UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
20-F








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





[X]
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934For the fiscal year
      ended March 31, 2008







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





[   ]
            SHELL COMPANY REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
              Date of event requiring this shell company
      report. . . . . . . . . . . . . . . . . .
..







For
the transition period from _____________ to _____________








Commission
File Number 000-30735





REDIFF.COM
INDIA LIMITED


(Exact
name of Registrant as specified in its charter)





Not
Applicable


(Translation
of Registrant’s name into English)





Republic
of India


(Jurisdiction
of incorporation or organization)





Mahalaxmi
Engineering Estate


1st
Floor, L. J. First Cross Road


Mahim
(West)


Mumbai
- 400016, India


+91-22-2444-9144


(Address
of principal executive offices)





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





Title
      of each Class
            Name
      of each exchange on which registeredNone
            Not
      Applicable








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





American
Depositary Shares,


each
represented by one-half of one equity share, par value Rs.5 per
share.


(Title
of Class)










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





Not
Applicable


(Title
of Class)





Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report:
14,615,800 equity shares.





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act of 1933.




Yes
[  ]                                       
No
[X]





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




Yes
[X]                                      
No
[   ]





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes
[X]                                      
No
[   ]





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




Large
accelerated filer
[   ] Accelerated
filer [X]        Non-accelerated
filer [   ]





Indicate
by check mark which financial statement item the registrant has elected to
follow.




Item
17
[  ]                                  Item
18 [X]





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




Yes
[  ]                                       
No
[X]













TABLE OF
CONTENTS





Page


CROSS
      REFERENCE TO FORM 20-F ITEM HEADINGS
              1CURRENCY
      OF PRESENTATION AND CERTAIN DEFINED TERMS
              4FORWARD-LOOKING
      STATEMENTS
              5EXCHANGE
      RATES
              6SELECTED
      CONSOLIDATED FINANCIAL DATA
              7RISK
      FACTORS
              8BUSINESS
              27MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              44MANAGEMENT
              57RELATED
      PARTY TRANSACTIONS
              67EXCHANGE
      CONTROLS
              68TRADING
      MARKET
              72RESTRICTION
      ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
              73PRINCIPAL
      SHAREHOLDERS
              78TAXATION
              80CONTROLS
      AND PROCEDURES
              87PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              89PRESENTATION
      OF FINANCIAL INFORMATION
              90ADDITIONAL
      INFORMATION
              91EXHIBIT
      INDEX
              98INDEX
      TO FINANCIAL STATEMENTS
              F-1

















CROSS
REFERENCE TO FORM 20-F ITEM HEADINGS







PART
I





Item
      1.
            Identity
      of Directors, Senior Management and
Advisers





Not
      applicable.





Item
      2.
            Offer
      Statistics and Expected Timetable





Not
      applicable.





Item
      3.
            Key
      Information





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





Item
      4.
            Information
      on the Company





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





Item
      4A.
            Unresolved
      Staff Comments





Not
      applicable.





Item
      5.
            Operating
      and Financial Review and Prospects





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





Item
      6.
            Directors,
      Senior Management and Employees





See
      “Management” and “Principal
Shareholders”.





Item
      7.
            Major
      Shareholders and Related Party
Transactions





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





Item
      8.
            Financial
      Information





See
the Report of Independent Registered Public Accounting Firm, U.S. GAAP
Consolidated financial statements and the notes thereto for Rediff.com India
Limited for the fiscal years ended March 31, 2006, 2007 and 2008 and the related
three-year period ended March 31, 2008. Also see “Business – Legal Proceedings”
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”.





Item
      9.
            The
      Offer and Listing





See
      “Trading Market”.





Item
      10.
            Additional
      Information





See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Acquisitions and Divestments – Value Communications Corporation”,
“Exchange Controls”, “Restriction on Foreign Ownership of Indian Securities”,
“Taxation” and “Additional Information”.




1




Item
      11.
            Quantitative
      and Qualitative Disclosures About Market
Risk





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





Item
      12.
            Description
      of Securities Other than Equity
Securities





Not
      applicable.





PART
II





Item
      13.
            Defaults,
      Dividend Arrearages and
Delinquencies





Not
      applicable.





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





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





Item
      15.
            Controls
      and Procedures





See
      “Controls and Procedures”.





Item
      16A.
            Independent
      Audit Committee Financial Expert





See
      “Management”.





Item
      16B.
            Code
      of Ethics





See
      “Management”.





Item
      16C.
            Principal
      Accountant Fees and Services





See
      “Principal Accountant Fees and
Services”.





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





Not
      applicable.





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





Not
      applicable.





PART
      III





Item
      17.
            Financial
      Statements





Not
      applicable.





Item
      18.
            Financial
      Statements


See
      the Report of Independent Registered Public Accounting Firm, U.S. GAAP
      Consolidated financial statements and the notes thereto for Rediff.com
      India Limited and its consolidated subsidiaries for the fiscal years ended
      March 31, 2006, 2007 and 2008 and the related three-year period ended
      March 31, 2008.
  2


Item
      19.
            Exhibits





See
      the Exhibit Index and the attached
exhibits.







3




CURRENCY
OF PRESENTATION AND CERTAIN DEFINED TERMS







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





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





Although
we have presented Indian Rupee amounts in this annual report in U.S. dollars,
this does not mean that the Indian Rupee amounts referred to have been, or could
be, converted into dollars at any particular rate, the rates stated below in the
section of this annual report entitled “Exchange Rates”, or at all. Except as
otherwise stated in this annual report and for the information derived from our
financial statements included in this annual report, all translations from
Indian Rupees to U.S. dollars contained in this annual report are based on the
noon buying rate, in the City of New York, on March 31, 2008, for cable
transfers in Indian Rupees as certified for customs purposes by the Federal
Reserve Bank of New York, which was Rs.40.02 to US$1.00. The reporting currency
for the financial statements is the U.S. dollar and the translation from Indian
Rupees to U.S. dollars has been performed using rates specified by the Reserve
Bank of India.








4





FORWARD-LOOKING
STATEMENTS







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





·
            our
      goals and strategies;





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





·
            the
      impact of regulations and court orders on our
  business;





·
            our
      future investments, costs and working
capital;





·
            the
      importance and expected growth of Internet technology, including sales of
      personal computers and mobile
phones;





·
            the
      pace of change in the Internet
market;





·
            the
      demand for Internet services; and





·
            advertising
      demand and revenues.





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





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





5




EXCHANGE
RATES







Fluctuations
in the exchange rate between the Indian Rupee and the U.S. dollar may affect the
market price of our American Depositary Shares (the “ADSs”), which trade on the
NASDAQ Global Market. Such fluctuations will also affect the U.S. dollar
conversion by our depositary for the ADSs, Citibank, N.A. (the “Depositary”), of
any cash dividends paid in Indian Rupees on our equity shares represented by the
ADSs.





The
following table sets forth, for the periods indicated, certain information
concerning the exchange rates between Indian Rupees and U.S. dollars based on
the noon buying rate in the City of New York for cable transfers in Rupees as
certified for customs purposes by the Federal Reserve Bank of New
York:





Fiscal
      Year Ended March 31,
            
            Period
      End(1)
            
            Average
      (1)(2)
            
            High
            
            Low(Rs.)2004
            
            43.40
            
            45.78
            
            47.46
            
            43.402005
            
            43.62
            
            44.87
            
            46.45
            
            43.272006
            
            44.48
            
            44.21
            
            46.26
            
            43.052007
            
            43.10
            
            45.06
            
            46.83
            
            42.782008
            
            40.02
            
            40.00
            
            43.05
            
            38.48





Notes:(1)
            The
      noon buying rate at each period end and the average rate for each period
      differed from the exchange rates used in the preparation of our financial
      statements.(2)
            The
      column titled “Average” represents the average of the noon buying rate on
      the last day of each month during the
period.








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





Month
            High
            
            Low(Rs.)March
      2008
            40.46
            
            39.76April
      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 (until September 19, 2008)
            46.81
            
            43.95





On
September 19, 2008, the noon buying rate in the City of New York was Rs.45.71 to
US$1.00.




6




SELECTED
CONSOLIDATED FINANCIAL DATA







Our
consolidated financial statements are presented in U.S. dollars and prepared in
accordance with U.S. GAAP. The selected balance sheet data set forth below as of
March 31, 2007 and 2008 and the selected statement of operations data for the
fiscal years ended March 31, 2006, 2007 and 2008 has been derived from our
audited financial statements presented elsewhere in this annual report and which
have been audited by Deloitte Haskins & Sells, an independent registered
public accounting firm. The selected balance sheet data set forth below as of
March 31, 2004, 2005 and 2006 and the selected statement of operations data for
the fiscal years ended March 31, 2004 and 2005 are derived from U.S. GAAP
financial statements which are not included in this annual report.*





Fiscal
      Years Ended March 31,2004
            
            2005
            
            2006
            
            2007
            
            2008(in
      US$ thousands, except per share data)Statement
      of Operations data:Revenues
            9,446
            
            12,627
            
            18,701
            
            28,676
            
            32,249Cost
      of revenues
            4,738
            
            5,113
            
            5,039
            
            5,416
            
            6,000Operating
      expenses
            7,927
            
            9,227
            
            12,683
            
            20,195
            
            27,767(Loss)/
      Income from continuing operations
            (3,349)
            
            (1,220)
            
            1,213
            
            6,963
            
            4,908(Loss)/
      Income from discontinued operations
            (2,371)
            
            (208)
            
            --
            
            --
            
            --Net
      (loss)/ income
            (5,720)
            
            (1,428)
            
            1,213
            
            6,963
            
            4,908(Loss)/
      Earnings per Equity Share(from
      continuing operations) – basic
            US$(0.26)
            
            US$(0.10)
            
            US$0.09
            
            US$0.48
            
            US$0.34(from
      discontinued operations) – basic
            US$(0.19)
            
            US$(0.01)
            
            --
            
            --
            
            --(Loss)/
      Earnings per Equity Share – basic
            US$(0.45)
            
            US$(0.11)
            
            US$0.09
            
            US$0.48
            
            US$0.34(Loss)/
      Earnings per Equity Share(from
      continuing operations) – diluted
            US$(0.26)
            
            US$(0.10)
            
            US$0.09
            
            US$0.47
            
            US$0.33(from
      discontinued operations) – diluted
            US$(0.19)
            
            US$(0.01)
            
            --
            
            --
            
            --(Loss)
      Earnings per Equity Share – diluted
            US$(0.45)
            
            US$(0.11)
            
            US$0.09
            
            US$0.47
            
            US$0.33Weighted
      average number of equity shares-
      Basic
            12,800
            
            12,850
            
            13,487
            
            14,543
            
            14,607-
      Diluted
            12,800
            
            12,850
            
            13,764
            
            14,924
            
            14,772





As
      of March 31,2004
            
            2005
            
            2006
            
            2007
            
            2008(in
      US$ thousands)Balance
      Sheet Data:Cash
      and cash equivalents
            11,639
            
            10,069
            
            53,094
            
            53,546
            
            59,033Current
      assets
            15,293
            
            15,323
            
            60,652
            
            65,851
            
            74,608Current
      liabilities
            3,825
            
            5,878
            
            7,239
            
            8,933
            
            10,998Total
      assets
            24,868
            
            25,690
            
            74,110
            
            86,493
            
            101,850Total
      shareholders’ equity
            21,027
            
            19,797
            
            66,870
            
            77,223
            
            90,150





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







7




RISK
FACTORS





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





Risks
Related to our Business





Pending
and potential litigation against us could have a material adverse effect on our
business and operating results and lower the market price of our
ADSs.





Super Cassette Industries
Complaint





A
complaint was filed by Super Cassettes Industries Limited (“SCIL”), a producer
and publisher of sound recordings and audio visual songs in India, against us
and our Chairman/Chief Executive Officer as well as Ram Gopal Verma Films
Private Limited, in the High Court of Delhi (Suit No. C.S. (O.S.) 736 of 2007).
The complaint alleges violations of the Indian Copyright Law of 1957 through our
placement on our website of video clips of certain songs from two Hindi films
(Nishabd and Honeymoon Travels Pvt Ltd).
Pursuant to an assignment, SCIL claims to own sole copyrights in the audio
visual songs, sound recordings, lyrics and musical composition in the two films.
The complaint seeks, among other relief, injunction relief and damages in the
amount of Rs.2.0 million (approximately US$50,000). In June 2007, we filed a
written reply. We have since removed these clips from our website. The matter is
pending before the High Court of Delhi. All of these actions require management
time and cost. In the event that we are unsuccessful in our defense, we and our
Chairman/Chief Executive Officer may face penalties and fines. Please see the
section entitled “Business 3⁄4 Legal Proceedings”
in this annual report for more information on the litigation.





Other
Proceedings





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





For
additional information regarding pending litigation filed against us, please see
“Business — Legal Proceedings” in this annual report.





A
slowdown in the Indian and the U.S. economies and in certain sectors could
adversely affect our business, operating results and financial
condition.





We
are dependent on the health of the Indian and the U.S. economies. A slowdown in
the United States and Indian economies or sectors in which our clients are
based, including the Internet and technology-based sectors, or an overall
reduction in consumer and business spending, could have a materially adverse
impact on our business and our prospects. A significant portion of our revenues
are derived from retail customers and from companies that operate in various
sectors, including the Internet and technology-based sectors as well as
insurance, financial services, banking and consumer goods sectors. Some of these
sectors have experienced a slowdown in growth during the fiscal year ended March
31, 2008 and the first quarter ended June 30, 2008 and could experience further
slowdowns in growth during the




8




second
half of 2008 and next year. As a result, some of our advertisers may reduce
their advertising expenditures. A prolonged or material decline in Internet
advertising expenditure will have a material adverse effect on our operating
results. Further, a slowdown in the Indian and U.S. economies may make it
difficult for us to raise money in the equity and debt markets on terms
favorable to us or at all, which may have an adverse effect on our financial
condition and operating results.





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





We
have incurred significant net losses and negative cash flows since our inception
in January 1996. As of March 31, 2008, we had an accumulated deficit of
approximately US$42.74 million. While we earned a net income of US$4.91 million
for the fiscal year ending March 31, 2008, we may in the future incur additional
net losses and negative operating cash flows. We expect to increase our spending
as we continue to expand our services, advertise and promote our brand, and
invest in the expansion of our infrastructure and sales and marketing staff. We
have incurred and in the future may incur expenses in connection with
acquisitions and investments. Accordingly, we will need to generate significant
additional revenues in order to remain profitable. We may not be able to do so.
Our business model is not yet proven in India or the United States, and we
cannot assure you that we will sustain our profitability or that we will not
incur operating losses in the future. If we are unable to maintain
profitability, we will be unable to build a sustainable business. In this event,
the price of our ADSs and the value of your investment would likely
decline.





Intense
competition in our businesses could prevent us from sustaining our
profitability.





Our
businesses compete in various sectors including with Indian and foreign online
content and services providers, and traditional print and television media
companies. In recent times, we have witnessed increased competition in India
from established foreign brands such as Google, Yahoo and MSN. We are also
subject to competition from companies known as “aggregators”, which aggregate
advertising space in third party websites and resell such space to our customers
or potential customers. Many of our competitors have a longer operating history,
greater name recognition and customer base, and greater management, financial,
technical, marketing, sales, brand, and other resources than we do. They can use
their superior experience and resources in a variety of competitive ways,
including by investing more aggressively in research and development, creating
superior content, making acquisitions, and competing more aggressively for
advertisers. There has also been a trend toward industry consolidation so our
smaller competitors today may become part of larger competitors in the future.
If our competitors in our online business are more successful than we are at
generating visitors and website traffic due to superior content and other
service offerings or our competitors in our publication business are more
successful at growing their circulation and advertising share, our revenues may
decline.





In
addition to Internet companies, our online business faces competition from other
companies that offer traditional media advertising opportunities, including
print and television companies. Most large advertisers have set advertising
budgets, a portion of which is allocated to Internet advertising. For the near
future, we expect that large advertisers will continue to focus their
advertising efforts on traditional media. If we fail to convince these companies
to spend a larger portion of their advertising budgets with us, or if our
existing advertisers reduce the amount they spend on Internet advertising, our
operating results may decline.





Competition
for visitors, customers, subscribers, advertisers and e-commerce partners is
intense and is expected to increase significantly in the future because there
are no substantial barriers to entry in our market. Furthermore, it is difficult
to predict which online advertising pricing model, if any, will emerge as the
industry standard. This makes it difficult to predict our future advertising
rates and revenues.





Our
Indian advertising revenues include revenues from other Internet companies,
including those engaged in the business of job searches, travel, matrimonial and
online shopping. Some of these companies are startups without proven long-term
business models and are dependent on external funding for future




9




growth.
Any downturn in advertising spending from this segment could have an adverse
impact on our revenues and profitability.





Our
publication business in the United States and Canada faces competition from not
only Internet-based publications but also from other publications targeted at
Indian-Americans and from television channels featuring Indian news and
programming. In addition, competition for paying subscribers for our India
Abroad newspaper, which is subscription-based, is intense due to the presence of
other paid newspapers such as News India Times, Indian Express and India West.
Further, our publications also face competition from free newspapers and from
electronic media, such as television and online publications and
services.





Our
revenues could be adversely affected if we are unable to successfully adapt to
new forms of pricing for the services and products we offer. Increased
competition or the actions of our existing competitors may result
in:





·
            loss
      of visitors and decreased website
traffic;





·
            loss
      of paid subscribers;





·
            loss
      of advertisers;





·
            reduced
      operating margins;





·
            loss
      of market share; and





·
            diminished
      value in our services.





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





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





Our
quarterly results may also fluctuate significantly in the future based on a
variety of factors. These factors could affect our long-term performance. Some
of these factors include:





·
            increased
      competition;





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





·
            changes
      in prices for our product and service
offerings;





·
            increases
      in personnel, marketing and other operating
  expenses;





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





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





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





·
            seasonality
      in retail sales;





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




10




·
            entry
      into new businesses requiring substantial
  investments.





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





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





Online
Advertising





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





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





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





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





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





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





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





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





Newspaper
Advertising





Our
business strategy in the United States and Canada for our India Abroad business
depends primarily on growth in advertising in our publications. Competition to
provide news and information regarding India or content that is of interest to
Indian-Americans in these markets is intense, with competitors including
publications with general circulation or that are offered for free and
electronic media, such as websites and television channels dedicated to Indian
news and programming. Our ability to secure advertising contracts and maintain
our advertising rates depends principally on the number of subscribers




11




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





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





We
derive a considerable portion of our revenues from certain key advertisers. For
the fiscal year ended March 31, 2008, our top ten advertisers in India accounted
for approximately 34% of our India Online Advertising revenues. For the same
period, for our U.S. publishing business, our top ten advertisers contributed
approximately 26% of total U.S. publishing revenues. Any failure to meet
advertiser expectations could result in cancellation or non-renewal of
contracts, which typically can be terminated by advertisers with or without
cause, with little or no advance notice and without penalty. The loss of, or a
significant reduction in the volume of business from, one or more of our large
advertisers could have a material adverse effect on our operating results and
financial condition.





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





Our
online businesses rely heavily on the Internet and, accordingly, depend upon the
continuous, reliable and secure operation of Internet servers, related hardware
and software and network infrastructure, such as telephone lines leased from
service providers. The continual accessibility of our websites and the
performance and reliability of our network infrastructure are critical to our
reputation, and our ability to attract and retain users, advertisers and
merchants. Any system failure or performance inadequacy that causes
interruptions in the availability of our services or increases the response time
of our services could reduce our appeal to advertisers and consumers. Factors
that could significantly disrupt our operations include:





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





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





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





·
            terrorist
      acts.





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





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




12




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





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





We
may lose a significant portion of our assets if banks in India collapse
following the recent financial crisis affecting the Untied Staes and
elsewhere.





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





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





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





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





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





·
            the
      potential disruption to our ongoing business and distraction of management
      during the acquisition and integration
process;





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





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





·
            the
      potential unknown liabilities associated with acquired
      businesses;





·
            the
      failure to develop successfully new products or
    technologies;





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





·
            unfavorable
      changes in business environment and government regulations;
      and





·
            unfavorable
      changes in accounting rules and guidelines relating to our
      acquisitions.




13




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





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





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





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





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





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





A
part of our India Online revenue growth for the fiscal year ended March 31, 2008
was from our fee-based Internet services, including paid e-mail services, other
subscription services and wireless short messaging service in India. If not
enough users adopt and use our fee-based Internet services, our growth may be
adversely affected.





We
depend on mobile operators to advertise our mobile products to their
customers.





We
have arrangements with most Indian mobile operators which allow the customers of
such mobile operators to download ringtones, wallpapers and other products from
our servers. These customers can also access information relating to news,
business and other information from us by using short messaging services. Some
operators permit us to selectively send SMS messages advertising our mobile
products to a section of their customer base. The Telecom Regulatory Authority
of India (“TRAI”) has instituted rules to prevent unsolicited commercial
communications to mobile phone users who sign up for a “Do Not Disturb”
registry. This and any other regulatory action to restrict or reduce our ability
to advertise our mobile products and services to mobile users may have an
adverse impact on our future operating results.





