Table of Contents


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.




FORM
20-F




(Mark
One)




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


OR




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


For
      the fiscal year ended March 31,
2008


OR




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


OR




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


Date
      of event requiring this shell company report
      _____________________


For
      the transition period from ______ to
_____




Commission
file number 1-15252




Mahanagar
Telephone Nigam Limited


(Exact
name of Registrant as specified in its charter)




N/A
              (Translation
      of Registrant’s name into English)
            The
      Republic of India
              (Jurisdiction
      of incorporation or organization)





12th
Floor, Jeevan Bharati Tower-1


124
Connaught Circus


New
Delhi 110001


India


(Address
of principal executive offices)




Smt Anita
Soni, Director Finance, 91-11-2332-1095,dirfinco@bol.net.in


Jeevan
Bharati Building, Tower I, 124 Connaught Circus, New Delhi 110001,
India


(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contract
Person)




Securities
registered or to be registered pursuant to Section 12(b) of the
Act:




Title
      of each class
            
            Name
      of each exchange on which registeredAmerican
      Depositary Shares, each representing two equity shares.
              Equity
      Shares (Not for trading, but only in connection with the registration of
      the American Depositary Shares)
            
            New
      York Stock Exchange





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




None




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




None




Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.




630,000,000
Equity Shares




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of 1933, or the Securities
Act.    YES    o
      NO    x




Table of Contents




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




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




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




Large
      accelerated filer
            
            x
            Accelerated
      filer
            
             ̈
            Non-accelerated
      filer
            
             ̈





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




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




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




Item 17
o      Item
18 o




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




Table of Contents





TABLEOF CONTENTS


Page





PRESENTATION OF FINANCIAL
    INFORMATION
            iiiSPECIAL NOTE REGARDING FORWARD-LOOKING
      STATEMENTS
            iiiPART I
            1Item 1.
            Identity of Directors, Senior Management and
      Advisers
            1Item 2.
            Offer Statistics and Expected Timetable
            1Item 3.
            Key Information
            1SELECTED FINANCIAL AND OPERATING DATA
            1EXCHANGE RATES
            3RISK FACTORS
            4Item 4.
            Information on the Company
            10HISTORY AND DEVELOPMENT OF THE COMPANY
            10BUSINESS OVERVIEW
            20LEGAL PROCEEDINGS
            32ORGANIZATIONAL STRUCTURE
            36PROPERTY, PLANTS AND EQUIPMENT
            36TELECOMMUNICATIONS REGULATION IN INDIA
            40Item 4A.
            Unresolved Staff Comments
            49Item 5.
            Operating and Financial Review and
Prospects
            49OPERATING RESULTS
            49LIQUIDITY AND CAPITAL RESOURCES
            63Item 6.
            Directors, Senior Management and Employees
            65DIRECTORS AND SENIOR MANAGEMENT
            65AUDIT COMMITTEE
            68EMPLOYEES
            68TRAINING
            70SHARE OWNERSHIP
            70Item 7.
            Major Shareholders and Related Party
      Transactions
            70MAJOR SHAREHOLDERS
            70CERTAIN RELATIONSHIPS AND RELATED PARTY
      TRANSACTIONS
            71Item 8.
            Financial Information
            72CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
      INFORMATION
            72SIGNIFICANT CHANGES
            73Item 9.
            The Offer and Listing
            73MARKET PRICE INFORMATION
            73THE INDIAN SECURITIES MARKET
            75Item 10.
            Additional Information
            81MEMORANDUM AND ARTICLES OF
      ASSOCIATION
            81MATERIAL CONTRACTS
            86INDIAN FOREIGN EXCHANGE CONTROLS AND SECURITIES
      REGULATIONS
            86TAXATION
            89DOCUMENTS ON DISPLAY
            93Item 11.
            Quantitative and Qualitative Disclosures about Market
      Risk
            93Item 12.
            Description of Securities Other than Equity
      Securities
            94PART II
            95Item 13.
            Defaults, Dividend Arrearage and
      Delinquencies.
            95Item 14.
            Material Modifications to the Rights of Security Holders and
      Use of Proceeds
            95Item 15.
            Controls and Procedures
            95Item 16A.
            Audit Committee Financial Expert
            99




i
 Table of Contents




Item 16B.
            Code of Ethics
            99Item 16C.
            Principal Accountant Fees and Services
            99Item 16D.
            Exemptions from the Listing Standards for Audit
      Committees
            99Item 16E.
            Purchase of Equity Securities by the Issuer and Affiliated
      Purchasers
            100PART III
            101Item 17.
            Financial Statements
            101Item 18.
            Financial Statements
            101Item 19.
            Exhibits
            101SIGNATURES
            102





ii
 Table of Contents




PRESENTATIONOF FINANCIAL INFORMATION




The
financial information in this report has been prepared in accordance with US
GAAP with respect to our consolidated statements of operations, shareholders’
equity and cash flow for the fiscal years ended March 31, 2006, 2007 and 2008,
and our balance sheets as of March 31, 2007 and 2008.  Our fiscal year
ends on March 31 of each year, so all references to a particular fiscal year are
to the year ended March 31 of that year.  The consolidated financial
statements, including the notes to those financial statements, are set forth at
the end of this report.




Although
we have translated in this report certain rupee amounts into dollars for
convenience, this does not mean that the rupee amounts referred could have been,
or could be, converted into dollars at any particular rate, the rates stated
below, or at all.  All translations from rupees to dollars with
respect to financial data as of March 31, 2008 are based on the noon buying rate
in the City of New York for cable transfers in rupees on such
date.  The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given.  The noon buying rate
on March 31, 2008 was Rs. 40.02 per US$1.00.




Information
contained in our website, www.mtnl.net.in, is
not part of this annual report, and no portion of such information is
incorporated herein.




Reference
to “we,” “us,” “our,”  “MTNL,” and the “Company” refer to Mahanagar
Telephone Nigam Limited.






SPECIALNOTE REGARDING FORWARD-LOOKING
STATEMENTS




This
report contains “forward-looking statements”, as defined in Section 27A of the
U.S.  Securities Act of 1933, as amended, and Section 21E of the
U.S.  Securities Exchange Act of 1934, as amended, that are based on
our current expectations, assumptions, estimates and projections about our
company and our industry.  The forward-looking statements are subject
to various risks and uncertainties.  Generally, these forward-looking
statements can be identified by the use of forward-looking terminology such as
“may,” “will,” “will likely result,” “believe,” “expect,” “will continue,”
“anticipate,” “estimate,” “intend,” “plan,” “contemplate,” “seek to,” “future,”
“objective,” “goal,” “project,” “should,” and similar expressions or variations
of these expressions.  We caution you that reliance on any
forward-looking statement involves risks and uncertainties, and that although we
believe that the assumptions on which our forward-looking statements are based
are reasonable, any of those assumptions could prove to be inaccurate, and, as a
result, the forward-looking statements based on those assumptions could be
incorrect.  The uncertainties in this regard include, but are not
limited to, those identified in the risk factors discussed elsewhere in this
report.  See Item 3D. “Key Information—Risk Factors” and Item 5
“Operating and Financial Review and Prospects.”  In light of these and
other uncertainties, you should not conclude that we will necessarily achieve
any plans and objectives or projected financial results referred to in any of
the forward-looking statements.  We do not undertake to release the
results of any revisions of these forward-looking statements to reflect future
events or circumstances.




iii
 Table of Contents





PARTI




Item 1.
            Identity
      of Directors, Senior Management and
Advisers




Not
applicable.




Item 2.
            Offer
      Statistics and Expected Timetable




Not
applicable.




Item 3.
            Key
      Information




3A.
            Selected
      Financial Data




SELECTEDFINANCIAL AND OPERATING DATA




You
should read the following selected financial and operating data in conjunction
with our consolidated financial statements and the related notes, and Item 5
“Operating and Financial Review and Prospects” and the other financial
information included elsewhere in this report and our other reports filed with
the SEC.




Our
selected financial and operating data included in this report are presented in
Indian rupees and are derived from our consolidated financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America (US GAAP) for the fiscal years ended March 31, 2004,
2005, 2006, 2007 and 2008.




The
selected statement of operations data and cash flow data for the three years
ended March 31, 2008, and the selected balance sheet data as of March 31, 2007
and 2008 under US GAAP have been extracted or derived from our consolidated
audited US GAAP financial statements which are included elsewhere in this
report. The selected statement of operations data and cash flow data for the
years ended March 31, 2004 and 2005, and the selected balance sheet data as of
March 31, 2004, 2005 and 2006 under US GAAP are derived from our consolidated
audited US GAAP financial statements not included in this report.  Our
historical results do not necessarily indicate our results expected for any
future period.  You should read the following information in
conjunction with “Item 5.  Operating and Financial Review and
Prospects,” and our consolidated financial statements included elsewhere in this
report.




Consolidated
financial statements for the year ended March 31, 2008 have been translated for
convenience into US dollars (although we have translated certain rupee amounts
in this report into US dollars for convenience, this does not mean that the
rupee amounts referred to could have been, or could be, converted into US
dollars at any particular rate, the rates stated below, or at
all).  All translations from rupees to dollars with respect to
financial data as of March 31, 2008 are based on the noon buying rate in the
City of New York for cable transfers in rupees on such date.  The
Federal Reserve Bank of New York certifies this rate for customs purposes on
each date the rate is given.  The noon buying rate on March 31, 2008
was Rs. 40.02 per US$1.00.




1
 Table of Contents




UnderUSGAAP




Fiscal
      Years Ended March 31,2004
            2005
            2006
            2007
            2008
            2008Statement of Income Data
            (Rs.
      in millions except per share data)
            Convenience
      translation into millions of US$ (Unaudited)Revenues
            Rs.61,084
            Rs.50,156
            Rs.46,668
            Rs.45,475
            Rs.44,705
            $1,117Total
      costs and expense
            (55,850)
            (47,229)
            (47,480)
            (48,927)
            (47,027)
            (1,175)Liability
      for post retirement medical benefits written back
            0
            0
            0
            5,794
            0
            0Operating
      income
            5,234
            2,927
            (812)
            2,342
            (2,323)
            (58)Other
      income / (expense), net
            1,714
            2,670
            2,388
            7,894
            4,661
            116Income
      before income taxes
            6,948
            5,597
            1,576
            10,236
            2,338
            58Income
      taxes
            (2,570)
            (2,124)
            (437)
            1,073
            121
            3Equity
      in (losses) of affiliate
            (20)
            (67)
            (73)
            (7)
            (1)
            (0)Net
      Income
            Rs.4,358
            Rs.3,406
            Rs.1,066
            Rs.11,302
            Rs.2,458
            $     61Weighted
      average equity shares outstanding
            630
            630
            630
            630
            630
            –EPS
      – Basic & diluted
            Rs.6.92
            Rs.5.41
            Rs.1.69
            Rs.17.94
            Rs.3.90
            $0.10Basic
      and diluted earnings per GDR/ADS
            Rs.13.84
            Rs.10.82
            Rs.3.38
            Rs.35.88
            Rs.7.80
            $0.20Dividends
      paid per equity share
            Rs.4.5
            Rs.6.5
            Rs.6.21
            Rs.4.56
            Rs.4.68
            $0.12Dividends
      paid per equity share
            $0.10
            $0.15
            $0.14
            $0.11
            $0.12
            –Dividends
      paid per GDR/ADS
            Rs.9.0
            Rs.13.0
            Rs.12.42
            Rs.9.12
            Rs.9.37
            $0.23Dividends
      paid per GDR/ADS
            $0.20
            $0.30
            $0.28
            $0.21
            $0.23
            –





As
      at March 31,2004
            2005
            2006
            2007
            2008
            2008Balance Sheet Data
            (Rs.
      in millions except per share data)
            Convenience
      translation into millions of US$ (Unaudited)Cash
      and Cash equivalents
            Rs.9,891
            Rs.7,561
            Rs.1,641
            Rs.1,660
            Rs.1,346
            $    34Investment
      in bank deposits
            15,654
            17,732
            19,020
            17,102
            32,444
            811Dues
      from Related Parties
            23,588
            27,789
            23,818
            23,659
            25,713
            643Total
      Assets
            168,023
            177,172
            170,151
            178,937
            193,547
            4,836Dues
      to Related Parties
            12,084
            11,339
            6,091
            5,729
            8,118
            203Total
      Liabilities
            83,466
            93,839
            89,703
            90,060
            105,160
            2,628Total
      Shareholders equity
            84,557
            83,333
            80,448
            88,877
            88,387
            2,209Capital
      Stock1
            12,949
            12,949
            12,949
            12,949
            12,949
            324





Fiscal
      Years Ended March 31,2004
            2005
            2006
            2007
            2008
            2008Cash flow data:
            (Rs.
      in millions except per share data)
            Convenience
      translation into millions of US$ (Unaudited)Net
      cash from operating activities
            Rs.19,885
            Rs.15,006
            Rs.6,006
            Rs.9,672
            Rs.27,640
            $  691Net
      cash used in investing activities
            Rs.(16,706)
            Rs.(12,706)
            Rs.(7,976)
            Rs.(6,780)
            Rs.(25,006)
            (625)Net
      cash from financing activities
            Rs.
      (3,198)
            Rs.
      (4,630)
            Rs.(3,951)
            Rs.(2,873)
            Rs.(2,948)
            (74)




1 Includes
capital stock and additional paid-in capital.




2
 Table of Contents


EXCHANGERATES




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




The
following table sets forth, for the fiscal years indicated, information
concerning the number of Indian rupees for which one US dollar would be
exchanged based on the noon buying rate in the City of New York for cable
transfers of Indian rupees, as certified for customs purposes by the Federal
Reserve Bank of New York.




Fiscal
      Year Ended March 31,
            At
      end of
              period
            Average
              rate
      (1)
            High
            Low2004
            43.40
            45.78
            47.46
            43.402005
            43.62
            44.86
            46.45
            43.272006
            44.48
            44.21
            46.26
            43.052007
            43.10
            45.06
            46.83
            42.782008
            40.02
            40.13
            43.05
            38.482009
      (through September 22, 2008)
            45.30
            42.76
            46.81
            39.73




(1)The average rate is the
average of the exchange rates on the last business day of each month during the
period.




The
following table sets forth the high and low exchange rates for the previous six
months and is based on the noon buying rate in the City of New York during the
period for cable transfers in Indian rupees as certified for customs purposes by
the Federal Reserve Bank of New York:




Month
            High
            LowApril
      2008
            40.45
            39.73May
      2008
            42.93
            40.45June
      2008
            42.97
            42.38July
      2008
            43.29
            41.10August
      2008
            43.74
            42.01September
      2008 (through September 22, 2008)
            46.81
            43.95




On
September 22, 2008, the noon buying rate was Rs. 45.30 = US$1.00.




3B.
            Capitalization
      and Indebtedness




Not
applicable.




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




Not
applicable.




3
 Table of Contents


3D.
              RiskFactors


You
should carefully consider all the information contained in this report and the
following risk factors that affect us and our industry in evaluating us and our
business.  The risks below are not the only ones we
face.  Additional risks not currently known to us or that we
presently deem immaterial may also affect our business.  This report
also contains forward-looking statements that involve risks and
uncertainties.  The market price of our equity shares or ADSs could
decline due to any of these risks or uncertainties.




Risks
Relating to Our Business




We
expect to continue to encounter increased competition in each of our markets,
which could reduce our revenues.




The
Indian government is rapidly liberalizing the telecommunications industry in
India.  The Department of Telecommunications (DOT) may license, at its
discretion, multiple additional service providers in any service area, with
respect to both basic telecommunications services and cellular
services.  In November 2003, the Department issued guidelines for
Unified Access Licenses, which cover both basic and cellular services within a
service area.  In the Indian context, “basic telecommunications
services” or “basic services” include basic fixed-line access service and a
number of other telecommunications services, other than long distance services,
cellular service and Internet access.  Basic services also include
CDMA-based fixed wireless and mobile services (without roaming).  Tata
Teleservices Limited and Reliance Infocomm Limited are currently competing with
us in the market for basic services in both Mumbai and Delhi, and Bharti
Tele-Ventures Limited is also competing with us in the basic services market in
Delhi and Mumbai.  All of these companies already have significant
telecommunications infrastructure in Delhi and Mumbai, including, with respect
to Tata Teleservices and Reliance Infocom, low-cost CDMA mobile and fixed
wireless technology.  With approximately 56.08% of our call units
having come from approximately 12.86% of our access lines in service, we are
particularly vulnerable to losing market share if these or other new operators
aggressively target our largest subscribers.  Some of our largest
customers have already migrated to other basic service operators.




We
experience significant and growing competition in the market for GSM cellular
and Internet services.  Many of these service providers enjoy
significant penetration in these markets, have established brand names and have
more experience operating a cellular network than we do.  Cellular
operators also face competition from rapidly growing CDMA-based mobile services,
which are priced considerably lower than GSM cellular services.




Increased
competition has kept and will likely continue to keep downward pressure on
prices and has required and will likely continue to require us to increase our
capital investment to improve and expand our services.  These
developments, in turn, have had and may continue to have a negative impact on
our profitability.




Our
business is subject to substantial regulation by the Government.




The DOT
retains the right to revoke our licenses after giving one month’s notice to
us.  The DOT also retains the right, after giving notice to us, to
modify the terms and conditions of our licenses at any time if in their opinion
it is necessary or expedient to do so in the interest of the general public or
for the proper operation of the telecommunications sector.  A
revocation of any license or a change in significant terms of any license, such
as its duration, the amount of license fee payable, the range of services
permitted and the scope of exclusivity could limit our ability to operate
particular lines of our business or result in increased costs in the form of
increased license fees or costs associated with applying for new licenses, or
contesting limitations on our licenses.




Regulations
applicable to public sector enterprises in India governing certain personnel
matters, procurement, capital expenditure and the issuance of securities may
affect our ability to compete effectively.




As long
as the Indian government’s shareholding in us equals or exceeds 51%, we are
deemed to be an Indian government company.  As such, we are subject to
laws and regulations generally applicable to public sector enterprises in
India.  These laws and regulations govern, among other things,
personnel matters, procurement, budgeting and capital expenditures and the
generation of funds through the issuance of securities.




4
 Table of Contents




Under our
articles of association, the President of India, on behalf of the Indian
government, may also issue directives with respect to the conduct of our
business and affairs, and certain matters with respect to our business,
including the appointment and remuneration of our Chairman and Managing Director
and the declaration of dividends.  None of our shareholders,
management or board of directors may take action in respect of any matter
reserved for the President of India without his approval.  If the
President of India does not allow us to  make capital expenditures
pursuant to our business plan, we may be unable to compete effectively or
maintain profitability.  Government formalities, including
requirements that many of our purchases be made through a competitive bidding
process, often cause delays in our equipment and product procurement; these
delays can place us at a disadvantage relative to private sector
competitors.




The
Indian government, our controlling shareholder, when considering matters
pertaining to us, often also considers the interests of the largest
government-owned telecommunications company, Bharat Sanchar Nigam Limited
(BSNL).  The Indian government is evaluating the possibility of a
merger of us with BSNL.




The
Indian government, through the DOT, holds 56.25% of our outstanding equity
shares and 100% of BSNL’s equity shares.  Consequently, the DOT
controls both of us.  The DOT has the power to determine the outcome
of most actions requiring approval of our board of directors or shareholders,
including proposed expansion of our basic and cellular services into new areas
in which we may compete with BSNL, transactions with BSNL or the assertion of
claims against BSNL.  When considering many of these matters, the DOT
may also take into account the interests of BSNL.  Failure by the DOT
to resolve conflicts involving us and BSNL in an equitable manner could have a
material adverse effect on our business prospects.




India’s
Ministry of Communications has appointed private sector banks to act as
consultants to advise on restructuring BSNL and us.  We understand
that these consultants have submitted their reports.  There have been
media reports about consideration of a merger of our companies or the transfer
by the DOT of their shares in us to BSNL or to a holding company that would
control both us and BSNL.  There are no further announcements on
this.  We cannot assess the likelihood of such a transaction, or the
impact of such a transaction on our business or the value of our shares or
ADSs.




We
have significant related party transactions.




The
Indian Government is our controlling shareholder and hence we are deemed to be
an Indian government company. As such, we are subject to laws and regulations
generally applicable to public sector enterprises in India. These laws and
regulations govern, among other things, personnel matters, procurement,
budgeting and capital expenditures and the generation of funds through the
issuance of securities.  We have extensive commercial and regulatory
relationships with the DOT and BSNL, most of which were established at the time
when there was no corporate separation between the DOT, BSNL and
us.  Also the Indian Government when considering matters pertaining to
us, often also considers the interests of the largest government-owned
telecommunications company, Bharat Sanchar Nigam Limited (BSNL).  We
have significant amounts due from related party and our inability to collect
them or change in the terms of our arrangements with our related parties could
adversely affect our revenues and profitability.  See Notes 3, 4, 19
and 25 to our consolidated financial statements and Item 7B. Related Party
Transactions in this report.




We
do not have title to property, and we cannot sell our properties without payment
of stamp duties and registering properties in our name.




In 1987,
the assets and properties of the DOT located in Delhi and Mumbai were
transferred to us by an order of the Government of India (the “Government”) and
a deed of sale was executed by the Government in our favor representing an
irrevocable transfer.  Indian law generally requires that to perfect
the transfer or lease of real property, the transfer should be evidenced by a
formal, duly stamped deed of transfer and registered with the Central Land
Registrar within a specified period after the execution of the deed of transfer
or lease. A formal transfer deed for real property of the DOT, transferred by
the Government to us has been executed but has not been registered with the
appropriate municipal authorities.  The formal transfer deed and
physical delivery of possession of the DOT’s non-real estate assets has resulted
in the transfer of such non-real estate assets of the DOT to us in Delhi and
Mumbai.




5
 Table of Contents




Indian
law also requires payment of stamp duty (at rates which vary among states) on
instruments, which effect transfer of title to real estate or in respect of
leases of real estate.  We have not paid stamp duty in respect of any
of the acquired or leased properties.  Accordingly, we may be liable
for stamp duty and penalties thereon if a deed is registered by us in the future
(other than with respect to the DOT properties acquired from the Government as
at March 30, 1987). All liabilities for stamp duties in respect of the DOT
properties acquired by us from the Government as at March 30, 1987 are to be
borne by the Government.  We have been advised by our counsel that
although we have valid possession including the risks and rewards of ownership
and title to all of our property to enable us to perfect and thereby acquire
marketable title to real property in our possession, we would need to have
relevant documents relating to transfer or lease of real property duly
registered and stamped.  Accordingly, we cannot sell our properties
without payment of stamp duties and registering the properties in our
name.




Compliance
with new and changing corporate governance and public disclosure requirements
adds uncertainty to our compliance policies and increases our costs of
compliance.  In certain areas management had concluded there were
material weaknesses in our internal controls.




We are
incorporated in India and investors should be aware that there are
differences in the governance standards and shareholder rights for a U.S.
company and those applicable to a foreign isser as us.  Changing laws,
regulations and standards relating to accounting, corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new U.S. Securities
and Exchange Commission, or SEC, regulations, the NYSE, rules, Securities and
Exchange Board of India, or SEBI, rules, and Indian stock market listing
regulations are creating uncertainty for companies like ours. These new or
changed laws, regulations and standards may lack specificity and are subject to
varying interpretations. Their application in practice may evolve over time, as
new guidance is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher costs of
compliance as a result of ongoing revisions to such corporate governance
standards.




In
particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding our required assessment of our
internal controls over financial reporting and our external auditors’ audit of
that assessment requires the commitment of significant financial and managerial
resources. We consistently assess the adequacy of our internal controls over
financial reporting, remediate any control deficiencies that may be identified,
and validate through testing that our controls are functioning as
documented.




As of
March 31, 2008, management had concluded that our internal controls over
periodical reporting were not effective by reason of certain material
weaknesses, particularly as to updating of our fixed assets register,
reconciliation of subscriber deposits, accounting for related party transactions
and information technology controls.  These deficiencies could result
in misstatements in reporting in those areas.  We had undertaken
certain initiatives and remedial action in those areas during the 2008 fiscal
year and have undertaken additional remedial action and expect to complete the
remedial action in the 2009 fiscal year.  See Item 15. Controls and
Procedures.




We
have received a demand to pay sales tax in respect of certain historical
telecommunications revenues, mainly telephone rental charges.  We are
not yet able to estimate our potential aggregate liability, but it could be
large and have a material adverse effect on our results of operations, financial
condition and cash flow.




We have
received a demand from the state government of Maharashtra, of which Mumbai is a
part, for payment of Rs.1.9 billion in sales tax for fiscal 1989-2000 on certain
telecommunications revenues, mainly telephone rental charges.




We have
challenged the demands raised before the respective high courts and we have been
granted interim stays against enforcement of the demands. However this stay
order is subject to the outcome of the Supreme Court judgment on the
issue.  During the year ended March 31, 2006, the Supreme Court of
India has concluded in the BSNL Vs Union of India case that rendering basic
services does not amount to a “transfer of right to use the telephone
system”.  Hence the imposition of the sales tax on any facility of the
telecommunication services is untenable in law.  Based on opinion
received from legal counsel and drawing reference to the judgment of the Supreme
Court of India in the abovementioned case, management believes that the sales
tax departments would have to withdraw their demands of sales tax on basic
telephony and that an adverse outcome in respect of the above is
remote.  The legal case filed in the Sales Tax Tribunal Maharashtra
has been remanded to the Commissioner to reconsider the issue in light of the
above Supreme Court judgment.




6
 Table of Contents




If we
were required to pay sales tax in respect of certain historical revenues,
including telephone rentals, such payments could have a material adverse effect
upon our results of operations, financial condition and cash flow.  At
this time, we cannot estimate potential aggregate actual liability
associated with sales tax.




We
have and may continue to implement Voluntary Retirement Schemes that will
affect our profitability.




We have
and continue to offer voluntary retirement to certain of our employees with a
view to reducing our workforce.  While we believe the long-term effect
to our financial performance will be beneficial, the cost of such programs will
affect our profitability over the next few years.




Risks
Relating to Investments in Indian Companies




There
are risks of political uncertainty in India that could affect our
business.




During
the past decade, the government of India has pursued policies of economic
liberalization, including significantly relaxing restrictions on the private
sector. Nevertheless, the role of the Indian central and state governments in
the Indian economy as producers, consumers and regulators has remained
significant. A coalition government is in power. We cannot assure that these
liberalization policies will continue in the future. The rate of economic
liberalization could change, and specific laws and policies affecting foreign
investment, currency exchange rates and other matters affecting investment in
our securities could change as well. A significant change in India’s economic
liberalization and deregulation policies could disrupt business and economic
conditions in India generally and could adversely affect the telecommunications
licensing and regulatory framework in which we operate our
business.




A
slowdown in economic growth in India may adversely affect our business and
results of operations.




Our
performance and the quality and growth of our business are necessarily dependent
on the health of the overall Indian economy.  The Indian economy has
grown significantly over the past few years.  Any future slowdown in
the Indian economy could harm us, our customers and other contractual
counterparties.  In addition, the Indian economy is in a state of
transition.  The share of the services sector of the economy is rising
while that of the industrial, manufacturing and agricultural sector is
declining.  It is difficult to gauge the impact of these fundamental
economic changes on our business.




Financial
instability in other countries, particularly emerging market countries in Asia,
could adversely affect the Indian economy and cause our business and the market
for our equity shares and ADSs to suffer.




Financial
turmoil in Asia, Russia and elsewhere in the world in the late 1990s affected
different sectors of the Indian economy in varying degrees.  Although
economic conditions are different in each country, investors’ reactions to
developments in one country can have adverse effects on the securities of
companies in other countries, including India.  A loss of investor
confidence in the financial systems of other emerging markets may cause
increased volatility in Indian financial markets and, indirectly, in the Indian
economy in general.  Any worldwide financial instability could
influence the Indian economy and could have a material adverse effect on the
market for securities of Indian companies, including our equity shares and
ADSs.




Social
conflict, terrorism and related military activity may adversely affect the
Indian economy or world economic activity, either of which could adversely
affect our business and the prices of our equity shares and ADSs.




India and
other parts of the world have recently experienced significant social conflict
and/or terrorist acts.  In India, social conflict, including religious
and regional/separatist conflicts, has been an ongoing problem, which
occasionally includes significant acts of terrorism.  To the extent
that the Indian economy is adversely affected by such conflict, terrorism or
military activity, our business may also be adversely affected, resulting in a
decline in revenue, and the prices of our equity shares and ADSs may
decline.




7
 Table of Contents




Risks
Relating to the ADSs and Equity Shares




Ability
to withdraw equity shares from the depositary facility is uncertain and may be
subject to delays.




India’s
restrictions on foreign ownership of Indian companies limit the number of shares
that may be owned by foreign investors and generally require government approval
for foreign ownership.  The maximum foreign ownership permitted in us
without prior governmental approval is 49% under the sectoral caps currently
provided for by the government of India and the Reserve Bank of
India.  Investors who withdraw equity shares from the depositary
facility will be subject to Indian regulatory restrictions on foreign ownership
of equity shares upon withdrawal.  It is possible that this withdrawal
process may be subject to delays.




Ability
to sell in India any equity shares withdrawn from the depositary facility may be
subject to delays.




Persons
seeking to sell in India any equity shares withdrawn upon surrender of an ADS
will require Reserve Bank of India approval for each such
transaction.  Because of possible delays in obtaining necessary
approvals, holders of equity shares may be prevented from realizing gains during
periods of price increases or limiting losses during periods of price
declines.




Ability
to withdraw and redeposit shares in the depositary facility is limited, which
may cause our equity shares to trade at a discount or premium to the market
price of our ADSs.




Because
of Indian legal restrictions, despite recent relaxations, the supply of ADSs may
be limited.  Under procedures recently adopted by the Reserve Bank of
India, the depositary will be permitted to accept deposits of our outstanding
equity shares and deliver ADSs representing the deposited equity shares to the
extent, and limited to the number, of ADSs that have previously been converted
into underlying equity shares.  Under these new procedures, if you
elect to surrender your ADSs and receive equity shares, you may be unable
to re-deposit those outstanding equity shares with our depositary and
receive ADSs because the number of new ADSs that can be issued cannot, at any
time, exceed the number of ADSs converted into underlying equity shares or
result in foreign equity in us exceeding 49%.  This may restrict your
ability to re-convert the equity shares obtained by you to
ADSs.  Also, investors who exchange ADSs for the underlying equity
shares and are not holders of record will be required to declare to us details
of the holder of record.  Any investor who fails to comply may be
liable for a fine of up to Rs.1,000 for each day such failure
continues.  See Item 10. “Additional Information—Indian Foreign
Exchange Controls and Securities Regulations.”




The
restrictions described above may cause our equity shares to trade at a discount
or premium to our ADSs.




Conditions
in the Indian securities market may affect the price or liquidity of the equity
shares and the ADSs.




The
Indian securities markets are generally smaller and more volatile than
securities markets in the world’s major financial centers.  Indian
stock exchanges have also experienced problems that have affected the market
price and liquidity of the securities of Indian companies.  These
problems have included temporary exchange closures, the suspension of stock
exchange administration, broker defaults, settlement delays and strikes by
brokers.  In addition, the governing bodies of the Indian stock
exchanges have from time to time imposed restrictions on trading in certain
securities, limitations on price movements and margin
requirements.  Further, from time to time, disputes have occurred
between listed companies and stock exchanges and other regulatory bodies, which,
in some cases, may have had a negative effect on market
sentiment.  Similar problems could happen in the future and, if they
do, they could affect the market price and liquidity of our equity shares and
our ADSs.




Because
there may be less company information available in Indian securities markets
than securities markets in more developed countries, the price of our equity
shares could fluctuate unexpectedly.




There is
a difference between the level of regulation and monitoring of the Indian
securities market and the activities of investors, brokers and other
participants and that of markets in the United States and other
developed




8
 Table of Contents




economies.  The
Securities and Exchange Board of India is responsible for improving disclosure
and other regulatory standards for the Indian securities markets.  The
Securities and Exchange Board of India has issued regulations and guidelines on
disclosure requirements, insider trading and other matters.  There
may, however, be less publicly available information about Indian companies than
is regularly made available by public companies in developed
economies.  As a result, shareholders could act on incomplete
information and cause the price of our equity shares to fluctuate
unexpectedly.




ADS
holders may be unable to exercise preemptive rights available to shareholders
and therefore may suffer future dilution of their ownership
position.




A company
incorporated in India must offer its holders of equity shares preemptive rights
to subscribe and pay for a proportionate number of shares to maintain their
existing ownership percentages prior to the issuance of any new equity shares,
unless these rights have been waived by at least 75% of the company’s
shareholders present and voting at a shareholders’ general
meeting.  Holders of our ADSs as well as our shareholders located in
the United States may be unable to exercise preemptive rights for our equity
shares underlying our ADSs unless a registration statement under the Securities
Act is effective with respect to those rights or an exemption from the
registration requirements of the Securities Act
is available.  Our decision to file a registration statement will
depend on the costs and potential liabilities associated with any such
registration statement, as well as the perceived benefits of enabling investors
in our ADSs to exercise their preemptive rights and any other factors we
consider appropriate at the time.  We do not commit that we would file
a registration statement under these circumstances.  If we issue any
such rights in the future, the rights would be issued to the depositary, which
may sell the rights in the securities markets in India for the benefit of the
holders of our ADSs.  There can be no assurance as to the value, if
any, the depositary would receive upon the sale of the rights.  To the
extent that holders of our ADSs as well as our shareholders located in the
United States are unable to exercise preemptive rights, their proportional
interests in us would be reduced.




ADS
holders may be subject to potential losses arising out of exchange rate risk on
the Indian rupee and risks associated with the conversion of rupee proceeds into
foreign currency.




Holders
of ADSs as well as our shareholders located outside India will be subject to
currency fluctuation risks and convertibility risks, since our equity shares are
quoted in rupees on the Indian stock exchanges on which they are
listed.  Dividends on our equity shares will also be paid in rupees,
and then converted into US dollars for distribution to ADS
holders.  Holders that seek to convert the rupee proceeds of a sale of
equity shares withdrawn upon surrender of ADSs into foreign currency and export
the foreign currency will need to obtain the approval of the Reserve Bank of
India for each transaction.  In addition, holders that seek to sell
equity shares withdrawn from the depositary facility will have to obtain
approval from the Reserve Bank of India, unless the sale is made on a stock
exchange or in connection with an offer made under the regulations regarding
takeovers.  Holders of rupees in India may also generally not purchase
foreign currency without general or special approval from the Reserve Bank of
India.




ADS
holders may be subject to Indian taxes arising out of capital
gains.




Generally,
capital gains, whether short-term or long-term, arising on the sale of the
underlying equity shares in India are subject to Indian capital gains
tax.  For the purpose of computing the amount of capital gains subject
to tax, Indian law specifies that the cost of acquisition of the equity shares
will be deemed to be the share price prevailing on The Stock Exchange, Mumbai or
the National Stock Exchange on the date the depositary advises the custodian to
deliver equity shares upon surrender of ADSs.  The period of holding
of equity shares, for determining whether the gain is long-term or short-term,
commences on the date of the giving of such notice by the depositary to the
custodian.




Investors
are advised to consult their own tax advisers and to consider carefully the
potential tax consequences of an investment in our ADSs.




9
 Table of Contents




ADS
holders may not be able to enforce a judgment of a foreign court against
us.




We are a
limited liability company incorporated under the laws of India.  All
our directors and executive officers are residents of India and almost all of
our assets and the assets of such persons are located in India.  India
is not a party to any international treaty in relation to the recognition or
enforcement of foreign judgments.  We have been advised by counsel
that recognition and enforcement of foreign judgments is provided for on a
statutory basis and that foreign judgments shall be conclusive regarding any
matter directly adjudicated upon except where:




·
            the
      judgment has not been pronounced by a court of competent
      jurisdiction;




·
            the
      judgment has not been given on the merits of the
  case;




·
            it
      appears on the face of the proceedings that the judgment is founded on an
      incorrect view of international law or a refusal to recognize the law of
      India in cases in which Indian law is
  applicable;




·
            the
      proceedings in which the judgment was obtained were opposed to natural
      justice;




·
            the
      judgment has been obtained by fraud;
or




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




It may
not be possible for holders of our ADSs or our shareholders to effect service of
process upon us or our directors and executive officers and experts named in the
report that are residents of India outside India or to enforce judgments
obtained against us or them in foreign courts predicated upon the liability
provisions of foreign countries, including the civil liability provisions of the
federal securities laws of the United States.




Moreover,
it is unlikely that a court in India would award damages on the same basis as a
foreign court if an action is brought in India.  Furthermore, it is
unlikely that an Indian court would enforce foreign judgments if it viewed the
amount of damages as excessive or inconsistent with Indian
practice.  An Indian court may not enforce a foreign judgment
involving more than actual and quantifiable damages.




Although
announced policy indicates there is no intention to do so, possible sales of our
equity shares by the government of India could affect the value of our
ADSs.




The
government of India holds approximately 56.25% of our outstanding equity
shares.    There have been no indications that the current
government of India plans to further reduce its shareholding in us through a
sale of equity.  As a result, this ownership affects the voting by
shareholders and the ability to influence any third party transactions, such as
mergers or other business combinations.




Any
future disposal of equity shares by the Indian government could adversely affect
the trading price of our equity shares and ADSs.




Item4.
            Information
      on the Company




4A.
            Historyand Development of the
  Company




HISTORY
AND DEVELOPMENT OF THE INDIAN TELECOMMUNICATIONS INDUSTRY




Until the
mid-1980s, the telecommunications sector in India was a monopoly controlled by
the government of India through the Department of Posts and Telegraphs of the
Ministry of Communications, providing all telecommunications services, both
domestic and international.  The Indian Telegraph Act of 1885
established the government of India’s monopoly in the sector and, together
with the Indian Wireless Telegraphy Act of 1933, provided the legal framework
for the regulation of the Indian telecommunications industry.




Development
of the telecommunications sector historically was seen as a relatively low
priority and received limited budgetary support from the government of
India.  As a result, the telecommunications infrastructure in India
grew relatively slowly.  In the mid-1980s, faced with rapidly
increasing demand for telecommunications




10
 Table of Contents




services
and equipment, the government of India commenced a reorganization of the sector
designed to facilitate the rapid introduction of new technology, stimulate the
growth of the telecommunications industry and tap the resources of the private
sector in facilitating such technological innovation and
growth.  The reorganization included the division of the Department of
Posts and Telegraphs into the DOT and the Department of Posts.




As part
of the reorganization, we were incorporated on February 28, 1986 under the
Companies Act as a wholly-owned government of India company and, on April 1,
1986, assumed responsibility for the control, management and operation of the
telecommunications networks in Delhi and Mumbai, two of the largest metropolitan
areas in India.  Videsh Sanchar Nigam Limited (VSNL) (now Tata
Communications Ltd) was established at the same time to provide international
telecommunications services and the DOT retained responsibility for providing
all other telecommunications services throughout India.  The DOT also
assumed regulatory authority over the Indian telecommunications
industry.  Simultaneously, the Telecom Commission was established in
1986 as an executive body under the Ministry of Communications to make policy
decisions and to accelerate the development of all aspects of the
telecommunications sector and the implementation of new telecommunications
policies.




In
December 1991, with a view to fulfilling its objective of facilitating the rapid
introduction of new services and technology, the DOT invited bids from Indian
companies with a maximum of 49% foreign ownership for two non-exclusive GSM
cellular licenses in each of the cities of Kolkata (formerly called Calcutta),
Chennai (formerly called Madras), Delhi and Mumbai.  The
private operators commenced cellular services in late 1995.  In
October 1997 we were permitted to provide GSM cellular service in Mumbai and
Delhi.  Beginning in 1995, the DOT also invited tenders and awarded
cellular licenses for the regional “circles” established for the purpose of
licensing cellular services in the rest of India.  We believe that as
of May 31, 2008, there were approximately 278 million cellular subscribers in
India.




Since
1992, as part of its general policy of gradually reducing its holdings in public
sector enterprises, the Indian government sold a portion of its equity holdings
in us and VSNL (now Tata Communications Ltd) to certain mutual funds, banks and
financial institutions controlled by the government of India.  In our
1997 global depositary receipt offering, the Indian government sold 40 million
of our equity shares represented by 20 million global depositary receipts,
constituting 6.3% of our then outstanding equity
shares.  Additionally, in 1997 and 1999, the Indian government sold
additional equity shares of VSNL in the form of global depositary receipts,
thereby reducing its equity interest in the company to 51%.  In
February 2002, the government of India divested an additional 25% interest in
VSNL to the Tata Group through a competitive bidding process.




In May
1994, the government of India announced its National Telecom Policy, which was
aimed at achieving accelerated telecommunications growth and network
expansion.  The broad objectives of this policy were higher national
telephone penetration, reduction of waiting lists, improvement in the quality of
networks, improved rural access to telecommunications services, introduction of
value-added services and private sector participation in the provision of basic
and cellular services.




In order
to achieve these objectives, the Indian government decided to permit private
sector involvement in basic telecommunications services, which, in the Indian
context, includes basic fixed-line access service and a number of other
telecommunications services (including CDMA-based fixed wireless and mobile
services (without roaming)), other than long distance services, cellular service
and Internet access.  Accordingly, in September 1994 the Indian
government announced its “Guidelines for Private Sector Entry into Basic Telecom
Services,” and beginning in 1995 began to invite tenders from companies with no
more than 49% foreign ownership for basic service licenses for the regional
“circles” established for licensing basic telecommunications
services.  After a period of consolidation, the most prominent
private-sector providers of basic telecommunications services currently include
Bharti Tele-Ventures Limited, Tata Teleservices and Reliance Infocomm, each of
which operates in multiple circles.  Tata Teleservices and Reliance
Infocomm both operate in the circles that include Mumbai and Delhi, and hence
now compete with us in those areas.  Bharti Tele-Ventures Limited also
provides basic services in Delhi.




In
February 1997, a multilateral agreement on basic telecommunications services was
agreed to among member governments of the World Trade
Organization.  As part of this agreement, the Indian government has
reaffirmed its commitment to further liberalize the Indian telecommunications
sector through the licensing of new basic and cellular service
providers.




11
 Table of Contents




In March
1997, the government established the Telecom Regulatory Authority of India
(TRAI), an independent regulatory authority with broad regulatory powers over
the telecommunications industry in India, including the power to set rates on
domestic and international telecommunications services and determine the terms
and conditions of interconnect arrangements between service
providers.  These regulatory powers had previously been vested in the
DOT, which controls us and is part of the Ministry of
Communications.  However, the power to grant, renew or revoke licenses
remains with the DOT.




In
November 1998, the government of India announced its Internet policy, which aims
to increase Internet usage by, among other things, allowing up to 49% foreign
ownership of Internet service providers (ISPs) and declaring a license fee
moratorium for five years. (Currently the foreign ownership limit for ISPs is up
to 74% in most cases.)




In March
1999, the government of India announced its New Telecom Policy 1999 which sets
forth as one of its central goals the fostering of increased competition in the
Indian telecommunications industry and the liberalization of government
telecommunications regulation.




Additionally,
effective May 1, 1999, the TRAI implemented the 1999 tariff order pursuant to
which the TRAI seeks to align tariffs charged by service providers with the
corresponding costs associated with such services so as to limit
cross-subsidization of services by a provider while allowing providers to set
tariffs at any level below certain maximum levels.  The TRAI has since
adjusted tariffs several times under the tariff order.




In
October 1999, the DOT, which had both performed the role of licensor and policy
maker for the Ministry of Communications and operated as India’s domestic long
distance service provider and basic service provider (except for the areas of
Delhi and Mumbai, which are covered by us), was bifurcated into two
departments.  The DOT/Telecom Commission, or the DOT, now
performs the role of licensor and policy maker, and the Department of Telecom
Services, functions as the government of India’s local and long distance network
service provider.  In October 2000, the Department of Telecom
Services’ local and long distance business was corporatized into a new company
named BSNL.  The Indian government has also recently established an
independent Information Technology Department within the Ministry of
Communications (now formally known as the Ministry of Communications and
Information Technology).  The IT department will, among other things,
promote the Internet, e-commerce and knowledge based
industries.  Internet licensing functions will remain with the
DOT.  The DOT controls the equity shares in us that are held by the
Indian government and appoints all of the directors on our 12-seat
board.  Two of our board seats are for DOT officers.




ILD
and NLD Licenses Simplified




The
Government has constantly endeavored to usher in policy decisions that could
facilitate affordable public telecom facilities, in accordance with the New
Telecom Policy, 1999.  In line with this strategy, in December 2005,
the Government made a major decision to remove various to further liberalise the
NLD (national long distance) and ILD (international long distance) licenses in
order to facilitate the growth of the IT and IT-enabled services in
India.  Some of the changes brought about by such decisions are as
follows:




(a)
            NLD Service
      License




(i)
            The
      entry fee for new NLD licenses was reduced from Rs. 100 crore to Rs. 2.5
      crore.  Likewise, the annual license fee for NLD licenses was
      reduced from 15% to 6% of AGR effective January
  2006.




(ii)
            The
      NLD licenses had stipulated a mandatory provision of setting up of a point
      of presence in each long distance charging area.  Mandatory roll
      out obligations were no longer required for future NLD license and
      existing licenses.




(iii)
            The
      net worth requirement and paid up capital requirement of the applicant
      company for NLD licenses was reduced to the level of Rs. 2.5 crore from
      Rs. 250 crore.




12
 Table of Contents




(iv)
            To
      facilitate promotion of the BPO/KPO industry, NLD service providers were
      permitted to access the subscribers directly for provision of leased
      circuits/closed user groups i.e. they can provide last mile
      connectivity.




(b)
            ILD Service
      License




(i)
            The
      entry fee for new ILD licenses was reduced from RS. 25 crore to Rs. 2.5
      crore.




(ii)
            The
      annual license fee for ILD licenses was reduced from 15% to 6% of AGR,
      effective January 2006.




(iii)
            There
      is no further need to have mandatory roll out obligation for ILD service
      licenses except for having at least one switch in
  India.




(iv)
            ILD
      service providers can access the subscriber directly only for provision of
      leased circuits/closed user groups.




(v)
            The
      net worth and paid up capital of the applicant company for ILD service
      license was reduced to Rs. 2.5
crore.




(c)
            Requirement of experience in
      telecom sector grant of
licenses




Prior
experience in telecom sector is no longer a prerequisite for being granted
telecom service licenses.




(d)
            Provision of Internet
      telephony, Internet Services and Broadband services by Access
      Providers




Access
service provider can provide Internet telephony, Internet services and Broadband
services.  If required, access service provider can use the network of
NLD/ILD service licensee.




(e)
            IP-II & ISPs with IP-VPN
      Licenses




(i)
            The
      Government has decided to do away with IP II and IPVPN
      licenses.  Existing IP-II/IP-VPN licenses are allowed to migrate
      to NLD/ILD service license.




(ii)
            Provisional
      entry fee of IP-VPN on migration to NLD/ILD to be adjusted in entry fee
      and dues to the Government by way of license fee and spectrum charges/or
      refunded as per TDSAT order.




(iii)
            ISP
      with Internet telephony (restricted) are charged a license fee at 6% of
      AGR effective January 2006.




(iv)
            The
      access providers can provide broadband services including triple play i.e.
      voice, video and data.  ISPs can provide Internet
      Access/Internet Content Services where Internet has been defined as a
      global information system that is logically linked by a globally unique
      address based on IP or its subsequent
      enhancement/upgradation.  ISPs cannot provide content services
      on a managed network (virtual/real) not derived from
    Internet.




(v)
            IP-II
      licensees which are not interested in migrating to NLD/ILD are not
      permitted to provide National/International leased line/bandwidth to
      individual subscribers as per existing IP-II license
      guidelines.




(vi)
            IP-VPN
      licensees which are not interested in migrating to NLD/ILD are not
      permitted to carry voice traffic over VPN
  network.




13
 Table of Contents




(f)
            VSAT
      commercial




(i)
            Annual
      license fee charged at 6% of AGR effective January
  2006.




Approximate
number of licenses for providing telecom services issued as of March 31, 2008
are:




SUMMARY
      OF LICENSESLICENSEES
            No.
      of
              LICENSEESBASIC
      LICENSEES
            2CMTS
      LICENSEES
            53UAS
      LICENSEES
            224NLD
      LICENSEES
            21ILD
      LICENSEES
            14TOTAL
      LICENSEES
            314




The table
clearly indicates that the competition among the telecom service providers has
increased many folds in recent years are we are making efforts to keep the pace
with the industry.




14
 Table of Contents


The
following chart illustrates the current operational and regulatory structure of
India’s telecommunications services industry:









15
 Table of Contents




In
November 2003, the DOT issued guidelines for Unified Access License which cover
within a service area both basic telecommunications services and cellular
services.  In the Indian context, “basic telecommunications services”
or “basic services” include basic fixed-lined access service and a number of
other telecommunications services, other than long distance services, cellular
service and Internet access.  Basic services also include CDMA-based
fixed wireless and mobile services (without roaming).  We have
submitted a request to the DOT to migrate to UAS Licenses for our service
area under mobile licenses for Delhi and Mumbai to be able to provide services
at par with other operators in these areas.  In September 2006, our
request for migration of our CMTS Licenses to UAS Licenses as our operating
cellular service in the licensed area was not accepted by the DOT.  In
October 2006, we sought reconsideration and grant of permission for migration to
UAS Licenses.




In April
2008, we received in-principal approval to use CDMA technology under the
existing Cellular Mobile Telephone Service (CMTS) License for Delhi and Mumbai
service areas.  We will use CDMA technology (in addition to GSM
technology being used by us) under the existing Cellular Mobile Telephone
Service (CMTS) License for Delhi and Mumbai service areas.




On
November 22, 2006, the DOT issued the instructions that “The licensee shall
ensure adequate verification of each and every customer before enrolling him as
a subscriber.  Instructions issued by the licensor in this regard from
time to time shall be scrupulously followed.”




For
ensuring that the complete subscriber information is available with all the
service providers and the same is duly verified, the DOT also decided that each
licensee shall take up re-verification of the existing subscribers on priority
and ensure that the re-verification of the existing subscribers is completed by
March 31, 2007.  By re-verification, it is meant that there shall be
100% check of CAF/SAF documentary proof of identity and documentary proof of
address and it would be ensured that the subscriber information available
in service provider’s database matches with that in CAF/SAF and associated
documents.  Further the licensee company would cross-verify the
information from the actual user by calling the respective
subscriber.  There shall not be any connection working after March 31,
2007 in licensee’s network without having the subscriber information duly
verified.




After
March 31, 2007, if any subscriber number is found working without proper
verification, a minimum penalty of Rs. 1000 per violation of subscriber number
verification would be levied on the licensee apart from immediate disconnection
of the subscriber number by the licensee.




In
response of the above DOT instructions, our GSM subscriber base reduced from
approximately 2.7 million to 2.5 million during the period March 2007 to April
2007.  As of May 31, 2008, our GSM subscriber base grew to 3.35
million.




We have
implemented the procedure for ‘Do not call’ for Telecom Unsolicited Commercial
Communication in the service areas of Delhi and Mumbai, in accordance with a
March 2008 amendment by Telecom Regulatory Authority of India, the Telecom
Unsolicited Commercial Communications Regulations, 2007 (4 of
2007).




Mahanagar
Telephone Nigam Limited




Mahanagar
Telephone Nigam Limited is the principal provider of fixed-line and other basic
telecommunications services in Delhi and Mumbai.  Delhi and Mumbai are
two of the largest, most densely populated and wealthiest metropolitan areas in
India.  At the end of fiscal 2008 our fixed-line telecommunications
networks in Delhi and Mumbai had an aggregate of approximately 3.81 million
fixed lines in service.  In February 2001, we launched our cellular
services using global system for mobile communications, or GSM, technology in
Delhi and Mumbai and had approximately 3.24 million subscribers as of March 31,
2008.  GSM is the European and Asian standard for digital mobile
telephone networks.  We launched CDMA-based services in 1997, and at
the end of fiscal 2008 had approximately 1.61 lakh limited mobile subscribers in
Mumbai and Delhi.  CDMA is a digital wireless technology that
increases network capacity by allowing more than one user to simultaneously
occupy a single radio frequency band with reduced interference.  We
began providing Internet service in both Delhi and Mumbai in February 1999 and
had approximately 1.36 million Internet access subscribers at the end of fiscal
2008.




16
 Table of Contents




We
obtained a national long distance license in May 2006 and began to carry our own
traffic between Mumbai and Delhi.




We
believe that the size of the markets in Delhi and Mumbai, the economic
environment, the Indian government’s ongoing liberalization of the
telecommunications industry and the still low level of penetration of
fixed-line, mobile and cellular services in these two areas and the low level of
penetration of Internet services in India provide opportunities for future
industry growth.




The
number of our access lines in service grew at a compound annual growth rate of
7.55% from March 31, 2000 to March 31, 2008.  In fiscal 2008, these
lines increased by 8.14%, due to cellular services.  In fiscal 2008,
our network had approximately 3.18 million access lines in service in Delhi and
approximately 4.03 million access lines in service in Mumbai.  In
addition, our access lines in service per employee increased from 66 at March
31, 2000 to 151 at March 31, 2008.




We derive
our revenue primarily from local, domestic long distance and international calls
that originate from our network.  In fiscal 2008, approximately 27% of
our revenue was derived from call charges, 57% from rentals of telephones,
access lines and other telecommunications equipment and use of our value-added
services and 8% from public call offices.  Interconnect revenue, which
is revenue derived from other telecommunications service providers for calls
made into our network, accounted for 8% of our revenues in fiscal
2008.  Local calls are carried on our network, unless the termination
point is in the network of one of the cellular operators or one
of  the new private-sector basic service providers in the
locality.  We have been carrying our own traffic between Delhi and
Mumbai since May 2006. Other domestic long distance calls continue to be passed
from our network to the domestic telecommunications network operated by BSNL,
although we have entered into interconnect agreements with the new
private-sector domestic long distance service providers and intend to pass such
domestic long distance calls also through such other providers.  In
addition, currently all international outgoing calls continue to be passed from
our network to international gateways operated by VSNL, India’s former
government-controlled international long distance carrier, although we have
entered into interconnect agreements with other private-sector international
long distance carriers and have plans for joint development with BSNL of
submarine cable to connect the east and west coasts of India with Malaysia and
the Middle East (and ultimately Europe and the USA).




We expect
competition to continue to increase in all major sectors of the Indian
telecommunications industry, as both government and private-sector companies
continue to invest in capacity expansion and seize opportunities to enter new
geographical areas and lines of business.  See “— Business
Overview—Competition” below.




Our
principal executive office is located at 12th floor,
Jeevan Bharati Tower—1, 124 Connaught Circus, New Delhi—110001, India,
and our telephone number is +91-11-2374-2212.




Licenses/License
Areas




We
provide all of our telecommunications services, other than Internet, under a
single, general, non-exclusive license.  The license initially granted
to us in 1986 was effective for a five-year period that ended on March 31,
1991.  The term of the license has been extended for a 25-year
period ending March 31, 2013 for basic services.




In
October 1997, our license was amended to explicitly include cellular services
and radio paging, and our license for such additional services currently extends
to October 2017.  The license is not specific as to the type of
cellular technology that we may use.  The license covers areas within
the territorial jurisdiction of the State of Delhi and the areas covered by the
municipalities of Mumbai, Navi Mumbai and Thane.  The DOT has extended
the scope of our license to allow us to provide cellular services in certain
surrounding areas of Delhi and Mumbai covered by other cellular operators in
those cities.  The license specifies that we may provide local,
domestic long distance access (through interconnection with domestic long
distance operators) and international long distance access (through
interconnection with networks of international long distance operators), as well
as telex and leased line services.  Specifically, our license permits
us to originate, terminate and transit domestic and international long distance
calls.  However, we believe that our license would need to be amended
if we wanted to enter the market for




17
 Table of Contents




domestic
long distance utilizing our network.  We expect to be licensed to
provide for full international long distance service in the near
future.




