for the amount of any Indian taxes that are withheldfrom dividend distributions made to such U.S. holders. The decision to claimeither a credit or deduction must be made annually, and will apply to allforeign taxes paid by the U.S. holder to any foreign country or U.S. possessionwith respect to the applicable tax year.

 

A portion ofdividends received may be income from United States sources, and the remainderwill be income from non-United States sources, for U.S. foreign tax creditpurposes under special U.S. Federal income tax rules, subject to variousclassifications and other limitations. The rules relating to computing foreigntax credits are complex. You should consult your own tax advisor to determinethe foreign tax credit implications of owning equity shares or ADSs.

 

Distributions inexcess of current and accumulated earnings and profits, as determined for U.S.federal income tax purposes, will be treated as a non-taxable return of capitalto the extent of your basis in the equity shares and ADSs and thereafter ascapital gain.

 

*Non-U.S. Holders.***Dividends paid to non-U.S. holders generallywill not be subject to U.S. income tax unless the dividends are “effectivelyconnected” with your conduct of a trade or business within the United States,and the dividends are attributable to a permanent establishment (or in the caseof an individual, a fixed place of business) that you maintain in the UnitedStates if that is required by an applicable income tax treaty as a conditionfor subjecting you to U.S. taxation on a net income basis. In such cases yougenerally will be taxed in the same manner as a U.S. holder, and will not besubject to U.S. Federal withholding tax. If you are a corporate non-U.S.holder, “effectively connected” dividends may, under certain circumstances, besubject to an additional “branch profits tax” at a 30% rate or a lower rate ifyou are eligible for the benefits of an income tax treaty that provides for alower rate.

 

*Taxation ofCapital Gains*

* *

*U.S. Holders.***Subject to the PFIC rules referred to below, ifyou are a U.S. holder and you sell or otherwise dispose of your equity sharesor ADSs, you will recognize capital gain or loss for U.S. Federal income taxpurposes equal to the difference between the U.S. Dollar value of the amountthat you realize and your tax basis, determined

 

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in U.S. Dollars,in your equity shares or ADSs. Prior to January 1, 2011, capital gains of anon-corporate U.S. holder are generally taxed at a maximum rate of 15% wherethe property is held for more than one year. The gain or loss will generally beincome or loss from sources within the United States for foreign tax creditlimitation purposes, unless it is attributable to an office or other fixedplace of business outside the United States and certain other conditions aremet. Your ability to deduct capital losses is subject to limitations.

 

*Non-U.S. Holders.***If you are a non-U.S. holder, you will not besubject to U.S. federal income tax on gain recognized on the sale or otherdisposition of your equity shares or ADSs unless:

 

·       the gain is “effectively connected” with yourconduct of a trade or business in the United States, and the gain isattributable to a permanent establishment (or in the case of an individual, afixed place of business) that you maintain in the United States if that isrequired by an applicable income tax treaty as a condition for subjecting youto U.S. taxation on a net income basis; or

 

·       you are an individual, you are present in theUnited States for 183 or more days in the taxable year of the sale and certainother conditions exist.

 

In the firstcase, the non-U.S. holder will be taxed in the same manner as a U.S. holder. Inthe second case, the non-U.S. holder will be subject to U.S. Federal income taxat a rate of 30% on the amount by which such the non-U.S. holder’s U.S.-sourcecapital gains exceed such non-U.S. holder’s U.S.-source capital losses.

 

If you are acorporate non-U.S. holder, “effectively connected” gains that you recognize mayalso, under certain circumstances, be subject to an additional “branch profitstax” at a 30% rate or at a lower rate if you are eligible for the benefits ofan income tax treaty that provides for a lower rate.

 

*PFIC Rules*

* *

We believe thatour equity shares and ADSs will not be treated as stock of a PFIC for U.S. federalincome tax purposes for the current tax year. The determination of whether ornot we are a PFIC is a factual determination that cannot be made until theclose of the applicable tax year and that is based on the types of income weearn and the value of our assets (including goodwill), both of which aresubject to change. In calculating goodwill for this purpose, we will value ourtotal assets based on the total market value, determined with reference to thethen market price of the equity shares and ADSs, and will make determinationsregarding the amount of this value allocable to goodwill. Because thedetermination of goodwill will be based on the market price of the equityshares and ADSs, it is subject to change. It is possible that the U.S. InternalRevenue Service may challenge our valuation of our assets (including goodwill),which may result in our being classified as a PFIC. Thus, it is possible thatwe may be or become a PFIC in the current or any future taxable year and wecannot assure you that we will not be considered a PFIC in any such tax year.

 

In general, ifyou are a U.S. holder, we will be a PFIC with respect to you if for any taxableyear in which you held the equity shares or ADSs:

 

·       at least 75% of our gross income for thetaxable year is passive income; or

 

·       at least 50% of the value, determined on thebasis of a quarterly average, of our assets is attributable to assets thatproduce or are held for the production of passive income.

 

Passive incomegenerally includes dividends, interest, royalties, rents (other than certainrents and royalties derived in the active conduct of a trade or business), theexcess of gains over losses from certain types of transactions in commodities,annuities and gains from assets that produce passive income. If a foreigncorporation owns at least 25% by value of the stock of another corporation, theforeign corporation is treated for purposes of the PFIC tests as owning itsproportionate share of the assets of the other corporation, as receivingdirectly its proportionate share of the other corporation’s income.

 

If we are treatedas a PFIC, and you are a U.S. holder that did not make a mark-to-marketelection, as described below, you will be subject to special rules with respectto:

 

·       any gain you realize on the sale or otherdisposition of your equity shares or ADSs; and

 

·       any excess distribution that we make to you(generally, any distributions to you during a single taxable year that aregreater than 125% of the average annual distributions received by you inrespect of the equity shares or ADSs during the three preceding taxable yearsor, if shorter, your holding period for the equity shares or ADSs).

 

Under theserules:

 

·       the gain or excess distribution will beallocated ratably over your holding period for the equity shares and ADSs;

 

·       the amount allocated to the taxable year inwhich you realized the gain or excess distribution will be taxed as ordinaryincome;

 

·       the amount allocated to each prior year, withcertain exceptions, will be taxed at the highest tax rate in effect for thatyear; and

 

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·       the interest charge generally applicable tounderpayments of tax will be imposed in respect of the tax attributable to eachsuch year.

 

Special rules applyfor calculating the amount of the foreign tax credit with respect to excessdistributions by a PFIC.

 

If you own sharesin a PFIC that are treated as marketable stock, you may make a mark-to-marketelection. If you make this election in a timely fashion, you will not besubject to the PFIC rules described above. Instead, in general, you willinclude as ordinary income each year the excess, if any, of the fair marketvalue of your equity shares and ADSs at the end of the taxable year over youradjusted basis in your equity shares and ADSs. You will also be allowed to takean ordinary loss in respect of the excess, if any, of the adjusted basis ofyour equity shares and ADSs over the fair market value at the end of thetaxable year (but only to the extent of the net amount of previously includedincome as a result of the mark-to-market election). Your basis in the equityshares and ADSs will be adjusted to reflect any such income or loss amounts.

 

We do not intendto furnish you with the information that you would need in order to make a “qualifiedelecting fund” election to include your share of its income on a current basis.

 

If you own equityshares or ADSs during any year that we are a PFIC, you must file U.S. InternalRevenue Service Form 8621 that describes the distribution received on theequity shares or ADSs and the gain realized on the disposition of the equityshares or ADSs. The reduced tax rate for dividend income, discussed in “Taxationof Dividends,” is not applicable to dividends paid by a PFIC.

 

*InformationReporting and Backup Withholding*

* *

In general,information reporting requirements will apply to dividends in respect of equityshares or ADSs or the proceeds received on the sale, exchange or redemption ofequity shares or ADSs paid within the United States (and, in certain cases,outside the United States) to U.S. holders other than certain exemptrecipients, such as corporations, and backup withholding tax at the rate of 28%may apply to such amounts if the U.S. holder fails to provide an accuratetaxpayer identification number (or otherwise establishes, in the mannerprovided by law, an exemption from backup withholding) or to report dividendsrequired to be shown on the U.S. holder’s U.S. Federal income tax returns.

 

Backupwithholding is not an additional income tax, and the amount of any backupwithholding from a payment to a U.S. holder will be allowed as credit againstthe U.S. holder’s U.S. Federal income tax liability provided that theappropriate returns are filed.

 

A Non-U.S. holdergenerally may eliminate the requirement for information reporting and backupwithholding by providing certification of its foreign status to the payer,under penalties of perjury, on IRS Form W-8BEN.

 

**10.F.Dividends and paying agents**

** **

**Not applicable**

** **

**10.G.Statement by experts**

** **

Not applicable

 

**10.H.Documents on display**

** **

This report and other information filed or to befiled by us can be inspected and copied at prescribed rates at the publicreference facilities maintained by the SEC at:

 

**Judiciary Plaza100 F Street, N.E.Public Reference RoomWashington, D.C. 20459**

** **

The SEC maintainsa website at www.sec.gov that contains reports, proxy and informationstatements, and other information regarding registrants that make electronicfilings with the SEC using its EDGAR system.

 

Our periodicreports and other information may also be inspected at the offices of the NewYork Stock Exchange located at 20 Broad Street, New York, New York 10005.

 

Additionally,documents referred to in this Form 20-F may be inspected at our corporate officewhich is located at Akruti Softech Park, MIDC Cross Road No. 21, Andheri (E),Mumbai-400 093, India.

 

**10.I.Subsidiary information**

** **

Not applicable

 

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**ITEM 11. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

***General***

 

Marketrisk is the loss of future earnings, or reduction in fair value or future cashflows that may result from a change in the price of a financial instrument. Thevalue of a financial instrument may change as a result of changes in interestrates, foreign currency exchange rates, equity prices and other market changesthat affect market risk sensitive instruments. Market risk is attributable toall market sensitive financial instruments including foreign currencyreceivables and payables.

 

Ourexposure to market risk is a function of our revenue and expense generatingactivities in foreign currency, the activity of investment in securities andliquid mutual fund units and the results of our hedging strategies for foreigncurrency exposures. The objective of market risk management is to avoidexcessive exposure of our earnings and equity to loss.

 

***Risk Management Procedures***

 

Wemanage market risk through treasury operations. Our market risk objectives andpolicies are approved by our senior management and Board of Directors. Theactivities of treasury operations include management of cash resources andinvestment in securities and liquid mutual fund units, implementing hedgingstrategies for foreign currency exposures, borrowing strategies, and ensuringcompliance with market risk limits and policies.

 

***Components of Market Risk***

 

*Exchange Rate Risk.***Ourexposure to market risk arises principally from exchange rate risk. We transacta major portion of our business in foreign currencies, particularly the U.S.dollar. The exchange rate between the rupee and the dollar has changedsubstantially in recent years and may fluctuate substantially in the future.The results of our operations can be adversely affected as the rupee fluctuatesagainst the dollar. Our exchange rate risk primarily arises from our foreigncurrency revenues, receivables, payables and other foreign currency assets andliabilities.

 

Wehave sought to reduce the effect of exchange rate fluctuations on our operatingresults by entering into foreign exchange forward and options contracts. As of December 31,2008, we had outstanding forward contracts in the amount of $ 285.4 million, JPY 400.0 million ($ 4.4 million), AUD 1.0 million ($ 0.7 million) and GBP 1.5 million($2.2 million), outstanding written options of GBP 0.9 million ($ 1.3 million),Euro 1.6 million ($ 2.2million) and JPY 150 million ($ 1.7million ), outstanding currency purchased options in the amount of $ 27.0 million, outstanding currencypurchased options, net sell in the amount of $ 61.3 million and outstanding currency written options in theamount of $ 21.0 million. As of December 31, 2007, we hadoutstanding forward contracts in the amount of $ 165.2 million, JPY 481.6 million ($ 4.3 million) and Euro 4 million ($ 5.6 million), outstanding written options of Euro 5 million ($ 7 million), outstanding currency purchasedoptions in the amount of $ 81.5million and outstanding currency written options in the amount of $ 2.5 million. These contracts typically mature within 1-53 months, must besettled on the day of maturity and may be cancelled subject to the payment ofany gains or losses in the difference between the contract exchange rate andthe market exchange rate on the date of cancellation. We use these instrumentsonly for hedging purposes. We may not purchase contracts adequate to insulateourselves from all foreign exchange currency risks. The policies of the ReserveBank of India may change from time to time which may limit our ability to hedgeour foreign currency exposures adequately. In addition, any such contracts maynot perform adequately as a hedging mechanism. We may, in the future, adoptmore active hedging policies.

 

*Interest Rate Risk.***Oursurplus cash resources are typically invested in liquid mutual fund units,units in other debt mutual funds in India, and sweep funds. These investmentsare exposed to interest rate risk whereby any increase in interest rates maydecrease the fair value of the investments. We attempt to reduce this risk byinvesting in funds with shorter durations and by adequately diversifying ourinvestments.

 

*Fair Value.***Thefair value of our market rate risk sensitive instruments, other than forwardcontracts and option contracts, closely approximates their carrying value.

 

**ITEM 12. DESCRIPTION OF SECURITIES OTHER THANEQUITY SECURITIES**

 

Notapplicable

 

**PART II**

 

**ITEM 13. DEFAULTS, DIVIDEND ARREARAGES ANDDELINQUENCIES**

 

None

 

**ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OFSECURITY HOLDERS AND USE OF PROCEEDS**

 

**Modificationin the rights of security holders**

 

OnApril 25, 2006, our Board, subject to the approval of our shareholders,recommended the amendment of our ESOP 2003 plan to provide an option to theCompany to grant ADR-linked stock options to enable certain

 

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employeesoutside India to acquire ADSs upon exercise of options. The shareholders of theCompany at the annual general meeting held on June 21, 2006 approved thesaid amendment to the Patni ESOP 2003 plan to enable the Company to issue up to2,000,000 ADR linked stock options to the employees of the Company as well asits subsidiaries. Accordingly, the amended plan, i.e., “Patni ESOP 2003-Revised 2006” has come into force with effect from June 21, 2006.

 

During2007 there has been no modifications to the rights of thesecurity holders.

 

Further,at the 30th Annual General Meeting held on June 26, 2008, the shareholdersof the Company had approved modification/repricing of the terms of Options toenable the Company to issue Restricted Stock Units (“RSUs”). Accordingly, theamended plan, i.e., “Patni ESOP 2003 (Revised 2008) came into force with effectfrom June 26, 2008.

 

**Useof proceeds**

 

**In our initial offering of ourADSs, completed on December 8, 2005, we issued 6,156,250 ADSs,representing 12,312,500 equity shares of Rs. 2 each, to an underwritingsyndicate (including the underwriters’ over-allotment option of 1,031,250 ADSsrepresenting 2,062,500 equity shares) at an initial offering price of$ 20.34 per ADS pursuant to a registration statement filed on Form F-1(File No.333-129771) with the SEC. The managing underwriters were Goldman Sachs(Asia) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and ABNAMRO Rothschild LLC. We received approximately $ 117 million in net proceedsfrom the offering (after adjusting for direct expenses relating to the offeringof ADSs of approximately $ 8.2 million, out of which $ 7.6 million waspaid as underwriting and management consulting fees and $ 0.6 million was paidfor other expenses).**

 

**As of December 31, 2008, US$ 86.3 million had been utilized for capital expenditure for office facilitiesand the balance $ 30.7 million remained as cash and cash equivalents pendingutilization.**

 

**ITEM 15. CONTROLS ANDPROCEDURES**

 

**Disclosure controls andprocedures**

 

Asof the end of the period covered by this Annual Report on Form 20-F, wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, as amended).Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective as of December 31, 2008,to provide reasonable assurance that the information required to be disclosedin filings and submissions under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized, and reported within the timeperiods specified by the SEC’s rules and forms, and that materialinformation related to us and our consolidated subsidiaries is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions about requireddisclosure.

 

**Management’s Report on InternalControls over Financial Reporting**

 

***Internal controlsover financial reporting***

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting. Internalcontrol over financial reporting as defined in Rule 13a-15(f) and15d-15(f) under the U.S.Securities and Exchange Act of 1934, as amended.

 

The internal control over financial reporting wasdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles in the United Statesof America and includes those policies and procedures that:

 
| · | Pertain to the maintenance  of records that in reasonable detail accurately and fairly reflect the  transactions and dispositions of the assets of the Company;                                                                                                                                                                                                                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                  |
| · | Provide  reasonable assurance that transactions are recorded as necessary to permit  preparation of financial statements in accordance with generally accepted  accounting principles in the United States of America, and that receipts and  expenditures of the Company are being made only in accordance with  authorizations of management and directors of the Company; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                  |
| · | Provide  reasonable assurance regarding prevention or timely detection of unauthorized  acquisition, use or disposition of the Company’s assets that could have a  material effect on the financial statements.                                                                                                                                                                  |

 

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Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Our management, including our Chief Executive Officerand Chief Financial Officer assessed the effectiveness of our internal controlover financial reporting as of December 31,2008. In making thisassessment, our management used the criteria set forth by the Committee ofSponsoring Organizations (COSO) of the Treadway Commission in “InternalControl-Integrated Framework”. This assessment included an evaluation of thedesign and operation of internal controls over financial reporting. Based onthis assessment, the management concluded that, as of December 31, 2008,the Company has maintained effective internal controls over financialreporting.

 

Our independent registered public accounting firm,KPMG, has issued their report, included herein, on the effectiveness of ourinternal control over financial reporting as of December 31, 2008.

 

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# **Report of Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Shareholders

PatniComputer Systems Limited:

 

Wehave audited Patni Computer Systems Limited’s internal control over financialreporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).**Patni Computer Systems Limited’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’s Report on Internal Controls overFinancial Reporting. Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, Patni Computer Systems Limited maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2008, based on criteria established inInternal Control - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission*.*

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets of Patni Computer Systems Limitedand subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income,shareholders’ equity and comprehensive income/(loss), and cash flows for eachof the years in the three-year period ended December 31, 2008, and ourreport dated April 10, 2009, expressed an unqualified opinion on those consolidated financial statements*.*

 

/s/KPMG

Mumbai, India

April 10,2009

 

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**Changes in internal controlover financial reporting**

 

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

 

**ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT**

 

OurAudit Committee members are Mr. Arun Duggal (Chairman), Mr. PradipShah and Mr. Ramesh Venkateswaran, each of whom is an independent directorpursuant to the applicable rules of the Securities Exchange Commission andthe NYSE. See “Item 6. Directors, Senior Management and Employees” for theexperience and qualifications of the members of the Audit Committee. Our Boardof Directors has determined that Mr. Arun Duggal is an Audit CommitteeFinancial Expert as defined in item 401(h) of Regulation S-K.

 

**ITEM 16B. CODE OF ETHICS**

 

Wehave adopted a code of business ethics applicable to our executive officers,directors and all other employees. We will make available a copy of the code ofethics to any person, without charge, if a written request is made to ourCompany Secretary at our corporate office at Akruti Softech Park, MIDC CrossRoad No.21 Andheri (E), Mumbai 400 093, India. The code is also available onour corporate website, www.patni.com.

 

**ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The following table sets forth the fees forprofessional audit services rendered by KPMG for the audit of the Company’sannual financial statements for 2007 and 2008, and fees billed for otherservices rendered by KPMG.

 
| **Fiscal Year Ended December 31,** | ** ** | **Audit Fees** | ** ** | **Tax Fees** | ** ** | **All Other Fees**    | ** ** | **Total Fees** | ** ** |
|-----------------------------------------|------------|----------------|------------|--------------|------------|-----------------------|------------|----------------|------------|
| ** **                              | ** ** | ** **     | ** ** | ** **   | ** ** | **(Amounts in US $)** | ** ** |
| 2007                                    |       | 795,747        |       | 132,462      |       | 169,719               |       | 1,097,928      |       |
| 2008                                    |       | 679,880        |       | 153,227      |       | 184,781               |       | 1,017,888      |       |

 

**Auditfees**

 

Auditfees represents fees for professional services in connection with the audit ofCompany’s annual consolidated financial statements and reviews of interimfinancial statement in accordance with U.S.GAAP, report concerning internal control over financial reporting, as well asaudits of standalone and consolidated financial statements of the Company andits subsidiaries prepared in accordance with Indian GAAP.

 

**Taxfees**

 

Servicesprovided primarily consist of tax compliance, assistance with tax examinationsand corporate tax advisory services.

 

**Allother fees**

 

Servicesprovided primarily consist of payroll related tax issues, transfer pricingstudy and quality review in respect of IT applications of the company.

 

Weobtain prior approval of our audit committee in connection with the nature ofservices that are provided and the fees to be paid for the services.

 

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**ITEM 16D. EXEMPTIONS FROM THE LISTINGSTANDARDS FOR AUDIT COMMITTEES**

 

Wehave not sought any exemption from the listing standards for audit committeesapplicable to us as a foreign private issuer.

 

**ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THEISSUER AND AFFILIATED PURCHASES**

 

Duringfiscal 2007, there were no purchases made by or on behalf of us or anyaffiliated purchaser of shares of any class of our securities that areregistered pursuant to Section 12 of the U.S. Securities and Exchange Act, 1934, as amended.

 

InFebruary 2008, our Board of Directors approved a proposal to repurchasefully paid equity shares to the extentof 10% of the paid up capital and free reserves, at a maximum price ofRs. 325 per equity share, for an aggregate amount of up to Rs. 2,370million. The buy backproposal had been approved in accordance with the provisions of Sections 77A, 77AA, 77B and otherapplicable provisions of the Indian Companies Act, 1956 and the provisions ofSecurities and Exchange Board of India (Buy-back of Securities) Regulations,1998 (“the Buy Back Regulations”),for which necessary public announcements were made on April 2, 2008.

 

Wecommenced the repurchase of shares on July 10, 2008. Our Board of Directors declared closure ofthe buy back offer on October 23, 2008. Subsequent to the sharerepurchase, such shares are required to be extinguished as per the requirementsof Section 77A of the Indian CompaniesAct, 1956.

 

Duringthe year ended December 31, 2008, we repurchased a total of 10,957,082equity shares through the Bombay Stock Exchange and the National Stock Exchangeof India Limited for anaggregate consideration of Rs. 2,370million ($ 53.1 million), whichwas being 100% of the amount authorizedfor such buy back. Subsequently,we extinguished such the equityshares bought back by us.

 
| **Period**                                         | ** ** | **Total number of Shares  purchased** | ** ** | **Amount  (Rs. in million)** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|------------------------------|------------|
|                                               |       |                                  |       |                         |       |
| July 10,  2008 to July 31, 2008          |       | 2,206,570                             |       | 508.61                       |       |
|                                               |       |                                  |       |                         |       |
| August 1, 2008 to August 31,  2008       |       | 3,279,250                             |       | 752.13                       |       |
|                                               |       |                                  |       |                         |       |
| September 1, 2008 to September 30,  2008 |       | 3,475,725                             |       | 750.48                       |       |
|                                               |       |                                  |       |                         |       |
| October 1, 2008 to October 23,  2008     |       | 1,995,537                             |       | 358.80                       |       |
|                                               |       |                                  |       |                         |       |
| Total                                              |       | 10,957,082                            |       | 2,370                        |       |

 

**ITEM 16F. CHANGE IN REGISTRANT’SCERTIFYING ACCOUNTANT**

 

NotApplicable

 

**ITEM 16G. CORPORATE GOVERANCE**

 

**Governance Standards forListed Companies**

 

Manyof the corporate governance standards set out in the NYSE Listed Company Manualdo not apply to us as a “foreign private issuer.” Under the NYSE corporategovernance standards, we need only (i) establish an independent auditcommittee that satisfies the requirements of Rule 303A.06 of the NYSEListed Company Manual described in the following table; (ii) provideprompt certification by our chief executive officer of any material non-compliancewith any corporate governance rules of the NYSE; (iii) provide annualwritten affirmations to the NYSE with respect to our corporate governancepractices (and provide interim written affirmations ****each time a change occursto the board or any of our committees)****; and (iv) providea brief description of significant differences between our corporate governancepractices and those followed by U.S. companies listed on the NYSE as requiredby

 

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Rule 303A.11of the NYSE Listed Company Manual.Indian corporate governance requirements forlisted companies are contained in Clause 49 of the listing agreement that companiesenter into with Indian stock exchanges. The following table sets out a brief,general summary of the significant differences between the corporate governancestandards applicable to us under our listing agreements with the Indian StockExchanges and the requirements of standards relating to U.S. domestic companieslisted on the NYSE.