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




14




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





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





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





We
may also be subject to claims for defamation, negligence, copyright or trademark
infringement, personal injury or other legal theories relating to the
information we post or products sold by third parties on our website. For
example, we have been named as a defendant in proceedings filed by Cartier
International B.V. (“Cartier International”) in the High Court of Delhi, India,
where Cartier International seeks to obtain a permanent injunction against a
vendor who used the trademark “Cartier” for selling products on our Rediff
Shopping website. We could also become liable if confidential information is
disclosed inappropriately on or through our website.





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





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





·
            unsolicited
      e-mail;





·
            lost
      or misdirected e-mail;





·
            illegal
      or fraudulent use of e-mail;





·
            interruptions
      or delays in e-mail service; and





·
            loss
      or deletion of data stored in
mailboxes.





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





The
laws in India and the United States relating to the liability of companies which
provide online services, like ours, for activities of their users, are still
relatively unclear. Investigating and defending these claims is expensive, even
if they do not result in liability. We do not carry insurance to protect us
against all types of claims, and there is no precedent on such liabilities under
Indian law. Further, our business is




15




based
on establishing the Rediff.com website as a trustworthy and dependable provider
of content and services. Allegations of impropriety, even if unfounded, could
damage our reputation, disrupt our ongoing business, distract our management and
employees, reduce our revenues and increase our expenses.





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





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





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





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





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





Indian
and/or overseas regulators and other telecommunications operators may challenge
our ability to offer a PC-to-PC voice facility as one of the features of our
Rediff BOL instant messenger service.





Our
Rediff BOL instant messenger service includes a feature that allows users to
talk to each other using their PCs. Although the voice data of our users is
transmitted through the Internet using voice-over-Internet-protocol technology
and does not, at any point, pass through regulated public switched telephone
networks, it is possible that Indian and/or overseas telecommunications
regulators, operators or trade associations may seek to impose restrictions on
our ability to offer this facility. If any such restrictions are imposed, we may
be required to discontinue this feature of Rediff BOL. Further, we may be
required to devote time and management attention, and incur expenses, addressing
any such restrictions or responding to claims from third parties.





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





We
anticipate expansion of our business in India as we address growth in our
customer base and market opportunities. In order to manage the expected growth
of our operations and personnel, we will be required to improve existing and
implement new operational and financial systems, procedures and controls, and to
expand, train and manage our employee base. Further, our management will be
required to maintain and expand our relationships with various other partners,
mobile phone operators, Internet and




16




other
online service providers and other third parties necessary to our business. We
cannot assure you that our current and planned personnel, systems, procedures
and controls will be adequate to support our future operations or that such
relationships will be maintained or developed.





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





The
exchange rate between the Rupee and the U.S. dollar has fluctuated substantially
both historically and in recent years, and could continue to fluctuate
substantially in the future. During the fiscal year ended March 31, 2008, the
Rupee appreciated approximately 7% as the Rupee/U.S. dollar noon buying rate
quoted by the Federal Reserve Bank of New York changed from Rs. 43.10 = US$1.00
as of March 31, 2007 to Rs. 40.02 = US$1.00 as of March 31, 2008. As of July 31,
2008, the Rupee/U.S. dollar noon buying rate quoted by the Federal Reserve Bank
of New York was Rs.42.47 = US$1.00, representing a depreciation rate of
approximately 6% against the rate as of March 31, 2008. The reporting currency
for the financial statements is the U.S. dollar and the translation from Indian
Rupees to U.S. dollars has been performed using rates specified by the Reserve
Bank of India.





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





If
we are unable to develop new services or enhance existing services in
anticipation of our users’ needs, our business could suffer.





Our
success is dependent, in part, on our ability to anticipate customers’ needs in
advance and develop new services or enhance the existing services to fulfill
those needs, on a cost-effective and timely basis. The development and
implementation of such services entail significant technical and business risks.
There can be no assurance that we will successfully implement new services. New
technologies are giving rise to new business opportunities, such as in gaming,
paid search and social networking. We believe that much of our future growth
will depend on our ability to seize upon these opportunities and successfully
launch new products and services. If we are unable, for technical, legal,
financial or other reasons, to adapt in a timely manner to changing market
conditions or customer requirements, our business and our future financial
performance could be materially adversely affected.





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





As
of March 31, 2008, our five largest shareholders beneficially owned an aggregate
of approximately 59.9% of our Equity Shares.





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





·
            amending
      our Articles of Association;





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





·
            commencing
      any new line of business; and





·
            commencing
      a liquidation.




17




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





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





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





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





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





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





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





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





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





The
market penetration of, or access to, personal computers, or PCs, and,
consequently, the Internet in India is far lower than in the United States.
According to the International Data Corporation (“IDC”), personal computer sales
for the fiscal year ending March 31, 2008 were estimated at 8.25 million units.
Alternate methods of obtaining access to the Internet, such as through cable
television modems or set-top boxes for televisions, although available, are
available in a limited manner in India. We cannot assure you that the market
penetration of personal computers in India will increase rapidly or at all, or
that alternate means of accessing the Internet will develop and become widely
available in India. If these events do not occur we will not be able to expand
our customer base, which will make it difficult for us to execute our business
strategy.




18




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





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





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





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





In
other developing Asian markets such as South Korea and Malaysia, an increase in
broadband penetration rates led to rapid growth in the number of online
subscribers. Currently, broadband penetration rates in India are very low
compared to other developed countries. According to TRAI, India had an estimated
broadband subscriber base of 3.9 million as of March 31, 2008. If the broadband
and telecom industry in India fails to register significant growth as has been
experienced by other developed countries, our growth may also be
affected.





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





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





·
            inconsistent
      quality of service;





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





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





·
            low
      number of Internet users in India;
and





·
            low
      levels of credit card penetration in
India.





If
usage of the Internet, credit cards and e-commerce in India does not
substantially increase and the legal infrastructure and network infrastructure
in India are not further developed, we are not likely to achieve significant
growth of our e-commerce products and services. Also, a slowdown in economic




19




growth
in India may result in an overall reduction in consumer and business spending,
which will adversely affect our e-commerce platform revenues.





Compliance
with new and changing corporate governance and public disclosure requirements
may add uncertainty and increase our costs of compliance.





Changing
laws, regulations and standards relating to accounting, corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC
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.





In
particular, continuing compliance with Section404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding our required assessment of our
internal control over financial reporting requires the commitment of significant
financial and managerial resources and external auditor’s independent assessment
of the internal control over financial reporting.





In
connection with this annual report, our management assessed our internal
controls over financial reporting, and determined that our internal controls
were effective as of March 31, 2008, and our independent auditors have expressed
an unqualified opinion over the effectiveness of our internal control over
financial reporting as of the end of such period. However, we will undertake
management assessments of our internal controls over financial reporting in
connection with each annual report, and any deficiencies uncovered by these
assessments or any inability of our auditors to issue an unqualified opinion
could harm our reputation and the price of our equity shares and ADSs. Our
efforts to comply with evolving laws, regulations and standards in this regard
have resulted in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. Further, if we fail to
comply with new or changed laws or regulations, our business and reputation may
be harmed.





Changes
in employee benefit policies or laws could affect our financial conditions and
our ability to retain talent.





The
Indian Finance Act of 2007 imposed a fringe benefit tax (“FBT”) on companies
with respect to specified securities or equity shares allotted or transferred,
directly or indirectly, by the company free of cost or at a concessional rate to
its employees. The FBT is payable by the employer on the difference between the
fair market value of options on the date of vesting and the exercise price
thereof. The new legislation permits the employer to recover the FBT from the
employees. If we are not successful in recovering the FBT from our employees,
this could have a negative impact on our cash flows. Further, any passing on of
the FBT by us to our employees may reduce the effectiveness of stock option
grants in attracting and retaining talented employees. We have been advised by
our auditors that, under U.S. GAAP, any payment of the FBT by us upon exercise
of options by our employees will be accounted for as a charge to our income
statement, while any corresponding recovery we receive from our employees is
required to be accounted for as a credit to additional paid in capital.
Accordingly, any such exercise of options will have a negative impact on our
profitability.





It
may be difficult for holders of our ADSs to enforce any judgment obtained in the
United States against us or our affiliates.





We
are incorporated under the laws of India and many of our directors and executive
officers reside outside the United States. Virtually all of our assets are
located outside the United States. As a result, holders of our ADSs may be
unable to effect service of process upon us outside the United States. In
addition, holders of our ADSs may be unable to enforce judgments against us if
such judgments are obtained in courts of the United States, including judgments
predicated solely upon the federal securities laws of the United
States.




20




Risks
Related to Investments in Indian Companies





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





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





Terrorist
attacks, such as the ones that occurred in New York and Washington, D.C., on
September 11, 2001, New Delhi on December 13, 2001, the bomb blasts in Mumbai on
August 25, 2003, the October 2004 bomb blasts in Northeast India and the Mumbai
train bombings on July 11, 2006, as well as other acts of violence or war,
including those involving India, the United States or other countries, may
adversely affect Indian and worldwide financial markets. These acts may also
result in a loss of business confidence and have other consequences that could
adversely affect our business, results of operations and financial condition.
Travel restrictions as a result of such attacks may have an adverse impact on
our ability to operate effectively. Increased volatility in the financial
markets can have an adverse impact on the economies of India and other
countries, including economic recession.





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





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





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





Political
instability related to the current multi-party coalition government could halt
or delay the liberalization of the Indian economy and adversely affect economic
conditions in India generally and our business in particular.





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





Since
1991, successive Indian governments have pursued policies of economic
liberalization, including significantly relaxing restrictions on the private
sector. We cannot assure you that these liberalization policies will continue in
the future. The 2004 general elections in India resulted in the election of a
multi-party coalition government that relies on the support of political parties
that have traditionally been opposed to the economic liberalization policies
that have been pursued by previous governments. The rate of economic
liberalization could change, and specific laws and policies affecting technology
companies, 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




21




deregulation
policies could adversely affect business and economic conditions in India
generally, including our business.





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





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





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





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





As
part of our business strategy, we may plan to acquire complementary businesses,
including businesses based outside of India. For the acquisition of a business
based outside India we may, under certain circumstances, be required to obtain
approval of the Reserve Bank of India and/or the Government of India. Under
guidelines issued by the Reserve Bank of India, the acquisition of companies
organized outside India is permitted under certain circumstances without prior
approval if such acquisition does not exceed 300% of the Indian party’s net
worth as of the date of the last audited balance sheet of the Indian party. This
ceiling includes contribution to the capital of companies organized outside
India, loans granted by the Indian party to such companies organized outside
India and 100% of guarantees issued by the Indian party to or on behalf of such
companies organized outside India.





We
cannot assure you that we will be able to obtain any required approval from the
Reserve Bank of India and/or the Government of India. Our failure to obtain
approval from the Reserve Bank of India and/or the Government of India for
acquisitions of companies organized outside India may restrict our growth, which
could negatively impact our revenues.





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





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





Risks
Related to the ADSs and Our Trading Market





An
active or liquid market for our ADSs is not assured.





Active,
liquid trading markets generally result in lower price volatility and more
efficient execution of buy and sell orders for investors. Liquidity of a
securities market is often a function of the volume of the shares that are
publicly held by unrelated parties. Although holders of our ADSs are entitled




22




to
withdraw the Equity Shares underlying the ADSs from our depositary facility at
any time, subject to certain legal restrictions, there is no public market for
our Equity Shares in India or elsewhere.





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





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





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





Under
current Indian regulations and practice, approval of the Reserve Bank of India
is not required for a renunciation in favor of a resident of India of rights to
subscribe to equity shares pursuant to a rights offering or for the sale of
equity shares underlying ADSs by a non-resident of India to a resident of India,
unless the sale breaches the pricing guidelines laid down for this purpose by
the RBI, which specify that where the equity shares of an Indian company are not
listed on a stock exchange:





·
            if
      the consideration payable for the transfer does not exceed Rs.2.0 million,
      at a price mutually agreed upon by the seller and the buyer, based on any
      recognized valuation methodology currently in use, on submission of a
      certificate from the statutory auditors of the Indian company whose equity
      shares are proposed to be transferred, regarding the valuation of such
      equity shares; and





·
            if
      the consideration payable for the transfer exceeds Rs.2.0 million, at a
      price arrived at, at the seller’s option, in any of the following manners,
      namely: (i) a price based on earnings per share (EPS linked to the Price
      Earning (P/E) multiple), or a price based on the Net Asset Value (“NAV”)
      linked to book value multiple, whichever is higher; or (ii) a price which
      is the lower of the two independent valuations of the equity shares being
      transferred, one prepared by the statutory auditors of the company and the
      other by a Chartered Accountant or a Merchant Banker in Category 1
      registered with Securities and Exchange Board of
  India.





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





Our
management has broad discretion with respect to the use of the net proceeds from
our securities offerings and cash from our operations. As of March 31, 2008, we
held approximately US$59.0 million as cash and cash equivalents and short term
deposits with banks on which we are earning interest.




23




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





Our
ADS market price is highly volatile and could drop unexpectedly in the
future.





The
stock markets in the United States have from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the securities of technology companies, particularly Internet companies.
Volatility in the price of our ADSs may be caused by factors outside of our
control and may be unrelated or disproportionate to our operating results. In
the past, following periods of volatility in the market price of a public
company’s securities, securities class action litigation has often been
instituted against that company. Securities class action litigation has been
instituted against us in the United States. Please see “Risk Factors – Pending
and potential litigation against us could have a material adverse effect on our
business and operating results and lower the market price of our ADSs” in this
annual report for more information. Such litigation brought against us, even if
unsuccessful, could damage our reputation and result in substantial costs and a
diversion of our management’s attention and resources.





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





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





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





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





If
our Depositary timely receives voting instructions from an owner of ADSs, it
will endeavor to vote the securities represented by those ADSs in accordance
with such voting instructions. In the event that voting takes place by a show of
hands, our Depositary will cause the custodian to vote all deposited securities
in accordance with the instructions received from owners of a majority of the
ADSs for which our Depositary receives voting instructions. However, the ability
of our Depositary to carry out voting instructions may be limited by practical
and legal limitations and the terms of the securities on deposit. We




24




cannot
assure that holders of ADSs will receive voting materials in time to enable them
to return voting instructions to our Depositary in a timely manner.





We
do not plan to pay dividends in the foreseeable future.





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





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





We
may be classified as a passive foreign investment company (a “PFIC”) for United
States federal income tax purposes for the current taxable year and it is
uncertain whether we will be classified as a PFIC for any future taxable year.
PFIC status is a factual determination made annually on the basis of the
composition of our income and the value of our active versus passive assets. We
currently maintain a significant amount of passive assets, including cash, which
contributes significantly to the risk that we may be or become classified as a
PFIC. In addition, the valuation of our goodwill and other unbooked intangibles
is based on our market capitalization, which, at its current level and taken
together with our level of passive assets, may cause us to be classified as a
PFIC for the current taxable year. If we do not spend substantial amounts of our
liquid assets for business development purposes or if our market capitalization
does not substantially increase, we may also be classified as a PFIC for one or
more future taxable years. If we are or become classified as a PFIC, United
States investors holding our ADSs or our Equity Shares may be subject to
penalizing tax and interest charge rules on gain recognized on the sale or other
disposition of our ADSs or our Equity Shares and on the receipt of distributions
on our ADSs or Equity Shares to the extent such gain or distribution is treated
as an “excess distribution” under the United States federal income tax rules.
Please see the section in this annual report entitled “Taxation – United States
Federal Income Tax Considerations – Passive Foreign Investment Company
Rules”.





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





The
market price of our ADSs could decline as a result of sales of a large number of
Equity Shares represented by ADSs on a U.S. stock exchange or elsewhere, or the
perception that such sales could occur. Such sales also might make it more
difficult for us to sell Equity Shares in the future at a time and at a price
that we deem appropriate. As of March 31, 2008, we had an aggregate of
14,615,800 Equity Shares outstanding. Of the outstanding Equity Shares,
8,907,200 ADSs, representing 4,453,600 Equity Shares, are freely tradable. Our
remaining Equity Shares may be sold in the United States pursuant to a
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act. Further, certain holders of at
least 30% of our Equity Shares can require us, subject to limitations, to effect
a registration of such Equity Shares and/or to list the Equity Shares either on
the NASDAQ Global Market (formerly the NASDAQ National Market), the National
Stock Exchange of India or the Bombay Stock Exchange Limited (formerly The Stock
Exchange, Mumbai).





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





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




25




Ministry
of Finance will be interpreted and implemented, and how they would apply to us,
is still uncertain. Because we generated profit each fiscal year since fiscal
2006, we may be required to list our Equity Shares on an Indian stock exchange
by the end of fiscal 2009. We may not be able to comply with this timeline for
listing and other standards imposed by the Ministry of Finance, and we are
uncertain as to the consequences to us of any non-compliance.





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





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





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





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





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





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





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





·
            was
      not rendered by a court of competent
  jurisdiction;





·
            was
      not rendered on the merits of the
case;





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





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





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





26




BUSINESS







Overview





Our
legal name is Rediff.com India Limited and our commercial name is Rediff.com. We
were incorporated in India on January 9, 1996 as Rediff Communication Private
Limited under the Indian Companies Act. We converted to a public company on May
29, 1998. On February 15, 2000, we changed our name to Rediff.com India Limited.
Our principal office is located at Mahalaxmi Engineering Estate, 1st Floor, L.J.
First Cross Road, Mahim (West), Mumbai 400 016, India, and our telephone number
is +91-22-2444-9144. Our Internet address is www.rediff.com.





We
are a leading Internet destination in India, focusing on providing world-class
online consumer offerings in India and to the global Indian community. Our
websites in India and the U.S. consist of communication services, such as e-mail
and instant messaging, news and information channels, community features,
sophisticated search engines, and mobile and online marketplace
services.





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





During
the fiscal year ended March 31, 2003, our management reclassified our business
segments and reviewed our performance on a new basis. In April of 2004, we sold
our phone card business and in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the impairment or
disposal of long-lived assets”, the operations of this business have been
classified under discontinued operations. Currently we operate two business
segments, the India Online business and the U.S. Publishing
business.





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





During
the years 2001 and 2002, while we waited for the Indian Internet user base to
grow, we made a number of acquisitions in the United States to strengthen our
offerings to people of Indian origin living in North America. First, we acquired
“thinkindia.com”, an Internet website servicing people of Indian origin in the
United States, for US$3.4 million. Next, in March 2001, we acquired Value
Communication Corporation (“ValuCom”), a provider of online phone cards, for
US$3.7 million plus deferred consideration payable over a period of two years.
Subsequently, in July 2002, we concluded the acquisition of ValuCom by paying
the deferred consideration of approximately US$3.1 million. In April 2001, we
acquired India Abroad, a weekly community newspaper based in New York, for
approximately US$11.4 million.





We
periodically evaluate the fair value of goodwill arising from these acquisitions
by applying the guidelines of SFAS No. 142, “Goodwill and Other Intangible
Assets”, and wrote off US$3.3 million, US$8.3 million and US$1.7 million
for the fiscal years ended March 31, 2002, 2003 and 2004, respectively. The
residual value of goodwill as of March 31, 2007 and 2008 relates to our U.S.
Publishing business and amounts to US$7.3 million.





During
the fiscal year ended March 31, 2004, we evaluated the prospects of the ValuCom
business and decided that, because of a number of factors, including the
downward trend of telecom rates for U.S.-




27




India
telephone calls, the emergence of low cost competitors and our lack of
sufficient scale, it was more prudent to exit the ValuCom business. In April
2004, we exited this business.





Our
Markets





We
believe that the growth of our revenues and profits from our India Online
business is dependent on the growth of the Indian Internet and mobile phone user
bases, the evolution of adequate payment mechanisms and our ability to capture a
sizeable share of the increase in revenues resulting from such
growth.





The
growth of the user bases for Internet and mobile phones, in turn, is dependant
on government policies which facilitate a competitive and financially healthy
telecom industry. During the last few years, the Government of India has taken a
number of steps in this direction, opening most sectors of the telecom industry
to private sector and foreign capital, establishing independent regulatory
authorities and reducing taxes on personal computers and mobile phones. We
believe that these government initiatives have begun to show results as a
combination of lower prices for both PCs and Internet access (including
broadband access) have led to growth in PC ownership and a corresponding growth
in the number of Internet subscribers. This growth is evidenced by the
following:





·
            Data
      for the full fiscal year 2008 from the International Data Corporation
      (IDC) shows that the number of PCs sold in India grew 22% on a year on
      year basis.





·
            Data
      from the TRAI shows that the total number of mobile subscribers in India
      grew by 58% to 261 million as at March 31, 2008 compared to the same date
      last year.





The
growth of our U.S. businesses is dependent on our ability to launch new services
that appeal to the approximately 2 million Asian Indians living in the United
States as well as increase in advertising revenues from our Rediff India Abroad
website and from our weekly newspapers, India Abroad and India in New
York.