The DOT
retains the right to revoke our license after giving one month’s notice to
us.  The DOT also retains the right, after giving notice to us, to
modify the terms and conditions of our license at any time if in their opinion
it is necessary or expedient to do so in the interest of the general public or
for the proper operation of the telecommunications sector.  A
revocation of the license or a change in significant terms of the license, such
as its duration, the amount of license fee payable, the range of services
permitted and the scope of exclusivity could limit our ability to operate
particular lines of our business or result in increased costs in the form of
increased license fees or costs associated with applying for new licenses, or
contesting limitations on our licenses.




We
provide our Internet services in Delhi and Mumbai under separate non-exclusive
license agreements.  These licenses were granted in November 1998, and
currently extend to September 7, 2017.  In addition, our wholly owned
subsidiary, Millennium Telecom Limited, provides Internet access services
throughout India under a license granted in 2000 for an initial period of 15
years.




Delhi.According to the
government of India’s provisional 2001 population census data, Delhi had a total
population of approximately 12.8 million.  In addition to being
India’s political capital, Delhi has the highest per capita income of all the
states in India.  Delhi has a high concentration of service and
manufacturing industries and houses the central government, the head offices for
many major public sector enterprises, embassies, high commissions and various
government missions and development agencies.




Mumbai.  The city
of Mumbai, the financial capital of India and the capital of the State of
Maharashtra, is India’s most populous city, with a population of approximately
16.4 million according to the 2001 census data.  Mumbai accounted for
36% of India’s income tax contributions in fiscal 2000.




Strategy




Key
elements of our strategy include the following:




·
            Expand GSM Cellular and CDMA
      Mobile Services in Delhi and Mumbai.  We launched our
      cellular services using GSM technology in Delhi and Mumbai in February
      2001, and currently have an installed capacity of 17.75 lakh lines in
      Delhi and 13.25 lakh lines in Mumbai. We believe that current penetration
      rates in Mumbai and Delhi remain attractive for continued high growth in
      subscriber base.  GSM capacity in Delhi and Mumbai was planned
      to be further expanded by 2 million each (1.5 million 3G
      including).  Purchase Order (PO) for the procurement of 750K 2G
      lines each for Delhi and Mumbai has already been placed.  PO for
      the balance 1250K each for Delhi and Mumbai is being placed in next phase
      based on spectrum for 3G of 5 mhz in each city which stands alotted. 
      The price for this spectrum shall be determined by the Government after
      the auction process of 3G spectrum is over.  In addition, we
      have launched lower-cost CDMA-based limited mobility mobile services in
      each of Mumbai and Delhi, and currently have 160,916 subscribers with an
      installed capacity of 1,098,230 CDMA connections (most of which are to
      employ the more advanced CDMA 2000 1X technology) in each
      city.  We believe that this new limited mobile service will
      enable us to target a wider customer base that is more price sensitive
      than GSM customers and that does not require India-wide and international
      roaming facilities.  We intend to compete effectively in these
      growing markets by providing high quality service at affordable
      rates.




·
            Focus on Customer
      Service.  In order to strengthen the loyalty of our
      customers, attract cellular subscribers and improve our competitive
      position, we have a program to improve customer service and become more
      responsive to the needs of our subscribers.  We have introduced
      improved bill collection and payment procedures (including bill payment
      over the Internet and via credit card), opened Tele-marts at which most
      subscriber services are available, introduced telephone directories on the
      Internet and on CD-ROM and implemented a customer service management
      system.  Our customer service management system enables our
      staff to provide customers with access to a range of “on-line” services,
      including registration for new telephone lines, changes of address and
      issuances of bills, and allows us to monitor complaints from a single
      point of contact.  We have identified high
  usage




18
 Table of Contents




“commercially
      important persons” and are making all efforts to strengthen our
      relationship with these
subscribers.


·
            Further Develop and Modernize
      our Network.  We intend to continue to invest in
      expanding and upgrading our network to improve the quality of
      service.  We have placed a PO to add 24K tandem capacity based
      on NGN – next generation network, in Delhi and Mumbai.  We have
      commissioned a state of art IP/MPLS core network in Delhi and Mumbai to
      provide a converged IP network for all services.  This network
      is currently carrying our Broadband, IPTV and GSM
      traffic.  Layer 2 and Layer 3 VPN services are also being
      provided by us through this network.  We are working on the
      expansion of our IP/MPS network so as to further extend the IP reach of
      our network.  Further, we are replacing our old PDH transmission
      network with synchronous digital hierarchy technology.  We have
      placed a PO for the supply of 42 terminals (20 Delhi and 20 Mumbai) of 40
      channel 10 GB/channel DWDM equipment to strengthen our transmission
      network.  The testing of the equipment is going on and the
      installation is expected to start after completion of
      testing.  We are continuing to implement fiber-in-local-loop and
      wireless-in-local-loop technologies where appropriate.  We have
      introduced broadband technology based on ADSL2+, capable of providing
      triple play services (video, voice and data), in a significant
      way.  Through expansion and modernization of our network, we
      seek to improve the capacity of our network, reduce network failure rates,
      improve call completion rates and decrease average waiting time for new
      lines as well as support our Internet and value-added
      services.




·
            Selectively Target
      International Opportunities.  We plan to selectively
      target expansion opportunities outside India where we can leverage our
      expertise and relationships.  Our Nepal joint venture, United
      Telecom Limited, in which we hold a 26.7% equity interest, has commenced
      wireless in local loop services as the first private-sector
      telecommunications operator in that country and had a subscriber base of
      111,000 as of March 31, 2008.  We have also been awarded
      licenses to provide basic, mobile and international long distance service
      in Mauritius.  We launched international long distance services
      in Mauritius in the current fiscal year. We have also launched a fixed
      wireless service in Mauritius.  As of February 29, 2008, we had
      approximately 26,500 fixed mobile customers.  On December 15,
      2006, mobile services were launched under the brand name “MOKOZEE,” and as
      of February 29, 2008, we had a total of 8,884 prepaid mobile
      customers.  We are also examining other international
      opportunities.




·
            Enter the Market for
      International Long Distance Services.  We intend to lay
      submarine cable jointly with BSNL from both the east and west coasts of
      India to the far East and the Middle East, respectively,  to
      carry voice and data traffic, and with an intent to further extend to the
      US and Europe.




·
            Expand Internet
      Services.  We commenced our Internet service provider
      operations in February 1999 with an initial network capacity to support up
      to 5,000 subscribers in each of Delhi and Mumbai.  As of March
      31, 2008, we had approximately 1.36 million Internet access
      users.  We have also started providing high speed internet
      services on broadband.




·
            Enhance Value-added
      Services.  We provide our subscribers with value-added
      services such as call-waiting, call-forwarding, wake-up calls, absent
      subscriber service and caller identification at no charge or for a nominal
      fee.  We also provide our Intelligent Network services to
      subscribers, which include our calling card services, a toll-free calling
      service, a premium rate “0900” number service, universal access service
      and a televoting service.  We also provide high speed data
      transmission services using integrated services digital network
      technology, which allows simultaneous high speed transmission of voice,
      data and images.  We expect that our value-added service
      offerings will increase use of our network, enhance overall customer
      satisfaction and provide new sources of
revenue.




19
 Table of Contents




4B.
            BusinessOverview




Services




Our
primary business is providing basic telecommunications services in Delhi and
Mumbai, which include:




1.
            Basic fixed-line access
      (including phone plus facilities) in Delhi and
      Mumbai:  We provide basic fixed-line access, which
      consists of installation and provision of basic voice telephony
      services.  Rental charges include maintenance of connections
      between a subscriber’s premises and our network, 60 pulses of calls per
      month as well as the use of a basic handset (although subscribers may
      elect to buy their own handset and have their installation charges reduced
      accordingly).  Phone plus facilities in basic fixed-line include
      such services as abbreviated dialing, call transfer, hotline facility,
      three party conferencing, absentee facility, CLIP facility, call hunting,
      call alert and morning alarm.




2.
            Public Call
      Offices:  Public call offices consist of both manned
      offices where people can make local, long distance and international
      calls, and coin operated telephone booths.  At March 31 2008,
      public call offices accounted for 6.29% of our total wire lines in
      service. The coin-operated public call offices offer only local call
      service, while the franchised public call offices offer local, domestic
      long distance and international call services.  We pay a
      commission to the franchisees amounting to 40% of the tariffs charged by
      the franchisee on local calls and 20-30% of the tariffs charged by the
      franchisee on domestic long distance depending on the number of calls per
      fortnight and international calls.  The franchisees charge the
      same tariffs we do for these
services.




3.
            GSM cellular services
      (including value-added services) in Delhi and Mumbai:  In
      February 2001, we launched our cellular mobile services using GSM
      technology (the European and Asian standard for digital cellular
      telephony) in Delhi and Mumbai under the brand name Dolphin.  In
      2002, we introduced our prepaid cellular services under the brand name
      Trump.  As of March 31, 2008, we had 32.42 lakh GSM cellular
      subscribers.  We provide national roaming facilities for our GSM
      cellular customers through the networks of BSNL outside Mumbai and Delhi
      and international roaming facilities with 45 operators in approximately 40
      countries, and we have established roaming facilities for our customers in
      a total of approximately 200 countries.  As of March 31, 2008,
      we had installed a cellular network with a capacity of 17.75 lakh lines in
      Delhi and 13.25 lakh lines in Mumbai.  GSM capacity in Delhi and
      Mumbai was planned to be further expanded by 2 million each (1.5 million
      3G including).  PO for the procurement of 750K 2G lines each for
      Delhi and Mumbai has already been placed.  PO for the balance
      1250K each for Delhi and Mumbai shall be placed in next phase on
      availability of spectrum for 3G.




4.
            Value Added
      services:  Value-added services on GSM such as
      call-waiting, call-forwarding, wake-up calls, absent subscriber service
      (informing callers that the subscriber is unavailable) and caller
      identification, friends & family, night talk, VMS call conference, WAP
      and voice mail.




5.
            Mobile and fixed-wireless
      services based on CDMA technology:  In May 1997, we began
      implementing wireless-in-local-loop services using CDMA technology for
      fixed wireless and mobile operations on a commercially experimental basis
      with a single exchange and capacity for 1,000 subscribers in Delhi.
      Wireless-in-local-loop services use wireless links from a local exchange
      in place of conventional cables. Two types of service are
      provided.  One type employs a handset that is fixed to a
      subscriber’s premises for “fixed wireless” service, while the other
      employs a mobile telephone -or “mobile” or “limited mobility”
      services.  We have since upgraded our CDMA equipment and
      receiving stations and, in October 1999, we opened subscriptions for up to
      an additional 9,000 CDMA mobile and fixed wireless connections in Delhi
      and dedicated 40% of these connections for fixed wireless.  As
      of March 31, 2008, the capacity of WLL was 550,000 and 548,230 for Delhi
      and Mumbai, respectively.  At March 31, 2008, we had
      approximately 161,000 operational CDMA mobile connections and
      approximately 131,000 operational, fixed wireless
    connections.




Our CDMA
mobile service offers only limited mobility within Delhi and Mumbai, and
currently we are not permitted to offer roaming facilities on this
service.  If we obtain the newly-available Unified Access License we
will be able to offer full mobility.




20
 Table of Contents




CDMA
fixed wireless is a substitute for fixed-line access.  Fixed wireless
allows us to enhance basic service penetration, provide quicker installation and
cover areas where the installation of cable would not be
economical.  Our CDMA mobile service is marketed under the brand name
Garuda.




6.
            ISDN services:We
      provide narrow-band ISDN services that allow subscribers to send high
      speed data make telephone calls with high quality voice transmission and
      hold desktop video conference over a single line.  In the past,
      the development of independent networks for a variety of services (such as
      voice, telex, packet-switched data and leased lines) made each of them
      relatively expensive.  ISDN technology allows a wide range of
      data services to be made available to the subscriber through a single
      connection and at a reduced cost.  We believe these high speed
      data transmission products will help us to attract high usage
      subscribers.  We introduced narrow-band ISDN services in August
      1996, and, at March 31, 2008, we had approximately 25,700 subscribers to
      this service.




7.
            Broadband
      services:  We also offer data communications services
      through our packet switched data network.  This service allows
      the transmission of data on standard international data protocols and
      access via dedicated lines or dial-up facilities.  We plan to
      expand broadband services on a large scale based on the ADSL
      technology.  ADSL means asymmetric digital subscriber loop, a
      technology that allows combinations of services including voice, data
      technology and one-way full motion video to be compressed and delivered
      over existing copper cables.  We expect to experience
      significant demand for these high speed data services from large
      corporate, financial, media, public service and education
      institutions.  We launched broadband services using ADSL 2+ in
      January 2005.  The broadband customer base as on March 31, 2008
      was 5.71 lakh. The installed capacity of broadband ports as of March 31,
      2008 was 6.02 lakh.




8.
            Internet access
      services:  We commenced our Internet service provider
      operations in February 1999 with initial equipment capacity to support up
      to 5,000 subscribers in each of Delhi and Mumbai.  We
      experienced significant demand for this service and have since expanded
      our Internet services capacity to support additional subscribers in each
      of Delhi and Mumbai.  As of March 31, 2008, we provided our
      Internet services to a total of approximately 1.36 million subscribers in
      Delhi and Mumbai.




We also
enable our customers to access the Internet without having to subscribe for
Internet service.  They can access the service and later be billed on
the basis of calling line identification usage.  The number of
customers who use this service is much higher than the number of Internet
subscribers we have.




9.
            Leased line
      service:  We provide point-to-point leased line services
      for local, domestic long distance and international
      connectivity.  Subscribers can use our leased lines to assemble
      their own private networks between offices within Delhi and Mumbai or
      together with BSNL, between Delhi and Mumbai and to other Indian
      cities.  Leased line services can be used for voice and data
      transmission at various bandwidths.  In addition, we earn
      revenues from leasing circuits to cellular operators in Delhi and Mumbai
      to interconnect their networks to our network.  At March 31,
      2008, we had approximately 51,200 leased line
  subscribers.




10.
            Telex and Intelligent Network
      services:  We are introducing Intelligent Network
      services over our entire network which at present
  includes:




·
            Calling
      card service




·
            Toll
      free calling service




·
            Premium
      rate “0900”number service




·
            Televoting
      service.




11.
            Interconnection with domestic
      international long distance carriers and with basic and cellular operators inDelhiand
      Mumbai:  We provide local telephone services in Delhi and
      Mumbai as well as domestic and international long distance through our
      connectivity with BSNL’s domestic long distance network and. VSNL’s
      international gateways.  Since May 2006, we have carried our own
      traffic between




21
 Table of Contents




Delhi
      and Mumbai.  We derive revenues from tariffs we collect on local
      domestic long distance and international calls that originate on our
      network.  Tariffs, or usage charges, consist of charges for
      local, domestic long distance and international calls.  Usage is
      measured by pulses, which are time-based limits of measure, metered at the
      relevant exchanges.  A set of pulse durations is established for
      each category of calls (i.e., local, domestic long distance or
      international long distance), and within each category, pulse durations
      vary depending on one or more of the following factors:  call
      distance; time of day; type of network on which the call is terminating
      (i.e. fixed, GSM cellular or CDMA mobile); destination country (for
      international long distance only); subscriber plan (for local calls only);
      and whether the call is within a circle or between two different circles
      (for domestic long distance only).  We estimate that, based on
      recent sample data, local calls constitute approximately 78% of our total
      pulses, while domestic long distance and international calls constitute
      approximately 17% and 5% of our pulses, respectively.  We are
      focused on increasing call volumes by promoting use of our value-added
      services and the use of long distance services.  In June 2008,
      we received a license to enter the international long distance service
      market.  We intend to lay submarine cable jointly with BSNL from
      both the east and west coasts of India to the far East and the Middle
      East, respectively, to carry voice and data
  traffic.




12.
            Interconnection.  We
      connect our network with BSNL and have entered into interconnect
      agreements with certain other licensed domestic long distance service
      carriers to provide our customers with domestic long distance service and
      intend to pass traffic to these other providers also (we carry our own
      traffic between Delhi and Mumbai since May 2006).  We connect
      our network with VSNL and have entered into interconnect agreements with
      certain other licensed international long distance carriers to provide our
      customers with international long distance service.  We connect
      our network with the other basic, cellular operators and Unified Access
      Service Providers in Mumbai and Delhi to offer our customers comprehensive
      access in our coverage areas.  The terms and conditions of our
      interconnect arrangements are governed by regulations of the TRAI and
      interconnect agreements that we have with many of these other
      operators.  The TRAI is also responsible for ensuring
      technical compatibility among operators.  Effective May 1, 2003,
      under the authority’s interconnection usage charges regulation,
      interconnect charges have been established for all major types of
      interconnection based on a “calling party pays” principle.  See
      “—License Fees and Network Utilization/Interconnection Arrangements” and
      “—Telecommunications Regulation in
India.”




Recently
Introduced Services




·
            We
      have launched Wi-fi service to provide internet connectivity to
      inaccessible and hot spots in the Delhi
area.




·
            We,
      in association with STPI, are setting up data centre for Web-Farming
      application.




·
            We
      have launched IPTV services in both Delhi and Mumbai on revenue sharing
      basis.




·
            We
      have also commissioned a state-of-the-art IP/MPLS core network in
      Delhi.




·
            We
      have launched VOIP (Voice 3 over Internet Protocol) services on revenue
      share arrangement.




Services
Under Development




·
            We
      plan to add one million lines in net switching capacity including capacity
      for WLL and GSM and 80,000 fiber KMs. of optical fiber in Delhi and Mumbai
      in fiscal 2009.  Our other plans for the year include deployment
      of Next Generation Network of 24,000 lines in Delhi and Mumbai
      each.




·
            A
      state of the art convergent billing and CRM system is under installation.
      This will facilitate CDR based billing, single bill for all services to
      the subscribers, flexibility in billing and innovative tariff packages for
      subscribers and thus will help in reducing billing
    complaints.




22
 Table of Contents




·
            We
      are further adding optical fiber in our access network and are introducing
      FTTH based on PON so as to provide all of our important customers with
      fiber connectivity to their homes in order to meet their further increased
      bandwidth requirement of both data and video
  applications.




·
            We
      have also floated an EOI for introduction of Wi-Max.  Pilot
      projects have been started in both Delhi and Mumbai for providing Wi Max
      services.




·
            We
      have floated a tender for the Converged Network to facilitate the
      convergence of voice, data and video multi-media networks into a single
      unified packet based multi-services platform capable of providing
      futuristic services.  The purpose of building this network is to
      have a service independent network which can facilitate rapid and
      economical introduction of new
services.




Telecommunications
Services in Other Countries




We are
selectively targeting expansion opportunities outside India where we can
leverage our expertise and relationships.  We are keen in expanding
our overseas operations, currently we are in the process of exploring the
potential in a few Asian and African countries.  United Telecom
Limited, a joint venture involving us (26.68%), Telecommunications Consultants
India Limited (26.66%), VSNL (26.66%) and Nepal Ventures Private Limited (20%),
commenced wireless in local loop services as the first private-sector
telecommunications operator in Nepal.  We have also been awarded
licenses to provide basic and international long distance service as well as
mobile services in Mauritius.  Through a Mauritius subsidiary, we have
begun to offer ILD services and fixed wireless services.  We intend to
begin the build out of our network there to provide additional
services.




Tariffs
and Other Customer Charges




Fixed-Line
Services.  Tariffs, or usage charges, consist of charges for local,
domestic long distance and international calls.  Usage is measured by
pulses, which are time-based units of measure, metered at the relevant
exchanges.  Pulses vary, depending on one or more
factors.  Local call pulse duration depends upon the type of network
on which the call is terminating (i.e., fixed, GSM cellular or CDMA mobile) and
the subscriber plan chosen, while domestic long distance call pulse duration
depends upon the call distance, type of network on which the call is terminating
and whether the call is within a regional circle or between two
circles.  International call pulse duration varies depending upon the
country of destination.  For operator assisted domestic and
international calls, a slab system of tariffs applies which differs depending
upon the speed at which the call is completed.  The subscriber is
billed at a fixed price per pulse that depends upon the subscriber plan chosen
and usage volume (low usage customers are offered a lower price per
pulse).  We currently offer several fixed-line plans, tailored to meet
the needs of different user profiles.




For
fixed-line services, customers also pay access charges consisting of a one-time
refundable security deposit, installation charges and monthly
subscription/rental charges.




We have
adopted a policy not to reduce our basic tariffs and related charges unless in a
response to tariff reductions by competitors.  However, since the 1999
tariff order, the TRAI has in several stages significantly reduced tariffs on
domestic and international long distance calls.  Effective July 20,
2002, international long distance call rates were reduced by about 40% and
effective October 2, 2004 national long distance call rates were
reduced  varying up to 60% for various designations  Because
we retain the remainder of prices of domestic and international long distance
calls originating on our network, net of interconnect charges, by lowering long
distance rates the tariff reductions have reduced the revenue we receive per
call.  While these rate reductions have been part of a “rebalancing”
effort aimed at reducing cross-subsidization between long distance (historically
priced at a premium) and local calls (historically subsidized) by at the same
time phasing out subsidization of local calls, the negative impact of the long
distance rate reductions have to date outweighed any positive impact of other
aspects of the tariff rebalancing effort.  Also effective May 1, 2003,
as part of its effort to reduce subsidies, the TRAI changed the standard plan
that we must offer all customers by increasing monthly rentals for basic
services by 12% from Rs. 250 to Rs.280, reduced the local call pulse duration
(for calls made to fixed and fixed wireless lines) from three minutes to two
minutes and the number of free monthly call pulses.




23
 Table of Contents




GSM
Cellular Services.  We offer our GSM cellular subscribers in Delhi and
Mumbai a choice of several plans, tailored to meet the needs of different user
profiles.  One of the plans is the standard plan, which, under TRAI
regulations, we are required to offer all customers and the terms of which the
authority establishes.  Generally, in addition to call charges for
local and long distance calls, our plans include the following types of charges:
refundable, non-interest bearing security deposit; installation charges;
monthly rental charges; and airtime charges.  Effective February 1,
2004, with the adoption by the TRAI of the interconnection usage charge
regulation and the “calling party pays” principle, charges for incoming cellular
calls (other than any roaming charges) have been eliminated.  In
addition, we provide the following value-added services free to all our GSM
cellular subscribers:




·
            national
      roaming




·
            call
      forwarding/divert




·
            call
      hold




·
            call
      waiting




·
            caller
      identification




However,
airtime charges on use apply to these services.  In addition, we offer
our GSM cellular subscribers value-added services like SMS, voice mail, WAP,
CRBT, call conference, GPRS/MMS, missed call alert and content-based SMS for a
fee.




In fiscal
2002, we introduced pre-paid GSM cellular services under the brand name “Trump”
in Delhi and Mumbai.  This market is also highly competitive, with
rates changing with market conditions.




Broadband
Service:  We started offering Broadband service in January 2005 to
subscribers in Delhi and Mumbai with choice of several plans, tailored to meet
the needs of different user profiles.  Generally, in addition to usage
charges for usage and data download, our plans include the following types of
charges:  non-interest bearing security deposit; installation &
testing charges; monthly DSL usage charges, monthly rental for modem, if
provided by us.




Internet
Protocol Television (IPTV):  We started offering IPTV service in
October 2006 to subscribers in Mumbai and in November 2006 to subscribers in
Delhi.




Voice
over Internet Protocol (VOIP):  We started offering Prepaid VOIP
service in August 2007 to subscribers in Delhi and Mumbai.




Video
Phone Services:  We launched Video Phone Services on promotional basis
for the period April 4, 2008 to July 7, 2008 for the service areas Delhi and
Mumbai.




In May
2005, we implemented leased line tariff at par with BSNL under revised tariff
ceilings prescribed by the TRAI.




CDMA
Services.  For CDMA mobile services, including the use of a CDMA
handset, our subscribers are charged a refundable security deposit, a monthly
charge and a monthly handset rental, in addition to airtime
charges.  We have not charged users for incoming calls.  We
offer our CDMA mobile subscribers a choice of several plans, tailored to meet
the needs of different user profiles.  Following commissioning in July
2006 of CDMA 20001X system in Mumbai, which has mobility between Mumbai and Navi
Mumbai, we provide the following value added services free to all our CDMA
subscribers:




·
            Call
      Hunting




·
            Call
      Waiting




24
 Table of Contents




·
            Caller
      Identification




·
            STD./ISD
      Dynamic Lock




·
            Call
      Forwarding




·
            Three-party
      Conference




·
            Abbreviated
      Dialing




We
started new Garuda (CDMA) mobile connection by giving RUIM cards for
postpaid/prepaid Garuda connections since April 2007 to subscribers in Delhi and
since December 2007 to subscribers in Mumbai.




We offer
different tariff plans and value added services to cater to and fulfill the need
of the various segments of customers.




Reduced
ILD tariff for Basic & Mobile service




We have
reduced the ILD tariffs for Basic and Mobile services effective May 1, 2007 for
the service area of Delhi and Mumbai.  The details are as
follows:




1.  BASIC




Countries
            Pulse
      in secExisting
            RevisedUSA,
      Canada, UK (Fixed), Singapore, Hong Kong, Thailand,
              Malaysia,
      Indonesia & other countries with ISD code 001
            9
            9.5UK
      (Mobile), Europe, Africa, Gulf, SAARC, China, Japan,
              South
      Korea, Australia, Christmas Island & New Zealand
            6
            6.5Rest
      of world
            4
            3.3




2.  WLL
(M/F) POSTPAID, DOLPHIN (POSTPAID) & TRUMP (PREPAID)




Countries
            Existing
                Rs.
      per minute
            Revised
                Rs.
      per minuteUSA,
      Canada, UK (Fixed), Singapore, Hong Kong, Thailand,
              Malaysia,
      Indonesia & other countries with ISD code 001
            6.67
            6.30UK
      (Mobile), Europe, Africa, Gulf, SAARC, China, Japan,
              South
      Korea, Australia, Christmas Island & New Zealand
            10.00
            9.20Rest
      of world
            15.00
            18.00




25
 Table of Contents




Reduced
tariff for Basic and Mobile service




We have
reduced the STD tariff for MTNL Delhi and Mumbai effective May
2008.  The details are as follows:




From
            Existing
            ReducedDelhi
            MumbaiMobile
      (GSM & CDMA)
            Rs.
      1.75/1.65 per min.
            Rs.
      1.25 per min.
            Rs.
      1.30 per min.Landline
      to Basic & WLL (M/F)
              between
      MTNL Delhi – Mumbai
            180
      sec. Pulse
            180
      sec. Pulse
            180
      sec. PulseLandline
      (other than to Basic &
              WLL
      (M/F) between MTNL
              Delhi
      – Mumbai)
            36
      sec. Pulse
            60
      sec. Pulse
            60
      sec. PulseCDMA
      (FW)
            Rs.
      2.00 per min.
            Rs.
      1.20 per min.
              (60
      sec pulse)
            Rs.
      1.20 per min.
              (60
      sec pulse)




Other
Services




For
access to narrow-band ISDN services, we charge our subscribers a monthly rental
and no registration fee.  Subscribers can also have primary rate
access for an initial fee.  Usage charges for local, domestic long
distance and international calls are the same as for the basic fixed-line
telephone.




Tariffs
charged by public telephone operators for telephone usage are at a fixed rate
ofRs.1.00 per
pulse, of 60 seconds for local calls and long distance pulse durations varying
depending upon the distance.




We do not
charge any registration fees for our Internet access services.  Our
Internet access fees have been falling considerably in response to competitive
pressures.  Internet users do not have to subscribe for Internet
services.  They can access the service and later be billed on the
basis of calling line identification usage.




Subscribers
for point-to-point leased line services are charged an annual fee based on the
type of service offered, the distance between the points and the duration of the
lease entered into by the subscriber.




License
Fees and Network Utilization/Interconnection Arrangements




License
Fees and Network Utilization Charges.  Under our previous arrangement
with the DOT, the license fees for providing basic services was fixed at Rs.900
per access line in service.  This arrangement expired on March 31,
2000.  In the absence of any new arrangement with the DOT, we
continued to pay license fees during fiscal 2001 on the same terms as our
previous arrangement.  On April 9, 2001, the DOT communicated that the
annual license fees will be revised and shall be payable at 12% of adjusted
gross revenue from basic telephone service effective from August 1, 1999, as
applicable to private operators from that date.  On September 5, 2001,
the DOT amended its position and indicated that the date from which the revised
license fees will be payable will be notified later.  However, in the
absence of an agreement for payment of license fees and any clarification from
DOT to date, we have paid license fees on the revised basis communicated by DOT
for fiscal 2002 and 2003.  Further subsequent to the year ended March
31, 2004, in a meeting held between DOT, BSNL and the Company to resolve the
ambiguity with respect to license fees and networking charges it was agreed that
the license fees were payable at 12% of AGR and networking charges as per TRAI
regulations with effect from August 1, 1999. Also, the revenue sharing
percentages earlier agreed to between us and BSNL, other than those governed by
TRAI regulations, were revised with retrospective effect.  This
resulted in an incremental charge of Rs. 3,520 million in the consolidated
statements of income on account of license fee and a benefit of Rs 1,515 million
on account of networking charges during the year ended March 31, 2004, in
respect of periods up to March 31, 2003.  Further license fee has been
revised at 10% of Adjusted Gross Revenue with effect from April 1, 2004. The
license fee for the NLD (national long distance) and ILD (international long
distance) service license which we have obtained is 6% of AGR. A license fee
on internet services of 6% of AGR has been in effect since January 1,
2006.




26
 Table of Contents




Cellular
License Fees and Spectrum Allocation Charges.  Each Indian cellular
service provider operating in top-tier circles, including us, currently pays a
cellular license fee of 10% of adjusted gross revenues received from its
cellular services plus spectrum charges of 2% of adjusted gross revenues for up
to 4.4 MHz of spectrum allocation and 3% of adjusted gross revenues for spectrum
allocation of up to 6.2 MHz and 4% of Adjusted Gross Revenue for spectrum
allocation of up to 8 MHz.  License fee has been revised from April 1,
2004 at 10% of adjusted gross revenue.




Unified
Access License.  In November 2003, the DOT issued guidelines for
Unified Access Licenses which cover within a service area both basic
telecommunications services and cellular services.  In the Indian
context, “basic telecommunications services” or “basic services” include basic
fixed-lined access service and a number of other telecommunications services,
other than long distance services, cellular service and Internet
access.  Basic services also include CDMA-based fixed wireless and
mobile services (without roaming).  We have submitted a request to the
DOT to migrate to UAS Licenses for our service area under mobile licenses
for Delhi and Mumbai to be able to provide services at par with other operators
in these areas.  In September 2006, our request for migration of our
CMTS Licenses to UAS Licenses as our operating cellular service in the licensed
area was not accepted by the DOT.  In October 2006, we sought
reconsideration and grant of permission for migration to UAS
Licenses.  In April 2008, in-principal approval has been received to
use CDMA technology under the existing Cellular Mobile Telephone Service (CMTS)
License for Delhi and Mumbai Service Areas.  We conveyed to DOT our
acceptance to use CDMA technology (in addition to GSM technology being used by
us) under the existing Cellular Mobile Telephone Service (CMTS) License for
Delhi and Mumbai Service Areas.




New
Interconnection Usage Charges Regulation.  Effective May 1, 2003,
under the TRAI’s new interconnection usage charges regulation, and further
amended and implemented since February 1, 2004, interconnect charges have been
established for all major types of interconnection.  Under this
regulation, we are entitled to specified interconnection revenues with respect
to incoming calls from operators that are linked to our network, and are
required to make specified payments in respect of outgoing calls from our
network into another operator’s network.  For this reason, this
regulation is said to be based on the “calling party pays”
principle.  As a result of this regulation, we are accruing
interconnect fees payable by BSNL in respect of the domestic long distance calls
that come into our network from that company’s network.  In addition,
as a result of related tariff changes, we no longer charge cellular or
CDMA-based mobile users for incoming calls, as we are now entitled to
interconnect payments from the caller’s service provider.  The terms
of all interconnect agreements are subject to the interconnect charges specified
in the regulation.  The TRAI has issued IUC Regulation (1 of 2005)
dated January 6, 2005 and implemented from February 1, 2005. In this IUC
amendment, the authority emphasized lower tariffs and linked high sustained
subscriber growth. Plans for consistent decline in tariffs to give sustained
boost to subscriber growth and teledensity.  The methodology of
imposing ADC per minute charge has kept unchanged. Only the Access Deficit
Charge has been changed, ADC on long distance calls and international calls has
been reduced.  Further, in the amended IUC regulation, BSNL only, and
not the other fixed lines operators, will receive ADC on all incoming
international calls and outgoing calls from Mobile/WLL (M).  The TRAI
has issued IUC Regulation (1 of 2006) dated February 28, 2006 and implemented
from March 1, 2006.  In this IUC amendment, the methodology of
imposing ADC per minute charge changed with AGR (adjusted gross revenue) basis @
1.5%.  ADC on international calls has been reduced on the basis of per
minute charge in addition to 1.5% of AGR.




The TRAI
has issued ADC Regulation (2 of 2007) dated March 21, 2007 and implemented from
April 1, 2007.  In this amended regulation ADC on percentage revenue
share was reduced to 0.75% from existing 1.50% of AGR.  ADC on
Outgoing international calls was reduced to zero from existing level of Rs. 0.80
per minute and on Incoming International Calls reduced to Rs. 1.00 per minute
from existing Rs. 1.60 per minute.




Telecommunication
Internconnection Usage Charges (IUC) Regulation 2008 (2 of 2008) issued by TRAI
on March 27, 2008 and implemented for the period from April 1, 2008 to September
30, 2008.




The
change in IUC regulation are as:




a)           On
outgoing ILD calls, ADC reduced from Rs. 0.80 to Rs. Zero.




b)           On
incoming ILD calls, ADC reduced from Rs. 1.60 to Rs. 1.00.




27
 Table of Contents




c)           ADC
shall be paid at 0.75% reduced instead of at 1.5% of AGR to the
BSNL.




Since the
introduction of ADC regime, the TRAI had maintained that ADC is a depleting
regime and this will end effective October 1, 2008.




Network
Utilization—Bharat Sanchar Nigam Limited (BSNL).  Under our previous
arrangement with BSNL, we paid network utilization charges to that company as a
fixed percentage of the amount of usage and other charges billed to our
customers for our services.  Our network utilization arrangement with
BSNL expired on March 31, 2001.  For fiscal 2002 the interconnection
charges on domestic long distance and international long distance calls were
accrued on the basis of the rates payable by other basic service operators in
the country.




Until the
end of fiscal 2002, all outgoing international long distance calls originating
from our network were subject to interconnection fees payable to BSNL, and we
received no revenue from incoming international long distance calls into our
network.  We paid interconnect fees to BSNL in respect of outgoing
international long distance calls pursuant to the network utilization
arrangement with BSNL until March 31, 2001 and for fiscal 2002 on the basis of
the rates that were payable by other basic service operators in the
country.  Beginning April 1, 2002, we recorded incoming and outgoing
international long distance traffic pursuant to interconnect agreements we have
signed with several international carriers, most importantly, VSNL (now Tata
Telecommunications Ltd).  As a result of these agreements, we no
longer make payments to BSNL in respect of international long distance
traffic.  In addition, our agreements with the international carriers
provide for income in respect of incoming calls, in addition to payments in
respect of outgoing calls originating from our networks.




For
fiscal 2003 the interconnection charges on domestic long distance calls were
again accrued on the basis of the rates payable by the other basic service
operators in the country.  Since beginning of fiscal 2003, we have
been accruing international long distance calls on the basis of interconnect
agreements that we signed with VSNL (now Tata Telecommunications Ltd.) and
others.  Since the beginning of fiscal 2004, the Telecommunication
Interconnect Usage Charges (IUC) Regulation (2 of 2003) 2003 covers arrangements
among Service Providers for Payment of Interconnection Usage Charges for
Telecommunication Services, Covering Basic Service which includes WLL(M)
Services, Cellular Mobile Service Providers and Long Distance Operators
throughout the territory of India.  The IUC Regulation (1 of 2005)
effective from February 1, 2005 has only reduced the ADC on Domestic Long
Distance calls and International calls keeping all other components of IUC
unchanged. Further, the ADC on incoming terminating calls on fixed network from
mobiles and international long distance has also been made payable to BSNL
only.




We
finalized the charges for network utilization and domestic long distance
agreements with BSNL.  Until October 30, 2006, NLD carriage charges
were paid as per TRAI IUC Regulation and effective November 2006 are at the
negotiable rates.  These rates shall not be applicable to NLD for
traffic between Delhi and Mumbai, which is routed on leased bandwidth by
us.




We are
responsible for collecting payments for calls from our subscribers and bear the
risk of non-collection of these charges.  Until the May 1, 2003
effectiveness of the interconnection usage charges regulation, we did not
receive any payments for calls coming into our network from BSNL’s
network.  We have also signed interconnect agreements with several
private-sector domestic long distance service providers, but to date still rely
on BSNL for substantially all of our domestic long distance
interconnection.  BSNL has also established its Trunk Automatic
Exchanges (TAXs) at Delhi and Mumbai. All the other private operators of
Delhi and Mumbai have established interconnection with these TAXs and
consequently we have stopped transiting their long distance calls to minimize
the risk of bad debts.




International Long Distance
Interconnect Arrangements.  Although we have signed
interconnect agreements with several international long distance carriers, we
continue to rely on VSNL (now Tata Telecommunciations Ltd) for substantially all
of our outgoing international long distance traffic.




Interconnect Arrangements
with Other
Cellular, Basic Service Providers and Unified Access Service Providers in Mumbai
andDelhi.  We
have entered into interconnect agreements with the other cellular, Unified
Access and basic service providers in Mumbai and Delhi to formalize our network
integration with them.  In addition to usage-based interconnect
charges, each cellular/unified/basic service operator in Delhi and Mumbai
pays




28
 Table of Contents




us an
annual fee for lines leased from us to connect to our network. For the
establishment of interconnection between operators, a model Reference
Interconnect Offer (RIO) was circulated by the TRAI asking BSNL and us to frame
our own interconnect offer which was proposed to be signed with other operators
for establishing new interconnections.  Several changes were desired
by the TRAI in the Interconnect Offer document of BSNL and us, and BSNL and we
challenged the proposed changes in TDSAT.  As per directions of
TDSAT,  several rounds of talks were held by the TRAI with BSNL and
most of the issues were resolved. TDSAT has now given judgment and accordingly
we have posted our interconnect offer on the website incorporating the changes
already agreed with the TRAI during discussions.




Interconnection
for Intelligent Network (IN) Service:  TRAI issued Regulations, 2006
(13 of 2006) dated November 27, 2006, which had to be implemented till February
27, 2007.




We signed
the addenda to the interconnect agreement for IN service with M/s Idea,
Reliance, Tata Communications, Bharti (Airtel) and Vodafone, which enables the
subscribers to access the toll free services of the other operators and visa
versa.




Customers and Customer
Service.  We classify our subscribers by use level and estimate
that in the last three months of fiscal 2008, approximately 12.86% of our access
lines in service accounted for 56.08% of our call units.  The
following table sets forth certain information with respect to our subscribers
for the final three months of fiscal 2008:




Average
      number of
                subscribers
      per segment as
                a
      percentage of total
                subscribers
              Average
      call units
                per
      segment as a
                percentage
      of all
                metered
      callsSubscriber
      segments(use
      of pulses on a bi-monthly basis)0-100
              32.22
              1.26101-500
              38.44
              20.09501-1,000
              16.59
              22.571,001-2,000
              8.70
              23.082,001-5,000
              3.52
              19.72Greater
      than 5,000
              0.64
              13.28




Our
general marketing strategy is to stimulate demand for telephone services in
order to increase average usage and revenue per line in service.  We
have identified high usage subscribers as “commercially important persons” and
are taking initiatives to strengthen our relationship with these
individuals.  These initiatives include regular visits and conducting
surveys to obtain feedback and determine client-specific needs and introduce
value-added services tailored to commercially important
persons.  Also, in certain areas we have constructed a digital local
loop network with better quality transmission dedicated for use by commercially
important persons.  Some of the commercially important persons are
also being connected to our network via fiber-in-local-loop
technology.  We also use print advertising to educate the general
public about our telephone services and other value-added services.




No single
subscriber accounted for more than 5% of our revenues in fiscal 2006, 2007 or
2008.  Government of India entities in the aggregate constitute the
largest user of our services.  We deal, however, with the various
departments and agencies of the government of India as separate subscribers and
the provision of services to any one department or agency does not
constitute a material part of our revenue.




Our
subscribers are billed by mail or courier once every billing
period.  Subscribers with access to long distance service are billed
monthly; subscribers with access to local services only are billed
bi-monthly.  We have introduced four billing cycles in respect of each
billing period which enables us to bill different subscribers at different times
in the billing period.  Cycle billing reduces the burden on the
billing system at any particular time of the month and provides more
consistent cash flow.




29
 Table of Contents




Billing
is computerized and processing takes place at decentralized bill processing
facilities in Delhi and Mumbai for ease of operation and better handling of
customer complaints.  A subscriber can inquire by an automated
telephone service or at one of our customer service centers to determine the
amount of his bill.  Payment may be made by mail or at a collection
center such as a national bank or a customer service center.  Payments
may also be made under our voluntary deposit scheme, where customers set up
an interest bearing deposit with us, or under our electronic clearance system,
where payment is directly debited from the subscriber’s bank
account.  We have also introduced a program through which
subscribers can pay bills through the Internet or at any of our Tele-mart
centers.  We allow subscribers to pay bills using a credit card and at
the post office, and plan to allow subscribers to pay bills at local merchants
and through other mechanisms to improve bill collection and
remittance.  We have also launched a new web-based service email bill
alert for delivery of telephone bills on email.




We have
developed our billing system jointly with Tata Consultancy Services in Delhi and
Mumbai.  This billing system is a part of a customized software
program known as a “customer service management system.” The billing system is
an integrated revenue billing system, which includes pre-connection and
post-connection services, accounting, billing collection and access to
subscriber records.  Other benefits of this system are one point data
capture for all subscribers, increased efficiency and reduction of lead time to
process queries.  This system enables our staff to handle, at a single
point of contact, various activities “on-line such as registration of a new
telephone connection, change of address and category, issuance of work orders,
issuance of duplicate bills, requests for transfer of telephone for domestic
long distance and international connectivity, collection of payments of bills,
status of outstanding bills, and monitoring of subscriber
complaints.




Payment
is due within 21 days from the date of issue of the bill.  If the
charges are not paid on time, we generally give a reminder by telephone after
the due date, cut off all services after 35 days from the date of issue of the
bill.  Subscribers with large amounts overdue may have their
telecommunications services terminated earlier.  Subscribers are
charged a surcharge on amounts overdue after 21 days (with maximum surcharge
being Rs.4,000) and a reinstatement fee of Rs.100.  This reinstatement
fee has been suspended in our Delhi unit for the one year ending September 1,
2007.




We
provide operator assisted services, including value-added products such as
wake-up calls, as well as operator connected and reverse charge calls to all of
our subscribers.  In addition, we provide free operator assisted
directory services.  Our strategy is to continue to enhance the level
of subscriber satisfaction by increasing access to operators and improving the
quality of subscriber interface, while also improving operational efficiency and
productivity.  In March 1999, we published a Delhi directory, and we
published a Mumbai directory in February 2000.  Both of these
directories are available free of charge on our website.  We have
recently introduced directory information on CD-ROMs, which are available for
Rs.50 each, as well as an on-line directory inquiry service which is available
to telephone users with personal computers and communication
software.




In order
to address subscriber disputes more quickly, we regularly hold telephone
“adalats,” or courts.  These adalats are presided over by our senior
management and, although their judgments are non-binding, we have resolved a
large number of disputes at these adalats.  We also hold “open house”
sessions to obtain feedback from subscribers, enabling us to take steps to
improve customer service.  Our service centers also provide various
types of services such as registration for new connections, shifting telephone
connections, billing information and collection of bill payments.  We
have customer service centers in many locations in both Delhi and in
Mumbai.  Generally, three to five employees provide these services in
each center.




Insurance




We
maintain comprehensive insurance for our assets under a single comprehensive
policy renewable annually.  The policy is renewed in July of each
year.  We do not anticipate having any difficulty in renewing our
insurance policies and believe our insurance coverage is reasonable and
consistent with industry standards in India.




Competition




One of
the primary objectives of the 1999 telecom policy is to encourage competition
within India’s telecommunications industry.  Accordingly, we will
encounter increased competition in each of our markets as




30
 Table of Contents




existing
and additional service providers actively seek to penetrate these markets
through the introduction of high quality products and services.




The 1999
telecom policy allows the DOT to license, at its discretion, multiple additional
basic and cellular service providers in any service area.  Under a
Unified Access Service License, such competitors as
Reliance  Infocom,  Bharti Airtel, Tata Teleservices
Limited, Idea Cellular Ltd. and Aircel Limited are currently competing with us
in the market for basic services in both Mumbai and Delhi.  All of
these companies already have significant telecommunications infrastructure in
Delhi and Mumbai, including, with respect to Tata Teleservices and Reliance
Infocom, low-cost CDMA mobile and fixed wireless technology.  With
approximately 56.08% of our call units having been derived from approximately
12.86% of our access lines in service (last three months of fiscal 2008), we are
particularly vulnerable to losing market share if these or other new operators
aggressively target our largest subscribers.




We
experience significant competition in the market for GSM cellular
services.  As of March 2008, we had approximately 14.10% and 19.73% of
the mobile subscribers in Delhi and in Mumbai, respectively.  Our
largest competitors in Delhi are Bharti AirTel, Idea Cellular and Hutchinson
Essar (Hutch)(now Vodafone).  In Mumbai, Bharti (AirTel), Vodafone and
BPL Mobile have the largest share in the market.  Cellular operators
also face significant competition from rapidly growing CDMA-based mobile
services, which are priced considerably lower than GSM cellular
services.




We
commenced providing our Internet services in Delhi and Mumbai in February
1999.  The competition among Internet service providers throughout
India is intense with approximately 357 licenses for providing Internet services
issued as of February 29, 2008.




There has
been significant consolidation in the telecommunications industry in
India.  For example, the Birla Group, the Tata Group and AT&T have
combined their interests in GSM cellular operators into one business, and the
Tata Group, which controls Tata Teleservices, acquired a controlling interest in
India’s dominant international long distance carrier, VSNL (now Tata
Telecommunications Ltd), and Tata Teleservices has acquired Hughes Tele.com, a
basic service provider in Delhi and Mumbai.  We expect the trend
toward consolidation to continue, resulting in larger, more diversified
competitors in the Indian market.  Vodafone Essar Mobile Services
Limited has acquired Hutchinson Essar Mobile Services Limited, another one of
the telecom operators in India.




Our
revenues from international calls are adversely affected by competition from
“call-back” services.  Call-back services were officially declared
illegal by the Ministry of Communications in July 1995.  Nevertheless,
the volume of international calls made from India through call-back services has
continued to grow.




In June
2008, we entered the international long distance business upon the licensor
issuing a license to us for that service.




Increased
competition has kept and will likely continue to keep downward pressure on
prices and has required and will likely continue to require us to increase our
capital investment to improve and expand our services.  These
developments, in turn, have had and may continue to have a negative impact on
our profitability.  In the tariff order, no minimum tariff levels are
specified and service providers have the flexibility to determine the tariff
below the maximum levels.  Our board of directors has determined not
to reduce fixed line tariffs unless such a reduction is in response to a tariff
reduction by a competitor.  However, the TRAI may prescribe minimum
tariffs or prohibit providers from reducing tariffs in response to
competition.  Additionally, the tariff order prescribes tariffs based
on the estimated cost to provide particular services.  These estimates
and corresponding tariffs may not accurately reflect our actual
costs.




In order
to compete with other basic and cellular operators and Internet service
providers, we are increasingly focused on the timely introduction of new and
improved products and services and pay increased attention to customer
service.  An inability to compete effectively would also damage our
longer-term business prospects through loss of customers and market
share.




31
 Table of Contents




LEGALPROCEEDINGS




Except as
described below and except with respect to regulatory proceedings described
elsewhere, we are not currently a party to any material legal or arbitration
proceedings or disputes.




Deductibility
of License Fees




The
Central Income Tax Authority of India (“CITA”) had historically disallowed the
license fee paid by us to DOT for the years ended March 31, 1994 through March
31, 2005 as a tax deductible expense and had raised a demand for payment of
taxes on increased taxable income relating to such expenses.  We had
contested these demands.  As part of the appeals process, we had paid
deposits under protest, amounting to Rs. 13,427 million as of March 31, 2005.
These deposits have been classified as part of restricted assets on our
consolidated balance sheets




During
the year ended March 31, 2005, we had obtained favorable decisions from the
Income Tax Appellate Tribunal (“ITAT”) with respect to the license fee
disallowed for the assessment years 1997-98 and 2001-2002.  Further in
respect of assessment years 1995-96 and 1996-97, the Committee of Disputes
(“COD”), on the recommendations of the Ministry of Law, decided not to give
clearance to either the Central Board of Direct Taxes or us to file appeals in
the Hon’able High Court, making the decision of the ITAT binding on both the
parties. Subsequent to the COD’s decision, we applied to ITAT to restore the
appeal and decide in our favor.




During
the year ended March 31, 2006, based on the judgments passed in the previous
years, the ITAT has allowed deduction of license fees as a tax deductible item
for assessment years 1998-99 to 2000-01 and 2002-03. License fees have also been
allowed as a deduction by the CITA for assessment year 2004-05.




During
the year ended March 31, 2007, based on the judgments passed in the previous
years, the  ITAT has allowed deduction of license fees as tax
deductible item for the assessment years 1995-96 and 1996-97
also.  Management believes that the ITAT following its favorable
judgments of earlier years will eventually decide in favor of the Company for
the years in dispute and an adverse outcome in respect of the above is not
probable.  Based on the above stated favorable orders, we have not
accrued the tax charge on the license fee in our financial
statements.  We have received interest on deposits paid under protest
to the tax authorities and the refunds for the years decided in our favor,
i.e. 1995-96, 1996-97, 1998-99, 1999-00, 2000-01, 2002-03, and 2004-05 in the
year 2007-08.  The refunds and the interest thereon have been
recognized in our statement of income for the year ended March 31,
2007.




During
the year ended March 31, 2008, we have received refunds for the years 2002-03
and 2004-05, together with interest, which has been accounted for in our
statement of income for the year ended March 31, 2008.




Deduction
of Claim of Benefit U/S 801A for New Undertakings.




As per
section 80IA of the Indian Income Tax Act, 1961 a Company, which starts to
operate telecommunication services at any time on or after April 1, 1995, but
before March 31, 2000, is entitled to a tax holiday for a period of 10 years
beginning with the year in which such services are started. As per the tax
holiday, 100% of the profits derived from such services are exempt from tax in
the first 5 years, and 30% of such profits are exempt from tax for the next five
years. On the basis of advice from our legal counsel, we have historically
claimed such benefit. Our claim have been rejected at the first appellate level
and the case has been referred to the Committee of Disputes, which is a body
formed by the Government to settle disputes between Government controlled
undertakings and the Government. The Committee has referred the case to the Tax
appellate authorities for reconsideration. During the year ended March 31, 2006,
the case has been set aside by the Income Tax Appellate Authority for the
assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and has referred the
matter back to the Assessing Officer for a fresh assessment after hearing the
case again. For the years ending up to and including March 31, 2006, considering
that the benefit claimed by us in the above years may not be ultimately allowed
by tax authorities, the provision for current taxes in these years had been
accounted in the basis of normal tax rates. During the year 2006-07 assessing
officer has made fresh assessment for calculation of deduction under section
80IA of the Indian Income Tax Act, 1961 and allowed partial benefit to us.We have filed appeals
against that partial allowance to the higher authority. (Also refer note 22 (b)
(ii)).




32
 Table of Contents




During
the year ended on March 31, 2008, we received refunds from Income Tax Authority
in respect of penalty levied for the years 1995-96, 1996-97, 2001-01 and
2001-02.  These penalties pertained to the claims we had made under
section 80IA of the Indian Income Tax Act.  The penalty amount has
been refunded by the income tax department along with interest thereon which has
duly been accounted for in our statement of income for the year ended on March
31, 2008.




Sales
Tax




We had
received a demand to pay sales tax in respect of certain historical
telecommunications revenues, mainly telephone rental charges.  We had
received a demand from the state government of Maharashtra, of which Mumbai is a
part, for payment of Rs. 3,200  million in sales tax for fiscal
1989-2000.  Further, we have also received notice from the Delhi state
government seeking further information in aid of an investigation into whether a
similar demand should be made upon us.  The amount of issue in Delhi
is significantly less.




The
department made these demands based on a case involving the Uttar Pradesh Trade
Tax Department (UPTTD) and the DOT, wherein the Supreme Court of India ruled
that a telephone connection along with a telephone set provided by a company
rendering basic services amounts to a "transfer of right to use the telephone
system" and the rentals collected by DOT towards this right to use should suffer
sales tax.  Subsequent to the passing of this order, both the cellular
and basic operators filed a petition before the Supreme Court under Article 32
of the Constitution in respect of the above.  The Hon’able
Supreme Court admitted the Petitions, in spite of its own judgment, and vide
orders dated September 25, 2003 referred the matter to a larger bench for
determination of dispute on merits and further directed that in future there
shall be no coercion for recovery of any dues.  The Hon'able Supreme
Court further directed that the operators should file statutory appeals against
the assessment orders for assessments already completed as on September 25,
2003.  Following the  Supreme Court order in the UPTTD case
the sales tax departments  across the country, have raised demands on
basic and cellular mobile operators.




We had
challenged the demands raised before the respective high courts and we have been
granted interim stays against enforcement of the demands. However this stay
order was subject to the outcome of the Supreme Court judgment on the
issue.  During the year ended March 31, 2006, the Supreme Court of
India has concluded in the BSNL Vs Union of India case that rendering basic
services does not amount to a "transfer of right to use the telephone system".
Hence the imposition of the sales tax on any facility of the telecommunication
services is untenable in law.  Based on opinion received from legal
counsel and drawing reference to the judgment of the Supreme Court of India in
the abovementioned case, management believed that the sales tax departments
would have to withdraw their demands of sales tax on basic telephony and that an
adverse outcome in respect of the above is remote.




During
the year ended March 31, 2007, the case relating to Delhi was
settled.  The amount of demand pertaining to Mumbai outstanding is Rs.
1,900 million.




Disputes
with BSNL




In
accordance with the Inter Connect Usages Regulations, we had accounted for
networking charges payable to BSNL amounting to Rs.6,924 million and Rs. 3,627
million for the years ended March 31, 2004 and 2005,
respectively.  However BSNL had raised a bill for the interconnection
charges for the calls originating from our network and terminating/transiting
at/from BSNL amounting to Rs.12,165 million and Rs. 8,030 million for the years
ended March 31, 2004 and 2005, respectively.  Our contention was that
the claim was not adequately supported by BSNL and hence not accepted by
us.




In the
absence of an interconnection agreement, we had provided NLD/ILD access charges
for the period ended March 31, 2002 at the rates lower than those demanded by
BSNL. Subsequent to the year ended March 31, 2004, in a meeting held among the
DOT, BSNL and us, the rates for NLD calls for the year ended March 31, 2002 were
agreed, and accordingly we have accounted additional liability of Rs. 233
million during the year ended March 31, 2004.  We may be required to
pay ILD access charges amounting to Rs. 195 million for the period April 1, 2001
to January 31, 2002 on the settlement of the dispute with BSNL in this
regard.