 

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| **Standard NYSE Practices**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Our  Practice**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Director Independence**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| A majority of the board  must consist of independent directors. Independence is defined by various  criteria including the absence of a material relationship between the  director and the listed company. For example, directors who are employees,  are immediate family of an executive officer of the company or receive over  $100,000 per year in direct compensation from the listed company are not  independent. Directors who are employees of or otherwise affiliated through  immediate family with the listed company’s independent auditor are also not  independent. Determinations of independence are made by the board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | Five  of our ten directors are “independent directors” as defined by the NYSE.  As an Indian Company we adhere to Clause 49  of the Indian Listing Agreements, which states that if the Chairman of the  Board is an executive director then not less than 50 per cent of the Board of  Directors should comprise of independent directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| The non-management  directors must meet at regularly scheduled executive sessions without  management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | We comply with this standard as our  non-management directors meet periodically without management at scheduled  executive sessions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Audit  Committee**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ·     The audit committee must (i) be  comprised entirely of independent directors; (ii) be directly  responsible for the appointment, compensation, retention and oversight of any  registered public accounting firm engaged (including resolution of disagreements  between management and the auditor regarding financial reporting) for the  purpose of preparing or issuing an audit report or performing other audit,  review or attest services for the listed issuer, and each such registered  public accounting firm must report directly to the audit committee;  (iii) establish procedures for the receipt, retention and treatment of  complaints with respect to accounting and auditing issues;  (iv) establish procedures for the confidential, anonymous submission by  employees of the listed issuer of concerns regarding questionable accounting  or auditing matters (v) be authorized to engage independent counsel and  other advisers it deems necessary in performing its duties; and (vi) be  given sufficient funding by the Board of Directors to compensate the  independent auditors and other advisors as well as for the payment of  ordinary administrative expenses incurred by the committee that are necessary  or appropriate in carrying out its duties.

 

The  audit committee must consist of at least three members, and each member must  be independent within the meaning established by the NYSE and Rule 10A-3  under the Securities Exchange Act of 1934.

 

·     The audit committee members  must be financially literate or become financially literate within a  reasonable period of their appointment to the audit committee.

 

·     Each  listed company must have disclosed whether their Board of Directors has  identified an audit committee financial expert (as defined under applicable  rules of the SEC), and if not the reasons why the board has not done so |       | We comply with this standard. Our Audit Committee is comprised of  three members all being “independent directors” within the meaning  established by the NYSE.  All the  Committee members are financially literate and the Audit Committee has  identified Mr. Arun Duggal, who is the Chairman of the Audit Committee,  as a financial expert (as defined under applicable rules of the SEC) The  Committee has a written charter that addresses the Committee’s purpose and  responsibilities. The charter and Clause 49 of the Indian Listing Agreements  address the duties, role and responsibilities of the Audit Committee.

 

The Audit Committee also meets separately, quarterly, with  management, with internal auditors and with independent auditors and reviews  with the independent auditors any audit problems or difficulties and  management’s response, if any.

 

The Audit Committee reports regularly to the  Board of  Directors.

  |

 

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| **Standard NYSE Practices**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Our  Practice**                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                                |
| ·     The audit  committee must  have a written charter that addresses the committee’s purpose and  responsibilities.

 

·     At a minimum, the committee’s purpose must be to assist the board in the oversight of the integrity of  the company’s financial statements, the company’s compliance with legal and  regulatory requirements, the independent auditor’s qualifications and  independence and the performance of the company’s internal audit function and  independent auditors.

 

·     The duties and responsibilities of the audit committee include conducting a review of the independent  auditing firm’s annual report describing the firm’s internal quality control  procedures, any material issues raised by the most recent internal quality control  review or peer review of the firm and any steps taken to address such issues.

 

The audit committee is also to assess the auditor’s independence by  reviewing all relationships between the company and its auditor. It must  establish the company’s hiring guidelines for employees and former employees  of the independent auditor.

 

The committee must also discuss the company’s annual audited  financial statements and quarterly financial statements with management and  the independent auditors, the company’s earnings press releases, as well as  financial information and earnings guidance provided to analysts and rating  agencies, and policies with respect to risk assessment and risk management.

 

The committee must also meet separately, periodically, with management,  with internal auditors (or other personnel responsible for the internal audit  function) and with independent auditors and review with the independent  auditor any audit problems or difficulties and management’s response.

The committee must report regularly to the board |       |                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                                                |
| Each listed company must have an  internal audit function.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | We comply with this standard as we have an internal audit function. |

 

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| **Standard NYSE Practices**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Our  Practice**                                                                                                                                                                                                                                                         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                                                                                                                                                                                                                                                                      |
| **Compensation  Committee**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                                                                                                                                                      |
| ·     Listed companies must have  a compensation committee composed entirely of independent board members as  defined by the NYSE listing standards.

 

·     The committee must have a  written charter that addresses its purpose and responsibilities.

 

·     These responsibilities include  (i) reviewing and approving corporate goals and objectives relevant to  CEO compensation; (ii) evaluating CEO performance and compensation in  light of such goals and objectives for the CEO; (iii) based on such  evaluation, reviewing and approving CEO compensation levels;  (iv) recommending to the board non-CEO compensation, incentive  compensation plans and equity-based plans; and (v) producing a report on  executive compensation as required by the Securities and Exchange Commission  to be included in the company’s annual proxy statement or annual report. The  committee must also conduct an annual performance self-evaluation. |       | We comply with this  standard as our Compensation and Remuneration committee is composed entirely  of “Independent directors” as defined by the NYSE listed standards. This  Committee has a written charter which addresses its purpose and  responsibilities. |

 

| Nominating/ Corporate Governance Committee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ·     Listed companies must have a nominating/  corporate governance committee composed entirely of independent board  members.

 

·     The committee must have a written charter  that addresses its purpose and responsibilities, which include (i) identifying  individuals qualified to become board members; (ii) selecting, or  recommending that the board select, the director nominees for the next annual  meeting of shareholders; (iii) developing and recommending to the  board a  set of corporate governance principles applicable to the company;  (iv) overseeing the evaluation of the board and management; and  (v) conducting  an annual performance evaluation of the committee. |   | As Foreign Private Issuer, we follow home country  practice in lieu of NYSE Corporate Governance Standards as permitted. Under  Clause 49 of the Indian Corporate Governance norms “Nominating and Corporate  Governance Committee” is non-mandatory requirement. However, as matter good  governance practice, we have “Nominating and Governance Committee” which  comprises of majority of Independent Directors and the Committee has a  written charter which addresses its purpose and responsibilities. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Equity-Compensation  Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Shareholders must be  given the opportunity to vote on all equity-compensation plans and material  revisions thereto, with certain limited exceptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | We comply with this standard. Our Employee  Stock Option Plan was approved by our Shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Corporate Governance  Guidelines                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Listed companies must  adopt and disclose corporate governance guidelines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | We have adopted corporate governance guidelines as prescribed in Clause 49  of the Indian Listing Agreements                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Code of Business  Conduct and Ethics                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| All listed companies  must adopt and disclose a code of business conduct and ethics for directors,  officers and employees, and promptly disclose any waivers of the code for  directors or executive officers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | We comply with this standard. The Company  has adopted a Code of Business Conduct and Ethics for its directors, officers  and employees. This code is posted on the website of the Company.                                                                                                                                                                                                                                                                                                                                        |

 

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**ITEM 17. FINANCIAL STATEMENTS**

 

SeeItem 18.

 

**ITEM 18. FINANCIAL STATEMENTS**

 

The following financial statement and auditorsreport for fiscal 2008 are incorporated herein by reference and are included inthis Item 18 of this report on Form 20-F:

 

·       Reportof Independent Registered Public Accounting Firm.

 

·       ConsolidatedBalance Sheets as of December 31, 2007 and 2008.

 

·       ConsolidatedStatements of Income for the years ended December 31, 2006, 2007 and 2008

 

·       ConsolidatedStatements of Stockholders Equity and Comprehensive Income for the years ended December 31,2006, 2007 and 2008.

 

·       ConsolidatedStatements of Cash Flows for the years ended December 31, 2006, 2007 and2008.

 

·       Notesto the Consolidated Financial Statements

 

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**ITEM 19. EXHIBITS**

 
| *1.1   |   | Articles  of Association of Patni Computer Systems Limited, as amended                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *1.2   |   | Memorandum  of Association of Patni Computer Systems Limited, as amended                                                                                        |
| *1.3   |   | Certificate  of Incorporation of Patni Computer Systems Limited, as amended                                                                                     |
| *2.1   |   | Form of  Deposit Agreement                                                                                                                                 |
| *2.2   |   | Patni’s  specimen certificate for equity shares                                                                                                            |
| *2.3   |   | Form of  American Depositary Receipt                                                                                                                       |
| *2.4   |   | Patni  ESOP 2003-Revised 2006 #                                                                                                                                 |
| *4.2   |   | Registration  Rights Agreement                                                                                                                                  |
| *4.3   |   | Purchase  Agreement between Patni Computer Systems Limited and Cymbal Corporation dated  November 3, 2004                                                  |
| *4.4   |   | Lease  Deed entered into between the Company and State Industrial Promotion  Corporation of Tamil Nadu Limited (SIPCOT), dated September 30, 2004          |
| *4.5   |   | Service  Agreement between Patni Computer Systems Inc. and Mr. Narendra K. Patni  dated December 1, 2000, as amended                                  |
| *4.6   |   | Consultancy  Agreement between Patni Computer Systems Limited and Patni Americas Inc.  (formally Patni Computer Systems Inc) dated October 27, 2000        |
| *4.7   |   | Terms  of employment for Mr. Gajendra K. Patni and Mr. Ashok  K. Patni                                                                      |
| *4.8   |   | Information  Technology Services Agreement between General Electric International Inc. and  Patni Computer Systems Inc. dated November 12, 2003            |
| ** 4.9 |   | Amendment  to Information Technology Services Agreement between General Electric  International Inc. and Patni Computer Systems Inc. dated August 03, 2006 |
| 8.1    |   | List  of subsidiaries of the Registrant, see “Item 4. Information on the Company—Organizational  Structure”                                      |
| 12.1   |   | Certification  of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act                                                                      |
| 12.2   |   | Certification  of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act                                                                      |
| 13.1   |   | Certification  of Chief Executive Officer under Section 906 of the Sarbanes Oxley Act                                                                      |
| 13.2   |   | Certification  of Chief Financial Officer under Section 906 of the Sarbanes Oxley Act                                                                      |

 

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*                                                       Previously filedon November 17, 2005 with the SEC on Form F-1 (File Number333-129771)

#                                                       Incorporated byreference from Form S - 8 (file number 33-137306)

**                                                Previously filed on March, 5, 2008 with the SEC on Form 20F/A(File Number 001-32692 08666713)

 

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**SIGNATURES**

 

The registrant hereby certifies that it meetsall of the requirements for filing on Form 20-F and that it has dulycaused and authorized the undersigned to sign this annual report on its behalf.

 
|                       |     | For  Patni Computer Systems Limited |
|----------------------------|----------|-------------------------------------|
|                       |     |                                |
|                       |     | By:                                 | /s/  JEYA KUMAR |
|                       |     |                                | Jeya  Kumar |
| * *                   | * * | * *                            | *Chief  Executive Officer* |
| * *                   | * * | * *                            |
|                       |     | For  Patni Computer Systems Limited |
|                       |     |                                |
|                       |     | By:                                 | /s/  SURJEET SINGH |
|                       |     |                                | Surjeet  Singh |
| * *                   | * * | * *                            | *Chief  Financial Officer* |
| * *                   | * * | * *                            |
| Mumbai,  India             |     |                                |
| Date:  June 16 , 2009 |     |                                |

 

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**Patni Computer Systems Limited and subsidiariesConsolidated financial statementsContents**

 
| Report  of Independent Registered Public Accounting Firm                                                                                       | F-2         |
|------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
| Consolidated  Balance Sheets as of December 31, 2007 and 2008                                                                             | F-3         |
| Consolidated  Statements of Income for the years ended December 31,  2006, 2007 and 2008                                             | F-4         |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Income for the years ended December 31,  2006, 2007 and 2008 | F-5 to F-6  |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2007 and 2008                                               | F-7 to F-8  |
| Notes to the Consolidated Financial Statements                                                                                                 | F-9 to F-52 |

 

F-1

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Table of Contents

 

Report of IndependentRegistered Public Accounting Firm

 

TheBoard of Directors and Shareholders

 

PatniComputer Systems Limited:

 

Wehave audited the accompanying consolidatedbalance sheets of Patni Computer Systems Limited and subsidiaries (the ‘Company’) as of December 31, 2008and 2007, and the related consolidatedstatements of income, shareholders’ equity and comprehensive income/(loss), andcash flows for each of the years in the three-year period ended December 31,2008. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Patni Computer Systems Limited and subsidiaries as of December 31,2008 and 2007, and the results of theiroperations and their cash flowsfor each of the years in the three-year period ended December 31, 2008, inconformity with U.S. generally accepted accounting principles.

 

Asdiscussed in Note 2.28 to the consolidated financial statements, effective January 1,2006, the Company adopted the fair value method of accounting for stock-based compensationas required by Statement of Financial Accounting Standards No. 123(R),Share- Based Payment.

 

Asdiscussed in Note 2.41 to the consolidated financial statements, effective January 1,2008, the Company adopted provisions of Statement of Financial AccountingStandard No. 157, Fair Value Measurements, which establishes a commondefinition for fair value, framework for measuring fair value, and expandsdisclosure about such fair value measurements. 

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), Patni Computer Systems Limited’sinternal control over financial reporting as of December 31, 2008, basedon  criteria established in Internal Control -Integrated Framework**issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO),and our report dated April 10, 2009 expressed an**unqualified opinion onthe effectiveness of the Company’s internal control over financial reporting. 

 

 

s/KPMG

Mumbai,India 

April 10, 2009

 

F-2

----

Table of Contents

 

**Consolidated balance sheet**

 
| ** **                                                                                                                                                                             | ** ** | **As  of**                  | ** **      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-----------------|
| ** **                                                                                                                                                                             | ** ** | **December 31,  2007** | ** **      | **December 31,  2008** | ** ** |
| **Assets**                                                                                                                                                                             |       |                        |            |   |   |
| *Current assets*                                                                                                                                                                       |       |                        |            |   |   |
| Cash and cash equivalents                                                                                                                                                              |       | $                           | 32,625,979      |   | $ | 60,138,457 |   |
| Investments                                                                                                                                                                            |       | 297,726,183                 |            | 245,529,769 |   |
| Accounts receivable, net                                                                                                                                                               |       | 136,371,683                 |            | 111,813,743 |   |
| Costs and estimated earnings in excess of billings  on uncompleted contracts                                                                                                           |       | 32,417,391                  |            | 30,663,367 |   |
| Advance income taxes                                                                                                                                                                   |       | 1,688,513                   |            | 8,922,311 |   |
| Deferred income taxes                                                                                                                                                                  |       | 6,879,161                   |            | 9,796,021 |   |
| Prepaid Expenses                                                                                                                                                                       |       | 2,132,687                   |            | 2,586,241 |   |
| Other current assets                                                                                                                                                                   |       | 30,600,530                  |            | 6,934,944 |   |
| **Total current assets**                                                                                                                                                               | ** ** | **$**                       | **540,442,127** | ** ** | **$** | **476,384,853** | ** ** |
| Advance income taxes                                                                                                                                                                   |       | 5,782,273                   |            | 3,093,606 |   |
| Deferred income taxes                                                                                                                                                                  |       | 12,479,374                  |            | 19,825,211 |   |
| Investments                                                                                                                                                                            |       | 3,425,527                   |            | 2,769,231 |   |
| Other assets                                                                                                                                                                           |       | 24,475,694                  |            | 19,956,864 |   |
| Property, plant and equipment, net                                                                                                                                                     |       | 171,026,782                 |            | 150,930,327 |   |
| Intangible assets, net                                                                                                                                                                 |       | 31,881,136                  |            | 27,073,168 |   |
| Goodwill                                                                                                                                                                               |       | 66,713,170                  |            | 65,309,045 |   |
| **Total assets**                                                                                                                                                                       | ** ** | **$**                       | **856,226,083** | ** ** | **$** | **765,342,305** | ** ** |
| **Liabilities  and shareholders’ equity**                                                                                                                                         |       |                        |            |   |   |
| *Current liabilities*                                                                                                                                                                  |       |                        |            |   |   |
| Capital lease obligation                                                                                                                                                               |       | 277,704                     |            | 175,741 |   |
| Trade accounts payable                                                                                                                                                                 |       | 10,517,823                  |            | 8,938,743 |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                                                                                                           |       | 3,555,245                   |            | 6,000,383 |   |
| Income taxes payable                                                                                                                                                                   |       | 20,237,930                  |            | 22,402,386 |   |
| Accrued expenses                                                                                                                                                                       |       | 55,079,924                  |            | 56,167,097 |   |
| Other current liabilities                                                                                                                                                              |       | 34,287,255                  |            | 59,689,464 |   |
| **Total current liabilities**                                                                                                                                                          | ** ** | **$**                       | **123,955,881** | ** ** | **$** | **153,373,814** | ** ** |
| Capital lease obligations excluding current  installments                                                                                                                              |       | 325,853                     |            | 184,214 |   |
| Other liabilities                                                                                                                                                                      |       | 25,362,959                  |            | 24,486,301 |   |
| Income taxes payable                                                                                                                                                                   |       | 23,811,111                  |            | 13,482,925 |   |
| Deferred income taxes                                                                                                                                                                  |       | 1,806,178                   |            | 2,858,796 |   |
| **Total liabilities**                                                                                                                                                                  | ** ** | **$**                       | **175,261,982** | ** ** | **$** | **194,386,050** | ** ** |
| Commitments and Contingencies                                                                                                                                                          |       |                        |            |   |   |
| **Shareholders’ Equity**                                                                                                                                                          |       |                        |            |   |   |
| Common shares Rs. 2 par value; Authorized  250,000,000 shares (Issued and outstanding; 139,009,409 shares and  128,105,007 shares as of December 31, 2007 and 2008 respectively). |       | 6,158,044                   |            | 5,672,130 |   |
| Additional paid-in capital                                                                                                                                                             |       | 313,350,315                 |            | 264,878,177 |   |
| Retained earnings                                                                                                                                                                      |       | 285,238,586                 |            | 375,215,818 |   |
| Accumulated other comprehensive income/(loss)                                                                                                                                          |       | 76,217,156                  |            | (74,809,870 | ) |
| **Total shareholders’ equity**                                                                                                                                                    | ** ** | **$**                       | **680,964,101** | ** ** | **$** | **570,956,255** | ** ** |
|                                                                                                                                                                                   |       |                        |            |   |   |
| **Total liabilities and  shareholders’ equity**                                                                                                                                   | ** ** | **$**                       | **856,226,083** | ** ** | **$** | **765,342,305** | ** ** |

 

Seeaccompanying notes to the consolidated financial statements.

 

F-3

----

Table of Contents

 

**Consolidated statements of income**

 
| ** **                                                                         | ** ** | **Year ended December 31,** | ** **     |
|------------------------------------------------------------------------------------|------------|----------------------------------|----------------|
| ** **                                                                         | ** ** | **2006**                         | ** **     | **2007** | ** ** | **2008** | ** ** |
| Net revenues                                                                       |       | $                                | 578,850,882    |   | $ | 662,911,669 |   | $ | 718,884,103 |   |
| Cost of revenues                                                                   |       | 373,965,978                      |           | 450,085,130 |   | 491,266,302 |   |
| **Gross profit**                                                                   | ** ** | **204,884,904**                  | ** **     | **212,826,539** | ** ** | **227,617,801** | ** ** |
| Selling, general and administrative expenses                                       |       | 106,471,937                      |           | 116,260,200 |   | 131,056,061 |   |
| Provision for doubtful debts and advances                                          |       | 1,191,017                        |           | 1,181,753 |   | 1,625,595 |   |
| Foreign exchange (gain)/loss, net                                                  |       | 2,747,926                        |           | (23,350,920 | ) | 18,358,897 |   |
| **Operating Income**                                                               | ** ** | **94,474,024**                   | ** **     | **118,735,506** | ** ** | **76,577,248** | ** ** |
| Other income/(expense)                                                             |       |                             |           |   |   |   |   |
| Interest and dividend income                                                       |       | 10,087,916                       |           | 12,540,158 |   | 13,001,582 |   |
| Interest expense                                                                   |       | (2,839,930                       | )              | (3,592,436 | ) | (1,744,367 | ) |
| Interest expense reversed (Refer note 11.2)                                        |       | —                           |           | — |   | 6,497,329 |   |
| Gain on sale of investments, net                                                   |       | 1,679,097                        |           | 6,370,002 |   | 9,731,648 |   |
| Other (expense)/income, net                                                        |       | 3,541,426                        |           | 1,706,227 |   | 2,561,206 |   |
| **Income before income taxes**                                                     | ** ** | **106,942,533**                  | ** **     | **135,759,457** | ** ** | **106,624,646** | ** ** |
| Income taxes                                                                       |       | 47,691,763                       |           | 21,783,963 |   | 5,203,401 |   |
| **Net Income**                                                                     | ** ** | **$**                            | **59,250,770** | ** ** | **$** | **113,975,494** | ** ** | **$** | **101,421,245** | ** ** |
| **Earnings per share**                                                             |       |                             |           |   |   |   |   |
| Basic                                                                              |       | $                                | 0.43           |   | $ | 0.82 |   | $ | 0.75 |   |
| Diluted                                                                            |       | $                                | 0.43           |   | $ | 0.82 |   | $ | 0.75 |   |
| **Weighted average number of common  shares used in computing earnings per share** |       |                             |           |   |   |   |   |
| Basic                                                                              |       | 137,957,477                      |           | 138,660,785 |   | 135,590,677 |   |
| Diluted                                                                            |       | 138,904,860                      |           | 139,569,933 |   | 135,760,422 |   |

 

Seeaccompanying notes to the consolidated financial statements.

 

F-4

----

Table of Contents

 

**Consolidated statements ofShareholders’ Equity and Comprehensive Income/(loss) for the years ended December 31,2006, 2007 and 2008**

 

*(in$ except share data)*

 
| ** **                                                                                     | ** ** | **Common  shares** | ** ** | ** **     | ** ** | **Additional**      | ** ** | **Retained**     | ** ** | **Comprehensive** | *** *** | **Accumulated  Other  Comprehensive** | ** ** | **Shareholders** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------|------------|---------------------|------------|------------------|------------|-------------------|--------------|---------------------------------------|------------|------------------|------------|
| ** **                                                                                     | ** ** | **Shares**         | ** ** | **Par value**  | ** ** | **Paid-In-Capital** | ** ** | **Earnings**     | ** ** | **Income/(loss)** | ** **   | **Income/(loss)**                     | ** ** | **Equity**       | ** ** |
| **Balance as of January 1, 2006**                                                         | ** ** | **137,798,399**    | ** ** | **$6,101,600** | ** ** | **$299,220,619**    | ** ** | **$132,511,943** |       |              | ** **   | **$1,194,908**                        | ** ** | **$439,029,070** | ** ** |
| Issuance of equity shares on exercise of options                                               |       | 483,454            |       | 21,360         |       | 1,802,953           |       |             |       |              |         |                                  |       | 1,824,313        |       |
| Tax benefit arising on exercise of stock options                                               |       |               |       |           |       | 23,338              |       |             |       |              |         |                                  |       | 23,338           |       |
| Compensation cost related to employee stock option  plan                                       |       |               |       |           |       | 3,984,071           |       |             |       |              |         |                                  |       | 3,984,071        |       |
| Cash dividend on common shares                                                                 |       |               |       |           |       |                |       | (8,565,154       | )          |              |         |                                  |       | (8,565,154       | )          |
| Comprehensive income                                                                           |       |               |       |           |       |                |       |             |       |              |         |                                  |       |             |       |
| Net income                                                                                     |       |               |       |           |       |                |       | 59,250,770       |       | 59,250,770        |         |                                  |       | 59,250,770       |       |
| Other comprehensive income:                                                                    |       |               |       |           |       |                |       |             |       |              |         |                                  |       |             |       |
| Translation adjustment                                                                         |       |               |       |           |       |                |       |             |       | 9,256,054         |         |                                  |       | 9,256,054        |       |
| Unrealised gain on investments, net of tax of  $1,076,106                                      |       |               |       |           |       |                |       |             |       | 2,102,200         |         |                                  |       | 2,102,200        |       |
| Unrealised gain on cash flow hedging derivatives,  net of tax of $ Nil                    |       |               |       |           |       |                |       |             |       | 2,531,633         |         |                                  |       | 2,531,633        |       |
| Comprehensive income                                                                           |       |               |       |           |       |                |       |             |       | 73,140,657        |         | 13,889,887                            |       |             |       |
| Adjustment to initially apply FASB Statement  No. 158, net of tax of $323,655             |       |               |       |           |       |                |       |             |       |              |         | (843,079                              | )          | (843,079         | )          |
| **Balance as of December 31,  2006**                                                      | ** ** | **138,281,853**    | ** ** | **6,122,960**  | ** ** | **305,030,981**     | ** ** | **183,197,559**  |       |              | ** **   | **$14,241,716**                       | ** ** | **$508,593,216** | ** ** |
| Issuance of equity shares on exercise of options                                               |       | 727,556            |       | 35,084         |       | 3,203,887           |       |             |       |              |         |                                  |       | 3,238,971        |       |
| Tax benefit arising on exercise of stock options                                               |       |               |       |           |       | 442,165             |       |             |       |              |         |                                  |       | 442,165          |       |
| Compensation cost related to employee stock option  plan                                       |       |               |       |           |       | 4,673,281           |       |             |       |              |         |                                  |       | 4,673,281        |       |
| Cash dividend on common shares                                                                 |       |               |       |           |       |                |       | (11,934,467      | )          |              |         |                                  |       | (11,934,467      | )          |
| Comprehensive income                                                                           |       |               |       |           |       |                |       |             |       |              |         |                                  |       |             |       |
| Net income                                                                                     |       |               |       |           |       |                |       | 113,975,494      |       | 113,975,494       |         |                                  |       | 113,975,494      |       |
| Other comprehensive income:                                                                    |       |               |       |           |       |                |       |             |       |              |         |                                  |       |             |       |
| Translation adjustment                                                                         |       |               |       |           |       |                |       |             |       | 58,571,590        |         |                                  |       | 58,571,590       |       |
| Unrealised gain on investments, net of tax of  ($424,845)                                      |       |               |       |           |       |                |       |             |       | 4,870,285         |         |                                  |       | 4,870,285        |       |
| Unrealised holding gains (losses) arising during  the year                                     |       |               |       |           |       |                |       |             |       | 10,750,148        |         |                                  |       | 10,750,148       |       |
| Less: Reclassification adjustment included in net  income                                      |       |               |       |           |       |                |       |             |       | (11,792,707       | )            |                                  |       | (11,792,707      | )          |
| Actuarial losses related to pension and other post  retirement benefits, net of tax of $47,185 |       |               |       |           |       |                |       |             |       | (423,876          | )            |                                  |       | (423,876         | )          |
| Comprehensive income                                                                           |       |               |       |           |       |                |       |             |       | 176,374,810       |         | 61,975,440                            |       | —           |       |
| **Balance as of December 31,  2007**                                                      | ** ** | **139,009,409**    | ** ** | **$6,158,044** | ** ** | **$313,350,315**    | ** ** | **$285,238,586** |       |              | ** **   | **$76,217,156**                       | ** ** | **$680,964,101** | ** ** |

 

See accompanying notes to the consolidated financial statements.