Our
Opportunity





Both
Internet and mobile phone usage are at an early stage in India and, after a
period of slow growth from 2000 to 2003, are starting to accelerate. We believe
our opportunities are driven by the following factors:





·
            We
      believe that we were an early mover in the Indian market; our brand is
      recognized and valued by Indian Internet
users;





·
            We
      offer services based on the latest technology; we believe that our
      platform is convenient to use and provides locally relevant services that
      have a high utility value for
consumers;





·
            We
      are one of the few Internet companies in India offering complete website
      services, such as e-mail, search, community, instant messaging, blogs,
      news and online shopping;





·
            According
      to TRAI, total broadband (≥ 256 Kbps download) subscribers base reached
      4.01 million by the end of April 2008, as compared to 3.90 million by the
      end of March 2008. As penetration and usage of the Internet grow in India,
      we believe advertisers will increasingly use this medium as an additional
      advertising channel. We believe that as Internet advertising grows in
      popularity in India, we are well positioned, as one of India’s leading
      websites, to benefit from this
growth;





·
            Anticipated
      improvement in online payment infrastructure, distribution and fulfillment
      facilities, and increase in credit and debit card penetration rates and
      the development of alternative payment mechanisms for online purchases,
      such as cash on deliveries is expected to fuel the growth of e-commerce in
      India; and




28




·
            In
      India, we expect mobile value-added services in the form of ringtones,
      games and chat services to increase in popularity as the mobile subscriber
      base increases.





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





Our
Strategy





We
are focused on providing a full range of culturally relevant online products and
services to Indians living in India and other parts of the world. We intend to
continue to focus on providing the following services:





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





·
            Our
      “Pay4Clicks” platform, which is an automated platform that allows
      merchants to advertise on the Rediff.com website, with a fee being charged
      to the merchant each time a user clicks on its
    advertisement.





·
            Community
      and social networking platforms which connect people through an online
      network. Our community products and platforms include iShare, Get Ahead
      Q&A and Rediff iLand.





·
            News
      and information services, including breaking news, our money channel
      Moneywiz as well as message boards for users to post their opinions, a
      facility for users to personalize news to suit their interests and
      periodic newsletters they can receive in their e-mail boxes. Our news and
      information channels cover politics, business, entertainment and
      sports.





·
            Communication
      services, including e-mail and instant messaging. E-mail services are
      provided in a variety of Indian
languages.





·
            Mobile
      services, including facilities for downloading ringtones, mobile games,
      wallpapers, chat and e-mail. We provide these services for both 2G and
      2.5G mobile services.





·
            Consumer
      and business services, including webhosting, domain name registration,
      matchmaking and astrology. Some of our consumer services are offered on a
      subscription basis.





·
            Search
      and classified services, including facilities to locate local information
      on domestic airfares, train fares, job listings, images and
      businesses.





·
            Online
      shopping services, including a platform for merchants in India to create
      online shops, package tracking facilities, and a facility for consumers to
      rate merchants. We offer a wide range of payment options to our
      consumers.





·
            In
      the United States, publication of “India Abroad” and “India in New York”,
      as well as providing online services to the Asian Indian
      community.





Our
Product and Service Offerings





India
Online Business





Our
Rediff.com India website consists of information, communication and content
services, free community products and platforms, e-commerce and mobile services.
With 65.7 registered million users as




29




of
March 31, 2008, we believe Rediff.com is one of the most recognized online
brands in India and among the Indian community worldwide.





For
the fiscal year ended March 31, 2008, the India Online business segment
generated US$23.65 million, an increase of approximately 14% compared to India
Online revenues during the fiscal year ended March 31, 2007.





Information and
Content





We
deliver information and content to our users in an easy to use interface. The
information and content channels currently available to our users include news,
business, movies, cricket/sports and several other topics of interest. We
currently offer this information and content without charge to our users. We
launched a new Rediff.com homepage in fiscal 2008 that incorporates Web 2.0
features which we believe enhance usability and our users’ browsing experience.
We also introduced a new Firefox toolbar application for the launch of Firefox
3.





We
believe that a significant percentage of our online users are between 18 and 34
years old. As such, we place emphasis on reaching younger users through more
focused information and content relevant to this audience.





Our
primary information and content channels are broadly classified into news
content and interest specific subjects. News content includes:





·
            Current affairs and breaking
      news. Our in-house editorial staff and contract journalists provide
      our users with up-to-date news focused on events of interest to Indians,
      including feature news stories, interviews and online chats with leading
      Indian personalities. We provide breaking news and in-depth coverage of
      significant news and other events.





·
            Business and Finance.
      Our Finance platform Moneywiz provides stock market quotes, company
      information and a personal portfolio tracker. In addition, we provide
      business news, feature articles, expert columns and interviews. Our
      business channel offers business news from India and coverage of Indian
      stock markets. This channel also provides regular columns and feature
      stories, as well as personal finance information. In fiscal 2007, we
      launched Market Voices, which provides live running commentary during the
      trading hours of the Indian stock
markets.





·
            Movies. Our movie
      channel offers coverage of movie news from Bollywood and Hollywood with
      box office information, regular columns, stories, interviews with movie
      personalities, movie reviews and slide
shows.





·
            Sports. Our sports
      channel provides coverage of Indian and global sporting news. We provide
      in-depth coverage of cricket news from India and around the globe,
      including statistics, scores and schedules, regular columns, feature
      stories and interviews. We also provide special coverage of major sporting
      events of specific interest to Indians. In fiscal 2007, we introduced a
      platform called Predict and Win, a skill-based sports game where players
      earn points based on their prediction of sports matches. The platform was
      launched in connection with the Cricket World Cup and has expanded to
      other sporting events.





Content
for these channels is managed through a combination of in-house editorial staff,
content syndication from newswires, content aggregation from other publications
and news providers, and by partnering with specialized content providers. We
also provide analysis of our in-house and aggregated news content and an
opportunity for users to participate in discussions and debates on a variety of
subjects online in our discussion forums. In fiscal 2007, the editorial content
channel, Get Ahead, was enhanced by integrating a forum for questions and
answers (“Q&A”). Users can post questions and answers on various issues and
vote for the most relevant answers within a community environment. Prolific
users are rated using a point system. The Company also launched a service
enabling external websites to create their own Q&A services using the
Company’s technology.




30




We
also operate a content crawling, aggregation and publishing platform, allowing
us to aggregate and publish, at a relatively low cost, a variety of channels
without actually incurring the expense of creating content.





Our
registered users have the opportunity to receive updated news and information
via e-mail by subscribing to a choice of newsletters.





Our
website also allows users to search the Rediff.com archives, which contain over
seven years of news and information, using our own search
technology.





Community Features and
Products





Through
a single login facility, we provide a combination of free and paid community
features and products to consumers and businesses. Our offerings include e-mail,
instant messaging, chat, vertical search tools, Matchmaker, astrology services,
blogs, message board, social networking and mobile services. Some of these
features and products are offered without charge, while others are offered on a
subscription or fee basis. Payment for our fee-based services can be made by
credit cards and within India by check/demand draft or through direct debit of
the user’s Internet banking account.





Our
specific offerings include:





E-mail





We
offer our users a variety of e-mail solutions tailored to their needs and we
believe that we have priced each of our branded e-mail products competitively.
All of our e-mail services offer Spam control and supports the use of English
and eleven Indian languages. Our e-mail offerings are described
below.





·
              Rediffmail,
      our flagship e-mail service, is provided free of charge to our users. Its
      features include the ability to search for specific e-mails or
      attachments, a drag and drop feature, auto-completion of e-mail addresses
      and unlimited free storage space (including the ability to send
      attachments of up to 10MB in size). Users can also subscribe to receive
      e-mail over their mobile phone. In fiscal 2007, we introduced a new
      version of the web-based mail service to provide users with an experience
      akin to desktop-based e-mail products. The e-mail service is also
      available in 11 Indian languages. We also recently introduced the
      following features:1.
              An
      Access Mails Anywhere function, enabling mobile phone users to configure
      their Rediffmail account with their mobile phone and access their inboxes
      and respond to mails from their mobile phones.2.
              Web
      messenger within our e-mail service allowing users to chat with friends
      from their mailbox.3.
              Newsfeeds
      from social networking sites Orkut, Facebook and Linkedin are now
      integrated into the Rediffmail inbox, enabling users to get updates of
      their friends’ activities through Rediffmail.As
      of March 31, 2008, we had approximately 65.7 million registered Rediffmail
      users.





·
            Rediffmail
      Pro is a subscription e-mail service targeted at business users.
      Rediffmail Pro offers small businesses the ability to select and
      configure, subject to availability, e-mail addresses. Subscribers are
      given five e-mail addresses and 1GB of storage space, which can be
      allocated among different users and increased without limitation at an
      additional charge. Rediffmail Pro also offers enhanced address book
      features and enhanced virus and spam protection. Users may also access
      their e-mail accounts using POP access through their Rediffmail Pro
      accounts. Rediffmail Enterprise Pro is a web based e-mail service
      primarily for companies with a significant number of agents/sales
      associates/dealers.




31




·
            Rediff
      Business Solution is aimed at the small and medium enterprise (“SME”)
      segment in India. Through this product, we offer SMEs a range of web
      management services such as domain name registration, web hosting and
      business e-mail. Features offered include 100MB web hosting service, a
      choice of Windows or Linux platforms, POP3 business e-mail sevice and the
      ability to register domain names for up to ten
  years.





Instant
Messaging





Rediff
BOL instant messenger is a free service that enables instant communication
across the Internet with other Rediff BOL users, even for users with low
bandwidth Internet connections. Users can make PC-to-PC voice phone calls, send
text messages via Short Messaging Service (“SMS”) free of charge to mobile
phones in India, create customized avatars and participate in chat rooms. Rediff
BOL has also been upgraded to include a video messaging feature, allowing users
to engage in interactive chats using both voice and video features. We also
offer Rediff BOL users the ability to communicate with others who share their
interests through various chat rooms organized by areas of interest and
geographic locations in India and around the world. Our chat services are
available free of charge.





Blogs





Rediff
iLand, our Web 2.0-based blogging tool, is a free online interactive community
where users can set up their own blogs and publish their thoughts and ideas
directly and instantly to the Web and visit other blogs and comment on them.
Users can also post pictures and create multiple blogs under a single username
and password. We offer “Moblogs”, a mobile blogging feature which allows users
to upload pictures or text from mobile phones directly onto their blogs. We
believe we were the first in India to offer this service. We have also
introduced eight new Indian languages on Rediff iLand allowing users to choose
the language they wish to blog in. The languages currently offered include
Hindi, Gujarati, Marathi, Tamil, Telugu, Malayalam, Bengali and
Kannada.





Social
Networking





Launched
in fiscal 2008, our video sharing platform iShare has gathered momentum. We
enhanced the platform by adding a new video and audio player with an auto play
feature, a full screen view mode and the web based video upload
feature.





Rediff
Connexions is our free online social networking product which allows users to
become part of a network by creating and uploading profiles that include details
about their profession, education and interests. Thereafter, users can invite
friends to join their network and can become linked to a larger network.
Connexions includes a tool that allows a user to search for people who provide
specific services or products either from within a user’s network or from other
users across the service.





In
fiscal 2007, we created a forum for questions and answers with Get Ahead, our
popular editorial content channel. This new social media platform allows users
to post questions and answers on various issues, and vote for the most relevant
answers, within a community environment. Prolific users of this platform are
rated using a point system.





Finance Channel





We
have enhanced our consumer finance channel Moneywiz with market voices, a live
running commentary. This commentary is updated in every few minutes during the
trading hours of the Indian stock markets.





Search
Services





As
India’s Internet user base grows there is an increasing need for localization of
services. Our search services are described below.




32




·
            Fare Search, which
      allows users to search for and compare transportation fares. Features to
      Fare Search include the “Lowest Fare Finder” search tool, which charts out
      the lowest price points for up to 90 days. Fare search offerings include
      searching for schedules, seat availability, fares and reservation status
      for trains in the India Railway System. Further, it provides search
      facility for tickets and schedules for approximately 20,000 buses that
      commute daily between approximately 10,000 locations in India. In
      addition, users can search for hotel accommodation across a large number
      of Indian cities with the “Hotel Search” facility. Users can also access
      Fare Search on GPRS enabled mobile
phones.





·
            Job Search, which
      allows users to search for jobs across multiple job sites as well as
      private company and government job openings. Job Search also includes a
      tool that allows human resource consultants and recruiters to upload job
      vacancies, at no cost, directly to the Job Search website. We recently
      introduced the addition of a free e-mail alert feature that allows users
      to stay updated on the latest job openings in their desired
      categories.





·
            Product Search, which
      allows users to search for and compare product features and prices across
      major Indian cities. Product Search features a “Price history” feature
      that enables users to track prices of different products on a
      month-on-month basis.·
            Video Search, the
      Company offers video search as part of its vertical search offerings and
      this helps users to search and find videos from a database of over two
      million online videos.





·
            Newshound, our news
      service, which tracks over 1,000 news sources and updates itself through a
      set of algorithms every few minutes and classifies relevant news and
      headlines within categories. Newshound is also accessible through general
      packet radio service (“GPRS”) enabled mobile
  phones.





·
            Other search services,
      which include Image Search, Book Search, Train Search and Ringtone
      Search.  We also enhanced our language search crawling
      technology to identify and reach more Indian language
      websites.





Mobile
Services





Rediff
Mobile offers mobile phone users a number of value added services. Users order
our value added services from their mobile phones by sending a request via SMS
to 57333, which is our designated number for such services, or by browsing our
content on GPRS or wireless application protocol (“WAP”) enabled mobile phones.
For certain value added services, users can also place orders through our
website, including downloads, contests, services, and news and information. Our
mobile offerings are described below:





·
            Downloads. Users can
      download ringtones, polyphonic ringtones, logos, picture messages,
      wallpapers and games from our website. We have introduced search of
      ringtones on mobile phones. Downloads include popular Indian content, such
      as Indi-pop ringtones, Indian cricket team logos and wallpapers featuring
      Bollywood movie stars.





·
            Contests. Users can
      participate in contests in which they can win prizes by correctly
      answering questions sent to them by SMS. Users are charged for the cost of
      each outgoing SMS message that responds to a
  question.





·
            Services. We offer
      users a variety of mobile phone related services by SMS, such as the
      ability to search, seek and interact with other users, play interactive
      games, and receive jokes and astrological predictions. Users are charged
      for the cost of each outgoing SMS message requesting the
      service.





·
            News and Information.
      Users can stay updated on current events by receiving cricket scores, news
      and stock quotes by an SMS message. Users are charged for the cost of each
      outgoing SMS message requesting the news and
  information.




33




·
            Subscription.
      Subscription based services have been introduced where customers can
      choose to subscribe for a monthly service for receiving daily SMS based
      information, jokes, or astrology related services for a fixed monthly
      fee.





·
            E-mail and Instant
      Messaging. Rediffmail and Rediff BOL subscribers can receive, read
      and reply to e-mails and instant messages by SMS. Users are charged a fee
      for each outgoing SMS which contains the e-mail or instant message. We
      also introduced a Hindi language feature for Rediff BOL and a downloadable
      program for subscribers with Symbian OS mobile
  phones.





We
have entered into agreements with major Indian mobile phone operators permitting
their mobile phone users to access our offerings. Our agreements with these
operators currently allow us to reach global systems for mobile communications
(“GSM”)-based and CDMA-based cellular providers, covering almost the entire
mobile footprint in India. Pursuant to the terms of our agreements with Indian
mobile phone operators, we receive a portion of the amounts charged by these
operators to their mobile phone users for using our mobile- based offerings.
With these partnerships with Indian mobile phone operators, we believe that we
have established an extensive footprint in the country for value-added mobile
services.





Online
Shopping





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





Customers
can pay for their purchases using a variety of payment options, including credit
cards, debit cards, online banking services, cash on delivery, gift vouchers and
checks/demand drafts. We have entered into agreements with leading Indian banks
to facilitate payment processes. We also have check-collection facilities in
large cities throughout India.





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





Auctions





In
2005, we launched Rediff Auctions, an e-commerce platform that allows customers
to use an online multi-price marketplace and bid for items listed for sale by
vendors. We provide vendors with the software tools that they can use to upload
and manage their online inventory. Vendor inventories are posted on the auction
site and bids are accepted for a specific period of time, after which the
customer with the highest bid wins the auction.





Our
Revenue Sources





India
Online business primarily includes revenues from online advertising and
fee-based services. Online advertising includes revenues from advertisements and
sponsorships from customers. Fee based services include revenues from online
shopping, subscription services and wireless short messaging
services.





Online
Advertising





Online
advertising on our site includes revenues from banner advertising, performance
based advertising, e-mail and text link campaigns and sponsorships of events.
Our advertisers enter into agreements pursuant to which they either pay a fixed
fee per thousand banner impressions for a given time-




34




period,
usually ranging from a few weeks to one year, or a variable fee depending upon
the number of clicks or leads provided to them through our website.





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





We
had over 440 advertisers on our Rediff.com India website during the fiscal year
ended March 31, 2008. Our top ten advertisers accounted for approximately 34% of
our India advertising revenues for the fiscal year ended March 31, 2008. A
partial list of our advertising clients includes Bennett Coleman Group,
Monster.com, Naukri.com, Bharatmatrimony.com, ICICI Group, Ebay.com, Microsoft,
Citibank and Hewlett Packard.





In
fiscal 2005, we launched “Pay4Clicks”, which is an automated platform that
allows merchants to advertise on the Rediff.com website, with a fee being
charged to the merchant each time a user clicks on its advertisement. Users who
click on an advertisement are directed to the merchant’s website or e-mail
address or to the merchant’s mobile phone via SMS. Our Pay4Clicks platform is
aimed at attracting Indian SMEs that have little or no online presence or have
limited advertising budgets, thereby allowing them to reach a wider market for
their products or services. We have also added a re-seller module to allow our
partners to sell advertisements on the Rediff.com website.





In
fiscal 2006, we launched our Rediff Classifieds platform, which is a
performance-based advertising platform which allows the display of classified
advertisements in accordance with defined categories. It has an automated ad
creating and uploading front-end tool and a mechanism that allows advertisers to
receive responses via SMS through any mobile phone in India.





Fee-based
services





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





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





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





Fee-based
revenues are also derived from providing mobile value-added services. We have
contracts with mobile phone operators for sharing revenues from these services.
SMS-based revenues are recognized when the service is performed.





Our
Infrastructure





Technology





Our
operating infrastructure is scalable and has been designed with a view to
serving and delivering millions of page views per day. This allows users to
access our products and services quickly and efficiently from different
locations worldwide. Our infrastructure is also designed to provide
high-




35




speed
access by forwarding queries to web-hosting sites with greater resources or
lower loads. In addition, our webpages are generated, served and cached by
servers located at co-location web hosting sites in India.





We
use Apache and IIS servers located in India and which run on Linux, and Windows
platforms. Servers in India are maintained mainly at Tata Communications
(previously, VSNL), the Reliance Data Centre, Bharti Airtel Ltd. and Netmagic
Solutions Pvt Ltd. in Mumbai. We also use the Akamai Inc. content delivery
network. We believe that using these hosting services enhances our ability to
protect our systems from power loss, break-ins and other potential external
causes of service interruption. These hosting services also provide continuous
customer service, multiple Internet connections and continuous power supply to
our systems. In addition, we conduct online monitoring of all our systems for
accessibility, load, system resources, network-server intrusion and timeliness
of content.





Online
Advertising





Our
sales and marketing professionals are responsible for seeking additional
advertisers and e-commerce merchants, creating advertisements, as well as
obtaining and analyzing customer feedback. Sales team members are based in
Mumbai, New Delhi, Bangalore, Chennai, Hyderabad and New York. The sales team
coordinates regularly regarding advertising across all of our businesses. Our
sales team includes designers, copywriters, programmers and campaign
managers.





In
the past few years, a number of advertising agencies have been established in
India to promote the Internet as an advertising medium among Indian advertisers.
In addition, several full-service advertising agencies in India have expanded
their operations by creating and growing their Internet / interactive
advertising divisions. We closely interact and work with these agencies to
garner larger online advertising budgets from their clients.





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





Online
Shopping





Our
shopping platform has a host of user-friendly features such as product search
and detailed product category listing. The “tracking order”, “view account”,
“shopping bag details” and “order status update by automated e-mail” features
make online shopping more convenient for users. Users can pay for purchases by
credit card, local check, cash-on-delivery (“C.O.D.”), Rediff gift vouchers or
direct debit to an Internet banking account if they have an account with
designated Indian banks. Our customer service officers address customer
inquiries and solicit feedback from users to continuously improve our offerings.
Customers are invited to provide feedback when items are delivered using our
vendor rating system, rating their experience with a vendor as satisfied,
unsatisfied or undecided. Vendors are rated based on feedback provided by
shoppers.





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





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





36




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





Electronic
Payments





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





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





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





United
States Publishing Business





Our
United States publishing business primarily consists of the Rediff India Abroad
website, which is targeted at the Indian-American community in North America,
our India Abroad newspaper and our India in New York newspaper. For the fiscal
year ended March 31, 2008, the United States publishing business generated
US$8.6 million of revenues, an increase of approximately 9% compared to U.S.
Publishing revenues during the fiscal year ended March 31, 2007. We previously
offered a Rediff Radio service in North America but discontinued this service in
October 2005.





Rediff India Abroad
website





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





India
Abroad





India
Abroad, which we acquired in April 2001, was established over 37 years ago and
is one of the oldest weekly newspapers focused on the Indian community residing
in North America. The newspaper is published in five North America editions -
New York, Tristate, Chicago/Dallas, Los Angeles and Canada.





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





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





India in New
York





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




37




Competition





Online





There
are a number of companies that provide websites focusing on India and the global
Indian community. These companies compete with our websites for visitors, online
advertising, e-commerce and subscription revenues. Competition for visitors,
advertising revenue and e-commerce is intense and is expected to increase in the
future as there are no substantial barriers to entry in our market.