33
 Table of Contents




During
the year ended March 31, 2006, the DOT had constituted a three member committee
from its Telecommunications Department comprising the Member (Production),
Member (Finance), and Deputy Director General (Business Solution) to resolve the
issues relating to networking charges. Based on the recommendations of the
Committee in their minutes dated January 2006, the networking charges payable to
BSNL for the years March 31, 2004 and March 31, 2005 have been settled at
Rs.14,078 million as against Rs.10,551 million.  Further, the
Committee has also settled networking charges for the years 2000 to 2003 in the
meeting held in January 2006. Accordingly, an amount of Rs. 3,809 million
(including the incremental charge of Rs. 3,527 million for the years 2004 and
2005) has been accounted as networking charges in the statement of operations
for the year ended March 31, 2006.




Subsequent
to the year end March 31, 2006, meetings have been held between BSNL and us
wherein BSNL has raised additional claims for the year up to March 31, 2005
aggregating Rs.2,678 million and claims  amounting to Rs.5,256 million
for the year ended March 31, 2006 on account of networking  and others
charges. As against these claim for the year ended March 31, 2006 we have
accounted Rs. 4,040 million for networking charges payable to BSNL.




Our
contention is that since all claims relating to networking and other charges for
the period up to March 31, 2005 have already been settled in accordance
with the minutes of the DOT committee held on January 2006 and the claims for
the year ended March 31, 2006, are not adequately supported by the
BSNL  and hence not accepted by the us.  Further, as we are
in the process of discussing/reconciling their claims for the year ended March
31, 2006 with BSNL and may be required to pay an additional amount based on the
final settlement, however such payments will not have a material adverse effect
upon our results of operations, financial condition and cash
flows.  Management believes that an adverse outcome in respect of the
above is not probable.




During
the year ended March 31, 2006, we had raised claims against BSNL for duct
charges, TAX claims and reciprocal service claims amounting to Rs. 2,116
million, Rs. 2,482 million and Rs. 320 million, respectively.  The
duct charges pertain to annual usage of infrastructure (ducts) for the period
October 1, 2000 to March 31, 2006, the TAX claims pertain to our Trunk Automatic
Exchange (“TAX”) used by BSNL for the period from February 1, 2004 to March 31,
2006 and the reciprocal service claims are on account of Reciprocal Service
Connections provided to BSNL employees for the period October 1, 2000 to March
31, 2006.  Management has not recognized these claims as income in the
statement of operations considering the history of other disputed claims with
BSNL  the fact that currently there is no separate agreement for these
services, and that BSNL has not accepted these claims. During the year ended
March 31, 2007, we had raised claims against BSNL for duct charges and TAX uses
charges amounting Rs. 478 million and Rs. 1,251 million,
respectively.  We have not recognized these claims as income in the
statement of operations considering the history of other disputed claims with
BSNL, that currently there is no separate agreement for these services, and that
BSNL has not accepted these claims.




During
the year ended March 31, 2008, we had raised claims against BSNL for duct
charges and TAX usage charges amounting to Rs. 515 million and Rs. 546 million,
respectively.  We have not recognized these claims as income in our
statement of operations considering the history of other disputed claims with
BSNL, that currently there is no separate agreement for these services and that
BSNL has not accepted these claims.




Disputes
with DOT




On the
formation of the Company, employees were deputed to us on deemed deputation
status from the DOT and we were required to contribute for the Leave Salary and
Pension Contribution (“LSPC”) as per the rates prescribed by the Government (11%
for leave salary and 14% for pension contribution).  We had accrued
for these expenses amounting to Rs. 2,885 million for the period 1986 to
1998, and subsequently paid them to the DOT.




During
the year ended March 31, 2006, a Committee was set up to examine the amount of
LSPC contributions payable by us to the DOT. The Committee concluded that an
additional amount of Rs.656 million was payable on account of short payment of
the LSPC contribution and an amount of Rs.1,738 million is payable on account of
interest payable on delayed payment of the LSPC contributions.  We
accepted the claim of the DOT for Rs.656 million and we had expensed it in
our statement of income for the year ended March 31, 2006.  In respect
of Rs.1,738 million, we have contested the claim from the DOT on the contention
we had abided by the DOT’s decision at all stages and deposited substantial sums
as required.  In this connection, the terms and conditions as
laid




34
 Table of Contents




down in
fundamental rules and service rules (FRSR) of the Government of India with
regard to prior intimation of calculation of contribution of the pension amount
has not been cummunicated to us, and management believes that an adverse outcome
in respect of the above is not probable.




Other
Disputes




In 1998,
M&N Publication made claims against us for Rs. 5,415
million.  These claims arise out of contracts for the printing of
telephone directories for Delhi and Mumbai. Each of these claims includes claims
for loss of reputation and loss of business opportunities aggregating to Rs.
2,000 million.  We had made claims of Rs. 4,169 million against
M&N Publications for failure to perform the contracts. These claims are
pending before a sole arbitrator.  We believe that we have valid
defenses to these claims and based on opinion received from legal counsel,
management believes that an adverse outcome is not probable.




In the
year 2004-2005, Alcatel brought claims aggregating to Rs. 129.20 million
(including interest from 1996 till date on the claims made Rs 87.91 million)
(March 2006 Rs. 121.21 million) against us.  These claims arise out of
contract for supply of digital local telephone exchange equipment. These claims
include claims for loss of reputation and loss of business opportunity
aggregating to Rs. 20 million.  We believe we have a valid defense to
these claims and based on opinion received from legal counsel, management
believes that an adverse outcome is not probable.




We have
received claims aggregating Rs. 336.95 million (March 2006 Rs 308.60 million)
from various PRM service providers (World Phone, Voice Infotech and ITC). These
claims arise from the contract for PRM services, which were started in the year
1999-2000.  We had not paid commission payable for these services to
these providers, as the amount was subsequently not recovered from the
subscribers. The claims include Rs. 119 million towards loss of profit and
wasteful expenditure incurred by the parties.  We believe we have a
valid defense to these claims and based on opinion received from legal counsel,
management believes that an adverse outcome is not probable.




We have
received claims from CMC limited aggregating to Rs. 497.52 million (March 2006
Rs. 452.52 Million).  These claims arise out of usage of leased
circuits for which we have charged them rental for CUG services as per the
revised tariff plan which is disputed by CMC Limited.  These claims
include claims for loss of reputation, business opportunity and undue harassment
aggregating to Rs. 220 million.  We believe we have a valid defense to
these claims and based on opinion received from legal counsel, management
believes that an adverse outcome is not probable.




Additionally,
we are also involved in law suits and claims amounting to Rs. 1,967.11 million
pending at various authorities which arise in the ordinary course of the
business. Management believes that we have a valid defense against these claims
and an adverse outcome is not probable. These would not have a material adverse
effect upon our results of operations, financial condition and cash
flows.




Dispute
with Other Operator




During
the year ended March 31, 2005, we noticed that a very large number of calls were
received from certain levels of another operator’s network.  On
further investigation/analysis, it came to our notice that these were actually
ILD calls, which were being received on Local/NLD trunks and that the CLIs
(Caller line Identification) of these calls had been tampered by the other
operator.  We raised a demand on the other operator based on the
relevant penal clauses of its agreement aggregating Rs.3,412 million for a
period of six months beginning April 2004. The other operator has disputed the
above claim and under repeated threats of disconnection, obtained a stay order
from High Court of Delhi. In the year ended March 31, 2005 during the course of
the hearings, the honorable High Court directed the other operator to pay
Rs.2,368 million to us.  During the year ended March 31, 2006, the
other operator under directions from the honorable High Court has further
deposited Rs.1,040 million with us.  During the year ended March 31,
2007, the petition filed by the other operator before the High Court has been
dismissed as withdrawn with the liberty to take such in accordance with
law.  Management believes that it is a remote possibility that these
amounts will have to be refunded.  However, these amounts have not
been recognized as income.




35
 Table of Contents




4C.
            OrganizationalStructure




We are
controlled by the Indian government and are not part of any group.




We have
no subsidiaries which are considered “significant subsidiaries”.




4D.
            Property, Plants and
Equipment




Infrastructure




We
believe that we have created one of the most technologically advanced networks
in India.  Our network capacity is growing rapidly, and as of March
31, 2008 we had a total capacity of 9.87 million lines.




We
operate entirely separate but similar networks in each of Delhi and
Mumbai.  Each network comprises a switching and transmission network,
which we refer to as our “switching network” and a local loop
network.  The local loop network principally consists of copper wire
based lines, connecting subscribers to the main exchanges or the remote line
units.  A number of subscribers are connected to the switching network
via fiber-optic cable and wireless-in-local-loop technology.  The
switching network includes the trunk automatic exchanges, which are used
for routing domestic long distance and international calls, the main switching
exchanges, through which all calls are routed, and remote line units, which are
connected to the main exchanges.  The local loop network comprises
all connections between the main exchanges or the remote line units and the
subscriber.  Subscribers are either connected directly to the main
exchanges or, depending upon the distance from the main exchanges, via remote
line units.  All domestic long distance traffic, including traffic
between Delhi and Mumbai, is routed through BSNL’s network.




Overview
of Our Network




At
      March 31,2004
              2005
              2006
              2007
              2008DelhiAccess
      lines in service (access lines in service) (thousands)
              2,003
              1,719
              1,621
              2,999
              3,181Equipped
      capacity (thousands) (1)
              3,154
              3,737
              4,219
              4,385
              5,135Number
      of exchanges:TAXs
      (2)
              4
              4
              4
              4
              4Main
      exchanges and RLUs (3)
              329
              339
              336
              336
              342Digital
      lines (thousands) (1)
              3,154
              3,737
              4,219
              4,385
              5,135Digitalization
      rate (4)
              100%
              100%
              100%
              100%
              100%MumbaiAccess
      lines in service (access lines in service) (thousands)
              2,408
              2,355
              2,256
              3,668
              4,028Equipped
      capacity (thousands) (1)
              2,806
              3,657
              4,217
              4,717
              4,734Number
      of exchanges:TAXs
      (2)
              4
              4
              4
              4
              4Main
      exchanges and RLUs (3)
              183
              183
              193
              202
              210Digital
      lines (in thousands) (1)
              2,806
              3,657
              4,217
              4,717
              4,734Digitalization
      rate (4)
              100%
              100%
              100%
              100%
              100%




(1)
            Represents
      lines that are connected to digital
switches.




(2)
            TAX
      means trunk automatic exchange, a switch that routes calls to BSNL’s
      domestic fixed-line network and VSNL’s international
    gateways.




(3)
            RLU
      means remote line units, which are switches that connect a subscriber to
      the main exchange.




(4)
            Percentage
      of total equipped capacity that consists of digital
  lines.




Switching
Equipment




All of
our exchanges are fully automated and our switching capacity is 100%
digital.  Our switching network consisted of 342 nodes in Delhi and
210 nodes in Mumbai as of March 31, 2008.  Each node has a capacity of
between 1,000 and 100,000 lines.




36
 Table of Contents




At March
31, 2008, there were 92 main exchanges and 250 remote line units in Delhi and 85
main exchanges and 125 remote line units in Mumbai.  Because one or
more main exchanges in each node are connected to one or more main exchanges in
every other node, traffic is routed in a “mesh” configuration.  We
have also installed high capacity tandem switches in Delhi and Mumbai to more
efficiently route traffic between exchanges.  A majority of calls to
our main exchanges are now being routed through the tandem switch to another
node.  This has resulted in a more integrated network and has reduced
the amount of capital expenditure required to install additional capacity in our
switching network.




Each node
is connected to each trunk automatic exchange.  Interconnection to
basic service providers, private cellular operators and Internet service
providers is provided by dedicated access to the main exchanges or tandem
switches.  Our entire switching network is connected by fiber optic
links.




Transmission




Our
transmission network consists largely of plesiochronous digital hierarchy, or
PDH, and synchronous digital hierarchy, or SDH, optical fiber.  PDH
and SDH are transmission standards for digital signal
transmission.  We plan to continue to deploy SDH optical fiber and
synchronous transfer mode terminals to improve network efficiency.




Access
Network




We
construct our access network with copper cable, which is extended to
distribution points to terminate connections.  We have commenced
deploying five pair underground cable into subscribers’ premises where an
internal distribution point is installed.  We believe this access
network will reduce the number of telephone poles and improve reliability of the
service.




We have
also implemented fiber-to-the-curb/building access and offer increased bandwidth
for business and high usage subscribers.  Fiber-to-the-curb/building
is also intended to supplement existing copper wire with optic
fiber.  We have provided digital loop carriers, or DLCs, for this
purpose.  In fiscal 2008, we added 27 access terminals in our
network.




We have
installed wireless-in-local-loop services using CDMA technology where feasible
in Delhi and Mumbai as a substitute for fixed-line access to enhance basic
service penetration, provide quicker installation and cover areas where the
installation of cable would not be economical.




Quality
of Our Network




We are
conducting an ongoing program to improve the quality of services
offered.  Our principal quality measures are call completion rate and
fault rate.  The table below shows the quality improvements we have
made since our inception in 1986.  We achieved this primarily by
focusing on improvements to our switching network.  Part of our local
loop network is comprised of old paper core copper cables, which are a principal
cause of network faults.  We are in the process of upgrading and
replacing copper access lines and believe that this will have a positive impact
on call completion rates and fault rates.




37
 Table of Contents




Year
      Ended March 31,1986
            2004
            2005
            2006
            2007
            2008(inception)Fault
      rate/100 (1)
              Telephones/month:Delhi
            34.9
            12.3
            11.1
            10.7
            9.4
            6.5Mumbai
            21.2
            8.8
            9.0
            8.4
            10.5
            9.3Call
      completion rate (2)DelhiLocal
      calls
            77.3%
            57.0
            57.6
            47.3
            48.3
            52.8Domestic
      long distance calls
            30.0%
            28.0
            30.0
            33.6
            38.5
            43.5MumbaiLocal
      calls
            93.0%
            50..3
            58.3
            55.1
            56.7
            54.4Domestic
      long distance calls
            23.9%
            36.6
            37.4
            36.6
            37.0
            45.6




(1)
            The
      fault rate is calculated by dividing the total number of verified customer
      complaints of malfunctioning telephone equipment and services by the total
      number of access lines in service and multiplying the result by
      100.




(2)
            For
      dates covering years after 1986, the call completion rate was measured on
      the basis of actual calls completed.  Call completion rates
      measured on this basis are lower than if measured on a free-to-free test
      basis since calls that are not answered because the recipient’s line is
      engaged or where the network cannot complete the call because of
      congestion are deemed incomplete.  Call completion rates
      measured on different bases are not
comparable.




Suppliers




In
carrying out our development program, we have used a core group of international
equipment suppliers to purchase key switching equipment in order to maintain
technological compatibility while simultaneously decreasing dependence on any
one vendor.  We believe that we have developed stable relationships
with our suppliers.




Development
Activities




Development
activities are carried out by a planning group in each of the Delhi and Mumbai
operations, with overall planning activity coordinated at the corporate office
in Delhi.  The main focus of each planning group is the expansion of
existing services, the development of new services and the introduction of new
technologies that are tested for their reliability, compliance with internal and
DOT technical specifications and compatibility with our network.




GSM
Cellular and CDMA Networks




We
launched our cellular services using GSM technology in Delhi and Mumbai in
February 2001, and currently have an installed capacity of 17.75 lakh lines
in Delhi and 13.25 lakh lines in Mumbai.  We believe that current
penetration rates in Mumbai and Delhi remain attractive for continued high
growth in subscriber base.  Last year MTNL had awarded a tender for
further adding 2 million lines of GSM based on 2G/3G each in Mumbai and Delhi in
phase-I PO for 750 K 2G lines each in Delhi and Mumbai had been
placed.  The equipment has been commissioned in Delhi.  In
Mumbai the installation of the core equipment is going
on.  Procurement for the balance, 1250 K each for Delhi and Mumbai, is
under process in next phase taking into account the spectrum for 3G of 5
mhz in each city, already alotted to us.




In
addition, we have launched lower-cost CDMA-based limited mobility services each
in Mumbai and Delhi, and presently have a total of approximately 161,000
subscribers with an installed capacity of 1,098,230 most of which are based on
more advanced CDMA 2000 1X technology).  We believe that this new
limited mobile service will enable us to target a wider customer base that is
more price sensitive than GSM customers and that does not require India-wide and
international roaming facilities.  We intend to compete effectively in
these growing markets by providing high quality service at affordable
rates.  Our CDMA mobile service offers only limited mobility within
Delhi and Mumbai, and currently we are not permitted to offer roaming facilities
on this service.  If we obtain the newly-available Unified Access
License we will be able to offer full mobility.  CDMA fixed wireless
is a substitute for fixed-line access.  Fixed wireless allows us to
enhance basic service penetration, provide quicker




38
 Table of Contents




installation
and cover areas where the installation of cable would not be
economical.  Our CDMA mobile service is marketed under the brand name
Garuda.




Network
Modernization




We have
historically planned our capital expenditures on five-year programs that are
subject to approval by the DOT and the Planning Commission of the Indian
government.  The Eleventh MTNL Plan is the five-year investment plan
covering the period from April 1, 2007 to March 31, 2012.  Generally,
five-year plan investment targets are much higher than actual investment
levels.  Additionally, rapid changes in communications technology and
customer preferences render detailed investment planning for five years
impossible.




Our
current estimate for capital expenditures for fiscal 2009 is Rs 24,309.7
million; however, based on our experience in past years, we expect that the
actual amount of capital expenditures for the year will be less than our
estimate.




The
following table shows our network-related capital expenditures for the periods
indicated.




(Rs.
      in millions)Year
      Ended March 31,2005
            
            
            2006
            
            
            2007
            
            
            2008Local
      switching and access lines (including CDMA)/Transmission/Network
      Modernization/Expansion Abroad
            
            
            5,748
            
            
            
            4,241
            
            
            
            4,460
            
            
            
            5,107Information
      technology
            
            
            426
            
            
            
            124
            
            
            
            1,730
            
            
            
            52Land,
      buildings and vehicles
            
            
            1,143
            
            
            
            881
            
            
            
            817
            
            
            
            926Build-out
      of GSM cellular networks
            
            
            3,068
            
            
            
            1,608
            
            
            
            951
            
            
            
            3,239Total
            
            
            10,385
            
            
            
            6,854
            
            
            
            7,958
            
            
            
            9,324




We have
funded our recent capital expenditures to the extent incurred, and intend to
fund the remaining capital expenditures, primarily from cash flow from
operations and existing cash balances.  Our capital expenditures may
be higher as we introduce international long distance service, if demand for our
GSM cellular service or CDMA-based mobile service is higher than anticipated or
if we otherwise enter new markets or provide additional services.




Properties




Our
principal executive offices are located in Delhi and are leased from the Life
Insurance Corporation of India.  We have interests in various
properties in Delhi and Mumbai that consist of land and buildings for offices,
administrative centers and technical facilities.  We believe that all
of our owned and leased properties are well maintained and adequate for their
present use.




In 1987,
the assets and properties of the DOT located in Delhi and Mumbai were
transferred to us by an order of the government of India and a deed of
sale.  Indian law generally requires that to perfect the transfer or
lease of real property, the transfer should be evidenced by a formal duly
stamped deed of transfer and registered with the Central Land Registrar within a
specified period after the execution of the deed of transfer or
lease.  A formal transfer deed for real property of the DOT
transferred by the government of India to us has been executed but has not been
registered with the appropriate authorities.  The formal transfer deed
and the physical delivery of possession of the DOT’s non-real estate assets has
resulted in the transfer of these non-real estate assets of the DOT to us in
Delhi and Mumbai.  We believe that our use of these properties
is not affected by the fact that this deed has not been registered with the
appropriate authorities.




Indian
law requires payment of stamp duty (at rates which vary among states) on
instruments, which effect transfer of title to real estate or in respect of
leases of real estate.  Applicable stamp duty has not been paid in
respect of any of the properties acquired or leased by
us.  Accordingly, we may be liable for stamp duty and related
penalties if a deed is executed by us in the future under the applicable rates
of stamp duty and penalty payable in the state where the property is located
(other than with respect to the DOT properties acquired from the government of
India as at March 30, 1987).  All liabilities for stamp duties in
respect of the DOT properties acquired by us from the government of India as at
March 30, 1987 are to be borne by the government of India.  We have
been advised by our




39
 Table of Contents




counsel
that although we have valid possession to all of the property, including the
risks and rewards of ownership and title, to enable us to perfect and thereby
acquire marketable title to real property in our possession, we would need to
have relevant documents relating to transfer or lease of real property duly
stamped and registered.  In preparing our financial statements, the
provision for this stamp duty has been made on a best estimate
basis.






TELECOMMUNICATIONSREGULATION IN INDIA




The
Telecom Regulatory Authority of India




In March
1997, the Indian government established the TRAI, an independent regulatory
authority under the provisions of the Telecom Regulatory Authority of India
Act.  The TRAI is an autonomous body comprised of a chairperson and
not more than two full-time members and not more than two part-time members
appointed by the Central government, and has primary responsibility
for:




·
            making
      non-binding recommendations to the DOT, either at the request of the DOT
      or on its own, as to:




·
            the
      need for and the timing of the introduction of new service
      providers;




·
            the
      terms and conditions of licenses to new or existing service
      providers;




·
            revocation
      of existing licenses for
non-compliance




·
            measures
      to facilitate competition and promote efficiency to facilitate growth in
      the industry;




·
            technology
      and equipment improvements in providers’ infrastructures and in the
      industry generally;




·
            ensuring
      compliance of providers with license
terms;




·
            ensuring
      technical compatibility between
providers;




·
            regulating
      revenue sharing between providers;




·
            establishing
      quality standards and ensuring compliance through periodic reviews of
      providers; and




·
            determining
      time schedules pursuant to which providers will establish inter-connection
      between their networks.




The TRAI
also has the authority to, from time to time, set the rates at which domestic
and international telecommunications services are provided in
India.  The TRAI does not have authority to grant licenses to service
providers or renew licenses (those functions remain with the
DOT).  The TRAI, however, has the power to:




·
            call
      upon service providers to furnish information relating to their
      operations;




·
            appoint
      persons to make official inquiries;




·
            inspect
      books; and




·
            issue
      directions to service providers to ensure their proper
      functioning.




Failure
to follow TRAI directives may lead to the imposition of fines.




The TRAI
had previously acted in both a regulatory and an adjudicatory
role.  The Indian government has amended the provisions of the Telecom
Regulatory Authority of India Act providing a separate adjudicative
body




40
 Table of Contents




called
the Telecom Disputes Settlement and Appellate Tribunal, also known as the
Appellate Tribunal, to adjudicate disputes between




·
            a
      licensor (i.e., the DOT) and a
licensee;




·
            regulator
      and service providers;




·
            two
      or more service providers; and




·
            between
      a service provider and consumer advocacy
groups.




Additionally,
the government of India, any Indian state or local government or any person may
apply to the Appellate Tribunal for adjudication of any of the disputes listed
above or appeal any order of the TRAI to the Appellate Tribunal.




Unified
License




In July
2003, the TRAI issued a consultation paper on, among other things, introduction
of a unified telecommunications license, under which it would be possible for a
telecommunications service provider to provide both basic services and cellular
services.  The consultation paper also addresses the possibility of
licensing the provision of international and national long distance services and
internet services under this one unified license.




On
October 27, 2003, the TRAI recommended that considering the vision of the
government of India through various policies (e.g., NTP94, NTP99, Convergence
Bill), technological development, market trends, international trends, the need
to accelerate growth of telephone density, public interest and for the proper
conduct of the Service/telegraphs, it is recommended that within six months
“Unified Licensing” regime should be initiated for all services covering all
geographical areas using any technology.




On
November 15, 2003, the TRAI’s recommendations on unified licensing were accepted
by the Government of India.  They provide for implementing Unified
Licensing for all telecom services within a time bound manner, starting with
Unified Access Licensing.  Based upon the TRAI’s recommendations, the
DOT has issued guidelines for Unified Access (Basic and Cellular) Service
License through their letter No.808-26/2003-VAS dated November 11,
2003.




New
Telecom Policy 1999 and Subsequent Developments




In March
1999, the Indian government introduced its 1999 telecom policy, which sets forth
a new policy framework for telecommunications regulation in
India.  One of the stated goals of the 1999 telecom policy is to
foster greater competition in the telecommunications industry.  To
that end, the 1999 telecom policy liberalizes the regulation of the industry by
allowing multiple basic service providers in any service area, with the number
of new entrants and their mode of service to be determined by the government of
India.  The 1999 telecom policy allows direct interconnectivity and
sharing of infrastructure between a basic service provider and any other type of
service provider in its area of operations.  Such service
providers must negotiate the terms of any interconnection.




In
addition, the 1999 telecom policy provides that either the DOT (now operating
through BSNL) or MTNL may be licensed as an additional cellular operator in any
service area it wishes to enter.  Additional cellular service
operators may be licensed in the future, based on the recommendation of the
TRAI, following its ongoing review (to occur at a minimum of at least once every
two years) of frequency spectrum utilization by existing providers, the optimal
use of available spectrum and the requirements of the market, competition and
the public interest.




Further,
the 1999 telecom policy states that competition in the international long
distance market would be reviewed and VSNL (now Tata Telecommunications Ltd)
would no longer have monopoly in this field.  The Indian government
opened this market for competition in April 2002.  Licenses have been
granted to a few companies like the Reliance Infocomm Limited, Bharti
Tele-Ventures Limited, BSNL and us.  After the change in the terms
and




41
 Table of Contents




conditions
to grant ILD licenses effective January 2006, many operators obtained an ILD
license for provision of international long distance services.  A
total of 15 ILD licenses have been granted.




The 1999
telecom policy states that the Indian telecommunications industry must expand at
a significantly greater pace and the Indian government must liberalize
regulation commensurate with worldwide trends in order for the Indian
telecommunications industry to fully develop in terms of technology, services,
quality and market penetration.  As the teledensity in India has
reached a level of over 28.33% as of June 2008, the industry has achieved a
major requirement of the country in terms of policy objectives.




The TRAI
has issued the IUC regulation 2 of 2003, dated October 29, 2003.  The
IUC Regulation (2 of 2003) covers arrangements among service providers for
payment of Interconnection Usage Charges for Telecommunication Services,
covering Basic Service, which includes WLL (M) services, Cellular Mobile Service
Providers and Long Distance Operators throughout the territory of India &
ILD operators. The TRAI has issued IUC Regulation (1 of 2005) dated January 6,
2005 and implemented from February 1, 2005. In this IUC amendment, the
authority emphasized lower tariffs and linked high sustained subscriber growth,
plans or consistent decline in tariffs to give sustained boost to subscriber
growth and teledensity.  The methodology of imposing ADC per minute
charge kept unchanged. Only the Access Deficit Charge has been changed, ADC on
long distance calls and international calls has been
reduced.  Further, in the amended IUC regulation, BSNL only, and not
the other fixed lines operators, will receive ADC on all incoming international
calls and outgoing calls from Mobile/WLL(M).  This regulation, however
also envisages that all the operators will continue to receive the same ADC as
per earlier regime but our receipts on account of ADC will reduce drastically
after the implementation of this amended regulation.  Accordingly, we
had challenged the regulation in the TDSAT.  The TDSAT did not grant
any stay and the regulation has been implemented from February 1,
2005.  In July 2006, the TDSAT dismissed the same with no orders as to
costs.  The TRAI has issued IUC Regulation (1 of 2006) dated February
28, 2006 which was implemented from March 1, 2006.  In this IUC
amendment, the methodology of imposing ADC was changed from a ‘per minute basis’
charge to a ‘% of AGR basis’ charge. The ADC is now payable by us at the rate of
1.5% of the AGR for Mobile services only. In addition, the ADC on international
calls has also been reduced on a per minute basis.  The TRAI has
issued ADC Regulation (2 of 2007) dated March 21, 2007 and implemented from
April 1, 2007.  In this amended regulation ADC on percentage revenue
share was reduced to 0.75% from existing 1.50% of AGR.  ADC on
outgoing international calls was reduced to zero from existing level of Rs. 0.80
per minute and on incoming international calls reduced to Rs. 1.00 per minute
from existing Rs. 1.60 per minute.




Telecommunication
Interconnection Usage Charges (IUC) Regulation 2008 (2 of 2008) issued by TRAI
on March 27, 2008, and implemented for the period from April 1, 2008 to
September 30, 2008.  The changes in this IUC Regulation are
as:




a)           On
outgoing ILD calls, ADC reduced from Rs. 0.80 to Rs. zero




b)           On
incoming ILD calls, ADC reduced from Rs. 1.60 to Rs. 1.00




c)           ADC
shall be paid at 0.75% reduced instead of at 1.5% of AGR to the
BSNL




Since the
introduction of the ADC regime, the TRAI had maintained that ADC is a depleting
regime and will end effective October 1, 2008.




The
recommendations of the 1999 telecom policy, and certain important subsequent
developments, are as follows:




Basic
Services, including CDMA-based Fixed Wireless and Mobile Services




The 1999
telecom policy permits direct interconnectivity between basic service providers
and any other type of service provider (including another basic service provider
or a cellular service provider) in their areas of operation and sharing of
infrastructure with any type of service provider.  It allows the basic
service providers to directly interconnect with VSNL after the opening up of
national long distance service from January 1, 2000.  The




42
 Table of Contents




basic
service providers have been permitted to utilize last mile linkages or
transmission links within its service area made available by other service
providers.




In
accordance with the 1999 telecom policy, the TRAI undertook a review of
interconnectivity between providers in different service areas.  In
July 2002 the authority adopted a reference interconnect offer regulation which
includes the model reference interconnect offer/draft agreement and the
reference interconnect offer guidelines.  Pursuant to this, service
providers are permitted to interconnect with other service providers on the
basis that they shall not discriminate as to the terms and conditions offered to
different service providers.  Effective May 1, 2003, the authority
implemented a regulation providing a complete set of interconnect usage
charges.  The regulation adopts a calling party pays principle, so
that the operator responsible for origination of a call bears liability for
payment of the interconnect fees for transmission and/or
termination.




In
January 2001, the DOT issued guidelines for basic services, including provisions
for wireless access systems limited within the local area.  In April
2001, the Indian government announced that all basic licensees, including us,
may offer wireless-in-local loop services under their basic service
licenses.  On August 26, 2005, the DOT clarified that fixed wireless
service has the character of limited mobile service and, therefore, is
categorized into limited mobile service within the scope of a basic service
license.




Cellular
Service




The 1999
telecom policy also provides for greater competition among cellular service
providers.  The government of India proposes to review spectrum
utilization from time to time in view of emerging spectrum availability, optimal
use of spectrum, market requirements, competition and the public
interest.  The TRAI will provide recommendations to the government of
India with respect to new licenses at least every two years.




The 1999
telecom policy permits direct interconnectivity between licensed cellular
service providers and any other type of service provider (including another
cellular service provider) in their area of operation including sharing of
infrastructure with any other type of service provider.  The cellular
service providers have been allowed to directly interconnect with the VSNL after
opening of national long distance from January 1,
2000.  Interconnectivity between service providers in different
service areas is now governed by the July 2002 reference interconnect offer
regulation and the May 2003 interconnection usage charges
regulation.  With the interconnection usage charges regulation and
related tariff changes, the TRAI introduced the calling party pays principle,
resulting in the elimination of customer charges (other than roaming charges)
for incoming cellular calls.




In April
2008, we received in-principal approval to use CDMA technology under the
existing Cellular Mobile Telephone Service (CMTS) License for Delhi and Mumbai
service areas.  We will use CDMA technology (in addition to GSM
technology being used by us) under the existing Cellular Mobile Telephone
Service (CMTS) License for Delhi and Mumbai service areas.




Unified
Access License




In
November 2003, the DOT issued guidelines for the Unified Access (Basic and
Cellular) Services License; which permit the provision of both basic and
cellular services (with mobility) within a service area.  We have
submitted a request to the DOT to migrate to UAS Licenses for our service area
under mobile licenses for Delhi and Mumbai to be able to provide services at par
with other operators in these areas.  In September 2006, our request
for migration of our CMTS Licenses to UAS Licenses as our operating cellular
service in the licensed area was not accepted by the DOT.  In October
2006, we sought reconsideration and grant of permission for migration to UAS
Licenses.




The DOT
has accepted our request regarding migration to Unified Access Services Licenses
and Amendment to License Agreements regarding spectrum allocation using dual
technology for Delhi and Mumbai service areas.  In July 2008, we
submitted requested information to the DOT.




43
 Table of Contents




Domestic
Long Distance




On August
13, 2000, the Indian government published guidelines for the liberalization of
the domestic long distance market subsequent to which applications were received
for domestic long distance licenses.  The Bharti Group and Reliance
Group have been awarded domestic long distance licenses.  These
guidelines do not restrict the number of new entrants into this market, but
entrants must satisfy a number of requirements.




In
addition, entrants into the domestic long distance market must pay a one time
entry fee of Rs.1 billion and provide bank guarantees of Rs.4 billion which will
be refunded upon completion of their network obligations.




Effective
January 1, 2006, the Government, with a view to promote growth of NLD service
and also to encourage competition, modified and simplified the terms and
conditions for NLD service as follows:




(i)
            Reduced
      the entry fee for new NLD licenses from Rs. 100 crore to Rs. 2.5 crore,
      and also reduced the annual license fee for NLDlicenses from 15%
      to 6% of AGR.




(ii)
            Eliminated
      the need to have mandatory roll out of obligations for future NLD licenses
      and existing licenses.




(iii)
            Reduced
      the net worth requirement and paid up capital requirement of the applicant
      company to Rs. 2.5 crore from Rs. 2,500 crore and Rs. 250 crore,
      respectively.




(iv)
            Permitted
      NLDservice
      providers to access the subscribers directly for provision of leased
      circuits/closed user groups, i.e. they can provide last mile
      connectivity.




On May
10, 2006, we were awarded a license for providing national long distance (NLD)
service.  Since then we have carried our own domestic long distance
service between Mumbai and Delhi on leased bandwidth.




International
Long Distance




The
Indian government has recently issued licenses to several private sector
companies for the provision of international long distance
services.




In
December 2005, the Government, with a view to promote growth of ILD service and
also to encourage competition, modified and simplified the terms and conditions
for ILD service as follows:




(i)
            Reduced
      the Entry Fee for ILD from RS. 25 crore to Rs. 2.5
  crore.




(ii)
            Reduced
      the annual license fee for ILD licenses from 15% to 6% of
    AGR.




(iii)
            Eliminated
      the need to have mandatory roll out obligation for ILD service licensees
      except for having at least one switch in
India.




(iv)
            Permitted
      ILD service providers to access the subscribers directly only for
      provision of leased circuits/closed user
groups.




(v)
            Set
      the net worth and paid up capital requirements of the applicant company
      for ILD service license at Rs. 2.5
crore.




On June
18, 2008, we received a license to provide ILD service.




44
 Table of Contents




Other
Service Providers




New
Telecom Policy (NTP) 1999 for providing application like tele-banking,
telemedicine, tele-trading, tele-education, e-commerce and call
centres.  Other Service Providers (OSPs) are allowed to operate by
using infrastructure provided by various Access Service
Providers.  Such OSPs are required to be registered with the
DOT.




Effective
September 2007, the Government decentralized the registrations of call centres
(Domestic and International) under the ‘Other Service Provider’ (OSP) category
and the Telemarketers under ‘Telemarketing’ category from the Department of
Telecom (Headquarters) to the respective Vigilance Telecom Monitoring (VTM)
Cells of 10 circles in the first phase.  The decentralization of
registration has been successful and pendency has come
down.  Therefore, registration under OSP/Telemarketing was
decentralized further to all VTM Cells with effect from June 1,
2008.




Infrastructure
Providers




On June
28, 2007, we were awarded a license for providing Infrastructure Provider
Category-1 (IP-1).  Companies registered as IP-1 can provide assets
such as Dark Fiber, Right of Way, Duct space and Tower.




Provision
of Internet telephony, Internet Services and Broadband services by Access
Providers




Internet
telephony had not been permitted in India.  It has now been decided
that access service providers can provide Internet telephony, Internet services
and Broadband services.  If required, access service providers can use
the network of NLD/ILD service licensee.




IP-II
and ISPs with IP-VPN Licenses




(i)
            The
      Government has decided to do away with IP-II and IP-VPN
      licenses.  Existing IP-II/IP-VPN licensees will be allowed to
      migrate to NLD/ILD service license.




(ii)
            Provisional
      entry fee of IP-VPN on migration to NLD/ILD to be adjusted in entry fee
      and dues to the Government by way of license fee and spectrum charges/or
      refunded as per TDSAT order.




(iii)
            Effective
      January 2006, ISP with Internet telephony (Restricted) charged license fee
      at 6% of AGR.




(iv)
            The
      access providers can provide broadband services including triple play i.e.
      voice, video and data.  ISPs can provide as per terms and
      conditions of license only Internet Access/Internet Content Services,
      whereby Internet has been defined as a global information system that is
      logically linked by a globally unique address based on IP or its
      subsequent enhancement/upgradation.  ISPs cannot provide content
      services on a managed network (virtual/real) not derived from
      Internet.




(v)
            IP-II
      licensees not interested in migrating to NLD/ILD are not permitted to
      provide National/International leased line/bandwidth to individual
      subscribers as per existing IP-II license
  guidelines.




(vi)
            IP-VPN
      licensees not interested in migrating to NLD/ILD are not permitted to
      carry voice traffic over VPN
network.




VSAT
commercial




Annual
License fee charged at 6% of AGR effective January 2006.




45
 Table of Contents




IPTV
Service




We have
launched the IPTV service to our customers of our available fixed line network
as Value Added Service in Mumbai on October 10, 2006 and in Delhi on November 1,
2006 under Basic Service License as Value Added Service.




MPLS
Services (Multi-Protocol Label Switching)




On July
23, 2007, we launched MPLS Service.  MPLS is a backbone for our
various IP Based Services




Keeping
with our trend of introducing modern and latest technologies at affordable rates
to our customers, we utilize IP based MPLS Technology to offer world class
IP-VPN (Virtual Private Network) services.  MPLS was developed to
provide faster data packet movement than traditional IP routing.




The
technology enables secure VPN to be built and allows scalability that will make
it possible for us to offer assured growth to our customers without having to
make significant investments.  We are now geared to provide bandwidth
on demand, IPTV, Video Conferencing, Voice Over IP (VoIP) and a host of other
value added services that could significantly change the way a corporate
business works.




Internet
Telephony:  In August 2007, we started offering Prepaid
Internet Telephony service to subscribers in Delhi and Mumbai.




Internet
Policy




In
November 1998, the government of India announced a new Internet policy, to
increase the usage of the Internet.




Effective
April 1, 2002, the Indian government adopted guidelines under which Internet
service providers could provide Internet telephony services.




The
government of India passed the Information Technology Act, 2000 to facilitate
the development of a secure environment for electronic commerce.  This
Act establishes a regulatory authority for electronic commerce, provides legal
validity to information in the form of electronic records and permits, unless
otherwise agreed, an acceptance of a contract to be expressed by electronic
means of communication.  It facilitates electronic intercourse in
trade and commerce by providing the legal framework for authentication and
origin of electronic record/communication through digital signature and
eliminates uncertainties over writing and signature requirements.




We
believe that as of February 29, 2008 there were approximately 357 licenses for
providing Internet services issued in India.




The
Tariff Order




Effective
May 1, 1999, the TRAI implemented The Telecommunications Tariff Order
1999.  The intention of the tariff order was to protect consumers by
aligning tariffs that telecommunications providers may charge for the service
provided while ensuring the commercial viability of the various service
providers and so encouraging the expansion of the Indian telecommunications
industry.  This “rebalancing” of tariffs is to take place in
stages.  The first stage of tariff rebalancing in May 1999 reduced the
charge per pulse from Rs. 1.40 to Rs. 1.20, decreased local call pulse durations
from five to three minutes (effectively increasing local call charges),
increased domestic and international call pulse durations (effectively reducing
domestic long distance and international call charges) and increased monthly
line rental rates for subscribers that generate more than 200 pulses per month
from Rs. 190 to Rs. 250.  The second stage of tariff rebalance
further reduced domestic long distance and international call charges effective
October 1, 2000 and increased monthly line rental rates to Rs. 250 for all
subscribers effective February 1, 2001.  Domestic long distance call
charges were further reduced significantly with effect from January 14, 2002,
March 7, 2003 and May 1, 2004, and international long distance call charges were
subject to further significant




46
 Table of Contents




reduction
with effect from July 20, 2002, October 21, 2003 and April 10,
2004.  Effective May 1, 2003, as part of its effort to balance the
effects of prior tariff reductions, the TRAI changed the standard plan that we
must offer all customers by increasing monthly rentals for basic services from
Rs. 250 to Rs. 280, reduced the local call pulse duration (for calls made to
fixed and fixed wireless lines) from three minutes to two minutes and the number
of free monthly call pulses.




Since
October 2004, we reduced drastically the ISD tariff. We are offering
different STD rates for different locations.  Calls from Mumbai to
Maharashtra, Goa and MTNL Delhi Network are at Rs. 1.65 per
minute.  We increased the pulse rate between Delhi and Mumbai for
Basic to WLL(M) of our network from 30 sec. to 180 sec. uniform for all plans
excluding One India Plan.  For all other places STD rate is flat Rs.
2.00 per minute from Fixed, WLL(M) and STD rate for Cellular service is Rs.
2.00/1.75 per minute for Mumbai/Delhi.  ISD rates to outside India
are:




Uniform
pulse rates (per minute) across all Plans




From
      Basic & WLL
                (M)
              From
                Cellular
                Postpaid
              From
                Cellular
                PrepaidCountry
              Delhi
              MumbaiUSA,
      UK (fixed), Canada and all
                countries
      with 001 access, Singapore,
                Malaysia,
      Hong Kong, Indonesia,
                Thailand
              Rs.
      6.30
              Rs.
      6.30
              Rs.
      6.30
              Rs.
      6.30UK
      (Mobile), Europe, Gulf, Asia,
                SAARC,
      China, Japan, South Korea,
                Australia,
      Christmas Island and New
                Zealand
              Rs.
      9.20
              Rs.
      9.20
              Rs.
      9.20
              Rs.
      9.20Rest
      of World
              Rs.
      18.00
              Rs.
      18.00
              Rs.
      18.00
              Rs.
      18.00IMMARSAT
              Rs.
      240
              Rs.
      240
              Rs.
      240
              Rs.
      240




Reduced
STD tariff for Basic and Mobile service




We have
reduced the STD tariffs for our Delhi and Mumbai service areas effective May
2008, as follows:




From
            Existing
            ReducedDelhi
            MumbaiMobile
      (GSM & CDMA)
            Rs.
      1.75/1.65 per min.
            Rs.
      1.25 per min.
            Rs.
      1.30 per min.Landline
      to Basic & WLL (M/F)
              between
      MTNL Delhi – Mumbai
            180
      sec. pulse
            180
      sec. pulse
            180
      sec. pulseLandline
      (other than to Basic &
              WLL
      (M/F) between MTNL
              Delhi
      – Mumbai)
            36
      sec. pulse
            60
      sec. pulse
            60
      sec. pulseCDMA
      (FW)
            Rs.
      2.00 per min.
            Rs.
      1.20 per min.
              (60
      sec pulse)
            Rs.
      1.20 per min.
              (60
      sec pulse)




47
 Table of Contents




Roaming
Charges




Tariffs
for Roaming Services became effective from July 2008 at the following
rates:




--For
Prepaid & Postpaid Service




Particulars
              Existing
                Roaming
      Tariff
                Rs.
      per minute
              Revised
                Roaming
      Tariff
                Rs.
      per minuteOutgoing
      calls within visited LSA (local)
              Rs.
      1.40
              Rs.
      1.00Outgoing
      calls beyond visited LSA (STD)
              Rs.
      2.40
              Rs.
      1.50Incoming
      calls under roaming
              Rs.
      1.75
              Rs.
      1.00


Notes:


1.
            No
      fixed monthly/weekly/daily charges on national roaming subscriber will be
      applicable under any plan.


2.
            No
      extra surcharge.


3.
            No
      separate PSTN charges on roaming
calls.


4.
            Receiving
      SMS is free while roaming.




The TRAI
has issued the Telecommunication Tariff (28 amendments) (5 of 2003) dated July
5, 2003.




A tariff
plan once offered by an Access Provider shall be available to a subscriber for a
minimum period of six months from the date of enrollment of the subscriber to
that tariff plan.




Because
we retain the remainder of prices of domestic and international long distance
calls originating on our network, net of interconnect charges, by lowering long
distance rates the tariff reductions have reduced the revenue we receive per
call.  We believe that, to date, the tariff order has not resulted in
significantly higher long distance usage and that, accordingly, the tariff order
has had a negative impact on our revenues and earnings as the lower charges have
not been offset by higher usage.




The
tariff order prescribes a reporting requirement such that a service provider
must report any change in tariff to the TRAI within seven days from
implementation.




The TRAI
has issued the Telecommunication Tariff (36 amendments) Order, 2005 (3 of 2005)
dated April 21, 2005, regarding revised ceiling tariff for different capacities
reduced by 3 to 70% - for higher capacities 70% less than existing market
rate.




Briefly,
the Authority has fixed revised ceiling tariff for the most commonly used
capacities/speed i.e. 64 kbps, 128 kbps, 256 kbps, E1 (speed of 2 Mega bits per
second), DS-3 (speed of 45 Mega bits per second) and STM-1 (speed of 155 Mega
bits per second).  The revised ceiling tariffs (for distance slab
above 500 Km) in respect of DLC are summarized in the Table given
below:




Capacity
      / Speed
              Ceiling
      Tariff
                (Rs.
      in lakhs)64
      Kbps
              0.44128
      Kbps
              0.79256
      Kbps
              1.36E1
      (2 Mbps)
              8.50DS-3
      (45 Mbps)
              62STM-1
      (155 Mbps)
              165




48
 Table of Contents





Foreign
Direct Investment Controls.




Following
is the current Indian government policy on foreign direct investment (FDI) in
the telecom sector:




(i)
            For
      basic Cellular, Value Added Services and Global Mobile Personal
      Communications by Satellite, FDI is permitted up to 49%, subject to
      licensing and security requirements and adherence by the companies (who
      are investing and the companies in which the investment is being made) to
      the license conditions for foreign equity cap and lock-in period for
      transfer and addition of equity and other license
    provisions.




(ii)
            For
      ISPs with gateways, radio paging and end-to-end bandwidth, FDI is
      permitted up to 74% with FDI beyond 49% requiring Government
      approval.  These services would be subject to licensing and
      security requirements.




(iii)
            No
      equity cap is applicable to manufacturing
  activities.




(iv)
            FDI
      up to 100% is allowed for the following activities in the telecom
      sector:




(a)
            ISPs
      not providing gateways (both for satellite and submarine
      cables);




(b)
            Infrastructure
      Providers providing dark fiber (IP Category
I);




(c)
            Electronic
      Mail; and




(d)
            Voice
      Mail.




The above
would be subject to the following conditions:




(a)
            FDI
      up to 100% is allowed subject to the condition that such companies would
      divest 26% of their equity in favour of Indian public in five years, if
      these companies are listed in other parts of the
  world;




(b)
            the
      above services would be subject to licensing and security requirements,
      wherever required; and




(c)
            proposal
      for FDI beyond 49% shall be considered by FIPB on case to case
      basis.




Item4A.
              Unresolved
      Staff Comments


Not
applicable.




Item5.
            Operating
      and Financial Review and Prospects




You should read the following
discussion in conjunction with the “Selected Financial and Operating
Data”and our
consolidated financial statements and the relatednotes, which appear elsewhere in
this report.  Our consolidated financial statements havebeenprepared in
accordance withU.S.GAAP.




5A.
            OperatingResults




Overview




A number
of developments have significantly affected our results of
operations.  These developments and a number of potential developments
may affect our results of operations, liquidity, capital resources and capital
expenditures in future periods.  These developments
include:




49
 Table of Contents




·
            adoption
      of the comprehensive interconnection usage charges regulation based on the
      calling party pays principle, with effect from May 1, 2003 and revision
      from time to time;




·
            our
      expansion into new businesses such as providing cellular and CDMA-based
      fixed wireless and mobile services and the rapid introduction by several
      other operators of low-cost CDMA-based technologies that can be used for
      both fixed wireless and mobile
services;




·
            introduction
      of VOIP and IPTV services;




·
            growing
      competition;




·
            our
      expansion into foreign markets - to date, Nepal and
    Mauritius;




·
            new
      interconnect arrangements with access service providers and
      international/national long distance carriers, including revenue sharing
      on incoming calls;




·
            industry
      consolidation; and




·
            our
      investment programs to expand and modernize our
  network.




Potential
future developments include:




·
            increased
      competition from basic and cellular operators, including the continued
      rapid introduction by several operators of low-cost CDMA-based
      technologies that can be used for both fixed wireless and mobile
      services;




·
            continued
      consolidation in the industry;




·
            further
      rate reductions as a result of intensifying competition or tariff
      reductions;




·
            new
      interconnect agreements with private
operators;




·
            license
      fee revisions, including revisions that may be applied
      retrospectively;




·
            our
      procuring a unified license regime;




·
            the
      benefits of our new International Long Distance License obtained in July
      2008;




·
            our
      laying a submarine cable jointly with BSNL from both the east and west
      coasts of India to Malaysia and the Middle East,
      respectively,  to carry voice and data traffic with the intent
      to further extend to the US and
Europe




·
            possible
      direct or reverse merger with BSNL;




·
            the
      implementation of voluntary retirement schemes for our
      employees;




·
            transfer
      of our trunk auto exchanges to BSNL on the directions of DOT;
      and




·
            further
      regulatory changes.




Our
future results of operations are also likely to be affected by macroeconomic
trends such as the rate of growth of the Indian economy, particularly in Delhi
and Mumbai, and the introduction of new technologies and products by our
competitors and us.  Many of these factors are beyond our
control.




50
 Table of Contents




Critical
Accounting Policies and Estimates




For
fiscal year 2008, we have prepared the consolidated financial statements in
accordance with US GAAP, and the financial statements for the years ended March
31, 2006 and March 31, 2007 are also so presented.




Our
accounting policies are described in Note 2 of the Notes to our consolidated
financial statements. Our consolidated financial statements which are part of
this Annual Report are prepared in conformity with US GAAP, which require us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates. We consider
the following policies to be most critical in understanding the judgments that
are involved in preparing our financial statements and the uncertainties that
could impact our results of operations, financial condition and cash
flows.




Recognition of Revenues.  Revenues include
amounts invoiced for call revenue, fixed monthly rental charges, roaming
charges, activation fees, internet services, access and interconnection revenue
and fees for value added services (‘VAS’).  Revenues for fixed line
and cellular telephonic services are recognized based upon metered call units
(MCU) of traffic processed.  Rental revenues and leased circuits
rentals are recognized based upon contracted fees schedule.  Revenues
from internet services are recognized based on usage by
subscribers.  Revenues associated with access and interconnection for
usage of our telephone network by other operators for local, national long
distance and international long distance calls are recognized in accordance with
the Interconnect Usage Charges Regulation released by the TRAI.  The
TRAI regulation specifies per minute rates for metered call units (MCU) of
traffic terminated on our network.  Revenues are shown net of service
tax and applicable discounts and allowance.  Unbilled receivables
represent revenues recognized in respect of services provided from the last bill
cycle date to the end of the year.  These are billed in subsequent
periods as per the terms of the billing plans.  Billings in advance
for services to be rendered and amounts charged for new connections are
classified in current liabilities under the heading “Deferred
income”.  Amounts charged for new connections are recognized over the
average life of the customer relationship.  A significant portion of
our revenue is derived from interconnect and access charges for calls
terminating at our network.  The related rules and telecommunication
industry related policies are framed and determined by the Government of India
through its departments and regulatory authorities such as the DOT and the
TRAI.  Since, interconnect and access charges are presently governed
by IUC regime, we have not entered into separate agreements with certain other
operators.  Any subsequent amendment to the presently applicable
guidelines with retrospective effect relating to tariff and interconnect/ access
charges will impact our revenues significantly.




For the
year ended March 31, 2008, a 10% increase or decrease in the rates for call
revenue, including public call office revenue, would have increased or decreased
the total revenue by approximately Rs.1,762 million. A 2% increase or decrease
in metered call units in respect of fixed line call revenue, including public
call office revenue, would have increased or decreased the total revenue by
approximately Rs.352 million for the year ended March 31,
2008.  Further, a 5% increase or decrease in rental charges would have
increased or decreased the total revenue by approximately Rs.589 million, as
applicable, while a 5% increase or decrease in rates for interconnection
services would have increased or decreased the total revenue by approximately
Rs.240 million.




License
Fees.  We are paying license fee and spectrum charges to DOT in
accordance with conditions governing license fee for Basic Telephone Service and
Cellular Telephone Service prescribed by DOT under the Revenues Sharing Regime,
whereby license fee is computed  at a specified percentage of adjusted
gross revenue.  The license fee is expensed as incurred.  In
view of the uncertain political environment and the fact that the license fee
is determined on the basis of guidelines prescribed by regulatory
authorities, the license fees is subject to change in the event any of these
guidelines are modified subsequently with retrospective effect. During the year
ended March 31, 2008, the applicable percentage of license fee was 10%. A change
in the specified percentage to 12% or 8% would have increased or decreased the
license fee charges by approximately Rs.889 million.  Refer to the
discussion in the ‘Comparison of Year Ended March 31, 2008 with Year Ended March
31, 2007’ under analysis of Results of Operation below.




Network
Charges.  Charges associated with access to and interconnection
to other operators’ network by us for local, national long distance and
international long distance calls are recognized in accordance with the
Interconnect Usage Charges Regulation released by the TRAI, where applicable,
and in accordance with the terms




51
 Table of Contents




of
agreements entered into with other operators.  TRAI regulation
specifies per minute charges for metered call units (MCU) of traffic terminated
on the other operators’ network.  In view of the uncertain political
environment and the fact that the network charges are determined on the basis of
guidelines prescribed by regulatory authorities, the network charges are
subject to change in the event any of these guidelines are modified subsequently
with retrospective effect.  Refer to the discussion in
the  ‘Comparison of Year Ended March 31, 2008 with Year Ended March
31, 2007’ under analysis of Results of Operation below.




Pension and Other Retirement
Benefits.  We sponsor pension and other retirement plans in
various forms covering substantially all employees who meet eligibility
requirements. Several statistical and other factors, which attempt to anticipate
future events, are used in calculating the expense and liability related to the
plans.  These factors include assumptions about the discount rate,
expected return on plan assets and rate of future compensation increases as
determined by us, within certain guidelines.  In addition, we also use
subjective factors such as withdrawal and mortality rates to estimate these
factors.  The actuarial assumptions used by us may differ materially
from actual results due to changing market and economic conditions, higher or
lower withdrawal rates or longer or shorter life spans of
participants.  These differences and the fact we have not invested
pension and other retirement benefit funds to cover retirement liability may
result in a significant impact to the amount of pension and other retirement
benefit expense recorded by us.  Holding all other factors constant, a
1% decrease or increase in the discount rate would increase or decrease the
projected pension and postretirement benefit obligations by approximately
Rs.3,480 million and Rs.3,150 million, respectively.  During the year,
we made an adhoc arrangement of medical scheme for retirees with effect from
September 1, 2007.  According to this adhoc arrangement the respective
units were allowed to settle such claims on case to case basis.  This
scheme was also discontinued with effect from March 20, 2008; however, the
employees who are under treatment will continue to get the benefits till
discharge from the hospital.  We are in the process to finalize an
alternate medical scheme.