 

F-5

----

Table of Contents

 

**Consolidated statements of Shareholders’ Equity andComprehensive Income/(loss) for the years ended December 31, 2006, 2007and 2008 *(Continued)***

 

*(in $except share data)*

 
| ** **                                                                                    | ** ** | **Common  shares** | ** ** | ** **    | ** **    | **Additional Paid-** | ** ** | **Retained**    | ** ** | **Comprehensive** | ** **      | **Accumulated  Other  Comprehensive** | ** ** | **Shareholders** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------|---------------|----------------------|------------|-----------------|------------|-------------------|-----------------|---------------------------------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | **Shares**         | ** ** | **Par value** | ** **    | **In-Capital**       | ** ** | **Earnings**    | ** ** | **Income/(loss)** | ** **      | **Income/(loss)**                     | ** ** | **Equity**       | ** ** |
| **Balance as of December 31,  2007**                                                     | ** ** | **139,009,409**    | ** ** | **$**         | **6,158,044** | ** **           | **$**      | **313,350,315** | ** ** | **$**             | **285,238,586** |                                  |       | ** **       | **$**      | **76,217,156** | ** ** | **$** | **680,964,101** | ** ** |
| Issuance of equity shares on exercise of options                                              |       | 52,680             |       | 2,634         |          | 188,325              |       |            |       |              |            |                                  |       | 190,959          |       |
| Purchase of Common stock                                                                      |       | (10,957,082        | )          | (488,548      | )             | (52,573,794          | )          |            |       |              |            |                                  |       | (53,062,342      | )          |
| Tax benefit arising on exercise of stock options                                              |       |               |       |          |          | 16,121               |       |            |       |              |            |                                  |       | 16,121           |       |
| Compensation cost related to employee stock option  plan                                      |       |               |       |          |          | 3,897,210            |       |            |       |              |            |                                  |       | 3,897,210        |       |
| Cash dividend on common shares                                                                |       |               |       |          |          |                 |       | (11,444,013     | )          |              |            |                                  |       | (11,444,013      | )          |
| Comprehensive income                                                                          |       |               |       |          |          |                 |       |            |       |              |            |                                  |       |             |       |
| Net income                                                                                    |       |               |       |          |          |                 |       | 101,421,245     |       | 101,421,245       |            |                                  |       | 101,421,245      |       |
| Other comprehensive income:                                                                   |       |               |       |          |          |                 |       |            |       |              |            |                                  |       |             |       |
| Translation adjustment                                                                        |       |               |       |          |          |                 |       |            |       | (119,927,020      | )               |                                  |       | (119,927,020     | )          |
| Unrealised gain on investments, tax effected  ($257,690)                                      |       |               |       |          |          |                 |       |            |       | (1,828,525        | )               |                                  |       | (1,828,525       | )          |
| Unrealised losses on derivative instruments:                                                  |       |               |       |          |          |                 |       |            |       |              |            |                                  |       |             |       |
| Unrealised holding gains (losses) arising during  the year, net of tax credit ($2,201,998)    |       |               |       |          |          |                 |       |            |       | (42,542,853       | )               |                                  |       | (42,542,853      | )          |
| Less: Reclassification adjustment included in net  income                                     |       |               |       |          |          |                 |       |            |       | 12,068,379        |            |                                  |       | 12,068,379       |       |
| Actuarial gain related to pension and other post  retirement benefits, net of tax of $195,797 |       |               |       |          |          |                 |       |            |       | 1,202,993         |            |                                  |       | 1,202,993        |       |
| Comprehensive income/(loss)                                                                   |       |               |       |          |          |                 |       |            |       | (49,605,781       | )               | (151,027,026                          | )          | —           |       |
| **Balance as of December 31,  2008**                                                     | ** ** | **128,105,007**    | ** ** | **$**         | **5,672,130** | ** **           | **$**      | **264,878,177** | ** ** | **$**             | **375,215,818** |                                  |       | ** **       | **$**      | **(74,809,870** | **)** | **$** | **570,956,255** | ** ** |

 

See accompanying notes to the consolidated financial statements.

 

F-6

----

Table of Contents

 

**Consolidated statements of cashflows**

 
| ** **                                                                        | ** ** | **Year ended December 31,** | ** **       |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------------|
| ** **                                                                        | ** ** | **2006**                         | ** **       | **2007** | ** ** | **2008** | ** ** |
| ** **                                                                        |       |                             |             |   |   |   |   |
| **Operating activities**                                                          |       |                             |             |   |   |   |   |
| Net income                                                                        |       | $                                | 59,250,770       |   | $ | 113,975,494 |   | $ | 101,421,245 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |                             |             |   |   |   |   |
| Depreciation and amortization of intangible assets                                |       | 19,573,548                       |             | 25,053,060 |   | 27,711,972 |   |
| Deferred taxes                                                                    |       | 4,344,470                        |             | (10,130,035 | ) | (9,215,965 | ) |
| Provision/(recovery) for doubtful debts and  advances                             |       | 1,191,017                        |             | 1,181,753 |   | 1,625,595 |   |
| (Gain)/loss on sale of property, plant and  equipment, net                        |       | (21,977                          | )                | (265,426 | ) | (371,526 | ) |
| (Gain) / loss on sale of investments                                              |       | (1,679,097                       | )                | (6,370,002 | ) | (9,731,648 | ) |
|                                                                              |       |                             |             |   |   |   |   |
| Compensation cost related to employee stock option  plan                          |       | 3,984,071                        |             | 4,673,281 |   | 3,897,210 |   |
|                                                                              |       |                             |             |   |   |   |   |
| Changes in assets and liabilities                                                 |       |                             |             |   |   |   |   |
| Accounts receivable                                                               |       | (40,234,185                      | )                | (13,492,304 | ) | 9,987,054 |   |
| Costs and estimated earnings in excess of billings  on uncompleted contracts      |       | 3,955,003                        |             | (8,300,239 | ) | (3,289,128 | ) |
| Other current assets                                                              |       | (735,650                         | )                | (21,663,190 | ) | 21,015,540 |   |
| Other assets                                                                      |       | (579,720                         | )                | 1,252,142 |   | (1,675,575 | ) |
| Trade accounts payable others                                                     |       | 4,025,950                        |             | (1,804,558 | ) | (958,041 | ) |
| Billings in excess of costs and estimated earnings  on uncompleted contracts      |       | 859,218                          |             | 59,255 |   | 3,081,643 |   |
| Taxes payable                                                                     |       | 4,979,698                        |             | 11,218,123 |   | (8,427,949 | ) |
| Excess tax benefit from stock based compensation                                  |       | (23,338                          | )                | (442,165 | ) | (16,121 | ) |
| Tax benefit on exercise of stock options                                          |       | —                           |             | 47,841 |   | 14,739 |   |
| Accrued expenses                                                                  |       | 16,246,514                       |             | 8,104,178 |   | 9,463,589 |   |
| Other current liabilities                                                         |       | (17,063,525                      | )                | 4,222,173 |   | 14,263,756 |   |
| Other liabilities                                                                 |       | 1,018,325                        |             | 3,952,833 |   | (9,453,334 | ) |
| **Net cash provided by operating  activities**                                    | ** ** | **$**                            | **59,091,092**   | ** ** | **$** | **111,272,214** | ** ** | **$** | **149,343,056** | ** ** |
| **Investing activities**                                                          |       |                             |             |   |   |   |   |
| Purchase of property, plant and equipment                                         |       | (48,620,365                      | )                | (61,891,010 | ) | (43,362,388 | ) |
| Proceeds from sales of property, plant and  equipment                             |       | 83,097                           |             | 557,761 |   | 3,841,641 |   |
| Purchase of investments                                                           |       | (781,204,843                     | )                | (1,149,342,754 | ) | (973,062,275 | ) |
| Proceeds from sale of investments                                                 |       | 686,658,104                      |             | 1,134,569,183 |   | 977,051,287 |   |
| Payments for acquisition, net of cash acquired                                    |       | (12,184,832                      | )                | (33,795,203 | ) | — |   |
|                                                                              |       |                             |             |   |   |   |   |
| Payments for acquisition of technology related  intangibles                       |       | (497,879                         | )                | (20,368,599 | ) | — |   |
|                                                                              |       |                             |             |   |   |   |   |
| Tax benefit on incentive stock option of Patni  Telecom                           |       | 340,366                          |             | 235,057 |   | — |   |
| ** **                                                                        | ** ** | ** **                       | ** **       | ** ** | ** ** | ** ** | ** ** |
| **Net cash used in investing  activities**                                        | ** ** | **$**                            | **(155,426,352** | **)** | **$** | **(130,035,565** | **)** | **$** | **(35,531,735** | **)** |

 

Seeaccompanying notes to the consolidated financial statements.

 

F-7

----

Table of Contents

 

**Consolidated statements of cash flows *(Continued)***

 
| ** **                                                                            | ** ** | **Year  ended**  | ** **     |
|---------------------------------------------------------------------------------------|------------|------------------|----------------|
| ** **                                                                            | ** ** | **2006**         | ** **     | **2007** | ** ** | **2008** | ** ** |
| ** **                                                                            | ** ** | ** **       | ** **     | ** ** | ** ** | ** ** | ** ** |
| **Financing activities:**                                                             |       |             |           |   |   |   |   |
| Payment of capital lease obligations                                                  |       | (390,886         | )              | (429,987 | ) | (293,418 | ) |
| Dividend on common shares                                                             |       | (8,562,666       | )              | (11,933,401 | ) | (11,440,837 | ) |
| Proceeds from common shares issued, net of expenses                                   |       | 1,824,313        |           | 3,238,971 |   | 190,958 |   |
| Purchase of Common Stock                                                              |       | —           |           | — |   | (53,062,342 | ) |
| Excess tax benefit arising on exercise of stock  options                              |       | 23,338           |           | 442,165 |   | 16,121 |   |
| **Net cash provided by/(used in)  financing activities**                              | ** ** | **$**            | **(7,105,901** | **)** | **$** | **(8,682,252** | **)** | **$** | **(64,589,518** | **)** |
| Effect of exchange rates changes on cash and cash  equivalents                        |       | 1,131,571        |           | 13,561,572 |   | (21,709,325 | ) |
| **Net increase in cash and cash  equivalents**                                        | ** ** | **(103,441,161** | **)**          | **(27,445,603** | **)** | **49,221,803** | ** ** |
| Cash and cash equivalents at the beginning of the  year                               |       | 148,819,600      |           | 46,510,010 |   | 32,625,979 |   |
| Cash and cash equivalents at the end of the year                                      |       | $                | 46,510,010     |   | $ | 32,625,979 |   | $ | 60,138,457 |   |
| Supplemental disclosure of cash flow information:                                     |       |             |           |   |   |   |   |
| Interest paid                                                                         |       | $                | 4,905,069      |   | $ | 26,764 |   | $ | 50,302 |   |
| Income taxes paid                                                                     |       | $                | 39,945,075     |   | $ | 29,532,237 |   | $ | 16, 993,377 |   |
| Non cash investing and financing activities:                                          |       |             |           |   |   |   |   |
| Additions to property, plant and equipment,  represented by capital lease obligations |       | $                | 361,133        |   | $ | 264,138 |   | $ | 149,745 |   |
| Property, plant and equipment acquired on credit                                      |       | $                | 4,814,076      |   | $ | 558,012 |   | $ | (3,158,568 | ) |

 

Seeaccompanying notes to the consolidated financial statements.

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**1****             ****Organizationand nature of business**

 

1.1           Patni ComputerSystems Limited (“Patni”) is a company incorporated in India under the IndianCompanies Act, 1956. In February 2004, Patni completed an initial publicoffering of its equity shares in India and in December 2005, the Companycompleted an initial public offering of American Depositary Shares in the UnitedStates of America (USA).

 

1.2           Patni Computers Systems (UK)Limited (“Patni UK”), a company incorporated in the United Kingdom (UK), PatniComputer Systems GmbH (“Patni GmbH”), a company incorporated in Germany, PatniAmericas, Inc. (“Patni USA”) formerly known as Patni Computer Systems, Inc.,a company incorporated in Massachusetts, USA and Patni Computer Sytems Brasil,Ltda a company incorporated in Brazil are 100% owned subsidiaries of Patni. On November 3,2004, Patni USA, acquired 100% equity in Patni Telecom (formerly known asCymbal Corporation), a company incorporated in California, USA, together withits subsidiaries in India, UK & Thailand, for consideration in cash.In July, 2007, Patni USA, acquired 100% equity in Patni Life Sciences Inc.(formerly known as Taratec Development Corporation), a company incorporated inNew Jersey, USA, for consideration in cash. Further, Patni also has foreignbranch offices in the USA, Japan, Sweden, Australia, Korea, Netherlands,Finland, UAE, South Africa, Canada and Turkey. In March 2008 the Companythrough it’s wholly owned subsidiary Patni UK incorporated a subsidiary inCzech Republic named Patni Computer Systems (Czech) s.r.o. In December 2008the company has set up a subsidiary in Mexico named PCS Computer SystemsMexico, SA.

 

Cymbal Information Services (Thailand) Ltd., subsidiary of Patni Telecomhas been dissolved and the liquidation has been completed in May, 2006.

 

1.3           Patni togetherwith its subsidiaries (collectively, “Patni Group” or “the Company”) is engagedin IT consulting, software development and Business Process Outsourcing (“BPO”).  The Company provides multiple serviceofferings to its clients across various industries comprising financialservices, insurance services, manufacturing, communications, media andentertainment and technology services (comprising independent software vendorsand product engineering) and other industries such as energy and utilities, retail,logistics and transportation. The various service offerings compriseapplication development, application maintenance and support, packaged softwareimplementation, infrastructure management services, product engineeringservices, quality assurance services and BPO services.

 

1.4           These financialstatements are prepared on a consolidated basis for all the years presented.

 

**2****             ****Summary ofsignificant accounting policies**

 

***Basis of preparation of financialstatements***

 

2.1           The accompanyingconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America (“US GAAP”).

 

***Principles of consolidation***

 

2.2           The consolidatedfinancial statements include the financial statements of Patni and all of itssubsidiaries, which are more than 50% owned and controlled. All inter-companyaccounts and transactions are eliminated on consolidation.

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*(Continued)***

 

***Accounting estimates***

 

2.3           The preparationof financial statements in conformity with US GAAP requires that managementmakes estimates and assumptions that affect the reported amount of assets andliabilities and disclosures of contingent assets and liabilities as of the dateof the financial statements and the reported amounts of revenue and expensesduring the reporting period.  Managementbelieves that the estimates used in the preparation of the consolidatedfinancial statements are prudent and reasonable.  The actual results could differ from theseestimates. Appropriate changes in estimates are made as management become awareof changes in circumstances surrounding the estimates. Changes in estimates arereflected in the financial statements in the period in which changes are madeand, if material, their effects are disclosed in the notes to the consolidatedfinancial statements.

 

***Revenue and cost recognition***

 

2.4           The Companyderives its revenues primarily from software services and to a lesser extentfrom BPO services. Revenue is recognized when there is persuasive evidence of acontractual arrangement with customers, delivery has occurred, the sales priceis fixed or determinable and collectability is probable. Software services areprovided either on a fixed price, fixed time frame or on a time and materialbasis. The Company’s fixed price contracts include application maintenance andsupport services, on which revenue is recognized ratably over the term ofmaintenance. Revenue with respect to other fixed price contracts is recognizedon a percentage of completion basis.  Revenuewith respect to time-and-material contracts is recognized as related servicesare performed.

 

Guidance has been drawn from paragraph 95 ofStatement of Position (“SOP”) 97-2, “Software Revenue Recognition” to accountfor revenue from fixed price arrangements for software development and relatedservices in conformity with SOP-81-1 (“Accounting for Performance ofConstruction - Type and  CertainProduction - Type Contracts”). The input (cost expended) method has been usedbecause management considers this to be the best available measure of progresson these contracts as there is a direct relationship between input andproductivity. Provisions for estimated losses, if any, on uncompleted contractsare recorded in the period in which such losses become probable based on thecurrent contract estimates.

 

2.5           The asset, “Costsand estimated earnings in excess of billings on uncompleted contracts”,represents revenues recognized in excess of amounts billed.  These amounts are billed after the milestonesspecified in the agreement are achieved and the customer acceptance for thesame is received.  The liability, “Billingsin excess of costs and estimated earnings on uncompleted contracts”, representsbillings in excess of revenues recognized.

 

2.6           Direct andincremental contract origination and set up costs incurred in connection withsupport/maintenance service arrangements are charged to expense asincurred.  These costs are deferred onlyin situations where there is a contractual arrangement establishing a customerrelationship for a specified period.  Thecosts to be deferred are limited to the extent of future contractualrevenues.  Further, revenue attributableto set up activities is deferred and recognised systematically over the periodsthat the related fees are earned, as services performed during such period donot result in the culmination of a separate earnings process.

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*(Continued)***

 

Costs that are incurred for a specific anticipated contract and thatwill result in no future benefits unless the contract is obtained, are notincluded in contract costs before the receipt of the contract. However, suchcosts are deferred, subject to the evaluation of their probable recoverability.

 

2.7           Warranty costson sale of services are accrued based on managements’ estimates and historicaldata at the time related revenues are recorded.

 

2.8           The Companygrants volume discounts to certain customers, which are computed based on apre-determined percentage of the total revenues from those customers during aspecified period, as per the terms of the contract. These discounts are earnedonly after the customer has provided a specified cumulative level of revenuesin the specified period. The Company reports revenues net of discounts offered tocustomers.

 

The Company estimates the total number of customers that will ultimatelyearn these discounts, based on which a portion of the revenue on the relatedtransactions is allocated to the services that will be delivered in the future.

 

Reimbursement of out of pocket expenses received from customers havebeen included as part of revenues in accordance with EITF 01-14 “IncomeStatement Characterization of Reimbursements Received for ‘Out of Pocket’Expenses Incurred”.

 

2.9           Revenues fromBPO Services are derived from both time-based and transaction-priced contracts.Revenue is recognized as the related services are performed, in accordance withthe specific terms of the contracts with the customer.

 

2.10         The Company reports taxesassessed by governmental authorities directly imposed on revenue producingtransactions on a net basis. This disclosure is provided as per EITF 06-03 on “Howtaxes collected from customers and remitted to government authorities should bepresented in the Income Statement”.

 

***Advertising cost***

 

2.11         Advertisingcosts incurred during the year have been expensed. The total amount ofadvertising costs expensed was $1.6 million, $0.9 million and $1.6 million forthe years ended December, 31, 2006, 2007 and 2008.

 

***Cash and cash equivalents***

 

2.12         The Companyconsiders investments in highly liquid investments with an original maturity ofthree months or less to be cash equivalents. Cash and cash equivalents comprisecash, deposits with banks and money market accounts.

 

***Investments***

 

2.13         Managementdetermines the appropriate classification of investment securities at the timeof purchase and re-evaluates such designation at each balance sheet date.  At December 31, 2007 and 2008,investment securities were classified as available-for-sale or held tomaturity. The investment securities classified as available-for-sale consistsof units of mutual funds and other securities. Other securities consistsprimarily of debt instruments, that carry market interest rates and are statedat cost. Held to maturity securities consist of investment in Government bondsmade by the Company pursuant to tax exemption scheme under the Indian IncomeTax Act, 1961. These bonds mature in five years from the time of deposit.

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*(Continued)***

 

2.14         Available-for-salesecurities are carried at fair market value with unrealized gains and losses,net of deferred income taxes, reported as a separate component of othercomprehensive income in the statement of shareholders’ equity and comprehensiveincome. The fair values represent either the quoted market prices for theinvestments at balance sheet date where available or Net Asset Value (“NAV”) asstated by the issuers of these mutual fund units in the published statements.  NAVs represents the price at which the issuerwill issue further units in the mutual fund and the price at which the issuerwill redeem such units from the investors. Accordingly, such NAV are analogousto fair market value with respect to these investments as transactions of thesemutual funds are carried out at such prices between investors and the issuersof these units of mutual funds.

 

Realized gains and losses, and decline in value judged to be other thantemporary on available-for-sale securities are included in the consolidatedstatements of income.  The cost ofsecurities sold or disposed is determined on average cost basis.

 

***Business combinations, goodwill andintangible assets***

 

2.15         Statement ofFinancial Accounting Standards (“SFAS”) No. 141, “Business Combinations”requires that the purchase method of accounting be used for all businesscombinations.  SFAS No. 141specifies criteria that intangible assets acquired in a business combinationmust be recognized and reported separately from goodwill.  In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets” all assets and liabilities of the acquiredbusinesses including goodwill are assigned to reporting units.

 

2.16         Goodwillrepresents the cost of the acquired businesses in excess of the fair value ofidentifiable tangible and intangible net assets purchased. Goodwill is notamortized but is tested for impairment atleast on an annual basis at year end,relying on a number of factors including operating results, business plans andfuture cash flows. Recoverability of goodwill is evaluated using a two-stepprocess. The first step involves a comparison of the fair value of a reportingunit with its carrying value. If the carrying amount of the reporting unitexceeds its fair value, the second step of the process involves a comparison ofthe fair value and carrying value of the goodwill of that reporting unit. Ifthe carrying value of the goodwill of a reporting unit exceeds the fair valueof that goodwill, an impairment loss is recognized in an amount equal to theexcess. Goodwill of a reporting unit will be tested for impairment betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of the reporting unit below its carrying amount.

 

2.17         Intangibleassets acquired either through a business combination or individually areamortized over their respective individual estimated useful lives in proportionto the economic benefits consumed in each period. Intangible assets comprise customerand technology related intangible assets and are being amortized over a periodof 5-10 years. The estimated useful life of an identifiable intangible asset isbased on a number of factors including the effects of obsolescence, demand,competition and other economic factors (such as the stability of the industry,and known technological advances) and the level of maintenance expendituresrequired to obtain the expected future cash flows from the asset.

 

2.18         Intangibleassets are evaluated for recoverability whenever events or changes incircumstances indicate that their carrying amounts may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to future undiscounted net cash flows expected tobe generated by the asset. If such assets are considered to be impaired, theimpairment to be 

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*(Continued)***

 

recognized is measured by the amount by whichthe carrying value of the assets exceeds the fair value of the assets.