Our
ability to compete successfully depends on many factors including:





·
            our
      ability to adapt to new technologies and to develop new products and
      services;





·
            the
      user friendliness and popularity of our
  services;





·
            our
      sales and marketing efforts;





·
            the
      performance of our technology; and





·
            ability
      to fund our operations.





We
compete with providers of Indian content over the Internet, including web
directories, search engines, content sites, websites, horizontal sites and
Internet Service Providers (“ISPs”). Our current and anticipated competitors
include:





·
            Google’s
      website;





·
            Yahoo’s
      website;





·
            MSN’s
      website; and





·
            AOL.





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





Many
of our competitors have a longer operating history, greater name recognition and
customer base, and greater management, financial, technical, marketing, sales,
brand, and other resources than we do. They can use their superior experience
and resources in a variety of competitive ways, including by investing more
aggressively in research and development, creating superior content, making
acquisitions, and competing more aggressively for advertisers. There has also
been a trend toward industry consolidation so our smaller competitors today may
become larger in the future. If our competitors are more successful than we are
at generating visitors and website traffic due to superior content and other
service offerings, our revenues may decline.





Print





There
are a limited number of companies that provide newspapers focusing on India and
the global Indian community. These newspapers compete with India Abroad for
advertising revenues. One of our main newspaper competitors is India
West.





Intellectual
Property




38




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





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





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





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





We
have registered our trademarks for “Rediff”, “Rediff on the Net and Design
(Square)” and “Rediff.com” under various classes with the United States Patents
and Trademarks Office. We have received registration for our trademarks
“Rediff”, “Rediff.com”, “Rediffmail”, “Rediffmail Mobile” and “Rediff Bol” in
India.





Facilities





India





Our
corporate headquarters are located in Mumbai, India, where we lease
approximately 16,800 square feet, located in two buildings. In one facility we
lease approximately 10,800 square feet and in the other, we lease a total of
approximately 6,000 square feet under two separate lease agreements. The lease
for our 10,800 square foot facility has been extended until January 20, 2011.
The lease for our 3,000 square foot facility expires on October 31, 2009. The
lease for our 3,000 square feet new adjoining offices expires on September 30,
2008. We also lease an area of approximately 350 square feet as a warehouse for
our Mumbai office.





We
lease office space for our branch offices in India. This includes an area of
approximately 3,165 square feet of office space in New Delhi, the lease for
which expires on November 30, 2009.





United
States





39




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





Seasonality





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





Legal
Proceedings





Action Relating to Access to
Pornographic Material





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





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





Actions Relating to
Copyright Violation





A
complaint was filed by the IMI, a society representing various music companies
in Magistrate’s Court India, against three of our directors. The complaint
alleges that by providing links to MP3 sites through its directory we have been
guilty of violating Section 51 of the Copyright Act 1957. The complaint alleges
that the MP3 sites to which links were provided permitted downloading of music
which had not been authorized to be so downloaded by copyright owners who are
members of IMI. Our directors were named as parties to the lawsuit because,
according to the complaint, the directors are in charge of our affairs and are
hence deemed to be guilty of committing the offense. Our directors were exempted
from personal appearance. Our directors filed an application for discharge of
the complaint before the Magistrate. On April 24, 2008, the Court dismissed this
lawsuit in our favor.





A
complaint was filed by SCIL, a producer and publisher of sound recordings and
audio visual songs in India, against us and our Chairman/Chief Executive Officer
as well as Ram Gopal Verma Films






Private
Limited in the High Court of Delhi (Suit No. C.S. (O.S.) 736 of 2007). The
complaint alleges violations of the Indian Copyright Law of 1957 through our
placement on our website of video clips of certain songs from two Hindi films
(Nishabd and Honeymoon Travels Pvt Ltd),
of which SCIL claims to own sole copyrights through an assignment in the audio
visual songs, sound recordings, lyrics and musical composition. The complaint
seeks, among other relief, injunctive relief and damages in the amount of Rs.2.0
million (approximately US$50,000). In June 2007, we filed a written reply and
submitted the following facts that: (i) these song clips were uploaded as an
editorial feature due to the recent release of the two films believing these to
be newsworthy, in the course of our regular activity and not for commercial
purposes; (ii) the clips in question were not downloadable by our users; (iii)
these clips were accompanied by editorial review as normally done for a film’s
release; (iv) these were uploaded on our sites with the permission of the
producer of these films or their publicists who had provided us with such clips
for the intended use; and (v) the use of the these clips on our website was fair
use, uploaded for its newsworthiness for promotional review and was
non-commercial in nature. We have subsequently removed these clips from our
website. The matter is pending before the High Court of Delhi. These actions
require management time and cost. In the event that we are unsuccessful in our
defense, we and our Chairman may face penalties and fines.





Actions Relating to
Trademark Infringement





A
complaint was filed by Cartier International against Lotus Safetywear Ltd.
(“Lotus Safetywear”) and us alleging that Lotus Safetywear has used the
trademark “Cartier” on products that are being sold on our Rediff Shopping
website. Cartier International is seeking a permanent injunction restraining the
defendants, including us, from using without license or permission the “Cartier”
trademark and/or such other identical or deceptively similar marks. Cartier
International is also claiming damages in the amount of Rs.2.0 million
(approximately US$50,000). We have filed our response to Cartier International’s
allegations and among the defenses we have raised are: (a) it is Lotus
Safetywear, and not Rediff.com, that has used the “Cartier” trademark and that
we have not infringed on any of Cartier International’s intellectual property
rights; (b) the Rediff Shopping website only provides an online platform that
enables customers and sellers to enter into sale/purchase transactions and we
are not involved in the sale or purchase of the goods/products listed on our
website; and (c) vendors such as Lotus Safetywear are required to comply with
the terms and conditions we impose on vendors using Rediff Shopping, which
include providing us with the description of their products, prices and product
images, and which also specifically provide that vendors shall not infringe on
third party rights, including third-party intellectual property rights. Although
we believe that we have valid defenses to the charges, if they are unsuccessful
after exhausting all legal remedies, we could be subject to monetary fines or
damages. On August 5, 2008, the Delhi High Court granted the decree restraining
Lotus Safetywear and Rediff.com from using the “Cartier” trademark and further
instructed Rediff.com to ensure that the Cartier advertisement does not appear
on our website.





We
may be subject to additional lawsuits of these natures filed in the future. We
cannot predict the outcome of these lawsuits, nor can we predict the amount of
time and expense that will be required to resolve these lawsuits. If these
lawsuits become time consuming and expensive, or if there are unfavorable
outcomes against us in any of these cases, there could be a material adverse
effect on our business, financial condition and results of operations. We
currently hold insurance policies for the benefit of our directors and officers
(the “D&O Policy”), which provide coverage against certain claims. However,
the amount of coverage may not be sufficient for our needs or the various
exclusions in the D&O Policy could result in denial of coverage, in which
case we would have to self-fund all or a substantial portion of our
indemnification obligations.





Other
proceedings





We
are also subject to other legal proceedings and claims, which have arisen in the
ordinary course of its business. Those actions, when ultimately concluded and
determined, will not, in the opinion of management, have a material effect on
our results of operations or financial position.




Subsidiaries




40




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





Rediff.com,
Inc., which runs our U.S.-based Internet website, is incorporated in Delaware.
India Abroad is a New York corporation, which publishes a weekly newspaper
targeted primarily at the Indian community in North America. ValuCom, an
Illinois corporation incorporated in 1996, is another subsidiary of Rediff.com
India Limited. In April 2004, we sold ValuCom’s business to Worldquest Networks,
Inc. (“WQN”).





Government
Regulation





General





Our
online business is primarily subject to regulation by the Ministry of
Communications and Information Technology (“MCIT”), which was formed in
October 1999 and is a part of the Government of India. We may also be subject to
regulation by the MCIT and the TRAI.





On
June 9, 2000, the Indian Information Technology Act, 2000 (the “IT Act”)was
enacted and was made effective as of October 17, 2000. The purposes of the IT
Act were to:





·
            provide
      legal validity to online contracts;




·
            provide
      legal validity to digital
signatures;




·
            make
      electronic records admissible in court in evidentiary
      proceedings;




·
            set
      default rules for time and place of dispatch and receipt of electronic
      records;




·
            allow
      for filing of documents, records and information with the Government of
      India in electronic form;




·
            allow
      for retention of documents, information or records in electronic
      form;




·
            set
      up certifying authorities to issue and supervise digital
      signatures;




·
            set
      up a controller of certifying authorities to monitor and supervise the
      certifying authorities;




·
            set
      up Cyber Regulations Appellate Tribunals to act as quasi-judicial bodies
      with respect to disputes relating to online transactions;
    and




·
            penalize
      computer crimes.




Despite
the enactment of the IT Act, there is a lack of clarity on various IT-related
issues, including legal recognition of electronic records, validity of contracts
entered into through the Internet and validity of digital
signatures.





New
Telecom Policy, 1999





The
New Telecom Policy, 1999 (“the New Telecom Policy”) relates to the restructuring
of the Indian telecommunications sector. The New Telecom Policy states that ISPs
who wish to provide applications such as tele-banking, tele-medicine,
tele-education, tele-trading and e-commerce, will be allowed to operate using
infrastructure provided by various Internet access providers. The New Telecom
Policy also provides that no license fees will be charged for providing the
specific services, but registration




41




with
the Government of India will be required. The New Telecom Policy prohibits such
service providers to provide switched telephony.





If
the New Telecom Policy is enforced in its current form, we may have to register
our services with the Government of India and we may also be governed by the
regulations issued by the TRAI.





The
TRAI was established in January 1997 by the Government of India under the
provisions of the Telecom Regulatory Authority of India Act, 1997, as an
autonomous body to regulate the telecommunications industry. On January 24,
2000, the President of India passed an ordinance to recast the TRAI. The
ordinance set up a Telecom Disputes Settlement and Appellate Tribunal to
adjudicate any dispute between a licensor and licensee, between service
providers, appeals of telecom service providers and between service providers
and groups of consumers. This ordinance has been replaced by the Telecom
Regulatory Authority of India (Amendment) Act, 2000. The TRAI under the amended
Act has powers to decide on new licenses and their terms and conditions, the
levy of fees and charges on services, interconnectivity between the telecom
service providers and perform administrative and financial functions entrusted
to it by the Government of India. The new TRAI has no adjudicatory powers, as
these powers vest in a Telecom Disputes Settlement and Appellate Authority.
Telecom service providers can bring cases to this appellate authority and the
orders of this authority can be challenged only in the Supreme Court of
India.





Privacy





At
present, India does not have any specific legislation to prevent invasion of
privacy by private parties. The Constitution of India protects the privacy of
private parties against any invasion by the state or government, but it may not
be possible to invoke this protection against violation by private parties.
There is no pending or proposed legislation that seeks to penalize or regulate
violation of privacy by private parties.





Encryption





Telecommunications
in India are governed by the Indian Telegraph Act, 1885, as amended (the
“Telegraph Act”), and the Indian Wireless Telegraphy Act, 1933, as amended (the
“Wireless Act”). Pursuant to the Telegraph Act, the provision of any
telecommunications services in India requires a license from the Government of
India obtained through the Department of Telecommunications. While the Telegraph
Act sets the legal framework for regulation of the telecommunications industry,
the Wireless Act regulates the possession of wireless telegraphy equipment.
Encryption hardware may be considered as an instrument capable of being used for
the transmission and reception of telecommunications signals. Any person
intending to use encryption hardware may be required to obtain prior permission
from the Department of Telecommunications of the Government of
India.





The
guidelines for ISPs permit the use of encryption equipment for providing secrecy
in transmission up to a level of encryption specified by the Government of
India. However, if the encryption equipment of levels higher than specified is
to be deployed, ISPs have to obtain the clearance of the Government of India and
should deposit one set of keys with the Department of
Telecommunications.





These
guidelines are applicable to ISPs and it is uncertain whether they will apply to
us. For using encryption hardware, we may have to obtain prior approval from the
Department of Telecommunications. However, it is uncertain whether we are
required to obtain any approval from the Department of Telecommunications or any
other department for using encryption software. Furthermore, there may be
certain restrictions in relation to the import of encrypted software into
India.





Imports





We
may be required to import into India computer hardware and Internet related
software purchased from foreign manufacturers for our business. These imports
will be subject to the Export and Import Policy issued by the Ministry of
Commerce of the Government of India. At the time of import, we




42




may
be required to pay a customs duty pursuant to the Customs Tariff Act, 1975, as
amended. We will also be subject to the Foreign Exchange Management Act, 1999,
and the rules thereunder (“FEMA”), in connection with payments in foreign
currency to the manufacturers of these products. We may require the approval of
the Reserve Bank of India if the payment in respect of such import is made
beyond a period of six months from the date of shipment.





Ownership
of Foreign Securities





We
may wish to invest in the securities of foreign companies. The FEMA may require
that we obtain permission from the Reserve Bank of India prior to making any
such investment or that we meet certain conditions in order to make such
investments.






43




MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








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





Overview





We
are a leading Internet destination in India focusing on India and the global
Indian community. Our websites in India and the United States include
information and content relevant to Indians, such as news, business, movies and
cricket/sports, community features, such as e-mail, chat, messenger, e-commerce,
matchmaker, astrology, blogs and mobile services. With 65.7 million online
registered users worldwide as at March 31, 2008, we believe Rediff.com is one of
the most recognized online brands both in India and among the Indian community
worldwide.





Additionally,
we publish a weekly newspaper, India Abroad, in the United States and Canada. In
February 1996, we initiated our online content offerings with rediff.co.in and
rediffindia.com. We later combined the sites into rediff.com, our online website
in India. With the acquisition of thinkindia.com, Inc. (later renamed
Rediff.com, Inc.) in February 2001, we launched Rediff U.S.A. (re-branded as
Rediff India Abroad), an online website providing content, community and online
shopping primarily for our users in North America.





Our
reportable business segments are:





·
            India
      Online business, which primarily includes revenues from online advertising
      and fee-based services. Online advertising includes revenues from
      advertisements and sponsorships. Fee-based services include revenues from
      online shopping, subscription services and wireless short messaging
      services.





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





Revenues
from our reportable business segments were as follows:





For
      the Fiscal Years Ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$India
      Online business
            12,174,927
            
            20,759,227
            
            23,649,363U.S.
      Publishing business
            6,525,753
            
            7,916,298
            
            8,599,840Total
      revenues
            18,700,680
            
            28,675,525
            
            32,249,203





We
have incurred significant net losses and negative cash flows since our inception
in January 1996. Although we earned net income of US$4.91 million for the fiscal
year ending March 31, 2008, as of March 31, 2008, we had an accumulated deficit
of US$42.74 million. We will need to generate additional revenues, while
controlling our expenses, to continue to increase our profits and to reduce our
accumulated deficit.





In
June 2000, we issued 5.3 million ADSs, representing 2.65 million Equity Shares,
at a price of US$12.00 per ADS, raising net proceeds of US$57.3 million, after
underwriting discounts and expenses, and we listed our ADSs on the NASDAQ. In
November 2005, we issued 3.0 million ADSs, representing




44




1.5
million Equity Shares, at a price of US$15.86 per ADS, raising net proceeds of
US$44.1 million, after underwriting discounts and other expenses, and these ADSs
were also listed on the NASDAQ. The net proceeds of our ADS offerings have been
used by us, and in future, are intended to be used by us, to develop content for
our Internet website, to advertise and promote our brand, and for general
corporate purposes, including capital expenditures, strategic investments,
partnerships and acquisitions.





Critical
Accounting Policies





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





The
following are the significant accounting policies used in the preparation of our
consolidated financial statements.





Revenue
Recognition





India
Online business





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





We
also earn revenues on sponsorship contracts, which include fees relating to the
design, coordination and integration of the customers’ content, which are
recognized ratably over the term of the contract.





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





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




45




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





U.S.
Publishing business





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





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





Allowances
for doubtful accounts receivable and other recoverables





We
maintain allowances for doubtful accounts receivable and for other recoverables
for estimated losses resulting from the inability of our customers to make
contractually agreed payments. Receivables which are outstanding for 180 days or
more and not confirmed by customers are provided for. We also make allowances
for a specific account receivable or other recoverable if the facts and
circumstances indicate that such account receivable or other recoverable is
unlikely to be collected. For example, if the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.





Depreciation
and amortization





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





Goodwill





We
allocate excess purchase price over the historical cost of businesses acquired
to goodwill based on their fair values.





We
test the carrying balances of goodwill for impairment annually or earlier upon
the occurrence of a triggering event. The first step compares the fair value of
each reporting unit to its carrying amount, including goodwill. If the fair
value of each reporting unit exceeds its carrying amount, goodwill is not
considered to be impaired and the second step will not be required.





If
the carrying amount of a reporting unit exceeds its fair value, the second step
compares the implied fair value of goodwill to the carrying value of a reporting
unit’s goodwill. The implied fair value of goodwill is determined in a manner
similar to accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and liabilities
of the reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to the assets and liabilities is the implied fair value of
goodwill. This allocation process is only performed for purposes of evaluating
goodwill impairment and does not result in an entry to adjust the value of any
assets or liabilities. An impairment loss is recognized for any excess in the
carrying value of goodwill over the implied fair value of goodwill.




46




Acquisitions
and Divestments





Value
Communications Corporation





On
March 23, 2001, we acquired the entire outstanding common stock of ValuCom, a
company engaged in selling prepaid long-distance calling cards primarily to the
Indian community in the United States and Canada. On April 8, 2004, we sold our
phone card business, consisting primarily of the “ValuCom” brand, trademarks,
websites, internally built software, customer lists and certain hardware to WQN.
In accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the disposal of the phone card business
qualified as discontinued operations at March 31, 2004.





India
Abroad Publications, Inc.





On
April 27, 2001, we acquired substantially all the outstanding voting shares of
India Abroad Publications, Inc., a New York corporation primarily engaged in the
publication of a weekly newspaper, India Abroad.





Pursuant
to a stock purchase agreement, at the closing of the acquisition, we paid
approximately US$11.4 million to the selling shareholders of India Abroad
Publications, Inc. Simultaneously with this acquisition, the former principal
shareholder repurchased certain assets for approximately US$1.1 million
resulting in an estimated gain of approximately US$314,000, which has been
recorded as reduction of goodwill.





We
accounted for this acquisition by the purchase method, in accordance with APB
Opinion No. 16, which resulted in the initial creation of goodwill of
approximately US$10.5 million.





Goodwill
Impairment





Our
goodwill amounts arise from the acquisitions of Thinkindia.com, Inc., India
Abroad Publications, Inc. and ValuCom. Our business in India has been treated as
a single reporting unit, and since none of the components in India benefited
from the synergies from acquisitions in the United States, no goodwill was
allocated to this reporting unit.





We
test for impairment of goodwill annually, or earlier upon the occurrence of a
triggering event.





Current
Trading and Business Outlook





We
believe that the India Online market is entering a phase of steady growth as
revealed by indicators such as the increase in the number of mobile subscribers,
higher PC sales and the increased penetration of broadband connections as
recognized and encouraged by the TRAI. During the fiscal year ended March 31,
2008, we continued our growth momentum with increases in our registered user
base, paid subscribers and revenues. More marketers are experimenting with the
medium. Growth in this industry is dependent on the advertising agencies
collaborating with online providers like us to cohesively promote the medium to
leading marketers across the country.





Our
U.S. Publishing business, comprising the Rediff India Abroad website, our India
Abroad newspaper and our India in New York newspaper, maintained its leadership
position within the Indian-American community during the fiscal year ended March
31, 2008. Our U.S. Publishing business segment is mainly dependent on our
ability to attract print and online advertisers while effectively managing costs
through greater operational efficiencies across our businesses.





We
believe the outlook for our India Online business during the fiscal year ending
March 31, 2009 will be dependent on the continued growth of online advertising
and fee-based business, which, in turn, is primarily driven by increase in the
Internet user and mobile user bases and the state of the Indian
economy.




47




Actual
results may differ materially from those suggested by our forward-looking
statements due to certain risks or uncertainties associated with our
expectations with respect to, but not limited to the impact on our business of a
continued economic slowdown or a downturn in the sectors in which our clients
operate, our ability to successfully implement our strategy, our ability to
successfully integrate the business we have acquired with our business, demand
for our online and offline service offerings, changes in the Internet
marketplace, technological changes, investment income, cash flow projections and
our exposure to market risks. By their nature, certain of the market risk
disclosures are only estimates and could be materially different from what
actually occur in the future. As a result, actual future gains, losses or impact
on net interest income could materially differ from those that have been
estimated. For further discussion on forward-looking statements, see the
discussion under the “Forward-Looking Statements” section of this annual
report.





Operating
Results





The
comparative analysis presented below relates to our continuing
operations.





Fiscal Year Ended March 31,
2008 compared to Fiscal Year Ended March 31, 2007





Revenues. Total revenues for
the fiscal year ended March 31, 2008 increased by 12% to US$32.2 million from
US$28.7 million for the fiscal year ended March 31, 2007. This increase was
principally attributable to an increase in revenues from our India Online
business and, to a lesser extent, an increase in revenues from our U.S.
Publishing business.