Income
Taxes.  In accordance with the provisions of SFAS 109,
Accounting for Income Taxes, income taxes are accounted for under the asset and
liability method.  Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss
carry-forwards.  Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statements of income in the period such
changes are enacted.  We assess the likelihood that our deferred tax
assets will be recovered from future taxable income and to the extent we believe
that recovery is not likely, we establish a valuation allowance.  The
valuation allowance is based on our estimates of taxable income and the period
over which our deferred tax assets will be recoverable. Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets.  In the event that actual results differ from
these estimates or we adjust these estimates in future periods we may need to
establish an additional valuation allowance which could materially impact our
financial position and results of operations.  The enacted tax rate
applicable to us was 33.99% during the year ended March 31, 2008.  A
1% increase or decrease in the tax rate to 34.99% or 32.99% would have increased
or decreased the income tax expense for the year by Rs.128 million.




As per
section 80IA of the Indian Income Tax Act, 1961 a company, which starts to
operate telecommunication services at any time on or after April 1, 1995, but
before March 31, 2000, is entitled to a tax holiday for a period of 10 years
beginning with the year in which such services are started. As per the tax
holiday, 100% of the profits derived from such services are exempt from tax in
the first 5 years, and 30% of such profits are exempt from tax for the next 5
years.  We, on the basis of advice from our legal counsel, have
historically claimed such benefit.  Our claim had been rejected at the
first appellate level and the case has been referred to the Committee of
Disputes, which is a body formed by the Government to settle disputes between
Government controlled undertakings and the Government. The Committee has
referred the case to the Tax appellate authorities for reconsideration. During
the year ended March 31, 2006, the case has been set aside by the Income Tax
Appellate Authority for the assessment years 1998-99, 1999-00, 2000-01 and
2002-03 and has referred the matter back to the Assessing Officer for a fresh
assessment after hearing the case again. For the years ending up to and
including March 31, 2006, considering that the benefit claimed by us in the
above years may not be ultimately allowed by tax authorities, the provision for
current taxes in these years had been accounted in the basis of normal tax
rates. During the year 2006-07 the assessing officer made fresh assessment for
calculation of deduction u/s 80IA of the Indian Income Tax Act, 1961 and allowed
partial benefit to us.We have has filed
appeals against that partial allowance to




52
 Table of Contents




the
higher authority. (Also refer
to Note 22 (b) (ii) to the consolidated financial
statements).During the year ended March 31, 2008, we received
funds from Income Tax Authority in respect of penalty levied for the years
1995-96, 1996-97, 2000-01 and 2001-02.  These penalty refunds pertain
to the claims made by us under 801A of the Indian Income Tax Act.  The
penalty amount has been refunded by the income tax department along with
interest thereon which has duly been accounted for in the statement of
operations for the year ended March 31, 2008.  An excess provision
amounting to Rs.6,050 million were adjusted to the tax expenses during the
year.




Legal
Contingencies.  As discussed in Note 22 to the consolidated
financial statements, legal proceedings covering a wide range of matters are
pending or threatened against us.  We have accrued amounts as
appropriate that represent our estimate of the probable outcome of these
matters. The judgments we make with regard to whether to establish a reserve are
based on an evaluation of all relevant factors by internal and external legal
counsel, as well as subject matter experts and is based upon an analysis of
potential results, assuming a combination of litigation and settlement
strategies.  Claims are continually monitored and reevaluated as new
information is obtained.  We may not establish a liability for a
particular matter until long after the litigation is filed, once a liability
becomes probable and estimable. The actual settlement of such matters could
differ from the judgments made in determining how much, if any, to
accrue.  We do not believe these proceedings will have a material
adverse effect on our consolidated financial position.  While we
believe that our accruals for these matters are adequate, if the actual loss
from a loss contingency is significantly different than the estimated
loss, our results of operations may be over or understated.




Recoverability of DOT
Receivables.  We are a Government Company under the Indian
Companies Act.  As of March 31, 2008, the Government owned 56.25% of
our issued share capital.  Consequently, the Government, acting
through the DOT, continues to control us and will have the power to determine
the outcome of transactions with the DOT or the assertion of claims against the
DOT.  We also provide and receive services to/from other Governmental
departments and other public sector organizations on normal commercial
terms.  Refer to Notes 3, 19, 22 and 25 to the consolidated financial
statements for a further discussion on our related party transactions and
significant risks and uncertainties.  The receivables from the DOT
constitute a significant portion of our assets and our assessment of the
recoverability of these assets involves critical accounting
estimates.  The assessments reflect management’s best assumptions and
estimates. Significant management judgment is involved in estimating these
factors, and they include inherent uncertainties.  Management
periodically evaluates and updates the estimates based on the conditions that
influence these factors. The variability of these factors depends on a number of
conditions, including uncertainty about future events, and thus our accounting
estimates may change from period to period. If other assumptions and estimates
had been used in the current period, the balances for these assets could have
been materially impacted.  Furthermore, if management uses different
assumptions or if different conditions occur in future periods, future operating
results could be materially impacted.




Allowance for Accounts
Receivable.  We estimate the amount of uncollectible
receivables each period and establish an allowance for uncollectible amounts.
The amount of the allowance is based on the age of unpaid amounts, information
about the creditworthiness of customers, and other relevant information.
Estimates of uncollectible amounts are revised each period, and changes are
recorded in the period they become known.




Estimated Useful Lives of
Property And Equipment.  We estimate the useful lives of plant
and equipment in order to determine the amount of depreciation expense to be
recorded during any reporting period.  If technological changes were
to occur more rapidly than anticipated or in a different form than anticipated,
the useful lives assigned to these assets may need to be shortened, resulting in
the recognition of increased depreciation expense in future periods. Likewise,
if the anticipated technological or other changes occur more slowly than
expected, the useful lives could be extended. This could result in a reduction
of depreciation expense in future periods.  Further, property and
equipment are being depreciated over their useful lives which exceed the license
term since the Company believes that its licenses will be extended beyond their
current term.  A one-year decrease or increase in the useful life of
these assets would have increased or decreased depreciation expense by
approximately Rs.846 million and Rs.713 million, respectively.




Impairment of Long-Lived
Assets. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” we review these types of assets for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable over the
remaining life of the asset or asset group. In order to determine if the asset
or asset group is recoverable, we determine if the expected future undiscounted
cash flows directly related to the asset or asset group are less than
the




53
 Table of Contents




carrying
amount of the asset or asset group.  If so, we then determine if the
carrying amount of the asset or asset group exceeds its fair value. We
determine fair value using estimated discounted cash flows.  If
impairment is indicated, the asset or asset group is written down to its fair
value. Assets to be disposed are reported at the lower of the carrying value or
the fair value less cost to sell.  The discounted cash flows
calculation uses various assumptions and estimates regarding future revenue -
which is a factor of the future subscriber base and the average revenue per
subscriber, expenses, terminal values of the assets and the cash flows
projections over the estimated remaining useful life of the asset or asset
group. These forecasts are subject to changes in external factors including
adverse regulatory and legal rulings.  We carried out an impairment
review of our long lived assets in 2008.  Based on our review, the
expected future cash flows directly associated with the asset groups exceed
their carrying amount and hence there is no impairment of long lived assets in
2008.




Impairment of Held
toMaturity
Securities.  We have invested Rs. 1,000 million in 8.75%
cumulative preference shares of ITI Limited (“ITI”) and Rs.2,500 million in
bonds issued by Maharashtra Krishna Valley Development Corporation (“MKVDC”), a
wholly owned subsidiary of Government of Maharashtra.




The ITI
share purchase agreement includes a provision for a letter of comfort from
Department of Telecommunication (Government of India) to us endorsing the
investment and also provides us a right to set off amounts receivable in respect
of principal outstanding from the dues payable to ITI, in connection with our
purchase of exchanges and cable supplies.




As of
September 30, 2005, ITI had not redeemed the first tranche amounting to Rs. 200
million as per the repayment schedule and ITI had requested an extension on the
redemption dates.  However, we have not accepted ITI’s request and
have looked to the DOT’s letter of comfort and requested settlement of the first
repayment tranche of Rs. 200 million.




As of
September 30, 2006, ITI has not redeemed both the first and second tranches
amounting to Rs. 200 million each as per the original repayment
schedule.




As of
September 30, 2007, ITI had not yet redeemed the first, second and third
tranches amounting to Rs. 200 million each pursuant to the original repayment
schedule.




As of
September 30, 2008, another tranche of Rs. 200 million will become due from
ITI.




Management
has evaluated the investment in ITI for impairment, on the basis that the first,
second and third tranches for repayment have not been settled by
ITI.  Management has evaluated the financial condition and business
outlook of ITI including the new purchase orders received by ITI for supply of
GSM equipment from BSNL and us.  We currently have accounts payable to
ITI of Rs.706 million as at March 31, 2007 which, pursuant to the share
agreement, we can legally settle against the repayments owing under the
cumulative preference shares.  In addition, we have the intent and
ability to retain the debt security for a period of time sufficient to allow for
anticipated recovery in value.




Based on
this evaluation and specifically considering that the share purchase agreement
includes a provision for a letter of comfort from Department of
Telecommunication (Government of India) to us endorsing the investment and also
provides us a right to set off amounts receivable in respect of principal
outstanding from the dues payable to ITI.  However, out of the total
investment of Rs. 1,000 million, Rs. 800 million has been charged as an
impairment during the 2008 fiscal year.




The MKVDC
bonds have a coupon rate of 11.5% per annum and are redeemable at the end of the
10th year from the date of allotment (May 31, 2002).  The repayment of
these bonds is guaranteed by the Government of Mahrashtra.  Based on
our assessment of carrying value of investment in MKVDC bonds we believe that
there is no impairment of investments as of March 31, 2008.




54
 Table of Contents




Revenue




We derive
a substantial portion of our revenue from local, domestic long distance and
international calls that originate on our network and from telephone
rentals.  We realize revenue in the form of installation charges,
ongoing subscription/rental charges and usage charges.  We also derive
revenues from providing Internet and broadband services, our Intelligent Network
services, public call office or public payphone services, interconnection with
basic service, long distance service and cellular operators, narrow-band ISDN
services, leased-line services, telex services, trunk services, VOIP, IPTV,
GSM cellular services in Delhi and Mumbai, those value-added services for
which we charge a fee and, since December 2001, CDMA-based mobile and fixed
wireless services in Delhi and in Mumbai.




We only
began receiving interconnect payments in respect of incoming international long
distance calls since April 1, 2002, when several interconnect agreements,
including our agreement with VSNL, took effect. In fiscal 2003, revenue sharing
with BSNL and other operators for incoming and outgoing domestic long distance
or subscriber trunk dialing calls was done on the basis of the TRAI’s
Interconnect Usage Charges Regulation 2003 (1 of 2003) implemented from May 1,
2003 and modified by Interconnect Usage Charges Regulation 2003 (2 of 2003)
effective February 1, 2004.  For April 2003, these charges were
accounted per the earlier arrangement. Call revenue is generally a function of
the number of access lines in service, the volume of traffic carried and the
level of call charges.  Telephone and other rental revenue is a
function of the number of access lines in service and the rental tariffs we
charge.  Public call office revenue is driven by the number of our
public call offices, the volume of traffic carried and the level of call
charges.  Interconnect revenue is a function of the contractual and
legal/regulatory rates prescribed for interconnection and the level of call
volumes originating from sources that pay interconnect fees.  For the
year ended March 31, 2008, there has been a decrease in the number of fixed
lines that, coupled with a decrease in the related tariffs, has resulted in
decreased revenues for these services. However, there has been an increase in
revenue due to increased GSM lines and broadband connections, despite a drastic
decrease in related tariffs.




The May
1999 tariff order provided for a “rebalancing” of tariffs in stages to reduce
subsidization of local calls by long distance users.  The first stage
of tariff rebalancing in May 1999 reduced the charge per pulse from Rs.1.40 to
Rs.1.20, decreased local call pulse durations from five to three minutes
(effectively increasing local call charges), increased domestic and
international call pulse durations (effectively reducing domestic long distance
and international call charges) and increased monthly line rental rates for
subscribers that generate more than 200 pulses per month from Rs.190 to
Rs.250.  The second stage of tariff rebalancing further reduced
domestic long distance and international call charges effective October 1, 2000
and increased monthly line rental rates to Rs.250 for all subscribers effective
February 1, 2001.  Domestic long distance call charges were further
reduced significantly with effect from January 14, 2002, March 7, 2003, May 1,
2004, and October 2, 2004, and international long distance call charges were
subject to further significant reduction with effect from July 20, 2002, October
21, 2003 and April 10, 2004.  Primarily as a result of these tariff
reductions, excluding termination revenues, our average revenue per access line
in service has been declining.  Any further tariff rebalancing may
result in lower call charges, particularly for domestic long distance and
international calls, which might be offset by an increase in rental
tariffs.  We are not able to assess at this time the full long-term
impact that the tariff order will have on subscriber calling patterns or on
revenues.  As competition intensifies, we expect call charges will
likely decline and, to the extent that call volumes do not increase as a result
of lower call charges, excluding termination revenues, our revenue per access
line in service may continue to decline.




We expect
that call revenue and revenue from public call offices may decline as a
percentage of total revenue as demand for our other products and services,
particularly our GSM cellular services, increases.




Cost
of Revenues




Our
operating costs include staff costs, license fees and network utilization
charges, depreciation expenses, maintenance costs and commissions paid to public
call office franchise operators.




Staff
costs.  In general, employees receive a base salary and
salary-related housing and other allowances, productivity-based incentive
payments and certain benefits, including a pension/gratuity plan and medical
benefits for themselves and certain members of their immediate
families.  The decrease in our staff costs was primarily
due




55
 Table of Contents




to VRS in
previous years and also a decrease in retirement benefit charges on account of
an increase in the discount rate used to value our post retirement obligations
to employees.  This is in line with the general increase in interest
rates in the economy over the same period.




In fiscal
2000, substantially all of our non-executive employees originally employed by
the DOT decided to terminate their services with the DOT and accept employment
with us effective November 1998.  Under the option given to them for
pension benefits, most of our absorbed employees have opted for retaining
pension benefits in accordance with the Central government pension rules. Some
other employees have opted for retirement rules, which are applicable to our
directly recruited employees, and opted to draw pro ratapension until their
absorption.  Accordingly, with effect from November 1, 1998 we started
accruing for pension and gratuity for these employees.  In
August/September 2002, the DOT indicated that the government would pay for the
pension benefits of the government employees absorbed by us who opted for either
the Central government scheme of pension or for the pro ratapension scheme for
the period served with the DOT.  However, the terms of such payments
are in the process of finalization.  Once these terms are finalized
and the payments are made to the DOT for the period of employment of these
employees with us, we expect that our liability for post retirement obligations
would be limited to contributions on the basis of the rules to be prescribed by
the government of India.  Presently, in the absence of any further
movement from the Government, we are discharging all such
liabilities.




Approximately
98% of our executive employees have accepted absorption into our company and are
now our direct employees.  These employees are entitled to certain
pension and gratuity benefits from the government of India.




We have
finalized a new compensation structure for our senior executive
employees.  The new structure provides for higher salaries and
benefits for our senior executive employees upon exercise of their option for
MTNL absorption.




As a
public sector enterprise, we abide by general DOT and Department of Public
Sector Enterprises personnel policies that, among other things, limit our
ability to reduce employment levels and control the amount of salaries and other
remuneration that we may pay to our employees.  Our employee
productivity measured by access lines in service per employee has been
increasing steadily but remains significantly lower than the Asian and global
averages.  During the year ended March 31, 2005, MTNL implemented a
Voluntary Retirement Scheme (VRS) for executive as well as non-executive
employees.  Under the scheme, the eligible employees were given an
option to voluntarily take retirement from service and make their choice within
the specified period of time.  The scheme provided for ex gratia
payments to eligible employees opting for voluntary retirement based on the
respective employee’s salary and term of employment.  As of March 31,
2007, a total of 3,947 employees retired under this scheme.




License fees and network
utilization charges.  Under our previous arrangement with the
DOT, the license fee for providing basic services was fixed at Rs.900 per access
line in service.  This arrangement expired on March 31,
2000.  In the absence of any new arrangement with the DOT, we
continued to pay license fees during fiscal 2001 on the same terms as our
previous arrangement.  On April 9, 2001, the DOT communicated that the
annual license fee will be revised and shall be payable at 12% of adjusted gross
revenue from basic telephone service effective from August 1, 1999, as
applicable to private operators from that date.  On September 5, 2001,
the DOT amended its position and indicated that the date from which the revised
license fees will be payable will be notified later. Accordingly, the
Company paid license fees  based on the earlier arrangement up to the
year ended March 31, 2001 and on the revised basis from April 1, 2001 onwards.
Subsequent to the year ended March 31, 2004 in a meeting with  DOT it
has been agreed that the license fee is payable at 12% of the adjusted gross
revenue with effect from August 1, 1999 and the charges for the same have been
accrued in the year ended March 31, 2004.  Further, license fee has
been revised at 10% of Adjusted Gross Revenue with effect from April 1,
2004. Under our previous arrangement with BSNL, we paid network utilization
charges to BSNL as a fixed percentage of the amount of usage and other charges
billed to our customers for our services.  Our network utilization
arrangement with BSNL expired on March 31, 2001.  To date no agreement
for networking charges has been entered into which determines the basis of
revenue sharing for incoming or outgoing domestic long distance or subscriber
trunk dialing calls through interconnection with BSNL’s network.  In
absence of the same, for fiscal 2003, the interconnection charges on domestic
long distance calls have been accrued on the basis of the rates that were
payable by other basic service operators in the country.  We are
in the process of finalizing a new agreement with BSNL.




56
 Table of Contents




In fiscal
2004, revenue sharing with BSNL and other operators for incoming and outgoing
domestic long distance or subscriber trunk dialing calls was done on the basis
of  TRAI’s Interconnect Usage Charges Regulation 2003 (1 of 2003)
implemented from May 1, 2003 and modified by Interconnect Usage Charges
Regulation 2003 (2 of 2003) effective February 1, 2004.  For April
2003, these charges were accounted per the earlier arrangement.




In fiscal
2005, TRAI’s IUC regulation (1 of 2003) as modified by IUC regulation 2003 (1 of
2004) was applicable till January 2005, for February and March 2005, regulation
as modified by amendment (1 of 2005) was applicable.




In fiscal
2006, TRAI’s IUC Regulation (1 of 2006) dated February 28, 2006 was applicable
through March 31, 2007.




In fiscal
2007, TRAI has issued ADC Regulation (2 of 2007) dated March 21, 2007 and
implemented from April 1, 2007.  In this amended regulation ADC on
percentage revenue share was reduced to 0.75% from existing 1.50% of
AGR.  ADC on outgoing international calls has been reduced to zero
from an existing level of Rs. 0.80 per minute and on incoming international
calls reduced to Rs. 1.00 per minute from existing Rs. 1.60 per
minute.




In fiscal
2007, TRAI issued the Telecommunication Tariff (Forty fourth amendment) Order,
2007 regarding National Roaming Charges and applicable from February 15,
2007.  The salient features are as follows:




1.
            Entry
      Fee (One time charge)
            Nil2.
            Monthly
      Access Charge for Regional or National Roaming
            Nil3.
            Composite
      charge including Public Switched Telecom
              Network
      (PSTN) charges for incoming call while Regional or
              National
      Roaming Ceiling
            Rs.
      1.75 per minute4.
            Composite
      charge including Public Switched Telecom
              Network
      (PSTN) charges for outgoing local call while
              Regional
      or National Roaming Ceiling
            Rs.
      1.40 per minute5.
            Composite
      charge including Public Switched Telecom
              Network
      (PSTN) charges for Outgoing local distance (inter
              circle)
      call while Regional or National Roaming Ceiling
            Rs.
      2.40 per minute6.
            Surcharge
      while Regional or National Roaming
            Nil7.
            Incoming
      Short Message Services (SMS) while roaming
            Nil





In fiscal
2007, TRAI issued the Telecommunication Tariff (Forty fifth amendment) Order,
2007 regarding unsolicited commercial communication and applicable from June 5,
2007.  The salient features are as follows:




ITEM
              TARIFF1.  Unsolicited
      commercial communication made from
                Basic
      Services (other than ISDN)
              Rs.500/-
      for each unsolicited commercial
                communication
      referred against item 1.2.  Unsolicited
      commercial communication made from
                Cellular
      Mobile Telecom Service (CMTS)
              Rs.500/-
      for each unsolicited commercial
                communication
      referred against item 2.




In fiscal
2007, TRAI issued the Regulation on Port Charges (1 of 2007) and applicable from
April 1, 2007.  The salient features are as under:




Coverage
Charges for ‘Ports’ (other than the Port Charges for Internet, which are
specified in Schedule VI of the Telecommunications Tariff Order
1999)




No.
      of ‘Ports’
            ‘Port’
      Charges (in Rs.) per annum1
      to 16 PCMs
            N*39,00017
      to 32 PCMs
            6,24,000
      + (N-16)*22,50033
      to 64 PCMs
            9,84,000
      + (N-32)*14,50065
      to 128 PCMs
            14,48,000
      + (N-64)*11,500




57
 Table of Contents




‘Port’
Charges covering all switches




129
      to 256 PCMs
            21,84,000
      + (N-128)*10,500





Note - N
refers to the number of ‘Ports’ within the capacity ranges under the column ‘No.
of Ports’.”




Since
Regulation 1 of 2007 of TRAI in relation to payment of port charges is contrary
to the judgment of the Hon’ble TDSAT, dated April 27, 2005 and March 3, 2005,
BSNL has filed Appeal no. 4/2007 against these Regulations before the Hon’ble
TDSAT.  MTNL has also impleaded into this case.




Until the
end of fiscal 2002, all outgoing international long distance calls originating
from our network were subject to interconnection fees payable to BSNL, and we
received no revenue from incoming international long distance calls into our
network.  We paid interconnect fees to BSNL in respect of outgoing
international long distance calls pursuant to the network utilization
arrangement with BSNL until March 31, 2001 and for fiscal 2002 on the basis of
the rates that were payable by other basic service operators in the
country.  Beginning April 1, 2002, we recorded incoming and outgoing
international long distance traffic pursuant to interconnect agreements we have
signed with several international carriers, most importantly,
VSNL.  As a result of these agreements, we no longer make payments to
BSNL in respect of international long distance traffic.  In addition,
our agreements with the international carriers provide for income in respect of
incoming calls, in addition to payments in respect of outgoing calls originating
from our networks.




For more
information on license fees and network utilization charges, please see
“Information on the Company—Business Overview.”




Inflation




Inflation
in India, as measured by the Indian consumer price index, was 4.6% in 2006, 6.7%
in 2007 and 7.8% in 2008.  Energy price spikes may affect this in the
current year.  We do not believe that inflation in India has had a
material impact on our results of operations in recent
years.  However, the TRAI has been granted the authority to determine
tariffs, and we are therefore restricted in our ability to increase tariffs to
compensate for inflation.  As a result, inflation could adversely
affect our results of operations.  See “Information on the
Company—Business Overview—Tariffs and Other Charges.”




Effect
of New Accounting Pronouncements




There are
a number of new accounting standards that have been issued that will affect our
information presented in accordance with US GAAP.  For a description
of these recent pronouncements, please see Note 2 to our consolidated financial
statements included elsewhere in this report.




Other
Matters




See
“Information on the Company—Business Overview—Legal Proceedings” and Note 22 to
our consolidated financial statements for information on our contingent
liabilities.




We are
selectively targeting expansion opportunities outside India where we can
leverage our expertise and relationships.  We have investments in
Nepal and Mauritius and are currently examining several other
opportunities.  We invested Rs.233.45 million up to fiscal 2004 and
Rs.56.70 million in fiscal 2007 on the Nepal venture, and in respect of the
Mauritius operations, Rs.425.03 million up to fiscal 2006, Rs.170.09 million in
fiscal 2007 and Rs. 142.46 million in fiscal 2008.




In June
2008, we obtained a license from the Department of Telecommunication to provide
international long distance service and we intend to deploy these
services.  We cannot determine at this time what impact entry into
these markets will have on our revenues and results of operations.




58
 Table of Contents




Segment
Information




We have
identified basic and cellular as the two operating segments of
MTNL.  Basic services segment consists of voice, data through local
calls, domestic long distance and international long distance calls on fixed
line services in the cities of Delhi and Mumbai in India. Further, it includes
revenues from Code Division Multiple Access, or CDMA, based cellular services
and internet access services.  Cellular consists of providing cellular
services in cities of Delhi and Mumbai using Global System for Mobile
communications, or GSM, technology.




During
the year ended March 31, 2005, we had not considered cellular services to be a
reportable segment since it did not meet the thresholds of
significance.  However as the cellular services have met the
thresholds of significance during the years ended March 31, 2006, 2007 and 2008,
we have disclosed the segment information for the year ended March 31, 2008 as
well as for the prior years.




During
the previous year we started operations in Mauritius.  However, as the
operations are insignificant as compared to our overall business, the same have
not been considered for separate segment disclosure.




During
the years ended March 31, 2007 and 2008, no single customer has contributed for
revenue in excess of 10% of total revenue.




The
amounts reviewed by the CODM are based on internal accounting policies of the
Company which are different from US GAAP.




Results
of Operations




The
following table sets forth selected income statement data expressed as a
percentage of revenue for the period indicated, derived from financial
statements that are prepared in accordance with US GAAP, included on pages F-1
to F-40 of this annual report.




Fiscal
      Years Ended March 31,2006
            
            
            2007
            
            
            2008Revenues
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Cost
      of revenues (excluding depreciation shown separately
below)
            
            
            (69.1
            %)
            
            
            (71.5
            %)
            
            
            (68.3
            %)Selling,
      general and administrative expenses (excluding depreciation shown
      separately below)
            
            
            (17.2
            %)
            
            
            (19.2
            %)
            
            
            (19.1
            %)Depreciation
            
            
            (17.1
            %)
            
            
            (18.7
            %)
            
            
            (18.6
            %)Postretirement
      medical benefit liability written back
            
            
            -
            
            
            
            12.7
            %
            
            
            -Excess
      liabilities written back
            
            
            1.7
            %
            
            
            1.8
            %
            
            
            0.7
            %Income
      / (loss) from operations
            
            
            (1.7
            %)
            
            
            5.2
            %
            
            
            (5.2
            )%Interest
      and other income, net
            
            
            5.1
            %
            
            
            17.4
            %
            
            
            10.4
            %Income
      before income taxes and share of losses from affiliate
            
            
            3.4
            %
            
            
            22.5
            %
            
            
            5.2
            %Income
      taxes
            
            
            (1.0
            %)
            
            
            2.4
            %
            
            
            0.3
            %Equity
      in (losses) of affiliate
            
            
            (0.1
            %)
            
            
            0.0
            %
            
            
            0.0
            %Net
      income
            
            
            2.3
            %
            
            
            24.9
            %
            
            
            5.5
            %





Comparison
of Year Ended March 31, 2008 with Year Ended March 31, 2007




Revenues: Basic services: Our
revenues from basic services decreased by 4.58% from Rs.37,989 million for the
year ended March 31, 2007 to Rs.36,249 million for the year ended March 31,
2008. The decrease was primarily driven by a decrease in fixed line call
revenue, including public call office (“PCO”) revenue, by 20.27% from Rs.22,103
million for the year ended March 31, 2007 to Rs.17,623 million for the year
ended March 31, 2008 and a decrease in revenue from telephone and other rentals
and broadband services increased 7.20% from Rs.16,320 million for the year ended
March 31, 2007 to Rs.15,146 million for the year ended March 31, 2008. However,
interconnect revenue increased by 56.20% from Rs.2,388 million for the year
ended March 31, 2007 to Rs.3,731 million for the year ended March 31,
2008.




59
 Table of Contents




Call
revenue has gone down despite increase in the average number of connections from
approximately 3,723,000 connections during the year ended March 31, 2007 to
approximately 3,944,000 connections during the year ended March 31, 2008. There
was also a net decrease of 3,660 million units in billed Metered Call Units
(“MCU”), from 25,105 million units during the year ended March 31, 2007 to
21,445 million units during the year ended March 31, 2008. Further, the call
tariff rates were reduced during the current year due to increased competition
in the market, resulting in a fall in average revenue per connection per month
from Rs.770 during the year ended March 31, 2007 to Rs.679 during the current
year, a decrease of Rs. 91 per connection per month.




Cellular services: Our
revenues from cellular services increased by 12.95% from Rs. 7,486 million for
the year ended March 31, 2007 to Rs.8,455 million for the year ended March 31,
2008. The increase was primarily driven by an increase of 981,990 in the average
number of cellular subscribers from approximately 2,012,000 as of March 31, 2007
to approximately 2,994,000 as of March 31, 2008. The same is offset by decrease
in  our income from roaming and prepaid trump by Rs. 570 million from
Rs.4,990 million for the year ended March 31, 2007 to Rs.4,420 million for the
year ended March 31, 2008.




Cost of Revenues: Basic
services: Our cost of revenues has decreased from Rs.28,910 million for
the year ended March 31, 2007 to Rs.25,816 million for the year ended March 31,
2008. The decrease is due to a decrease in interconnection charges by 37% from
Rs 7,937 million for the year ended March 31, 2007 to Rs.5,037 million for the
year ended March 31, 2008 and decrease in license fees by 8.14 % from Rs.4,237
million for the year ended March 31, 2007 to Rs.3,892 million for the year ended
March 31, 2008. However, the same is offset by Rs.800 million as provision made
for impairment in the investments in Preference shares of ITI
Limited.




Cellular services: Our cost of
revenues has increased by Rs.1,119 million from Rs.3,587 million for the year
ended March 31, 2007 to Rs.4,706 million for the year ended March 31, 2008. The
increase is due to increase in interconnect charges by Rs.752 million from
Rs.2,051 million for the year ended March 31, 2007 to Rs. 2,803 million for the
year ended March 31, 2008 and license fees and spectrum charges increase by
Rs.114 million from Rs.818 million in the year ended March 31, 2007 to Rs. 932
million for the year ended March 31, 2008. However, the same is offset to some
extent by decrease in staff costs by Rs.52 million from Rs.197 million for the
year ended March 31, 2007 to Rs.145 million for the year ended March 31,
2008.




As
regards license fees payable as a percentage of the Adjusted Gross Revenues
(“AGR”), the increase is basically due to a 12.95% increase in cellular revenue
as compared to the previous year.




Selling, General and Administrative
Expenses (SG&A)




Basic services: Our selling,
general and administrative expenses went down by 4.31% from Rs.8,224 million
during the year ended March 31, 2007 to Rs.7,869 million during the year ended
March 31, 2008. The decrease is mainly on account of decrease in the provision
for doubtful debtors by Rs.842 million from Rs.996 million for the year ended
March 31, 2007 to Rs.154 million for the year ended March 31, 2008 and staff
cost is also decreased by Rs.442 million from Rs.5,546 million for the year
ended March 31, 2007 to Rs.5,104 million for the year ended March 31, 2008 and
decrease in advertisement cost by Rs.109 million from Rs.396 million during the
year ended March 31, 2007 to Rs.287 million during the year ended March 31,
2008. However, the same is offset by increase in loss on sale of assets by
Rs.438million and loss of assets by Rs.394 million during the year ended March
31, 2008.




Cellular Services: Our
selling, general and administrative expenses gone up by Rs.119 million from Rs.
529 million during the year ended March 31, 2007 to Rs.648 million during the
year ended March 31, 2008. The increase is primarily on account of an increase
in advertisement expenses by Rs.15 million from Rs.51million for the year ended
March 31, 2007 to Rs.66 million for the year ended March 31, 2008 and power and
fuel increased by Rs. 21 million from Rs.53million for the year ended March 31,
2007 to Rs.74 million for the year ended March 31, 2008 and miscelleanous
expenses also increase by Rs.57 million from Rs.70 million for the year ended
March 31, 2007 to Rs.127 million for the year ended March 31, 2008.




60
 Table of Contents




Income from Operations




Basic Services: Our loss from
operations has increased by Rs.4,392 million from a loss from operations of
Rs.350 million for the year ended March 31, 2007 to a loss from operations of
Rs.4,742 million for the year ended March 31, 2008. The increase in operating
loss is mainly due to a 4.58 % decrease in revenue from Rs.37,989 million for
the year ended March 31, 2007 to Rs.36,249 million for the year ended March 31,
2008, and secondly, a decrease due to non-writing back of provision for post
retirement medical liability during the current year which had been written back
by Rs.5,794 million during the previous year ended March 31, 2007, and Rs.800
million provided as provision for impairment of the investments made in the
preference shares of ITI Limited. However, the same is offset to some extent by
a decrease in the selling, general and administrative expenses from Rs.8,224
million for the year ended March 31, 2007 to Rs.7,869 million for the year ended
March 31, 2008 and a decrease in depreciation by Rs.211 million from Rs.7,838
million for the year ended March 31, 2007 to Rs.7,627 million for the year ended
March 31, 2008.




Cellular Services: Our income
from operations has decreased by 10.14% from Rs.2692 million for the year ended
March 31, 2007 to Rs.2,419 million for the year ended March 31, 2008. The
decrease is mainly attributable to increase in costs of Rs.1,119 million from
Rs.3,587 million for the year ended March 31, 2007 to Rs.4,706 million for the
year ended March 31, 2008 and an increase in the selling, general and
administrative expenses from Rs.529 million for the year ended March 31, 2007 to
Rs.648 million for the year ended March 31, 2008. However it is offset by
increase in revenue by Rs.969 million from Rs.7,486 for the year ended March 31,
2007 to Rs.8,455 million for the year ended March 31, 2008.




Interest and Other Income:
During the year ended March 31, 2008, our interest and other income has
decreased by 41% from Rs.7,894 million for the year ended March 31, 2007 to Rs.4
,661 million for the year ended March 31, 2008. The decrease is attributable to
decrease in interest and other income from Rs.6,310 million for the year ended
March 31, 2007 to Rs.2,043 million for the year ended March 31, 2008. However,
the same is offset by a 65% increase in interest from bank deposits from
Rs.1,584 million for the year ended March 31, 2007 to Rs.2,618 million for the
year ended March 31, 2008.




Income Taxes: Income tax
reversal decreased by Rs.962 million from Rs.1,073 million for the year ended
March 31, 2007 to Rs. 121 million for the year ended March 31, 2008. The
decrease in reversal is attributable to increase in the current tax expense by
Rs.909 million from Rs.3,452 million for the year ended March 31, 2007 to
Rs.4,361 million for the year ended March 31, 2008.




The
current tax expense has increased mainly due to adjustments arising from
disallowance of expenses while computation of tax during the year ended March
31, 2008.




The
deferred tax assets have increased largely on account of deferment of charges in
the financial statements in respect of provision for impairment of ITI
investments, depreciation and loss on sale of assets.




Comparison
of Year Ended March 31, 2007 with Year Ended March 31, 2006




Revenues: Basic services: Our
revenues from basic services decreased by 7.84% from Rs.41,219 million for the
year ended March 31, 2006 to Rs.37,989 million for the year ended March 31,
2007. The decrease was primarily driven by a decrease in fixed line call
revenue, including public call office (“PCO”) revenue, by 2.36% from Rs.22,637
million for the year ended March 31, 2006 to Rs.22,103 million for the year
ended March 31, 2007 and a decrease in interconnect revenue by 14.98% from
Rs.2,809 million for the year ended March 31, 2006 to Rs.2,388 million for the
year ended March 31, 2007.  However, revenue from telephone and other
rentals and broadband services increased 4.90% from Rs.15,338 million for the
year ended March 31, 2006 to Rs.16,320 million for the year ended March 31,
2007.




Call
revenue has gone down as a result of a decrease in the average number of
connections from 4,127,530 connections during the year ended March 31, 2006 to
3,723,104 connections during the year ended March 31, 2007. There was also a net
decrease of 3,901 million units in billed Metered Call Units (“MCU”), from
29,006 million units during the year ended March 31, 2006 to 25,105 million
units during the year ended March 31, 2007. Further,




61
 Table of Contents




the call
tariff rates were reduced during the current year due to increased competition
in the market, resulting in a fall in average revenue per connection per month
from Rs.805 during the year ended March 31, 2006 to Rs.770 during the current
year, a decrease of Rs.35 per connection per month.




Cellular services: Our
revenues from cellular services increased by 37.38% from Rs. 5,449 million for
the year ended March 31, 2006 to Rs.7,486 million for the year ended March 31,
2007. The increase was primarily driven by an increase of 600,918 in the average
number of cellular subscribers from 1,411,425 as of March 31, 2006 to 2,012,343
as of March 31, 2007. Due to the increase in subscribers, our income from
roaming and prepaid trump also increased by Rs.1,143 million from Rs.3,847
million for the year ended March 31, 2006 to Rs.4,990 million for the year ended
March 31, 2007.




Cost of Revenues: Basic
services: Our cost of revenues has decreased from Rs.29,595 million for
the year ended March 31, 2006 to Rs.28,910 million for the year ended March 31,
2007. The decrease is due to a decrease in interconnection charges by 35% from
Rs 12,173 million for the year ended March 31, 2006 to Rs.7,973 million for the
year ended March 31, 2007. The decrease is offset by an increase in license fees
by 6,834% from Rs.62 million for the year ended March 31, 2006 to Rs.4,237
million for the year ended March 31, 2007.




The
increase in the license fee is primarily on account of the fact that in the
fiscal year ended March 31, 2006 we had reversed excess license fee Rs.3408
million accounted for years up to March 31, 2005, which reduced the charges for
previous year.




Cellular services: Our cost of
revenues has increased by Rs.914 million from Rs.2,673 million for the year
ended March 31, 2006 to Rs.3,587 million for the year ended March 31, 2007. The
increase is due to (i) an increase in interconnect charges by Rs.708 million
from Rs.1,343 million for the year ended March 31, 2006 to Rs.2,051 million for
the year ended March 31, 2007, and (ii) an increase in license fees by Rs.327
million from Rs.491 million for the year ended March 31, 2006 to Rs.818 million
for the year ended March 31, 2007. However, staff costs decreased by Rs.22
million from Rs.219 million for the year ended March 31, 2006 to Rs.197 million
for the year ended March 31, 2007.




As
regards license fees payable as a percentage of the Adjusted Gross Revenues
(“AGR”), the increase is basically due to a 37.38% increase in cellular revenue
as compared to the prior year.




Selling, General and Administrative
Expenses (SG&A)




Basic services: Our selling,
general and administrative expenses went up by 26% from Rs.6,529 million during
the year ended March 31, 2006 to Rs.8,224 million during the year ended March
31, 2007. The increase is mainly on account of an increase in the charges
accrued for provisions required against potential bad debt. During the current
year the changes for provision for doubtful debtors was Rs.1023 million.
Advertisement costs increased by 19% from Rs.333 million during the year ended
March 31, 2006 to Rs.396 million during the year ended March 31,
2007.




Cellular Services: Our
selling, general and administrative expenses went down by Rs.629 million from
Rs.1,158 million during the year ended March 31, 2006 to Rs.529 million during
the year ended March 31, 2007. The decrease is primarily on account of an
decrease in charges accrued for provisions required against potential bad debt
by Rs.600 million from Rs.780 million for the year ended March 31, 2006 to
Rs.180 million for the year ended March 31, 2007and decrease in advertisement
expenses by Rs.31 million from Rs.82 million for the year ended March 31, 2006
to Rs.51 million for the year ended March 31, 2007.




Income from Operations




Basic Services: Our loss from
operations has decreased by Rs.1,076 million from a loss from operations of
Rs.1,426 million for the year ended March 31, 2006 to a loss from operations of
Rs.350 million for the year ended March 31, 2007. The decrease in operating loss
is mainly attributable to medical benefits written back amounting to Rs. 5,794
million and the same is offset by (i) a 7.84% decrease in revenue from Rs.41,219
million for the year ended March 31, 2006 to Rs.37,989 million for the year
ended March 31, 2007, (ii) an increase in the selling,




62
 Table of Contents




general
and administrative expenses from Rs.6,529 million for the year ended March 31,
2006 to Rs.8,224 million for the year ended March 31, 2007, and (iii) an
increase in depreciation by Rs.384 million from Rs.7,454 million for the year
ended March 31, 2006 to Rs.7,838 million for the year ended March 31,
2007.




Cellular Services: Our income
from operations has increased by 180% from Rs.963 million for the year ended
March 31, 2006 to Rs. 2,692 million for the year ended March 31, 2007. The
increase is mainly attributable to a 37.38% increase in revenue from Rs.5,449
million for the year ended March 31, 2006 to Rs.7,486 million for the year ended
March 31, 2007, and a decrease in our selling, general and administrative
expenses by 54% from Rs.1,158 million for the year ended March 31, 2006 to
Rs.529 million for the year ended March 31, 2007. However, it is offset to some
extent due to increases in the cost of revenues from Rs.2,673 million for the
year ended March 31, 2006 to Rs.3,587 million for the year ended March 31,
2007.




Interest and Other Income:
During the year ended March 31, 2007, our interest and other income has
increased by 231% from Rs.2,388 million for the year ended March 31, 2006 to
Rs.7,894 million for the year ended March 31, 2007. The increase is attributable
to an 702% increase in interest and other income from Rs.787million for the year
ended March 31, 2006 to Rs.6,310 million for the year ended March 31, 2007,
offset by a 1.06% decrease in interest from bank deposits from Rs.1,601 million
for the year ended March 31, 2006 to Rs.1,584 million for the year ended March
31, 2007.




The
increase in interest and other income was mainly due to the recognition of
interest on income tax for the year ended March 31, 2006 amounting to Rs. Nil
million as compare to the Rs.5,216 million for the year ended March 31,
2007.




Income Taxes: Income tax
expense decreased from Rs.437 million for the year ended March 31, 2006 to
Rs.(1,073) million for the year ended March 31, 2007. The decline is
attributable to a decrease in the current tax expense from Rs.1,253 million for
the year ended March 31, 2006 to Rs.(1,171) million for the year ended March 31,
2007.  Deferred tax expense also increased from Rs.(816) million for
the year ended March 31, 2006 to Rs.98 million for the year ended March 31,
2007.




The
current tax expense has decreased mainly due to adjustments arising from
completion of tax assessment of previous years.




The
deferred tax assets have decreased largely on account of lower charges in the
financial statements in respect of provision for post retirement medical
benefits. The deferred tax liability has decreased due to reduction in the
amount of excess depreciation allowance on tax in the current year as compared
to earlier year.




5B.
            Liquidityand Capital
  Resources




A summary
of our cash flows appears below:




(in
      millions of Rs.)Year
      Ended March 312006
            
            
            2007
            
            
            2008Net
      cash provided by the operating activities
            
            
            6,006
            
            
            
            9,672
            
            
            
            27,640Net
      cash used in investing activities
            
            
            (7,975
            )
            
            
            (6,780
            )
            
            
            (25,006
            )Net
      cash from financing activities
            
            
            (3,951
            )
            
            
            (2,873
            )
            
            
            (2,948
            )Net
      increase/(decrease) in cash and cash equivalents
            
            
            (5,920
            )
            
            
            19
            
            
            
            (314
            )Cash
      and cash equivalents at the beginning of the year
            
            
            7,561
            
            
            
            1,641
            
            
            
            1,660Cash
      and cash equivalents at the end of the year
            
            
            1,641
            
            
            
            1,660
            
            
            
            1,346





We have
historically met our working capital and capital expenditure requirements
principally from cash flows generated from operations.  We have also
from time to time undertaken external borrowings.  As of March 31,
2008, we had no borrowings.  We expect to meet our planned capital
requirements for the next two years primarily from cash flow generated from
operations, together with existing cash balances and supplemented by market
borrowings, whenever required.  At March 31, 2008, we had cash and
cash equivalents of Rs.1.35 billion and liquid short-term investments in bank
deposits of Rs.32.44 billion.  We anticipate capital expenditures of
approximately




63
 Table of Contents




Rs.5.49
billion in fiscal 2009.  We do not expect to have any liquidity
problem in regard of possible adverse results in our pending litigations, as we
would expect to discharge any obligations from cash on hand.  We have
significant amounts due from related parties, which if not settled, would
significantly impact cash flow from operations.  We believe that
existing cash and cash equivalents and funds generated from operations will be
sufficient to meet these requirements. However, we may significantly alter our
proposed capital expenditures plans and accordingly, may require additional
financing to meet our requirements. In either case, we cannot assure you that
additional financing will be available at all or, if available, that such
financing will be obtained on terms favorable to us or that any additional
financing will not be dilutive to our shareholders.




Operating
Activities




Net cash
flow from operating activities was Rs.9.67 billion in fiscal 2007 and Rs.27.64
billion in fiscal 2008. The increase in cash generation from operating
activities during the current year is primarily attributable to decrease in
other receivable Rs.6.18 billion during the year ended March 31, 2008 from
Rs.(19.02) billion for the year ended March 31, 2007, an increase in accrued
employee cost from Rs.4.54 billion as at March 31, 2008 from Rs.(2.65) billion
as at March 31, 2007, and an decrease  in receivable and accrued
revenue to Rs.1.9 billion as at March 31, 2008 from Rs.(2.69) billion as at
March 31, 2007. Net cash flow from operating activities was Rs.6.01 billion in
fiscal 2006 and Rs.9.67 billion in fiscal 2007. The increase in cash generation
from operating activities during the year ended March 31, 2007 is primarily
attributable to an increase in net income from Rs.1.07 billion for the year
ended March 31, 2006 to Rs.11.30 billion for the year ended March 31, 2007, an
increase in depreciation from Rs.8.00 billion as at March 31, 2006 to Rs.8.52
billion as at March 31, 2007, and an increase in deferred taxes from Rs.(.82)
billion as at March 31, 2006 to Rs.0.10 billion as at March 31,
2007.




Investing
Activities




Net cash
used in investing activities increased from Rs.6.78 billion for fiscal 2007 to
Rs. 25.01 billion for fiscal 2008. This is mostly due to deposits in investment
made in short term bank deposits of Rs.15.34 billion during the year ended March
31, 2008.  However, Rs.1.92 billion was withdrawn during the year
ended March 31, 2007. Offsetting the above amount to some extent was an increase
in the purchase of fixed assets from Rs.8.70 billion during the year ended March
31, 2007 to Rs. 9.57 billion during the year ended March 31, 2008. Net cash used
in investing activities decreased from Rs.7.98 billion for fiscal 2006 to
Rs.6.78 billion for fiscal 2007. This is mostly due to a withdrawal of the
investment made in short term bank deposits of Rs.1.92 billion during the year
ended March 31, 2007.  However, Rs.1.29 billion was deposited during
the year ended March 31, 2006. Offsetting the above amount to some extent was an
increase in the purchase of fixed assets from Rs.6.72 billion during the year
ended March 31, 2006 to Rs.8.70 billion during the year ended March 31,
2007.




Financing
Activities




Net cash
used in financing activities has increased from Rs. 2.87 billion for fiscal 2007
to Rs.2.95 billion for fiscal 2008.  This increase is on account of an
increase in dividend tax rate during the previous year. Net cash used in
financing activities has decreased from Rs.3.95 billion for fiscal 2006 to
Rs.2.87 billion for fiscal 2007. This decrease is on account of a decrease in
the amounts of cash dividends paid from Rs.3.95 billion during the year ended
March 31, 2006 to Rs.2.87 billion during the year ended March 31,
2007.




Capital
Expenditure




See
“Property, Plants and Equipment – Network Modernization” for a discussion of our
capital requirements for capital expenditures.




5C.
            Research
      and Development




We did
not incur research and development expenditures in the last three fiscal
years.




64
 Table of Contents




5D.
            Trend
      Information




For a
discussion of other important trends affecting us, see “—Operating
Results—Overview” above.




5E.
            Off-Balance
      Sheet Arrangements




As of
March 31, 2008, we were not a financial guarantor of obligations of any
unconsolidated entity, and we were not a party to any similar off-balance sheet
obligation or arrangement.




5F.
            Tabular
      Disclosure of Contractual
Obligations




The
following table shows our contractual payment obligations as of March 31, 2008,
and the effect of such obligations for the specified future
periods:




(in
      millions of Rs.)
              Payments
      due by periodTotal
            
            
            Less
              than
      1
              year
            
            
            1-3
              years
            
            
            3-5
              years
            
            
            More
              than
      5
              yearsPurchase
      obligations (capital commitments)
            
            
            5,493
            
            
            
            5,493
            
            
            
            —
            
            
            
            —
            
            
            
            —Pension
      and other post-retirement obligations
            
            
            24,006
            
            
            
            1,412
            
            
            
            3,301
            
            
            
            4,007
            
            
            
            15,286Total
            
            
            29,499
            
            
            
            6,905
            
            
            
            3,301
            
            
            
            4,007
            
            
            
            15,286




We are
obligated to pay license fees and spectrum charges to DOT in accordance with
conditions governing license fees for Basic Telephone Service and Cellular
Telephone Service under the Revenue Sharing Regime. The specified percentage for
license fees on fixed line services and cellular services was 10% of the
Adjusted Gross Revenue (“AGR”) for each of the years ended March 31, 2006, 2007
and 2008.




We do not
expect to have any difficulty repaying such amounts, and may do so entirely from
cash flow generated from operations.  As of March 31, 2008, we had no
debt outstanding and no credit facilities.




5G.
            Safe
      Harbor




See
statement on page 1 of this Report.




Item6.
            Directors,
      Senior Management and Employees




6A.
            Directorsand Senior
  Management




The
government of India controls us and has the power to elect all of our directors
and to determine the outcome of almost all actions requiring approval of our
board of directors or shareholders.  The Department
of  Telecommunications, as the representative of our majority
shareholder, the government of  India, also has the authority to
exercise the special powers granted to the President of  India under
our articles of association.  These include the right to appoint our
Chairman and Managing Director and to issue directives with respect to our
business.  See “Additional Information- Memorandum and Articles of
Association-Powers of the President of India”.




Directors




The Board
of Directors has ultimate responsibility for the administration and management
of our affairs, except for certain matters that are reserved by our articles of
association for the approval of  the President of
India.  Our articles of association provide for a board of not less
than four and not more than 18 directors.  The directors are appointed
by the government of India.  The President of India is empowered by
Article 66A of our articles of association to appoint one-third of the total
number of our directors sitting at any time for an indefinite term and to
designate our Chairman and Managing Director.  Our remaining directors
are also appointed by the Govt. of  India




65
 Table of Contents




and
non-official part time directors serve for three-year terms . As per the
provisions of the Indian Companies Act,  one-third of these set term
directors retire each year at our annual general meeting.




We
currently have eight directors, four of whom are our most senior
officers.  We refer to these directors as “full-time
directors”.  Our Executive Director, Mumbai and our Executive
Director, Delhi are normally ex-officio members of the Board.  Two of
our directors are officers of the DOT. Finally, there are two directors who are
neither our employee nor an employee of the DOT.  We refer to these
directors as “part-time” directors”.  All of our directors were
appointed by the DOT.  Four board seats are currently vacant i.e. two
ex-officio director and two part-time directors.




The
business address of each of the directors is our registered
office.  The names of our current directors, their ages and their
positions as at the date of this report appear below:




Name
            Age
            PositionR.S.P.
      Sinha
            57
            Director(1)
      / Chairman and Managing DirectorKuldeep
      Singh
            54
            Director(1)
      / Director (Technical)Anita
      Soni (Ms.)
            55
            Director(1)
      / Director (Finance)S.P.
      Pachauri
            55
            Director(1)
      / Director (HR)Anuradha
      Joshi Durgapal
            34
            Director
      (2) / Deputy Director General, Department of
      TelecommunicationsJ.S.
      Deepak
            50
            Director
      (2) / Joint Secretary (T) Department of
  TelecommunicationsS.
      Balasubramaniam
            65
            Director
      (3)Usha
      Sahajpal
            65
            Director
      (3)




(1)
full-time director




(2)
Government director




(3)
part-time directors




Mr.
R.S.P. Sinha has been our Chairman and Managing Director since November 2003 and
a member of our board as Director (Fin) since April, 2002.  Prior to
joining us, he was Director (Finance) of Videsh Sanchar Nigam Ltd.  He
is a Fellow Member of the Institute of Cost & Works Accountants of
India.  Mr. Sinha has 23 years experience in senior financial
positions both in the private sector and the public sector, including 11 years
experience as full-time director of the board of Public Sector
Undertakings.  Mr. Sinha worked as Director (Finance) on the board of
VSNL (now Tata Communications Ltd.) from January 1999 to February 2002 and
Director (Finance), MTNL from April, 2002 to October 2003.




Mr.
Kuldeep Singh has been our Director (Technical) and a member of our Board since
December 9, 2004. He is an Engineering graduate with master in business
administration. Mr. Singh joined the Indian telecom services in 1979. He has
more than 32 years experience in the field of computers and telecommunications.
Before being appointed as Director (T) on the board of MTNL, he worked as GM in
MTNL for more than four years.  Prior to this, he worked in DOT,
Overseas Communication Services and National Informatic Centre in various
responsible positions.




Ms. Anita
Soni has been our Director (Finance) since April 26, 2005.  Mrs. Soni
joined Indian Postal Telecommunications finance services of the Government of
India in 1977. She has Master of Arts (Economics Honours) from
Punjab University.  She has more than 29 years experience as a
senior finance Executive in Indian P & T (Finance & Accounts)
Service.  Before joining MTNL as Director (Finance), she held
positions in DOT, MTNL, and BSNL and has experience in all aspects of telecom
finance.  She is on the panel of experts of the International Telecom
Union (ITU), and has participated in various ITU projects.




Mr. S.P.
Pachauri has been our Director (HR) since December 6, 2007.  Before
being appointed as Director (HR), he had held various positions as GM (Mobile
Services) in MTNL, and prior thereto he had held various positions in different
parts of India, including Director, telecom project at Lucknow Circle, GMT
Kashmir at Jammu




66
 Table of Contents




&
Kashmir circle, and Project Manager (OFC) TSCL.  He holds a B.E. and a
M.E. in Electronics & Communications from
Roorkee University.




Mrs.
Anuradha Joshi Durgapal has been a member of our Board since July 31, 2008 and
is presently working as DDG (FEB) DOT.  She joined the Indian Post and
Telecommunication Accounts and Finance Service in 1987.  She has
worked in MTNL, Delhi and DOT at various middle and senior level management
posts and looked after Telecom revenues, banking, finance, establishment,
accounts, audit, training and project finance.  She has also worked in
Cabinet Secretariat on deputation basis for five years.  She has been
a member of the Study Group 3 relating to the tariff and economic issues in the
International Telecommunication Union (ITU) during 2007-08.  She holds
a post graduate Degree in M.Sc.(Chemistry) from IIT Delhi.  She also
holds Masters Degree in Public Policy from
Australian National University, Canberra.




Mr. J.S.
Deepak, has been a member of our Board since April 30, 2008, and is presently
working as Joint Secretary in the Department of
Telecommunications.  He holds M.Sc. degree in Electronics from
Banglore University and MBA from prestigious institute IIM, Ahmedebad in
Marketing and Finance.  Mr. Deepak belongs to 1982 batch of Indian
Administrative Services (IAS) and has over 25 years of experience.  He
has worked in the Govt. of UP in different departments/organizations such as
Principal Secretary, Industrial Development Export Commissioner UP, Managing
Director, UP Export Corporation Limited, Deputy Managing Director, State
Industrial Development Corporation, UP, Principal Secretary, Elementary
Education, Health, Family Welfare in Government of UP and Commissioner, Faizabad
and Commissioner Meerut.