 

***Property, plant and equipment***

 

2.19         Property, plantand equipment are stated at cost less accumulated depreciation andamortization. Gains and losses on disposals are included in the consolidated statementsof income at amounts equal to the difference between the net book value of thedisposed assets and the net proceeds received upon disposal.  Expenditures for replacements andimprovements are capitalized, whereas the cost of maintenance and repairs ischarged to income when incurred.

 

2.20         Property, plantand equipment are depreciated over the estimated useful life of the asset usingthe straight-line method, once the asset is put to its intended use. The costof software obtained for internal use is capitalized and amortized over theestimated useful life of the software. The estimated useful lives of assets areas follows:

 
| Buildings                                                           |   | 40 years                                                                       |
|---------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|
| Leasehold  premises and improvements                                |   | Over the lease period or the useful lives of the assets, whichever is  shorter |
| Computer — Hardware and software and other service  equipments |   | 3 years                                                                        |
| Furniture  and fixtures                                             |   | 3-8 years                                                                      |
| Other  equipment                                                    |   | 3-8 years                                                                      |
| Vehicles                                                            |   | 4-5 years                                                                      |

 

***Impairment of long-lived assets andlong-lived assets to be disposed***

 

2.21         Long-lived assetsand certain identifiable intangible assets are reviewed for impairment wheneveran event or changes in circumstances indicate that the carrying amount of suchassets may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to future net undiscounted cash flowsexpected to be generated by the asset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of assets.  Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less cost to sell.

 

***Functional and Foreign currencytranslation***

 

2.22         The functionalcurrency of Patni and its branches in the USA, Japan, Sweden, Finland, UAE,South Africa, Canada, Australia, Korea and Netherland is the Indian Rupee. Thefunctional currencies of Patni’s subsidiaries are the applicable localcurrencies.

 

2.23         The accompanyingconsolidated financial statements are reported in US Dollars.  The translation is performed for balancesheet accounts using the exchange rate in effect at the balance sheet date andfor statements of income accounts using the exchange rate prevailing on thedate of those transactions In respect of subsidiaries, the respectivefunctional currencies are first translated into Indian Rupees and then into USDollars.  The gains or losses resultingfrom such translation are reported in other comprehensive income in thestatement of shareholders’ equity and comprehensive income.

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*(Continued)***

 

***Foreign currency transactions***

 

2.24         Transactions inforeign currencies are translated into the functional currency at the rates ofexchange prevailing at the date of the transaction.  Resulting gains or losses from settlement ofsuch foreign currency transactions are included in the consolidated statementsof income. Unsettled monetary assets and liabilities denominated in foreign currenciesare translated into the functional currency at the rates of exchange prevailingat the balance sheet date.

 

A transaction gain or loss arising from achange in exchange rates between the date of a transaction and the year endexchange rates is included in the consolidated statements of income.

 

***Income taxes***

 

2.25         Income taxes areaccounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss carry forwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of changes in tax rates is recognized in results ofoperations in the period that includes the enactment date.  The measurement of deferred tax assets isreduced, if necessary, by a valuation allowance if it is more likely than notthat some portion or all of the assets will not be realised. The Companyrecognizes interest and penalties related to uncertain tax positions in Other(expense)/income.

 

***Concentration of credit risk***

 

2.26         Financialinstruments that potentially subject the Company to concentration of creditrisks consist principally of cash, cash equivalents, investments and accountsreceivables.  Cash and cash equivalentsare invested with corporations, financial institutions and banks withinvestment grade credit ratings.  Toreduce credit risk, investments are made in a diversified portfolio of mutualfunds, government bonds, which are periodically reviewed.  To reduce its credit risk on accountsreceivables, the Company performs ongoing credit evaluations of customers.

 

***Retirement benefits to employees***

 

2.27         Contributions todefined contribution plans are charged to income in the period in which theyaccrue.  Current services costs fordefined benefit plans are accrued in the period to which they relate, based onactuarial valuation performed by an independent actuary in accordance with SFASNo. 87, “Employers’ Accounting for Pensions”, SFAS No. 132R “Employers’Disclosures about Pensions and Other Postretirement Benefits”, both as amendedby SFAS No. 158 “Employer’s Accounting for Defined Benefit Pension andOther Postretirement Plans”. The Company adopted SFAS No. 158 as of December 31,2006 which requires the net funded position of the plans to be recognized as anasset or liability in the employers’ balance sheet.

 

In measuring the defined benefit obligations, the Company uses discountrate based on yields of high quality fixed income instruments (i.e. yields onhigh quality corporate bonds) prevailing as at the balance sheet date for thecorresponding tenure of the obligations.

 

***Stock-based compensation***

 

2.28         The Companyadopted SFAS No. 123R, “Share-Based Payment” (SFAS No. 123R)effective January 1, 2006. This statement requires compensation expenserelating to share-based payments to be recognized in net income using a fair valuemeasurement method. Under the fair value method, the estimated fair

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*(Continued)***

 

***Stock-based compensation (continued)***

 

value of awards is charged to income on aaccelerated basis over the requisite service period, which is generally thevesting period. The Company elected the modified prospective method as prescribedin SFAS No. 123R and therefore, prior period was not restated.

 

Under the modified prospective method, thisstatement was applied to new awards granted after the time of adoption, as wellas to the unvested portion of previously granted equity-based awards for whichthe requisite service had not been rendered as of January 1, 2006. TheCompany granted stock options under the ‘Patni ESOP 2003 Revised 2006’ plan (‘theplan’). See Note 17 for further discussion.

 

2.29         Prior to theadoption of SFAS 123R, the Company was required to record benefits associatedwith the tax deductions in excess of recognized compensation cost as anoperating cash flow. However SFAS 123R requires that such benefits be recordedas a financing cash inflow. In the accompanying Consolidated Statements of CashFlows for year ended December 31, 2006, 2007 and 2008, tax benefit of $23,338,$ 442,165 and $16,121, respectively has been classified as financing cashflows.

 

2.30         Effective April 1,2007, an amendment has been made to Indian Income Tax Act 1961 subjectingspecified securities allotted or transferred by an employer to its employees toFringe Benefit Tax (FBT). The liability to pay FBT by the employer arises atthe time of allotment of the securities, consequent to exercise of option bythe employees and is calculated on the difference between the fair value of theunderlying share on the date of vesting and the exercise price paid by theemployee based on the corporate tax rate. The FBT arising from such allotmentof specified option is collectible from employees, which is considered as akinto a reset in the terms of the ESOP Plan as it would reduce the ultimatebenefit to the employee, by way of increase in exercise price and hence isrecognized as additional paid-in-capital.

 

***Dividends***

 

2.31         Dividends oncommon shares are recorded as a liability on the date of declaration by theshareholders at the Annual General Meeting.

 

***Derivatives and hedge Accounting***

 

2.32         The Companyenters into forward foreign exchange contracts/option contracts(derivatives) to mitigate the risk of changes in foreign exchange rates oninter company and end customer accounts receivable and forecasted salestransactions denominated in foreign currencies. The strategy also includesentering into short-term forward foreign exchange contracts which are replacedwith successive new contracts up to the period in which the forecastedtransactions are expected to occur (roll-over hedging).Upon completion of theformal documentation and testing for effectiveness, the Company designatesforward and option contracts, which meet the hedging criteria, as cash flowhedges. Changes in fair values of designated cash flow hedges are deferred andrecorded as a component of accumulated other comprehensive income until the hedgedtransactions occur and are then recognised in the consolidated statements of income.However, for derivatives acquired pursuant to roll-over hedging strategy, theforward premium/discount points are excluded from assessing hedgeeffectiveness. Changes in fair value for derivatives not designated as hedginginstruments and ineffective portion of the hedging instruments are recognizedin consolidated statements of income in the current period.

 

2.33         In respect ofderivatives designated as hedges, the Company formally documents all relationshipsbetween hedging instruments and hedged items, as well as its risk managementobjective and strategy for undertaking various hedge transactions. The Companyalso formally assesses, both at the inception of

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summaryof significant accounting policies*(Continued)***

 

***Derivatives and hedge Accounting (Continued)***

 

the hedge and on an ongoing basis, whether each derivative is highlyeffective in offsetting changes in fair values or cash flows of the hedgeditem. If it is determined that a derivative is not highly effective as a hedge,or if a derivative ceases to be a highly effective hedge, the Company will,prospectively, discontinue hedge accounting with respect to that derivative.

 

The derivatives, which do not qualify for hedge accounting, areaccordingly, recognised at fair value with gains or losses included in foreignexchange (gain)/loss in the consolidated statements of income.

 

***Earnings per share***

 

2.34         In accordancewith SFAS No. 128, “Earnings per Share”, basic earnings per share is computedusing the weighted average number of common and redeemable common sharesoutstanding during the year. Diluted earnings per share is computed using theweighted average number of common and redeemable common shares and dilutivecommon equivalent shares outstanding during the year using the treasury stockmethod for options except where the result would be anti-dilutive.

 

***Commitments and Contingencies***

 

2.35         Liabilities forloss contingencies arising from claims, assessments, litigations, fines andpenalties and other sources are recorded when it is probable that a liabilityhas been incurred and the amount of the assessment and/or remediation can bereasonably estimated.

 

***Reclassifications***

 

2.36         Certain reclassificationshave been made in the financial statements of prior years to conform to classificationsused in the current year.

 

***Recently Issued Accounting Standards***

 

2.37         In December 2007,the FASB issued FASB Statement No. 141R, Business Combinations (Statement141R) and FASB Statement No. 160, Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment to ARB No. 51 (Statement 160).Statements 141R and 160 require most identifiable assets, liabilities,noncontrolling interests, and goodwill acquired in a business combination to berecorded at “full fair value” and require noncontrolling interests (previouslyreferred to as minority interests) to be reported as a component of equity,which changes the accounting for transactions with noncontrolling interestholders. Both Statements are effective for periods beginning on or after December 15,2008, and earlier adoption is prohibited. Statement 141R will be applied tobusiness combinations occurring after the effective date. Statement 160 will beapplied prospectively to all noncontrolling interests, including any that arosebefore the effective date. The Company is currently evaluating the impact ofadopting Statement 141R and Statement 160 on its results of operations andfinancial position.

 

2.38         In April 2008,the FASB issued FASB Staff Position (FSP) FAS 142-3 , Determination of theUseful Life of Intangible Assets . FSP FAS 142-3 amends the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscalyears beginning after December 15, 2008 and early adoption is prohibited.We are currently evaluating the impact of the same pending adoption of FSP FAS142-3 on our consolidated financial statements.

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summary ofsignificant accounting policies*(Continued)***

 

***Recently Issued Accounting Standards(Continued)***

 

2.39         The FinancialAccounting Standards Board (“FASB”) issued SFAS No. 161 Disclosure aboutDerivative Instruments and Hedging activities - An amendment to SFAS No 133 (“SFAS161”) in March 2008. Statement 161 requires increased quantitative,qualitative and credit-risk disclosures. Quantitative disclosures shouldinclude information (in a tabular format) about the fair value of thederivative instruments, including gains and losses, and should contain moredetailed information about the location of the derivative instrument in theentity’s financial statements. Credit-risk disclosures should includeinformation about the existence and nature of credit-risk related contingentfeatures included in derivative instruments. Credit risk related contingentfeatures can be defined as those that require entities upon the occurance of acredit event to settle derivative instruments or to post collateral. TheCompany will be required to adopt this new standard prospectively, for fiscalyears, and interim periods within those fiscal years, beginning on or after November 15,2008. The Company is currently evaluating the requirements of SFAS 161 and havenot yet determined the impact that is expected to result from the adoption ofthe standard.

 

2.40         In December 2008,the FASB issued FSP FAS 132(R)-1, Employer’s Disclosures about PostretirementBenefit Plan Assets (“FSP FAS 132(R)-1”). The FSP requires enhanced disclosures about plan assets currentlyrequired by SFAS No. 132 (revised 2003), Employer’s Disclosures aboutPensions and Other Postretirement Benefits. FSP FAS 132(R)-1 requires more detailed disclosures about employers’plan assets, including employers’ investment strategies, major categories ofplan assets, concentrations of risk within plan assets, and valuationtechniques used to measure the fair value of plan assets. FSP FAS 132(R)-1 iseffective for fiscal years ending after December 15, 2009, and earlyadoption is permitted. We are currently assessing the impact of this FSP on ourfinancial statement disclosures

 

***Recently Adopted Accounting Standards***

 

2.41         In September 2006,the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157,“Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishesa common definition for fair value to be applied to US GAAP requiring use offair value, establishes a framework for measuring fair value, and expandsdisclosure about such fair value measurements. SFAS No. 157 is effectivefor financial assets and financial liabilities for fiscal years beginning afterNovember 15, 2007. Issued in February 2008, FSP 157-1 “Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13” removed leasing transactionsaccounted for under Statement 13 and related guidance from the scope of SFAS No. 157.FSP 157-2 “Partial Deferral of the Effective Date of Statement 157” (“FSP 157-2”),

 

deferred the effective date of SFAS No. 157 for all nonfinancial assetsand nonfinancial liabilities to fiscal years beginning after November 15,2008.

 

The implementationof SFAS No. 157 for financial assets and financial liabilities, effective January 1,2008, did not have a material impact on the Company’s consolidated financialposition and results of operations. The Company is currently assessing theimpact of SFAS No. 157 for nonfinancial assets and nonfinancialliabilities on its consolidated financial position and results of operations.

 

SFAS No. 157, defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date (exit price).SFAS No. 157 classifies the inputs used to measure fair value into the followinghierarchy:

 

Level 1: Unadjustedquoted market prices in active market.

 

Level 2: Unadjustedquoted prices in active markets for similar assets or liabilities or

 

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
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|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**2****             ****Summaryof significant accounting policies*(Continued)***

 

***Recently Adopted Accounting Standards(Continued)***

 

Unadjustedquoted prices for identical or similar assets or liabilities in markets thatare not active or

 

Inputsother than quoted prices that are observable for the asset or liability.

 

Level 3: Unobservable inputs used for measuring the assets orliability.

 

In accordance with SFAS 157 the following table sets out the Company’sfair value hierarchy for its financial assets (Investments and Derivativeinstruments) measured at fair value on a recurring basis as of December 31,2008:

 
| ** **                             | ** ** | **Level 1** | ** ** | **Level 2** | ** **  | **Level 3** | ** ** |
|----------------------------------------|------------|-------------|------------|-------------|-------------|-------------|------------|
| **Assets  :**                          |       |        |       |        |        |        |       |
| Liquid  mutual funds                   |       | —      |       | $           | 152,904,732 |        | —     |   |
| Fixed  maturity plan                   |       | —      |       | $           | 90,550,521  |        | —     |   |
| Other  investments                     |       | 2,024,878   |       | —      |        | 49,638      |       |
| **Liabilities  :**                     |       |        |       |        |        |        |       |
| Foreign  currency exchange derivatives |       | —      |       | $           | 38,417,603  |        | —     |   |

 

Investmentcategorized as Level 3 at January 1, 2008 consisted principally ofinvestment in unquoted equity securities at cost of $ 750,000. An impairmentloss of $706,277 has been recognised during the year. There have been no salesduring the year in this category.

 

2.42         In February 2007, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 159 (“SFAS 159”), “The FairValue Option for Financial Assets and Financial Liabilities”. Under SFAS 159,companies may elect to measure certain financial instruments and certain otheritems at fair value. The standard requires that unrealized gains and losses onitems for which the fair value option has been elected be reported in earnings.SFAS 159 was effective for the Company beginning in the first quarter of fiscal2008. The Company has not elected to use fair value measurements under SFASNo.159 with respect to any eligible instruments.

 

F-18

----

Tableof Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**3****           ****Acquisitions**

 

***3.1***          Acquisition of business and assets of Logan-OrvissInternational Associates BV (‘LOI’)

*** ***

***On July 2, 2007, the Companyacquired the business and assets of LOI, a European telecommunicationsconsulting services Company. The Company believes that through this acquisitionit will strengthen its presence in communication and media practice throughconsultancy services on IT initiatives. The purchase price of $8,613,938(including direct acquisition related expenses of $863,938) was paid in cash.***

*** ***

***This transaction has beenaccounted using the purchase method as required by SFAS No. 141 “BusinessCombinations”. The purchase price has been allocated to the acquired assets asper management’s estimates and independent valuation of fair values assummarized below:***

 
| **Intangible assets**                                            | ** ** | ** ** | ** ** | ** ** | ** **    |
|------------------------------------------------------------------|------------|------------|------------|------------|---------------|
| - Customer  contracts and non contractual customer relationships |       | 1,370,000  |       |       |          |
| - Intellectual  property rights                                  |       | 790,000    |       | 2,160,000  |          |
| Goodwill                                                         |       |       |       | 6,453,938  |          |
| **Total purchase price**                                         |       |       | ** ** | **$**      | **8,613,938** | ** ** |
|                                                                  |            |            |            |            |               |  |

*** ***

***Goodwill generated from theabove acquisition was allocated to “Communications, Media and Entertainment”segment.***

*** ***

***Further, as a part of thebusiness acquisition, the Company initiated an incentive plan linked torevenues for certain specific employees. Management estimates that incentivepayments under this plan will not exceed $13,080,000 but be paid through June 2010.Since, the incentive payments are linked to continuing employment, the paymentsunder the plan are recognized as compensation for post acquisition services.Accordingly, $22,664 and $222,690 have been recorded as Cost of revenues andSelling, General and Administrative expenses respectively for the year ended December 31,2007. During the current year based on the assessment of revenue targetsachieved for the year ended June 30, 2008, $117,108 has been recorded as Selling,general and administrative expenses for these employees.  Further, based on the assessment of revenuetargets to be achieved for the year ended June 30, 2009, an additionalamount of $62,510 has been recorded as Selling, general and administrative expensesfor these employees for the year ended December 31, 2008.***

*** ***

***3.2******         ******Acquisition of Taratec Development Corporation (Taratec)***

 

***On July 23, 2007, PatniUSA acquired 100% equity interest in Taratec DevelopmentCorporation(subsequently named as Patni Life Sciences), which is a leadingconsulting company in the life sciences industry providing integrated business,information technology, and regulatory compliance products and services.***

*** ***

***The primary purpose for theacquisition was to enhance Patni’s market specific services and provideadditional capability to support the growing and diverse requirements of theLife Sciences market, from pharmacovigilance to demand-driven supply chains.The purchase price of $15,680,226 (including direct acquisition related expensesof $435,008), was paid in cash on July 23, 2007.***

*** ***

***The terms of the purchasealso provide for payment of contingent consideration to all the sellingshareholders, payable over three years, and calculated based on the achievementof specified revenue and margin targets. The contingent consideration ispayable in cash and cannot exceed $13,200,000.***

 

F-19

----

Tableof Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**3****                                        ****Acquisitions*(Continued)***

 

***3.2******                              ******Acquisition of Taratec Development Corporation (Taratec) (Continued)***

 

***The Company has followed theconsensus reached in EITF 95-8, “Accounting for Contingent Consideration Paidto the Shareholders of an Acquired Enterprise in a Purchase Business Combination”and accordingly, will record the contingent payments, other than payments tocertain employees under the incentive plan described below, as goodwill in theperiods in which the contingency is resolved.***

*** ***

***Further, as a part of theacquisition, the Company initiated an incentive plan linked to revenues andmargins, for certain specific employees of Taratec and Patni. The incentivepayments under this plan will not exceed $3,500,000 through June 2010.Since, the incentive payments are linked to continuing employment; the paymentsunder the plan are recognized as compensation for post acquisition services.Accordingly, $156,974 and $17,867 have been recorded as Cost of revenues andSelling, General and Administrative expenses, respectively for the year ended December 31,2007. Based on the assessment of revenue targets achieved for the year ended June 30,2008 and to be achieved for the year ended June 30, 2009 management hasconcluded that no amount is required to be accrued as compensation cost forthese employees for the year ended December 31, 2008.***

*** ***

***This transaction has beenaccounted using the purchase method of accounting as required by SFAS No. 141“Business Combinations”. The purchase price, net of cash acquired of$2,843,782, has been allocated to the acquired assets and assumed liabilitiesas per management’s estimates and independent valuation as summarized below:***

 
| Net current assets                                               |   |      |       | $         | 2,528,948      |       |
|------------------------------------------------------------------|--------|-----------|------------|-----------|----------------|------------|
| Deferred tax asset                                               |   |      |       | 920,600   |           |
| Property, plant and equipment                                    |   |      |       | 84,538    |           |
| Deferred tax liability                                           |   |      |       | (696,000  | )              |
| Intangible assets                                                |   |      |       |      |           |
| - Customer contracts and non contractual customer  relationships |   | 1,550,000 |       |      |           |
| - Intellectual property rights                                   |   | 190,000   |       | 1,740,000 |           |
| Goodwill                                                         |   |      |       | 8,258,358 |           |
| **Total purchase price**                                         |   |      | ** ** | **$**     | **12,836,444** | ** ** |

 

***Goodwill generated from theabove acquisition was allocated to “Manufacturing services” segment.***

 

F-20

----

Tableof Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**4            Cashand Cash Equivalents**

 

Cashand cash equivalents held by the Company account wise are as follows:

 
| **As of December 31,** | ** ** | **2007**   | ** **     | **2008**   | ** ** |
|-----------------------------|------------|------------|----------------|------------|------------|
| Money In Transit            |       | $          | 326,249        |       | $          | 982,398 |   |
| Bank Accounts               |       | 31,928,493 |           | 58,033,967 |       |
| Term Deposits               |       | 208,160    |           | 1,026,777  |       |
| Cash in Hand                |       | 163,077    |           | 95,315     |       |
| **Total**                   | ** ** | **$**      | **32,625,979** | ** ** | **$**      | **60,138,457** | ** ** |

 

Cash and cashequivalents as of December 31, 2007 and December 31, 2008 includerestricted cash balance of $ 8,672 and $ 9,755 respectively. Restrictions areprimarily on account of unclaimed dividends.

 

The following tablesets out the break-up of cash and cash equivalents held in banks:

 
| **As of December 31,**                    | ** ** | **2007**       | ** **     | **2008**       | ** ** |
|------------------------------------------------|------------|----------------|----------------|----------------|------------|
| ** **                                     | ** ** | ** **     | ** **     | ** **     | ** ** |
| Money in Transit                               |       | $              | 326,249        |           | $          | 982,398 |   |
| ** **                                     |       |           |           |           |       |
| **Bank Accounts**                              |       |           |           |           |       |
| Bank of Tokyo, Japan                           |       | 1,791,386      |           | 1,270,163      |       |
| Bank of Boston, USA                            |       | 203,975        |           | 6,225,554      |       |
| ANZ Bank, Australia                            |       | 665,518        |           | 1,052,805      |       |
| ABN Amro Bank N.V, India                       |       | 2,270          |           | 1,780,079      |       |
| Citibank N.A., India                           |       | 119,364        |           | 1,317,536      |       |
| Handelsbanken, Finland                         |       | —         |           | 2,038,103      |       |
| Bank of America, USA                           |       | 8,647,770      |           | 25,579,070     |       |
| Natwest Bank, UK                               |       | 971,874        |           | 1,282,157      |       |
| Citibank EEFC accounts,  India                 |       | 3,821,592      |           | 3,423,021      |       |
| ICICI EEFC Bank account,  India                |       | 1,250,393      |           | 261,597        |       |
| Standard Chartered Bank  -EEFC accounts, India |       | 5,964,539      |           | 1,231,418      |       |
| Standard Bank of S  Africa, South Africa       |       | 804,677        |           | 1,840,823      |       |
| Commerce Bank, USA                             |       | 1,349,800      |           | 1,637,792      |       |
| Others *                                       |       | 6,335,335      |           | 9,093,849      |       |
| **Total**                                      | ** ** | **31,928,493** | ** **     | **58,033,967** | ** ** |
| ** **                                     | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Term Deposits**                              | ** ** | ** **     | ** **     | ** **     | ** ** |
| Merrill Lynch, USA                             |       | 208,160        |           | 1,136          |       |
| Yes Bank, India                                |       | —         |           | 1,025,641      |       |
| **Total**                                      | ** ** | **208,160**    | ** **     | **1,026,777**  | ** ** |
| ** **                                     | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Cash in Hand**                               | ** ** | **163,077**    | ** **     | **95,315**     | ** ** |
| ** **                                     | ** ** | ** **     | ** **     | ** **     | ** ** |
| **Cash and Cash Equivalents**                  | ** ** | **$**          | **32,625,979** | ** **     | **$**      | **60,138,457** | ** ** |

 

----

* Others includesbank balances in various accounts with banks spread across various locations inwhich the Company held balances of less than $1 million individually.