India Online business. We
recognized US$23.7 million in revenues from our India Online business for the
fiscal year ended March 31, 2008, as compared to US$20.8 million for the fiscal
year ended March 31, 2007, representing an increase of US$2.9 million, or 14%,
over the previous fiscal year. The increase in revenues were mainly due to
increases in:





·
            advertising
      revenues by US$1.7 million, primarily as a result of an increase in
      Internet advertising on our website by existing and new advertisers;
      and





·
            fee-based
      services by US$1.2 million due to an increase in revenues from our
      subscription services, mobile services and our online shopping
      marketplace. This resulted from greater usage of these
      services.





U.S. Publishing business. We
recognized US$8.6 million in revenues for the U.S. Publishing business for the
fiscal year ended March 31, 2008, as compared to US$7.9 million for the fiscal
year ended March 31, 2007, representing an increase of US$0.7 million, or 9%,
over the previous fiscal year. The increase in revenues was primarily due to
increase in advertising revenues from our Rediff India Abroad
website.





Cost of revenues. Cost of
revenues primarily includes cost of content for the Rediff websites, editorial
costs, printing and circulation costs for the India Abroad and India in New York
newspapers, e-commerce marketplace related costs and related salaries. For the
fiscal year ended March 31, 2008, cost of revenues was US$6.0 million, or 19% of
total revenues, compared to US$5.4 million, or 19% of total revenues during the
previous fiscal year.





We
anticipate that our cost of revenues in absolute dollar terms for our India
Online business will increase during the fiscal year ended March 31, 2009, as
compared to the fiscal year ended March 31, 2008, as we expect to incur
additional costs to continue to grow our business.





Sales and marketing expenses.
Sales and marketing expenses primarily include employee compensation for sales
and marketing personnel, advertising and promotion expenses and market research
costs. For the fiscal year ended March 31, 2008, sales and marketing expenses
were US$6.9 million, compared to US$5.9 million for the fiscal year ended March
31, 2007, representing an increase of US$1.0 million, or 18%, over the previous
fiscal year. The increase was attributable to an increase in advertising




48




and
publicity costs as we continued to invest in promoting our brand and services,
as well as an increase in payroll costs.





We
expect our sales and marketing expenses in absolute dollar terms will increase
for the fiscal year ended March 31, 2009, as compared to the fiscal year ended
March 31, 2008, as we launch more products and services, expand the range of
offerings on our websites and invest further in brand building, advertising and
personnel.





Product development expenses.
Product development costs primarily include Internet communication costs,
software usage fees, software development expenses and compensation to product
development personnel. For the fiscal year ended March 31, 2008, product
development expenses were US$6.0 million compared to US$3.8 million for the
fiscal year ended March 31, 2007, representing an increase of US$2.2 million, or
56%. The increase was primarily due to an increase in bandwidth charges by
US$1.1 million, and an increase in product development charges by US$1.1
million.





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





General and administrative
expenses. General and administrative costs primarily consist of
compensation for administrative personnel, fees for legal and professional
services, allowances for doubtful accounts, insurance premium, depreciation and
amortization, and compensation cost for all employees under the Employee Stock
Option Plan (“ESOP”) and sundry administrative costs. For the fiscal year ended
March 31, 2008, general and administrative expenses were US$14.9 million
compared to US$10.5 million for the fiscal year ended March 31, 2007,
representing an increase of US$4.4 million, or 42%. This increase was primarily
due to an increase of US$3.0 million in depreciation and amortization expense,
primarily as a result of an increase in capital expenditure during fiscal 2008,
an increase in ESOP compensation cost of US$0.7 million in fiscal 2008 as a
result of expensing the fair value of options under Statement of Financial
Accounting Standard No. SFAS No. 123(R) Share-based payments(“SFAS
123R”), and an increase of US$0.7 million on account of administrative and
establishment costs. We expect that as we continue to grow, our general and
administrative expenses will continue to increase.





Other income (loss), net.
Other income (loss), net primarily consists of interest income, foreign exchange
gain or loss and income arising from sale of investment. During the fiscal year
ended March 31, 2008, other income (net) was US$6.9 million compared to US$4.0
million for the fiscal year ended March 31, 2007, representing an increase of
US$2.9 million. Interest income for the fiscal year ended March 31, 2008 was
US$5.5 million, compared to US$3.7 million for the fiscal year ended March 31,
2007, representing an increase of US$1.8 million, or 48%. The increase in
interest income was primarily due to an increase in interest income from our
cash deposits with banks. This increase in interest income was primarily due to
higher applicable interest rates from our Rupee denominated deposits during the
fiscal year ended March 31, 2008, as compared to the fiscal year ended March 31,
2007. In fiscal 2008, we recorded a foreign exchange loss of US$0.6 million,
compared to a foreign exchange gain of US$0.1 million in fiscal 2007, arising
from the conversion of U.S. dollar amounts held by us to our functional currency
for financial reporting purposes (i.e., the Indian Rupee). In fiscal 2008, other
income also includes US$1.9 million arising from sale of investment in equity
shares in an external company. The cost of this investment was impaired in the
Company’s books and records in a prior year.





Net income. As a result of
the foregoing, our net income for the fiscal year ended March 31, 2008 was
US$4.9 million, compared to a net income of US$7.0 million for the fiscal year
ended March 31, 2007.





Fiscal Year Ended March 31,
2007 compared to Fiscal Year Ended March 31, 2006





Revenues. Total revenues for
the fiscal year ended March 31, 2007 increased by 53% to US$28.7 million from
US$18.7 million for the fiscal year ended March 31, 2006. This increase was
principally attributable to an increase in revenues from our India Online
business and, to a lesser degree, the increase in revenues from our U.S.
Publishing business.




49




India Online business. We
recognized US$20.8 million in revenues from our India Online business for the
fiscal year ended March 31, 2007, as compared to US$12.2 million for the fiscal
year ended March 31, 2006, representing an increase of US$8.6 million, or 70%,
over the previous fiscal year. The increase in revenue was mainly due to
increases in:





·
            advertising
      revenues by US$7.7 million, primarily as a result of an increase in
      Internet advertising on our website due to an increase in the number of
      advertisers as well as an increase in advertising rates compared to the
      previous year; and





·
            fee-based
      services by US$0.9 million due to an increase in revenues from our
      subscription services, mobile services and our online shopping
      marketplace. This resulted from greater usage of these
      services.





U.S. Publishing business. We
recognized US$7.9 million in revenues for the U.S. Publishing business for the
fiscal year ended March 31, 2007, as compared to US$6.5 million for the fiscal
year ended March 31, 2006, representing an increase of US$1.4 million, or 21%,
over the previous fiscal year. The increase in revenues was primarily due to
increase in advertising revenues from our Rediff India Abroad
website.





Cost of revenues. Cost of
revenues primarily includes cost of content for the Rediff websites, editorial
costs, printing and circulation costs for the India Abroad and India in New York
newspapers, e-commerce marketplace related costs and related salaries. For the
fiscal year ended March 31, 2007, cost of revenues was US$5.4 million, or 19% of
total revenues, compared to US$5.0 million, or 27% of total revenues during the
previous fiscal year.





Sales and marketing expenses.
Sales and marketing expenses primarily include employee compensation for sales
and marketing personnel, advertising and promotion expenses and market research
costs. For the fiscal year ended March 31, 2007, sales and marketing expenses
were US$5.9 million, compared to US$3.5 million for the fiscal year ended March
31, 2006, representing an increase of US$2.4million, or 67%, over the previous
fiscal year. The increase was attributable to an increase in advertising and
publicity costs as we continued to invest in promoting our brand and services,
as well as an increase in Indian sales and marketing costs due to an increase in
the number of sales and marketing staff we employed. The increase in advertising
revenues in fiscal 2007 also led to a corresponding increase in incentive
payments to sales employees during fiscal 2007 due to both the increase in the
number of sales employees and higher per employee incentive
payments.





Product development expenses.
Product development costs primarily include Internet communication costs,
software usage fees, software development expenses and compensation to product
development personnel. For the fiscal year ended March 31, 2007, product
development expenses were US$3.8 million compared to US$2.6 million for the
fiscal year ended March 31, 2006, representing an increase of US$1.3 million, or
49%. The increase was primarily due to an increase in bandwidth charges by
US$0.6 million, and an increase in product development charges by US$0.5
million.





General and administrative
expenses. General and administrative costs primarily consist of
compensation for administrative personnel, fees for legal and professional
services, allowances for doubtful accounts, insurance premium, depreciation and
amortization, compensation cost for all employees under the ESOP and sundry
administrative costs. For the fiscal year ended March 31, 2007, general and
administrative expenses were US$10.5 million compared to US$6.6 million for the
fiscal year ended March 31, 2006, representing an increase of US$3.9 million, or
58%. This increase was primarily due to an increase of US$1.6 million in
depreciation and amortization expense, primarily as a result of an increase in
capital expenditure during fiscal 2007, an increase in ESOP compensation cost of
US$1.3 million in fiscal 2007 as a result of expensing the fair value of options
under Statement of Financial Accounting Standard No. SFAS No. 123(R) Share-based payments(“SFAS
123R”) and not recording such compensation costs using the intrinsic value
method under Accounting Principles Board Opinion No. 25, and an increase of
US$0.6 million on account of provision for doubtful debts.




50




Other income (loss), net.
Other income (loss), net primarily consists of interest income and foreign
exchange gain or loss. During the fiscal year ended March 31, 2007, other income
(net) was US$4.0 million compared to US$0.3 million for the fiscal year ended
March 31, 2006, representing an increase of US$3.7 million. Interest income for
the fiscal year ended March 31, 2007 was US$3.7 million, compared to US$1.2
million for the fiscal year ended March 31, 2006, representing an increase of
US$2.5 million, or 205%. The increase in interest income was primarily due to an
increase in interest income from our cash deposits with banks. This increase in
interest income was primarily due to higher applicable interest rates from our
Rupee denominated deposits during the fiscal year ended March 31, 2007, as
compared to the fiscal year ended March 31, 2006. In fiscal 2007, we recorded a
foreign exchange gain of US$0.1 million, compared to a foreign exchange loss of
US$1.0 million in fiscal 2006, arising from the conversion of U.S. dollar
amounts held by us to our functional currency for financial reporting purposes
(i.e., the Indian Rupee). Other income also includes US$0.1 million arising from
sale of a minority investment in equity shares in an external company. The cost
of this investment was impaired in the Company’s books and records in a prior
year.





Net income. As a result of
the foregoing, our net income for the fiscal year ended March 31, 2007 was
US$7.0 million, compared to a net income of US$1.2 million for the fiscal year
ended March 31, 2006.





Liquidity
and Capital Expenditures





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





As
of March 31, 2008, we had cash and cash equivalents of $59.0 million as compared
to $53.5 million as at March 31, 2007. We believe that our working capital is
sufficient for our present requirements.





For
the fiscal years ended March 31, 2006, 2007 and 2008, we earned net income of
US$1.2 million, US$7.0 million and US$4.9 million, respectively. Although in
each of these three fiscal years we recognized a profit (primarily due to
increased revenues), we may in the future incur net losses and negative cash
flows from operations, which would require us to continue to use the proceeds
from the sale of our equity securities and ADSs to fund our operations and
capital expenditures.





As
of March 31, 2008, our accounts receivable balance was US$12.0 million compared
to US$10.7 million as of March 31, 2007, net of allowances of US$3.5 million and
US$2.7 million as of March 31, 2008 and 2007, respectively. This increase was
principally due to the increase in our revenues. During the fiscal years ended
March 31, 2006, 2007 and 2008, we had write-offs or provided allowances of
US$0.4 million, US$0.9 million, and US$0.8 million, for delinquent trade
receivables, respectively. These write-offs and allowances constituted 2.1%,
3.3%, and 2.6% of total revenues in those years, respectively.





Cash
Flows


For
      the Fiscal Year Ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Net
      cash (used in) generated from operating activities:-
      from continuing operations
            1,663,403
            
            6,544,790
            
            7,715,894-
      from discontinued operations
            13,737
            
            --
            
            --Total
            1,677,140
            
            6,544,790
            
            7,715,894Net
      cash used in investing activities
            (4,584,737)
            
            (8,248,943)
            
            (8,372,985)Net
      cash generated from financing activities
            45,145,582
            
            482,915
            
            32,851Effect
      of exchange rate changes on cash
            786,291
            
            1,673,903
            
            6,110,630Net
      (decrease)/increase in cash and cash equivalents
            43,024,279
            
            452,665
            
            5,486,390




51




Fiscal Year Ended March 31,
2008





Net
cash generated from continuing operations of US$7.7 million during the fiscal
year ended March 31, 2008 was principally attributable to net income of US$4.9
million, primarily due to an increase in advertising and fee based revenues.
Non-cash items of depreciation, amortization, allowances for doubtful debts and
stock-based compensation cost totaled US$8.6 million due to increased capital
expenditures and adoption of SFAS.123R. This was offset by an increase in
working capital of US$3.9 million, which increase was primarily due to an
increase in gross accounts receivable of US$2.2 million and an increase in
recoverable income taxes of US$2.4 million which was partially offset by an
increase in accounts payable and accrued liabilities of US$2.0
million.





Net
cash used in investing activities during the fiscal year ended March 31, 2008
was US$8.4 million, consisting principally of purchases of servers and other
capital equipment aggregating to US$10.3 million in connection with the
expansion of our network and data storage facility which was partially offset by
cash received from sale of investment of US$1.9 million.





Net
cash provided by financing activities during the fiscal year ended March 31,
2008 was US$0.03 million, which represented the net cash proceeds from our
employee stock options exercised during the year.





As
of March 31, 2008, we had aggregate commitments for capital expenditures of
approximately US$1.3 million.





Fiscal Year Ended March 31,
2007





Net
cash generated from continuing operations of US$6.5 million during the fiscal
year ended March 31, 2007 was principally attributable to net income of US$6.9
million, primarily due to an increase in advertising and fee based revenues.
Non-cash items of depreciation, amortization, allowances for doubtful debts and
stock-based compensation cost totaled US$7.0 million due to increased capital
expenditures and adoption of SFAS.123R. This was offset by an increase in
working capital of US$4.9 million, which increase was primarily due to an
increase in gross accounts receivable of US$6.2 million and an increase in
recoverable income taxes of US$1.3 million which was partially offset by an
increase in accounts payable and accrued liabilities of US$1.9
million.





Net
cash used in investing activities during the fiscal year ended March 31, 2007
was US$8.2 million, consisting principally of purchases of servers and other
capital equipment aggregating to US$7.8 million in connection with the expansion
of our network and data storage facility.





Net
cash provided by financing activities during the fiscal year ended March 31,
2007 was US$0.5 million, which represented the net cash proceeds from our
employee stock options exercised during the year.





As
of March 31, 2007, we had aggregate commitments for capital expenditures of
approximately US$53,257.





Fiscal Year Ended March 31,
2006





Net
cash generated from continuing operations of US$1.7 million during the fiscal
year ended March 31, 2006 was principally attributable to the net income for the
year of US$1.2 million, primarily due to an increase in advertising and fee
based revenues. Non-cash items of depreciation and amortization totaled US$1.5
million due to increased capital expenditures. This was offset by an increase in
working capital of US$1.1 million, which increase was primarily due to an
increase in accounts receivable of US$2.3 million which was partially offset by
an increase in accounts payable and accrued liabilities of US$0.8 million and an
increase in customer advances and unearned revenues of US$0.5
million.




52




Net
cash used in investing activities during the fiscal year ended March 31, 2006
was US$4.6 million, consisting principally of purchases of servers and other
capital equipment in connection with the expansion of our network.





Net
cash provided by financing activities during the fiscal year ended March 31,
2006 was US$45 million, which represented net cash proceeds from our follow-on
offering of ADSs in November 2005 and from employee stock options exercised
during the year.





As
of March 31, 2006, we had aggregate commitments for capital expenditures of
approximately US$0.11 million.





Contractual
Obligations





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





Years
      ended March 31,
            
            Operating
      Leases
            
            Capital
      CommitmentsUS$
            
            US$2009
            
            611,142
            
            1,275,3292010
            
            376,807
            
            --2011
      and thereafter
            
            1,929,312
            
            ---Total
      payments
            
            2,917,261
            
            1,275,329





Capital
Expenditures





Our
principal capital expenditures are for purchases of computer equipment, such as
servers for our websites and leasehold improvements. In fiscal 2008, 2007 and
2006, we had capital expenditures of US$10.3 million, US$7.8 million and US$4.6
million, respectively.





Costs
incurred in the operations stage that provides additional functions or features
to the Company’s website are capitalized and amortized over their estimated
useful life of three years. Maintenance expenses or costs that do not result in
new features or functions are expensed as product development costs as incurred.
Costs incurred for website development are accounted for in accordance with EITF
00-2, "Accounting for Website Development Costs".





Dividends





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





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





Income
Tax Matters





As
of March 31, 2008, we had net operating loss carry forwards for our Indian
operations aggregating approximately US$15.1 million, which will expire between
April 1, 2009 and March 31, 2014.




53




We
also have unabsorbed depreciation carry forwards as of March 31, 2008
aggregating approximately US$7.8 million.





As
of March 31, 2008, Rediff Holdings, Inc., our U.S. subsidiary and the holding
company of our Rediff.com, Inc. and India Abroad Publications, Inc. investments,
had net operating loss carryforward of approximately US$5.4 million for federal
income tax purposes. These net operating loss carryforwards expire in years 2020
through 2027.





As
of March 31, 2008, ValuCom had a net operating loss carryforward of
approximately US$2.9 million. This loss will expire in years 2021 through 2026.
Following the sale of its phone-card business to WQN in April 2004, ValuCom
currently does not engage in any business activity.





Whether
we will be able to realize the future tax benefits related to the deferred
income tax asset is dependent on many factors, including our ability to generate
taxable income within the net operating loss carry forward period. Management
considered these factors and believed that a full valuation allowance of the
deferred tax assets was required for the period presented.





For
the years ended March 31, 2007 and 2008, the provision for current income taxes
was approximately US$83,000 and US$433,000, respectively.





Market
Risks





Foreign
Currency Exchange Rate Risk





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





While
we hold a major portion of our cash and cash equivalents in Indian Rupee
denominated bank accounts, we still hold a portion of the net proceeds from our
November 2005 follow-on ADS offering in a U.S. dollar-denominated bank account.
The following table sets forth information about our net foreign currency
exchange (U.S. dollars) exposure as of March 31, 2008:





As
      of March 31, 2008(in
      US$ thousands)Accounts
      payable in U.S. dollars
            
            2,374Accounts
      receivable in U.S. dollars, net of allowance
            
            637Cash
      balances held in U.S. dollars
            
            5,581Net
      foreign currency exchange exposure
            
            3,844





We
do not currently try to reduce our exposure to foreign currency exchange rate
fluctuations by using hedging transactions. However, we may choose to do so in
the future. We may not be able to do this successfully. Accordingly, we may
experience economic losses and negative impacts on earnings and equity as a
result of foreign currency exchange rate fluctuations. If the Indian Rupee
appreciates against the U.S. dollars by one Rupee, the net foreign currency
exchange loss as of March 31, 2008 would be approximately
US$95,000.





Interest
Rate Risk





We
hold interest-bearing accounts in India as well as outside India and
fluctuations in interest rates affected our interest earnings for the fiscal
year ended March 31, 2008. These interest rates are linked




54




to
the interest rates prevailing in India and the United States. We expect that our
interest earnings will continue to be affected in the future by fluctuations in
interest rates. A hypothetical 1% increase or decrease in the prevailing
interest rates applicable to cash deposits during such period would have
affected our interest income by approximately US$590,000.





Off-balance
Sheet Arrangements





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





New
Accounting Pronouncements





We
adopted the Financial Accounting Standards Board, or FASB, Interpretation
No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109”, on April 1, 2007. FIN 48
provides specific guidance on the financial statement recognition, measurement,
reporting and disclosure of uncertain tax positions taken or expected to be
taken in a tax return. FIN 48 addresses the manner in which tax positions,
either permanent or temporary, should be reflected in the financial
statements.





In
December 2007, the Financial Accounting Standards Board issued SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements an amendment of
ARB No. 51” (“SFAS No. 160”). SFAS No. 160 improves the relevance, comparability
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This standard is effective for fiscal years
beginning on or after December 15, 2008. The Company’s management is currently
evaluating the impact on the adoption of SFAS No. 160 will have on the Company’s
financial reporting and disclosures.





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We have evaluated the impact of this
pronouncement and believe that this does not have a material effect on our
financial position, cash flows or results of operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. 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. This Statement is expected to expand the
use of fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments. The fair value
option established by this Statement permits all entities to choose to measure
eligible items at fair value at specified election dates. We have evaluated the
impact of this pronouncement and believe that this does not have a material
effect on our financial reporting and disclosures.





In December 2007, FASB issued SFAS No.
141 (Revised 2007), Business Combinations (“SFAS 141R”). This Statement replaces SFAS No. 141,
Business Combinations. SFAS 141R requires an acquirer torecognize 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 recognizecontingent consideration at the
acquisition date, measured at its fair value at that date. We will be required
to apply this new Statement prospectively to business combinations consummated
in fiscal years beginning after December 15, 2008.Early adoptionis prohibited.