Dr. S.
Balasubramanian has been a member of our Board since November 25, 2005 as Non
Official part time Director.  He holds an M.A. (Economics) degree, M.
Phil (Economics) degree, Ph.D. (Eco.) and DDS from University of
Madras.  He served as professor of Economics in Madras University
for 29 years as well as Head of Dept of Economics for 16 years in
Presidency College, Chennai.  He has published several
publications in Socio-Economics thoughts, etc.  He has also served as
a member of Tamilnadu Public Service Commission.




Mrs. Usha
Sahajpal has been a member of our Board since April 30, 2008 as Non Official
part-time Director (Independent Director).  She holds Master of Arts
(Political Science) degree from Delhi University.  She was
employed by Indian Audit and Accounts Service from 1966 to 1976 and Indian
Civil Accounts Service from 1976 to 2003 (till retirement).  During
her tenure, she has held various positions in the Indian Audit and Accounts
Department as Controller of Accounts in various ministries of the Govt. of
India, Finance Advisor to the Employees Provident Fund Organization, Ministry of
Labour, Chief Controller of Accounts, Ministry of Industry, Jt. Secretary and
Finance Advisor, Ministry of Agriculture, Principal Chief Controller of
Accounts, Central Board of Excise and Customs, Department of Revenue, Ministry
of Finance and Controller General of Accounts, Ministry of
Finance.  She has retired from service on March 31, 2003 as Controller
General of Accounts, Ministry of Finance, Govt. of India.  She is
presently non-official, part-time Director on the Board of South Eastern Coal
Field Ltd. (a subsidiary of Coal India, Ltd.), Member, Finance Committee,
Jawahar Lal Nehru University, Delhi and Member of other institutes/societies and
NGOs.




Other
Principal Executive Officers




The
business address of each of our principal executive officers is our registered
office.  In addition to those officers who are members of the board of
directors, our principal executive officers and their ages and positions as at
the date of this report are as follows:




Name
            Age
            PositionK.C.
      Gupta
            59
            Executive
      Director, OperationS.R.
      Sayal
            45
            Company
      Secretary





Mr. K.C.
Gupta has been our Executive Director, Operation, since December
2004.  Mr. Gupta joined the Indian Telecommunication Service in 1972
and has held various posts in different parts of India including service with
Telecommunications Consultants India Limited from 1996-2000. Mr. Gupta holds an
engineering degree from Delhi College of Engineering, Delhi.




67
 Table of Contents




Mr. S.R.
Sayal has been our Company Secretary since October 2006, having previously
served as Dy. Company Secretary since August 1997.  Prior to
joining us as Dy. Company Secretary in 1997, Mr. Sayal worked for National
Fertilizers Ltd. (Government of India Enterprises) and other private sector
companies.  Mr. Sayal is a Fellow Member of the Institute of Company
Secretaries of India.  Mr. Sayal has a Bachelor of Commerce (Hons.)
Master of Arts (English) degree from Delhi University and a Bachelor of Laws
degree from Agra University.




6B.
            Compensation




Compensation
of Directors and Officers




The total
remuneration and benefits in kind paid by us to all of our directors and
executive officers as a group in fiscal 2008 was approximately Rs. 3.80
million.




The
full-time directors, including the Chairman and Managing Director, are appointed
by the Government and receive compensation pursuant to the terms of their
appointment.  The other directors receive a fee of RS. 10,000 for
every meeting of the Board or Committee attended by them.




There are
no outstanding loans, advances or guarantees of any amounts to our directors or
principal officers.  There have been no transactions effected by us
during the current or immediately preceding fiscal year, and there were no
transactions effected during an earlier financial year that remain in any
respect outstanding or unperformed, between us and any of our directors or
principal officers which were unusual in their nature or conditions or
significant to our business.




6C.
            Board
      Practices




We have
the following committees of our Board of Directors:  Audit Committee
and Shareholders’/Investors’ Grievances Committee.  By reason of the
Government’s ownership position, we do not have a Compensation Committee or a
Nominating Committee.




AUDITCOMMITTEE




The Audit
Committee of the Board of Directors reviews, acts on and reports to the Board of
Directors with respect to the various auditing and accounting matters, including
the recommendation of our independent auditors, the scope of the annual audits,
fees to be paid to the independent auditors, the performance of our independent
auditors and our accounting practices.  Effective July 31, 2008, the
Board reconstituted the Audit Committee, now comprised of Dr. Balasubramanian,
Chairman, Mrs. Usha Sahajpal and Mrs. Anuradha Joshi Durgapal.  Mrs.
Joshi is an Government of India employee and is not considered independent under
Indian standards but under US standards we avail ourselves of an exemption from
certain independence standards (See Item 16D to this Report).  We are
following up regularly with the DOT for early appointment of additional
directors onthe
Board so that we may reconstitute our Audit Committee to include only persons
who are not MTNL or government employees and qualify as independent under Indian
standards.




The
Shareholders’ Investors’ Grievance Committee oversees reports received from the
registrar and transfer agent and to facilitate the prompt and effective
resolution of complaints from our shareholders and investors.  This
Committee consists of Dr. S. Balasubramanian, Smt Usha Sahajpal, Smt Anita Soni
and Sh S.R. Sayal.




6D.
            Employees




EMPLOYEES




At March
31, 2008, we had 47,422 employees, of whom 6,599 were executive and 40,823 were
non-executive employees.  We seek to improve employee productivity
through continuing education and training and by




68
 Table of Contents




emphasizing
the importance of quality of service and subscriber satisfaction.  We
have placed a special emphasis on retraining our workforce to meet the demands
of modernizing our network and improving customer satisfaction.




In
general, employees receive a base salary and salary-related housing and other
allowances, productivity based incentive payments and certain benefits,
including a pension/gratuity plan, medical benefits for themselves and certain
members of their immediate families and post-retirement medical benefits for
retired employees.  The decrease in our staff costs was primarily due
to a Voluntary Retirement Scheme (VRS) in previous years and a decrease in
retirement benefit charges on account of an increase in the discount rate used
to value our post retirement obligations to employees.  This is in
line with the general increase in interest rates in the economy over the same
period.




In fiscal
2000, substantially all of our non-executive employees originally employed by
the DOT decided to terminate their services with the DOT and accept employment
with us effective November 1998.  Under the option given to them for
pension benefits, most of our absorbed employees have opted for retaining
pension benefits in accordance with the Central government pension rules and
some other employees have opted for retirement rules which as applicable to our
directly recruited employees, and opt to draw pro rata until their
absorption.  Accordingly, with effect from November 1, 1998 we started
accruing for pension and gratuity for these employees.  In
August/September 2002, the DOT indicated that the government would pay for the
pension benefits of the government employees absorbed by us who opted for either
the Central government scheme of pension or for the pro ratapension scheme for
the period served with the DOT.  However, the terms of such payments
are in the process of finalization.  Once these terms are finalized
and the payments are made to DOT for the period of employment of these employees
with us, we expect that our liability for post retirement obligations would be
limited to monthly contributions on the basis of the rules to be prescribed by
the government of India.  Presently, in the absence of any further
movement from the Government, we are discharging all such
liabilities.




Approximately
98% of our executive employees have accepted absorption by us, and are now our
direct employees.  These employees are entitled to certain pension and
gratuity benefits from the government of India.




We have
finalized a new compensation structure for our senior executive
employees.  The new structure provides for higher salaries and
benefits for our senior executive employees upon exercise of their option for
MTNL absorption.




As a
public sector enterprise, we abide by general DOT and Department of Public
Sector Enterprises personnel policies, which, among other things, limit our
ability to reduce employment levels and control the amount of salaries and other
remuneration that we may pay to our employees.  Our employee
productivity measured by access lines in service per employee has been
increasing steadily but remains significantly lower than the Asian and global
averages.  During the year ended March 31, 2005, we implemented a
Voluntary Retirement Scheme for our executive as well as non-executive
employees.  Under the scheme, the eligible employees were given an
option to voluntarily take retirement from service and make their choice within
the specified period of time.  The scheme provided for ex gratia
payments to eligible employees opting for voluntary retirement based on the
respective employee’s salary and term of employment.  As of March 31,
2008, a total of 3,947 employees had retired under this scheme.




The
mandatory retirement age for all employees is 60 years of age.  Upon
retirement, employees (who have opted for government pension) and their
dependents are entitled to a pension under a defined benefit
plan.  The pension amount is based on the employee’s years of service
and salary level upon retirement and, in a reduced amount, is transferable to
dependents upon the employee’s death.  We also provide post-retirement
health care benefits to retired employees and their
dependents.  However, effective March 2008, we discontinued the
existing scheme of medical benefit for the retired employees and their
dependents.  During the year the amount provided in the accounts up to
March 31, 2006 has been written back.  Further, no provision for post
retirement benefit has been made in the accounts.  See details under
“Critical Account Policies and Estimates” above.






Almost
all of our non-executive employees are members of local unions organized in each
of Delhi and Mumbai.  Over the last three years we have not
experienced any material work stoppage and we consider our relationship with our
employees and the labor unions to be good.  Our executive employees
seconded from DOT are




69
 Table of Contents




members
of national officers’ associations, which act as an informal consultative
mechanism for conveying management staff’s views regarding personnel policies to
our senior executives.




TRAINING




In order
to deal with the new realities of competitive marketplace, we have launched a
massive training effort to train our workforce.  Training design has
been so modified to tilt the balance of training from knowledge to skill and
attitude, which are key to succeed in a customer-driven
marketplace.  During the 2008 fiscal year, a total number of 8,782
employees were trained as against the MoU targets of 6,000
employees.




In
addition to this, highly specialized training was given abroad to 87 MTNL
officers.




In
addition to already existing District Telecom Training Centers (DTTC), our
Center for Excellence in Telecom Technology and Management (CETTM) has been
established as a state of the art facility to impart technical, managerial and
corporate training to telecom and management personnel of Mumbai & Delhi
units.  CETTM caters to our training needs as well as other
organizations like railways, National Thermal Power Corporation, State Bank of
India and other corporate clients.  CETTM has arranged with M/s
Telecom Consultants of India Ltd to provide customized training to participants
from countries sponsored by Ministry of External Affairs, Govt. of India, under
ITEC-SCAAP Indian Technical Education Cooperation-Special Commonwealth African
assistance program)  This centre is an ISO 9001:  2000
Certified institution.  The CETTM complex has 17 lecture halls,
22 technology labs, conference rooms with board room integration, RFID based
modern library and an ultra modern auditorium.  CETTM is equipped with
a hostel complex for residential programmes having 408 AC and non-AC rooms and
27 executives suites to house the trainees.  CETTM has signed MOU with
Red Hat, Novell and others for conducting IT training leading to certification
courses like RHCE, NCLP etc.




6E.
            ShareOwnership




None of
our directors or connected persons or our principal executive officers owned any
of our equity shares as of the date of this report.




On
January 7, 2000, the Indian government offered to sell up to 14 million equity
shares, representing approximately 2.2% of our outstanding equity shares, to our
employees at a discount as compensation in connection with the restructuring of
DOT.  Because the terms were not viewed as favorable, none of our
employees accepted this offer before it expired on December 31,
2000.  In a recent communication the DOT has indicated for closure of
the issue but we have again taken up the matter with the
government.  Our employees have demanded that the shares allocated to
them, at Rs.46 per share, but the DOT has not yet responded.




Item7.
            Major
      Shareholders and Related Party
Transactions




7A.
            MajorShareholders




The
following table sets forth information about the shareholders holding 5% or more
of our outstanding equity shares as of March 31, 2008, according to our register
of shareholders:




Name
      of Owner
            Number of
      Shares (4)
            Percentage (4)Government
      of India (1)
            354,372,740
            56.25%Life
      Insurance Corporation of India (2)
            109,350,080
            17.36%The
      Bank of New York (3)
            34,763,018
            5.52%




(1) The equity
shares owned by the government of India are registered in the name of the
President of India or his nominees in our register of shareholders.




(2) Life
Insurance Corporation of India is also controlled by the government of
India.




(3) These equity
shares are held by The Bank of New York as custodian for the holders of our
ADSs.




70
 Table of Contents




(4) At March 31,
2008, 630,000,000 common shares were outstanding.




7B.
            Related
      party transactions




CERTAINRELATIONSHIPS AND RELATED PARTY
TRANSACTIONS




We have a
number of distinct relationships with the government of India as outlined
below:




The
Government of India as Shareholder




The
government of India currently owns 56.25% of our outstanding equity
shares.  Accordingly, the government of India will continue to have
the ability to control us, elect all of our directors and determine the outcome
of substantially all actions requiring the approval of our board of
directors or shareholders.




The
government of India has announced its intention to divest its shareholdings in a
number of government companies by offering significant equity stakes in those
companies to strategic partners through a competitive bidding
process.  To date, there have been no announcements that the
government of India plans to reduce its shareholding in us through this
process.




The DOT
acts as representative of our majority shareholder, the government of
India.  The DOT also has the authority to exercise the special powers
granted to the President of India under our articles of
association.  These include the right to appoint our Chairman and
Managing Director and to issue directives with respect to our
business.  See “Additional Information— Memorandum and Articles of
Association—Powers of the President of India.”




Government
of India as Regulator




Our
business is subject to comprehensive regulation by the Ministry of
Communications through the Telecom Commission and the DOT pursuant to the
provisions of the Telegraph Act and the terms of the licenses under which we
operate.  While the Telegraph Act sets the legal framework for
regulation of the telecommunications sector, much of our supervision and
regulation is implemented more informally through the general administrative
powers of the DOT, including those reserved to the DOT under our license, and of
other government of India agencies.  In March 1997, an autonomous
body, the TRAI, was established with quasi-judicial powers to regulate
telecommunications services in India.  See “Information on the
Company— Telecommunications Regulation in India—The Telecom Regulatory Authority
of India.”




We
operate all of our services under licenses granted by the DOT.  The
licenses identify the services that we are permitted to provide, which we
believe covers all of the services that we currently do provide.  A
license for any additional service requires the approval of the
DOT.  The DOT retains the right, however, after giving us appropriate
notice, to modify the terms and conditions of our license at any time if,
in its opinion, it is necessary or expedient to do so in the interest of the
general public or for the proper operation of the telecommunications
sector.  The DOT may also terminate our license before its scheduled
expiration upon our breach of any of its terms.  Under the Telecom
Regulatory Authority of India Act, the Telecom TRAI has been granted the
authority to determine tariffs.




So long
as the government of India’s shareholding in us equals or exceeds 51%, we are
deemed to be an Indian government company under the Companies Act and are
subject to regulations generally applicable to public sector enterprises in
India.  These regulations concern personnel matters, including
appointment of key management personnel and the hiring, dismissal and
compensation of employees, as well as procurement, capital expenditures and the
generation of funds through the issuance of securities.  For example,
all appointments to our board of directors must first be recommended by the
Public Enterprises Selection Board, a government agency, and its recommendations
are reviewed by the government of India, although until recently all
appointments to our board have been recommended only by the government of
India.  All appointments to our board of directors are also approved
by our shareholders.  Disputes between government of India enterprises
(such as us) and government of India departments generally must be referred to
the Committee on Disputes of the government of India for mediation




71
 Table of Contents




before
either party may bring a claim in a court of law.  A single government
of India ministry or department is designated as the primary supervisor of each
public sector enterprise and the DOT has been designated as our primary
supervisor.  Our activities are also subject to review by India’s
Parliament, and the DOT must submit an annual report to Parliament regarding our
business activities.




The
government of India plays an important role in the preparation of our financial
statements.  Under Indian regulations, as a government of India
company, our annual accounts are audited by statutory auditors and branch
auditors which are independent chartered accountants appointed each year by the
government of India at the direction of the Comptroller and Auditor General of
India.  See “Additional Information—Memorandum and Articles of
Association—Audit and Annual Report.” In accordance with the government of
India’s practice with respect to government of India companies, auditors have
generally not been permitted to serve as our branch or statutory auditors
for more than three consecutive years.  In addition, the Comptroller
and Auditor General conducts an independent review of our financial statements
that are audited by the statutory and branch auditors.  The annual
report submitted to the Parliament includes a copy of our audit report and any
comments upon or supplements to the audit report made by the Comptroller and
Auditor General.




The
Government of India as Customer




The
government of India purchases our services on a commercial basis, and
government entities, in the aggregate, constitute the single largest user of our
services.  The DOT sets the tariffs for these services, which are the
same as our tariffs to our other customers.  However, certain limited
categories of high-level government of India officials may not have their
telephone connections disconnected for non-payment of bills.




Our
Financing of the Department of Telecommunications




As a
department of the government of India, the DOT cannot raise funds through
external borrowings from non-government of India entities, and has historically
depended on us to raise funds on its behalf for use in its telecommunications
business.  By restructuring us as a corporation, the DOT was able to
create a company, which could raise debt in the capital markets to be used to
fund its telecommunications operations.  The Indian government
guaranteed these borrowings and we on-lent the proceeds of the borrowings on
terms substantially similar to the terms of the original loan.  As a
result of the corporatization of the Department of Telecom Services into BSNL in
October 2000, we no longer borrow funds on behalf of the DOT.  All
external borrowings that had made on behalf of the DOT/BSNL have been repaid by
us.




Other




In
addition to the transactions and circumstances described above in this Item 7,
we enter into numerous business relationships with entities that have varying
degrees of government control, as well as with the government itself and
subdivisions of the government.  For example, as discussed elsewhere
in this report, our principal interconnect arrangements are with
BSNL.  For more information on our relationships and transactions with
the government of India and its subdivisions and entities controlled by the
government, see [Note 4 and Note 19] to our consolidated financial statements,
which appear elsewhere in this report.




7C.
            Interest
      of experts and counsel




None.




Item8.
            Financial
      Information




8A.
            ConsolidatedStatements and Other Financial
      Information




See “Item
18.  Financial Statements” and pages F-1 through F-40.




72
 Table of Contents




8B.
            SignificantChanges




Recent
Developments




Dividends.  Under
Indian law, a company pays dividends upon a recommendation by its board of
directors and approval of a majority of the shareholders at the annual general
meeting of shareholders held within six months of the end of each fiscal
year.  Shareholders have the right to decrease but not increase the
dividend amount recommended by the board of directors.  Dividends may
be paid out of company profits for the fiscal year in which the dividend is
declared after transfer to the reserves of a percentage of our profits for
that year of not less than 2.5%.  The Companies Act further provides
that, in the event of inadequacy or absence of profits in any year, a dividend
may be declared for that year out of our accumulated profits, subject to certain
limitations.




In
February 2008, our Board of Directors recommended the payment of interim
dividend of Rs. 3.00 per share, amounting to a total of Rs. 1,890 million to
record holders of equity shares in February 2008.




In July
2008, our Board of Directors recommended the payment of a dividend of Rs.4.0 per
share, amounting to a total of Rs.2,520 million, including interim dividend
of  Rs. 3/- per share, to record holders of equity shares on September
23, 2008.  This dividend is to be approved by our shareholders at our
annual general meeting to be held on September 26, 2008.  We must pay
a “dividend distribution tax” at the rate of 15% (plus a surcharge of 10% and an
add-on tax at the rate of 3% of the interim dividend) and dividend distribution
tax on final dividend of Rs.1.00 per share at the rate of 15% (plus a surcharge
of 10% and an add-on tax at the rate of 3%).  Currently, there is no
Indian tax payable by shareholders in respect of dividends
received.




For a
description of the tax consequences of dividends paid to our shareholders, see
Item 10E. “Additional Information—Taxation—Indian Taxation—Taxation of
Distributions.”




Item9.
            The
      Offer and Listing




9A.
            Offer
      and listing details




Not
applicable.




9B.
            Plan
      of Distribution




Not
applicable.




9C.
            Markets




Not
applicable.




MARKETPRICE INFORMATION




Equity
Shares




Our
outstanding equity shares are listed on several Indian stock exchanges and were
first quoted on The Stock Exchange, Mumbai on May 13, 1993.  Our
equity shares are also traded on the National Stock Exchange in
India.  The following table sets forth the high and low closing prices
on The Stock Exchange, Mumbai for our equity shares for the periods
indicated:




Share
      price
              (Rs.)Calendar
      period
            
            High
            
            
            Low2004
      Fiscal Year
            
            
            141.00
            
            
            
            81.052005
      Fiscal Year
            
            
            166.45
            
            
            
            92.902006
      Fiscal Year
            
            
            170.05
            
            
            
            108.00




73
 Table of Contents




Share
      price
              (Rs.)Calendar
      period
            
            High
            
            
            Low


2007
      Fiscal Year
            
            
            221.80
            
            
            
            144.852008
      Fiscal Year
            
            
            219.45
            
            
            
            112.602007
      Fiscal YearFirst
      Quarter
            
            
            221.80
            
            
            
            165.50Second
      Quarter
            
            
            157.00
            
            
            
            157.50Third
      Quarter
            
            
            157.50
            
            
            
            144.85Fourth
      Quarter
            
            
            167.70
            
            
            
            152.002008
      Fiscal YearFirst
      Quarter
            
            
            169.40
            
            
            
            141.90Second
      Quarter
            
            
            173.70
            
            
            
            129.00Third
      Quarter
            
            
            199.80
            
            
            
            144.00Fourth
      Quarter
            
            
            219.45
            
            
            
            92.75Last
      Six MonthsApril
      2008
            
            
            116.00
            
            
            
            97.00May
      2008
            
            
            113.90
            
            
            
            92.55June
      2008
            
            
            99.10
            
            
            
            89.65July
      2008
            
            
            108.90
            
            
            
            83.20August
      2008
            
            
            113.20
            
            
            
            97.15September
      (through September 22)
            
            
            101.00
            
            
            
            85.20





On
September 22, 2008, the closing price of our equity shares on The Bombay Stock
Exchange was Rs. 89.80.




Our
global depositary receipts were listed on the London Stock Exchange and quoted
on SEAQ International until we terminated our global depositary receipt program
following the completion of our exchange offer in which we exchanged global
depositary receipts of tendering holders for New York Stock Exchange-listed
American Depositary Shares, or ADSs.  The commencement of our ADS
program and the termination of our global depositary receipt program both
occurred in the fourth quarter of calendar year 2001.




The table
below shows the high and low closing prices on the New York Stock Exchange for
our ADSs for the period indicated.




ADS
      priceCalendar
      Period
              
              High
      US$
              
              
              Low
      US$2004
      Fiscal Year
              
              
              6.25
              
              
              
              3.332005
      Fiscal Year
              
              
              9.27
              
              
              
              5.402006
      Fiscal Year
              
              
              8.44
              
              
              
              5.412007
      Fiscal Year
              
              
              9.75
              
              
              
              5.612008
      Fiscal Year
              
              
              10.75
              
              
              
              4.622007
      Fiscal YearFirst
      Quarter
              
              
              9.75
              
              
              
              6.19Second
      Quarter
              
              
              7.03
              
              
              
              5.61Third
      Quarter
              
              
              7.18
              
              
              
              5.70Fourth
      Quarter
              
              
              7.62
              
              
              
              5.902008
      Fiscal YearFirst
      Quarter
              
              
              8.21
              
              
              
              6.38Second
      Quarter
              
              
              8.50
              
              
              
              5.96Third
      Quarter
              
              
              10.20
              
              
              
              7.36Fourth
      Quarter
              
              
              10.75
              
              
              
              4.62Last
      Six MonthsApril
              
              
              5.74
              
              
              
              4.81May
              
              
              5.76
              
              
              
              4.05
  74
 Table of Contents
  ADS
      priceCalendar
      Period
              
              High
      US$
              
              
              Low
      US$
 June
              
              
              4.81
              
              
              
              4.20July
              
              
              5.24
              
              
              
              4.06August
              
              
              5.34
              
              
              
              4.56September
      (through September 22, 2008)
              
              
              4.64
              
              
              
              3.80




On
September 22, 2008, the closing price of our ADSs on the New York Stock Exchange
was US$4.10 per ADS.  Our NYSE symbol is MTE.




THEINDIAN SECURITIES MARKET




The
information in this section has been extracted from publicly available documents
from various sources, including officially prepared materials from the
Securities and Exchange Board of India, The Bombay Stock Exchange, and the
National Stock Exchange, and has not been prepared or independently verified by
us or any of our affiliates or advisers.




The
Indian Securities Market




India has
a long history of organized securities trading.  In 1875, the first
stock exchange was established in Mumbai.




The
Securities and Exchange Board of India




India’s
stock exchanges are regulated by the Securities and Exchange Board of India
under the Securities and Exchange Board of India Act, 1992, the Securities
Contracts (Regulation) Act, 1956, and the Securities Contracts (Regulation)
Rules, 1957.  The Securities Contracts (Regulation) Rules regulate the
recognition of stock exchanges, the qualifications for membership and the manner
in which contracts are entered into and enforced between members.




The main
objective of the Securities and Exchange Board of India, which was established
by the government of India in February 1992, is to promote the development of
and regulate the Indian securities markets and protect the interests of
investors.  The Securities and Exchange Board of India may make or
amend an exchange’s by-laws and rules, overrule an exchange’s governing body and
withdraw recognition of an exchange.  In the past, the Securities and
Exchange Board of India’s regulation of market practices was
limited.  The Securities and Exchange Board of India Act, 1992 granted
the Securities and Exchange Board of India powers to regulate the business of
Indian securities markets, including stock exchanges and other financial
intermediaries, promote and monitor self-regulatory organizations, prohibit
fraudulent and unfair trade practices and insider trading, and regulate
substantial acquisitions of shares and takeovers of companies.  The
Securities and Exchange Board of India has also issued:




·
            guidelines
      concerning minimum disclosure requirements by public
      companies;




·
            rules
      and regulations concerning:




·
            investor
      protection, insider trading, substantial acquisitions of shares and
      takeovers of companies, buybacks of securities, employee stock option
      schemes, foreign capital market issues, derivative instruments and sweat
      equity; and




·
            debenture
      trustees, depositaries, development financial institutions, venture
      capital funds, foreign institutional investors, stockbrokers,
      underwriters, merchant bankers, portfolio managers, mutual funds, credit
      rating agencies and other capital market participants;
  and




·
            rules
      and regulations regarding the prohibition of fraudulent and unfair trade
      practices relating to the securities
market.




75
 Table of Contents




The
Securities Contracts (Regulation) Act has been amended to include derivatives of
securities and instruments of collective investment in the definition of
“securities.” This has been done with a view to develop and regulate the markets
for derivatives.  Trading in index-linked futures currently takes
place on the National Stock Exchange and The Stock Exchange,
Mumbai.  Trading in individual stock futures that have been notified
by Securities and Exchange Board of India is now permitted.  The
Securities and Exchange Board of India also set up a committee for the
review of Indian securities laws, which has proposed a draft Securities
Bill.  The draft Securities Bill, if accepted, will result in a
substantial revision in the laws relating to securities in India.




Public
Company Regulation




Under the
Companies Act, a public offering of securities in India must generally be made
by means of a prospectus, which must contain information specified in the
Companies Act and be filed with the Registrar of Companies having jurisdiction
over the place where a company’s registered office is situated.  A
company’s directors and promoters may be subject to civil and criminal liability
for misstatements in a prospectus.  The Companies Act also sets forth
procedures for the acceptance of subscriptions and the allotment of securities
among subscribers and establishes maximum commission rates for the sale of
securities.




The
Securities and Exchange Board of India has issued detailed guidelines concerning
disclosures by public companies and investor protection.  Prior to the
repeal of certain rules in mid-1992, the Controller of Capital Issues of the
government of India regulated the prices at which companies could issue
securities.  The Securities and Exchange Board of India guidelines now
permit existing listed companies to price freely their issues of securities,
though the pricing of initial public offerings is subject to certain
restrictions.  All new issues governed by the Securities and Exchange
Board of India guidelines are conditional upon a minimum subscription
requirement of 90.0% of the securities being issued.  Promoters of
companies are required to retain a certain minimum certified holding of equity
share capital, which is subject to a lock-in for three
years.  Further, existing shareholders of the company, who are not
promoters, are subject to a lock-in of one year from the date of the initial
public offering.  No issuance of bonus shares is permitted within 12
months of any public issue or rights issue.




Public
limited companies are required under the Companies Act to prepare, file with the
Registrar of Companies and circulate to their shareholders audited annual
accounts, which comply with the Companies Act’s disclosure requirements and
regulations governing their manner of presentation.  In addition, a
listed company is subject to continuing disclosure requirements pursuant to the
terms of its listing agreement with the relevant stock
exchange.  Listed companies are now required to publish quarterly
unaudited financial results that are reviewed by an outside auditor in
accordance with a prescribed standard for non-audit reviews.  The
Securities and Exchange Board of India has recently notified amendments to the
listing agreement tightening the continual disclosure standards by corporations
and corporate governance measures to be adopted by listed
companies.




Listing




The
listing of securities on a recognized Indian stock exchange is regulated by the
Securities Contract Rules.




Under the
standard terms of stock exchange listing agreements, the governing body of each
stock exchange is empowered to suspend trading of or dealing in a listed
security for breach of the company’s obligations under such agreement, subject
to the company receiving prior notice of the intent of the
exchange.  In the event that a suspension of a company’s
securities continues for a period in excess of three months, the company may
appeal to the Securities and Exchange Board of India to set aside the
suspension.  The Securities and Exchange Board of India has the power
to veto stock exchange decisions in this regard.




The
Securities and Exchange Board of India has issued the Securities and Exchange
Board of India (Delisting of Securities) Guidelines, 2003, which sets forth the
procedure for delisting of securities in the following
circumstances:




·
            voluntary
      delisting sought by the promoters of a
company;




76
 Table of Contents




·
            any
      acquisition of shares of the company or a scheme or arrangement, by
      whatever name referred to, consequent to which the public shareholding
      falls below the minimum limit specified in the listing conditions or
      listing agreement that may result in delisting of
    securities;




·
            promoters
      of the company who voluntary seek to delist their securities from all or
      some of the stock exchanges;




·
            cases
      where a person in control of management is seeking to consolidate his
      holdings in a company, in a manner which would result in the public
      shareholding in the company falling below the limit specified in the
      listing conditions or in a listing agreement that may have the effect of
      the company being delisted; and




·
            compulsory
      delisting by stock exchanges (e.g., upon failure by a company to pay
      required listing fees).




Indian
Stock Exchanges




There are
24 stock exchanges in India.  Most of the stock exchanges have their
own governing board for self-regulation.




It is
estimated that the two major exchanges, The Bombay Stock Exchange and the
National Stock Exchange, account for more than 90.0% of the market
capitalization of listed Indian companies.  The Bombay Stock Exchange
and the National Stock Exchange account for a majority of trading volumes
of securities in India.  The Bombay Stock Exchange and National Stock
Exchange together hold a dominant position among the stock exchanges in terms of
number of listed companies, market capitalization and trading
activity.




There are
generally no restrictions on price movements of any security on any given
day.  However, to restrict abnormal price volatility, the Securities
and Exchange Board of India has instructed stock exchanges to apply daily
circuit breakers, which do not allow transactions at prices different by more
than 8.0% of the previous closing price for shares quoted at Rs.20 or
more.  The Securities and Exchange Board of India has instructed stock
exchanges to relax the circuit breakers by a further 8.0% after half an
hour from the time prices reach the limit of 8.0%.  It has allowed
stock exchanges to fix circuit breakers for shares quoted at prices up to
Rs.20.  There is no circuit filter applicable for trading in shares on
rolling settlement and for which derivative instruments are
available.  There is, however, a dummy circuit filter applicable in
case of a 20% movement on share prices in order to prevent accidental
trades.  There is a 20% circuit filter applicable for trading in
shares on rolling settlement and for which derivative instruments are not
available.  There is also an index based circuit filter based on the
BSE SENSEX and NSE S&P CNX Fifty indices wherein trading in the entire
market is halted for a specific period depending upon whether the index
fluctuates in excess of 10%, 15% or 20%.  Further, margin requirements
are also imposed by stock exchanges that are required to be paid at rates fixed
by the stock exchanges.  The Indian stock exchanges can also exercise
the power to suspend trading during periods of market volatility.




A
settlement cycle is an account period for the securities traded on a stock
exchange.  At the end of the period, obligations are settled, i.e.,
buyers of securities pay for and receive securities while sellers give
securities and receive payment for them.  The obligations are settled
on a net basis, i.e., if some security is both purchased and sold in the same
settlement cycle then only the net quantity of securities is delivered or
received and the net amount of funds paid or received.  Typically, the
length of the settlement period is two business days.  The Securities
and Exchange Board of India has specified certain shares to be settled by
rolling settlement.  Under rolling settlement, the length of the
settlement period is one day.  All stocks trading under the rolling
settlement system are settled on a T+2-day basis; trades executed on a Monday
are typically settled on the following Monday.  Stocks that are not
under the rolling settlement system follow the account period settlement
system.




In
December 1993, the Securities and Exchange Board of India announced a ban on
forward trading on the Ahmedabad, Calcutta and Delhi stock exchanges and The
Stock Exchange, Mumbai in order to contain excessive speculation, protect the
interests of investors and regulate the stock market.  All
transactions thereafter were required to be for payment and
delivery.




77
 Table of Contents




In
October 1995, the Securities and Exchange Board of India announced the
introduction of a modified forward trading system to enable buyers and sellers
to defer the settlement of their obligations to the following settlement
cycle.  This system began on The Stock Exchange, Mumbai in January
1996 for select shares.  The new system segregates trades into
different categories, namely, carry-forward, delivery and jobbing, with
different identification numbers of the various trades.  The
Securities and Exchange Board of India has appointed a committee to recommend
modalities for a carry forward mechanism under the rolling
settlement.  Once the revised carry forward mechanism is
approved, rolling settlement will be applicable also for shares in the carry
forward list.




In May
2001, the Securities and Exchange Board of India announced that all shares
included in the new system will trade only in the compulsory rolling settlement
system from July 2, 2001.  All outstanding deferred positions under
the earlier system would have to be compulsorily liquidated by September 3,
2001.




In 1992,
the Securities and Exchange Board of India promulgated rules and regulations
that prescribe conditions for registration of stockbrokers.  A
stockbroker may not buy, sell or deal in securities except pursuant to a
certificate granted by the Securities and Exchange Board of
India.  The regulations also prescribe a broker code of conduct and
rules for the fair treatment of investors by brokers, the procedures for
registration, the payment of registration fees, maintenance of appropriate books
and records and the right of inspection of the books of the stockbrokers by the
Securities and Exchange Board of India.  Broker liability in cases of
default extends to suspension or cancellation of the broker’s
registration.  The Securities and Exchange Board of India has issued
registration certificates to over 9,000 stockbrokers who are members of
various stock exchanges in India.  Before these regulations,
stockbrokers were required to be registered only with the stock exchanges of
which they were members.  The Securities and Exchange Board of India
regulations introduced the concept of dual registration of stockbrokers with the
Securities and Exchange Board of India and the stock exchanges, and brought the
brokers under regulation for the first time.




The
Securities and Exchange Board of India has enforcement powers over secondary
market participants for violation of any provisions of the Securities and
Exchange Board of India Act, 1992, the rules and regulations of the Securities
and Exchange Board of India, the Securities Contracts (Regulation) Act, 1956, or
the rules and regulations made thereunder.  The Securities and
Exchange Board of India may also take enforcement actions for violations of the
Securities Contract Act or rules made thereunder and rules, regulations and
by-laws of the stock exchanges.




The
Securities and Exchange Board of India has also announced SEBI Regularization
Scheme, 2002, under which parties who are guilty of violating the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997, will be
granted general amnesty on the payment of a fine for each default during the
prescribed period of time.




Internet-Based
Securities Trading and Services




The
Securities and Exchange Board of India has recently allowed Internet-based
securities trading under the existing legal framework.  The
regulations seek to allow the Internet to be used as an order routing system
through stock brokers registered with the Securities and Exchange Board of India
on behalf of clients for executing trades on a recognized stock exchange in
India.  Stock brokers interested in providing this service are
required to apply for permission to the respective stock exchange and also have
to comply with certain minimum conditions stipulated by the Securities and
Exchange Board of India.  Given the limited life of these new
regulations to date, it is possible that these regulations will continue to
evolve in the future.




Takeover
Code




Disclosure
and mandatory bid obligations under Indian law are governed by the Securities
and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (Takeover Code) which prescribes certain thresholds or trigger
points that give rise to these obligations.  The Takeover Code is
under constant review by the Securities and Exchange Board of India and was most
recently amended in December 2002.




78
 Table of Contents




The most
important features of the Takeover Code, as amended, are as
follows:




·
            Any
      acquirer (meaning a person who, directly or indirectly, acquires or agrees
      to acquire shares or voting rights in a company, either by himself or with
      any person acting in concert) who acquires shares or voting rights that
      would entitle him to more than 5.0% of the shares or voting rights in a
      company is required to disclose the aggregate of his shareholding or
      voting rights in that company to the company (which in turn is required to
      disclose the same to each of the stock exchanges on which the company’s
      shares are listed) within two working days of (a) the receipt of allotment
      information; or (b) the acquisition of shares or voting rights, as the
      case may be.




·
            A
      person has to make a three-stage disclosure when he acquires 5%, 10% and
      14% of the shares and/or voting rights in a company, of his holdings to
      that company (which in turn is required to disclose the same to each of
      the stock exchanges on which the company’s shares are
    listed).




·
            Promoters
      or persons in control of a company are also required to make annual
      disclosure of their holdings in the same
manner.




·
            An
      acquirer cannot acquire shares or voting rights which (taken together with
      existing shares or voting rights, if any, held by him or by persons acting
      in concert with him) would entitle such acquirer to exercise 15.0% or more
      of the voting rights in a company, unless such acquirer makes a public
      announcement offering to acquire a further 20.0% of the shares of the
      company.




·
            An
      acquirer who, together with persons acting in concert with him, holds
      between 15.0% and 75.0% of the shares cannot acquire additional shares or
      voting rights that would entitle him to exercise a further 5.0% of the
      voting rights in the period of a financial year unless such acquirer makes
      a public announcement offering to acquire a further 20.0% of the shares of
      the company.




·
            Any
      further acquisition of shares or voting rights by an acquirer who holds
      75.0% of the shares or voting rights in a company triggers the same public
      announcement requirements.




·
            In
      addition, regardless of whether there has been any acquisition of shares
      or voting rights in a company, an acquirer acting in concert cannot
      directly or indirectly acquire control over a company (for example, by way
      of acquiring the right to appoint a majority of the directors or to
      control the management or the policy decisions of the company) unless such
      acquirer makes a public announcement offering to acquire a minimum of
      20.0% of the shares of the company.




The
Takeover Code sets out the contents of the required public announcements as well
as the minimum offer price.




The
Takeover Code permits conditional offers and provides specific guidelines for
the gradual acquisition of shares or voting rights.  Specific
obligations of the acquirer and the board of directors of the target company in
the offer process have also been set out.  Acquirers making a public
offer are also required to deposit in an escrow account a percentage of the
total consideration which amount will be forfeited in the event that the
acquirer does not fulfill his obligations.  In addition, the Takeover
Code introduces the “chain principle” by which the acquisition of a company will
obligate the acquirer to make a public offer to the shareholders of each
subsidiary company which is listed.




The
general requirements to make such a public announcement do not, however, apply
entirely to bailout takeovers when a promoter (i.e., a person or persons in
control of the company, persons named in any offer document as promoters and
certain specified corporate bodies and individuals) is taking over a financially
weak company but not a “sick industrial company” pursuant to a rehabilitation
scheme approved by a public financial institution or a scheduled
bank.  A “financially weak company” is a company which has at the end
of the previous financial year accumulated losses, which have resulted in
erosion of more than 50.0% but less than 100.0% of the total sum of its paid up
capital and free reserves at the end of the previous financial
year.  A “sick industrial




79
 Table of Contents




company”
is a company registered for more than five years which has at the end of any
financial year accumulated losses equal to or exceeding its entire net
worth.




The
Takeover Code does not apply to certain specified acquisitions including the
acquisition of shares (1) by allotment in a public and rights issue, (2)
pursuant to an underwriting agreement, (3) by registered stockbrokers in the
ordinary course of business on behalf of clients, (4) in unlisted companies, (5)
pursuant to a scheme of reconstruction or amalgamation or (6) pursuant to a
scheme under Section 18 of the Sick Industrial Companies (Special Provisions)
Act, 1985.  Certain exemptions have also been provided for acquisition
of shares pursuant to exercise of a put option or call option in the subsequent
stage of a disinvestment, subject to the prior existence of such put option or
call option having been disclosed in the open offer document.  The
Takeover Code does not apply to acquisitions in the ordinary course of business
by public financial institutions either on their own account or as a
pledge.  In addition, the Takeover Code does not apply to the
acquisition of ADSs so long as they are not converted into equity
shares.




In case
of creeping acquisitions/consolidations of holdings, the ceiling has been
reduced from 10% to 5% of equity shareholding of the target company with effect
from October 1, 2002.  No exemptions are available to inter setransfers among
promoters, in the event that the transfers take place at 25% premium to the
market price of equity shares of the company.  Change in control is,
however, allowed in the event a special resolution is passed (in addition to the
filing of the postal ballots).




Insider
Trading




The
Securities and Exchange Board of India has recently adopted the new Insider
Trading Regulations which require significantly greater disclosure by the
company with regard to the trading of the company’s shares.




Under the
Insider Trading Regulations, an insider is as a person who is or was connected
with the company or is deemed to have been connected with the company, and who
is reasonably expected to have access, by virtue of such connection, to
unpublished price sensitive information in respect of securities of the company,
or who has received or has had access to such unpublished price sensitive
information.




Further,
under the Regulations, no insider may, either on his own behalf or on behalf of
any other person, deal in securities of a company listed on a stock exchange on
the basis of any unpublished price sensitive information, or communicate any
unpublished price sensitive information to any person, with or without his
request for such information, except as required in the ordinary course of
business or under any law, or counsel or procure any other person to deal in
securities of any company on the basis of unpublished price sensitive
information.




In
accordance with Regulations, the company has promulgated an internal code of
conduct which is applicable to the directors and designated employees of the
company for dealings in shares of the company by the directors and designated
employees of the company, and with regard to access to unpublished price
sensitive information that the directors or the designated employees might
have.  The Regulations also require the company to follow strict
information disclosure requirements on a need to know basis.




Depositories




In August
1996, the Indian Parliament enacted the Depositaries Act, 1996 which provides a
legal framework for the establishment of depositaries to record ownership
details and effectuate transfers in book entry form.  The Securities
and Exchange Board of India passed the Securities and Exchange Board of India
(Depositories and Participants) Regulations, 1996 which provides for the
formation of such depositaries, the registration of participants as well as the
rights and obligations of the depositaries, participants and the
issuers.  Every depositary has to register with the Securities and
Exchange Board of India.  Pursuant to the Depositories Act, the
National Securities Depository Limited was established by the Unit Trust of
India, the Industrial Development Bank of India and the National Stock Exchange
in 1996 to provide electronic depositary facilities for trading in equity and
debt securities.  The National Securities Depository Limited, which
commenced operations in November 1996, was the first depositary in
India.  Another depositary, the Central Depository Services (India)
Limited, established by The




80
 Table of Contents




Stock
Exchange, Mumbai has commenced operations since July 15, 1999.  The
depositary system has significantly improved the operations of the Indian
securities markets.




9D.
            Selling
      shareholders




Not
applicable.




9E.
            Dilution




Not
applicable.




9F.
            Expenses
      of the issue




Not
applicable.




Item10.
            Additional
      Information




10A.
            Share
      Capital




Not
applicable.




10B.
            Memorandumand Articles of
      Association




Set forth
below is certain information relating to our share capital, including certain
provisions of our articles of association and the Companies Act.  The
information is not complete and is qualified in its entirety by reference to our
articles of association.




General




Our
authorized share capital is Rs. 8,000,000,000, divided into 800,000,000 equity
shares with a par value of Rs.10 each.  At the date of this report,
630,000,000 shares were issued and fully paid.




Our
equity shares are in registered form.  The shares are the only class
of share capital currently outstanding.  There are no convertible
debentures or warrants currently in existence.




Dividends




Our
shareholders, acting at the annual general meeting, may declare a dividend upon
the recommendation of the board of directors.  The amount of the
dividend declared may not exceed the amount recommended by the board of
directors, although a lesser amount may be declared.  Dividends are
distributed and paid within 30 days of the declaration by the
shareholders.  Our board of directors also is authorized under our
articles of association to declare and pay interim dividends to
shareholders.




If any
dividend remains unclaimed at the end of 30 days, the amount of the dividend
will be transferred to a separate account belonging to us.  If it
still remains unclaimed at the end of seven years, this amount will be
transferred to government of India and cannot be claimed by the relevant
shareholder.  Dividends are payable only in cash to registered holders
on a record date fixed prior to the relevant annual general
meeting.




Dividends
may be paid only out of our profits for the relevant year, after transfer to our
reserves of a percentage of our profits for that year of not less than
2.5%.  The Companies Act further provides that, in the event of
inadequacy or absence of profits in any year, a dividend may be declared for
that year out of our accumulated profits, subject to certain
limitations.  A dividend tax of approximately 16.995% (inclusive of
Education surcharge) of distributed profit for a relevant period is payable by
us.




81
 Table of Contents




The
following table sets forth, for the periods indicated, the dividend per equity
share and per global depositary receipt and the total amount of dividends paid
on the equity shares, both exclusive of dividend tax.




For
      fiscal year
              Dividend
      per
                equity
      share
              Dividend
      per
                ADS/GDR
              Total
      amount of
                dividends
      paid(Rs.)
              (Rs.)
              (millions
      of Rupees)2008
              4.0
              8.0
              2,5202007
              4.0
              8.0
              2,5202006
              4.0
              8.0
              2,5202005
              4.5
              9.0
              2,8352004
              4.5
              9.0
              2,835




The
Ministry of Finance has adopted non-binding guidelines regarding the payment of
dividends by “public sector undertakings (PSUs)” which apply to
us.  According to the guidelines, profit-making public sector
undertakings which are commercial enterprises should generally declare a minimum
dividend each fiscal year of 20% of the higher of paid-up share capital as of
year-end or profit after tax for the year.  In the case of
telecommunications, oil, petroleum, chemical and other infrastructure
industries, profit making PSUs should declare a minimum dividend for each fiscal
year of 30% of profit after tax for the year or 30% on equity, whichever is
higher.




Future
dividends will depend upon our revenues, cash flow, financial condition and
other factors.  As an owner of ADSs, holders will be entitled to
receive dividends payable in respect of the equity shares represented by our
ADSs.  The equity shares represented by our ADSs rank equally with our
existing shares.  ADS holders will bear all of the
currency exchange risk of the conversion of any dividends from Indian
rupees to dollars, and a decline in the value of the Indian rupee as compared to
the dollar would reduce the dollar value of any dividends we may pay that are
received by ADS holders.  At present, we have equity shares issued in
India.




Free
Distribution of Equity Shares




In
addition to permitting dividends to be paid out of current or retained earnings,
the Companies Act permits us to distribute bonus shares to
shareholders.  Upon any distribution of bonus shares, an amount equal
to the face value of the bonus shares to be distributed is transferred from the
general reserve or share premium account to share capital.  The bonus
shares must be distributed to shareholders in proportion to the number of equity
shares owned by them.




Preemptive
Rights and Issue of Additional Shares




Subject
to the approval of the President of India, we may by ordinary resolution
increase our share capital by the issue of new shares or create a new class of
shares.  In addition, the rights attached to the shares of any class
may be varied with the consent of not less than three-fourths of the issued
shares of that class.  The Companies Act gives shareholders the right
to subscribe for new shares in proportion to their existing shareholdings unless
otherwise determined by a special resolution to that effect adopted at a general
meeting of shareholders.  Such a resolution was adopted with respect
to the equity shares offered by us in the global depositary receipt offering at
an extraordinary general meeting held on November 19, 1997.  We
must offer shares to existing shareholders by notice specifying the number of
shares offered and the date, within 30 days from the date of offer, by which the
offer must be accepted.  The board of directors is entitled to
distribute the shares in respect of which preemptive rights have not been
exercised in the manner that it deems most beneficial to us.




General
Meetings of Shareholders




We are
required to convene an annual general meeting of our shareholders within six
months after the end of each financial year (subject to extensions which may be
granted by the competent authorities) and may convene an extraordinary general
meeting of shareholders when necessary or at the request of a
shareholder or shareholders holding not less than 10% of our paid-up
capital on the date of the request.  The annual general meeting of the
shareholders is generally convened by the Company Secretary in accordance with a
resolution of the board of




82
 Table of Contents




directors.  Written notice
setting out the agenda of the meeting must be given at least 21 days (excluding
the day of service) prior to the date of the general meeting to the shareholders
whose names are on the register at the record date.  Those
shareholders who are registered as shareholders on the date of the general
meeting are entitled to attend or vote at such meeting.




The
annual general meeting of shareholders must be held at our registered office or
at such other place within the city in which the registered office is located;
meetings other than the annual general meeting may be held at any other place
determined by the board of directors.




Our
articles of association provide that a quorum for a general meeting is the
presence of at least five shareholders, including a representative of the
President of India.




This
year’s annual general meeting is scheduled for September 26, 2008.




Voting
Rights




At any
general meeting, voting is by show of hands (where each shareholder has one
vote) unless a poll is demanded by at least 10% of those entitled to vote on the
resolution or those holding shares with a paid-up value of at least
Rs.50,000.  Upon a poll, every shareholder entitled to vote and
present in person or by proxy has one vote for every share held by the
shareholder.  The Chairman has a deciding vote in the case of any
tie.  Our articles of association do not allow shareholders to
cumulate their votes.




Any
shareholder may appoint a proxy.  The instrument appointing a proxy
must be lodged with us at least 48 hours before the time of the
meeting.  A corporate shareholder may appoint an authorized
representative who may vote in all respects as if a shareholder, both on a show
of hands and upon a poll.




Ordinary
resolutions may be passed by simple majority of those present and voting at any
general meeting for which the required period of notice has been
given.  However, certain resolutions such as those relating to the
alteration of our articles of association, the commencement of a new line of
business, the issue of further shares without preemptive rights and a reduction
of share capital require a three-fourth majority of the votes cast in favor of
the resolution (whether by show of hands or upon a poll).  The
Companies Act has been amended to require that certain shareholder resolutions
only be passed through postal ballot.




Register
of Shareholders, Record Dates and Transfer of Shares




Our share
transfer agents maintain registers of our shareholders and beneficial owners of
shares held through depositaries.  For the purpose of determining
equity shares entitled to annual dividends, the register is closed for a
specified period prior to the annual general meeting.  The Companies
Act and our listing agreement with The Stock Exchange, Mumbai (and the other
Indian Stock Exchanges) permit us, according to a resolution of the Board
and upon at least 15 days’ advance notice to The Stock Exchange, Mumbai (and
such other stock exchanges), to set the record date and upon seven days’ public
notice to close the register of shareholders for not more than 30 days at a
time, and not more than 45 days in a year, in order for us to determine which
shareholders are entitled to certain rights relating to the
shares.  Trading of shares may, however, continue while the register
of shareholders is closed.




Following
introduction of the Depositories Act, 1996, and the repeal of Section 22A of the
Securities Contracts (Regulation) Act, 1956, which enabled companies to refuse
to register transfers of shares in certain circumstances, the shares of a
company are freely transferable, subject only to the provisions of Section 111A
of the Companies Act.  Pursuant to Section 111A, if the transfer of
shares is in contravention of any of the provisions of the Securities and
Exchange Board of India Act, 1992 or the regulations issued thereunder or
the Sick Industrial Companies (Special Provisions) Act, 1985, the Company Law
Board (a statutory body which administers the Companies Act) may, on application
made by an investor, the Securities and Exchange Board of India or certain
other parties, direct the rectification of the register of
members.  The Company Law Board may, in its discretion, issue an
interim order suspending the voting rights attached to the relevant shares,
before making or completing its inquiry into the alleged
contravention.  Pending the inquiry, the rights of a holder to
transfer the shares would not be




83
 Table of Contents




restricted,
although the voting rights attached to the shares may remain suspended by an
order of the Company Law Board.




The
Indian Companies Act, 1956, has been recently amended to provide for the
constitution of a National Company Law Tribunal and dissolution of the Company
Law Board.  The National Company Law Tribunal shall exercise all
powers that had been conferred on the Company Law Board or the High Courts by
the Indian Companies Act, 1956.  This amendment has not yet been
brought into force.




Shares
held through depositories are transferred in the form of book entries or in
electronic form in accordance with the rules and procedures laid down by
Securities and Exchange Board of India.  These regulations provide the
regime for the functioning of the depositaries and the participants and set out
the manner in which the records are to be kept and maintained and the safeguards
to be followed in this system.  Transfers of beneficial ownership
of shares held through a depositary are exempt from stamp duty.




The
Securities and Exchange Board of India has notified our equity shares for
trading and settlement only in book-entry form for all investors, except for
transactions made outside and which are not required to be reported to the stock
exchange.  Transfers of equity shares in book-entry form require both
the seller and the purchaser of the equity shares to establish accounts with
depositary participants appointed by depositaries established under the
Depositaries Act, 1996.  Charges for opening an account with a
depositary participant, transaction charges for each trade and custodian charges
for securities held in each account vary depending upon the practice of each
depositary participant.  Upon delivery, the equity shares shall be
registered in the name of the relevant depositary on our books in book-entry
form and this depositary shall enter the name of the investor in its records as
the beneficial owner.  The transfer of beneficial ownership shall be
effected through the records of the depositary.  The beneficial owner
shall be entitled to all rights and benefits and subject to all liabilities in
respect of his securities held by a depositary.




The
requirement to hold our equity shares in book-entry form will apply to the ADS
holders when the equity shares are withdrawn from the depositary facility upon
surrender of the global depositary receipts.  In order to trade our
equity shares in the Indian market, the withdrawing ADS holder will be required
to comply with the procedures described above.




We have
entered into a listing agreement with each of the other Indian stock exchanges
on which the shares are listed.  Clause 40A of the listing agreements
provides that if an acquisition of a listed company’s equity shares results in
the acquirer and its associates holding 5% or more of the company’s outstanding
equity shares, the acquirer must report its holding to the relevant stock
exchanges.  If an acquisition would result in the acquirer and its
associates holding equity shares which carry 10% or more of the voting rights,
then the acquirer must notify the relevant stock exchanges.  If an
acquisition is deemed a takeover, the acquirer must, before acquiring shares,
offer (in accordance with Clause 40B of the listing agreements) on a uniform
basis to all remaining shareholders of the company to acquire a minimum of a
further 20% of the total shares of the company at a prescribed
price.  The acquisition of shares of a company listed on an Indian
stock exchange beyond certain threshold amounts is subject to regulations
governing takeovers of Indian companies.  See “The Offer and
Listing—The Indian Securities Market—Takeover Code.” Clauses 40A and 40B and
such regulations will not apply to shares so long as they are represented by
ADSs.




Shareholder
Access to Corporate Records




Under the
Companies Act, the shareholder register and index, the register and index of
debenture holders and copies of all annual returns together with copies of
certificates and documents required to be annexed thereto, must be kept at our
registered office for inspection by any share or debenture holder free of charge
and by any other person on payment of a fee.  The minute books of the
general meetings of our shareholders must be kept at our registered office and
be made available for inspection by our shareholders regardless of the size of
their shareholding.




84
 Table of Contents




Disclosure
of Ownership Interest




Section
187C of the Companies Act generally requires beneficial owners of shares of
Indian companies who are not holders of record to declare to the company details
of the holder of record and holders of record to declare details of the
beneficial owner.  While it is unclear whether Section 187C applies to
holders of ADSs of a company, investors who exchange ADSs for shares are subject
to this Section.  Failure to comply with Section 187C would not affect
the obligation of a company to register a transfer of shares or to pay any
dividends to the registered holder of any shares in respect of which such
declaration has not been made, but any person who fails to make the required
declaration may be liable for a fine of up to Rs.1,000 for each day the failure
continues.  Furthermore, any charge, promissory note or any other
collateral agreement created, executed or entered into by the registered owner
of any share in respect of which a declaration required under Section 187C has
not been made is not enforceable by the beneficial owner or any person claiming
through him.