 

F-21

----

Tableof Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**5****                                        ****Investments**

 

5.1                                 Investmentsecurities consist of the following:

 
| ** **                                    | ** ** | **As of December 31, 2007** | ** **  |
|-----------------------------------------------|------------|----------------------------------|-------------|
| ** **                                    | ** ** | **Cost of  Purchase**            | ** **  | **Gross unrealized  holding gains** | ** ** | **Gross unrealised  holding losses** | ** ** | **Fair value** | ** ** |
| ** **                                    |       |                             |        |   |   |   |   |   |   |
| **Available for sale:**                       |       |                             |        |   |   |   |   |   |   |
| **Mutual Fund Units:**                        |       |                             |        |   |   |   |   |   |   |
| - Liquid                                      |       | $                                | 136,918,416 |   | $ | 1,446,308 |   | $ | (10,226 | ) | $ | 138,354,498 |   |
| - Fixed Maturity                              |       | 135,584,588                      |        | 7,475,568 |   | — |   | 143,060,156 |   |
| Other Investments                             |       | 16,311,529                       |        | — |   | — |   | 16,311,529 |   |
| Amount reported as investments — current | ** ** | **288,814,533**                  | ** **  | **$** | **8,921,876** | ** ** | **$** | **(10,226** | **)** | **$** | **297,726,183** |   |
| **Held to maturity:**                         |       |                             |        |   |   |   |   |   |   |
| Bonds                                         |       | $                                | 3,425,527   |   |   |   |   |   |   |   |
| Amount reported as investments- non current   | ** ** | **3,425,527**                    |        |   | ** ** | ** ** | ** ** | ** ** | ** ** |

 
|                                        | ** ** | **As  of December 31, 2008** |            |
|---------------------------------------------|------------|-----------------------------------|-----------------|
|                                        | ** ** | **Cost of  Purchase**             | ** **      | **Gross unrealized  holding gains** | ** ** | **Gross unrealised  holding losses** | ** ** | **Fair value** | ** ** |
| ** **                                  |       |                              |            |   |   |   |   |   |   |
| **Available for sale:**                     |       |                              |            |   |   |   |   |   |   |
| **Mutual Fund Units:**                      |       |                              |            |   |   |   |   |   |   |   |   |   |   |
| - Liquid                                    |       | $                                 | 151,126,457     |   | $ | 1,788,582 |   | $ | (10,307 | ) | $ | 152,904,732 |   |
| - Fixed Maturity                            |       | 85,569,637                        |            | 4,980,890 |   | (6 | ) | 90,550,521 |   |
| Other Investments                           |       | 2,008,240                         |            | 66,276 |   | — |   | 2,074,516 |   |
| Amount reported as investments- current     | ** ** | **$**                             | **238,704,334** | ** ** | **$** | **6,835,748** | ** ** | **$** | **(10,313** | **)** | **$** | **245,529,769** |   |
| **Held to maturity:**                       |       |                              |            |   |   |   |   |   |   |
| Bonds                                       |       | $                                 | 2,769,231       |   |   |   |   |   |   |   |
| Amount reported as investments- non current | ** ** | **$**                             | **2,769,231**   |   |   |   |   |   |   |   |

 

5.2                                 Dividends fromsecurities available for sale and gross realized gains and losses on sale ofsecurities available for sale are as follows:

 
| **For the years ended**                                         | ** ** | **December 31,  2006** | ** ** | **December 31,  2007** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------|------------|
| Dividends from securities available for sale                    |       | $                           | 5,941,888  |                        | 9,946,965  |                   | 11,510,937 |   |
| Gross realised gains on sale of securities  available for sale  |       | 1,963,728                   |       | 6,399,319                   |       | 10,477,436             |       |
| Gross realised losses on sale of securities  available for sale |       | 284,631                     |       | 31,861                      |       | 745,788                |       |
|                                                                 |            |                             |            |                             |            |                        |            |  |

 

F-22

----

Tableof Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**5****                                        ****Investments*****(Continued)***

 

5.3                                 Maturity ofinvestment securities classified as available-for-sale and held-to-maturity areas follows as of December 31, 2008:

 
| ** **                                   | ** **   | **Cost of  Purchase** | ** **     | **Fair Value** | ** **   |
|----------------------------------------------|--------------|-----------------------|----------------|----------------|--------------|
| **Available for Sale:**                      | *** *** | *** ***          | *** ***   | *** ***   | *** *** |
| Mutual Fund Units (Fixed Maturity)           |         |                  |           |           |         |
| - Within one year                            |         | 85,569,637            |           | 90,550,521     |         |
| - Due after one year through five years      |         | —                |           | —         |         |
| *** ***                                 | ** **   | **$**                 | **85,569,637** | ** **     | **$**        | **90,550,521** | ** ** |
| **Held to Maturity :**                       | *** *** | *** ***          | *** ***   | *** ***   | *** *** |
| Bond - Due after one year through five years |         | 2,769,231             |           |           |         |
|                                         | ** **   | **$**                 | **2,769,231**  | *** ***   | *** *** | *** *** |
|                                              |              |                       |                |                |              |  |  |

 

5.4**                                **Investmentsecurities are held in the following mutual fund and other investment schemes:

** **
| **As of December, 31**            | ** ** | **2007**        | ** ** | **2008**        | ** ** |
|-----------------------------------|------------|-----------------|------------|-----------------|------------|
|                              |       |            |       |            |       |
| **Available for Sale Securities** |       |            |       |            |       |
| ICICI Prudential Mutual  Fund     |       | $               | 20,770,271 |            | $          | 42,692,251 |   |
| Reliance Mutual Fund              |       | 22,474,708      |       | 34,918,630      |       |
| Birla Sunlife Mutual Fund         |       | 43,635,932      |       | 32,007,002      |       |
| Tata Mutual Fund                  |       | 32,967,629      |       | 30,461,581      |       |
| Kotak Mutual Fund                 |       | 31,330,938      |       | 25,128,363      |       |
| IDFC Mutual Fund                  |       | 14,454,867      |       | 18,441,673      |       |
| JM Financial Mutual Fund          |       | 19,365,426      |       | 13,991,066      |       |
| DSP BlackRock Mutual Fund         |       | 6,862,877       |       | 12,123,623      |       |
| Deutsche Mutual Fund              |       | 10,815,141      |       | 7,952,685       |       |
| Lotus India Mutual Fund           |       | 363,887         |       | 7,237,046       |       |
| Franklin Templeton Mutual  Fund   |       | 15,665,028      |       | 6,158,668       |       |
| Fortis Mutual Fund                |       | 18,286,760      |       | 5,739,249       |       |
| HSBC Mutual Fund                  |       | 11,803,353      |       | 3,956,269       |       |
| HDFC Mutual Fund                  |       | 3,004,292       |       | 2,647,146       |       |
| Canara Bank CD                    |       | —          |       | 2,024,876       |       |
| Global Treasury Fund              |       | 10,486,529      |       | 5,918           |       |
| ING Vysya Mutual Fund             |       | 7,634,611       |       | —          |       |
| Principal Mutual Fund             |       | 11,767,823      |       | —          |       |
| UTI Mutual Fund                   |       | 10,211,111      |       | —          |       |
| Others                            |       | 5,825,000       |       | 43,723          |       |
| **Total**                         | ** ** | **297,726,183** | ** ** | **245,529,769** | ** ** |
|                              |       |            |       |            |       |
| **Held to Maturity**              |       |            |       |            |       |
| NABARD Capital Gains  Bonds       |       | 3,425,527       |       | 2,769,231       |       |
| **Total**                         | ** ** | **3,425,527**   | ** ** | **2,769,231**   | ** ** |
|                                   |            |                 |            |                 |            |  |  |

 

F-23

----

Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**6****                                       ****Accountsreceivable**

 

6.1                                Accountsreceivable consist of the following:

 
| **As of  December 31,**            | ** ** | **2007**   | ** **      | **2008**   | ** ** |
|-----------------------------------------|------------|------------|-----------------|------------|------------|
|                                    |       |       |            |       |       |
| Receivables                             |       | $          | 138,699,173     |       | $          | 114,736,385 |   |
| Less: Allowances for  doubtful accounts |       | (2,327,490 | )               | (2,922,642 | )          |
|                                    |       |       |            |       |       |
|                                    | ** ** | **$**      | **136,371,683** | ** ** | **$**      | **111,813,743** | ** ** |

 

6.2                                The activity inthe allowance for doubtful accounts receivable for the years ended December 31,2006, 2007 and 2008 is as follows

 
| **As of  December 31,**                                           | ** ** | **2006**   | ** **    | **2007**   | ** ** | **2008**      | ** ** |
|------------------------------------------------------------------------|------------|------------|---------------|------------|------------|---------------|------------|
|                                                                   |       |       |          |       |       |          |       |   |   |   |
| Allowance for doubtful  accounts as of the beginning of the year       |       | $          | 2,495,219     |       | $          | 3,105,764     |       | $ | 2,327,490 |   |
| Additional provision (net  of recoveries) made during the year         |       | 1,147,109  |          | 1,050,245  |       | 1,561,630     |       |
| Accounts receivable written  off against the allowance during the year |       | (536,564   | )             | (1,828,519 | )          | (966,478      | )          |
|                                                                   | ** ** | ** ** | ** **    | ** ** | ** ** | ** **    | ** ** |
| Allowance for doubtful accounts  as of the end of the year             | ** ** | **$**      | **3,105,764** | ** ** | **$**      | **2,327,490** | ** ** | **$** | **2,922,642** | ** ** |

 

**7****                                       ****Costsand estimated earnings in excess of billings and billings in excess of costsand estimated earnings on uncompleted contracts**

 
| **As of  December 31,**                                                 | ** ** | **2007**    | ** **     | **2008**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|----------------|-------------|------------|
|                                                                         |       |        |           |        |       |   |   |
| Cost incurred on  uncompleted contracts                                      |       | $           | 37,932,876     |        | $          | 62,885,237 |   |
| Estimated earnings                                                           |       | 33,967,584  |           | 38,889,183  |       |
|                                                                         |       | 71,900,460  |           | 101,774,420 |       |
| Less: Billings to date                                                       |       | (43,038,314 | )              | (77,111,436 | )          |
|                                                                         |       | $           | 28,862,146     |        | $          | 24,662,984 |   |
| Included in the  accompanying balance sheet under the following captions:    |       |        |           |        |       |
| Costs and estimated  earnings in excess of billings on uncompleted contracts |       | 32,417,391  |           | 30,663,367  |       |
| Billings in excess of costs  and estimated earnings on uncompleted contracts |       | (3,555,245  | )              | (6,000,383  | )          |
|                                                                         | ** ** | **$**       | **28,862,146** |        | **$**      | **24,662,984** |   |

 

F-24

----

Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**8****                                       ****Otherassets**

 

***Other assets consist of thefollowing:***

 
| **As of  December 31,**                         | ** ** | **2007**    | ** **     | **2008**   | ** ** |
|------------------------------------------------------|------------|-------------|----------------|------------|------------|
|                                                 |       |        |           |       |       |
| Advances to vendors                                  |       | $           | 1,969,206      |       | $          | 1,317,240 |   |
| Refundable security deposit                          |       | 7,907,629   |           | 6,457,639  |       |
| Deferred of cost in respect  of revenue arrangements |       | 3,303,564   |           | 1,689,331  |       |
| Due from employees                                   |       | 3,356,975   |           | 1,646,155  |       |
| Derivative contracts                                 |       | 13,292,568  |           | 75,424     |       |
| Leasehold Land                                       |       | 17,225,046  |           | 13,833,378 |       |
| Deposit with tax  authorities                        |       | 6,829,927   |           | —     |       |
| Others                                               |       | 1,191,310   |           | 1,872,641  |       |
|                                                 | ** ** | **$**       | **55,076,225** | ** ** | **$**      | **26,891,808** | ** ** |
| Less : Other current assets                          |       |        |           |       |       |
| Advances to vendors                                  |       | (1,969,206  | )              | (1,317,240 | )          |
| Refundable security deposit                          |       | (2,403,420  | )              | (353,433   | )          |
| Deferred of cost in respect  of revenue arrangements |       | (3,303,564  | )              | (1,689,331 | )          |
| Due from employees                                   |       | (3,181,259  | )              | (1,626,875 | )          |
| Derivative contracts                                 |       | (11,721,845 | )              | (75,424    | )          |
| Deposit with tax  authorities                        |       | (6,829,927  | )              | —     |       |
| Others                                               |       | (1,191,310  | )              | (1,872,641 | )          |
|                                                 |       | (30,600,531 | )              | (6,934,944 | )          |
| Other assets                                         | ** ** | **$**       | **24,475,694** | ** ** | **$**      | **19,956,864** | ** ** |

 

**9             Property,plant and equipment**

 

9.1                                Property, plantand equipment consists of the following:

 
| **As of  December 31,**                          | ** ** | **2007**     | ** **      | **2008**     | ** ** |
|-------------------------------------------------------|------------|--------------|-----------------|--------------|------------|
|                                                  |       |         |            |         |       |
| Land                                                  |       | $            | 4,339           |         | $          | 3,508 |   |
| Building                                              |       | 56,168,539   |            | 56,885,137   |       |
| Leasehold improvements                                |       | 7,833,303    |            | 6,960,380    |       |
| Computer – Hardware and  other service equipment |       | 55,676,933   |            | 49,981,070   |       |
| Computer – Software                              |       | 29,953,484   |            | 28,665,685   |       |
| Furniture and fixtures                                |       | 20,818,460   |            | 19,153,158   |       |
| Other equipment                                       |       | 41,844,783   |            | 38,046,505   |       |
| Vehicles                                              |       | 2,133,390    |            | 1,579,933    |       |
| Asset held for sale                                   |       | 3,421,179    |            | —       |       |
| Capital work-in-progress                              |       | 36,962,152   |            | 39,515,267   |       |
| Capital advances                                      |       | 18,271,144   |            | 11,759,987   |       |
|                                                  |       | 273,087,706  |            | 252,550,630  |       |
| Less: Accumulated  depreciation and amortization      |       | (102,060,924 | )               | (101,620,303 | )          |
|                                                  | ** ** | **$**        | **171,026,782** | ** **   | **$**      | **150,930,327** | ** ** |

 

F-25

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**9****                                       ****Property,plant and equipment *(continued)***

 

9.2                                Depreciation andamortization on property, plant and equipment and amortization of computersoftware included in depreciation and amortization of property, plant andequipment is as follows:

 
| **For the  years ended**           | ** ** | **December  31, 2006** | ** ** | **December  31, 2007** | ** ** | **December  31, 2008** | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| Depreciation and  amoritization    |       | $                      | 18,605,047 |                   | 22,965,130 |                   | 23,254,443 |   |
| Amortization of computer  software |       | 4,437,291              |       | 4,796,933              |       | 4,432,496              |       |
|                                    |            |                        |            |                        |            |                        |            |  |

*** ***

***Unamortized computersoftware cost as at December 31, 2007 and 2008 amounted to $6,065,303, and$ 5,071,501 respectively.***

*** ***

**10****                                ****Goodwilland intangible assets**

 

10.1                          Intangibleassets as at December 31, 2007 and 2008 consist of the following:

 
| **As of  December 31,**             | ** ** | **2007**       | ** **           | **2008**       | ** ** |
|------------------------------------------|------------|----------------|----------------------|----------------|------------|
| Customer related intangibles             |       | $              | 14,037,795           |           | $          | 14,037,795 |   |
| Technology related  intangibles          |       | 497,879        |                 | 497,879        |       |
| Intellectual property  rights            |       | 21,448,600     |                 | 21,448,600     |       |
| Foreign currency  translation adjustment |       | (28,356        | )                    | (378,795       | )          |
|                                     | ** ** | **35,955,918** | ** **           | **35,605,479** | ** ** |
| Less: Accumulated amortization           |       | (4,074,782     | )                    | (8,532,311     | )          |
|                                     | ** ** | **$**          | ** 31,881,136** | ** **     | **$**      | **27,073,168** | ** ** |

*** ***

***During the year ended December 31,2007, Patni through its wholly owned subsidiary, Patni USA, acquired from oneof its major customers, the worldwide rights for software Proprietary IntellectualProperty Rights (“IPR”) that enables communication service providers to offercustomer management, retail point-of-sale and billing services for a variety ofproducts and services. Cost of acquisition of the IPR amounting to $20,368,600has been capitalized as an intangible asset and is being amortized over aperiod of ten years. The Company intends to use this intellectual property forthe purposes of software licensing, provision of reusable IP-led IT services,managed services and provision of hosted or software-as-a-service solutions. Aroyalty of 5% is payable to seller on such sales.***

*** ***

10.2                          Amortization forthe years ended December 31, 2006, 2007 and 2008 amounted to $968,501,$2,087,930 and $4,457,529 respectively. The estimated amortization for theintangible assets, for the next five years will be as follows:

 
| ** **   | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011**  | ** ** | **2012**  | ** ** | **2013**  | ** ** |
|--------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Amortization |       | 4,207,984 |       | 3,861,295 |       | 3,380,405 |       | 3,241,855 |       | 3,150,936 |       |

 

F-26

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**10****                                ****Goodwilland intangible assets *(Continued)***

 

10.3                          The movement ingoodwill balance is given below:

 
| ** **                                                                                   | ** ** | **December 31,  2007** | ** **     | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|----------------|-----------------------------|------------|
|                                                                                         |       |                        |           |                        |       |   |   |
| Balance at beginning of the  year                                                            |       | $                           | 39,831,664     |                        | $          | 66,713,170 |   |
|                                                                                         |       |                        |           |                        |       |
| Add: Additional goodwill  arising on account of contingent consideration for Patni Telecom   |       | 12,402,039                  |           | —                      |       |
| Add: Goodwill on business  acquisition                                                       |       | 14,712,296                  |           | —                      |       |
| Less: Tax benefit on  incentive stock option of Patni Telecom                                |       | (235,057                    | )              | —                      |       |
| Add: Tax paid upon final  settlement with tax authority pertaining to pre-acquisition period |       | —                      |           | 350,310                     |       |
| Add: Exchange Difference                                                                     |       | 2,228                       |           | (1,754,435                  | )          |
| Balance at end of the year                                                                   | ** ** | **$**                       | **66,713,170** | ** **                  | **$**      | **65,309,045** | ** ** |

*** ***

***Goodwill as of December 31,2007 and December 31, 2008 includes $ 6,453,938 and $ 4,701,731respectively which is deductible for tax purposes as per local taxation laws inthe United Kingdom.***

*** ***

10.4                          Goodwill as of December 31,2007 and 2008 has been allocated to the following reportable segments:

 
| **Segment**                             | ** ** | **December 31,  2007** | ** **     | **December 31,  2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|----------------|------------------------|------------|
| Financial services                      |       | $                           | 2,594,374      |                   | $          | 2,594,374 |   |
| Communication, Media and  Entertainment |       | 55,860,438                  |           | 54,456,313             |       |
| Manufacturing Services                  |       | 8,258,358                   |           | 8,258,358              |       |
| **Total**                               | ** ** | **$**                       | **66,713,170** | ** **             | **$**      | **65,309,045** | ** ** |

 

**11****                                ****Changein estimate**

 

11.1                          During 2006, theCompany reached a settlement with the Internal Revenue Service (the “IRS”)relating to its tax returns of its U.S. operations (Patni USA and its USbranch) for fiscal years 2001 and 2002. The settlement addressed transferpricing, branch tax matters and payroll taxes. The Company was unable tosubstantiate to the IRS that returns pertaining to its U.S. branch for theyears ended March 31, 2002 and 2003 were filed within 18 months from therespective due dates and hence were deemed as delinquent returns by the IRS.Accordingly, the IRS disallowed all of the deductions on the branch income taxreturns and assessed additional income tax obligations of U.S. $15.2 million.Delinquent tax returns were treated as errors in computation of income taxesfor the years in which such tax returns were due for filing under the IRS rules andthe Company restated its 2003 and 2004 financial statements for such errors.

 

The Company reviewed the adequacy of thepreviously established tax exposure reserves with respect to prior years in July 2006in light of certain positions taken by the IRS during the settlement for 2001and 2002 and based on such positions, the Company revised its estimate for taxexposure relating to various income tax matters along with related adjustmentsto accrued interest. The IRS settlement for 2001 and 2002 also covered payrolltax matters for which a provision had previously been established. Thesettlement resulted in a liability that was less than the amount previouslyprovided for, in part due to the liability being offset by an increase inincome tax liability during settlement. As a result, the Company 

 

F-27

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**11****                                ****Changein estimate *(continued)***

 

reducedits accrual for payroll taxes exposure during 2006 with a consequentialreversal of the related deferred tax asset.

 

***These revisions to theestablished tax exposure reserves represented a revision to previous reserveestimates, and accordingly, such amounts have been recorded as part of theconsolidated statement of income for the Company’s fiscal year ended December 31,2006 as a change in estimate as follows:***

 
| Reduction of accrual for  payroll taxes (1) |       | $          | (9,041,958     | )          |
|---------------------------------------------|------------|------------|----------------|------------|
| Increase in interest  expense               |       | 2,600,608  |           |
| Increase in other expense  (2)              |       | (3,743,032 | )              |
| Increase in income taxes  current           |       | 26,928,920 |           |
| Increase in income taxes  deferred          |       | 3,421,312  |           |
|                                        | ** ** | **$**      | **20,165,850** | ** ** |

 

(1) Included under cost of revenues

(2) Included under other income/expense

 

***The respective annualamounts with respect to the above amount are shown in the table provided below:***

 
| **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **Total**  | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|------------|------------|
| $        | (1,248,987 | )        | $          | (372,881 | )          | $        | 2,572,523  |     | $          | 10,862,317 |       | $ | 8,352,878 |   | $ | 20,165,850 |   |
|          |            |          |            |          |            |          |            |          |            |            |            |  |  |  |  |  |  |

 

11.2                          During the yearended December 31, 2008, the US Internal Revenue Service (“IRS”) completedits assessment of tax returns for the years ended 2003 and 2004 of PatniAmericas Inc. and for the years ended March 31, 2003, 2004 and 2005 of theUS branch of the Company. Based on the completion of assessment of these years,the Company reviewed the adequacy of the previously established tax exposurereserves with respect to these years and re-measured the established taxpositions for the latter years based on the experience gained from the taxexamination and accordingly, the following amounts have been included in theincome statement for the fiscal year ended December 31, 2008 as a changein estimate:

 
| Reduction of accrual for  payroll taxes (1) |       | $           | (2,769,567      | )     |
|---------------------------------------------|------------|-------------|-----------------|-------|
| Reduction in interest  expenses (2)         |       | (6,497,329  | )               |
| Increase in interest  expense               |       | 560,507     |            |
| Reduction in other expense  (3)             |       | (1,092,687  | )               |
| Reduction in income taxes -  current        |       | (12,496,744 | )               |
| Increase in income taxes -  deferred        |       | 4,112,604   |            |
|                                        | ** ** | **$**       | **(18,183,216** | **)** |

 

(1)                      Included undercost of revenues

(2)                      Included underInterest expense reversed

(3)                      Included underother income/expense

 

**12****                                ****Accruedexpenses consist of the following:**

 
| **As of  December 31,** | ** ** | **2007**   | ** **     | **2008**   | ** ** |
|------------------------------|------------|------------|----------------|------------|------------|
| Employee costs               |       | $          | 31,718,079     |       | $          | 32,214,120 |   |
| Subcontractor accruals       |       | 5,553,123  |           | 5,502,961  |       |
| Professional fees payable    |       | 2,786,817  |           | 2,432,067  |       |
| Others                       |       | 15,021,905 |           | 16,017,949 |       |
|                         | ** ** | **$**      | **55,079,924** | ** ** | **$**      | **56,167,097** | ** ** |

 

F-28

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**13****                                ****Otherliabilities**

 

***Other liabilities consist ofthe following:***

 
| **As of  December 31,**                            | ** ** | **2007**    | ** **     | **2008**    | ** ** |
|---------------------------------------------------------|------------|-------------|----------------|-------------|------------|
| Deferred revenue                                        |       | $           | 4,188,096      |        | $          | 3,387,715 |   |
| Provision for leave pay  obligation                     |       | 15,440,999  |           | 15,975,135  |       |
| Provision for retirement  benefits                      |       | 9,922,971   |           | 9,930,835   |       |
| Capital expenditure payable                             |       | 6,715,195   |           | 1,596,090   |       |
| Provision for payroll tax  matters                      |       | 6,481,233   |           | 1,520,559   |       |
| Interest on corporate taxes  and other related expenses |       | 8,633,630   |           | 2,337,601   |       |
| Advance from customers                                  |       | 1,237,237   |           | 1,335,869   |       |
| Derivative liabilities                                  |       | —      |           | 38,493,027  |       |
| Others                                                  |       | 7,030,853   |           | 9,598,934   |       |
|                                                    | ** ** | **$**       | **59,650,214** | ** **  | **$**      | **84,175,765** | ** ** |
| Less : Other Current  liabilities                       | ** ** | ** **  | ** **     | ** **  | ** ** |
| Deferred revenue                                        |       | (4,188,096  | )              | (3,387,715  | )          |
| Provision for leave  encashment                         |       | (15,440,999 | )              | (15,975,135 | )          |
| Provision for retirement  benefits                      |       | (164,127    | )              | (178,808    | )          |
| Capital expenditure payable                             |       | (6,715,195  | )              | (1,596,090  | )          |
| Advance from customers                                  |       | (1,237,237  | )              | (1,335,869  | )          |
| Derivative liabilities                                  |       | —      |           | (27,695,752 | )          |
| Others                                                  |       | (6,541,601  | )              | (9,520,095  | )          |
|                                                    |       | (34,287,255 | )              | (59,689,464 | )          |
| Other Liabilities                                       | ** ** | **$**       | **25,362,959** | ** **  | **$**      | **24,486,301** | ** ** |

 

**14****                                ****Leases**

 

14.1                          Patni acquirescertain vehicles under capital lease for a non-cancelable period of4 years. The gross amount recorded in property, plant and equipment forsuch capital leases and the related accumulated depreciation amounted to$1,375,858 and $757,413 as at December 31, 2007 and $ 896,255 and $539,392as at December 31, 2008 respectively. The depreciation expense in respectof these assets aggregated $264,623, $347,542 and $ 326,267 for the years endedDecember 31, 2006, 2007 and 2008, respectively.