55




In March 2008, FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities–An Amendment of FASB Statement No. 133
(“SFASNo.161”). SFASNo.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 andrelated hedged items, if any, under
SFASNo.133 and the effect of such instruments
and related hedge items, if any, on the financial position, financial
performance and cash flows. We will be required to adopt this new Statement
prospectively, for fiscalyears beginning after November 15, 2008. We are currently evaluating the
requirements of SFASNo.161 and have not yet
determined the impact this Statement may have on our consolidated financial
statements.







56




MANAGEMENT







The
following table sets forth, as of August 22, 2008, the name, age and position of
each of our directors and executive officers.





Name
            Age
            PositionAjit
      Balakrishnan(1)(2)
            60
            Chairman
      and Managing DirectorJoy
      Basu
            47
            Chief
      Financial OfficerDiwan
      Arun Nanda(1)(2)
            65
            DirectorSunil
      N. Phatarphekar(1)(2)(3)
            44
            DirectorPulak
      Prasad(1)
            40
            DirectorAshok
      Narasimhan(1)
            60
            DirectorSridar
      Iyengar(1)(3)
            61
            DirectorRashesh
      C. Shah(1)
      (3)
            44
            Director





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





Ajit Balakrishnan is the
founder, Chairman and Managing Director of the Company. Mr. Balakrishnan is also
a Director of Rediffusion Dentsu Young & Rubicam Private Limited, India
Abroad Publications, Inc., India In New York, Inc., India Abroad Publications
(Canada) Inc., Value Communications Corporation and VuBites India Private
Limited. Mr. Balakrishnan is also the Chairman of the Board of Governors of The
Indian Institute of Management Calcutta and Chairman of the Working Group of
Internet Governance set up by the Government of India. Mr. Balakrishnan holds a
Bachelors degree in Physics from Kerala University and a Post Graduate Diploma
in Management from the Indian Institute of Management, Kolkata. Mr.
Balakrishnan’s initial term of appointment as Managing Director of the Company
expired on August 24, 2003. At our Annual General Meeting held on September 29,
2003, our shareholders re-appointed Mr. Balakrishnan for an additional five-year
term as Managing Director with effect from August 24, 2003, which expires on
August 23, 2008. Subject to the approval of Shareholders, the Board re-appointed
Mr. Balakrishnan for an additional five year term as Managing Director with
effect from August 23, 2008.





Joy Basu has been our Chief
Financial Officer since September 2003, having joined us in April 2003. From
October 2002 to April 2003, he served as Chief Financial Officer of Sahara India
Media Communication Limited. From April 2000 to September 2002, he served with
the Sterlite Group of Companies, primarily as Chief Financial Officer of
Sterlite Optical Technologies-Limited. From 1993 to 2000 he served with the RPG
Group of companies, where the last position he held was General Manager -
Strategic Planning. From 1986 to 1993 he served with the Tata Group in various
capacities. Mr. Basu holds a Bachelor’s degree in Commerce (Honors) from St.
Xavier’s College, Calcutta University. He is also a member of the Institute of
Chartered Accountants of India and has attended the Senior Executive Course at
the Manchester Business School, U.K on a British Chevening Scholarship. He has
been awarded the India CFO Award 2006 for “Excellence in Finance in an SME”
instituted by IMA India.





Diwan Arun Nanda has been a
director of the Company since its incorporation in 1996. Mr. Nanda is also a
Director of Rediffusion Dentsu, Young & Rubicam Private Ltd., Wunderman
India Private Limited, Rediffusion Dentsu, Young & Rubicam Pvt. Ltd.
Srilanka, Everest Brand Solutions Pvt. Ltd., Clariant Chemicals (India) Limited,
Eveready Industries India Ltd, Kingfisher Airlines Limited and Mastek Limited.
Mr. Nanda is also a director of several other Indian companies. Mr. Nanda holds
a Bachelor’s Degree in Commerce from Loyola College, Chennai University, and a
Post Graduate Diploma in Management from the Indian Institute of Management,
Ahmedabad.





Sunil N. Phatarphekar has been
a director of the Company since 1998. Mr. Phatarphekar is the proprietor of SNP
Legal (Advocates), a Mumbai law firm. Mr. Phatarphekar earlier was a partner of
Doijode, Phatarphekar & Associates, a Mumbai law firm. After obtaining his
Bachelor’s Degree in




57




Commerce
from Jai Hind College, Bombay University, and a Bachelor’s Degree in Law from
Government Law College, Bombay University, he joined Crawford Bayley &
Company, a Mumbai law firm. Thereafter, he was a partner at two Mumbai law
firms, Mahimtura & Co. and Shah Desai Doijode & Phatarphekar. Mr.
Phatarphekar is also a director of several other Indian companies.





Pulak Prasad has been a
director of the Company since 1999. He is the Founder and Managing Director of
Nalanda Capital, a Singapore-based fund management and advisory company. He is
also a Director of Bharti Televentures Ltd. and several other Indian and foreign
companies. Prior to creating Nalanda, Mr. Prasad was Managing Director and
co-head of the India office of Warburg Pincus, covering their India, South and
South East Asian operations. He joined Warburg Pincus in 1998. From 1992 to
1998, he was a management consultant with McKinsey & Company in India, U.S.
and South Africa. Mr. Prasad holds a Bachelor’s Degree in Technology from the
Indian Institute of Technology, New Delhi and a Post-Graduate Diploma in
Management from the Indian Institute of Management, Ahmedabad.





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





Sridar A. Iyengar has been a
director of the Company since September 2004. He serves on the Board of Infosys
Technologies Limited, a NASDAQ-listed company, Infosys BPO Limited, Rediff
Holdings, Inc. (USA), OnMobile Global Ltd, Kovair Software Inc., AverQ Inc.,
Career Launcher Ltd., Mahindra Holidays & Resorts India Limited and ICICI
Bank Ltd, which is an NYSE-listed company, and also advises many early-stage
technology companies in the United States and India. He is also a member of the
boards of the American India Foundation and the Foundation for Democratic
Reforms in India. From 1968 until his retirement in March 2002, he was employed
by KPMG, retiring as the Partner-in-Charge of KPMG’s Emerging Business Practice.
He worked as a partner in all three of KPMG’s regions - Europe, America and Asia
Pacific - as well as in all four of KPMG’s functional disciplines - assurance,
tax, consulting and financial advisory services. He was Chairman and CEO of
KPMG’s India operations between 1997 and 2000 and during that period was a
member of the Executive Board of KPMG’s Asia Pacific practice. Prior to that, he
headed up the International Services practice in the West Coast of USA. On his
return from India in 2000 he was asked to lead a major effort of KPMG focused on
delivering audit and advisory services to early stage companies. He also served
as a member of the Audit Strategy group of KPMG LLP. He is a Fellow of the
Institute of Chartered Accountants in England and Wales, holds a Bachelor’s
Degree in Commerce (Honors) from the University of Calcutta and has attended the
Executive Education course at Stanford University.





Rashesh Shahhas been a
director of the Company since 2006. He is Founder and Chairman of the Edelweiss
Group companies and has 18 years of experience in public and private markets in
India. Prior to founding Edelweiss, he worked with ICICI Bank Ltd and Prime
Securities, where he headed Research and Investments focusing on the buy-side
trading. Mr. Shah has advised over 100 companies on both financial and
non-financial issues. He is also a director on several other Indian companies.
He is a member of the Executive Committee of the National Stock Exchange and the
Chairman of the Capital Market Committee of FICCI. He holds a Bachelor of
Science Degree from Mumbai University, a Master’s in Business Administration
(MBA) from Indian Institute of Management, Ahmedabad and a Diploma in
International Trade from IIFT, New Delhi.




58




Board
Composition





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





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





·
            The
      remaining directors on the Board of Directors are non-permanent directors
      who are appointed by shareholders and retire by rotation. Diwan Arun Nanda
      and Sunil N. Phatarphekar retired by rotation and were re-elected by the
      shareholders at our last annual general meeting held on September 21,
      2007. Mr. Sridar Iyengar and Mr. Pulak Prasad will retire by rotation at
      our next Annual General Meeting of shareholders, which is scheduled to be
      held before September 30, 2008.





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





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





Code
of Ethics





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





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





Audit
Committee





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





As
of the date of this annual report, our audit committee is comprised of the
following members, all of whom are independent directors: Sridar A. Iyengar;
Sunil N. Phatarphekar; and Rashesh C. Shah.





Audit
Committee Financial Expert





Mr.
Sridar A. Iyengar has been designated the independent audit committee financial
expert. Prior to his appointment as a member of our Board of Directors, Mr.
Iyengar was a partner at KPMG, retiring in March 2002 as Partner-in-Charge of
KPMG’s Emerging Business Practice.





Compensation
Committee




59




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





NASDAQ
Corporate Governance Requirements





In
general, corporate governance principles for Indian companies whose shares are
not traded on any Indian stock exchange are set forth in the Companies Act.
Corporate governance principles under provisions of Indian law may differ in
significant ways from corporate governance standards for U.S. NASDAQ-listed
companies. Under the latest amendment to the NASD Marketplace Rule 4350(a)(1),
foreign private issuers such as ourselves are permitted to follow certain home
country corporate governance practices in lieu of certain of the requirements of
Rule 4350. Under the amendment, foreign private issuers must disclose
alternative home country practices they follow.





The
following are the requirements of Rule 4350 we do not follow and the home
country practices we follow in lieu of these Rule 4350 requirements. Our
independent Indian counsel has submitted to the NASDAQ a letter, dated June 27,
2005, certifying that our corporate governance practices as described below are
not prohibited by and are consistent with Indian law.





(i)
            Rule
      4350(b)(2) and Rule 4350 (b)(3) - Distribution of quarterly and interim
      reports





In
lieu of the requirements of Rule 4350(b)(2) and Rule 4350(b)(3), we follow
Indian law, under which companies whose shares are not traded on any Indian
stock exchange are not required to prepare and/or distribute quarterly and
interim reports to shareholders. However, we have in the past regularly released
copies of press releases and conference call transcripts relating to our
quarterly results of operations by posting them on our website. Further, we
furnish press releases relating to our quarterly results of operations with the
SEC on Form 6-K and we currently intend to continue to do so.





(ii)
            Rule
      4350(c)(1) - Independent Directors





In
lieu of the requirements of Rule 4350(c)(1), we follow the Companies Act, which
does not require that a majority of the Board of Directors of Indian companies
be comprised of independent directors. Nevertheless, as of the date of this
annual report, our Board has determined that four out of its seven members are
independent.





(iii)
            Rule
      4350(c)(2) - Executive sessions of Independent
  Directors





In
lieu of the requirements of Rule 4350(c)(2), we follow the Companies Act, which
does not require independent directors to hold regularly scheduled meetings at
which only such independent directors are present (i.e., executive sessions).
Under the Companies Act, our Board of Directors as a whole is responsible for
monitoring our business, although it is permitted to delegate specific
responsibilities to designated directors or to non-director executive
officers.





(iv)
            Rule
      4350(c)(3) - Compensation of
Officers





In
lieu of the requirements of Rule 4350(c)(3), we follow Indian law, which
requires companies to form a Compensation Committee in case of remuneration
payable to specified managerial personnel by companies having no profits or
inadequate profits. In such a case, a “Remuneration Committee” is required to be
constituted for approving the payment of remuneration to certain specified
“managerial personnel” as defined in the Companies Act. Such Remuneration
Committee, if constituted for this purpose, should consist of at least three
non-executive independent directors including nominee directors, if any. For
purposes of the Companies Act “managerial personnel” include the company’s
managing director, whole time director and manager, each as defined under the
Companies Act.





We
do not pay and currently do not intend to pay any remuneration to any of our
managerial personnel as defined in the Companies Act. As such, we are not
required to constitute a Remuneration




60




Committee
under the Companies Act. However our Board of Directors has formed a
compensation committee, which currently comprises of three directors including
one independent director, for the sole purpose of administering our stock option
plans and other compensation plans as may be approved by our shareholders from
time to time.





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





(v)
            Rule
      4350(c)(4) - Nomination of
Directors





In
lieu of the requirements of Rule 4350(c)(4), we follow the requirements of the
Companies Act pursuant to which directors are required to be appointed by
shareholders at their general meeting. In addition, under the Companies Act, our
board can make appointments, subject to any regulations in a company’s articles
of association, to fill any casual vacancies caused if the office of a director
is vacated before his term of office has expired. Any person so appointed shall
hold office only up to the date up to which the director in whose place he is
appointed would have held office. Our board also has the power to appoint
additional directors who shall hold office only up to the date of our next
annual general meeting of the company. The Companies Act also allows our board
to appoint an alternate director to act for a director during his absence for a
period of not less than three months from the state in which the board meetings
are ordinarily held. Finally, our Articles of Association states that Ajit
Balakrishnan, Diwan Arun Nanda and Rediffusion Holdings Private Limited (earlier
called Rediffusion Advertising Private Limited), are entitled to appoint and
have appointed Mr. Balakrishnan as Director on the Board and Chairman of
Rediff.com India Ltd. so long as they hold, singly or jointly, not less than
10.0% of the issued, subscribed and paid up capital of Rediff.com India Ltd. Mr.
Balakrishnan serves an indefinite term and is not required to retire by
rotation.





(vi)
            Rule
      4350(f) - Quorum





In
lieu of the requirements of Rule 4350(f), we follow the Companies Act, under
which a quorum for purposes of a meeting of the holders of our common stock is
considered present as long as five of our members are present in
person.





(vii)
            Rule
      4350(g) - Solicitation of Proxies





As
a foreign private issuer, we are not subject to Regulations 14A and 14C under
the Securities and Exchange Act of 1934, as amended. As such, in lieu of the
requirements of Rule 4350(g), we follow the requirements of the Companies Act.
Section 176 of the Companies Act prohibits a company incorporated thereunder,
such as us, from soliciting proxies. Because we are prohibited from soliciting
proxies under Indian law, we will not meet the proxy solicitation requirement of
Rule 4350(g). However, in accordance with Indian law, we give written notices of
all our shareholder meetings (containing a statement that a shareholder is
entitled to appoint a proxy, or, where that is allowed, one or more proxies, to
attend and vote instead of himself, and that a proxy need not be a member) to
all our shareholders and we also furnish such notices with the SEC under Form
6-K.





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





Employees





As
of March 31, 2008, we had 349 employees and full-time consultants. Of such
employees, 131 are in our sales and marketing teams, 89 are creative and
editorial, 64 are dedicated to technology and product development, 22 are
dedicated to e-commerce, 8 are dedicated to production and circulation and 35




61




are
administrative. We believe that our relationship with our employees is good. The
table sets forth the distribution of our employees by geographic location of our
facilities and by department:





As
      at March 31,Department
            2006
            2007
            2008Creative
            13
            14
            15Editorial
            67
            61
            74Production
      and Circulation
            12
            12
            8Sales
      and Marketing
            95
            111
            131Technology
      and Product Development
            34
            46
            64Shopping
            25
            23
            22Administration
      and others
            28
            26
            35Total
            274
            293
            349





Compensation





Our
Articles of Association provide that each of our directors may receive an
attendance fee for every Board and Committee meeting, provided that no director
shall be entitled to an attendance fee in excess of Rs.2,000 per meeting. In
fiscal year 2008, we did not pay any attendance fees to our directors. Mr. Ajit
Balakrishnan, who is our Managing Director, does not receive any additional
compensation for his service on our Board of Directors. Directors of our U.S.
subsidiaries receive compensation for their service on the boards of these
subsidiaries.





The
following table sets forth details regarding compensation paid to executive
officers and directors of the Company during the fiscal year ended March 31,
2008;





Name
            
            Salary and other compensation(US$)Ajit
      Balakrishnan
            
            200,000(1)Joy
      Basu
            
            90,913Sridar
      A. Iyengar
            
            25,000(1)Sunil
      Phatarphekar
            
            10,000(1)





(1)
            Each
      of Mr. Balakrishnan, Mr. Iyengar and Mr. Phatarphekar receive a salary /
      compensation from Rediff Holdings, Inc., our wholly-owned
      U.S.-incorporated subsidiary, in their capacity as directors of Rediff
      Holdings, Inc. None of them receive any salary from Rediff.com India
      Limited.





Employee
Benefit Plans





Employee
Stock Option Plan 1999





Our
1999 Employee Stock Option Plan (the “1999 ESOP”) allows for the grant to our
employees of warrants to purchase our Equity Shares. Each warrant granted gives
the employee the right to purchase a specified number of our Equity Shares under
the 1999 ESOP. The 1999 ESOP was approved by our Board of Directors in August
1998 and by our shareholders in February 1999. A total of 280,000 Equity Shares,
after giving effect to our 2 for 5 reverse share split effective as of May 3,
2000, were reserved for issuance under the 1999 ESOP. As of March 31, 2000, we
had granted, under the 1999 ESOP, warrants, equivalent to the right to purchase
232,300 Equity Shares, after giving effect to our 2 for 5 reverse share split
effective as of May 3, 2000, at a weighted average exercise price of US$6.53
(Rs.285) per share. From April 1, 2001 to March 31, 2002, we had granted
additional warrants equivalent to the right to purchase 19,000 Equity Shares at
a weighted average exercise price of US$2.25 (Rs.108) per share under the 1999
ESOP. During




62




the
same period, there was a forfeiture of warrants, equivalent to 13,450 Equity
Shares from the employees who had left the Company. During the fiscal year ended
March 31, 2003, warrants equivalent to 12,900 Equity Shares were forfeited due
to the resignation of employees. During the fiscal year ended March 31, 2004, we
granted additional warrants equivalent to the right to purchase 7,500 Equity
Shares and during the same period, warrants equivalent to 22,975 Equity Shares
were forfeited due to resignation of employees. During the fiscal years ended
March 31, 2006 and 2007, we granted additional warrants equivalent to the right
to purchase 30,000 Equity Shares and during the same period, warrants equivalent
to 7,750 Equity Shares were forfeited due to resignation of employees. During
the fiscal year ended March 31, 2008, warrants equivalent to 1,000 Equity Shares
lapsed due to termination of the plan.





Unless
otherwise determined by the Board of Directors, the warrants granted under the
1999 ESOP vest at a rate of 25% on each successive anniversary of the grant
date, until fully vested. Equity shares acquired pursuant to the 1999 ESOP are
subject to a four-year lock-up period from the date of grant of the respective
warrants. In the case of termination of the employee, the employee shall have
the right to exercise only the warrants vested up to the time of termination,
and the unvested warrants shall lapse. In the case of death, incapacitation, or
retirement at the normal retirement age of an employee, all warrants granted to
him or her shall vest in full either on the employee or his or her legal heirs,
as appropriate. The period during which vested warrants may be exercised expires
five years after the date of grant.





On
January 16, 2006, our Compensation Committee terminated the 1999 ESOP, without
prejudice to the interest of participants in the 1999 ESOP who have already been
granted options under it.





Associate
Stock Option Plan 1999





Our
Associate Stock Option Plan 1999 (the “1999 ASOP”) allows for the grant to our
associates, such as key vendors, software developers, retainers, consultants,
and all other persons or legal entities not eligible to participate in the 1999
ESOP, of warrants to purchase our Equity Shares. Each warrant granted gives the
associate the right to purchase a specified number of our Equity Shares under
the 1999 ASOP. The 1999 ASOP was approved by our Board of Directors and our
shareholders in February 1999. A total of 198,000 Equity Shares, after giving
effect to our 2 for 5 reverse share split effective as of May 3, 2000, were
reserved for issuance under the 1999 ASOP. As of March 31, 2000, we had granted
warrants under the 1999 ASOP, equivalent to the right to purchase 73,600 Equity
Shares, after giving effect to our 2 for 5 reverse share split effective as of
May 3, 2000, at a weighted average exercise price of US$11.73 per share. From
April 1, 2001 to March 31, 2002 there was a fresh issuance of warrants
equivalent to 1000 Equity Shares to Associates at the rate of US$2.25 under the
1999 ASOP. During the same period, there was a forfeiture of warrants,
equivalent to 5,750 Equity Shares from the associates who had terminated their
association with Rediff. Warrants equivalent to 28,000 Equity Shares were issued
on January 1, 2003 at an exercise price of US$2.26 to three of our Directors.
During the fiscal year ended March 31, 2005 we granted warrants equivalent to
the right to purchase 6,000 Equity Shares at a weighted average exercise price
of US$15.11 per share. During the fiscal year ended March 31, 2008, two of our
Directors exercised 12,000 options (6,000 options each) at a weighted average
price of US$2.74 per share. 17,000 options lapsed due to termination of the
plan.





The
warrants granted under the 1999 ASOP vest at rates set forth on each warrant.
Equity shares acquired pursuant to the 1999 ASOP are subject to a four-year
lock-up period from the date of grant of the respective warrants. In the case of
termination of the relationship, the associate shall have the right to exercise
only the warrants vested up to the time of termination, and the unvested
warrants shall lapse. In the case of death of the associate, all warrants
granted to him or her shall vest in full on his or her legal heirs, as
appropriate. The period during which vested warrants may be exercised expires
five years after the date of grant.





On
January 16, 2006, our Compensation Committee terminated the 1999 ASOP, without
prejudice to the interest of participants in the 1999 ASOP who have already been
granted options under it.