So long
as the government of India’s shareholding equals or exceeds 51%, Section 187C
will not apply to holders of our equity securities, including holders of our
ADSs or equity shares.




Audit
and Annual Report




At least
21 days before the annual general meeting of shareholders, we must circulate
either a detailed or an abridged version of our audited balance sheet and profit
and loss account and the related reports of our board of directors and our
auditors.  We are also required under the Companies Act to make
available upon request of any shareholder a complete balance sheet and profit
and loss account in the case of circulation of abridged accounts.




The
Comptroller and Auditor General of India, has the power to direct the manner in
which our accounts are audited by the auditors appointed pursuant to Section
619(2) of the Companies Act, to give the auditors instructions in regard to any
matter relating to the performance of their functions and to conduct a
supplementary or test audit of our accounts by such
auditors.  The Comptroller and Auditor General also has the right to
comment on or supplement the audit report to the Comptroller and Auditor General
which must be placed before our annual general meeting at the same time and in
the same manner as the audit report.




Powers
of the President of India




Under
Articles 66A and 66B of our articles of association, the President of India is
entitled to appoint one third of our total number of directors including our
Chairman and Managing Director as well as our whole time
directors.  Article 69(i) requires the Chairman to reserve for the
decision of the President of India all proposals, decisions or matters which
raise in the opinion of the Chairman any important issue and which are, on that
account, fit to be reserved for the decision of the President of
India.  No decision on these important issues may be taken in the
absence of the Chairman appointed by the President of India.  Article
69(ii) lists the matters in respect of which prior approval of the President of
India must be obtained, which include issuance of debentures and the sale, lease
or disposal of any land or building with an original book value in excess of
Rs.1 million.  Under Article 71, we may not take action in respect of
any proposal or decision of the board of directors reserved for approval of the
President until his approval is obtained.  The President may modify
the board of directors’ proposals or decisions.




Article
70 grants the President of India the power to issue directives in regard to the
conduct of our business and affairs, which are binding on our board of
directors.  These powers include the power to give directives to us as
to the exercise and performance of our functions in matters involving national
security or substantial public interest, power to call for returns, accounts and
other information with respect to our properties and activities and to determine
in consultation with the board of directors our financial and economic
objectives.




Acquisition
by Us of Our Own Shares




Until
1998, the Companies Act did not permit a company to acquire its own equity
shares because of the resulting reduction in the company’s
capital.  However, the government of India amended the Companies Act
to allow a repurchase of shares in certain circumstances.  A buy-back
requires compliance with specific buy-back guidelines specified in the Companies
Act and by the Securities and Exchange Board of India.




85
 Table of Contents




Holders
of ADSs will be eligible to participate in a buy-back in certain
cases.  An ADS holder may acquire shares by withdrawing from the
depositary facility and then selling those shares back to us.




There can
be no assurance that the shares offered by an ADS holder in any buy-back of
shares by us will be accepted by us.  Investors are advised to consult
Indian legal advisers prior to participating in any buyback by us, including in
relation to any tax issues relating to such buy-back.




Liquidation
Rights




Subject
to the rights of employees, creditors and of the holders of any other shares
entitled by their terms to preferential repayment over the shares, in the event
of our winding up, the holders of our shares are entitled to be repaid the
amount of capital paid up or credited as paid up on their shares.  All
surplus assets after payments due to the holders of any preference shares belong
to the holders of the shares in proportion to the amount paid up or credited as
paid up on such shares, respectively, at the commencement of the winding
up.




American
Depositary Shares




Our ADSs
were originally issued in an exchange offer during October 2001 in which we
offered ADSs for our global depositary receipts on a one-for-one
basis.  Our global depositary receipt program was cancelled and the
receipts delisted from the London Stock Exchange in December 2001.  At
the end of October 2001, our ADSs were listed and began trading on the New York
Stock Exchange.  There have been no changes to the depositary
agreement governing our ADSs since the exchange offer.




10C.
            MaterialContracts




Since
April 1, 2006, we have not entered into any material contracts that were not in
the ordinary course of business.




10D.
            Exchange
      Controls




INDIANFOREIGN EXCHANGE CONTROLS AND SECURITIES
REGULATIONS




Restrictions
on Conversion of Rupees




There are
restrictions on the conversion of rupees into dollars.  Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India’s major
trading partners.  In the February 1992 budget, a new dual exchange
rate mechanism was introduced by allowing conversion of 60.0% of the foreign
exchange received on trade or current account at a market-determined rate and
the remaining 40.0% at the official rate.  All importers were,
however, required to buy foreign exchange at the market rate except for certain
specified priority imports.  In March 1993, the exchange rate was
unified and allowed to float.  In February 1994 and again in August
1994, the Reserve Bank of India announced relaxations in payment restrictions in
the case of a number of transactions.  Since August 1994, the
government of India has substantially complied with its obligations owed to the
International Monetary Fund, under which India is committed to refrain from
using exchange restrictions on current international transactions as an
instrument in managing the balance of payments.  Effective July 1995,
the process of current account convertibility was advanced by relaxing
restrictions on foreign exchange for various purposes, such as foreign business
travel, travel for education, travel for pilgrimage, medical treatment and
others.




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




ADSs
issued by Indian companies to non-residents have free transferability outside
India.  However, under Indian regulations and practice, the approval
of the Reserve Bank of India is required for the sale of equity shares
underlying the ADSs (other than a sale on a stock exchange or in connection with
an offer made under the takeover regulations) by a non-resident of India to a
resident of India as well as for renunciation of rights to a resident of
India.  Investors who seek to sell in India any equity shares (other
than a sale on a stock exchange or in connection




86
 Table of Contents




with an
offer made under the takeover regulations) withdrawn from the depositary
facility and to convert the rupee proceeds from such sale into foreign currency
and repatriate such foreign currency from India will, subject to the foregoing,
have to obtain Reserve Bank of India approval for each such
transaction.




Limitations
on Deposits of Equity Shares into the ADS Program




Under
procedures recently adopted by the Reserve Bank of India, the depositary will be
permitted to accept deposits of our outstanding equity shares and deliver ADSs
representing the deposited equity shares to the extent, and limited to the
number, of ADSs that have previously been converted into underlying equity
shares.  Under these new procedures, if you elect to surrender your
ADSs and receive equity shares, you may be unable to re-deposit those
outstanding equity shares with our depositary and receive ADSs because the
number of new ADSs that can be issued cannot, at any time, exceed the number of
ADSs converted into underlying equity shares or result in foreign equity in us
exceeding 49%.




Specifically,
in February 2002, the Reserve Bank of India issued operative guidelines for
“limited two-way fungibility.” Under the guidelines, a registered broker in
India is now permitted to purchase equity shares of an Indian company on behalf
of persons resident outside India for the purpose of converting the equity
shares so purchased into ADRs or GDRs, providedthat (i) the equity
shares are purchased on a recognized stock exchange, (ii) the Indian company has
issued ADRs or GDRs, (iii) the equity shares are purchased with the permission
of the custodian of the ADRs or GDRs of the Indian company, and are deposited
with such custodian, (iv) the number of equity shares so purchased to be
converted into ADRs or GDRs do not exceed the ADRs or GDRs previously converted
into underlying equity shares (the number of equity shares available for
conversion into




ADRs or
GDRs is dependent upon the number of equity shares arrived at after conversion
of ADRs into equity shares will have to be checked with the custodian) and (v)
the number of equity shares so purchased to be converted shall be subject to
sectoral caps as applicable and all the concerned parties shall comply with the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder.




Further,
paragraph (v) of the guidelines states that the company should not be involved
in the process and the process should be demand driven upon the request for ADRs
or GDRs emanating from overseas investors, and expenses involved in the overseas
transaction would be borne by the investors themselves.




Restrictions
On Foreign Ownership Of Indian Securities




The
government of India regulates ownership of Indian companies by
foreigners.  Foreign investment in Indian securities, including the
equity shares represented by the ADSs, is generally regulated by the Foreign
Exchange Management Act, 1999, which permits transactions including the inflow
or outflow of foreign exchange and empowers the Reserve Bank of India to
prohibit or regulate such transactions.




The
Foreign Exchange Management Act permits most transactions involving foreign
exchange except those prohibited or restricted by the Reserve Bank of
India.  The extent of control exercised over transactions involving
foreign exchange depends upon the type of transaction
involved.  Transactions that alter the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or
the assets and liabilities in India of persons resident outside India are known
as capital account transactions.  Transactions other than capital
account transactions are known as current account transactions.




The
Foreign Exchange Management Act has eased restrictions on current account
transactions.  However, the Reserve Bank of India continues to
exercise control over capital account transactions.  The Reserve Bank
of India has issued regulations under the Foreign Exchange Management Act to
regulate various capital account transactions, including certain aspects of the
purchase and issuance of shares by Indian companies.




The
Reserve Bank of India has issued a notification under the provisions of the
Foreign Exchange Management Act relaxing the requirement of prior approval for
an Indian company making an ADS issue provided




87
 Table of Contents




that the
issuer is eligible to issue ADSs pursuant to guidelines issued by the Ministry
of Finance and has the necessary approval from the Foreign Investment Promotion
Board.




Under the
foreign investment rules, the following restrictions are applicable on foreign
ownership:




·
            under
      the “foreign direct investment” scheme, foreign individuals may own more
      than 49% of the equity shares of an Indian telecommunications company only
      with the approval of the Foreign Investment Promotion Board; this approval
      is granted on a case-by-case basis.  However, ISPs with
      gateways, radio paging, and end to end bandwidth permitted up to 74% with
      FDI beyond 49% requiring government
approval.




·
            under
      the “depositary” scheme, foreign investors may purchase ADSs or global
      depositary receipts, subject to the receipt of all necessary government
      approvals at the time the depositary receipt program is set
      up;




·
            under
      the “portfolio investment” scheme, foreign institutional investors,
      subject to registration with the Securities and Exchange Board of India
      and the Reserve Bank of India, may be permitted to own, in the aggregate,
      up to an additional 24.0% of our equity shares that are not represented by
      ADSs or global depositary receipts (and up to 49.0% with the approval of
      our shareholders); no single foreign institutional investor may own more
      than 10.0% of our equity shares;
and




·
            under
      the “portfolio investment” scheme, non resident Indians may own up to an
      aggregate or 10.0% of our equity shares; no single non-resident Indian may
      own more than 5.0% of our total equity
shares.




We had
obtained approvals from the Ministry of Finance, the Foreign Investment
Promotion Board, the DOT and special permission from the Reserve Bank of India
for the offering of our global depositary receipts.  Various tax
concessions were also made available with respect to the existing global
depositary receipt offering in accordance with the provisions of Section 115AC
of the Indian Income-tax Act, 1961.  Since no new shares were issued
or offered in our exchange offer and the exchange offer was related to a change
in the form of depository receipts, the original approvals needed merely to be
taken on file, noted and recorded for modification.  We obtained from
the Ministry of Finance, Reserve Bank of India, the Foreign Investment Promotion
Board and the DOT, modifications to the original
approvals/special permission given by them, for our exchange
offer.




As of
March 31, 2008, foreign direct investment in us was 12.25% of our equity
shares.




An
investor in ADSs does not need to seek the specific approval from the government
of India to purchase, hold or dispose of its ADSs.  However, foreign
investment in our ADSs may not exceed 49% without prior government
approval.




Our
outstanding equity shares, including the equity shares underlying the ADSs, are
listed and traded on the Calcutta, Delhi and Chennai Stock Exchanges, The Stock
Exchange, Mumbai and the National Stock Exchange.  The prices for
equity shares as quoted in the official list of each of the Indian stock
exchanges are in Indian rupees.  The ADS are listed on the New York
Stock Exchange.




Equity
shares which have been withdrawn from the depositary facility and transferred on
our register of shareholders to a person other than the depositary or its
nominee may be voted by that person.  However, an ADS holder may not
receive sufficient advance notice of shareholder meetings to enable you to
withdraw the underlying equity shares and vote at such meetings.




Notwithstanding
the foregoing, if a foreign institutional investor, non-resident Indian or
non-Indian corporation were to withdraw its equity shares from the ADS program,
its investment in the equity shares would be subject to the general restrictions
on foreign ownership noted above and may be subject to the portfolio investment
restrictions, including the 10-24% portfolio investment limitations, and
the 5-10% non-resident Indian limitation.  The application of
these limitations, however, is not clear.  Secondary purchases of
securities of Indian companies in India by foreign direct investors or
investments by non-resident Indians, persons of Indian origin and
foreign




88
 Table of Contents




institutional
investors above the ownership levels set forth above, require government of
India approval on a case-by-case basis.  It is unclear whether similar
case-by-case approvals of ownership of equity shares withdrawn from the
depositary facility by foreign institutional investors and non-resident Indians
would be required.




Further,
if an ADS holder withdraws equity shares from the ADS program and its direct or
indirect holding in us exceeds 15.0% of our total equity (under the Takeover
Code), such holder would be required to make a public offer to the remaining
shareholders.  If one withdraws equity shares from the depositary
facility, one will not be able to redeposit them with the
depositary.




If one
wishes to sell the equity shares withdrawn from the depositary facility, they
will be required to receive the prior approval of the Reserve Bank of
India.




Under
procedures approved by the Reserve Bank of India, the custodian will be
permitted to accept deposits of our outstanding equity shares purchased on a
recognized stock exchange by registered brokers in India on behalf of a foreign
investor.  The depositary may issue ADRs evidencing ADSs representing
the deposited equity shares to the extent, and limited to the number, of ADSs
that have previously been converted into underlying equity shares, subject to
applicable foreign ownership restrictions.  See “— Limitations on
Deposits of Equity Shares into the ADS Program” above for more details on these
procedures.




Other
Regulations




For more
information on relevant securities and related regulations, please see Item 9C.
“The Offer and Listing—The Indian Securities Market.”




10E.
            Taxation




Indian
Taxation




The
following is a summary of the material Indian tax consequences for holders of
ADSs and equity shares received upon withdrawal of such equity shares who are
not resident in India, whether of Indian origin or not.  This
discussion is based on the provisions of the Indian Income-Tax Act, 1961,
including the special tax regime for ADSs contained in Section 115AC, which has
been extended to cover additional ADSs that an investor may acquire in an
amalgamation or restructuring of the company, and certain regulations
implementing the Section 115AC regime.  The Indian Income Tax Act is
amended every year by the Finance Act of the relevant year.  Some or
all of the tax consequences of the Section 115AC regime may be amended or
modified by future amendments to the Indian Income Tax
Act.  Amendments to Section 115AC extend the special tax regime of
Section 115AC to ADSs re-issued, in accordance with procedures established by
the Indian government (operative guidelines issued under the Foreign Exchange
Management notification dated February 13, 2002), against existing shares of an
Indian company purchased by a non-resident investor in foreign currency through
an approved intermediary.  Under these guidelines re-issuance of ADSs
would be permitted to the extent of ADSs which have been converted into
underlying shares.




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




Residence




For the
purpose of the Income Tax Act, an individual is a resident of India during any
fiscal year, if he (1) is in India in that year for 182 days or more or (2)
having within the four years preceding that year been in India for a period or
periods amounting in all to 365 days or more, is in India for period or periods
amounting in all to 60 days or more in that year.  The period of 60
days is substituted by 182 days in case of an Indian citizen or a person of
Indian origin who being resident outside India visits India during the financial
year or an Indian citizen who leaves




89
 Table of Contents




India for
the purposes of his employment during the financial year.  A company
is resident in India in any fiscal year if it is registered in India or the
control and management of its affairs is situated wholly in India in that
year.  A firm or other association of persons is resident in India
except where the control and the management of its affairs are situated wholly
outside India.




Taxation
of Distributions




Dividends
distributed by an Indian company after March 31, 2002 are not subject to tax in
the hands of shareholders.  We must pay a “dividend distribution tax”
at the rate of 15% (plus a surcharge of 10% and an add-on tax at the rate of 3%
of the interim dividend) and distribution tax on the final dividend of Rs. 1.00
per share at the rate of 15% (plus a surcharge of 10% and an add-on tax at the
rate of 3%).




Taxation
on Redemption of ADSs




The
acquisition of equity shares upon a redemption of ADSs by a non-resident
investor will not give rise to a taxable event for Indian tax
purposes.




Taxation
on Sale of Equity Shares or ADSs




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




Subject
to any relief under any relevant double taxation treaty, a gain arising on the
sale of an equity share to a resident of India or where the sale is made inside
India will generally give rise to a liability for Indian capital gains
tax.  Such tax is required to be withheld at source.  Where
the equity share has been held for more than 12 months (measured from the date
of advice of redemption of the ADSs by the Depositary), the rate of tax is
10.46% (inclusive of surcharge).  Where the equity share has been held
for 12 months or less, the rate of tax varies and will be subject to tax at
normal rates of income-tax applicable to non-residents under the provisions of
the Indian Income Tax Act, subject to a maximum of 41.82% (inclusive of
surcharge) in the case of foreign companies.  The actual rate depends
on a number of factors, including without limitation the nature of the
non-resident investor.  During the period the underlying equity shares
are held by non-resident investors on a transfer from the Depositary upon
redemption of ADRs, the provisions of the Avoidance of Double Taxation Agreement
entered into by the government of India with the country of residence of the
non-resident investors will be applicable in the matter of taxation of any
capital gain arising on a transfer of the equity shares.  The double
taxation treaty between the United States and India does not provide
U.S.  residents with any relief from Indian tax on capital
gains.




For
purposes of determining the amount of capital gains arising on a sale of an
equity share for Indian tax purposes, the cost of acquisition of an equity share
received upon redemption of an ADS will be the price of the share prevailing on
The Stock Exchange, Mumbai or the National Stock Exchange on the date on which
the depositary advises the custodian of such redemption, not the acquisition
cost of the ADS being redeemed.  The holding period of an equity share
received upon redemption of an ADS will commence from the date of advice of
redemption by the depositary.  The exact procedures for the
computation and collection of Indian capital gains tax are not
settled.




Rights




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




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




90
 Table of Contents




Stamp
Duty




A
transfer of ADSs is not subject to Indian stamp duty.  Normally, upon
the acquisition of equity shares from the depositary in exchange for ADSs
representing such equity shares in physical form, an investor would be liable
for Indian stamp duty at the rate of 0.5% of the market value of the equity
shares at the date of registration.  Similarly, a sale of equity
shares by an investor would be also subject to Indian stamp duty at the rate of
0.5% of the market value of the equity shares on the trade date, although
customarily such tax is borne by the transferee, that is, the
purchaser.  However, our equity shares are mandatorily deliverable in
uncertificated form and under Indian stamp law, no stamp duty is payable on the
acquisition or transfer of equity shares in uncertificated/dematerialized
form.




Other
Taxes




At
present, there are no taxes on wealth, gifts and inheritance which may apply to
the ADSs and underlying equity shares.




Service
Tax




Brokerage
or commission paid to stockbrokers in connection with the sale or purchase of
shares was subject to a service tax 12.24%, however the rate was changed to
12.36% effective May 13, 2007.  The stockbroker is responsible for
collecting the service tax and paying it to the relevant authority.




United
States Federal Income Taxation




The
following is a summary of certain United States federal income tax
considerations for U.S.  Holders (as defined below) of ADSs or equity
shares who hold ADSs or equity shares as of the date hereof.  This
summary is based upon existing United States federal income tax law which is
subject to change, possibly on a retroactive basis.  This summary does
not discuss all aspects of United States federal income taxation which may be
important to particular holders in light of their individual investment
circumstances, such as ADSs or equity shares held by holders subject to special
tax rules ( e.g., financial institutions, insurance companies, broker-dealers,
tax-exempt organizations, and non-U.S.  Holders) or to persons that
will hold ADSs or equity shares as part of a straddle, hedge, conversion, or
other integrated transactions for United States federal income tax purposes or
that have a functional currency other than the United States dollar, all of
whom may be subject to tax rules that differ significantly from those summarized
below.  In addition, this summary does not discuss any state, local,
or foreign tax considerations.  This summary assumes that
investors hold, and will continue to hold, their ADSs or equity shares as
“capital assets” (generally, property held for investment) under the United
States Internal Revenue Code of 1986, as amended (Code).  Holders are
urged to consult their tax advisers regarding the United States federal, state,
local, and foreign income tax considerations, including the “passive foreign
investment company” rules described below, of the ownership and disposition of
ADSs or equity shares.




For
purposes of this summary, a “U.S.  Holder” is a beneficial owner of
ADSs or equity shares that is for United States federal income tax purposes (i)
an individual who is a citizen or resident of the United States, (ii) a
corporation, partnership, or other entity created or organized in or under the
law of the United States or any State or political subdivision thereof, (iii) an
estate the income of which is includible in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust (A) the
administration of which is subject to the primary supervision of a United States
court and which has one or more United States persons who have the authority to
control all substantial decisions of the trust, or (B) that was in existence on
August 20, 1996, was treated as a United States person under the Code on the
previous day, and properly elected to continue to be so treated.  The
tax treatment of persons who hold their ADSs or equity shares through a
partnership (including an entity treated as a partnership for United States
federal income tax purposes) will generally depend on the status of the partner
and the activities of the partnership.




91
 Table of Contents




General




For
purposes of United States federal income taxation, a holder of ADSs will be
treated as the owner of his proportionate interest in the underlying equity
shares held by the depositary.  Accordingly, no gain or loss will be
recognized upon the exchange of ADSs for the holder’s proportionate interest in
equity shares, a holder’s tax basis in the withdrawn equity shares will be the
same as his tax basis in the ADSs surrendered in exchange therefor, and such
holder’s holding period in the withdrawn equity shares will include the period
during which the holder held the surrendered ADSs.




A foreign
corporation will be classified as a “passive foreign investment company” (PFIC),
for United States federal income tax purposes, if 75% or more of its gross
income or 50% or more of its assets are “passive” as determined under the PFIC
rules.  The determination of whether a foreign corporation is a PFIC
is a factual determination and may entail the resolution of certain legal issues
such as the tax treatment of on-lending transactions involving related parties
under the PFIC rules.  In addition, such determination is made on an
annual basis and, accordingly, is subject to change from year to
year.  The following discussion assumes that we will not be classified
as a PFIC for United States federal income tax purposes.  For further
PFIC considerations, see “—PFIC Considerations” below.




U.S.
Holders




Taxation of
Dividends.     Any cash distributions paid by us
out of our earnings and profits, as determined under United States federal
income tax principles, will be subject to tax as ordinary dividend income and
will be includible in the gross income of a U.S.  Holder upon
receipt.  Cash distributions paid by us in excess of our earnings and
profits will be treated as a tax-free return of capital to the extent of the
U.S.  Holder’s adjusted tax basis in his ADSs or equity shares, and
thereafter as gain from the sale or exchange of a capital
asset.  Dividends paid in Indian rupees will be includible in income
in a United States dollar amount based on the United States dollar—Indian rupee
exchange rate prevailing at the time of receipt of such dividends by the
depositary.  Dividends received on the ADSs or equity shares will not
be eligible for the dividends received deduction allowed to corporations, but
generally will qualify for the reduced income tax rate for qualified dividend
income, provided certain holding period requirements are met.




Dividends
paid on ADSs or equity shares will be treated, for United States federal income
tax purposes, as foreign source income.  A U.S.  Holder may
be eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of any Indian income tax imposed on dividends received on the
ADSs or equity shares.  U.S.  Holders who do not elect to
claim a foreign tax credit for Indian income tax withheld may instead claim the
Indian income tax withheld as a deduction for United States federal income tax
purposes, but only for a year in which the U.S.  Holder elects to do
so for all creditable foreign taxes.  In certain circumstances, a
U.S.  Holder may not claim a foreign tax credit (and instead may claim
a deduction) for foreign taxes imposed on a dividend if the
U.S.  Holder (i) has not held the ADSs or equity shares for at least
16 days in the 30-day period beginning 15 days before the ex-dividend date
during which it is not protected from risk of loss, (ii) is obligated to make
certain payments related to such dividend, or (iii) subject to the promulgation
of future Treasury regulations that are anticipated to be retroactively applied,
holds the ADSs or equity shares in an arrangement in which the expected economic
profit of the U.S.  Holder is insubstantial compared to the value of
the foreign tax credit expected to be obtained as a result of the
arrangement.




A
distribution of additional shares issued by us to U.S.  Holders with
respect to their ADSs or equity shares that is pro rata to all of our
shareholders may not be subject to United States federal income
tax.  In the case of such a non-taxable stock dividend, such a
distribution will not give rise to foreign source income and a
U.S.  Holder will not be able to use the foreign tax credit arising
from any Indian withholding tax imposed in connection with such distribution
unless the foreign tax credit can be applied (subject to applicable limitations)
against United States federal income tax due on other foreign source income of
the U.S.  Holder.  The tax basis of such additional shares
will be determined by allocating the U.S.  Holder’s tax basis in the
ADSs or equity shares between the ADSs or equity shares and the additional
shares, based on their relative fair market values on the date of
distribution.




Sale or
Other Disposition of ADSs or Ordinary Shares.  A
U.S.  Holder will generally recognize capital gain or loss upon the
sale or other disposition of ADSs or equity shares in an amount equal to the
difference between




92
 Table of Contents




the
amount realized upon the disposition and the U.S.  Holder’s adjusted
tax basis in such ADSs or equity shares.  Any capital gain or loss
will be long-term if the ADSs or equity shares have been held for more
than one year and will generally be United States source gain or
loss.  The claim for a deduction in respect of a capital loss is
subject to limitations.




PFIC
Considerations.     If we were to be classified
as a PFIC in any taxable year, a U.S.  Holder would be subject to
special rules generally intended to reduce or eliminate any benefits from the
deferral of United States federal income tax that a U.S.  Holder could
derive from investing in a foreign corporation that does not distribute all of
its earnings on a current basis.  In such event, a
U.S.  Holder of ADSs or equity shares may be subject to tax at
ordinary income tax rates on (i) any gain recognized on the sale of the ADSs or
equity shares and (ii) any “excess distribution” paid on the ADSs or equity
shares (generally, a distribution in excess of 125% of the average annual
distributions paid by us in the three preceding taxable years).  In
addition, a U.S.  Holder may be subject to an interest charge on such
gain or excess distribution.




10F.
            Dividend
      and Paying Agents




Not
applicable.




10G.
            Statements
      by Experts




Not
applicable.




10H.
            Documentson
Display




We file
reports, including annual reports on Form 20-F, and other information with the
SEC pursuant to the rules and regulations of the SEC that apply to foreign
private issuers.  One may read and copy any materials filed with the
SEC at the Public Reference Room at 100 F Street N.E., Room 1580, Washington,
D.C.  20459.  You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330.  We
file our periodic reports electronically through the SEC’s EDGAR
system.  Any filings we make electronically are available to the
public over the Internet at the SEC’s Website at
http://www.sec.gov.




In
addition, in accordance with the requirements of the New York Stock Exchange
(NYSE), we have disclosed on our website significant ways in which our corporate
governance standards differ from those followed by United States domestic
issuers under NYSE standards is available at http://mtnl.net.in/nyse-india.doc.




10I.
            Subsidiary
      Information




Not
applicable.




Item
      11.
            Quantitativeand Qualitative Disclosures about Market
      Risk




Credit
Risk




Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of periodic temporary investments of excess cash, trade
receivables, and investments in ITI Limited preference shares and MKVDC bonds.
We place our temporary excess cash in short term deposits. By their nature, all
such financial instruments involve risk including the credit risk of
non-performance by counter parties. In management’s opinion, as of March 31,
2007 and 2008, there was no significant risk of loss in the event of
non-performance of the counterparties to these financial instruments, other than
the amounts already provided for in the financial statements.  To
reduce credit risk, we perform ongoing credit evaluation of our
customers.  As of March 31, 2007 and 2008, BSNL and DOT accounted for
more than 10% of total receivables.




The risk
in relation to investment in ITI Limited is offset by clause relating to our
entitlement to set off the amounts receivable in respect of principal
outstanding from the dues payable to ITI Limited. The clause is built into the
share purchase agreement.  As of March 31, 2008, RS. 800 million of
the investment of Rs. 1,000 million




93
 Table of Contents




investment
in ITI was charged as an impairment.  The balance of Rs. 200 million
becomes due in the fiscal year ending March 31, 2009.  See item 5A
Operating Results.




The
credit risk for the investment in bonds issued by MKVDC is minimized due to the
payment mechanism envisaged in the prospectus, which states that any shortfall
is to be met by the Maharashtra State Government that has undertaken to earmark
an amount equal to interest and principal repayments out of its annual budget
for the respective corporation. In the event of such amount not being
transferred the trustees would be entitled to invoke the guarantee given by the
state government.




Exchange
Rate and Interest Rate Risk




We are
not exposed to any material foreign currency exchange risk since our revenues
and expenses are primarily in Indian rupees.  We are not exposed to
any material interest rate risk since we do not rely on borrowings to meet our
working capital and capital expenditure requirements.  As of March 31,
2008, we had no debt.




Fair
Value




The fair
value of our 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 settled within the
next twelve months.




The
approximate fair value of investments in held to maturity securities, as
determined by using current interest as of March 31, 2008 is Rs.2,523 million as
compared to their carrying amount of Rs.3,500 million.




The
approximate fair value of loans to employees, as determined by using current
interest as of March 31, 2008 is Rs.1,672 million as compared to their carrying
amount of Rs.1,969 million.




Due to
the uncertainties attached to the timing of ultimate realization of restricted
assets, it is not practicable to determine their fair values.  The
fair value of amounts due to and from related parties cannot be determined given
that the amounts are with related parties.   The terms of
settlement are not normal commercial terms.




Item12.
            Description
      of Securities Other than Equity
Securities




Not
applicable.




94
 Table of Contents




PARTII




Item13.
            Defaults,
      Dividend Arrearage and
Delinquencies.




None.




Item14.
            Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds




None.




Item15.
            Controls
      and Procedures




(a)           Disclosure
Controls and Procedures




Our
management, under the supervision of and with the participation of our Chairman
and Managing Director, as Chief Executive Officer (CEO), and our
Director-Finance, acting as Chief Financial Officer (CFO), has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) on
March 31, 2008, the end of the period covered by this report.  Based
on such evaluations, our CEO and CFO have concluded that as of March 31, 2008,
certain of our disclosure controls and procedures were not effective for the
reasons explained below.




(b)           Management’s
Annual Report on Internal Control over Financial Reporting




Our Board
of Directors and the senior management team are responsible for establishing and
maintaining adequate internal controls. Our internal control framework is
designed to provide a reasonable assurance regarding the reliability of
financial reporting and the preparation and fair representation of our published
financial statements in accordance with generally accepted accounting
principles. Management, under the oversight of the Audit Committee, has
conducted an assessment of the effectiveness of internal controls over financial
reporting based on the criteria established in Internal Controls – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The assessment of internal controls was designed to include
the Entity Level Controls, Process Application and Transaction Controls and
Information Technology General Controls. The scope of the controls testing
included the significant accounting balances mapped on materiality parameters as
adopted by a core team and our Board of Directors.  The internal
controls were in operations during the reporting period from April 1, 2007 to
March 31, 2008. The internal controls identified by the management were
comprehensively tested by the core team assisted by an  independent
firm of accountants and supported by the internal auditors of MTNL who are
independent firms of accountants.




The
nature of controls assessed were: (1) Entity Level Controls, which includes
aspects like control environment, information and communication, monitoring,
risk assessment, control activities, addressing the various important COSO
attributes; (2) Process Application and Transactions, which includes various
revenue processes, and other processes like operating expenditures, fixed
assets, inventory, cash disbursement, treasury, taxation and financial statement
consolidation procedures at both Mumbai and Delhi units as well as at corporate
office; and (3) Information Technology General Controls, which includes IT
processes like logical security, end user computing, computer operations, change
management, physical security and service level agreement, tested at both Mumbai
and Delhi units.




Management’s
assessment was completed on July 4, 2008. Based on this assessment, management
has concluded that as at March 31, 2008, the internal controls over periodical
reporting were not effective due to certain material weaknesses. These
deficiencies may cause a material misstatement in the annual financial
statements which may not be prevented or detected.  Management has
undertaken to remedy these deficiencies, and expects to complete the remedial
process during fiscal 2009.  Management’s conclusions on the material
deficiencies are stated below:




95
 Table of Contents




I.           Property and
Equipment




During
the 2008 fiscal year management identified that there are not enough effective
controls over timely and adequate update of the fixed assets registers including
providing location of the asset at various accounting areas of the Delhi and
Mumbai units. Although physical verification of assets was undertaken during the
year in accordance with our three year physical verification of assets plan,
deficiencies were noticed in the process for identification of mismatches found
on physical verification of property and equipment and further tallying the
verification reports with the fixed assets registers and tallying the fixed
assets registers with the books of accounts. Appropriate action plan on such
mismatches is being undertaken. Management took appropriate measures to ensure
that this deficiency was adequately considered while preparing the financial
statements for the 2008 fiscal year. Management has concluded that, as of March
31, 2008, we did not maintain effective controls over the accounting for
properties and equipments. We also had ineffective controls at our Delhi and
Mumbai units over adequate updation of asset registers, including updating the
location of the fixed assets and implementation thereof on mismatches, if any,
found out of the physical verification of assets. These control deficiencies
could result in a misstatement with reference to the value of the property and
equipments and the corresponding amount of depreciation.




II.           Subscriber
Deposits




The
accounting of subscriber deposits was identified by management as one of the key
deficit area in the 2007 fiscal year and it continues to be deficit in the
current year also. Specifically, the reconciliation of the balances of deposits
as per CSMS system and the books of accounts was inadequate. Management and the
units have identified that this deficiency is largely due to the legacy
inherited at the time of migration from manual accounts to CSMS in the earlier
years and subsequent manual adjustments of refunds out of the system. The
transactions for the 2008 fiscal year in both Delhi and Mumbai units have not
been fully tallied with the books of accounts. Though the transactions for the
2008 fiscal year in respect of MS-Mumbai unit have been tallied with the books
of accounts, the same were not tallied in Delhi unit. Management took reasonable
measures during the 2008 fiscal year to ensure that this deficiency was
adequately considered while preparing the financial statements for the year
ended March 31, 2008.  Accordingly, management has concluded that, as
of March 31, 2008, we did not maintain effective control over the accounting for
deposits received from subscribers. Specifically, our controls were ineffective
as to the process of reconciliation of subscriber-wise listing of deposits with
the control account balances of previous accounting periods in both Delhi and
Mumbai units. However, Delhi and Mumbai units are in the process of
reconciliation of current period as well as earlier period of deposits. This
control deficiency could result in a misstatement to the current and non-current
portion of customer deposits.




III.           Related Party
Transactions




The
accounting of transactions with our related parties consists of transactions
with Department of Telecommunication (DOT) and Bharat Sanchar Nigam Limited
(BSNL) is being done on the basis of the existing instructions issued from time
to time by the controlling department of Government of India and other related
guidelines as well as existing regulations. These guidelines require
identification of transactions and/or issues under dispute and also lay down the
methodology to resolve the same. There is no practice of obtaining balance
confirmation for the outstanding balance at the year end, in our books of
accounts, from such related parties and also to reconcile the said balance as
per our books of accounts.  The overall balances pertaining to these
related parties are not reconciled with the balances as per the books of account
of such related parties. Management took appropriate measures during the 2008
fiscal year to ensure that this deficiency was adequately considered while
preparing the financial statements. Accordingly, management has concluded that,
as of March 31, 2008, we did not maintain adequate control over the accounting
for dues to and from related parties. Specifically, our controls were
ineffective as to process of obtaining period end account balance confirmations
and reconciliation thereof. This control deficiency could result in a
misstatement to the balances of dues to/from related parties and the
corresponding revenue and cost of revenue.




IV.           Information Technology
General Controls




During
the review of our Information Technology General Controls (ITGC), management has
identified and concluded that, as of March 31, 2008, there were certain
ineffective controls in the area of Information




96
 Table of Contents




Technology
General Controls. The IT security policy is being prepared and adopted. The IT
security policy and procedures require further strengthening and implementation
with reference to  controls related to (i) assigning IT Security
officer/s to monitor IT processing activities and submit periodic reports to
management and the Board of Directors and/or Audit Committee, (ii) back up
practices, (iii) network access controls and (iv) appointment of independent
auditors for audit of IT areas and controls, etc. The policy of using password
has been prepared and adopted during the current year. However, implementation
of password controls is still not implemented at the Delhi and Mumbai units.
During the year under review, in case of Delhi unit, audit trails have been
enabled for all applications except for UNICORN.  However, in case of
Mumbai unit audit trails have not been enabled for almost all the applications,
i.e. CSMS, IMS, WFMS, Ability, and UNICORN. Audit trails generation and review
processes require further strengthening. We also are preparing a Business
Continuity Management Plan (BCM) to address business interruptions on their
occurrence. Though management has determined that there were no instances of
unauthorized access/events, this control deficiency could result in unauthorized
access to key applications and data bases. These control deficiencies leads to
risk of breaches of security or errors remaining unnoticed and not rectified.
The above deficiencies could also lead to risk of misstatement of financial
statements. However, the review of financial statements at the unit and
corporate level in the FMS system pre-empted any such possible errors in
preparation of financial statements in the 2008 fiscal year.




P. Parikh
& Associates, the registered public accounting firm that audited our
financial statements included in this Form 20-F, has issued an attestation
report on management’s assessment of our internal controls over financial
reporting.   See Item 18. “–Financial Statements.”




By:
            /s/ Anita SoniName: 
      Anita Soni
              Title: 
      Director – FinanceBy:
            /s/ R.S.P. SinhaName: 
      Mr. R.S.P. Sinha
              Title: 
      Chairman and Managing Director





(c)           Attestation
report of the registered public accounting firm




See Item
18. “–Financial Statements” for the attestation report of P. Parikh &
Associates, the registered public accounting firm that audited our financial
statements included in this Form 20-F.




(d)           Changes
in internal control over financial reporting




We had
undertaken certain initiatives and remedial action in a few areas during the
2008 fiscal year on the material weakness issues disclosed above. Additional
remedial action is being undertaken and expected to be completed in fiscal
2009.  The remedial action taken amongst other things
include:  (i) physical verification of fixed assets done on a rotation
basis under a three year plan; (ii) the fixed assets register is been updated
giving full particulars of quantitative details, in the Mumbai unit; (iii) IT
security policy has been prepared and adopted during the 2008 fiscal year; and
(iv) remedial action has been taken in granting and monitoring of user access
rights through preparation, approval and maintenance of user access right forms
and audit trail has been enabled for certain applications.




Property and
Equipments




Physical
verification of fixed assets is being done on a rotation basis identifying the
assets which are to be verified for each year by us in order to complete
verification of all the assets by the end of the third year. Further, based on
the efficiency or otherwise of the process, the Delhi and Mumbai units are in
the process of preparing and implementing plan to consider and take appropriate
action on discrepancies or mismatches found on the physical verification of
assets. The Corporate Office advises the units on remedial action to be taken on
a case-to-case basis.  In the Mumbai unit, the accounting areas are in
the process of updating the assets register giving full particulars of location
of fixed assets. This activity is being monitored by the General Manager
(Finance) of the Delhi and Mumbai units.




97
 Table of Contents




Subscriber
Deposits




In
respect of reconciliation of the subscriber deposits, management has directed
both the Delhi and Mumbai units to complete the reconciliation on high priority
basis, including linking debtors to the deposits and only the reconciled data is
to be migrated to the convergent billing system, which is likely to be
operational by end of the 2009 fiscal year.  We have made substantial
progress in this reconciliation process.  In case of Mumbai location,
MS-Mumbai (GSM services) and Mumbai unit limited for CDMA services have
completed the subscriber deposit reconciliation and reasonable progress has been
made in South, Central and North areas of Mumbai unit. In case of Delhi unit,
the subscriber deposit reconciliation for the 2007 fiscal year is completed.
However, for the 2008 fiscal year, the reconciliation is still in progress in
some of the areas.




Related Party
Transactions




The
accounting of transactions of related parties consists of transactions with
Department of Telecommunication (DOT) and Bharat Sanchar Nigam Limited (BSNL).
While DOT is the parent organization of MTNL, BSNL is fully owned by the
Government of India.




In
respect of transactions and balances with DOT, the following steps have been
undertaken:




1.
            Both
      the Mumbai and Delhi units under continued direction by the management
      have submitted their net claims and related details on claims receivables
      and payables to DOT to get the issues resolved. Deliberations are
      continuing on high levels at DOT with the officers of CCA (Control and
      Communication Accounts) of DOT at both places on a regular
      basis.




2.
            A
      joint committee of senior officers of DOT and the Company is monitoring
      the progress.




In
respect of transactions and balances with BSNL, following steps have been
undertaken:




1.
            Both
      the Mumbai and Delhi units have been directed to reconcile claims payable
      and receivable with BSNL.




2.
            At
      both Mumbai and Delhi units,  senior level officers have
      exchanged various correspondence and organized meetings with BSNL for
      obtaining balance confirmation and to resolve the
  same.




3.
            At
      the corporate level, a formal committee of senior officers of the Company,
      BSNL and DOT is monitoring the
progress.




It may be
noted that there is a periodic monitoring on these matters by the Government of
India. In a recent development, the Comptroller and Auditor General of India has
advised DOT to instruct BSNL to reconcile and resolve this matter with us by
March 31, 2009.




Information Technology
General Controls




In fiscal
2008, we adopted a detailed and formal IT Security policy.  The IT
security policy had been earlier scheduled to be fully implemented by December
31, 2007.  Certain areas in the IT security policy and procedures
require further strengthening and implementation with reference
to  controls related to (i) assigning IT Security officer/s to monitor
IT processing activities and submit periodic reports to management and the Board
of Directors and/or Audit Committee, (ii) back up practices, (iii) network
access controls and (iv) appointment of independent auditors for audit of IT
areas and controls, etc. These areas are to be strengthened and implemented by
March 31, 2009.  Password controls at Delhi and Mumbai units are to be
implemented by March 31, 2009.  At the Mumbai unit, the Business
Continuity Management Plan is under preparation.




Some of
these remedial actions could not be undertaken earlier due to delay in
implementation of comprehensive convergent billing system, which was earlier
scheduled to be functional by March 31, 2008, is now expected to be functional
by March 31, 2009.




98
 Table of Contents




Item 16A. Audit Committee
Financial Expert




The Board
of Directors has identified Dr. S. Balasubramanian, Chairman of the Audit
Committee, as a “financial expert”.




Item16B. Code of
Ethics




We have a
Code of Ethics as part of our Rules of Conduct.  A copy of the Code of
Ethics may be obtained upon request addressed to the Company Secretary at our
principal executive office, indicated on the cover of this report.




Item16C. Principal Accountant
Fees and Services




M/S P.
Parikh & Associates, Chartered Accountants, served as our independent
registered public accounting firm for the year ended March 31, 2008 in
connection with the audit of the consolidated financial statements being filed
with this report.  M/S Chandabhoy & Jassoobhoy, Chartered
Accountants, had served as our independent registered public accounting firm for
the year ended March 31, 2007.  Price Waterhouse Bangalore (New Delhi
office) had served as our independent registered public accounting firm for the
years ended March 31, 2006 and 2005.




The
following table sets forth the remuneration that we paid to M/S P. Parikh &
Associates in 2008 and M/S Chandabhoy & Jassoobhoy in 2007 in Million
Rs.:




2007
            
            
            2008Audit
      Fees
            
            
            2.90
            
            
            
            5.75All
      Other Fees
            
            
            -
            
            
            
            -Total
            
            
            2.90
            
            
            
            5.75


Audit
fees




Audit
fees represent fees for professional services rendered for the audit of the
consolidated financial statements prepared in accordance with US
GAAP.  Audit fees are fees agreed upon with M/S P. Parikh &
Associates and M/S Chandabhoy A. Jassoobhoy for the fiscal years 2008 and 2007,
respectively (including related expenses) for the audit of our annual
consolidated financial statements.




Audit
committee pre-approval policies and procedures




Our Board
of Directors requires management to obtain the board’s approval before engaging
independent outside auditors to provide any audit or permitted non-audit
services to us, in addition to Audit Committee approval.  Pursuant to
this policy, our Board of Directors pre-approves all audit and non-audit
services provided by M/S P. Parikh & Associates, our principal
auditor.  Pursuant to the Board’s pre-approval process, M/S P. Parikh
& Associates, prepares a detailed list of services that it proposes to
perform during the coming year.  These proposed services are presented
to the Board of Directors, which considers and approves the
services.  Management is not permitted to engage our outside auditors
for any audit or non-audit service that is not on the list of services approved
by the Board of Directors without first returning the Board of Directors for
approval of such additional services.




Item16D. Exemptions from the
Listing Standards for Audit Committees




One
member of our Audit Committee (Ms. Anuradha Joshi Durgapal) is an employee of
the government of India, our majority shareholder.  We rely on the
exemption from the independence requirements of Rule 10A-3(b)(1)(ii)(B)
promulgated under the Securities Exchange Act of 1934, provided by Section
(b)(1)(iv)(E) of such rule, to comply with the listing requirements of the New
York Stock Exchange.  We meet the requirements for this exemption as
we are a foreign private issuer and Ms. Anuradha Joshi Durgapal is not an
executive officer of the Company. We do not believe that reliance on this
exemption from independence requirements affects the ability of the Audit
Committee to function independently.




99
 Table of Contents




Item16E. Purchase of Equity
Securities by the Issuer and Affiliated Purchasers




Not
applicable




100
 Table of Contents




PARTIII




Item17.
            Financial
      Statements




Not
applicable.




Item18.
            Financial
      Statements




See pages
F-1 through F-40.




Item19.
            Exhibits




Number
            Description
      of Exhibit1.1
            Memorandum
      and Articles of Association of the Registrant, as amended on January 31,
      2002.  *2.1
            Form
      of Deposit Agreement among the Registrant, The Bank of New York, as
      depositary, and the holders from time to time to American Depositary
      Shares issued thereunder, including as an exhibit, the form of American
      Depositary Receipt.**4.1
            Lease
      Agreement dated January 16, 1996 between Life Insurance Corporation of
      India and the Registrant.**4.2
            License
      Agreement for provision of Internet Services in Delhi dated November 6,
      1998 between President of India acting through Assistant Director General,
      Ministry of Communications and the Registrant.**4.3
            License
      Agreement for provision of Internet Services in Mumbai dated November 6,
      1998 between President of India acting through Assistant Director General,
      Ministry of Communications and the Registrant.**4.4
            License
      Agreement for provision of Internet Services dated October 6, 2000 between
      President of India acting through Assistant Director General, Ministry of
      Communications and Millennium Telecom Limited.**12.1
            Certification
      of Chief Executive Officer***12.2
            Certification
      of Principal Financial Officer***13.1
            Certification
      of Chief Executive Officer***13.2
            Certification
      of Principal Financial Officer***




*Previously
filed on September 30, 2002, as exhibits to Annual Report on Form 20-F for
fiscal 2002.




**Previously
filed on September 27, 2001, as exhibits to Registration Statement on Form F-4
(file number 333-13944).




***Filed
herewith




101
 Table of Contents




Mahanagar
Telephone Nigam Limited
 INDEXTO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReport of Independent Registered Public Accounting Firm
              F-1Consolidated Balance Sheets as of March 31, 2007 and 2008
              F-3Consolidated Statements of Operations for the years ended
      March 31, 2006, 2007 and 2008
              F-5Consolidated Statements of Shareholders’ Equity for the years
      ended March 31, 2006, 2007 and 2008
              F-6Consolidated Statements of Cash Flows for the years ended
      March 31, 2006, 2007 and 2008
              F-7Notes to the Consolidated Financial Statements
              F-9
  
 
 Reportof Independent Registered Public Accounting
Firm.
 
 To,
 The Board
of Directors and Shareholders of,
 Mahanagar
Telephone Nigam Limited.
  We have
audited the accompanying consolidated Balance Sheet of Mahanagar Telephone Nigam
Limited and its Subsidiaries (the “Company”) as of March 31, 2008 and March 31,
2007 and the related consolidated Statements of Operations, Shareholders’ Equity
and Cash Flow Statement for the year ended March 31, 2008, March 31, 2007 and
March 31, 2006 respectively. We also have audited Company’s internal control
over financial reporting as of March 31, 2008, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). These financial statements are the responsibility
of the Company’s Management. The Management of the Company is also responsible
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying management’s report on assessment of effectiveness
of internal control over financial reporting. Our responsibility is to express
an opinion on these financial statements and an opinion on the Company’s
internal control over financial reporting, based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (PCAOB) – United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinion.
  A
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A Company’s internal control over
financial reporting includes those policies and procedures that:
  (a)
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
  (b)
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of Management and
      Directors of the Company; and
  (c)
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that control may become
ineffective because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  A
material weakness is a control deficiency or a combination of control
deficiencies that may result in the material misstatement of the financial
statements. The following material weaknesses have been identified as of March
31, 2008 and has been included in management’s assessment:
  F-1
 Index
  1.
              The
      Company did not maintain enough effective controls over the accounting for
      properties and equipments. The Company has ineffective controls in its
      Delhi and Mumbai units with respect to the adequate updation of the fixed
      assets register and reconciliation of assets as per the fixed assets
      register. This control deficiency could result in a mis-statement with
      reference to the value of the properties and equipments and the
      corresponding amount of
depreciation.
  2.
              The
      Company did not maintain enough effective control over the accounting for
      deposits received from subscribers. There is no reconciliation of the
      balance of deposits as per CSMS system and the books of accounts. The
      Company has ineffective controls on the process of reconciliation of
      subscriber-wise listing of deposits with the control account balance in
      both Delhi and Mumbai units. This control deficiency could result in a
      mis-statement of the current and non-current portion of customer
      deposits.
  3.
              The
      Company did not maintain effective control over the accounting of dues
      from and to related parties, i.e. Department of Telecommunication (DoT)
      and Bharat Sanchar Nigam Limited (BSNL). There is no practice of obtaining
      balance confirmation for the outstanding balance at the year end, in the
      books of accounts of the Company from such related parties and also to
      reconcile the said balance as per the books of accounts of the Company.
      This control deficiency could result in a misstatement to the balances of
      dues from/to related parties and the corresponding revenue and cost of
      revenue.
  4.
              There
      were ineffective controls in the area of Information Technology General
      Controls (“ITGC”), which includes
  (i)
              Password
      Controls – Though the policy of using password has been prepared and
      adopted during the year, the same has not been implemented in Delhi and
      Mumbai units;
  (ii)
              In
      case of Mumbai units, audit trials have not been enabled for almost all
      the applications. Whereas, in case of Delhi unit, audit trials have been
      enabled for all applications except for
UNICORN;
  (iii)
              Deficiency
      in Implementation of Business Continuity Plan (BCP). Consequently, in case
      of any disaster/emergency, there is no Back up
  Plan.
  The above
deficiencies could result in unauthorized access to key applications and
databases and could lead to risk of mis-statement in financial
statements
  These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of consolidated financial statements
as of March 31, 2008, and our opinion regarding the effectiveness of the
Company’s internal control over financial reporting does not affect our opinion
on those consolidated financial statements.
  In our
opinion, management’s assessment on not maintaining effective internal control
over financial reporting as of March 31, 2008, is fairly stated, in all material
respects, based on the criteria established in Internal Control – Integrated
Framework issued by the COSO.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Mahanagar Telephone Nigam Limited
as of March 31, 2008 and March 31, 2007, and the results of its operations and
its cash flows for each of the years in the three year period ended March 31,
2008 are in conformity with accounting principles generally accepted in the
United States of America.
  P.
PARIKH & ASSOCIATES
 CHARTERED
ACCOUNTANTS
 
 Mumbai,
India.
 Date:
September 25, 2008
  F-2
 Index
  MAHANAGAR
      TELEPHONE NIGAM LIMITEDCONSOLIDATEDBALANCE SHEETSAs of March
      31,2007
                
                
                
                2008
                
                
                2008(Indian
      Rupees in millions, except per share data and as stated
      otherwise)
                
                
                Convenience
      translation into million of US $ (Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                Rs.
                
                
                1,660
                
                Rs.
                
                
                1,346
                
                
                $
                34Short
      term investments in bank deposits
                
                
                
                17,102
                
                
                
                
                32,444
                
                
                
                811Trading
      security
                
                
                
                –
                
                
                
                
                1,017
                
                
                
                25Accounts
      receivable, net
                
                
                
                4,566
                
                
                
                
                2,943
                
                
                
                74Due
      from related parties
                
                
                
                2,476
                
                
                
                
                3,671
                
                
                
                92Inventories
                
                
                
                2,239
                
                
                
                
                1,163
                
                
                
                29Unbilled
      Revenues
                
                
                
                4,080
                
                
                
                
                3,451
                
                
                
                86Deferred
      income taxes
                
                
                
                7,359
                
                
                
                
                10,066
                
                
                
                252Other
      receivables
                
                
                
                28,010
                
                
                
                
                21,995
                
                
                
                550Total
      current assets
                
                
                
                67,492
                
                
                
                
                78,095
                
                
                
                1,951Deferred
      Income Tax
                
                
                
                
                
                
                
                
                3,669
                
                
                
                92Investments
      in held to maturity securities
                
                
                
                3,500
                
                
                
                
                2,653
                
                
                
                66Investments
      in affiliates
                
                
                
                115
                
                
                
                
                117
                
                
                
                3Property
      and equipment, net
                
                
                
                80,966
                
                
                
                
                81,479
                
                
                
                2,036Intangible
      Assets-Application Software
                
                
                
                74
                
                
                
                
                331
                
                
                
                8Due
      from related parties
                
                
                
                21,183
                
                
                
                
                22,042
                
                
                
                551Restricted
      assets
                
                
                
                3,672
                
                
                
                
                3,389
                
                
                
                85Other
      assets
                
                
                
                1,935
                
                
                
                
                1,772
                
                
                
                44Total
      assets
                Rs.
                
                
                178,937
                
                Rs.
                
                
                193,547
                
                
                $
                4,836
  F-3
 Index
  LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                Rs.
                
                
                12,115
                
                Rs.
                
                
                12,484
                
                
                $
                312Dues
      to related parties
                
                
                
                5,729
                
                
                
                
                8,118
                
                
                
                203Accrued
      expenses and other current liabilities
                
                
                
                27,550
                
                
                
                
                31,704
                
                
                
                792Total
      current liabilities
                
                
                
                45,394
                
                
                
                
                52,307
                
                
                
                1,307Accrued
      employee cost
                
                
                
                28,727
                
                
                
                
                33,262
                
                
                
                831Deferred
      income taxes
                
                
                
                7,305
                
                
                
                
                11,657
                
                
                
                291Dues
      to related parties
                
                
                
                -
                
                
                
                
                -
                
                
                
                -Non
      current portion of customer deposits
                
                
                
                8,634
                
                
                
                
                7,934
                
                
                
                198Total
      liabilities
                
                
                
                90,060
                
                
                
                
                105,160
                
                
                
                2,628Contingencies
      and commitments (refer note
      22)Shareholders’
      equityEquity
      shares, 800,000,000 shares authorized, par
                  value
      Rs. 10 per shareIssued
      and outstanding –  630,000,000 and
                  630,000,000
      shares as of March 31, 2007 and 2008
                  respectively
                
                
                
                6,300
                
                
                
                
                6,300
                
                
                
                157Additional
      paid-in capital
                
                
                
                6,649
                
                
                
                
                6,649
                
                
                
                166Retained
      earnings
                
                
                
                75,620
                
                
                
                
                75,130
                
                
                
                1,877Research
      and development reserve
                
                
                
                308
                
                
                
                
                308
                
                
                
                8Total
      shareholders' equity
                
                
                
                88,877
                
                
                
                
                88,387
                
                
                
                2,209Total
      liabilities and shareholders' equity
                Rs.
                