 

14.2                          Patni USA hasoperating lease agreements, primarily for leasing office space, that expireover the next 1-6 years. These leases generally require Patni USA to paycertain executory costs such as taxes, maintenance and insurance. Patni UK hasoperating lease agreement, for leasing office space, that expire over the next10 years.

 

14.3                          Patni hasoperating lease agreements, primarily for leasing office and residentialpremises. These agreements provide for cancellation by either party with anotice period ranging from 30 days to 120 days, after the initial lock-inperiod, if any. Some leases contain a clause for renewal of the leaseagreements. Some leases provide for annual renewal of the lease payments.

 

F-29

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Tableof Contents

 

| Patni  Computer Systems Limited and subsidiaries |   |   |
|--------------------------------------------------|--------|--------|

 

| **See accompanying notes to the consolidated financial  statements *(Continued)*** |
|------------------------------------------------------------------------------------|

 

**14****          ****Leases *(continued)***

 

14.4         Patni Telecomand its subsidiaries have operating leases for office space that expire overthe next 1-3 years. These agreements provide for cancellation by either partywith a notice period ranging from 30 days to 180 days, after the initiallock-in period, if any.

 

14.5         Future minimumlease payments under non-cancelable operating leases (with initial or remaininglease terms in excess of one year) and future capital lease payments as of December 31,2008 are as follows:

 
| ** **                                                        | ** ** | **Capital  lease** | ** ** | **Operating  lease** | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| 2009                                                              |       | $                  | 193,394    |                 | $          | 9,896,762 |   |
| 2010                                                              |       | 118,666            |       | 6,627,546            |       |
| 2011                                                              |       | 69,558             |       | 3,587,956            |       |
| 2012                                                              |       | 9,816              |       | 1,736,155            |       |
| beyond  2012                                                      |       | —             |       | 4,606,885            |       |
| Total  minimum lease payments                                     |       | 391,434            |       | $                    | 26,455,304 |   |
| Less:  Amount representing interest                               |       | (31,479            | )          |                 |       |
| Present  value of net minimum capital lease payments              |       | 359,955            |       |                 |       |
| Less:  Current installments of obligations under capital leases   |       | (175,741           | )          |                 |       |
| Obligations  under capital leases, excluding current installments |       | $                  | 184,214    |                 |       |   |

 

14.6         Rental expensefor all operating leases for the years ended December 31, 2006, 2007 and2008 was $12,510,436, $14,291,084 and $ 14,777,332 respectively.

 

**15****        ****Derivatives financialinstruments**

 

15.1         The Companyfrequently enters into foreign currency forward and option contracts to hedgeinter company and end customer receivables, both anticipated and firmcommitments. These contracts are entered to mitigate foreign currency riskcaused by changes in exchange rates and are used to hedge these inter companyand end customer receivables. At December 31, 2008, the Company’s foreigncurrency contracts mature within one to fifty three months.

 

***Since there is a directrelationship between the forward contracts and the currency denomination of theunderlying transaction, the forward contracts are highly effective in hedgingthe cash flows of the Company’s inter company and end customer receivables.These forward contracts also meet the criteria for cash flow hedge accountingtreatment and, accordingly, part of revaluation gains or losses on theseforward contracts are included in other comprehensive income (loss) and arerecognized in the consolidated statement of income based on occurrence of theunderlying transaction.***

*** ***

***For forward contractsdesignated as a cash flow hedge, the hedge effectiveness is assessed based onchanges in fair value attributable to changes in spot prices and accordingly,the changes in the fair value of the contract related to the changes in thedifference between the spot price and the forward or futures price would beexcluded from assessment of hedge effectiveness and recognised in consolidatedstatements of income together with any ineffective portion of the hedge.***

*** ***

***For range forward contractsand contracts maturing beyond 18 month period and designated against forecastedtransactions, the hedge effectiveness is assessed based on overall changes infair value, and the revaluation gains and losses are recognised in OtherComprehensive Income, being effective hedges. If it is determined that aderivative is not highly effective as a hedge, or if a derivative ceases to bea highly effective hedge, the Company, prospectively, discontinues hedgeaccounting with respect to that derivative.***

*** ***

***At December 31, 2008,the Company had $ 30,012,023 of net losses related to cash flow hedges includedin Accumulated Other Comprehensive Income. At December 31, 2008$21,416,746 of these losses on derivative instruments accumulated in OtherComprehensive Income are expected to be reclassified to earnings during the***

 

F-30

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**15****        ****Derivatives financialinstruments *(continued)***

 

***next 12 months. There wereno cash flow hedges which were discontinued during the year because ofnon-occurrence of forecasted transaction.***

 

15.2         The followingtable presents the aggregate contracted principal amounts of the Company’sderivative contracts outstanding:

 
| ** **                                   | ** ** | **Currency** | ** ** | **December 31, 2007** | ** **  | **December 31,  2008** | ** ** |
|----------------------------------------------|------------|--------------|------------|----------------------------|-------------|-----------------------------|------------|
| Forward contracts, sell                      |       | USD          |       | $                          | 165,170,000 |                        | $          | 285,436,000 |   |
| Forward contracts, sell                      |       | JPY          |       | JPY                        | 481,580,000 |                        | JPY        | 400,000,000 |   |
| Forward contracts, sell                      |       | AUD          |       |                       | —      |                        | AUD        | 1,000,000 |   |
| Forward contracts, sell                      |       | GBP          |       |                       | —      |                        | £     | 1,500,000 |   |
| Forward contracts, sell                      |       | EURO         |       | €                     | 4,000,000   |                        |       | — |   |
| Foreign currency written options, sell       |       | GBP          |       |                       | —      |                        | £     | 900,000 |   |
| Foreign currency written options, sell       |       | EURO         |       | €                     | 5,000,000   |                        | €     | 1,600,000 |   |
| Foreign currency written options, sell       |       | JPY          |       |                       | —      |                        |       | 150,000,000 |   |
| Foreign currency purchased options, sell     |       | USD          |       | $                          | 81,500,000  |                        | $          | 27,000,000 |   |
| Foreign currency written options, net sell   |       | USD          |       | $                          | 2,500,000   |                        | $          | 21,000,000 |   |
| Foreign currency purchased options, net sell |       | USD          |       |                       | —      |                        | $          | 61,250,000 |   |

 

**16****          ****Shareholders’ equity**

 

***Common shares***

 

16.1         The Company hasonly one class of equity shares. For all matters submitted to vote in theshareholders’ meeting, every holder of equity shares (except holders ofAmerican Depository Shares - ADSs), as reflected in the records of the Companyshall have one vote in respect of each share held. In the event of liquidationof the affairs of the Company, all preferential amounts, if any, shall bedischarged by the Company. The remaining assets of the Company after suchdischarge shall be distributed to the holders of equity shares in proportion tothe number of shares held by them.

 

16.2         In December 2005,pursuant to an Initial Public Offering of American Depositary Shares, theCompany issued 6,156,250 ADSs (12,312,500 common shares) for a net proceeds of$117,021,852 (after adjusting for direct expenses relating to ADSs of$8,196,274). The common shares represented by the ADSs are similar to othercommon shares except for voting rights. Under the depository agreement, thedepository of ADSs shall vote as directed by the Board of Directors of theCompany.

 

16.3         In February 2008,the Board of Directors of the Company approved a proposal to repurchase fullypaid equity shares upto 10% of the paid up capital and free reserves, at amaximum price of Rs. 325 per equity share, for an aggregate amount upto Rs.2,370,000,000. The buyback proposal had been approved in accordance with theprovisions of Section 77A, 77AA, 77B and other applicable provisionsof the Indian Companies Act, 1956 and the provisions of Securities and ExchangeBoard of India (Buy-back of Securities) Regulations, 1998 (“Buy BackRegulations”), for which necessary public announcements were made on 2 April 2008.

 

The Company commenced the repurchase of shareson July 10, 2008. Subsequent to the share repurchase, such shares arerequired to be extinguished as per the requirements of Section 77A of theCompanies Act, 1956.

 

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Table ofContents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**16****          ****Shareholders’ equity *(continued)***

 

16.4         During the yearended December 31, 2008, the Company repurchased a total of 10,957,082equity shares through the Bombay Stock Exchange and the National Stock Exchangefor an aggregate consideration of Rs. 2,370,000,000 ($53,062,342) being 100% ofthe amount authorised for buy back. Subsequently, the Company extinguished suchequity shares.

 

16.5         Retainedearnings includes profits aggregating Rs. 21,914,164 ($449,521) set aside asCapital Redemption Reserve as required by the Indian Companies Act, 1956 pursuantto the repurchase which can be utilised only for the purpose of issuing fullypaid bonus shares of the Company.

 

16.6         Retainedearnings as of December 31, 2007 and 2008 include profits aggregating$5,221,083 and $7,949,095, respectively which are not distributable asdividends under Indian Companies Act, 1956 (Companies Act).

 

***Retained earnings and dividends***

 

16.7         The ability ofPatni to declare and pay dividend under the Companies Act, is determined by itsdistributable profits as shown by its statutory accounts prepared in accordancewith Indian GAAP. When Patni wishes to declare dividends, it is required as perthe Companies Act, to transfer upto 10% of its net income (after the deductionof any accumulated deficit) computed in accordance with Companies Act to ageneral reserve before a dividend can be declared. Also, Indian law on foreignexchange governs the remittance of dividends outside India.

 

16.8         At December 31,2007 the currency translation adjustment gain included in other comprehensiveincome amounted to $69,189,515. At December 31, 2008 the currencytranslation adjustment loss included in other comprehensive income amounted to$50,737,505.

 

**17****          ****Employeestock compensation plans**

 

17.1         On June 302003, Patni established the ‘Patni ESOP 2003’ plan (‘the plan’). Under theplan, the Company is authorized to issue up to 11,142,085 equity shares toeligible employees.  Employees covered bythe Plan are granted an option, which may be based on service or performancecriteria, to purchase shares of the Company subject to the requirements ofvesting. The options vest in a graded manner over four years with 25% of theoptions vesting at the end of each year and expire at the end of 5 years fromthe date of vesting. A compensation committee constituted by the Board ofDirectors of the Company administers the plan. The plan has been amended toenable the Company to issue up to 2,000,000 ADR linked options (wherein one ADRlinked option is equal to two equity shares) to the employees of the Company aswell as its subsidiaries and hence “Patni ESOP 2003- Revised 2006” came intoforce with effect from June 21, 2006.

 

The Company issued 200,000 Performance Linkedoptions in May 2006 to certain Senior Management Personnel under the “PatniESOP 2003-Revised 2006” Plan wherein vesting of options is dependent onachieving certain performance targets. Vesting is triggered on achievement ofthe targets, but no lesser than 12 months after grant of options. As at 31st December 2007,70,000 out of such options vested. Compensation cost is recognised on acumulative catch up basis based on the assessment of probability of performancecriteria being achieved.

 

F-32

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Tableof Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

***17***         Employee stock compensation plans (Continued)

*** ***

On April 29, 2008, the Board of Directorsof the Company approved the proposal to modify the option terms of “Patni ESOP 2003- Revised 2006” plan by reducing thenumber of options granted as well as the exercise price to Rs. 2/- per share.This proposal required the approval of the shareholders through a specialresolution in the Annual General Meeting of the Company. Shareholders approvedthe modification at the Annual General Meeting held on June 26, 2008enabling the management to modify the terms of “Patni ESOP 2003- Revised 2006plan”. The modification was deferred initially to comply with the Indian stockexchange regulations which prohibited such modifications during the time when ashare buy-back offer was in effect. The plan to modify the terms was eventuallyscrapped due to prevailing market conditions.

 

17.2         The weightedaverage grant date fair values of options granted during the year ended December 31, 2007was $ 3.58 for equity linked options and $ 4.39 for ADR linked options. Theweighted average grant date fair values of options granted during the yearended December 31, 2008 was $2.29 for equity linked options and $6.51 forADR linked options.

 

17.3         Stock optionsactivity under the plan is as follows:

 
| ** **                                                      | ** ** | **Year ended December 31, 2007** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **Exercise price**                    | ** ** | **Shares   arising out of  options** | ** ** | **Weighted average  remaining  contractual life  (months)** | ** ** |
| Outstanding at the beginning of the year                        |       | $3.16                                 |       | 1,242,966 |   | 56 |   |
|                                                            |       | $5.51-$7.35                           |       | 2,420,927 |   | 65 |   |
|                                                            |       | $8.37-$10.93                          |       | 2,460,860 |   | 81 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Granted during the year (including 154,000 ADR  linked options) |       | $7.55 - 11.18                         |       | 425,000 |   | 90 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Forfeited during the year                                       |       | $3.16                                 |       | (65,075 | ) | — |   |
|                                                            |       | $5.51 - $7.35                         |       | (194,579 | ) | — |   |
|                                                            |       | $8.71-$11.18                          |       | (416,363 | ) | — |   |
|                                                            |       |                                  |       |   |   |   |   |
| Exercised during the year                                       |       | $3.16                                 |       | (594,065 | ) | — |   |
|                                                            |       | $5.51-$7.35                           |       | (140,479 | ) | — |   |
|                                                            |       | $8.71 - 10.25                         |       | (3,442 | ) | — |   |
|                                                            |       |                                  |       |   |   |   |   |
| Outstanding at the end of the year                              |       | $3.16                                 |       | 583,826 |   | 47 |   |
|                                                            |       | $5.51-$7.35                           |       | 2,085,869 |   | 53 |   |
|                                                            |       | $7.55 - 11.18                         |       | 2,466,055 |   | 71 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Exercisable at the end of the year                              |       | $3.16                                 |       | 583,826 |   | 47 |   |
|                                                            |       | $5.51-$7.35                           |       | 1,474,250 |   | 46 |   |
|                                                            |       | $8.37-$10.93                          |       | 706,655 |   | 53 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Vested and expected to vest                                     |       | $3.16                                 |       | 563,871 |   | 52 |   |
|                                                            |       | $5.51-$7.35                           |       | 2,055,503 |   | 53 |   |
|                                                            |       | $7.55 - 11.18                         |       | 2,389,906 |   | 70 |   |

 

F-33

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**17****          ****Employeestock compensation plans*****(Continued)***

 
| ** **                                                      | ** ** | **Year ended December 31, 2008** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **Exercise price**                    | ** ** | **Shares  arising out of  options** | ** ** | **Weighted average  remaining  contractual life  (months)** | ** ** |
| Outstanding at the beginning of the year                        |       | $3.16                                 |       | 583,826 |   | 47 |   |
|                                                            |       | $5.51-$7.35                           |       | 2,085,869 |   | 53 |   |
|                                                            |       | $7.55-$11.18                          |       | 2,466,055 |   | 71 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Granted during the year (including 152,950 ADR  linked options) |       | $0.04                                 |       | 596,000 |   | 90 |   |
|                                                            |       | $2.25                                 |       | 350,000 |   | 90 |   |
|                                                            |       | $7.55-$11.18                          |       | 962,900 |   | 90 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Forfeited during the year                                       |       | $3.16                                 |       | (16,051 | ) | — |   |
|                                                            |       | $5.51-$7.35                           |       | (115,593 | ) | — |   |
|                                                            |       | $7.55-$11.18                          |       | (569,929 | ) | — |   |
|                                                            |       |                                  |       |   |   |   |   |
| Exercised during the year                                       |       | $3.16                                 |       | (42,250 | ) | — |   |
|                                                            |       |                                  |       |   |   |   |   |
| Outstanding at the end of the year                              |       | $0.04                                 |       | 596,000 |   | 89 |   |
|                                                            |       | $2.25                                 |       | 350,000 |   | 89 |   |
|                                                            |       | $3.16                                 |       | 525,525 |   | 35 |   |
|                                                            |       | $5.51-$7.35                           |       | 1,970,276 |   | 41 |   |
|                                                            |       | $7.55-$11.18                          |       | 2,859,026 |   | 59 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Exercisable at the end of the year                              |       | $3.16                                 |       | 525,525 |   | 35 |   |
|                                                            |       | $5.51-$7.35                           |       | 1,885,276 |   | 40 |   |
|                                                            |       | $7.55-$10.93                          |       | 1,261,219 |   | 37 |   |
|                                                            |       |                                  |       |   |   |   |   |
| Vested and expected to vest                                     |       | $0.04                                 |       | 596,000 |   | 89 |   |
|                                                            |       | $2.25                                 |       | 350,000 |   | 89 |   |
|                                                            |       | $3.16                                 |       | 525,525 |   | 35 |   |
|                                                            |       | $5.51-$7.35                           |       | 1,970,276 |   | 41 |   |
|                                                            |       | $7.55-$11.18                          |       | 2,819,546 |   | 58 |   |

 

17.4         The fair valueof each option is estimated on the date of grant using the Black-Scholes modelwith the following assumptions for the equity linked options.

 
| **Year ended**                  | ** ** | **December 31,  2007** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Dividend yield                  |       | 0.78                        | %          | 0.68%-1.09                  | %          |
| Weighted average dividend yield |       | 0.78                        | %          | 0.93                        | %          |
| Expected life                   |       | 3.5-6.5 years               |       | 3.5-6.5 years               |       |
| Risk free interest rates        |       | 8.00% - 8.22                | %          | 7.10% - 7.37                | %          |
| Volatility                      |       | 32.84% - 42.32              | %          | 33.01% - 39.45              | %          |
| Weighted Average Volatility     |       | 36.68                       | %          | 37.35                       | %          |

 

F-34

----

Table of Contents

** **

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

** **

**17****          ****Employee stock compensationplans *(Continued)***

 

17.5         The fair valueof each option is estimated on the date of grant using the Black-Scholes modelwith the following assumptions for ADR linked options.

 
| **Year ended**                  | ** ** | **December 31, 2007** | ** ** | **December 31,****2008** | ** ** |
|---------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| Dividend yield                  |       | 0.65% - 0.79               | %          | 0.68                          | %          |
| Weighted average dividend yield |       | 0.76                       | %          | 0.68                          | %          |
| Expected life                   |       | 3.5-6.5 years              |       | 3.5-6.5years                  |       |
| Risk free interest rates        |       | 4.25%-4.75                 | %          | 3.04%-3.51                    | %          |
| Volatility                      |       | 34.32% - 44.07             | %          | 41.36%-44.76                  | %          |
| Weighted average volatility     |       | 39                         | %          | 43                            | %          |

 

17.6         The aggregateintrinsic value of options exercised and fair value of options vested is asfollows:

 
| **As of**                            | ** ** | **December 31,  2006** | ** ** | **December 31, 2007** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Intrinsic value of options exercised |       | $                           | 2,420,290  |                       | $          | 4,160,153                   |       | $ | 119,815 |   |
| Fair value of options vested         |       | 2,534,827                   |       | 4,850,500                  |       | 5,267,840                   |       |
|                                      |            |                             |            |                            |            |                             |            |  |  |  |

 

17.7         The intrinsicvalue of options outstanding, exercisable, vested and expected to vest is asfollows:

 
| **As of**                           | ** ** | **December 31, 2007** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Options outstanding                 |       | $                          | 2,984,374  |                        | $          | 1,681,499 |   |
| Options exercisable                 |       | 2,885,587                  |       | —                      |       |
| Options vested and expected to vest |       | 2,954,874                  |       | $                           | 1,681,499  |   |
|                                     |            |                            |            |                             |            |  |  |

 

17.8         The compensationexpense recognized as cost of revenues and selling, general and administrativeexpense is as follows:

 
| ** **                                   | ** ** | **December 31,  2006** | ** ** | **December 31, 2007** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Cost of Revenues                             |       | $                           | 1,668,108  |                       | $          | 1,832,101                   |       | $ | 1,526,983 |   |
| Selling, general and administrative expenses |       | 2,315,963                   |       | 2,841,180                  |       | 2,370,227                   |       |
|                                              |            |                             |            |                            |            |                             |            |  |  |  |

 

17.9         The method usedto estimate the expected term of the instruments in the option valuation modelis the ‘Simplified Method’ as per SAB 107.

 

17.10       As on December 31,2008 the total compensation cost related to non-vested awards not yetrecognized is $ 4,169,514 and the weighted average period over which it isexpected to be recognized is 25 months.

 

17.11       Effective April 1, 2007, an amendment has been made to IndianIncome Tax Act 1961 subjecting specified securities allotted or transferred byan employer to its employees to a Fringe Benefit Tax (FBT). The liability topay FBT by the employer arises at the time of allotment of the securities,consequent to exercise of the option by the employees and is calculated on thedifference between the fair value of the underlying share on the date ofvesting and the exercise price paid by the employee based on the corporate taxrate. The FBT arising from such allotment of securities is recovered by theCompany from employees. Thus, it was considered appropriate to use the Binomialvaluation model to compute the option value for options granted to employees inIndia as it produces an estimated fair value based on assumedchanges in the prices of a financial instrument over

 

F-35

----

Table ofContents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**17****          ****Employee stock compensationplans *(Continued)***

 

successive periods of time. During the yearended December 31, 2007 the Company had granted 425,000 options (including154,000 ADR linked options) of which 53,000 options were valued using theBinomial Model.