2002
Stock Option Plan




63




In
January 2002, our Board of Directors approved the 2002 Stock Option Plan (“2002
plan”) which provides for the grant of incentive stock options and non-statutory
stock options to our employees. All options under these plans are exercisable
for our ADSs. Necessary approvals from the regulators in India have been
obtained. During the fiscal year ended March 31, 2004, we made appropriate
filings with the SEC prior to the first exercise date of the options granted
under the 2002 plan. Unless terminated sooner, this plan will terminate
automatically in January 2012. A total of 280,000 of our Equity Shares were
reserved for issuance under the 2002 plan. As of March 31, 2003, we had granted
under the 2002 plan, warrants equivalent to the right to purchase 220,500 Equity
Shares at an exercise price of Rs.109 per share. During the fiscal year ended
March 31, 2004, we granted warrants equivalent to the right to purchase 116,000
Equity Shares at a weighted average exercise price of US$7.75 per share. During
the same period, warrants equivalent to 32,225 Equity Shares were exercised and
warrants equivalent to 69,250 Equity Shares were forfeited. During the fiscal
year ended March 31, 2005, we granted warrants equivalent to the right to
purchase 10,500 Equity Shares at a weighted average exercise price of US$10.98.
During the same period, warrants equivalent to 52,625 Equity Shares were
exercised and warrants equivalent to 4,875 Equity Shares were forfeited. During
the fiscal years ended March 31, 2006 and 2007, we did not grant any awards
under the 2002 plan. During the fiscal year ended March 31, 2007, warrants
equivalent to 25,125 Equity Shares were exercised.





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





2004
Stock Option Plan





In
June 2004, our Board of Directors approved the 2004 Stock Option Plan (“2004
plan”), which provides for the grant of stock options to our employees. All
options under the 2004 plan are exercisable for our ADSs. Unless terminated
sooner, the 2004 plan will terminate automatically in January 2014. A total of
358,000 Equity Shares are currently reserved for issuance pursuant to the 2004
plan. During the fiscal year ended March 31, 2006, we granted warrants
equivalent to the right to purchase 5,100 Equity Shares at a weighted average
exercise price of Rs.655 (US$14.73) per share. During the same period, warrants
equivalent to 51,910 Equity Shares were exercised and warrants equivalent to
47,125 Equity Shares were forfeited. During the fiscal year ended March 31,
2007, we granted 92,500 options equivalent to the right to purchase 46,250
Equity Shares at a weighted average exercise price of Rs.1,008 (US$23.13) per
share. During the same period, warrants equivalent to 39,075 Equity Shares were
exercised and warrants equivalent to 11,875 Equity Shares were forfeited. During
the fiscal year ended March 31, 2008, 33,625 options equivalent to 16,812 Equity
Shares were forfeited due to resignation of the employees.





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





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





2006
Employee Stock Option Plan





Our
2006 Employee Stock Option Plan (the “ESOP 2006”) allows for the grant to our
employees of options to purchase our Equity Shares. Each option granted gives
the employee the right to purchase a specified number of our Equity Shares under
the ESOP 2006. The ESOP 2006 was adopted and approved by our Compensation
Committee on June 20, 2006 in accordance with the approval granted by our
shareholders on March 31, 2006. A total of 150,000 Equity Shares were approved
for issuance under the ESOP 2006. During the fiscal year ended March 31, 2007,
we have granted 123,000 options under the




64




ESOP
2006, equivalent to the right to purchase 123,000 Equity Shares at an exercise
price of Rs.10 (US$0.23) per share. 58,000 and 65,000 options will vest at a
rate of 25% and 20%, respectively, on each successive anniversary of the grant
date, until fully vested. During the fiscal year ended March 31, 2008, options
equivalent to 12,000 Equity Shares were forfeited at weighted average price of
US$11.05 per share in the same fiscal year.





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





2006
ADR Linked Employee Stock Option Plan





Our
2006 ADR Linked Employee Stock Option Plan (the “ADR Linked ESOP 2006”) allows
for the grant to our employees of options to purchase our ADRs representing
Equity Shares of the Company. Each option granted gives the employee the right
to purchase a specified number of our ADRs under the ADR Linked ESOP 2006. The
ADR Linked ESOP 2006 was adopted and approved by our Compensation Committee on
October 3, 2006 in accordance with the approval granted by our shareholders on
March 31, 2006. A total of 335,000 Equity Shares (equivalent to 670,000 ADRs)
were approved for issuance under the ADR Linked ESOP 2006. During the fiscal
year ended March 31, 2007, we granted 281,500 options under the ADR Linked ESOP
2006, equivalent to the right to purchase 140,750 Equity Shares at an exercise
price of Rs.1,207 (US$27.69) per share. These options will vest at a rate of 25%
on each successive anniversary of the grant date until fully vested. During the
fiscal year ended March 31, 2008, 32,500 options equivalent to 16,250 Equity
Shares were issued at a weighted average price of US$31.78 per share. 15,750
options equivalent to 7,875 Equity Shares were forfeited at a weighted average
price of US$11.05 per share in the same fiscal year.





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





Retirement
Plans





Gratuity





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





The
following tables set out the status of the gratuity plans and the amounts
recognized in the Company’s financial statements for the fiscal years ended
March 31, 2006, 2007 and 2008. The measurement date used is March 31 of the
relevant fiscal year.





Fiscal
      Years ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Change
      in benefit obligationBenefit
      obligation at the beginning of the year
            96,524
            
            105,679
            
            198,777Actuarial(gain)
      loss
            5,618
            
            81,386
            
            12,708




65




Service
      cost
            21,479
            
            21,769
            
            53,468Interest
      cost
            7,210
            
            7,950
            
            20,639Benefits
      paid
            (22,942)
            
            (23,997)
            
            (17,504)Effect
      of exchange rate changes
            (2,210)
            
            5,990
            
            18,436Benefit
      obligation at the end of the year
            105,679
            
            198,777
            
            286,524Unrecognized
      net actuarial loss (gain)
            2,976
            
            -
            
            -Accrued
      liability
            108,655
            
            198,777
            
            286,524





Net
gratuity cost for the fiscal years ended March 31, 2006, 2007 and 2008 comprise
of the following:





Fiscal
      Years ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Service
      cost
            21,479
            
            21,769
            
            53,468Interest
      cost
            7,210
            
            7,950
            
            20,639Recognized
      net actuarial (gain) loss
            5,618
            
            81,386
            
            12,708Net
      gratuity cost
            34,307
            
            111,105
            
            86,815





The
assumptions used in accounting for gratuity in the fiscal years ended March 31,
2006, 2007 and 2008 were as follows:





Fiscal Yearsended March 31,2006
            
            2007
            
            2008Discount
      rate
            8%
            
            10%
            
            9.25%Rate
      of increase in compensation
            8%
      for first 2 years and 5% thereafter
            
            10%
      for first 5 years and 7% thereafter
            
            10%
      for first 4 years and 7% thereafter





Provident
Fund





Employees
based in India and the Company each contributes at the rate of 12% of salaries
to a provident fund maintained by the Government of India for the benefit of
such employees. The provident fund is a defined contribution plan. Accordingly,
the Company expenses such contributions as incurred. Amounts contributed by the
Company to the provident fund, in the aggregate, were US$113,222, US$166,314 and
US$242,259 for the fiscal years ended March 31, 2006, 2007 and 2008,
respectively.





Compensated
Absences





The
Company provides for the cost of vacation earned based on the number of days of
unutilized leave at each balance sheet date.








66




RELATED PARTYTRANSACTIONS







Five
of our largest shareholders beneficially hold an aggregate of approximately
59.9% of our Equity Share capital. As a result, such shareholders, if they were
to act collectively, could exercise control or significantly influence most
matters requiring shareholder approval, including significant corporate
transactions.





Advertising
and Mobile Revenues





During
the fiscal years ended March 31, 2007 and 2006, we earned advertising revenues
of US$31,281 and US$43,299, respectively, from Rediffusion-Dentsu, Young &
Rubicam Limited, a company in which Mr. Ajit Balakrishnan and Mr. Diwan Arun
Nanda are shareholders and directors and in which Mr. Sunil Phatarphekar is a
director.





During
the fiscal year ended March 31, 2007, we earned mobile revenues of US$19,800
from OnMobile Asia Pacific Pvt. Ltd., a company in which Mr. Sridar Iyengar is a
director.





Product
Development Expenses





During
the fiscal years ended March 31, 2008 and 2007, we incurred product development
expenses (including amount capitalized) of US$310,094 and US$385,667,
respectively, to Tachyon Technologies Private Ltd, a company in which we are a
minority shareholder.











67




EXCHANGE
CONTROLS







Restrictions
on Conversion of Rupees





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





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





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





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





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





Notwithstanding
the foregoing, if a foreign investor were to withdraw its equity shares from the
ADS program, its investment in the equity shares would be subject to the general
restrictions on foreign ownership and may be subject to the portfolio investment
restrictions and limitations. Further, foreign investors who withdraw their
equity shares from the ADS program with the result that their direct or




68




indirect
holding in the company is crosses certain thresholds specified in the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover
Code”), the shareholder may be required to make a public offer to the remaining
shareholders of the company under the Takeover Code. For details see the section
titled “Restriction on Foreign
Ownership and Indian Securities”.





Investors
who seek to sell in India to resident Indians any Equity Shares 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 be subject
to pricing guidelines specified by the Reserve Bank of India for such sales and
subject to certain reporting requirements. Prior approval of the Reserve Bank of
India will be required in the event the price for any such sale does not comply
with such pricing guidelines.





An
Active or Liquid Market for Our ADSs Is Not Assured





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





Restriction
on Debt Issues





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





Indian
borrowers are allowed to raise up to US$20 million, in the event the minimum
average maturity of the ECB is three years and up to US$500 million, in the
event the minimum average maturity is five years, without Reserve Bank of India
approval (the “automatic route”) so long as, inter alia, the following
conditions are met.





·
            “All-in
      cost” ceiling does not exceed 200 basis points over the six-month LIBOR
      for the respective currency of borrowing, in the case of ECBs with a
      minimum average maturity of three to five years, and 350 basis points over
      the six-month LIBOR for the respective currency of borrowing, in the case
      of ECBs with a minimum average maturity being more than five
      years.





·
            Proceeds
      from ECBs can be only raised for permitted purposes, such as capital
      investments, overseas direct investment in a joint venture or a
      wholly-owned foreign subsidiary. ECB proceeds cannot be used for
      on-lending, for investing in capital markets and real estate, for working
      capital and general corporate purposes or for refinancing existing
      domestic loans.





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





·
            Pre-payment
      or redemption of ECBs prior to maturity in amounts up to US$500 million is
      permitted without prior Reserve Bank of India approval, provided that any
      such prepayment and redemption can only be undertaken if the same complies
      with the stipulated average maturity period of three years, in the case an
      ECB of up to US$20 million, and five years, in the case of an ECB of up to
      US$500 million.




69




redemption
      can only be undertaken if the same complies with the stipulated average
      maturity period of three years, in the case an ECB of up to US$20 million,
      and five years, in the case of an ECB of up to US$500
    million.


·
            Proceeds
      from ECBs in excess of US$20 million may not be utilized for Indian
      Rupee-denominated expenditure without the prior approval of the Reserve
      Bank of India.





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





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





The
maximum amount of ECB that may be raised by an eligible borrower under the
automatic route is US$500 million, or its equivalent, during a single financial
year. The primary responsibility to ensure that ECB raised/utilized are in
conformity with the RBI instructions is that of the concerned borrower and any
contravention of the RBI guidelines will be viewed seriously and may invite
penal action.





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





Fungibility
of ADSs





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





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





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




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




·
              the
      number of shares of the Indian company so purchased does not exceed the
      ADSs converted into
      underlying shares; and
 ·
                  compliance
      with the provisions of the ADR scheme and the guideline issued
      thereunder.


Sponsored
ADR Schemes





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





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





·
            The
      sponsoring company whose shareholders propose to divest existing shares in
      the overseas




70


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


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





·
            The
      proceeds of the ADR issue raised abroad shall be repatriated into India
      within a period of one month from the closure of the issue. However, the
      proceeds of the ADR issue can also be retained abroad to meet the future
      foreign exchange requirements of the company and by a recent notification
      this facility has been extended indefinitely till further
      notice.








71




TRADING
MARKET







General





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





The
number of outstanding Equity Shares as of March 31, 2008, was 14,615,800. We
have been informed by our depository that as of March 31, 2008, there were
approximately 25 record holders of ADRs evidencing 8,907,200 ADSs (representing
4,453,600 Equity Shares) in the United States.





The
tables below set forth high and low trading prices for our ADSs on the NASDAQ
National Market (now the NASDAQ Global Market) until June 24, 2002, on the
NASDAQ Capital Market from June 24, 2002 to October 6, 2006 and on the NASDAQ
Global Market since October 9, 2006.





Annual
      and Quarterly high-low price history:Price
      Per ADS
                  (in
      U.S. dollars)High
                
                LowFiscal
      year ended March 31, 2004
                13.87
                
                2.76Fiscal
      year ended March 31, 2005
                15.47
                
                5.25Fiscal
      year ended March 31, 2006
                33.75
                
                6.07Fiscal
      year ended March 31, 2007
                25.00
                
                11.16First
      Quarter (April 2006 to June 2006)
                25.00
                
                11.22Second
      Quarter (July 2006 to September 2006)
                16.72
                
                11.16Third
      Quarter (October 2006 to December 2006)
                21.19
                
                14.23Fourth
      Quarter (January 2007 to March 2007)
                20.32
                
                15.35Fiscal
      year ending March 31, 2008First
      Quarter (April 2007 to June 2007)
                19.20
                
                15.90Second
      Quarter (July 2007 to September 2007)
                27.50
                
                13.68Third
      Quarter (October 2007 to December 2007)
                20.13
                
                10.25Fourth
      Quarter (January 2008 to March 2008)
                11.29
                
                6.46Fiscal
      year ending March 31, 2009First
      Quarter (April 2008 to June 2008)
                9.77
                
                6.19Second
      Quarter (July 1, 2008 to September 19, 2008)
                7.15
                
                4.39
 
 Monthly
      high-low price history for previous six months:Price
      Per ADS
                  (in
      U.S. dollars)High
                
                LowMarch
      2008
                8.65
                
                6.46April
      2008
                9.77
                
                8.16May
      2008
                9.26
                
                7.31June
      2008
                7.96
                
                6.19July
      2008
                7.71
                
                5.06August
      2008
                7.30
                
                5.76September
      2008 (until September 19, 2008)
                5.96
                
                4.39
 
 72


RESTRICTION
ON FOREIGN OWNERSHIP OF INDIAN SECURITIES







Prior
to June 1, 2000, foreign investment in Indian securities, including the
acquisition, sale and transfer of securities in Indian companies, was regulated
by the FERA. As of June 1, 2000, foreign investment in and divestment from
Indian securities have been regulated by the provisions of the FEMA, the
notifications and regulations issued by the Reserve Bank of India thereunder,
and the rules made by the Ministry of Finance of the Government of India. A
summary of the regulatory environment for foreign investment in India is
provided below.





ADR
Guidelines





Subject
to the fulfillment of certain conditions, Indian companies issuing ADSs are no
longer required to obtain approval of the Ministry of Finance or the Reserve
Bank of India under the Issue of Foreign Currency Convertible Bonds and Ordinary
Shares (Through Depositary Receipt Mechanism) Scheme, 1993, as amended from time
to time, or the 1993 Scheme. Although we will not require approval of either the
Ministry of Finance or the Reserve Bank of India, we are required to furnish a
quarterly return to the Reserve Bank of India and the Ministry of Finance within
15 days of the close of each calendar quarter.





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





Foreign
Direct Investment





Currently,
subject to certain exceptions, foreign direct investment and investment by
individuals of Indian nationality or origin residing outside India, or
non-resident Indians, including investment in the ADSs, does not require the
prior approval of the Government of India, or the Reserve Bank of India,
although a declaration in the prescribed form, detailing the foreign investment
must be filed with the Reserve Bank of India once the foreign investment is made
in the Indian company. The Government of India has indicated that in all cases
the Reserve Bank of India would continue to be the primary agency for the
purposes of monitoring and regulating foreign investment. The foregoing
description applies only to an issuance of shares by, and not to a transfer of
shares of, Indian companies. Transfer of shares of an Indian company by a
non-resident Indian can be undertaken without having to obtain prior approval
from the Reserve Bank of India by making an application with an authorized
foreign exchange dealer, provided conditions specified in the FEMA are
fulfilled. Otherwise, such transfers would require prior approval from Reserve
Bank of India.





The
following investments require the prior permission of the FIPB/RBI (where
applicable):





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





(ii)
            investments
      by any foreign investor who as of January 12, 2005 had any existing joint
      venture or technology transfer or trademark agreement in India in the same
      field as that in which the company in which the investment is proposed to
      be made. However, no prior approval is required
  if:





(a)
            the
      investor is a venture capital fund registered with
  SEBI,





(b)
            in
      the existing joint venture, investment by either of the parties is less
      than 3%, or





(c)
            the
      existing joint venture or collaboration is defunct or sick; In so far as
      joint ventures to be entered into after January 12, 2007 are concerned,
      the joint venture agreement may include a “conflict of interest” clause to
      help safeguard the interests of the joint venture partners in the event of
      one of the partners desiring to set up another joint venture or a
      wholly-owned subsidiary in the same field of economic
      activity.




73






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





(iv)
            The
      shares or convertible debentures are not being issued by the Indian
      Company with a view to acquiring existing shares of any Indian Company. A
      person residing outside India (other than a citizen of Pakistan or
      Bangladesh) or any entity incorporated outside India (other than an entity
      incorporated in Pakistan or Bangladesh) may purchase shares, convertible
      debentures or preference shares of an Indian company, subject to certain
      terms and conditions.





The
RBI has consolidated its various circulars on foreign investments in India, in a
Master Circular No. 02/2007-8 dated July 2, 2007 summarizing the current
regulatory provisions as amended from time to time:





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





(i)
            business
      of “chit” fund;





(ii)
            “nidhi”
      company;





(iii)
            agricultural
      or plantation activities;





(iv)
            real
      estate business, or construction of farm houses;
  or





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





However,
it is clarified that real estate business does not include the development of
townships or the construction of residential/commercial premises, roads or
bridges. It is further clarified that partnership firms / proprietorship
concerns having investments pursuant to FEMA regulations are not allowed to
engage in the Print Media sector.





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





a)
            retail
      trading;





b)
            atomic
      energy;





c)
            lottery
      business;





d)
            gambling
      and betting; and





e)
            agriculture
      (excluding floriculture, horticulture, development of seeds, animal
      husbandry, pisiculture and cultivation of vegetables, mushrooms etc. under
      controlled conditions and services related to agro and allied sectors) and
      plantations (other than tea
plantations).





The
Ministry of Finance, in its notification dated April 30, 2007, categorised as
debt all foreign investment of preference shares (other than fully convertible
preference shares), such as nonconvertible, optionally convertible or partially
convertible in which must conform to the ECB Guidelines. All fully convertible
preference shares continue to be part of the capital of a company and would
therefore be included in calculating the foreign equity for the purposes of
sectoral caps. FDI in Indian companies does




74




not
require the prior approval of the FIPB or the RBI where FDI is under a 100%
automatic route of the RBI/FIPB and is not prohibited by the FEM Securities
Regulations. The foregoing description applies only to an issuance of shares by,
and not to a transfer of shares of, Indian companies. The FEM Securities
Regulations lay down the pricing guidelines with respect to determining the
price at which shares may be issued by an Indian company to a non-resident
investor and the same would need to be complied with. The Indian Government has
set up the Foreign Investment Implementation Authority (“FIIA”) in the
Department of Industrial Policy and Promotion. The FIIA has been mandated to (i)
translate foreign direct investment approvals into implementation, (ii) provide
a proactive one-stop aftercare service to foreign investors by helping them
obtain necessary approvals, (iii) sort out operational problems and (iv) meet
with various Indian Government agencies to find solutions to foreign investment
problems.





Portfolio
Investment by Non-Resident Indians





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





The
Overseas Corporate Bodies, at least 60% of which are owned by the Non-Resident
Indians (Overseas Corporate Bodies), were allowed to invest by way of portfolio
investment until 2001 when the RBI prohibited such investments. In this
connection, the RBI has issued directions to the authorized dealers in terms of
A.P. (DIR Series) Circular No. 14 dated September 16, 2003 and has notified the
Foreign Exchange Management (Withdrawal of General Permission to Overseas
Corporate Bodies) Regulations 2003, by Notification No. FEMA 101/2003-RB dated
October 3, 2003. However, it has clarified that the entities owned by
Non-Resident Indians (which were formerly classified as Overseas Corporate
Bodies) would continue to enjoy all the facilities available to other foreign
investors. Pursuant to the Ministry of Finance Notification dated August 31,
2005 amending the FCCB Scheme, OCBs who are not eligible to invest in India
through the Portfolio Route, and entities prohibited from buying, selling or
dealing in securities by the SEBI will not be eligible to subscribe for the
Bonds.





Portfolio
Investment by Foreign Institutional Investors





In
September 1992, the Government of India issued guidelines that enable foreign
institutional investors, including institutions such as pension funds,
investment trusts, asset management companies, nominee companies and
incorporated/institutional portfolio managers referred to as Foreign
Institutional Investors, or FIIs, to make portfolio investments in all
securities of listed and unlisted companies in India. Investments by registered
Foreign Institutional Investors or Non-Resident Indians made through a stock
exchange are known as Portfolio Investments. Foreign investors wishing to invest
and trade in Indian securities in India under these guidelines are required to
register with the SEBI. However, since the SEBI provides a single window
clearance, a single application must be made to the SEBI . Foreign investors are
not necessarily required to register with the SEBI as Foreign Institutional
Investors and may invest in securities of Indian companies pursuant to the
Foreign Direct Investment route discussed above, but in order to make Portfolio
Investments freely and to remit funds into and outside India without an approval
for each remittance, registration as an FII or as a ‘sub-account’ of an FII is
necessary.