                
                178,937
                
                Rs.
                
                
                193,547
                
                
                $
                4,836
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
 Index
 
 MAHANAGAR
      TELEPHONE NIGAM LIMITEDCONSOLIDATEDSTATEMENTS OF OPERATIONSYear
      ended March 31,2006
              
              2007
              
              
              2008
              
              2008(Indian
      Rupees  in millions, except per share data and as stated
      otherwise)
              
              Convenience translation into
      million of
                US$
                (Unaudited)Revenues,
      net
              
              Rs.
              46,668
              Rs.
              45,475
              
              Rs.
              44,705
              $
              1,117Cost
      of revenues  (excluding
                depreciation
      shown separately below)
              
              
              (32,268)
              
              (32,497)
              
              
              (30,522)
              
              (763)Selling,
      general and administrative expenses
              
              
              (8,034)
              
              (8,753)
              
              
              (8,517)
              
              (213)Depreciation
              
              
              (7,999)
              
              (8,516)
              
              
              (8,309)
              
              (208)Liability
      for post retirement Medical Benefit
              
              
              0
              
              5794
              
              
              0
              
              0Excess
      liabilities written back
              
              
              821
              
              839
              
              
              320
              
              8Income
      from Operations
              
              
              (812)
              
              (2,342)
              
              
              (2,323)
              
              (58)Interest
      from short term Bank Deposit
              
              
              1,601
              
              1,584
              
              
              2,618
              
              65Interest
      and other income net
              
              
              787
              
              6,310
              
              
              2,043
              
              51Income
      before unusual items, Income
                taxes,
      and share of losses of affiliates
              
              
              1,576
              
              10,236
              
              
              2,338
              
              58Income
      taxes (Refer note
      17)
              
              
              (437)
              
              1073
              
              
              121
              
              3Equity
      in (losses) of affiliates
              
              
              (73)
              
              (7)
              
              
              (1)
              
              (0)Net
      income
              
              Rs.
              1,066
              Rs.
              11,302
              
              Rs.
              2,458
              $
              61Earnings
      per equity shareBasic
      and diluted
              
              Rs.
              1.69
              Rs.
              17.94
              
              Rs.
              3.90Weighted
      average number of equity
                shares
      used in computing earnings
                per
      equity share
              
              Rs.
              630
              Rs.
              630
              
              Rs.
              630
              $
              15.74
 
 The
accompanying notes form an integral part of these consolidated financial
statements.
  F-5
 Index
  MAHANAGAR
      TELEPHONE NIGAM LIMITEDCONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’
    EQUITYCommon
      stock
              
              Additional
              
              
              
              Research
      and
              
              
              TotalEquity
      shares
              
              paid-in
              
              Retained
              
              development
              
              
              stockholders'No.
      of shares
              
              Amount
              
              capital
              
              earnings
              
              Reserve
              
              
              equity(Indian
      Rupees in millions, except per share data and as stated
      otherwise)Balance
      as on
                March
      31, 2005
              630,000,000
              Rs.
              6,300
              Rs.
              6,649
              Rs.
              70,076
              Rs.
              308
              
              Rs.
              83,333Net
      income
              
              
              
              
              
              
              1,066
              
              
              
              
              1,066Cash
      dividend paid at the rate of Rs. 6.27 per share including dividend
      tax
              
              
              
              
              
              
              (3,951)
              
              
              
              
              (3,951)Balance
      as on
                March
      31, 2006
              630,000,000
              Rs.
              6,300
              Rs.
              6,649
              Rs.
              67,191
              Rs.
              308
              
              Rs.
              80,448Net
      income
              
              
              
              
              
              
              11,302
              
              
              
              
              11,302Cash
      dividend paid at the rate of Rs. 4.56 per share including dividend
      tax
              
              
              
              
              
              
              (2,873)
              
              
              
              
              (2,873)Balance
      as on
                March
      31, 2007
              630,000,000
              Rs.
              6,300
              Rs.
              6,649
              Rs.
              75,620
              Rs.
              308
              
              Rs.
              88,877Net
      income
              
              
              
              
              
              
              2,458
              
              
              
              
              2,458Cash
      dividend paid at the rate of Rs. 4.68 per share including dividend
      tax
              
              
              
              
              
              
              (2,948)
              
              
              
              
              (2,948)Balance
      as on
                March
      31, 2008
              630,000,000
              Rs.
              6,300
              Rs.
              6,649
              
              75,130
              Rs.
              308
              
              Rs.
              88,387Convenience
      translation into million of US $ (Unaudited)
              
              $
              157
              $
              166
              $
              1,877
              $
              8
              
              $
              2,209
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6
 Index
 
 MAHANAGAR
      TELEPHONE NIGAM LIMITEDCONSOLIDATEDSTATEMENTS OF CASH FLOWS2,006
              
              2007
              
              2008
              
              2008(Indian
      Rupees in millions, except per
                share
      data and as stated otherwise)
              
              
              
              Convenience
      translation into US$ (Unaudited)Cash
      flows from operating activitiesNet
      income
              
              Rs.
              1,066
              Rs.
              11,302
              Rs.
              2,458
              $
              61Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
              
              
              7,999
              
              8,516
              
              8,309
              
              208(Profit)/loss
      on sale of fixed assets
              
              
              93
              
              50
              
              415
              
              10Deferred
      taxes
              
              
              (816)
              
              98
              
              (2,023)
              
              (51)Provision
      for bad and doubtful debts
              
              
              (248)
              
              1,180
              
              352
              
              9Excess
      liabilties written back
              
              
              (821)
              
              (839)
              
              (320)
              
              (8)Equity
      in (losses) of equity affiliates, net of taxes
              
              
              73
              
              7
              
              (2)
              
              (0)Changes
      in assets and liabilities, net(Increase)
      / decrease in accounts receivables and unbilled revenue
              
              
              748
              
              (2,686)
              
              1,900
              
              47(Increase)
      / decrease in Inventory
              
              
              418
              
              (792)
              
              1,076
              
              27(Increase)/
      decrease in dues from related parties
              
              
              3,971
              
              158
              
              (2,054)
              
              (51)(Increase)/
      decrease in other receivables
              
              
              (4,368)
              
              (19,021)
              
              6,179
              
              154(Increase)
      / decrease in restricted assets
              
              
              1,306
              
              9,755
              
              283
              
              7Increase/
      (decrease) in trade payables
              
              
              (439)
              
              (13)
              
              369
              
              9Increase/
      (decrease) in dues to related parties
              
              
              (5,249)
              
              (362)
              
              2,390
              
              60Increase/
      decrease in accrued employee cost
              
              
              3,944
              
              (2,652)
              
              4,535
              
              113Increase
      / (decrease) in accrued expenses and other payables
              
              
              (1,671)
              
              4,971
              
              3,776
              
              94Net
      cash provided by the operating activities
              
              
              6,006
              
              9,672
              
              27,640
              
              691Cash
      flows from investing activitiesPurchase
      of property and equipment
              
              
              (6,713)
              
              (8,697)
              
              (9,567)
              
              (239)Proceeds
      from property and equipment
              
              
              26
              
              56
              
              73
              
              2Investment
      in affiliates
              
              
              -
              
              (56)
              
              (171)
              
              (4)Investments  in
      short term bank deposits
              
              
              (1,288)
              
              1,917
              
              (15,342)
              
              (383)Net
      cash used in investing activities
              
              
              (7,975)
              
              (6,780)
              
              (25,006)
              
              (625)
  F-7
 Index
  Cash
      flows from financing activitiesDividends
      paid ( including tax)
              
              
              (3,951)
              
              (2,873)
              
              (2,948)
              
              (74)Net
      cash from financing activities
              
              
              (3,951)
              
              (2,873)
              
              (2,948)
              
              (74)Net
      increase/(decrease) in cash and cash equivalents
              
              
              (5,920)
              
              19
              
              (314)
              
              (8)Cash
      and cash equivalents at the beginning of the period
              
              
              7561
              Rs.
              1,641
              Rs.
              1,660
              
              41Cash
      and cash equivalents at the end of the period
              
              Rs.
              1,641
              1,660
              1,346
              $
              34Supplemental
      cash flow informationCash
      paid for interest
              
              Rs.
              244
              Rs.
              20
              Rs.
              28
              $
              1Cash
      paid/(received) from income taxes
              
              Rs.
              2,475
              Rs.
              5,278
              Rs.
              (9,162)
              $
              (229)
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-8
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  1.
              DESCRIPTIONOF
BUSINESS
  Mahanagar
Telephone Nigam Limited (“MTNL" or “the Company”) was incorporated in New Delhi,
India as a limited liability company under the Indian Companies Act, 1956. MTNL
is the principal provider of basic or fixed line telecommunications services in
Delhi and Mumbai. MTNL also provides internet and cellular services in both
Delhi and Mumbai. MTNL’s license for fixed line services which covers the state
of Delhi and the municipalities of Mumbai, Navi Mumbai and Thane (which are in
the state of Maharashtra) is valid up to March 31, 2013 and MTNL’s licenses for
internet and cellular services are valid up to September 7, 2017 and October 9,
2017 respectively. With effect from May 10, 2006 MTNL has obtained a National
Long Distance license for Delhi and the municipalities of Mumbai, Navi Mumbai
and Thane valid up to May 9, 2026.
  Millennium
Telecom Limited (hereinafter referred to as “MTL”), a wholly owned India based
subsidiary of MTNL, is engaged in providing capacity building in international
bandwidth and web based tendering portal solutions.
  Mahanagar
Telephone Mauritius Limited (hereinafter referred to as “MTML”), a wholly owned
subsidiary of MTNL was registered in Mauritius in November 2003, MTML was
granted a license by the Government of Mauritius on January 27, 2004 to provide
public switched telecom services, public land mobile services and international
long distance services for a period of 15 years with service obligation within
18 months of grant of license. MTML commenced operations during the year ended
March 31, 2006.
  2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
  (a)
              Principles
      of Consolidation and Basis of
Presentation
 The
consolidated financial statements include all controlled subsidiaries. In
addition, we review our relationships with other entities to assess if we are
the primary beneficiary of a variable interest entity. If the determination is
made that we are the primary beneficiary, then that entity is consolidated. All
significant inter-company balances and transactions are eliminated in
consolidation.
  MTNL’s
investments in business entities in which it does not have control, but has the
ability to exercise significant influence over operating and financial policies
(generally 20-50 percent ownership), are accounted for under the equity method
of accounting.
  The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles applicable in the United States
(“U.S. GAAP”) and presented in Indian rupees, the national currency of India
which is also the functional currency of the Company. Solely for the convenience
of the readers, these consolidated financial statements as of and for the year
ended March 31, 2008, have been translated into United States dollars at the
noon buying rate in New York city on March 31, 2008, for cable transfers in
Indian rupees, as certified for customs purposes by the Federal Reserve Bank of
New York of $1= Rs.40.02. No representation is made that the Indian rupee
amounts have been, could have been or could be converted into United States
dollars at such a rate or any other rate on March 31, 2008 or at any other
date.
  (b)
              Use
      of estimates
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the results of operations during the reporting periods. Actual results could
differ materially from these estimates. Significant estimates and assumptions
are used when accounting for certain items, such as but not limited to,
allowances for uncollectible accounts receivable, future obligations under
employee benefit plans, useful lives of property and equipment, valuation
allowances for deferred taxes and contingencies.
  F-9
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  (c)
              Foreign
      currency translation
 The
Indian rupee is the functional currency of MTNL and its domestic
subsidiaries and equity affiliates. Transactions in foreign currency are
recorded at the exchange rate prevailing on the date of transaction. Monetary
assets and liabilities denominated in foreign currencies are expressed in the
functional currency at the exchange rates in effect at the balance sheet date.
Revenues, costs and expenses are recorded using average exchange rates
prevailing during the reporting periods. Gains or losses resulting from foreign
currency transactions are included in results of operations.
  (d)
              Revenue
      recognition
 Revenues
include amounts invoiced for call revenue, fixed monthly rental charges, roaming
charges, activation fees, internet and broadband services, access and
interconnection revenue and fees for value added services.
  Revenues
for fixed line are recognized based upon metered call units (“MCU”) of traffic
processed and cellular telephone services are recognized based on call data
records (“CDR”) of traffic processed. Rental revenues and leased circuits
rentals are recognized based upon contracted fee schedules. Revenues from
internet and broadband services are recognized based on usage by subscribers.
Revenues associated with access and interconnection for usage of the Company’s
network by other operators for local, national long distance and international
long distance calls are recognized gross in accordance with the Interconnect
Usage Charges Regulation released by Telecom Regulatory Authority of India
(“TRAI”) and contracted fee schedules. TRAI regulation specifies the maximum per
minute rates for traffic terminated on the Company’s network. Revenues are
recorded net of applicable discounts, allowances and service tax.
  Amounts
included in the financial statements, which relate to services provided from the
last billing cycle date up to the end of the reporting period, are classified in
current assets as “Unbilled revenue”. These are billed in subsequent periods as
per the terms of the billing plans.
  Billings
in advance for services to be rendered and amounts charged for new connections
are included in accrued
expenses and other current liabilities’ under the caption Deferred income.
Amounts charged for new connections are recognized over the average life of the
customer relationship.
  (e)
              License
      fee
 MTNL is
required to pay license fees and spectrum charges to Department Of
Telecommunications (“DOT”) in accordance with conditions governing license fees
for Basic Telephone Service and Cellular Telephone Service under the Revenue
Sharing Regime. The license fees and spectrum charges are expensed as incurred
and computed using specified percentages as prescribed by DOT. The specified
percentage for license fees on fixed line services and cellular services were
10% of the Adjusted Gross Revenue (“AGR”) for the years ended March 31, 2006,
2007 and 2008. With effect from January 1, 2006 the Company is required to pay
license fee at the rate of 6% of the AGR on the internet and broadband services
(including internet telephony). License fees and spectrum charges charged to
income as part of cost of revenues amounted to  Rs. 552 million, Rs.
4,843 million and Rs 4,403 million (including license fee on Internet services)
for the years ended March 31,  2006, 2007 and 2008 respectively.
(Refer Note 4)
  (f)
              Network
      charges
 MTNL
recognizes charges associated with access to and interconnection to other
operators’ network for local, national long distance and international long
distance calls in accordance with the Interconnect Usage Charges Regulation
released by Telecom Regulatory Authority of India (“TRAI”), where applicable, or
in accordance with the terms of agreements entered into with other operators.
TRAI regulation specifies per minute charges for traffic terminated on the other
operators’ network.
  (g)
              Cash
      and cash equivalents
 MTNL
considers all highly liquid investments, with an original maturity or remaining
maturity of three months or less at the date of purchase to be cash equivalents.
Cash equivalents are stated at cost, which approximates their fair value due to
the short maturity of the investments.
  F-10
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  (h)
              Investment
      in short term bank deposits
 Investment
in bank deposits represents term deposits placed with banks earning fixed rate
of interest with maturities ranging from more than three months to one year.
Interest on investment in bank deposits is recognized on accrual
basis.
  (i)
              Inventories
 Inventories
are stated at the lower of cost or market value. Cost is determined using the
weighted average method for all categories of inventories. Inventories comprise
of handsets, cables, exchange equipment and other stores and spares which are
used in operating and maintaining networks. MTNL reviews its inventories on a
periodic basis to identify and provide for inventory obsolescence and
inventories with carrying values in excess of realizable values based on its
assessment of the future demands and market conditions. These write-downs are
included in cost of revenues.
  (j)
              Investment
 MTNL has
evaluated its investments in debt and equity securities in accordance with SFAS
115, “Accounting for Certain Investments in Debt and Equity Securities” and
determined that all of its debt securities are to be classified as
held-to-maturity (“HTM”). Debt securities are classified as held-to-maturity
since management has the positive intent and ability to hold the securities to
maturity. Held-to-maturity investments are carried at amortized cost using the
effective yield method, adjusted for the amortization or accretion of premiums
or discounts, if any. Costs include transaction cost.  Currently all the
investments classified as HTM were acquired at face value, without paying any
premium or discount or incurring any transaction cost. Realized gains and losses
on sale of HTM securities are included in earnings. Dividends and interest on
securities are recognized when earned and included in other income.
  MTNL
records an investment impairment charge on held-to-maturity securities when
management believes an investment has experienced a decline in value that is
judged to be other than temporary. For securities where quoted market prices are
not available, fair value is determined using pricing techniques such as
discounted cash flow analysis. In order to determine whether a decline in value
is other than temporary, the Company evaluates, among other factors, the
duration and extent to which the value has been less than the carrying value,
the financial condition and business outlook of the investee including cash flow
indicators, current market condition and trends in the industry or the ability
of the Company to retain the investment for a period of time sufficient to allow
for any anticipated recovery in value.
  (k)
              Property
      and equipment
 Property
and equipment are stated at cost less accumulated depreciation. Assets acquired
under capital leases are stated at the present value of minimum lease payments
less accumulated depreciation.
  Cost, in
the case of the network, comprises all expenditure up to and including cabling
and wiring within customers’ premises, contractor’s charges, materials and
direct labor. Employees’ remuneration and benefits are capitalized based on
technical assessment of actual staff costs directly related to such capital
expenditure. Interest cost incurred for qualifying assets during construction
period is capitalized based on actual investment and average cost of funds or
specific rate of borrowings. Interest capitalized is included as a part of asset
cost and is depreciated over the estimated useful life of the asset. Maintenance
and repair costs are charged to expense as incurred. Major overhauls that extend
the useful lives of existing assets are capitalized. The cost and the
accumulated depreciation for property and equipment sold, retired or otherwise
disposed off are removed from the stated values and the resulting gains and
losses are included in the statement of income.
  Advances
paid towards the acquisition of property and equipment outstanding at each
balance sheet date and expenditures for construction of network systems and
other projects (prior to the asset being ready for its intended use) are
reflected as Capital Work in Progress.
  Depreciation
is computed using the straight-line method over the estimated useful lives.
Assets under capital leases and leasehold improvements are amortized
straight-line over their estimated useful life or the lease term, as
appropriate. Property and equipment are being depreciated over their useful
lives, which exceed the license term since the Company believes that its
licenses will be extended beyond their current term.
  F-11
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  The
Company has adopted the provisions of FASB statement no. 143 “Asset Retirement
Obligations”. At present the Company does not have any material asset retirement
obligation.
  MTNL has
established the estimated useful lives of assets for depreciation purposes as
follows:
  Land
      - leasehold
              Over
      the period of the leaseBuildings
              30
      to 60 YearsCable
      and related equipment
              20
      to 25 YearsExchanges
      and related Equipment
              10
      YearsOther
      fixed assets
              5
      to 10 Years
 
 (l)
              Impairment
      of long lived assets
 MTNL has
adopted the provisions of SFAS 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets”. MTNL reviews long-lived assets, for impairment whenever
events or changes in business circumstances indicate the carrying amount of
assets may not be fully recoverable. Each impairment test is based on a
comparison of the undiscounted cash flows expected to be generated from the use
of the asset to its recorded value. If impairment is indicated, the asset is
written down to its fair value. Assets to be disposed are reported at the lower
of the carrying value or the fair value less cost to sell.
  (m)
              Operating
      Leases
 MTNL has
certain cancelable operating leases for office premises. Rental expenses for
operating leases are accounted for on a straight line method. Rental expense
amounted to Rs. 612 million, Rs. 610 million and Rs. 619 million, for the years
ended March 31, 2006, 2007 and 2008 respectively.
  (n)
              Retirement
      benefits
  Company's
      employees
  The
Company has two sets of retirement schemes for its employees based on the option
exercised by them. Under one scheme, the employees are eligible for provident
fund, gratuity, leave encashment  and in the other scheme, the
employees are eligible for pension, general provident fund, gratuity and leave
encashment.
  Pension
 The
pension scheme is a defined benefit retirement plan (the “Pension Plan”). Under
the pension plan, after retirement, employees are eligible for monthly payments
including dearness allowance based on the last drawn salary. MTNL provides for
the Pension Plan on the basis of an actuarial valuation. The entire Pension Plan
of MTNL is unfunded.
  Gratuity
 MTNL has
a defined benefit retirement plan (the “Gratuity Plan”) covering eligible
employees. The Gratuity Plan provides a lump sum payment to vested employees at
retirement or termination of employment based on the respective employee’s
salary and years of employment. MTNL provides for the Gratuity Plan on the basis
of actuarial valuation.
  Medical
 The
medical scheme is a defined benefit retirement plan (the “Medical Plan”). In
accordance with the Medical Plan, retirees are entitled to receive
reimbursements limited to half of the monthly salary drawn by the employee on
the date of retirement and reimbursement of hospitalization charges in any year.
(Also refer note
24(b))
  F-12
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  Leave
      encashment
 Leave
encashment benefit comprises of encashment of leave balances accrued by
employees. These balances can be accumulated and carried forward up to a maximum
of 300 days and are encashable during the tenure of employment or on the
employee leaving the Company or on retirement. Leave encashment is being
provided for on the basis of actuarial valuation.
  Provident
      fund
 Under
Indian law, employees are entitled to receive benefits under the Provident Fund,
which is a defined contribution plan. Both, the employee and the employer make
monthly contributions to the plan at a predetermined rate (presently 12.0%) of
the employees’ salary (basic and dearness allowance). The contributions are paid
to the Provident Fund Trust established by MTNL. MTNL is obligated to make
contributions when there are shortfalls in statutorily assured rates of return
on the assets of the trust. Currently, MTNL has no further obligation under the
provident fund beyond its contribution, which is expensed when
accrued.
  General
      provident fund
 The
General Provident Fund scheme (the “GPF”) is a retirement scheme applicable to
employees who have opted for the Government pension scheme. Under the scheme,
employees contribute between 6% to 100% of their basic pay to GPF. The employer
is not required to make any contributions towards the fund. The Scheme also
allows participants to withdraw up to 90% of the amount contributed by them
towards the GPF.
  During
the year ended March 31, 2005, the Company had set up an ‘MTNL GPF Trust’ (“GPF
Trust”) and had applied to the Income Tax authorities for the recognition of the
said Trust. During the year ended March 31, 2006, the GPF Trust has been
recognized by the Income Tax authorities and the Company has funded the GPF
Trust by transferring the accumulated GPF contribution till the date of
formation of the GPF Trust. The Company has also provided interest at the
statutorily applicable rate of 8% per annum on the employee contributions upto
the date of formation of the GPF Trust. MTNL is obligated to make contributions
when there are shortfalls in statutorily assured rates of return on the assets
of the GPF Trust. Currently, MTNL has no further obligation under the General
Provident Fund.
  Pension,
gratuity, and leave encashment are defined benefit retirement plans. The
liability thereof is provided based on an actuarial valuation. All actuarial
gains and losses are expensed off in the year, in which they
arise.  The gratuity plan is funded plan while pension and leave
encashment are unfunded plans.
  Employees on
      secondment from DOT
  The
employees who are seconded from DOT are entitled to pension, gratuity and leave
encashment from the Government. MTNL makes contributions, to fund the
Government’s pension, gratuity and leave encashment liability in respect of
seconded employees, in accordance with the rates prescribed by the Government.
MTNL has no further liability in respect of these employees. Additionally, these
employees are covered under eligible Government medical schemes.
  (o)
              Income
      taxes
 In
accordance with the provisions of SFAS 109, “Accounting for Income Taxes”income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statements
of income in the period such changes are enacted. Based on management’s
judgment, a valuation allowance against any deferred tax asset is recognized
when it is more likely than not that some portion or all of such deferred tax
asset will not be realized.
  (p)
              Advertisement
      expenses
 Advertising
and business promotion costs are expensed as incurred and amounted to Rs. 414
million, Rs. 447 million, and Rs. 353 million for the years ended March 31,
2006, 2007 and 2008 respectively.
  F-13
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  (q)
              Dividends
 Dividends
are recorded in the consolidated financial statements in the period in which
they are approved by the shareholders.
  (r)
              Earnings
      per share
 In
accordance with SFAS No. 128, Earnings Per Share (EPS), basic earnings per share
is computed using the weighted average number of equity shares outstanding
during the period. MTNL does not have any dilutive securities and hence the
basic and diluted earnings per share are the same.
  (s)
              Recently
      issued accounting pronouncements
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 defines “fair value” as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. This Statement establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements but
provides guidance on determination of fair value and lays down the fair value
hierarchy to classify the source of information used in fair value measurements.
Upon adoption of the Statement, difference between the carrying amounts and the
fair values of instruments should be accounted for as a cumulative-effect
adjustment to the beginning balance of retained earnings. SFAS 157 is effective
for fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FASB Staff Position No. SFAS 157-2 (FSP FAS 157-2) which delays the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This FSP
partially defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008 for items within the scope of this FSP. The Company has
evaluated the impact of this Statement, except as it applies to those
nonfinancial assets and nonfinancial liabilities as noted in FSP FAS 157-2, and
believe that adoption of SFAS 157, prospectively, on April 1, 2008, will not
have a material effect on the Company’s consolidated financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to
measure eligible financial assets and liabilities, firm commitments and other
eligible items at fair value, on an instrument-by-instrument basis, that is
otherwise not permitted under other generally accepted accounting principles.
The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. At the effective date, on adopting this irrevocable fair
value option for eligible items that exist on that date, the effect of such
re-measurement to fair value should be accounted for as a cumulative-effect
adjustment to the beginning balance of retained earnings. The Company will be
required to adopt to this  new standard for the fiscal year
beginning   April 1 ,2008. The Company has evaluated the impact
of this Statement and believe that adoption of SFAS No. 159, prospectively, on
April 1, 2008, will not have a material effect on the Company’s consolidated
financial statements.
  In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (SFAS 141R). This Statement replaces SFAS No. 141, Business
Combinations. SFAS 141R requires an acquirer to recognize the assets acquired,
the liabilities assumed including contingencies and non-controlling interest in
the acquiree, at the acquisition date, measured at their fair value, with
limited exceptions specified in the statement. In a business combination
achieved in stages, this Statement requires the acquirer to recognize the
identifiable assets and liabilities as well as the non-controlling interest in
the acquiree at full amounts of their fair values. This Statement requires the
acquirer to recognize contingent consideration at the acquisition date, measured
at its fair value at that date. The Company will be required to apply this new
Statement prospectively to business combinations consummated in fiscal years
beginning after December 15, 2008.  Early adoption is prohibited. The
Company believes the effect  of  SFAS  141R will depend
on the nature and significance of any acquisitions that are subject to this
statement.
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51 (SFAS 160). SFAS
160 establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. This
Statement requires the recognition of a non-controlling interest as equity in
the consolidated financial
  F-14
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  statements
and separate from the parent’s equity. Purchases or sales of equity interests
that do not result in a change in control will be accounted for as equity
transactions.  The Company will be required to adopt this new Statement
prospectively to all non-controlling interest, including any that arose before
the effective date, for fiscal years, beginning after December 15, 2008. Early
adoption is prohibited. The Company is currently evaluating the requirements of
SFAS 160 and has not yet determined the impact this Statement may have on the
Company’s consolidated financial statements.
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities – An Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161
requires enhanced disclosures on derivative and hedging activities by requiring
objectives to be disclosed for using derivative instruments in terms of
underlying risk and accounting designation. This Statement requires disclosures
on the need of using derivative instruments, accounting of derivative
instruments and related hedged items, if any, under SFAS 133 and the effect of
such instruments and related hedge items, if any, on the financial position,
financial performance and cash flows. The Company will be required to adopt this
new Statement prospectively, for fiscal years beginning after November 15, 2008.
The Company is currently evaluating the requirements of SFAS 161 and have not
yet determined the impact this Statement may have on the Company’s consolidated
financial statements.
  (t)
              Reclassifications
 Certain
items previously reported in specific financials statements captions have been
reclassified to conform to the current year’s presentation.
  3.
              RELATIONSHIP
      BETWEEN DOT/BSNL/VSNL AND THE COMPANY ( Also refer note
  19)
  The
relationships between the Department of Telecommunication (“DOT”) / Bharat
Sanchar Nigam Limited (“BSNL”) / Videsh Sanchar Nigam Limited (“VSNL”) and MTNL
are as follows:
  a. MTNL
is a subsidiary of the Government of India which owns 56.25% of MTNL through
DOT. DOT is a department of the Government of India. BSNL is an affiliate among
common control with MTNL as the Government, acting through the DOT, holds 100%
of the issued share capital of BSNL. VSNL is an equity investee of the
Government of India.
  b. DOT
has granted licenses to MTNL to operate fixed line, cellular and internet
services. The licenses for fixed line, cellular and internet services are valid
until March 31, 2013, October 9, 2017 and September 7, 2017 respectively. DOT
has also granted to MTNL, with effect from May 10, 2006 a National Long Distance
License for Delhi and the municipalities of Mumbai, Navi Mumbai and Thane valid
up to May 9, 2026. DOT retains the right to revoke these licenses after giving
one month's notice to MTNL.
  c. In
October 1999, the DOT which had performed the role of both licensor and policy
maker for the Ministry of Communication and operated as India’s domestic long
distance service provider and fixed-line service provider (except for the areas
of Delhi and Mumbai), was split into two departments DOT and the Department of
Telecom Services (DTS). DOT/ Telecom Commission, or DOT, now performs the role
of licensor and policy maker. The Department of Telecom Services, or DTS,
functioned as the Government of India's local and long distance network service
provider till September 30, 2000. On October 1, 2000, DTS was incorporated as
BSNL and carries out the functions of DTS including the determination of the
networking charges payable for access to its network.
  d. Until
March 31, 2001, BSNL was the sole service provider for carriage of NLD (National
Long Distance) calls. Further it was also carrying ILD calls up to the gateway
provided by VSNL, India’s former government-controlled international long
distance carrier. However, carriage of NLD and ILD (International Long Distance)
calls has been opened to other operators with effect from April 1, 2001 and
April 1, 2002 respectively. MTNL continues to use BSNL network for the carriage
of NLD calls, and has entered into arrangements with other ILD operators for
carriage of ILD calls with effect from April 1, 2002. However, international
calls continue to be passed from MTNL’s network to international gateways
operated by VSNL. MTNL pays the negotiated per minute charge to VSNL for
carriage and termination of international calls which varies depending on the
country of destination. Subsequent to the year ended
  F-15
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  March 31,
2006, MTNL has started using its NLD license and has entered into a contract
with VSNL for a lease line to carry MTNL’s call traffic between Delhi and
Mumbai.
  The
following table gives details in respect of the Company’s significant revenues
and (expenses) related to carriage of ILD calls, NLD calls License
Fees,  Spectrum Charges and inter connect usage charges with the above
mentioned related parties:
  For
      the years ended March 31,2006
              
              2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedVSNL
      - Expenses for carriage of ILD calls originating on MTNL’s
      network
              (583)
              
              (492)
              
              (487)
              
              (12)VSNL
      - Revenues for ILD/NLD calls terminating on MTNL’s network
              46
              
              65
              
              90
              
              2DOT
      - License fees and spectrum charges (Refer note
      4)
              (552)
              
              (5,055)
              
              (4,127)
              
              (103)BSNL
      - Networking charges for NLD calls (Refer note
      4)
              (8,217)
              
              (3,087)
              
              (3,487)
              
              (87)BSNL
      - Revenues for interconnect usage charges as per TRAI
      Regulation
              2,442
              
              754
              
              2725
              
              68
 
 4.
              LICENSE
      FEES AND NETWORK CHARGES
  On April
9, 2001, the DOT communicated that the annual license fee will be revised and
shall be payable at 12% (same as the rate applicable to private operators) of
Adjusted Gross Revenue (“AGR”) for Basic Telephone Service effective from August
1, 1999, (as against Rs.900 per direct exchange line under the earlier
arrangement). On September 5, 2001, the DOT, amended its position and informed
MTNL that the date from which the revised license fees will be payable will be
notified later. The DOT also informed the Company that the network charges
payable to BSNL will also be revised, and the license fee and network charges
would be reviewed with effect from the same date.
  Accordingly,
license fee and networking charges on revised basis were not to be paid till the
DOT communicated the effective date for such revision. The earlier license fee
and networking arrangement expired on March 31, 2000 and March 31, 2001
respectively. No agreement had been entered for payment of  networking
charges for the fiscal years ended March 31, 2002, 2003 and 2004. In the absence
of any agreement,  networking charges for these years have been
accrued on the same basis as applicable to that of private operators. In the
fiscal 2001, the Company paid license fee based on the earlier
arrangement.
  Subsequent
to the March 31, 2004, a meeting was held between DOT, BSNL and MTNL to resolve
the ambiguity with respect to license fee and networking charges. The parties
agreed that the license fees were payable at 12% of AGR and networking charges
as per TRAI regulations with effect from August 1, 1999. Also, the revenue
sharing percentages earlier agreed to between MTNL and BSNL, other than those
governed by TRAI regulations, were revised with retrospective effect. This had
resulted in an incremental charge of Rs.3,520 million on account of license fee
and a benefit of Rs.1,515 million on account of networking charges for periods
upto March 31, 2003, which had been accounted for in the year ended March 31,
2004.
  F-16
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  During
the year ended March 31, 2006, the Company has accounted for a reversal of
license fees amounting to Rs 3,408 million. The Company has received a
confirmation from DOT stating that provisional assessment of license fees upto
the financial year 2004-05 in respect of MTNL has been completed and that MTNL
has fully paid all license fee dues upto March 31, 2005. Subsequent to the year
ended March 31, 2006, the Company has also received an NLD license from DOT. One
of the pre-requisites for obtaining an NLD license is the absence of any dues
towards DOT on account of license fees. In view of the above and after obtaining
an opinion from a legal counsel the Company has concluded that there is no
longer any ambiguity regarding the license fees payable for the period upto
March 31, 2003 (Rs.3,520 million) and for the years ended March 31, 2004 and
2005. The Company has accounted for Rs.3,408 million (net) the additional
amounts accrued upto March 31, 2005 as a reduction in license fees in the
statement of income as part of cost of revenues for the year ended March 31,
2006.
  During
the year ended March 31, 2006, the DOT had constituted a three-member committee
comprising of Member (Production), Telecommunications, Member (Finance),
Telecommunications and Deputy Director General (Business Solutions) to resolve
the various disputes relating to networking charges. Based on the
recommendations of the Committee vide their minutes dated January 2006, DOT has
settled the disputes on the networking charges for the period from 2000 to 2005.
Accordingly, an additional amount of Rs.3,809 million has been accounted as
networking charges in the statement of income as part of cost of revenues for
the year ended March 31, 2006.
  5.
              CASH
      & CASH EQUIVALENTS DETAILS
  2007
              
              2008
              
              2008(Millions
      of Rupees)
              
              (Millions
      of
                Dollars)
                UnauditedCash
      at bank and in hand
              
              1,660
              
              1,346
              
              34Cash
      and cash equivalents
              
              1,660
              
              1,346
              
              34
 
 6.
              INVESTMENTS
      IN BANK DEPOSITS
  Investments
in bank deposits represents term deposits placed with banks earning fixed rate
of interest and amounted to Rs. 17,102 million and Rs. 32,444 million as of
March 31, 2007 and 2008 respectively with maturities from more than three months
to one year. Interest on investments in bank deposits is recognized on accrual
basis.
  7.
              PROPERTY
      & EQUIPMENT
  2007
              
              2008
              
              2008(Millions
      of Rupees)
              
              (Millions
      of
                Dollars)
                UnauditedLand
      & buildings
              
              14,781
              
              15,891
              
              397Cable
      and related equipment
              
              74,149
              
              75,279
              
              1,881Exchanges
      and related Equipment
              
              66,652
              
              69,990
              
              1,749Other
      fixed assets
              
              5,638
              
              5,931
              
              148Intangible
      Assets
              
              126
              
              410
              
              10Capital
      work in progress
              
              8,044
              
              10,234
              
              256Total
              
              169,390
              
              177,735
              
              4,441Accumulated
      depreciation and amortization
              
              (88,350)
              
              (95,925)
              
              (2,397)Property
      and equipment, net
              
              Rs.
      81,040
              
              Rs.
      81,809
              
              $2,044
 
 In 1987,
the assets and properties of the DOT located in Delhi and Mumbai were
transferred to MTNL by an order of the Government of India (the "Government")
and a deed of sale was executed by the Government in
  F-17
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  favor of
MTNL representing an irrevocable transfer. Indian law generally requires that to
perfect the transfer or lease of real property, the transfer should be evidenced
by a formal, duly stamped deed of transfer and registered with the Central Land
Registrar within a specified period after the execution of the deed of transfer
or   lease. A formal transfer deed for real property of the DOT,
transferred by the Government to MTNL has been executed but has not been
registered with the appropriate municipal authorities. The formal transfer deed
and physical delivery of possession of the DOT's non-real estate assets has
resulted in the transfer of such non-real estate assets of the DOT to MTNL in
Delhi and Mumbai.
  Indian
law also requires payment of stamp duty (at rates which vary among states) on
instruments, which effect transfer of title to real estate or in respect of
leases of real estate. MTNL has not paid stamp duty in respect of any of the
acquired or leased properties. Accordingly, MTNL may be liable for stamp duty
and penalties thereon if a deed is registered by MTNL in the future (other than
with respect to the DOT properties acquired from the Government as at March 30,
1987). All liabilities for stamp duties in respect of the DOT properties
acquired by MTNL from the Government as at March 30, 1987 are to be borne by the
Government. The Company has been advised by its counsel that although the
Company has valid possession including the risks and rewards of ownership and
title to all of its property, to enable MTNL to perfect and thereby acquire
marketable title to real property in its possession, it would need to have
relevant documents relating to transfer or lease of real property duly
registered and stamped. Accordingly, MTNL cannot sell its properties without
payment of stamp duties and registering the properties in its name. In preparing
these consolidated financial statements, MTNL has capitalized provision for
stamp duty based on its best estimate amounting to Rs.859 million and Rs.82
million as of March 31, 2007 and 2008 respectively. MTNL does not intend to sell
any of these properties. In terms of its Articles of Association MTNL has to
obtain prior approval of the President of India in respect of sale or disposal
of any land or building costing more than Rs.1 million.
  8.
              INVESTMENTS
      IN HELD TO MATURITY SECURITIES
  Investments
of MTNL consist of held-to-maturity securities (“HTM”).
  As
      of March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedHeld-to-maturity
      securities8.75%
      Redeemable Cumulative Preference Shares of ITI Limited
              
              Rs.
      1,000
              
              Rs.
      200
              
              $  511.5%
      Bonds of Maharashtra Krishna Valley Development
Corporation
              
              Rs.
      2,500
              
              Rs.
      2,500
              
              $62Investments
      - Non-current
              
              Rs.
      3,500
              
              Rs.
      2,700
              
              $67
 
 8.75% Redeemable
      Cumulative Preference Shares of ITI
  Limited
  On
February 14, 2003, MTNL invested Rs. 1,000 million in 8.75% cumulative
preference shares of ITI Limited (“ITI”) on a private placement basis. ITI is a
government company in the telecommunication equipment and distribution business.
ITI also supplies exchanges and cables to MTNL. These preference shares are
redeemable in five equal annual installments commencing from September 30,
2005.
  The share
purchase agreement between ITI and MTNL includes a provision for a letter of
comfort from Department of Telecommunication (DOT) to MTNL endorsing the
investment and also provides MTNL a right to set off principal payments owing
under the terms of these Cumulative Preference Shares against amounts payable to
ITI, in connection with MTNL’s purchase of exchanges and cable
supplies.
  As of
September 30, 2005, ITI had not redeemed the first tranche amounting to Rs. 200
million as per the repayment schedule and ITI had requested MTNL for an
extension on the redemption dates. However MTNL
  F-18
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  had not
accepted ITI’s request and has looked to the DOT’s letter of comfort and
requested settlement of the first repayment tranche of Rs. 200
million.
  As of
September 30, 2006, ITI has not yet redeemed both the first and second tranches
amounting to Rs. 200 million each as per the original repayment schedule. ITI
has to redeem third tranches amounting to Rs. 200 million as on September 30,
2007.
  As of
September 30, 2007, ITI has not yet redeemed  the first, second and
third tranches amounting to Rs. 200 million each as per the original repayment
schedule.
  Management
has evaluated the investment in ITI for impairment, on the basis that the first,
second and third tranches for repayment have not been settled by ITI. Management
has evaluated the financial condition and business outlook of ITI including
the new purchase orders received by ITI for supply of GSM equipment from BSNL
and the Company. The Company currently has account payable to ITI of Rs 209
million as at March 31, 2008 which, pursuant to the share agreement, the
Company can legally settle against the repayments owing under the cumulative
preference shares. In addition, the Company has the intent and ability to retain
the debt security for a period of time sufficient to allow for anticipated
recovery in value.
  Based on
this evaluation and specifically considering that the share purchase agreement
includes a provision for a letter of comfort from Department of
Telecommunication (Government of India) to MTNL endorsing the investment and
also provides MTNL a right to set off amounts receivable in respect of principal
outstanding from the dues payable to ITI, management has concluded that Rs. 800
million of this debt security due as of September 30, 2009 is
impaired.
  11.5% Bonds issued by
      Maharashtra Krishna Valley Development
  Corporation
  MTNL has
also invested Rs. 2,500 million in bonds issued by Maharashtra Krishna Valley
Development Corporation (“MKVDC”), a wholly owned subsidiary of Government of
Maharashtra. MKVDC allotted these bonds to MTNL on May 31, 2002. The bonds have
a coupon rate of 11.5% per annum and are redeemable at the end of the 10th  year
from the date of allotment. The repayment of these bonds is guaranteed by the
Government of Mahrashtra.
  Interest
income has been recognized and realized on the bonds held in MKVDC.
  MTNL
records an investment impairment charge when management believes an investment
has experienced a decline in value that is judged to be other than temporary.
MTNL monitors its investments for impairment by considering current factors
including economic environment, market conditions and the operational
performance and other specific factors relating to the business underlying the
investment. Based on its assessment of its carrying values of the above
investments, management believes that there is no impairment of investments as
of March 31, 2008.
  9.
              INVESTMENT
      IN EQUITY AFFILIATE
  On July
21, 2001, MTNL, in consortium with Telecommunications Consultants India Limited,
VSNL and Nepal Venture Private Limited entered into a joint venture arrangement
to form United Telecom Limited (UTL). UTL was formed to provide wireless in
local loop (“WLL”) services in Nepal. As at March 31, 2003, MTNL had invested
Rs. 200 million in UTL in proportion to its 26.7% holding. In 2004, MTNL
invested Rs. 33 million in UTL in proportion to its 26.7%
holding.  During the year ended March 31, 2007 MTNL has further
invested Rs.56 million.. MTNL’s equity in losses of the affiliate amounted to
Rs.73 million and Rs.7 million for the years ended March 31,  2006 and
2007 respectively. MTNL’s profit in equity   of the affiliate
amounted to Re.1 million  for the year ended March 31,2008. The
carrying value of investment in UTL is Rs. 115 million and Rs 117
million  as of March 31, 2007 and 2008, respectively. During the year
ended March 31, 2008 MTNL has further invested Rs.2.41 million.  In
2008, MTNL share in UTL is 27.77% holding.
  F-19
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  On March
31, 2006, MTNL STPI IT Services Ltd.  (hereinafter referred to as
“STPI”), a joint venture of MTNL and Software Technology Parks of India, a
society registered under the Ministry of Information Technology
with  50% share holding. The main objective of the company is to
undertake all such activities that are required to make domain “India in”
popular. The project under this joint venture is under way.  STPI
project of data centre at Chennai (formerly Madras) will provide services like
messaging, web-hosting, application hosting, web-farming application etc. The
Company is on process of recruiting its own staff and will be recruiting the
best professionals from software industry by providing remuneration in line with
the industry.  As on March 31, 2007, an amount of Rs.3.71 million has
been advanced to STPI.  Total investment of MTNL in share of STPI is
Rs 0.25 million as on March 31, 2008.
  10.
              INVENTORIES
  2007
              
              2008
              
              2008(Millions
      of Rupees)
              
              (Millions
      of
                Dollars)
      UnauditedCabling
              
              858
              
              1,047
              
              26Exchange
      equipment
              
              568
              
              405
              
              10Telephone
      and Telex Equipments
              
              956
              
              355
              
              9Other
              
              348
              
              (144)
              
              (4)Less:
      Allowance for slow moving/obsolete stock
              
              (491)
              
              (499)
              
              (12)Rs.
      2,239
              
              Rs.
      1,163
              
              Rs.
      29
 
 As
on  March 31, 2008, the four installments of Rs. 200 million each have
not been repaid by the ITI Ltd.  Neither management
has  been able to recover the same nor any adjustments have been made
out of the total amount payable to ITI Ltd., Rs. 800 million has been
impaired.
  Activity
in allowance for slow moving / obsolete stock is as follows:
  For
      the years ended March 31,2006
              
              2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedBalance
      at beginning of year
              358
              
              371
              
              491
              
              12Charged
      to expense
              35
              
              126
              
              127
              
              3Less:
      amounts written off
              (22)
              
              (6)
              
              (119)
              
              (3)Balance
      at end of year
              Rs.
      371
              
              Rs.
      491
              
              Rs.
      499
              
              Rs.
      12
 
 11.
              ACCOUNTS
      RECEIVABLE AND ALLOWANCE FOR DOUBTFUL
DEBTS
  Accounts
receivable are stated net of allowance for doubtful debts. Accounts receivable
are not collateralized. The allowance for doubtful debts is determined
principally on the basis of past credit loss experience and an evaluation of
potential losses on the outstanding receivable balances. The activity in
allowance for uncollectible accounts is given below:
  For
      the years ended March 31,2006
              
              2007
              
              2008
              2008(Millions
      of Rupees)
              (Millions
                of
      Dollars)
                UnauditedBalance
      at beginning of year
              
              6,794
              
              4,991
              
              6,191
              155Charged
      to expense
              
              (248)
              
              1180
              
              411
              10Less:  Amounts
      written off
              
              (1,555)
              
              20
              
              908
              23Balance
      at end of year
              
              Rs.
      4,991
              
              Rs.
      6,191
              
              Rs.
      7,510
              Rs.
      188
  F-20
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  12.
              RESTRICTED
      ASSETS
  As on
March 31, 2008, restricted assets include the amount paid to income tax
authorities under protest amounting to Rs 3,389 million.
  13.
              OTHER
      RECEIVABLES
  Other
receivables consist of the following:
  Other
      receivablesAs
      of March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
                of
      US $)UnauditedLoans
      to employees
              
              2,150
              
              1969
              
              49Advance
      tax (refer note below)
              
              10,173
              
              (3,248)
              
              (81)Accrued
      interest
              
              1,092
              
              2,377
              
              59Others
              
              16,530
              
              22,669
              
              56629,945
              
              23,767
              
              594Less:
      Other assets
              
              (1,935)
              
              (1,772)
              
              (44)Rs.
      28,010
              
              Rs.
      21,995
              
              $550
 
 Advance
tax balance is net of income tax liability amounting to Rs. 44,183 million and
Rs. 34,127 million as of March 31, 2006 and 2007. ‘Others’ include refund
receivable of Rs. 10,793 millions from the tax authorities and which are
received in 2007-08. Other assets include the non current portion of loans given
to employees and capital lease receivable.
  14.
              ACCRUED
      EXPENSES AND OTHER CURRENT
LIABILITIES
  Accrued
      expenses and other current liabilitiesAs
      of March 31,2007
              
              2008
              
              2008(Millions
      of Rupees)
              
              (Millions
                of
                Dollars)
                UnauditedInterest
      accrual
              
              
              3
              
              3
              
              0General
      provident fund contribution of   employees
              
              
              9,293
              
              10,095
              
              252Deferred
      income
              
              
              5,518
              
              5,763
              
              144Advance
      received from customers and others
              
              
              648
              
              773
              
              19Customer
      deposits
              
              
              2,159
              
              1,984
              
              50Accrued
      employee cost
              
              
              2,036
              
              1,383
              
              35Other
      payables and accruals
              
              
              7,893
              
              11,704
              
              292Rs.
      27,550
              
              Rs.
      31,704
              
              $792
 
 The
General Provident Fund accrual represents amounts contributed by employees (who
have opted for the Government pension rules), net of advances taken. Prior to
the absorption (in the year 2000), this fund was being maintained by DOT. MTNL
has raised claims amounting to Rs. 10,095 million on DOT up to March 31, 2008
(2007: Rs 9,293 million) in respect of employee contributions (pre absorption)
together with the interest accrued. An offsetting amount has been included in
the non-current portion of amounts due from related parties as disclosed in Note
19.
  F-21
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  Subsequent
to absorption, in the absence of any rules available for deposit of such
employee contributions, the amounts of employee contributions have been retained
by MTNL. These funds are not restricted and could be used to fund the activities
of MTNL until such time that the funds must be transferred to the GPF Trust.
During the year ended March 31, 2006 a GPF Trust had been created and Rs 4340
million had been transferred to GPF Trust The outstanding amount owing to the
trust of Rs. 10,095 million continues to be a part of accrued expenses and other
current liabilities, as the amount is due to be recovered by the
DOT.
  15.
              INTEREST
      AND OTHER INCOME, NET
  Interest
and other income, net consist of the following:
  For
      the years ended March 31,2006
              
              2007
              
              2008
              
              2008(Million
      of rupees)
              
              $
      Millions unauditedInterest
      from investment in MKVDC
              
              239
              
              288
              
              288
              
              7Interest
      on loans to employees
              
              173
              
              207
              
              109
              
              3Interest
      on advances and others, net
              
              51
              
              324
              
              310
              
              8Interest
      paid on customers deposits
              
              (25)
              
              (20)
              
              (16)
              
              (0)Interest
      paid General Providend Fund
              
              (207)
              
              65
              
              0
              
              0Interest
      on Income Tax Refunds
              
              -
              
              5,266
              
              1,100
              
              27Other
      income
              
              556
              
              180
              
              251
              
              6Rs.
      787
              
              Rs.
      6,310
              
              Rs.
      2,043
              
              $51
 
 16.
              EXCESS
      LIABILITIES WRITTEN BACK
  The
excess liabilities written back includes accruals being reversed to income and
relates to unmatched excess cash received in respect of debtors (which, as per
The Limitation Act, after a period of three years become time barred and become
property of the Company), amounting to Rs.297 million Rs. 49 million and
Rs.1million for the years ended March 31, 2005, 2006 and 2007 respectively. This
line item also includes other time barred liabilities outstanding for more than
3 years amounting to Rs.630 million, Rs. 674 million and Rs.100 million for the
years ended March 31, 2005, 2006 and 2007 respectively, and other provisions no
longer required which have been written back amounting to  Rs. 98
million , Rs.738 million and Rs.320 million for the years ended March
31,  2006, 2007 and 2008 respectively.
  17.
              INCOME
      TAXES
  Total
income tax expense is attributable to income from continuing operations and
consists of the following:
  For
      the years ended March 31,2006
              
              2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedCurrent
      tax
              Rs.
      1,253
              
              Rs.
      (1,171)
              
              Rs.
      1,903
              
              $
       48Deferred
      tax
              (816)
              
              98
              
              (2,024)
              
              (51)Aggregate
      Taxes
              Rs.
      437
              
              Rs.
      (1,073)
              
              Rs.
      (121)
              
              $
      (3)
 
 A
reconciliation of the income tax expense to the amount computed by applying the
statutory Indian income tax rate to income before income tax expense is
summarized below:
  F-22
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  For
      the years ended March 31,2006
              
              2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedIncome
      before taxes and share from affiliates
              Rs.
      1,576
              
              Rs.
      10.236
              
              2,338
              
              58Average
      enacted tax rate in India
              33.66%
              
              33.66%
              
              33.99%Computed
      tax expense
              531
              
              3,445
              
              795
              
              20Effect
      of tax assessed for earlier years
              71
              
              (4,626)
              
              (8,074)
              
              (202)Effect
      of change in tax rates
              (173)
              
              0
              
              (1)
              
              0Permanent
      differences
              8
              
              108
              
              7,159
              
              179Income
      taxes recognized in the statement of income
              Rs.
      437
              
              Rs.
      (1,073)
              
              Rs.
      (121)
              
              $(3)
 
 Permanent
differences represent certain expenses, which are not allowed as deductible
expenses under the Indian Income Tax Act, 1961.
  As per
section 80IA of the Indian Income Tax Act, 1961 a company, which starts to
operate telecommunication services at any time on or after April 1, 1995, but
before March 31, 2000, is entitled to a tax holiday for a period of 10 years
beginning with the year in which such services are started. As per the tax
holiday, 100% of the profits derived from such services are exempt from tax in
the first 5 years, and 30% of such profits are exempt from tax for the next 5
years. MTNL on the basis of advice from its legal counsel has historically
claimed such benefit. The Company’s claim have been rejected at the first
appellate level and the case has been referred to the Committee of Disputes,
which is a body formed by the Government to settle disputes between Government
controlled undertakings and the Government. The Committee has referred the case
to the Tax appellate authorities for reconsideration. During the year ended
March 31, 2006, the case has been set aside by the Income Tax Appellate
Authority for the assessment years 1998-99, 1999-00, 2000-01 and 2002-03 and has
referred the matter back to the Assessing Officer for a fresh assessment after
hearing the case again. During the year 2006-07 assessing officer has made fresh
assessment for calculation of deduction u/s 80IA of the Indian Income Tax Act,
1961 and allowed partial benefit to MTNL.MTNL has filed appeals
against that partial allowance to the higher authority.
  Significant
components of activities that gave rise to deferred tax assets and liabilities
included in the financial statements are as follows:
  As
      of March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedDeferred tax
      assets:Allowances
      for bad and doubtful debts
              
              Rs.1,897
              
              Rs.
      3,461
              
              $86Deferred
      settlements amount not recognized in income
              
              3,450
              
              7,041
              
              176Post
      retirement benefits
              
              3,350
              
              2,526
              
              63Others
              
              2,012
              
              706
              
              18Total
      deferred tax assets
              
              10,709
              
              13,735
              
              343Deferred tax liabilities:Excess
      of tax allowance over depreciation
              
              (9,643)
              
              (5,639)
              
              (141)Interest
      capitalized
              
              (1,012)
              
              (6,018)
              
              (150)Total
      deferred tax liabilities
              
              (10,655)
              
              (11,657)
              
              (291)Net
      deferred tax asset / (liability)
              
              Rs.54
              
              Rs
      2,078
              
              $52
  F-23
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  Net
deferred tax assets / (liabilities) included in the consolidated balance sheets
are as follows:
  As
      of March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedCurrent:Deferred
      tax assets
              
              Rs.
      7,359
              
              Rs
      11,209
              
              $280Non-current:Deferred
      tax assets
              
              3,350
              
              2,526
              
              63Deferred
      tax liabilities
              
              (10,655)
              
              (11,657)
              
              (291)Total
      non current
              
              (7,306)
              
              (9,132)
              
              (228)Net
      deferred tax asset / (liability)
              
              Rs.
      54
              
              Rs
      2,078
              
              $52
 
 18.
              RETIREMENT
      BENEFITS
  (a)
              Employees seconded
      from DOT
 
 MTNL’s
employees who are seconded from DOT are entitled to pension, gratuity benefits
and leave encashment from the Government. MTNL makes contributions to the DOT to
fund the liability in respect of these employees in accordance with the rates
prescribed by the Government. MTNL’s contributions are charged to income in the
period they are incurred. The amount for pension, gratuity and leave encashment
recognized for such employees in the consolidated statements of income are as
follows:
  For
      the years ended March 31,2006
              
              2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedPension
      (including gratuity)
              Rs.
      9
              