 

***The fair value of optionsgranted after April 1, 2007 is estimated on the date of grant using theBinomial model with the following assumptions for equity linked options.***

*** ***
| **Year ended**           | ** ** | **December 31, 2007** | ** ** |
|--------------------------|------------|----------------------------|------------|
| Dividend yield           |       | 0.7%-0.8                   | %          |
| Expected life            |       | 3.5-6.5 years              |       |
| Risk free interest rates |       | 7.93% - 8.01               | %          |
| Volatility               |       | 38.2% - 38.3               | %          |

 

**18****          ****IncomeTax**

 

18.1         Total income taxfor the year ended December 2006, 2007 and 2008 were allocated as follows:

 
| **For the years ended  December 31,**                 | ** ** | **2006**  | ** **     | **2007**   | ** ** | **2008**       | ** ** |
|------------------------------------------------------------|------------|-----------|----------------|------------|------------|----------------|------------|
| Income from operations                                     |       | $         | 47,691,763     |       | $          | 21,783,963     |       | $ | 5,203,401 |   |
| Shareholders’ equity, for                             |       |      |           |       |       |           |       |
| - unrealized holding gain/(loss) on investment  securities |       | 1,076,106 |           | (424,845   | )          | (257,690       | )          |
| - unrealized losses on derivative instruments              |       | —    |           | —     |       | (2,201,998     | )          |
| - pension                                                  |       | (305,835  | )              | 118,638    |       | 107,142        |       |
| - gratuity                                                 |       | (17,820   | )              | (71,454    | )          | 88,655         |       |
| - tax benefit arising on exercise of stock options         |       | 317,028   |           | (442,165   | )          | (16,121        | )          |
| Goodwill and intangible assets                             |       | (340,366  | )              | (235,057   | )          | 350,310        |       |
| **Total**                                                  | ** ** | **$**     | **48,420,876** | ** ** | **$**      | **20,729,081** | ** ** | **$** | **3,273,698** | ** ** |

 

18.2         Income taxexpense attributable to income from continuing operations consists of thefollowing:

 
| **For  the years ended December, 31,** | ** ** | **2006**   | ** **     | **2007**    | ** ** | **2008**       | ** ** |
|----------------------------------------|------------|------------|----------------|-------------|------------|----------------|------------|
| **Current taxes**                      |       |       |           |        |       |           |       |
| Domestic                               |       | $          | 1,655,461      |        | $          | 9,186,360      |       | $ | 10,376,924 |   |
| Foreign                                |       | 41,691,833 |           | 22,727,637  |       | 4,042,442      |       |
| ** **                             |       | 43,347,294 |           | 31,913,997  |       | 14,419,366     |       |
| **Deferred taxes**                     |       |       |           |        |       |           |       |
| Domestic                               |       | (336,467   | )              | (5,731,246  | )          | (9,562,995     | )          |
| Foreign                                |       | 4,680,936  |           | (4,398,789  | )          | 347,030        |       |
|                                   |       | 4,344,470  |           | (10,130,035 | )          | (9,215,965     | )          |
| **Total**                              | ** ** | **$**      | **47,691,763** | ** **  | **$**      | **21,783,963** | ** ** | **$** | **5,203,401** | ** ** |

 

F-36

----

Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**18****          ****IncomeTax *(Continued)***

 

Pre-tax income from domestic and foreign operations is set out below:

 
| **For the years ended  December 31,** | ** ** | **2006**   | ** **      | **2007**   | ** ** | **2008**        | ** ** |
|--------------------------------------------|------------|------------|-----------------|------------|------------|-----------------|------------|
| **Pre-tax income**                         |       |       |            |       |       |            |       |
| Domestic                                   |       | $          | 56,805,563      |       | $          | 94,707,850      |       | $ | 79,583,951 |   |
| Foreign                                    |       | 50,136,970 |            | 41,051,607 |       | 27,040,695      |       |
| **Total**                                  | ** ** | **$**      | **106,942,533** | ** ** | **$**      | **135,759,457** | ** ** | **$** | **106,624,646** | ** ** |

 

18.3         The tax effectof temporary differences that give rise to significant portion of deferred taxassets and liabilities are presented below:

 
| ** **                                                                   | ** ** | **2007**    | ** **     | **2008**   | ** ** |
|------------------------------------------------------------------------------|------------|-------------|----------------|------------|------------|
| **Deferred tax assets:**                                                     |       |        |           |       |       |
| Compensated absences,  Accrued Incentives, Pension obligations, etc          |       | $           | 12,027,255     |       | $          | 13,007,057 |   |
| Accounts receivable                                                          |       | 673,881     |           | 577,542    |       |
| Deferred revenue                                                             |       | 431,829     |           | 183,890    |       |
| Carry forward business and other losses                                      |       | 2,736,959   |           | 2,822,999  |       |
| Payroll taxes and interest on payroll and corporate  taxes                   |       | 5,941,881   |           | 2,026,936  |       |
| ESOP compensation costs                                                      |       | 1,451,337   |           | 2,095,365  |       |
| Others                                                                       |       | —      |           | 107,091    |       |
| Unrealized loss on derivatives                                               |       | —      |           | 2,201,998  |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | —      |           | 121,440    |       |
| Mat Credit Entitlement (1)                                                   |       | 7,209,533   |           | 12,962,034 |       |
| Gross deferred assets                                                        |       | 30,472,675  |           | 36,106,352 |       |
| Less: Valuation allowance                                                    |       | (934,150    | )              | —     |       |
| Total deferred tax assets                                                    |       | $           | 29,538,525     |       | $          | 36,106,352 |   |
| Deferred tax liabilities:                                                    |       |        |           |       |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | (1,512,757  | )              | —     |       |
| Property, plant and equipment                                                |       | (2,862,844  | )              | (1,124,579 | )          |
| Undistributed earnings of US branch                                          |       | (1,806,178  | )              | (3,517,525 | )          |
| Unrealised gain on available for sale securities                             |       | (1,078,481  | )              | (847,410   | )          |
| Intangible assets                                                            |       | (3,839,354  | )              | (2,877,255 | )          |
| Tax deduction available for notional interest  deduction                     |       | (499,851    | )              | (499,851   | )          |
| Tax deductible Goodwill                                                      |       | (195,190    | )              | (477,296   | )          |
| Others                                                                       |       | (191,514    | )              | —     |       |
| Total deferred tax liabilities                                               |       | (11,986,169 | )              | (9,343,916 | )          |
| Net Deferred tax assets                                                      | ** ** | **$**       | **17,552,356** | ** ** | **$**      | **26,762,436** | ** ** |
| **Classified as**                                                            |       |        |           |       |       |
| **Deferred tax assets**                                                      |       |        |           |       |       |
| Current                                                                      |       | $           | 6,879,161      |       | $          | 9,796,021 |   |
| Non current                                                                  |       | 12,479,374  |           | 19,825,211 |       |
| **Deferred tax liabilities**                                                 |       |        |           |       |       |
| Current                                                                      |       | —      |           | —     |       |
| Non current                                                                  |       | 1,806,178   |           | 2,858,796  |       |
| Net Deferred tax assets                                                      | ** ** | **$**       | **17,552,356** | ** ** | **$**      | **26,762,436** | ** ** |

 

F-37

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 
| **18** | **Income Tax *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | (1)Pursuant  to the changes in the Indian income tax laws, Minimum Alternate Tax (MAT) has  been extended to income in respect of which deduction is claimed under  section 10A; consequently, the Company have calculated the tax liability for  current domestic taxes after considering MAT. The excess tax paid under MAT  provisions over and above normal tax liability can be carried forward and  set-off against future tax liabilities computed under normal tax provisions.  The Company was required to pay MAT during fiscal 2006, 2007 and 2008,  accordingly, a deferred tax asset of $117,641, $5,710,616 and $7,133,776 has  been recognized during fiscal year December 31, 2006, 2007 and 2008  respectively, which can be carried forward for a period of 7 years.                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 18.4   | In  assessing the realisability of deferred tax assets, management considers  whether it is more likely than not, that some portion, or all, of the  deferred tax assets will not be realised. The ultimate realisation of  deferred tax assets is dependent upon the generation of future taxable income  during the periods in which the temporary differences and loss carryforwards  are deductible. Management considers the reversal of taxable temporary  differences, the projected future taxable income, tax planning strategies and  impact of tax exemptions currently available to the company, in making this  assessment. Based on the level of expected taxable incomes over the periods  in which the deferred tax assets are deductible, management believes that it  is more likely than not, the Company will realise the benefits of those  deductible differences, net of existing valuation allowances. Taxable income  for the years 2006, 2007 and 2008 aggregated $29,143,691, $ 34,905,541 and  $35,969,214 respectively. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | The  operating loss of the subsidiary in the UK amounting to $2,726,720 can be  carried forward for an indefinite period and the operating loss of the  subsidiary in the US amounting to $4,605,143 will expire at various dates  through December 31, 2028.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 18.5   | Deferred  tax liability in respect of undistributed earnings of Patni’s foreign  subsidiaries as of 2006, 2007 and 2008 aggregating $4,688,485, $4,732,486 and  $6,111,412 respectively has not been recognised in the financial statements,  as such earnings are considered to be indefinitely re-invested. As of  December 31, 2008, the undistributed earnings of these subsidiaries were  approximately $ 40,742,743.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 18.6   | The  net change in valuation allowance in the year 2008 is mainly on account of  reversal of valuation allowance recognized in prior years for deferred tax  asset recorded on business loss carryforwards of Japan operation, aggregating  to $ 501,719.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 18.7   | The  reported income tax expense attributable to income from continuing operations  differed from amounts computed by applying the enacted tax rate to income  from continuing operations before income-taxes as a result of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

F-38

----

Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**18****          ****Income Tax *(Continued)***

 
| ** **                                                        | ** ** | **2006**    | ** **     | **2007**    | ** ** | **2008**       | ** ** |
|-------------------------------------------------------------------|------------|-------------|----------------|-------------|------------|----------------|------------|
| Income before income taxes                                        |       | $           | 106,942,533    |        | $          | 135,759,457    |       | $ | 106,624,646 |   |
| Weighted average enacted tax rate in India                        |       | 33.66       | %              | 33.91       | %          | 33.99          | %          |
| Computed expected income tax expense                              |       | $           | 35,996,857     |        | $          | 46,032,638     |       | $ | 36,241,717 |   |
| Effect of:                                                        |       |        |           |        |       |           |       |
| Income exempt from tax                                            |       | (29,673,705 | )              | (32,290,707 | )          | (31,274,645    | )          |
| Changes in valuation allowance                                    |       | 501,719     |           | 370,305     |       | (501,719       | )          |
| Non deductible expenses                                           |       | 5,767,090   |           | 792,881     |       | 2,837,440      |       |
| US State taxes, net of federal tax benefit                        |       | 1,698,868   |           | 1,407,693   |       | 761,085        |       |
| Branch taxes                                                      |       | 5,928,986   |           | 8,162,897   |       | 10,393,012     |       |
| Foreign income taxed at different rates                           |       | (12,403     | )              | 194,339     |       | 921,930        |       |
| Change in statutory tax rate on deferred taxes                    |       | —      |           | (22,301     | )          | —         |       |
| Profit on sale of investments taxed at other than  statutory rate |       | (571,740    | )              | (2,047,266  | )          | (3,076,104     | )          |
| Change to prior year tax expense estimates                        |       | 27,401,735  |           | —      |       | (12,496,744    | )          |
| Others                                                            |       | 654,356     |           | (816,516    | )          | 1,397,430      |       |
| **Reported income tax expenses**                                  | ** ** | **$**       | **47,691,763** | ** **  | **$**      | **21,783,963** | ** ** | **$** | **5,203,401** | ** ** |

 

18.8         A substantialportion of profits of the group’s India operations is exempt from Indian incometax, being profit from undertakings situated at Software Technology Parks.Under the tax holiday, the tax payer can utilize exemption of profits fromincome taxes for a period of ten consecutive years. The Company has opted forthis exemption for undertakings situated in Software Technology Parks and theseexemptions expire on various dates between years 2005 and 2010. The aggregateeffect on net income of the tax holiday and export incentive scheme were $25,304,980,$28,931,047 and $27,312,225 for 2006, 2007 and 2008 respectively. Further, theper share effect of this exemption on net income was $0.18, $0.20 and $0.20 for2006, 2007 and 2008 respectively.

 

18.9         The Company andsome of its subsidiaries file income tax returns in the U.S. federaljurisdiction, and various states and foreign jurisdictions. With fewexceptions, the Company is no longer subject to U.S. federal, state and local,or non-U.S. income tax examinations by tax authorities for years before 2005.The Internal Revenue Service (IRS) commenced an examination of the Company’sU.S. income tax returns for 2005 and 2006 in the last quarter of 2008.

 

***The Company adopted theprovisions of FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, on January 1, 2007. As a result of the adoption ofInterpretation 48, the Company recognized no increase/decrease in the taxliability. A reconciliation of the beginning and ending amount of unrecognizedtax benefits is as follows:***

 
| Balance at January 1, 2008                               |       | 49,333,633     |       |
|---------------------------------------------------------------|------------|----------------|------------|
| Additions based on tax positions related to the  current year |       | 9,076,827      |       |
| Additions for tax positions of prior years                    |       | 6,251,572      |       |
| Reductions for tax positions of prior years                   |       | (19,049,718    | )          |
| (Settlements)/Refund                                          |       | 1,211,383      |       |
| Exchange Difference                                           |       | (952,128       | )          |
| **Balance at December 31,  2008**                        | ** ** | **45,871,569** | ** ** |

 

F-39

----

 

Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**18****          ****Income Tax *(Continued)***

 

During the year ended December 31,2008, the Company recognized $(5,448,920) in interest and penalties mainly onaccount of credit of $7,590,016 arising on account of settlement with IRS foryears 2003 and 2004 for Patni Inc and for the years ended March 2003, 2004and 2005 for US Branch.  As of December 31,2008, the Company has $3,815,375 as accrued interest and penalties related touncertain tax positions.

 

***The Company conducts itsbusiness globally, and, as a result, the Company and some of its subsidiariesfile income tax returns in India, the U.S., and various foreignjurisdictions.  The tax years ended March 31,2000 to March 31, 2008 remain open to examination by the Indian taxauthorities. With few exceptions, the Company is no longer subject to U.S. federal,state and local income tax examinations by tax authorities for years before2005. The Internal Revenue Service (IRS) commenced an examination of theCompany’s U.S. income tax returns for 2005 and 2006 in December 2008. TheCompany does not anticipate that total unrecognized tax benefits will changesignificantly due to the settlement of audits or the expiration of statute oflimitations prior to December 31, 2009.***

*** ***

***As of December 31,2008, the Company had $42,696,468 of net unrecognized tax benefits arising outof tax positions which would affect the effective tax rate if recognized.***

*** ***

**19****        ****Retirement benefits toemployees**

 

***Gratuity benefits***

 

19.1       In accordancewith the Payment of Gratuity Act, 1972, Patni provides for gratuity, a definedretirement plan covering all employees. The plan provides a lump sum payment tovested employees at retirement or termination of employment based on therespective employee’s defined portion of last salary and the years ofemployment with the Company.

 

19.2       Patni contributeseach year to a gratuity fund based upon actuarial valuations performed by anactuary. The fund is administered by Patni through a trust set up for thepurpose. All assets of the plan are owned by the trust and comprise of approveddebt and other securities and deposits with banks.

 

19.3         With regard toPatni India and Patni Telecom India’s (formerly known as Cymbal InformationServices Pvt. Ltd.) Gratuity Plan, the following table sets forth the plan’sfunded status and amounts recognized in the Company’s consolidated balancesheets. Measurement dates used to measure fair value of plan assets and benefitobligation is December 31.

 

F-40

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Table ofContents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**19****          ****Retirement benefits toemployees *(Continued)***

 
| **At December 31,**                                                    | ** ** | **2007**  | ** ** | **2008**   | ** ** |
|-----------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| **Change in benefit obligation**                                            |       |      |       |       |       |
| Projected benefit obligation (“PBO”) at  January 1,          |       | $         | 4,482,982  |       | $          | 6,308,260 |   |
| Service cost                                                                |       | 1,091,201 |       | 1,094,495  |       |
| Interest cost                                                               |       | 401,351   |       | 552,411    |       |
| Translation loss/(gain)                                                     |       | 621,133   |       | (1,382,756 | )          |
| Actuarial loss                                                              |       | 493,318   |       | (678,102   | )          |
| Benefits paid                                                               |       | (781,725  | )          | (582,006   | )          |
| PBO at December 31,                                                    |       | 6,308,260 |       | 5,312,302  |       |
| Fair value of plan assets as at January 1,                             |       | 5,308,811 |       | 5,798,553  |       |
| Actual return on plan assets                                                |       | 322,368   |       | 468,515    |       |
| Employer contributions                                                      |       | 253,798   |       | 3,037      |       |
| Benefits paid                                                               |       | (781,725  | )          | (582,005   | )          |
| Translation gain/(loss)                                                     |       | 695,302   |       | (1,110,944 | )          |
| Plan assets as at December 31,                                         |       | 5,798,553 |       | 4,577,156  |       |
| Funded status                                                               |       | (519,063  | )          | (735,146   | )          |
| Accumulated benefit obligation                                              |       | 4,309,009 |       | 4,132,787  |       |
| Amounts recognized in the consolidated balance  sheets consists of:         |       |      |       |       |       |
| Prepaid benefit cost (included in ‘other assets’)                 |       |      |       |       |       |
| Provision for Gratuity (included in ‘other current  liabilities’) |       | 10,714    |       | 25,395     |       |
| Provision for Gratuity (included in ‘other  liabilities’)         |       | 508,349   |       | 709,751    |       |
|                                                                        |       | $         | 519,063    |       | $          | 735,146 |   |

 

19.4         Key weightedaverage assumptions used to determine the benefit obligation were as follows:

 
| ** **    | ** ** | **2007** | ** ** | **2008** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Discount rate |       | 9.00     | %          | 9.00     | %          |

 

For the actuarial valuation at December 31, 2008 compensationlevels have been assumed to increase at 8% per annum for the first three years,and 7% per annum thereafter. For the actuarial valuation at December 31,2007 compensation levels have been assumed to increase at 15% per annum for thefirst year, 12.5% per annum for the next 3 years and 7% per annum thereafter.

*** ***

***The expected rate of returnon assets in future is considered to be 7.5%. This is based on the expectationof the average long-term rate of return to prevail over the next 15 to 20 yearson the type of investments prescribed as per the statutory pattern ofinvestments.***

*** ***

***19.5***         The composition of planassets is detailed below:

*** ***
| **As of  December 31,**               | ** ** | **2007**  | ** **    | **%**      | ** ** | **2008**   | ** ** | **%**         | ** ** |
|-------------------------------------------------|------------|-----------|---------------|------------|------------|------------|------------|---------------|------------|
| Central Government Securities                   |       | $         | 156,134       |       | 3          | %          | $          | 126,000       |       | 3 | % |
| Investment in Government Securities based funds |       | 5,255,917 |          | 90         | %          | 3,364,745  |       | 73            | %          |
| Public Sector/Financial Institutions/Bank bonds |       | 386,502   |          | 7          | %          | 1,086,411  |       | 24            | %          |
|                                            |       |      |          |       |       |       |       |          |       |
| Total                                           | ** ** | **$**     | **5,798,553** | ** ** | **100**    | ** ** | **$**      | **4,577,156** | ** ** | **100** | ** ** |

 

F-41

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Table ofContents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**19****          ****Retirement benefits toemployees *(Continued)***

 

19.6         Net periodicgratuity cost included the following components:

 
| **Year ended December 31,** | ** ** | **2006** | ** **  | **2007**   | ** ** | **2008**      | ** ** |
|----------------------------------|------------|----------|-------------|------------|------------|---------------|------------|
| Service cost                     |       | $        | 982,652     |       | $          | 1,091,201     |       | $ | 1,094,495 |   |
| Interest cost                    |       | 329,613  |        | 401,351    |       | 552,411       |       |
| Expected return on assets        |       | (378,065 | )           | (416,245   | )          | (365,565      | )          |
| Amortization                     |       | 41,284   |        | (920       | )          | 137,128       |       |
| **Net gratuity cost**            | ** ** | **$**    | **975,484** | ** ** | **$**      | **1,075,387** | ** ** | **$** | **1,418,469** | ** ** |

 

19.7         Key weightedaverage assumptions used to determine the net periodic gratuity cost were asfollows:

 
| ** **                | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate             |       | 8.00     | %          | 8.85     | %          | 9.00     | %          |
| Expected return on assets |       | 7.50     | %          | 7.50     | %          | 7.50     | %          |

*** ***

***For the actuarial valuationat December 31, 2008, 2007 and 2006, compensation levels have been assumedto increase at 15% per annum for the first year, 12.5% per annum for the next3 years and 7% per annum thereafter.***

*** ***

19.8         Patni’s expectedcontribution to gratuity fund for the calendar year 2009 is $ 1,051,036.  The expected benefit payments for next tenyears are as follows:

 
| ** **                | ** ** | **2009** | ** ** | **2010** | ** ** | **2011**  | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 - 18** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|---------------|------------|
| Expected benefit payments |       | $        | 1,419,323  |     | $          | 1,366,051 |       | $        | 1,452,000  |     | $          | 1,554,344     |       | $ | 1,549,477 |   | $ | 5,104,205 |   |
|                           |            |          |            |          |            |           |            |          |            |          |            |               |            |  |  |  |  |  |  |

 

***Pension benefits***

 

19.9         Founderdirectors of Patni India and Executive director in employment with Patni USAare entitled to receive pension benefits upon retirement or on termination fromemployment at the rate of 50% of their last drawn monthly salary. The pensionis payable from the time the eligible director reaches the age of sixty five inrespect of Founder directors of Patni India and seventy one in respect ofExecutive director in employment with Patni USA,  and is payable to the directors or thesurviving spouse. The liabilities for these pension plans are actuariallydetermined and periodically recognized. These plans are not funded.

 

F-42

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Table ofContents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**19****          ****Retirement benefits toemployees *(Continued)***

 

19.10       With regard toPatni India pension plans, the following table sets forth the plan’s fundedstatus and amounts recognized in the Company’s consolidated balance sheet.Measurement dates used to measure benefit obligation is December 31 foreach fiscal year.

 
| **At December 31,**         | ** ** | **2007**   | ** ** | **2008**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| **Change in benefit obligation** |       |       |       |       |       |
| PBO at January 1,           |       | $          | 1,909,302  |       | $          | 2,310,023 |   |
| Service cost                     |       | 71,175     |       | —     |       |
| Interest cost                    |       | 181,987    |       | 181,491    |       |
| Translation loss/(gain)          |       | 245,816    |       | (446,918   | )          |
| Actuarial loss/(gain)            |       | (61,101    | )          | 18,133     |       |
| Benefits paid                    |       | (37,156    | )          | (140,042   | )          |
| PBO at December 31,         |       | 2,310,023  |       | 1,922,687  |       |
| Funded status                    |       | (2,310,023 | )          | (1,922,687 | )          |
| Accumulated benefit obligation   |       | 2,310,023  |       | 1,922,687  |       |
|                                  |            |            |            |            |            |  |  |

 

19.11       Key weightedaverage assumptions used to determine benefit obligation for Patni Indiapension plan were as follows:

 
| ** **                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Discount rate                   |       | 9.00     | %          | 9.00     | %          |
| Increase in compensation levels |       | 0        | %          | 0        | %          |

 

19.12       Net periodicpension cost of Patni India pension plan included the following components:

 
| **Year ended December  31,** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                 |       | $        | 66,718     |     | $          | 71,175   |       | — |   |
| Interest cost                |       | 148,860  |       | 181,987  |       | 181,491  |       |
| Amortization                 |       | —   |       | —   |       | —   |       |
| Net pension cost             |       | $        | 215,578    |     | $          | 253,162  |       | $ | 181,491 |   |
|                              |            |          |            |          |            |          |            |  |  |  |

 

19.13       Key weightedaverage assumptions used to determine net periodic pension cost for the PatniIndia pension plan were as follows:

 
| **Year ended December 31,** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                    |       | 8        | %          | 8.85     | %          | 9.00     | %          |
| Rate of compensation increase    |       | 10       | %          | 10       | %          | 0        | %          |

 

F-43

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Table ofContents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 

**19****          ****Retirement benefits toemployees *(Continued)***

 

19.14       Patni’s expectedcontribution for the calendar year 2009 is $ 125,374. The expected benefitpayments for next ten years are as follows:

 
| ** **                | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 – 2018** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------------|------------|
| Expected benefit payments |       | $        | 125,374    |     | $          | 125,374  |       | $        | 125,374    |     | $          | 125,374              |       | $ | 125,374 |   | $ | 940,308 |   |
|                           |            |          |            |          |            |          |            |          |            |          |            |                      |            |  |  |  |  |  |  |

 

19.15       With regard toPatni USA pension plan, the following table sets forth the plan’s funded statusand amounts recognised in the Company’s consolidated balance sheet. Measurementdates used to make up benefit obligation is December 31 for each fiscalyear

 
| **At December 31,**         | ** ** | **2007**   | ** ** | **2008**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| **Change in benefit obligation** |       |       |       |       |       |
| PBO at January 1,           |       | $          | 6,071,754  |       | $          | 7,093,885 |   |
| Service cost                     |       | 191,148    |       | 200,000    |       |
| Interest cost                    |       | 327,036    |       | 318,000    |       |
| Translation loss/(gain)          |       | 774,259    |       | —     |       |
| Actuarial loss/ (Gain)           |       | (270,312   | )          | (338,885   | )          |
| PBO at December 31,         |       | 7,093,885  |       | 7,273,000  |       |
| Funded status                    |       | (7,093,885 | )          | (7,273,000 | )          |
| Accumulated benefit obligation   |       | $          | 4,004,314  |       | $          | 4,516,000 |   |

 

19.16       Key weightedaverage assumptions used to determine benefit obligation for Patni USA pensionplan were as follows:

 
| ** **                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Discount rate                   |       | 4.50     | %          | 4.50     | %          |
| Increase in compensation levels |       | 10       | %          | 10       | %          |

 

19.17       Net periodicpension cost of Patni USA pension plan included the following components:

 
| **Year ended December 31,** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                     |       | $        | 171,332    |     | $          | 191,148  |       | $ | 200,000 |   |
| Interest cost                    |       | 284,566  |       | 327,036  |       | 318,000  |       |
| Amortization                     |       | 196,139  |       | 44,169   |       | —   |       |
| Net pension cost                 |       | $        | 652,037    |     | $          | 562,353  |       | $ | 518,000 |   |

 

19.18       Key weightedaverage assumptions used to determine net periodic pension cost for the PatniUSA pension plan were as follows:

 
| **Year ended December 31,** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                    |       | 5        | %  p.a     | 5        | %  p.a     | 4.5      | %  p.a     |
| Rate of compensation increase    |       | 10       | %  p.a     | 10       | %  p.a     | 10       | %  p.a     |

 

F-44

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial statements  *(Continued)*** |

 