              Rs.
      170
              
              Rs.
      13
              
              0Leave
      encashment
              8
              
              9
              
              7
              
              0Rs.
      17
              
              Rs.
      179
              
              Rs.
      20
              
              $0
 
 (b)
              Employees of
      MTNL
 
 i.
              Pension, Gratuity and
      Medical benefits
  The
pension and gratuity to the non-executives employees of MTNL are defined benefit
plans, the cost and liability, for which are based on an actuarial valuation.
Further MTNL introduced a ‘MTNL retired employees medical facility scheme’ for
employees with effect from January 1, 2002. The scheme was initially introduced
for a period of 12 weeks and was subsequently extended every year by orders
issued by the competent officials. The cost and liability of the medical benefit
plan for its retired employees is based on an actuarial valuation. The Company
entered into an agreement with ICICI Lombard for its medical coverage for the
period from April 1, 2006. ICICI Lombard subsequently expressed their inability
to continue with the scheme and finally the agreement was discontinued from
September 2, 2006. The earlier scheme was reinstated thereafter.(Refer to Note
24 (b))
  ii
              Absorption of
      Executive employees
  The
Company had given an option to its executive employees (B category) for
absorption with MTNL with effect from October 1, 2000, at a revised pay scale
that is higher than the existing pay scale. The offer for absorption provided
that in addition to getting post retirement benefits like gratuity and leave
encashment, the employees would have to opt for pension based on the government
rules.
  F-24
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  During
the year ended March 31, 2004, majority of employees had opted for absorption
with MTNL. MTNL determined the incremental liability on account of revised pay
scales and related retirement cost based on an actuarial valuation. MTNL has
raised claims on DOT amounting to Rs. 2,784 million for the period upto the
October 1, 2000, which represent amounts recoverable towards retirement benefits
calculated at the rates prescribed by DOT for its employees on secondment. These
have been included in Dues from related parties as disclosed in Note
19.
  During
the year ended March 31, 2005, an additional 1,108 executive employees opted for
absorption with MTNL. MTNL has determined the incremental liability on account
of revised pay scales and related retirement cost based on an actuarial
valuation. In respect of these employees, MTNL has raised claims on DOT
amounting to Rs. 541 million for the period upto the October 1, 2000,which
represent amounts recoverable towards retirement benefits calculated at the
rates prescribed by DOT for its employees on secondment. These have been
included in Dues from related parties as disclosed in Note 19.
  During
the year ended March 31, 2006, the Company had given an option to its executive
employees (Category A) for absorption with the Company with effect from October
1, 2000, at a revised pay scale that is higher than the existing pay scale. Out
of approximately 1,218 Group A employees currently working in MTNL, 65 employees
have exercised their option as at March 31, 2006 and have been absorbed in MTNL.
The offer for absorption provided that in addition to getting the post
retirement benefits like gratuity and leave encashment subsequent to absorption,
the employee would have to opt for either pension based on the government rules
or provident fund based on the company policy. A case has been filed by the
Indian Telecom Service Association (acting on behalf of Group A officers) with
the High court appealing for the stay order against absorption of Group A
employees on the contention that terms and conditions of absorption are not
clear. The High Court has subsequently passed a stay order against further
absorption of Group A employees. Pending finalization of the terms of
absorption, the Company, during the year ended March 31, 2006, has provisionally
accrued a charge of amounting to Rs.25.39 million on account of revised pay
scales for the executive employees who exercised the option upto that date.
However, no claims have been raised by the Company on DOT for the related
retirement costs pending finalization of terms of absorption and outcome of the
court case.
  iii.
              The following tables
      sets forth the status of the pension, gratuity plan and medical benefits.
      The measurement date used is March 31, of the relevant fiscal
      year.
  The Pension
Plan
  As
      of March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedAccumulated
      benefit obligation
              Rs.
      21,989
              
              Rs.
      27,177
              
              $679Changes
      in projected benefit obligation:Projected
      Benefit obligation at the beginning of the year
              26,156
              
              28,716
              
              718Service
      cost
              847
              
              924
              
              23Interest
      cost
              2,092
              
              2,369
              
              59Actuarial loss
              1,167
              
              739
              
              18Benefits
      paid
              (1,546)
              
              (1,298)
              
              (32)Projected
      Benefit obligation at the end of the year
              28,716
              
              31,450
              
              786Changes
      in plan asset
              -
              
              -
              
              -Unfunded
      status
              (28,716)
              
              (31,450)
              
              (786)Accrued
      provision for pension
              Rs.
      (28,716)
              
              Rs.(31,450)
              
              $(786)
  F-25
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  For
      the Years Ended March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedThe
      components of net pension costs are reflected below:Current
      service cost
              Rs.
      847
              
              Rs.
      924
              
              $23Actuarial
      obligation assumed on account of absorptionInterest
      cost
              2,092
              
              2,369
              
              59Loss
      on curtailmentActuarial
      loss
              1,167
              
              739
              
              18Net
      periodic pension cost
              Rs.
      4,106
              
              Rs.
      4,032
              
              $101
 
 Cash
Flows
  The
Company expects to make the following benefit payments, which reflect expected
future service, as appropriate:
  For
      the financial year ended March 31,
              Expected
      contribution(Million
      of Rupees)
              (Million
      of US $)
                Unaudited2009
              1,002
              252010
              1,039
              262011
              1,094
              272012
              1,208
              302013
              1,320
              332014
      – 2018
              10,002
              250
 
 The Gratuity
Plan
  As
      of March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedAccumulated
      benefit obligation
              Rs.
      3,928
              
              Rs.
      4,823
              
              $121Changes
      in projected benefit obligation:Projected
      Benefit obligation at the beginning of the year
              4,998
              
              6,434
              
              161Service
      cost
              271
              
              284
              
              7Interest
      cost
              400
              
              530
              
              13Actuarial
      (gain) or loss
              (797)
              
              (624)
              
              (16)Curtailment Loss
              -
              
              -Actuarial
      obligation assumed on account of absorption
              -
              
              -Benefits
      paid
              (737)
              
              (290)
              
              (7)Projected
      Benefit obligation at the end of the year
              Rs.
      4,135
              
              Rs.
      6,334
              
              $158Changes
      in plan assetFair
      value of the plan assets at the beginning of the Year
              3,618
              
              6,434
              
              161Actual
      return on plan assets
              361
              
              356
              
              9Employer
      contributions
              737
              
              (165)
              
              (4)Benefits
      paid
              (737)
              
              (290)
              
              (7)Plan
      assets at the end of the year
              Rs.
      3,979
              
              Rs.
      6,335
              
              $(158)Unfunded
      status
              (1,568)
              
              0
              
              0Accrued
      provision for gratuity
              Rs.(1,568)
              
              0
              
              0
  F-26
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  For
      the years ended March 31,2007
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedThe
      components of net gratuity costs are reflected below:Current
      service cost
              Rs.
      271
              
              Rs.
      284
              
              $7Actuarial
      obligation assumed on account of absorption
              -Interest
      cost
              400
              
              530
              
              13Actuarial
      (gain) or loss
              (868)
              
              (489)
              
              (12)Curtailment
      (Gain)/ Loss
              (289)
              
              (491)
              
              (12)Net
      periodic gratuity cost
              Rs.
      (486)
              
              Rs.
      (166)
              
              $(4)
 
 Cash
Flows
  The
Company expects to make the following benefit payments, which reflect expected
future service, as appropriate:
  For
      the financial year ended March 31,
              Expected
      contribution(Million
      of Rupees)
              (Million
      of US $)
                Unaudited2009
              409
              102010
              635
              162011
              530
              132012
              680
              172013
              798
              202014
      – 2018
              5,283
              132
 
 iv.
              Leave
      Pay Obligation
  Leave pay
expenses amounted to Rs. 235 million , Rs. 532 million and Rs. 639 million
for the years ended March 31,  2006 , 2007  and 2008
respectively. Accrued employee costs include Rs.2,488 million and Rs. 3,196
million leave pay obligation of MTNL as of March 31, 2007 and 2008
respectively.
  The
weighted average actuarial assumptions used to determine benefit obligations and
net periodic benefit cost were:
  2006
              2007
              2008Discount
      rate
              8.00%
              8.00%
              8.25%Future
      salary increases
              5%
              5%
              5%Future
      pension increases
              5%
              5%
              5%Rate
      of return on plan assets
              8.50%
              8.50%
              8.50%Rate
      of hospitality incidence (% of mortality rate)
              150%
              150%
              150%Average
      hospitalization period per year
              10
      days
              10
      days
              10
      daysAverage
      expenses per hospitalization
              Rs.
      50,000
              Rs.
      50,000
              Rs.
      50,000
 
 v.
              Provident
      fund
  Provident
fund, a defined contribution plan, is being administered through trustees and
MTNL’s contributions are expensed each year. MTNL has recognized, Rs.263 million
Rs.237 million and Rs.265
  F-27
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  million
for the years ended March 31, 2006, 2007 and 2008 respectively in the
consolidated statements of income.
  vi.
              Voluntary
      Retirement Scheme
  During
the year ended March 31, 2005, MTNL implemented a Voluntary Retirement Scheme
for certain eligible employees. Under the scheme, the eligible employees were
given an option to voluntarily take retirement from service and make their
choice within the specified period of time (all prior to March 31, 2005). The
scheme provided for ex-gratia payments to eligible employees opting for
voluntary retirement based on the respective employee’s salary and term of
employment. MTNL’s obligation amounted to Rs. 1,381 million for the year ended
March 31, 2005. In addition, the curtailment loss in the gratuity and pension
plan on account of the VRS amounted to Rs. 40 million and Rs. 236 million
respectively for the year ended March 31, 2005. The Company has made actual
payments amounting to 1,428 million as against the estimates of Rs 1381 million
in respect of the VRS scheme implemented during the year and accordingly the
additional charge of Rs. 47 million has been accounted in the year ended March
31, 2006.
  During
the year ended March 31, 2006, MTNL implemented two more Voluntary Retirement
Schemes for executives and non executives respectively. Under the schemes, the
eligible employees were given an option to voluntarily take retirement from
service and make their choice within the specified period of time. The schemes
provide for ex-gratia payments to eligible employees opting for voluntary
retirement based on the respective employee’s salary and term of employment. The
Non executive employees were to exercise their options from March 20, 2006 to
April 10, 2006. Under the scheme 312 employees exercised their options till
March 31, 2006 and 1,069 employees subsequent to March 31, 2006. MTNL’s
obligation amounted to Rs. 227 million for those who exercised their option
before March 31, 2006. In addition, the curtailment loss in the gratuity and
pension plan on account of the VRS amounted to Rs. NIL and Rs. NIL for the
year ended March 31, 2007 and 2008 respectively.
  The
Executive employees exercised their options during the year ended March 31,
2006. Under this scheme, MTNL’s obligation amounted to Rs. 677 million for the
year ended March 31, 2006. In addition, the curtailment loss in the gratuity and
pension plan on account of the VRS amounted to Rs.48 million and Rs.136 million
respectively for the year ended March 31, 2006.
  19.
              RELATED
      PARTY TRANSACTIONS
  MTNL is a
Government Company under the Indian Companies Act. MTNL is listed on the major
stock exchanges in India and the New York Stock Exchange. As of March 31, 2008,
the Government owns 56.25% of the issued share capital of MTNL, with the
remaining balance owned by private investors’. Consequently, the
Government, acting through the DOT, continues to control MTNL and will have the
power to elect all of its Directors to determine the outcome of most actions
requiring approval of the Board of Directors or Shareholders, including proposed
expansions of MTNL's business (including into areas in which MTNL may compete
with BSNL), transactions with the DOT or the assertion of claims against the
DOT/BSNL.
  In
addition, under MTNL's Articles of Association, the President of India, on
behalf of the Government, may issue directives with respect to the conduct of
the business and affairs of MTNL, and certain matters with respect to its
business including the appointment and remuneration of the Company's Chairman
cum Managing Director and the declaration of dividends. MTNL may not take action
in respect of any matter reserved for the President of India without his
approval. BSNL is a 100% owned subsidiary of the Government of India, and
therefore by virtue of common control, is an affiliated sister Company of
MTNL.  VSNL is an equity investee of the Government of
India.
  As noted
in Note 9, MTNL has a 27.77% holding in United Telecom Limited (UTL) and 50%
holding in MTNL STPI IT Services Ltd. (STPI).
  F-28
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  Note 3
describes in more detail the nature of the relationships between the
DOT/BSNL/VSNL and the Company as well as transactions with these parties.
Amounts due to and from the DOT/BSNL/VSNL are disclosed separately on the
Company’s balance sheet as amounts due to/from related parties.
  The
balances receivable from and payable to related parties other than employees are
summarized as follows:
  As
      of March 31,2007
              
              2008Receivables
              
              Payables
              
              Receivables
              
              Payables(Millions
      of rupees)DOT
      (note i)
              
              
              Rs.
      21,181
              
              Rs.
      1,696
              
              Rs.
      22,042
              
              
              Rs.
      1,939BSNL
      (note ii)
              
              
              2,476
              
              3,387
              
              3,667
              
              
              5,528VSNL
      (note ii)
              
              
              2
              
              646
              
              3
              
              
              652Due
      from / to Related Parties
              
              
              Rs.
      23,659
              
              Rs.
      5,729
              
              Rs.
      25,713
              
              
              Rs.
      8,118Less:
      Current Portion
              
              
              Rs.
      2,476
              
              Rs.
      3,387
              
              3,667
              
              
              5,528Due
      from / to Related Parties, non-current portion
              
              
              Rs.
      21,183
              
              Rs.
      2,342
              
              Rs.
      22,046
              
              
              Rs.
      2,591Due
      from / to Related Parties - Current
                Million
      of US $ Unaudited
              
              $
              57
              
              78
              $
              92
              
              $
              138Due
      from / to Related Parties - Non Current
                Million
      of US $ Unaudited
              
              $
              491
              
              54
              $
              551
              
              $
              65
 
 Note
i:
  The
amounts due from the DOT are primarily on account of pre-absorption retirement
benefits which are recoverable by MTNL. Such retirement benefits (pre
absorption) were calculated at the rates prescribed by DOT (Refer Note 18).
Furthermore, amounts recoverable for the General Provident Fund in respect of
employee contributions (pre absorption) of Rs 10,095 million (2007: Rs 9,293
million) together with the interest accrued (Refer Note 14) is also included in
this balance. Amounts due to the DOT represent license fees and spectrum charges
to be paid by MTNL in accordance with conditions governing license fees for
Basic Telephone Service and Cellular Telephone Service under the Revenue Sharing
Regime (Refer Note 2(e) and 3).
  Note
ii:
  Amounts
due from BSNL and VSNL represent trade receivables related to interconnect usage
charges as per TRAI Regulations and the payables are on account of networking
charges for NLD calls. (Refer Note 3).
  Management
has classified the amounts due from the DOT and VSNL as non-current on the basis
that there are no fixed terms for repayment from these related parties, and
while management expects to negotiate settlement of the amounts within the next
12 months, there are no assurances that this will occur.
  20.
              EQUITY
      SHARES
  The
Company has only one class of capital stock referred to herein as equity shares.
Par value of each equity share outstanding as of March 31, 2008 is
Rs.10.
  Voting
 Each
holder of equity shares is entitled to one vote.
  Dividends
 Final
dividends proposed by the Board of Directors are payable when formally declared
by the shareholders, who have the right to decrease but not increase the amount
of the dividend recommended by the Board of Directors.
The Board of Directors declare interim dividends without the need for
shareholders’ approval. Dividends payable to equity shareholders are based on
the net income available for distribution as reported in
  F-29
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  MTNL’s
unconsolidated financial statements prepared in accordance with Indian GAAP.
Dividends are declared and paid in Indian rupees. Net income in accordance with
US GAAP may, in certain years, either not be fully available or be additionally
available for distribution to equity shareholders.
  Under
Indian GAAP the accumulated retained earnings available for distribution to
equity shareholders, subject to certain restrictions was  Rs.84,906
million , Rs. 93906 million and Rs 91715 million as of March 31, 2006, 2007 and
2008 respectively.
  Under the
Indian Companies Act, dividends may be paid out of the profits of a company in
the year in which the dividend is declared or out of the undistributed profits
of previous fiscal years. Before declaring a dividend greater than 10.0% of the
par value of its equity shares, a company is required to transfer to its
reserves a minimum percentage of its profits for that year, ranging from 2.5% to
10.0% or higher, depending on the dividend percentage to be declared in such
year.
  Liquidation
 In the
event of liquidation of the Company, the holders of equity shares shall be
entitled to receive all of the remaining assets of the Company in proportion to
the number of equity shares held, after distribution of all preferential
amounts, if any.
  Stock
options
 MTNL has
not granted any stock options to any of its employees or to others.
  21.
              FINANCIAL
      INSTRUMENTS AND CONCENTRATION OF
RISK
  Credit
risk
 Financial
instruments which potentially subject MTNL to concentrations of credit risk
consist principally of periodic temporary investments of excess cash, trade
receivables, and investments in ITI Limited preference shares and MKVDC bonds.
The Company places its temporary excess cash in short term deposits. By their
nature, all such financial instruments involve risk including the credit risk of
non-performance by counter parties. In management’s opinion, as of March 31,
2007 and 2008, there was no significant risk of loss in the event of
non-performance of the counter parties to these financial instruments, other
than the amounts already provided for in the financial statements. To reduce
credit risk, MTNL performs ongoing credit evaluation of customers.
  The risk
in relation to investment in ITI Limited is offset by clause relating to MTNL’s
entitlement to set off the amounts receivable in respect of principal
outstanding from the dues payable to ITI Limited. The clause is built into the
share purchase agreement.  As of March 31, 2008, Rs. 800 million of
the investment of Rs. 1,000 million investment in ITI was charged as an
impairment.  The balance of Rs. 200 million becomes due on September
30, 2009.
  The
credit risk for the investment in bonds issued by MKVDC is minimized due to the
payment mechanism envisaged in the prospectus, which states that any shortfall
is to be met by the Maharashtra State Government that has undertaken to earmark
an amount equal to interest and principal repayments out of its annual budget
for the respective corporation. In the event of such amount not being
transferred the trustees would be entitled to invoke the guarantee given by the
state government.
  Fair
value
 The fair
value of MTNL’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
approximate fair value of investments in held to maturity securities, as
determined by using current interest as of March 31, 2008 is Rs.2,523 million as
compared to their carrying amount of Rs. 3,500 million.
  F-30
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  The
approximate fair value of loans to employees, as determined by using current
interest as of March 31, 2008 is Rs.1,672 million as compared to their carrying
amount of Rs.1,969 million.
  Due to
the uncertainties attached to the timing of ultimate realization of restricted
assets, it is not practicable to determine their fair values.
  22.
              CONTIGENCIES
      AND COMMITMENTS
  i.
              CAPITAL
      COMMITMENTS
  Contractual
commitments for capital expenditure pending execution were Rs. 6,166 million and
Rs. 5,493 million as of March 31, 2007 and 2008 respectively. Contractual
commitments for capital expenditures are related to purchase of property and
equipment.
  ii.
              GUARANTEES
  MTNL has
outstanding financial/performance bank guarantees of Rs. 1,123 million and
Rs.914 million as of March 31, 2007 and 2008 respectively. The bank guarantees
are essentially provided to the Government of India for financial and
performance roll out obligations as prescribed in respective license
agreements.
  iii.
              CONTINGENT
      LIABILITIES
  MTNL is
involved in tax and legal proceedings, claims and litigation arising in the
ordinary course of business. MTNL periodically assess its liabilities and
contingencies in connection with these matters based upon the latest information
available. For those matters where it is probable that MTNL could have incurred
a loss and the loss or range of loss can be reasonably estimated, the Company
has recorded reserves in its consolidated financial statements. In other
instances, MTNL is unable to make a reasonable estimate of any liability because
of the uncertainties related to both the probable outcome and  amount or
range of loss. As additional information becomes available, MTNL adjusts its
assessment and estimates of such liabilities accordingly.
  Based on
review of the latest information available, management believes that the
ultimate liability in connection with pending tax and legal proceedings, claims
and litigation will not have a material effect on the Company’s results of
operations, cash flows or financial position, with the possible exception of the
matters described below.
  (a)
              Sales
      tax
 The
Company has received a demand to pay sales tax in respect of certain historical
telecommunications revenues, mainly telephone rental charges. The Company has
received a demand from the state government of Maharashtra, of which Mumbai is a
part, for payment of Rs. 1,944 million in sales tax for fiscal 1999-2003.
Further MTNL has also received notice from the Delhi state government seeking
further information in aid of an investigation into whether a similar demand
should be made upon the Company.
  The
department made these demands based on a case involving the Uttar Pradesh Trade
Tax Department (UPTTD) and the DOT, wherein the Supreme Court of India ruled
that a telephone connection along with a telephone set provided by a company
rendering basic services amounts to a "transfer of right to use the telephone
system" and the rentals collected by DOT towards this right to use should suffer
sales tax. Subsequent to the passing of this order, both the cellular and basic
operators filed a petition before the Supreme Court under Article 32 of the
Constitution in respect of the above. The Hon’ble Supreme Court admitted the
Petitions, inspite of its own judgment, and vide orders dated September 25, 2003
referred the matter to a larger bench for determination of dispute on merits and
further directed that in future there shall be no coercion for recovery of any
dues. The Hon’ble Supreme Court further directed that the operators should file
statutory appeals against the assessment orders for assessments already
completed as on September 25, 2003. Following the Supreme Court order in the
UPTTD case the sales tax departments across the country, have raised demands on
basic and cellular mobile operators.
  F-31
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  MTNL has
challenged the demands raised before the respective high courts and the Company
has been granted interim stays against enforcement of the demands. However this
stay order is subject to the outcome of the Supreme Court judgment on the issue.
During the year ended March 31, 2006, the Supreme Court of India has concluded
in the BSNL Vs Union of India case that rendering basic services does not amount
to a "transfer of right to use the telephone system". Hence the imposition of
the sales tax on any facility of the telecommunication services is untenable in
law. Based on opinion received from legal counsel and drawing reference to the
judgment of the Supreme Court of India in the abovementioned case, management
believes that the sales tax departments would have to withdraw their demands of
sales tax on basic telephony and that an adverse outcome in respect of the above
is remote. During the year 2007 the case relating to Delhi has been settled. The
amount of demand pertaining to Mumbai outstanding is Rs 1099
million
  (b)
              Income
      taxes
 i.
              The
      Central Income Tax Authority of India (“CIT”) had historically disallowed
      the license fee paid by the Company to DOT for the years ended March 31,
      1994 till March 31, 2006 as a tax deductible expense and had raised a
      demand for payment of taxes on increased taxable income relating to such
      expenses. These demands had been contested by the Company. As part of the
      appeals process, the Company had paid deposits under protest, amounting to
      Rs 13,427 million as of March 31, 2005. These deposits have been
      classified as part of restricted assets on the Company’s consolidated
      balance sheets.
  During
the year ended March 31, 2005, the Company had obtained favorable decisions from
the Income Tax Appellate Tribunal (“ITAT”) with respect to the license fee
disallowed for the assessment years 1997-98 and 2001-2002. Further in respect of
assessment years 1995-96 and 1996-97, the Committee of Disputes (“COD”), on the
recommendations of the Ministry of Law, decided not to give clearance to either
the Central Board of Direct Taxes or the Company to file appeals in the Hon’
able High Court, making the decision of the ITAT binding on both the parties.
Subsequent to the COD’s decision, the Company has applied to ITAT to restore the
appeal and decide in favor of the Company.
  During
the  year ended March 31, 2006, based on the judgments passed in the
previous years, ITAT has allowed deduction of license fees as a tax deductible
item for assessment years 1998-99 to 2000-01 and 2002-03. During the year ended
March 31, 2007 license fees have also been allowed as a deduction by CIT (A) for
assessment year 2004-05.
  During
the current year ended March 31, 2007, based on the judgements issued in the
previous years, ITAT has allowed deduction of license fees as tax deductible
item for the assessment years 1995-96 and 1996-97 also. Management believes that
ITAT following its favorable judgments of earlier years will eventually decide
in favor of the Company for the years in dispute and an adverse outcome in
respect of the above is not probable. Based on the above stated favorable
judgements, the Company has not accrued the tax charge on the license fee in the
financial statements. The Company during the year 2006-07 has received interest
on deposits paid under protest to the tax authorities and the refunds for the
years decided in favor of the Company i.e. 1995-96, 1996-97, 1998-99, 1999-00,
2000-01, 2002-03 and 2004-05.  The refunds and the interest thereon
have been recognized in the statement of income for the year ended March 31,
2007.
  During
the year ended March 31, 2008, the Company has received refunds for the year
2002-03 and 2004-05 along with interest which has been duly accounted for in the
Company’s books of accounts for the year ended March 31, 2008.
  As part
of the appeals process, the Company had  deposited under protest,
amounting to Rs 3,146 million as of March 31, 2008. These deposits have been
classified as part of restricted assets on the Company’s consolidated balance
sheets.
  ii.
              The
      Income Tax authorities have historically disallowed the Company’s claim
      for a tax holiday under section 80IA of the Indian Income Tax Act, 1961
      (Also refer note 17). For assessment years 2001-02 to 2004-05, the income
      tax authorities have demanded Rs.10,677 million as penalties for the
      deduction claimed by the Company under Section 80 IA -Income Tax Act,
      1961. The Company is contesting these disputes at various levels of income
      tax appellate authorities including the ITAT. During the year ended
  F-32
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  March
      31, 2006, the Company’s appeal to determine the applicability of section
      80 IA has also been admitted by the High Court. Under the Indian laws,
      High Courts only admit a case, pertaining to income taxes, if there is a
      ‘question of law’ involved in the litigation and not ‘a question of
      facts’. Under the Income tax laws no penalty can be levied if there is a
      ‘question of law’- interpretation involved. The Company has adequately
      disclosed in its income tax filings its claims under section 80IA and
      further since its appeal has also been admitted by the High Court,
      management believes that it is ‘a question of law’ on which no penalty can
      be levied by the income tax authorities. Also, the ITAT has restored the
      claim of the company u/s 80IA for the assessment years 1998-99, 1999-00,
      2000-01 and 2002-03 to the assessing
officer.
  Subsequent
to the year ended March 31, 2007, MTNL has received fresh orders from the
assessing officer partially allowing the deduction u/s 80IA for the assessment
years 1998-99, 1999-00, 2000-01 and 2002-03 and received refunds and interest
thereon. For claiming full deduction of claim u/s 80IA, the Company has filed
the appeals to the higher authority. The Company is of the view that the orders
in respect of the above years have reached a stage of finality and accordingly
the refunds and the interest thereon have been recognized in the statement of
income for the year ended March 31, 2007 under tax expense and interest income
respectively. However, in respect of other years it is possible that the
authorities may take a different view as the same matters are at various stages
of appeals or assessment. In view of this, the Company has not recognized the
benefit of tax deduction u/s80IA for these years until a finality is reached on
the subject matter.
  During
the current year ended on March 31, 2008, the Company has received refunds from
Income Tax Authority in respect of penalty levied for the year 1995-96, 1996-97,
2000-01 and 2001-02. These penalties pertain to the claims made by the company
u/s 80IA of India Income Tax Act. The penalty amount has been refunded by the
Income tax dept alongwith interest thereon which has duly been accounted for in
the statement of Income for the year ended March 31, 2008.
  iii.
              General
      Provident Fund is a scheme applicable to the Company’s employees who have
      opted for the Government Pension rules. In the absence of any rules
      available for deposit or such contribution the amounts had been retained
      by the Company pending notification from the
  Government.
  The CIT
had considered the contributions made by the employees towards the General
Provident Fund for the year ended March 31, 2001 to 2004, as taxable income of
the Company. The amount of additional income tax demanded together with interest
amounted to Rs. 1,652 million as of March 31, 2005. As a part of the appeals
process the Company had deposited Rs. 1,306 million as of March 31,2005 under
protest to the tax authorities. These deposits had been classified as part of
restricted assets on the Company’s consolidated balance sheets.
  During
the year ended March 31, 2005, the Company had set up an ‘MTNL GPF Trust’ and
had applied to the Income Tax authorities for the recognition of the said Trust.
The Company believed that the entire GPF contribution till date will be allowed
on payment of the same to the Trust. During the year ended March 31, 2006 the
GPF Trust has been recognized by the Income Tax authorities and the amount
deposited in the Trust has been allowed as a deduction in the relevant
year.
  (c)
              Disputes
      with BSNL
 In
accordance with the Inter Connect Usages Regulations, the Company has accounted
for interconnection charges payable to BSNL amounting to Rs.6,924 million and
Rs. 3,627 million for the years ended March 31, 2004 and 2005 respectively (also
refer note 4).  However BSNL had raised a bill for the interconnection
charges for the calls originating from MTNL’s network and terminating/transiting
at/from BSNL amounting to Rs.12,165 million and Rs.8,030 million for the years
ended March 31, 2004 and 2005 respectively. The Company’s contention was that
the claim was not adequately supported by BSNL and hence not accepted by the
Company.
  In the
absence of an interconnection agreement, MTNL had provided NLD/ILD access
charges for the period ended March 31, 2002 at the rates lower than those
demanded by BSNL. Subsequent to the year ended March 31, 2004, in a meeting held
between DOT, BSNL and the Company the rates for NLD calls
  F-33
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  for the
year ended March 31, 2002 were agreed and accordingly the Company has accounted
additional liability of Rs. 233 million during the year ended March 31, 2004.
The Company may be required to pay ILD access charges amounting to Rs. 195
million for the period April 1, 2001 to January 31, 2002 on the settlement of
the dispute with BSNL in this regard.
  During
the year ended March 31, 2006, the DOT had constituted a three members committee
comprising the Member (Production), Telecommunications, Member (Finance),
Telecommunications and Deputy Director General (Business Solution) to resolve
the issues relating to networking charges. Based on the recommendations of the
Committee vide their minutes dated January 2006, the networking charges payable
to BSNL for the years March 31, 2004 and March 31, 2005 have been settled at
Rs.14,078 million as against Rs.10,551 million. Further, the Committee has also
settled networking charges for the years 2000 to 2003 in the meeting held in
January 2006. Accordingly, an amount of Rs. 3,809 million (including the
incremental charge of Rs. 3,527 million for the years 2004 and 2005) has been
accounted as networking charges in the statement of operations for the year
ended March 31, 2006.
  Subsequent
to the year end March 31, 2006, meetings have been held between BSNL and MTNL
wherein BSNL has raised additional claims for the year upto March 31, 2005
aggregating Rs.2,007 million and claims amounting to Rs.5,670 million for the
year ended March 31, 2006 on account of networking and others charges. As
against these claim for the year ended March 31, 2006 the Company has accounted
Rs. 4,040 million for networking charges payable to BSNL.
  The
Company’s contention is that since all claims relating to networking and other
charges for the period upto March 31, 2005 have already been settled in
accordance with the minutes of DOT committee held on January 2006 and the claims
for the year ended March 31, 2006, are not adequately supported by the BSNL and
hence not accepted by the Company. Further, the Company is in the process of
discussing/reconciling their claims for the year ended March 31,2006 with BSNL
and may be required to pay an additional amount based on the final settlement,
however such payments will not have a material adverse effect upon the Company’s
results of operations, financial condition and cash flows. Management believes
that an adverse outcome in respect of the above is not probable.
  During
the year ended March 31, 2006, MTNL has raised claims on BSNL for duct charges,
TAX claims and reciprocal service claims amounting to Rs.2,116 million, Rs.2,482
million and Rs.320 million respectively. The duct charges pertain to annual
usage of infrastructure (ducts) for the period October 1, 2000 to March 31,
2006, the TAX claims pertain to the Company’s Trunk Automatic Exchange (“TAX”)
used by BSNL for the period from February 1, 2004 to March 31, 2006 and the
reciprocal service claims are on account of Reciprocal Service Connections
provided to BSNL employees. for the period October 1, 2000 to March 31, 2006.
Management has not recognized these claims as income in the statement of
operations considering the history of other disputed claims with BSNL the fact
that currently there is no separate agreement for these services, and that BSNL
has not accepted these claims.
  During
the year ended March 31, 2007, MTNL has raised claims on BSNL for duct charges,
TAX claims IUC charges claims amounting to Rs.477 million, Rs.1,251 million and
Rs.101 million respectively. The duct charges pertain to annual usage of
infrastructure (ducts) for the period April 1, 2006 to March 31, 2007, the TAX
claims pertain to the Company’s Trunk Automatic Exchange (“TAX”) used by BSNL
for the period from April 1, 2006 to March 31, 2007 and the IUC charges claims
pertain to incoming calls terinated at MTNL exchange to the extent of 101
millions not accepted by BSNL as income in the statement of operations
considering the history of other disputed claims with BSNL the fact that
currently there is no separate agreement for these services, and that BSNL has
not accepted these claims.
  During
the current year ended March 31, 2008 MTNL has raised claims against BSNL for
duct charges and tax usage charges amounting to Rs. 515 million and Rs. 546
million respectively. We have not recognized these claims as
income.
  F-34
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  (d)
              Disputes
      with DOT
 On the
formation of the Company, employees were deputed to MTNL on deemed deputation
status from DOT and the Company was required to contribute for the Leave Salary
and pension Contribution (“LSPC”) as per the rates prescribed by the Government.
The Company had accrued for these expenses amounting to Rs 2,884.74 million for
the period 1986 to 1998 and subsequently paid them to DOT.
  During
the year ended March 31, 2006, a Committee was set up to examine the amount of
LSPC contributions payable by MTNL to DOT. The Committee concluded that an
additional amount of Rs.656 million was payable on account of short payment of
the LSPC contribution and an amount of Rs.1,738 million is payable on account of
interest payable on delayed payment of the LSPC contributions. The Company has
accepted the claim of DOT for Rs.656 million and has expensed it in its
statement of income for the year ended March 31, 2006. In respect of Rs.1,738
million, the Company has contested the claim from DOT on the contention that
MTNL has abided by DOT’s decision at all stages by depositing the amounts as
required. In this connection the terms & condition as laid down in
Fundamental Rules & Service Rules (FRSR) to the Govt. of India with regard
to prior intimation of calculation of contribution of the pension amount has not
been communicated to us, and management believes that an adverse outcome in
respect of the above is not probable.
  (e)
                Others
 
 i.
                In
      1998, M&N Publication made claims for Rs 5415 million against the
      Company. These claims arise out of contracts for the printing of telephone
      directories for Delhi and Mumbai. Each of these claims includes claims for
      loss of reputation and loss of business opportunities. The Company has
      made claims of Rs. 4169 million against M&N Publications for failure
      to perform the contracts. These claims are pending before a sole
      arbitrator. The Company believes that it has valid defenses to these
      claims and based on opinion received from legal counsel, management
      believes that an adverse outcome is not
  probable.
  ii.
              In
      the year 2004-2005, Alcatel brought claims aggregating to Rs. 137.19
      million (including interest from 1996 till date on the claims made Rs
      95.90 million)   (March 2007 Rs 129.20) against the
      Company. These claims arise out of contract for supply of digital local
      telephone exchange equipment. These claims include claims for loss of
      reputation and loss of business opportunity. The Company believes it has a
      valid defense to these claims and based on opinion received from legal
      counsel, management believes that an adverse outcome is not
      probable.
  iii.
              The
      Company has received claims aggregating Rs. 366.39(March 2007 Rs 336.95
      million) from various PRM service providers (World Phone, Voice Infotech
      and ITC). These claims arise from the contract for PRM services, which
      were started in the year 1999-2000. MTNL has not paid commission payable
      for these services to these providers, as the amount was subsequently not
      recovered from the subscribers. The claim includes Rs 119 million towards
      loss of profit and wasteful expenditure incurred by the parties.The
      Company believes it has a valid defense against these claims and based on
      opinion received from legal counsel, management believes that an adverse
      outcome is not probable.
  iv.
              The
      Company has received claims from CMC limited aggregating to Rs.548.70
      (March 2007 Rs 497.52) million.  These claims arise out of usage
      of leased circuits for which MTNL has charged them rental for CUG services
      as per the revised tariff plan which is disputed by CMC Limited. These
      claims include claims for loss of reputation, business opportunity and
      undue harassment aggregating to Rs 220 million..  The Company
      believes it has a valid defense to these claims and based on opinion
      received from legal counsel, management believes that an adverse outcome
      is not probable.
  v.
              Additionally
      the Company is also involved in law suits and claims amounting to Rs.
      2,438.42 million pending at various authorities which arise in the
      ordinary course of the business. Management believes that it has a valid
      defense against these claims and an adverse outcome is not probable. These
      would not have a material adverse effect upon the Company’s results of
      operations, financial condition and cash
flows.
  F-35
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  iv.
              DISPUTE
      WITH OTHER OPERATOR
  During
the year ended March 31, 2005, MTNL noticed that a very large number of calls
were received from certain levels of another operator’s network. On further
investigation/analysis, it came to the Company’s notice that these were actually
ILD calls, which were being received on Local/NLD trunks and that the CLIs
(Caller line Identification) of these calls had been tampered by the other
operator. MTNL raised a demand on the other operator based on the relevant penal
clauses of its agreement aggregating Rs.3,412 million for a period of six months
beginning April 2004. The other operator has disputed the above claim and under
repeated threats of disconnection, obtained a stay order from High Court of
Delhi. In the year ended March 31, 2005 during the course of the hearings, the
honorable High Court directed the other operator to pay Rs.2,368 million to
MTNL. During the year ended March 31, 2006, the other operator under directions
from the High Court has further deposited Rs.1040 million with
MTNL.
  During
the year ended March 31, 2007 there were no further development in the matter
and the management believes that the possibility that these amounts have to be
refunded is remote. However, these amounts have not been recognized as
income.
  (f)
              Summary
      of above litigations
 The
following table summarizes the potential exposure (excluding interest and
penalty) of the Company of March 31, 2008 with respect to above stated pending
litigations in the event the same is settled against the Company:
  As
      of March 31,Also
      refer note:
              
              2008
              
              2008(Million
      of Rupees)
              
              (Million
      of
                US
      $)
                UnauditedDispute
      relating to disallowance of license fee
              22
      (iii) (b) (i)
              
              Rs.646
              
              $16Dispute
      relating to disallowance of 80 IA deduction
              22
      (iii) (b) (ii)
              
              1,424
              
              36Disputes
      with BSNL
              22
      (iii) (c)
              
              3,667
              
              92Disputes
      with DOT
              22
      (iii) (d)
              
              22,042
              
              551Arbitration
      dispute with M & N Publications
              22
      (iii) (e) (i)
              
              4,515
              
              113Arbitration
      dispute with Alcatel
              22
      (iii) (e) (ii)
              
              137
              
              3PRM
      services
              22
      (iii) (e) (iii)
              
              366
              
              9CMC
      Services
              22
      (iii) (e) (iv)
              
              549
              
              14Other
      Lawsuits and claims
              22(iii)
      (e) (v)
              
              2,438
              
              61Total
              
              
              Rs.35,784
              
              $895
  F-36
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  23.
              SEGMENTAL
      INFORMATION
  The
Chairman and Managing Director (CMD) of the Company has been identified as the
Chief Operating Decision Maker (CODM) as defined by SFAS No. 131. The CODM of
the Company determines its business segments based on the nature of services,
the differing risks and returns and the organizational structure. These segments
are basic (including CDMA) and cellular services. Basic services segment
consists of voice, data through local calls, domestic long distance and
international long distance calls on fixed line services in the cities of Delhi
and Mumbai in India. Further, it includes revenues from Code Division Multiple
Access, or CDMA, based cellular services and internet access services. Cellular
consists of providing cellular services in cities of Delhi and Mumbai using
Global System for Mobile communications, or GSM, technology. These services were
launched in February 2001.
  During
the years ended March 31, 2004 and 2005, the Company had not considered cellular
services to be a reportable segment since it did not meet the thresholds of
significance. However as the cellular services have met the thresholds of
significance during the year ended March 31, 2006, the Company has disclosed the
segment information. MTNL has also disclosed segment information for the prior
years.
  During
the current year the Company has started operations in Mauritius. However, as
the operations are insignificant as compared to the overall business of the
Company, the same have not been considered for separate segment disclosure.
During the years ended March 31, 2006, March 31, 2007, and March 31, 2008, no
single customer has contributed for revenue in excess of 10% of total
revenue.
  MTNL’s
operating segment information for the years ended March 31, 2006, 2007 and
2008 are as follows. The table gives the amounts reviewed by the CODM reconciled
to the consolidated US GAAP financial statements.
  The
amounts reviewed by the CODM are based on internal accounting policies of the
Company which are different from US GAAP.
  Basic
                Cellular
                Unallocated
                  (Corporate)
                Elimination
                Total
                Reconciling
      Adjustments
                Consolidated
      TotalsMillions
      of RupeesFor
      the year ended March 31, 2008Revenue
      — External customers
                38,787
                8,438
                -
                -
                47,225
                (2,520)
                44,705Revenue
      — Inter-segment
                1,172
                384
                -
                (1,556)
                -
                -
                -Total
      Revenues
                39,959
                8,822
                -
                (1,556)
                47,225
                (2,520)
                44,705Operating
      income / (loss)
                (636)
                2,121
                (1,214)
                -
                270
                (1,794)
                (1,524)Interest
      income/ (expense), net
                739
                25
                3,346
                -
                4,110
                6
                4,115Equity
      in earnings/(losses) of associated companies, net of taxes
                -
                -
                -
                -
                -
                -
                -Non
      Operating income, net
                -
                -
                -
                -
                -
                (1)
                (1)Post
      Retirement Medical Benefit Liability Written Back
                2,451
                182
                (696)
                -
                1,937
                (1,391)
                546Net
      income / (loss)
                2,554
                2,327
                1,435
                -
                6,316
                (3,979)
                2,337Segment
      assets
                119,660
                12,747
                82,058
                -
                214,464
                (20,918)
                193,546Depreciation
      and amortization
                6,354
                681
                5
                -
                7,041
                1,268
                8,309
  F-37
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  Capital
      expenditures for long-lived assets
                5,912
                3,269
                2
                
                9,182
                -
                9,182For
      the year ended March 31, 2007Revenue
      — External customers
                41,402
                7,691
                0
                0
                49,093
                (3,618)
                45,475Revenue
      — Inter-segment
                633
                51
                0
                -684
                0
                -
                0Total
      Revenues
                42,035
                7,742
                0
                -684
                49,093
                (3,618)
                45,475Operating
      income / (loss)
                118
                2,606
                -1512
                
                1,212
                (4,664)
                (3,453)Interest
      income/ (expense), net
                178
                44
                5094
                
                5,316
                2,049
                7,365Equity
      in earnings/(losses) of associated companies, net of taxes
                0
                0
                0
                
                0
                (7)
                (7)Non
      Operating income, net
                1,157
                223
                19
                
                1,399
                (870)
                529Post
      Retirement Medical Benefit Liability Written Back
                
                
                
                
                
                5,794
                5,794Net
      income / (loss)
                1,453
                2,873
                3,600
                
                7,927
                2,309
                10,236Segment
      assets
                117,019
                9,454
                87,204
                
                213,677
                (34,740)
                178,937Depreciation
      and amortization
                6,152
                674
                6
                
                6,832
                1,684
                8,516Capital
      expenditures for long-lived assets
                7117
                664
                4
                
                7,788
                -
                7,788For
      the year ended March 31, 2006Revenue
      — External customers
                49,883
                5,727
                -
                -
                55,610
                (8,
      942)
                46,668Revenue
      — Inter-segment
                744
                216
                -
                (960)
                -Total
      Revenues
                50,627
                5,943
                -
                (960)
                55,610
                (8,942)
                46,668Operating
      income / (loss)
                4,696
                1,808
                (4,846)
                -
                1,658
                (2,470)
                (812)Interest
      income/ (expense), net
                (67)
                1
                3,831
                -
                3,765
                (1,995)
                1,770Equity
      in earnings/(losses) of associated companies, net of taxes
                -
                -
                -
                -
                -
                (73)
                (73)Non
      Operating income, net
                1,190
                59
                42
                -
                1,291
                (673)
                618Net
      income / (loss)
                5,819
                1,868
                (973)
                -
                6,714
                (5,138)
                1,576Segment
      assets
                113,195
                7,749
                83,519
                -
                204,463
                (34,312)
                170,151Depreciation
      and amortization
                5,916
                544
                7
                -
                6,467
                1,532
                7,999Capital
      expenditures for long-lived assets
                5,274
                1,609
                (28)
                -
                6,855
                -
                6,855
  There is
material differences between segment information internally reviewed, by the
CODM, and consolidated financial statements prepared under U.S. GAAP. The
material differences that affect us are primarily attributable to U.S. GAAP
requirements for:
  ·
                Revenue
      recognition
 ·
                Employee
      benefits - Accounting for gratuity and pension obligations; accounting for
      leave pay obligations and curtailment benefits arising from voluntary
      retirement scheme under US GAAP.
 ·
                Property,
      plant and equipment - Useful lives of assets, foreign exchange
      capitalized, interest capitalized and leases,
  and
 ·
                Deferred
      taxes - Accounting for deferred taxes under US
  GAAP.
  More
specifically, the reconciling items relate to the following:
  ·
                The
      reconciling items pertaining to revenues amounted to  Rs.8,942
      million, Rs. 3,618 million and Rs. 2,520 million for the years ended March
      31, 2006, 2007 and 2008. These reconciling items primarily pertain to
      non-recognition of revenues under US GAAP (Refer notes 22(iii)(c) and
      22(iv)) since the amounts are either disputed or collectibility is not
      reasonably possible and netting off of commissions from revenues under US
      GAAP.
 ·
                The
      reconciling items pertaining to operating income / (loss)
      amounted  Rs. 2,470 million, Rs. 4,664 million and Rs 1,794
      million for the years ended March 31, 2006, 2007 and 2008. These
      reconciling items
  F-38
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  are
      mainly attributable to US GAAP adjustments for revenues, cost of revenues
      and selling general and administrative expenses and reclassification of
      excess liability written back. The cost of revenues and selling, general
      and administrative expenses have reconciling items on account of
      accounting for employee benefits, depreciation, provision for doubtful
      debts and other adjustments on account of BSNL / DOT (Refer notes 3 and 4)
      under US GAAP.
 ·
                The
      reconciling item in respect of interest income / (expense), net for the
      year ended March 31, 2007 is on account of recognition of interest on
      income tax refund under US GAAP, which was not recognized during the year
      March 31, 2006, since final assessment order was received during the year
      ended March 31, 2007 (refer note
22(b)(ii)).
 ·
                The
      reconciling item in respect of post retirement medical benefit liability
      written back due to events subsequent to the balance sheet date.(Refer
      note 24 (b)).
 ·
                The
      reconciling item in respect of non operating income / (loss) primarily
      pertain to reclassification of excess liability written back from non
      operating income / (loss) to operating income /
  (loss).
 ·
                The
      reconciling adjustments for segment assets pertain primarily to US GAAP
      adjustments in respect of useful lives of assets, foreign exchange
      capitalized, interest capitalized and depreciation
  expense.
  24.
              SUBSEQUENT
      EVENTS
  a)
              The
      Board of Directors has recommended payment of final dividend at 10% on the
      paid up equity capital of Rs. 6,300 million on July 31, 2008. The Company
      would be required to pay dividend tax at the rate of 17% (approx) of the
      dividend distributed.
  b)
              MTNL
      vide its office order no. MTNL/CO/Pers CGHS Rules/99/440 dated December
      20, 2001 had introduced a medical scheme for its retired employee’s w.e.f.
      1.01.2002 for a initial period of 12 weeks and subsequently extended the
      scheme from time to time. The said facilities, in respect of indoor
      treatment, were discontinued from April 1, 2006 to September 1, 2006
      during the operation of MTNL Group Health Insurance Scheme (MTNLGHIS)
      service by ICICI Lombard General Insurance Company. However, consequent
      upon foreclosure of MTNLGHIS during the year, the said facilities were
      restored under the scheme which had an expiry date of August 31, 2007. The
      Company vide office order no. MTNL/CO/Pers/8(1-176)/2006/1342 dated August
      24, 2007, decided that the said facilities shall be available to the MTNL
      Retired Employees in terms of the aforesaid circular till August 31, 2007
      and no further. This office order was widely communicated. The Company
      does not at present have any plans for a similar or an alternative scheme.
      In the earlier years, though the scheme in operation was subject to
      renewal on an annual basis based on issue of orders by the competent
      officials, actuarial valuation was done on the assumption of continuity of
      the said scheme. Consequently, the provision of Rs. 5,794 million
      pertaining to this matter was considered excess and reversed to the
      statement of operations as a material infrequent
  item.
  During
the year the Company has discontinued its medical benefit scheme for retired
employees effective August 31, 2007. Thereafter an adhoc arrangement was made
effective as of September 1, 2007. According to this adhoc arrangement the
respective units were allowed to settle such claims on case to case basis. This
scheme was also discontinued effective March 20, 2008; however the employees who
are under treatment will continue to get the benefits till discharge from the
hospital. MTNL vide its office order no.MTNL/CO/Pers/8(1-176)2006 dt April 17,
2008 has introduced medical plan till finalization of new alternative
arrangement for Indoor Treatment of Retired MTNL employees, under this plan the
emergent cases requiring hospitalisation may be decided by the Executive
Directors of the respective units on a case to case basis.
  25.
              SIGNIFICANT
      RISKS AND UNCERTAINTIES
  a)
              The
      telecommunication industry in India is subject to substantial regulation
      by the Government. The Company is subject to certain risks common to
      companies within the telecommunications industry in India. These include,
      but are not limited to, substantial regulation by the Government. Changes
      in the Government policies including a revocation of the license or a
      change in significant terms of the license, such as its duration, the
      amount of license fee payable, the range of services permitted and the
      scope of exclusivity may significantly affect management’s estimates and
      the Company’s performance. Further the Indian Government is the
      controlling shareholder in MTNL and hence the Company is deemed to be an
      Indian government company. As such, the
  F-39
 Index
 MAHANAGAR
TELEPHONE NIGAM LIMITED
  Notes to the consolidated
financial statements
  Company
      is subject to laws and regulations generally applicable to public sector
      enterprises in India. These laws and regulations govern, among other
      things, personnel matters, procurement, budgeting and capital expenditures
      and the generation of funds through the issuance of securities. Also the
      Indian Government when considering matters pertaining to the Company,
      often also considers the interests of the largest government-owned
      telecommunications company, Bharat Sanchar Nigam Limited
      (BSNL).
 b)
              The
      Company operates the network under a license from the DOT that is valid
      until March 31, 2013 for fixed-line services and until October, 2017 for
      cellular services. The DOT retains the right, however, to revoke the
      license after giving one month's notice to the Company. The DOT also
      retains the right, after giving notice to the Company, to modify the terms
      and conditions of the license at any time if in its opinion it is
      necessary or expedient to do so in the interest of the general public or
      for the proper operation of the telecommunications sector. A revocation of
      the license or a change in significant terms of the license, such as its
      duration, the amount of license fee payable or the range of services
      permitted, would have a material adverse effect on the Company’s business,
      financial condition and results of
operations.
  c)
              Most
      of the Company’s employees were on secondment from DOT. The non-executive
      employees were given the option to be absorbed in the Company with effect
      from November 1, 1998. Under the option for pensionary benefits, these
      employees could opt to retain pensionary benefits in accordance with the
      Central Government pension rules or in accordance with MTNL
      retirement rules which were applicable to its directly recruited
      employees, and opt to draw pro rata monthly pension till their absorption
      in MTNL. Accordingly with effect from November 1, 1998, the Company
      started accruing for pension and gratuity for these
    employees.
  Further,
rules relating to settlement of pensionary terms in respect of Government
employees transferred to public undertakings, required the company to create a
pension fund and provided for the Government to discharge its pensionary
liability by paying in lump sum as a one time payment, the pro rata pension and
gratuity for the service up to the date of transfer (November 1, 1998) of
government servants from the Government to the undertaking. Accordingly, on
January 8, 2002, the Company claimed an amount of Rs.11,700 million from DOT as
DOT’s share of the liability.
  However
the DOT vide their letter no. 40-29/2002 -Pen (T) on August 29, 2002 and
September 4, 2002 has communicated that the pensionary benefits to the
Government employees absorbed in MTNL and who have opted for either the
Government Scheme of pension or for prorated pension scheme shall be paid by the
Government. However, the terms of the settlement are yet to be finalized. In
absence of details with regard to the basis required for determination of the
amount payable by the company, no adjustment has been made in the cost of
retirement benefits accrued in these financial statements for the
above.
  d)
              The
      Company had given an option to its executive employees (B category) for
      absorption with the Company with effect from October 1, 2000, at a revised
      pay scale that is higher than the existing pay scale. The offer for
      absorption provided that in addition to getting post retirement benefits
      like gratuity and leave encashment, subsequent to absorption, the
      employees would have to opt for pension based on the government rules.
      Pending the finalization of the terms of absorption and actuarial
      determination of incremental liability, the Company, during the year ended
      March 31, 2003, had accrued an additional charge amounting to Rs. 1,329
      million on account of revised pay scales and related retirement costs for
      executive employees who exercised the option of absorption with the
      Company up to that date.
  e)
              The
      present arrangement of Pay and Allowance expired on December 31, 2006 and,
      and accordingly the next pay revision was due from January 1, 2007. Wage
      board has been constituted by Government for review of this aspect for all
      Public Sector Unit and the impact and financial effect of the wage
      revision as well as the form and content of such revision would be known
      on notification by the Government. This may result in increase in pay and
      perks and Post Retirement benefits for serving and retired employees
      respectively.
  f)
              The
      Company has been advised by its counsel that although the Company has
      valid possession including the risks and rewards of ownership and title to
      all of its property, to enable MTNL to perfect and thereby acquire
      marketable title to real property in its possession, it would need to have
      relevant documents relating to transfer or lease of real property duly
      registered and stamped. Accordingly, MTNL cannot sell its properties
      without payment of stamp duties and registering the properties in its
      name. (Also refer to note 7).
  F-40
 Table of Contents




SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.




MAHANAGAR
      TELEPHONE NIGAM LIMITEDBy:
            /s/ Anita SoniName:        Anita
      Soni
              Title:          Director
      – Finance





Date:  September
25, 2008




102
 Table of Contents




EXHIBIT
INDEX





Number
            
            Description
      of Exhibit1.1
            
            Memorandum
      and Articles of Association of the Registrant, as amended on January 31,
      2002.*2.1
            
            Form
      of Deposit Agreement among the Registrant, The Bank of New York, as
      depositary, and the holders from time to time to American Depositary
      Shares issued thereunder, including as an exhibit, the form of American
      Depositary Receipt.**4.1
            
            Lease
      Agreement dated January 16, 1996 between Life Insurance Corporation of
      India and the Registrant.**4.2
            
            License
      Agreement for provision of Internet Services in Delhi dated November 6,
      1998 between President of India acting through Assistant Director General,
      Ministry of Communications and the Registrant.**4.3
            
            License
      Agreement for provision of Internet Services in Mumbai dated November 6,
      1998 between President of India acting through Assistant Director General,
      Ministry of Communications and the Registrant.**4.4
            
            License
      Agreement for provision of Internet Services dated October 6, 2000 between
      President of India acting through Assistant Director General, Ministry of
      Communications and Millennium Telecom Limited.**12.1
            
            Certification of Chief Executive
      Officer***12.2
            
            Certification of Principal Financial
      Officer***13.1
            
            Certification of Chief Executive
      Officer***13.2
            
            Certification of Principal Financial
      Officer***


_____________________________





*Previously
      filed on September 30, 2002, as exhibits to Annual Report on Form 20-F for
      fiscal 2002.**Previously
      filed on September 27, 2001, as exhibits to Registration Statement on Form
      F-4 (file number 333-13944).***Filed
      herewith




Table of Contents