**19       Retirement benefits to employees *(Continued)***

 
| 19.19  | Net  periodic amount included in Other Comprehensive Income consisted of actuarial  (gain)/Loss. Amount recognised in net periodic employee benefit costs from  Other Comprehensive Income in the current year amount to $132,524, expected  amortisation out of Other Comprehensive Income in 2009 is $Nil. At  December 31, 2007 and 2008, $1,266,956 and $63,962 respectively of  actuarial loss included in other comprehensive income which will be  recognised in latter years as part of net periodic benefit cost.                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | ***Provident fund***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 19.20  | All  employees of Patni India and Patni Telecom India receive provident fund  benefits through a defined contribution plan in which both the employee and  employer make monthly contributions to the plan at 12% each of the covered  employee’s defined portion of salary. The Company has no further obligations  under the plan beyond monthly contribution. Patni contributes to the  Provident Fund Plan maintained by the Government of India.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 19.21  | Patni  contributed $3,895,116, $ 4,145,932 and $ 4,251,292 to the Provident Fund  Plan in 2006, 2007 and 2008 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **20** | **Segment Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 20.1   | SFAS  No. 131, “Disclosures about Segments of an Enterprise and Related  Information”, establishes standards for the way enterprises report  information about operating segments and related disclosures about products  and services, geographic areas and major customers. The Company’s operations  relate to providing IT services and solutions, delivered to customers  operating in various industry segments. Accordingly, revenues represented  along industry classes comprise the principal basis of segmental information  set out in these consolidated financial statements. Secondary segmental  reporting is performed on the basis of the geographical location of the  customers. The accounting policies consistently used in the preparation of  the consolidated financial statements are also consistently applied to  individual segment information.                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 20.2   | Industry  segments of the Company comprise financial services, insurance services,  manufacturing companies, communications media and entertainment, technology  services (comprising independent software vendors and product engineering)  and others such as energy and utilities, retail, logistics and  transportation. The Company evaluates segment performance and allocates  resources based on revenue growth. Revenue in relation to segments is  categorized based on items that are individually identifiable to that  segment. Costs are not specifically allocable to individual segment as the  underlying resources and services are used interchangeably. Property,  plant & equipment used in the Company’s business or liabilities  contracted have not been identified to any of the reportable segments, as the  property, plant & equipment and their services are used  interchangeably between segments. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 20.3   | Until  December 31, 2006, the Company reported Product Engineering Services  (PES) and Independent Software Vendors (ISV) as separate industry segments.  The PES business is primarily related to embedded technology services for  products and the ISV unit provided the user interface for these products.  Both these segments form part of technology services. Effective  January 1, 2007, the Company has integrated these two business segments  with the primary focus on the following synergies (i) demand for  providing end-to-end solutions from product engineering clients.  (ii) leveraging the domain skills and platform skills to provide end-to-end  solutions. Segment data for 2006 have been reclassified to conform to current  period presentation.                                                                                                                                                       |

 

F-45

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| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 
| **20** | **Segment Information *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 20.4   | Patni’s  geographic segmentation is based on location of customers and comprises United  States of America (‘USA’), Europe, Japan, India and Others. Revenue in  relation to geographic segments is categorized based on the location of the  specific customer entity for which services are performed irrespective of the  customer entity that is billed for the services and whether the services are  delivered onsite or offshore. Categorization of customer related assets and  liabilities in relation to geographic segments is based on the location of  the specific customer entity which is billed for the services. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 20.5   | Substantial  portion of Patni’s long lived assets are located in India.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 20.6   | Based  on the economic characteristics of the telecommunication business segment the  company has renamed the segment as communications, media and entertainment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

F-46

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Tableof Contents

 
| Patni Computer Systems Limited and  subsidiaries |   |
|--------------------------------------------------|--------|
| ** **                                       |

**See accompanying notes to the consolidated financialstatements *(Continued)***

 

**20****                                 ****SegmentInformation *(Continued)***

 

***20.7******                       ******Industry segments***

 
| **Particulars**                                                             | ** ** | **Financial  services**     | ** ** | **Insurance** | ** ** | **Manufacturing** | ** ** | **Communication,  Media &  Entertainment** | ** **  | **Product  Engineering** | ** ** | **Others**  | ** ** | **Total**  | ** **      |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|---------------|------------|-------------------|------------|-----------------------------------------------------|-------------|--------------------------|------------|-------------|------------|------------|-----------------|
|                                                                        |       | **December 31,  2006** | ** ** |
| Revenues                                                                    |       | $                           | 88,360,525 |          | $          | 134,513,555       |       | $                                                   | 125,395,979 |                     | $          | 109,204,432 |       | $          | 82,457,792      |   | $ | 38,918,599 | ** ** | **$** | **578,850,882** | ** ** |
| Accounts receivables, net                                                   |       | 16,469,861                  |       | 21,301,154    |       | 26,507,789        |       | 22,694,977                                          |        | 16,927,759               |       | 11,716,964  | ** ** | **$**      | **115,618,504** | ** ** |
|                                                                        |       |                        |       |          |       |              |       |                                                |        |                     |       |        | ** ** | ** ** | ** **      |
| Billings in excess of cost and estimated earnings  on uncompleted contracts |       | (207,662                    | )          | (211,665      | )          | (727,686          | )          | (489,852                                            | )           | (818,284                 | )          | (869,432    | )          | **$**      | **(3,324,581**  | **)** |
| Advance from customers                                                      |       | (4,833                      | )          | (18,172       | )          | (121,713          | )          | —                                              |        | (38,721                  | )          | (2,529      | )          | **$**      | **(185,968**    | **)** |
|                                                                        |       |                        |       |          |       |              |       |                                                |        |                     |       |        |       | ** ** | ** **      |
| Cost and estimated earnings in excess of billings  on uncompleted contracts |       | 2,425,124                   |       | 1,017,735     |       | 4,756,834         |       | 10,414,219                                          |        | 2,445,959                |       | 1,774,474   | ** ** | **$**      | **22,834,345**  | ** ** |
|                                                                        |       | **December 31,  2007** | ** ** |
| Revenues                                                                    |       | $                           | 93,725,976 |          | $          | 156,608,255       |       | $                                                   | 157,413,791 |                     | $          | 89,387,331  |       | $          | 111,063,050     |   | $ | 54,713,266 | ** ** | **$** | **662,911,669** | ** ** |
| Accounts receivables, net                                                   |       | 17,458,013                  |       | 27,515,894    |       | 35,482,616        |       | 19,919,098                                          |        | 21,762,194               |       | 14,233,868  | ** ** | **$**      | **136,371,683** | ** ** |
|                                                                        |       |                        |       |          |       |              |       |                                                |        |                     |       |        | ** ** | ** ** | ** **      |
| Billings in excess of cost and estimated earnings  on uncompleted contracts |       | (322,417                    | )          | (337,306      | )          | (1,429,386        | )          | (418,269                                            | )           | (772,703                 | )          | (275,163    | )          | **$**      | **(3,555,245**  | **)** |
| Advance from customers                                                      |       | (189,649                    | )          | (400,875      | )          | (135,283          | )          | (82,437                                             | )           | (288,354                 | )          | (140,638    | )          | **$**      | **(1,237,237**  | **)** |
| Cost and estimated earnings in excess of billings  on uncompleted contracts |       | 3,644,377                   |       | 1,907,851     |       | 9,243,504         |       | 7,945,259                                           |        | 6,217,741                |       | 3,458,660   | ** ** | **$**      | **32,417,391**  | ** ** |
|                                                                        |       | **December 31,  2008** | ** ** |
| Revenues                                                                    |       | $                           | 91,673,353 |          | $          | 177,274,553       |       | $                                                   | 180,460,749 |                     | $          | 90,244,846  |       | $          | 112,806,537     |   | $ | 66,424,065 | ** ** | **$** | **718,884,103** | ** ** |
| Accounts receivables, net                                                   |       | 13,790,442                  |       | 25,124,852    |       | 28,986,411        |       | 16,314,653                                          |        | 15,696,213               |       | 11,901,173  | ** ** | **$**      | **111,813,743** | ** ** |
| Billings in excess of cost and estimated earnings  on uncompleted contracts |       | (1,043,777                  | )          | (223,984      | )          | (1,901,632        | )          | (367,631                                            | )           | (1,692,082               | )          | (771,277    | )          | **$**      | **(6,000,383**  | **)** |
| Advance from customers                                                      |       | (85,646                     | )          | (50,311       | )          | (351,117          | )          | (40,794                                             | )           | (639,133                 | )          | (168,868    | )          | **$**      | **(1,335,869**  | **)** |
| Cost and estimated earnings in excess of billings  on uncompleted contracts |       | 2,734,036                   |       | 2,162,504     |       | 6,152,872         |       | 9,881,320                                           |        | 4,528,019                |       | 5,204,616   | ** ** | **$**      | **30,663,367**  | ** ** |

 

F-47

----

Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 
| **20**     | **Segment information *(Continued)*** |
|------------|---------------------------------------|
|       |                                  |
| ***20.8*** | ***Geographic segments***             |

 
| **Particulars**                                                             | ** ** | **USA**                      | ** **  | **Europe** | ** ** | **Japan**   | ** ** | **India** | ** ** | **Others** | ** ** | **Total**  | ** **      |
|-----------------------------------------------------------------------------|------------|------------------------------|-------------|------------|------------|-------------|------------|-----------|------------|------------|------------|------------|-----------------|
| ** **                                                                  | ** ** | ** **                   | ** **  |
| ** **                                                                  | ** ** | **December   31, 2006** | ** **  |
| ** **                                                                  | ** ** | ** **                   | ** **  |
| Revenues                                                                    |       | $                            | 467,907,248 |       | $          | 67,281,267  |       | $         | 21,827,569 |       | $          | 2,367,695  |            | $ | 19,467,103 | ** ** | **$** | **578,850,882** | ** ** |
| Accounts  receivables, net                                                  |       | 84,143,450                   |        | 24,949,728 |       | 3,441,415   |       | 1,562,956 |       | 1,520,955  | ** ** | **$**      | **115,618,504** | ** ** |
| Billings  in excess of cost and estimated earnings on uncompleted contracts |       | (1,658,212                   | )           | (914,024   | )          | (675,485    | )          | (60,767   | )          | (16,093    | )          | **$**      | **(3,324,581**  | **)** |
| Advance  from customers                                                     |       | (132,511                     | )           | (20,580    | )          | (3,367      | )          | (3,356    | )          | (26,154    | )          | **$**      | **(185,968**    | **)** |
| Cost  and estimated earnings in excess of billings on uncompleted contracts |       | 11,488,904                   |        | 8,518,364  |       | 1,348,568   |       | 172,637   |       | 1,305,872  | ** ** | **$**      | **22,834,345**  | ** ** |
|                                                                        |       |                         |        |       |       |        |       |      |       |       | ** ** | ** ** | ** **      | ** ** |
|                                                                        |       | **December 31,  2007**  |        |
|                                                                        |       | ** **                   |        |
| Revenues                                                                    |       | $                            | 516,438,299 |       | $          | 97,712,926  |       | $         | 20,044,614 |       | $          | 5,376,202  |            | $ | 23,339,629 | ** ** | **$** | **662,911,669** | ** ** |
| Accounts  receivables, net                                                  |       | 100,096,293                  |        | 28,257,749 |       | 2,915,162   |       | 1,245,098 |       | 3,857,380  | ** ** | **$**      | **136,371,683** | ** ** |
| Billings  in excess of cost and estimated earnings on uncompleted contracts |       | (1,833,086                   | )           | (624,628   | )          | (839,150    | )          | (172,146  | )          | (86,233    | )          | **$**      | **(3,555,245**  | **)** |
| Advance  from customers                                                     |       | (1,054,657                   | )           | (98,860    | )          | (73,768     | )          | (9,952    | )          | —     | ** ** | **$**      | **(1,237,237**  | **)** |
| Cost  and estimated earnings in excess of billings on uncompleted contracts |       | 19,824,710                   |        | 8,047,805  |       | 1,894,379   |       | 268,574   |       | 2,381,923  | ** ** | **$**      | **32,417,391**  | ** ** |
|                                                                        |       |                         |        |       |       |        |       |      |       |       | ** ** | ** ** | ** **      | ** ** |
|                                                                        |       | **December 31,  2008**  |        |
|                                                                        |       | ** **                   |        |
| Revenues                                                                    |       | $                            | 545,440,929 |       | $          | 112,640,874 |       | $         | 25,039,034 |       | $          | 6,426,537  |            | $ | 29,336,729 | ** ** | **$** | **718,884,103** | ** ** |
| Accounts  receivables, net                                                  |       | 84,479,242                   |        | 18,910,013 |       | 3,289,297   |       | 1,962,387 |       | 3,172,804  | ** ** | **$**      | **111,813,743** | ** ** |
| Billings  in excess of cost and estimated earnings on uncompleted contracts |       | (3,122,673                   | )           | (186,880   | )          | (1,528,806  | )          | (55,839   | )          | (1,106,185 | )          | **$**      | **(6,000,383**  | **)** |
| Advance  from customers                                                     |       | (687,186                     | )           | (71,776    | )          | (507,529    | )          | (8,242    | )          | (61,136    | )          | **$**      | **(1,335,869**  | **)** |
| Cost  and estimated earnings in excess of billings on uncompleted contracts |       | 14,773,659                   |        | 11,387,849 |       | 1,144,701   |       | 858,273   |       | 2,498,885  | ** ** | **$**      | **30,663,367**  | ** ** |

 

F-48

----

Table ofContents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 
| **20**     | **Segment information *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 20.9       | One  customer accounted for 15%, 12% and 11% of the total revenues for the year  ended December 31, 2006, 2007 and 2008, respectively. Net receivables  from this customer as at December 31, 2007 and 2008, amounted to 9% and  8% of the total net receivables, respectively. The revenues from this  customer were across all the industry segments of the Company. Another  customer in the Insurance industry segment accounted for 10%, 9% and 10% of  the total revenues for the years ended December 31, 2006, 2007 and 2008,  respectively. Net receivables for this customer as at December 31, 2007  and 2008, amounted to 6% and 6% of the total net receivables respectively. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **21**     | **Foreign exchange (gain)/loss**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|       | Aggregate  foreign exchange (gain)/loss for the years ended December 31, 2006, 2007  and 2008 amounted to $3,456,706, $ (23,350,920) and $ 18,358,897  respectively. Foreign exchange loss amounting to $708,780, $ Nil and $ Nil  for the years ended December 31, 2006, 2007 and 2008 respectively, have  been included in “Other (expense)/income, net” in the consolidated statements  of income.                                                                                                                                                                                                                                                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **22**     | **Earnings per share**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|       | A  reconciliation of the common shares used in the computation of basic and  diluted earnings per share is set out below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 
| ** ** | **Years ended December 31,**                                                    | ** ** | **2006**    | ** ** | **2007**    | ** ** | **2008**    | ** ** |
|------------|--------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** ** | ** **                                                                           |       |        |       |        |       |        |       |
|       | **Common shares**                                                                    |       |        |       |        |       |        |       |
| ** ** | ** **                                                                           |       |        |       |        |       |        |       |
|       | Weighted average number of shares outstanding                                        |       | 137,957,477 |       | 138,660,785 |       | 135,590,677 |       |
|       |                                                                                 |       |        |       |        |       |        |       |
|       | Effect of dilutive equivalent shares-stock options  outstanding                      |       | 947,383     |       | 909,148     |       | 169,745     |       |
|       |                                                                                 |       |        |       |        |       |        |       |
|       | Weighted average number of equity shares and  dilutive equivalent shares outstanding |       | 138,904,860 |       | 139,569,933 |       | 135,760,422 |       |

 
|   | Options  to purchase 2,630,860, 1,992,055 and 5,704,527 equity shares were outstanding  during the year ended December 31, 2006, 2007 and 2008, respectively,  but were not included in the computation of diluted earnings per share  because the exercise price of the options was greater than the average market  price of the equity shares.                                                                                                                                                                                                              |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **23** | **Related  party transactions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.1   | Patni  enters into various transactions with related parties, such as PCS Technology  Ltd. (‘PCSTL’), formerly known as PCS Industries Ltd., PCS International ltd,  PCS Cullinet, PCS Finance, Ravi and Ashok enterprises, Ashoka Computers - all  affiliates, directors of Patni and their relatives. Such transactions were  consummated on terms equivalent to those that prevailed in arm’s-length  transactions.                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | The  Company’s executive directors, Mr G.K.Patni and Mr A.K.Patni, under contract  of employment until October 22, 2010, ceased to be executive directors  effective October 1, 2007 but will continue as directors on the Board.  Termination benefit payments as provided in the contract of employment are in  compliance with the Indian Companies Act and amounted to $2,220,139, which  have been recorded as selling, general and administrative expenses in the  consolidated statement of income for the year ended December 31, 2007. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | Further,  an amount of $141,076 and $457,436 has been recorded as commissions for these  two directors (included in selling, general and administrative expenses) for  the year ended December 31, 2007 and 2008 respectively.                                                                                                                                                                                                                                                                                                                                 |

 

F-49

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Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 
| **23**       | **Related party transactions *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *** *** | ***Expenses***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.2         | Patni  has taken certain residential properties under operating leases from certain  affiliates and the Patni family. The rentals and other incidental charges  incurred were $ 127,748, $93,725 and $82,036 for the years ended  December 31, 2006, 2007 and 2008, respectively. Amounts payable with  respect to these obligations as at December 31, 2007 and 2008 were  $13,799 and $24,909 respectively. Outstanding security deposits under the  operating leases placed by Patni with affiliates and the Patni family at  December 31, 2007 and December 31, 2008 were $120,478 and $35,857  respectively.                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *** *** | ***Due from employees***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.3         | Patni  grants personal loans to eligible employees, either for housing or personal  purposes and advances to meet initial conveyance and living expenses while on  travel. Personal loans include loans for vehicle purchase and other individual  employee needs. Such loans and advances are repayable in equal installments  over periods ranging from 1—60 months. Interest on these loans and advances  is charged at 0- 9%. Loans outstanding at December 31, 2007 and 2008  were $ 620,271 and $450,472 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.4         | Patni  USA, Patni UK, Patni GmbH, Patni Telecom and its subsidiaries grant personal  loans to employees as well as advances to meet initial conveyance and living  expenses while on travel. Such loans and advances are repayable over a period  of 6 months. Interest charged on these loans and advances ranged from 0% to  10%. Balance outstanding of such loans and advances at December 31, 2007  and 2008 were $ 2,736,703 and $1,195,683 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | Employees  execute promissory notes for the amount advanced along with a guarantor’s  agreement as collateral. In the case of long term housing loan, the original  house deed is sought to be deposited with the Company as collateral, in  addition to the guarantor’s agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **24**       | **Line of Credit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | The Company has an  overall Line of Credit of Rs.610,000,000 ($15,478,305) and Rs.610,000,000  ($12,512,821) as of December 31, 2007 and 2008, respectively, from its  bankers for various requirements such as pre and post shipment loan, Export  Bill Discounting, Overdrafts, Working capital demand loan, Financial  Guarantees, Guarantees - Bid Bond / Performance, etc. These facilities bear  interest as negotiated with the bank from time to time. The facilities are  secured by accounts receivables of the Company. Patni Inc and Patni Telecom  have a line of credit of $2,000,000 as of December 31, 2007 and 2008,  each for meeting the working capital requirements bearing interest at Bank  Prime rate less 1%. There was no outstanding balances under this facility as  of December 31, 2007 and December 31, 2008. In addition Patni Inc  has a facility for issuance of Letters of credit to the extent of $ 500,000  as of December 31, 2007 and 2008, respectively. |

 

F-50

----

Table of Contents

 

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

 
| **25**       | **Commitments and Contingencies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 25.1         | The  Company is obligated under a number of contracts relating to capital  expenditure. Estimated amounts remaining to be executed on such contracts  (net of advances), aggregated $ 33,395,547 and $ 50,108,878 at  December 31, 2007 and 2008 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 25.2         | Guarantees  given by a bank on behalf of Patni amounted $ 3,857,802 and $ 1,319,911 as at  December 31, 2007 and 2008, respectively and letter of credit issued by  bank was $ 1,472,183 and $ Nil as at December 31, 2007 and 2008  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 25.3         | In December 2006,  the Company received a demand notice from the Indian Income Tax department  for approximately Rs 630.17 million, including an interest demand of  approximately Rs 186.85 million (.$12,926,489 including an interest demand of  approximately $3,827,266) for the assessment year 2004-05. The tax demand was  mainly on account of disallowance of deduction claimed by the Company under  Section 10A of the Income Tax Act, 1961, in respect of profits earned by  its various eligible undertakings. Section 10A of Indian Income Tax Act  exempts the profits earned by an undertaking for the export of computer  software upon the fulfillment of certain conditions. One of the conditions is  that the unit should not have been formed by the splitting up of an existing  business. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | The Company had only  expanded its software development business whereas the Income Tax department  contends that the business of the new units is comprised of business  transferred from existing units by splitting them. The Company, in  consultation with its tax advisers, filed an appeal in January 2007  challenging the disallowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | One  of the requirements under the Indian Income Tax Rules to proceed with an  appeal is to deposit, either immediately or through monthly installments, a  sum equivalent to 50% of the amount that is under appeal. Until  March 31, 2008, the Company deposited a sum of Rs 310.28 million  ($7,212,464). Considering the facts and nature of disallowances and based on  the advice given by the Company’s legal counsel, management considered that  the disallowance was not tenable and, therefore was confident of a favorable  outcome in appeal proceedings and hence no provision for such income tax  demand was considered necessary.                                                                                                                                                                 |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | Subsequently,  in February 2008, the Company received an order from the Commissioner  Income Tax (CIT) (Appeals) in favor of the Company by allowing the claim  under Section 10A. The Company received the refund of the taxes paid  after adjustment of the new demand for the assessment year 2002-03 as  explained above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | In  December 2007, the Company received another demand, for Rs. 261.70  million including an interest demand of approximately Rs 139.88 million ($ 5,368,267 including an interest demand of approximately $ 2,869,279) for the  assessment year 2002-03. The new demand related to the same issue of  disallowance of tax benefits under Section 10A. In the opinion of  management, and based on advice received, the demand was considered as not  tenable against the Company and the Company filed an appeal with the appellate  authority.                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | Subsequently,  in March 2008, the Company received an order from the CIT (Appeals) in  favor of the Company by allowing the claim under Section 10A.The total  amount paid till March 2008 of Rs 261.70 million ($ 6,083,288) along  with interest has also been received as refund.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | The  Indian Income tax department has appealed against the CIT (Appeal’s) order in  respect of assessment year 2002-03 and 2004-05 in the tribunal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *** *** | ***In December 2008 the  Company received a Demand of approximately Rs 458.66 million for the  Assessment Year 2003-04 including an interest demand of Rs 258.64 million (.$ 9,408,512 including an interest demand of approximately $ 5,305,521) and  another Demand in January 2009 of approximately Rs 1,131.76 million for  the Assessment Year 2005-06 including an interest demand of approximately Rs  421.97 million ($ 23,215,659 including an interest demand of approximately $ 8,655,847).***                                                                                                                                                                                                                                                                                           |

*** ***

***F-51***

----

***Table of Contents***

*** ***

| Patni  Computer Systems Limited and subsidiaries                                   |   |   |
|------------------------------------------------------------------------------------|--------|--------|
|                                                                               |   |   |
| **See accompanying notes to the consolidated financial  statements *(Continued)*** |

*** ***
| **25** | **Commitments and Contingencies *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | These  new demands concern the same issue of disallowance of tax benefits under  Section 10A. The Company has filed an Appeal and stay of demand has been  granted till 30 June 2009. The Company is required to pay 10% of the  amount under appeal before March 2009. Additionally, subsequent to year  ended December 31, 2008, the Company has deposited with the Indian  income tax authorities Rs. 209 million ($ 4.1million) as deposit relating to  the demands received in December 2008. Management considers these  demands as not tenable against the Company and, therefore, no provision for  this tax contingency has been established. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | Certain other income  tax related legal proceedings are pending against the Company. Potential  liabilities, if any, have been adequately provided for, and the Company does  not currently estimate any incremental liability in respect of these  proceedings. Additionally, the Company is also involved in lawsuits and  claims which arise in ordinary course of business. There are no such matters  pending that Patni expects to be material in relation to its business.                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **26** | **Fair value of financial instruments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | The  fair value of Patni’s current assets and current liabilities approximate  their carrying values because of their short-term maturity. Such financial  instruments are classified as current and are expected to be liquidated  within the next twelve months. The fair value of capital lease obligations  has been estimated by discounting cash flows based on current rate available  to the Company for similar types of borrowing arrangements. The fair value  and carrying value of capital lease obligations is set out below:                                                                                                                                     |

 
| ** ** | **Capital lease obligations** | ** ** | **Fair Value** | ** ** | **Carrying value** | ** ** |
|------------|-------------------------------|------------|----------------|------------|--------------------|------------|
|       |                          |       |           |       |               |       |   |   |
|       | At December 31, 2007     |       | $              | 578,708    |               | $          | 603,557 |   |
|       |                          |       |           |       |               |       |   |   |
|       | At December 31, 2008     |       | 351,650        |       | 359,955            |       |

 

F-52

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