Foreign
institutional investors are required to comply with the provisions of the
Securities and Exchange Board of India (Foreign Institutional Investors)
Regulations, 1995, or Foreign Institutional Investor Regulations. A registered
FII may buy, subject to the ownership restrictions discussed below, and




75




sell
freely securities issued by any Indian company, realize capital gains on
investments made through the initial amount invested in India, subscribe to or
renounce rights offerings for shares, appoint a domestic custodian for custody
of investments made and repatriate the capital, capital gains, dividends, income
received by way of interest and any compensation received towards sale or
renunciation of rights offerings of shares. An FII may not hold more than 10% of
the total issued capital of a company in its own name, a corporate/individual
sub-account of the FII may not hold more than 5% of the total issued capital of
a company and a broad based sub-account of the FII may not hold more than 10% of
the total issued capital of a company. The total holding of all FIIs in a
company is subject to a cap of 24% of the total paid-up capital of a company,
which can be increased to the relevant statutory cap/ceiling in respect of the
said company with the passing of a special resolution by the shareholders of the
company in a general meeting.





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





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





·
            by
      way of a private placement, where the price is not less than the price
      according to the terms of the relevant guidelines or the guidelines issued
      by the former Controller of Capital
Issues.





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





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





Takeover
and Insider Trading Regulations





Under
the Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997, as amended, or Takeover Code, upon the
acquisition of more than 5% of the outstanding shares or voting rights of a
listed public Indian company, a purchaser is required to notify the company, and
the company and the purchaser are required to notify all the stock exchanges on
which the shares of such company are listed. Upon the acquisition of 15% or more
of such shares or voting rights or a change in control of the company, the
purchaser is required to make an open offer to the other shareholders offering
to purchase at least 20% of all the outstanding shares of the company at a
minimum offer price as determined pursuant to the Takeover Code. Upon conversion
of ADSs into equity shares, an ADS holder will be subject to the Takeover Code;
provided the Indian company is listed in India. Similarly, appropriate
disclosures would have to be made under the SEBI (Prohibition of Insider
Trading), Regulations, 1992, or Insider Trading Regulations, if the equity
shares of the Indian company are listed on a recognized stock exchange in India.
So long as our Equity Shares are unlisted in India, the provisions of the
Takeover Code and the Insider Trading Regulations will not be
applicable.





Qualified
Institutional Placement under the Disclosure and Investor Protection (DIP)
Guidelines





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





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




76




QIBs
are defined as:





·
            Public
      financial institution as defined in Section 4A of the Companies
      Act;·
            Scheduled
      commercial banks;·
            Mutual
      funds;·
            FIIs
      registered with SEBI;·
            Multilateral
      and bilateral development financial institutions;·
            Venture
      capital funds registered with SEBI;·
            Foreign
      venture capital investors registered with SEBI;·
            State
      industrial development corporations;·
            Insurance
      companies registered with the Insurance Regulatory and Development
      Authority;·
            Provident
      funds with minimum corpus of Rs.250 million; or·
            Pension
      funds with minimum corpus of Rs.250
million.





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





·
            Investors/Allottees:
      The specified securities can be issued only to QIBs, as defined above.
      Such QIBs shall not be promoters or related to promoters of the issuer,
      either directly or indirectly. Each placement of the specified securities
      issued through QIP program shall be on a private placement basis, in
      compliance with the requirements of the Companies Act and the DIP
      Guidelines. A minimum of 10% of the securities in each placement shall be
      allotted to mutual funds.





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





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





·
            Pricing: The floor
      price of the specified securities shall be determined on a basis similar
      to that for Global Depository Receipt or Foreign Currency Convertible
      Bonds issues and shall be subject to adjustment in case of corporate
      actions such as stock splits, rights issues and bonus
    issues.





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








77




PRINCIPAL
SHAREHOLDERS







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





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





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





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





Shares
      Beneficially Owned
              As
      of August 6, 2008
            
            Shares
      Beneficially Owned
              As
      of August 16, 2007
            
            Shares
      Beneficially Owned
              As
      of August 10, 2006Name
      of Beneficial Owner
            
            Number
      of
              Equity
              Shares
      held
            
            Percent
      of total Equity Shares outstanding
            
            Number
      of Equity Shares held
            
            Percent
      of total Equity Shares outstanding
            
            Number
      of Equity Shares held
            
            Percent
      of total Equity Shares outstandingOfficers
      and DirectorsAjit
      Balakrishnan (1)(1A)
      (1B) (1C)
            
            3,463,982
            
            23.70%
            
            3,463,982
            
            24%
            
            3,463,982
            
            24%Diwan
      Arun Nanda(1)
            
            3,444,742
            
            23.57%
            
            3,444,742
            
            24%
            
            3,444,742
            
            24%Pulak
      Prasad(2)
            
            --
            
            --
            
            --
            
            --
            
            2,008,000
            
            14%All
      Directors and Officers as a Group
              (2
      persons)
            
            6,920,724
            
            47.35%
            
            6,908,724
            
            48%
            
            6,716,722
            
            46%OtherShareholders
      holding more than 5 % shareholdingRediffusion
      Holdings Private Limited(1)
            
            2,200,002
            
            15%
            
            2,200,002
            
            15%
            
            2,200,002
            
            15%Draper-India
      International
            
            2,200,000
            
            15%
            
            2,200,000
            
            15%
            
            2,200,000
            
            15%Queenswood
      Investments Ltd
            
            2,008,000
            
            14%
            
            2,008,000
            
            14%
            
            2,008,000
            
            14%








Notes:


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





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





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





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




78




(2)
            With
      effect from January 1, 2007, Pulak Prasad has ceased to be an employee of
      Warburg Pincus LLC and has represented that he has no beneficial interest
      in the outstanding equity shares held by Queenswood Investments
      Limited.





Joy
Basu, Chief Financial Officer of the Company, holds stock options which are
exercisable for less than 1% of the beneficial ownership in the
Company.





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





Sridar
Iyengar, a director of the Company, holds stock options which are exercisable
for less than 1% of the beneficial ownership in the Company.





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





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





Our
ADSs are registered pursuant to Section 12(g) of the Securities Act. We have
been informed by our depository that as of July 31, 2008, 8,907,200 ADSs were
held by approximately 25 record holders of ADRs in the United
States.








79





TAXATION







Indian
Tax





The
following discussion of Indian tax consequences for investors in ADSs and Equity
Shares received upon redemption of ADSs who are not resident in India, whether
of Indian origin or not, is based on the current provisions of the Indian Income
Tax Act, 1961, including the special tax regime for ADSs contained in Section
115AC, as amended, and certain regulations implementing the Section 115AC
regime. The Indian Income Tax Act is amended every year by the Finance Act of
the relevant year. Some or all of the tax consequences of the Section 115AC and
other relevant provisions may be amended or modified by future amendments to the
Indian Income Tax Act. Furthermore, the tax rates described in this section are
only those set forth in the Indian Income Tax Act read together with the Finance
Act, 2008 to the extent these provisions are effective. In the event there is
any double taxation avoidance agreement between two states and an investor is a
resident of either of the states, then to the extent the provisions of the
double taxation avoidance agreement are more favorable to the investor, under
the Indian Income Tax Act, the provisions of the double taxation avoidance
agreement would prevail.





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





Residence





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





Taxation
of Distributions





Shareholders
who receive dividends by a domestic company will not be subject to tax on the
distribution if the company has paid the dividend distribution tax (the “DDT”).
Consequently, withholding tax on dividends paid to shareholders does not apply.
However, if dividends are declared, we are required to pay taxes at a rate of
16.995%, including applicable surcharge and Education Cess, of the total
dividend declared. If the company has not paid the DTT, the shareholder would be
taxable at the applicable Indian income tax rates depending on the legal status
of the shareholders.





Taxation
on Sale of ADSs





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





Taxation
on Redemption of ADSs





Though
there is no specific provision exempting the redemption of ADSs, it can be
inferred from the provisions of Section 47(xa) is that transfer by way of
conversion of bonds referred to in clause (a) of




80




sub-section
(1) of Section 115AC into shares or debentures of any company would not be
considered as transfer and therefore the same would be exempt.





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





Since
the exemption is provided under the Scheme and not under the Income Tax Act,
1961, it is not certain whether Indian tax authorities would grant the
exemption. Moreover, Article 7(3) of the Scheme clarifies that the cost of
acquisition of the underlying shares acquired through the redemption of ADRs,
shall be determined as the price of ordinary shares of the issuing company
prevailing on the Stock Exchange on the date of the advice or redemption.
Therefore, the tax authorities may contend that since the Scheme does not
provide the methodology for calculating the capital gains on sale of underlying
shares in the case of unlisted companies, the benefit under the Scheme would not
be available to companies not listed in India. In such a case, there may be a
risk of taxability of gains on acquisition of underlying Equity Shares upon
redemption of ADSs.





Taxation
on Sale of Equity Shares





Subject
to any relief under any relevant double taxation treaty, a gain arising on the
sale of an equity share by a non-resident investor will generally give rise to a
liability for Indian capital gains tax and tax is required to be withheld at
source. Capital gains on sale of equity shares, which have been held for more
than 12 months (measured from the date of advice of redemption of ADSs by the
depositary in the case of non-resident sellers) are considered as long-term
capital gains and generally taxable at the rate of 20%, except in the case of a
sale of equity shares entered into on a recognized stock exchange in India the
transaction is chargeable to Securities Transaction Tax (“STT”). Surcharge on
this tax would be applicable at the rate of 2.5% in the case of non-resident
corporations if the total income exceeds Rs.1 Crore (Rs.10 million), while for
individuals or an association of persons, the rate of surcharge would be 10% if
their Indian taxable income exceeds Rs.1,000,000. In all the above cases, the
amount of tax and surcharge would be increased by an Education Cess of 2% and
secondary and higher Education Cess of 1% resulting in an aggregate Education
Cess of 3%. Article 9(5) of the Scheme indicates that the long term capital
gains on sale of redeemed underlying shares held by non-resident investors in
the domestic market would be charged to tax at 10% in accordance with the
provisions of section 115AC. Though section 115AC provides for lower rate of tax
(i.e., 10% plus surcharge where applicable and Education Cess of 3%) on long
term capital gains arising from transfer of ADSs (other than one between two
non-residents made outside India), it is unclear whether the lower rate of tax
would also extend to gains arising from transfer of shares converted from ADSs
under the amended provisions of Section 115AC. However, it may be noted that
certain other provisions of the Indian Income Tax Act also provide for lower
rate of tax (i.e., 10% plus surcharge where applicable and Education Cess of 3%)
for specific classes of taxpayers, such as FIIs, registered with
SEBI.





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





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





During
the period the underlying Equity Shares are held by non-resident investors on a
transfer from our depositary upon redemption of ADSs, the provisions of the
Avoidance of Double Taxation




81




Agreement
entered into by the Government of India with the country of residence of the
non-resident investors will be applicable in the matter of taxation of any
capital gain arising on a transfer of our Equity Shares.





Short-term
capital gains realized on the sale of equity shares which are listed in India
will be chargeable to tax at 15% plus a surcharge of 2.5% if total income
exceeds Rs.1 Crore (Rs.10 million, or 10% in the case of individuals and
association of persons if the gain exceeds Rs.1,000,000) and a further cess of
3%; provided the transaction of the sale is entered into in a recognized stock
exchange in India, the transaction is charged the STT and the contract for the
sale of the shares is settled by the actual delivery or transfer of those
shares.





Under
the regulations, the purchase price of Equity Shares received in exchange for
ADSs will be the price of the underlying Equity Shares on the date that the
depositary gives notice to the custodian of the delivery of the Equity Shares in
exchange for the corresponding ADSs. Pursuant to Article 7(3) of the Scheme, in
the case of companies listed in India, the purchase price of the equity shares
would be the price of the equity shares prevailing on the Bombay Stock Exchange
Limited (“BSE”) or The National Stock Exchange of India Limited (“NSE”) on the
date the depositary gives notice to the custodian of the delivery of the equity
shares in exchange for the corresponding ADSs. However, pursuant to Section
49(2A) of the Indian Income Tax Act as inserted retrospectively by the Finance
Act 2008, where the capital asset, being a share or debenture of a company,
becomes the property of the assessee by way of conversion of bonds, debentures,
debenture stock, or deposit certificate in any form, the cost of acquisition of
the asset to the assessee shall be deemed to be that part of the cost of
debenture, debenture-stock, bond or deposit certificate in relation to which
such asset is acquired by the assessee. Therefore, it is unlikely that the
beneficial tax treatment prescribed under the Scheme would be available to the
Company for the fiscal year 2008.





Rights





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





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





Stamp
Duty





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





Other
Taxes





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




82




Service
Tax





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





United
States Federal Income Tax Considerations





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





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





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





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





General





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





83




We
may be classified as a PFIC for U.S. federal income tax purposes for our current
taxable year ending March 31, 2009, a determination that can only be made after
the close of the taxable year. Even if it is determined that we are not
classified as a PFIC for our current taxable year, we may become classified as a
PFIC for the taxable year ending March 31, 2010 or one or more future taxable
years, particularly under circumstances where we determine not to deploy
significant amounts of cash for business development purposes. The determination
of whether we are, or will become, classified as a PFIC is a fact intensive
determination that is made annually based on the composition and amounts of
income that we earn and the composition and valuation of our assets, all of
which are subject to change. For purposes of determining whether we are, or will
become, classified as a PFIC, cash and other liquid assets are categorized as
passive assets and the value of our goodwill and other unbooked intangibles are
taken into account. The value of our assets for a taxable year is determined by
reference to the average of the fair market values of our assets determined as
of the end of each quarterly period during the taxable year. In addition, the
composition of our assets will be affected by how, and how quickly, we spend our
liquid assets that we presently hold. To the extent we are able to deploy
substantial amounts of cash for business development purposes, our level of
active assets, as compared with our passive assets, may become more
prominent.





In
estimating the value of our goodwill and other unbooked intangibles, we have
taken into account our market capitalization. If our market capitalization does
not increase from its current level, we may be or become classified as a PFIC
for the current or one or more future taxable years. Even if our market
capitalization does increase, it is possible that the Internal Revenue Service
may challenge our valuation approach with respect to our goodwill and other
unbooked intangibles, which may result in us being or becoming classified as a
PFIC for the current or one or more future taxable years.





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





Because
PFIC status is a fact intensive determination made on an annual basis, no
assurance can be given that we are not or will not become classified as a PFIC
for the current or one or more future taxable years. The discussion immediately
below under the headings “Distributions” and “Sale or Other Disposition of ADSs
or Equity Shares” describes certain tax considerations if we are not subject to
classification as a PFIC for United States federal income tax purposes, and are
followed by a summary of the PFIC rules under the heading “Passive


Foreign
Investment Company” if we were to be classified as a PFIC. United States
investors are urged to consult their tax advisors regarding the potential
application and effect of the PFIC rules in connection with their prospective
investment in our ADSs or our Equity Shares.





Distributions





The
gross amount of cash distributions with respect to the ADSs (or Equity Shares)
will, upon receipt by the Depositary (or by you), be includible in your gross
income as dividend income to the extent of our current and accumulated earnings
and profits, as determined under United States federal income tax principles.
Because we do not intend to determine our earnings and profits on the basis of
United States federal income tax principles, any distribution paid will
generally be treated as a dividend for United States federal income tax
purposes. A non-corporate recipient of dividend income will generally be subject
to tax on dividend income from a “qualified foreign corporation” at a maximum
United States federal tax rate of 15% rather than the marginal tax rates
generally applicable to ordinary income so long as certain holding period
requirements are met. A non-United States corporation (other than a PFIC)
generally will be considered to be a qualified foreign corporation (i) if it is
eligible for the benefits of a comprehensive tax treaty with the United States
which the Secretary of Treasury of the United States determines is satisfactory
for purposes of this provision and which includes an exchange of information
program or (ii) with respect to any dividend it pays on stock which is readily
tradable on an established securities market in the United States. There is
currently a tax treaty in effect between the United States and India which the
Secretary of Treasury has determined is satisfactory for these purposes and we
believe we should be eligible for the benefits of the treaty. United States
corporate holders will generally not be eligible for the dividends




84




received
deduction for distributions to domestic corporations in respect of distributions
on our ADSs or our Equity Shares.





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





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





Sale
or Other Disposition of ADSs or Equity Shares





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





Passive
Foreign Investment Company





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





Under
the PFIC rules:





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





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





As
an alternative to the foregoing rules, a holder of “marketable stock” in a PFIC
may make a mark-to-market election, provided that the shares are “regularly
traded” on a “qualified exchange.”  So long as our ADSs are regularly
traded on the NASDAQ Global Market, our ADSs should be treated as marketable
stock on a qualified exchange for this purpose. No assurances, however, may be
given whether the ADSs would be treated, or continue to be treated, as
“regularly traded” on such exchange. If you make




85




a
valid mark-to-market election, you will generally (i) include as income for each
taxable year the excess, if any, of the fair market value of your ADSs or Equity
Shares as determined at the end of the taxable year over the adjusted tax basis
of such ADSs or Equity Shares and (ii) deduct as a loss the excess, if any, of
the adjusted tax basis of your ADSs or Equity Shares over the fair market value
of such ADSs or Equity Shares as determined at the end of the taxable year, but
only to the extent of the amount previously included in income as a result of
the mark-to-market election. Your adjusted tax basis in your ADSs or Equity
Shares would be adjusted to reflect any income or loss resulting from the
mark-to-market election.





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








86




CONTROLS
AND PROCEDURES







Disclosure
Controls and Procedures





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





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





Management’s
Report on Internal Control over Financial Reporting





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





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





Under
the supervision and with the participation of our management, including our
Chairman, who serves as our Principal Executive Officer, and our Chief Financial
Officer, we conducted an assessment of the effectiveness of our internal control
over financial reporting as of March 31, 2008. In making this assessment, our
management primarily used the criteria set forth in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO”). A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Our management has concluded that
we maintained effective internal control over financial reporting as of March
31, 2008.




87




Our
independent registered public accounting firm, Deloitte Haskins & Sells, has
audited the consolidated financial statements included in this annual report on
Form 20-F, and as part of their audit, has issued their report, included herein,
on the effectiveness of our internal control over financial reporting as of
March 31, 2008.





Changes
in Internal Controls over Financial Reporting




During
the period covered by this annual report, there were no changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.




88




PRINCIPAL
ACCOUNTANT FEES AND SERVICES







The
following table summarizes the fees billed to us by our principal accountant,
Deloitte Haskins & Sells, Mumbai, India and its affiliates (collectively
“Deloitte”) for various services rendered to us during the fiscal years ended
March 31, 2006, 2007 and 2008.





Fiscal
      year ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Audit
      Fee
            107,127
            
            116,742
            
            224,070Audit-Related
      Fees
            --
            
            5,597
            
            --Tax
      Fees
            11,276
            
            16,538
            
            23,620All
      Other Fees
            161,205
            
            --
            
            --





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





Audit-related
fees represents payments for statutory certification work for the fiscal years
ended March 31, 2007. Tax fees primarily comprise fees for tax audit and
permitted tax advisory services. Tax fees also include other corporate tax
services such as assistance with foreign income tax and service
tax.





All
other fees comprise of payments made to Deloitte for services in connection with
our Form F-3 Registration Statement and our follow-on ADS offering in November
2005.





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








89




PRESENTATION
OF FINANCIAL INFORMATION







The
consolidated financial statements in this annual report have been prepared in
accordance with U.S. GAAP. Our fiscal year ends on March 31 of each year so all
references to a particular fiscal year are to the year ended March 31 of that
year. The consolidated financial statements, including the notes to these
financial statements, audited by Deloitte Haskins & Sells, an independent
registered public accounting firm, are set forth at the end of this annual
report.





Although
we have translated in this annual report certain Indian Rupee amounts into U.S.
dollars, this does not mean that the Indian Rupee amounts referred to could have
been, or could be, converted into U.S. dollars at any particular rate, the rates
stated earlier in this annual report, or at all. The Federal Reserve Bank of New
York certifies the exchange 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. The
reporting currency for the financial statements is the U.S. dollar and the
translation from Indian Rupees to U.S. dollars have been performed using rates
specified by the Reserve Bank of India.





90





ADDITIONAL
INFORMATION




Memorandum
and Articles of Association





Objects
and Purposes





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





Description
of Share Capital





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





Share
Capital





Our
authorized share capital is 24,000,000 Equity Shares, par value Rs.5 per share
(after giving effect to our 2 for 5 reverse share split effective May 3, 2000).
As of March 31, 2008, 14,615,800 Equity Shares were issued and
outstanding.





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





Shareholder Rights
Agreements





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





Amended and Restated
Shareholders’ Rights Agreement





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




91


Registration
Rights





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





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





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





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





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





·
            more
      than once in a twelve month period;





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





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





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





Other
Rights





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





Dividends





Under
the Companies Act, unless our Board of Directors recommends the payment of a
dividend, we may not declare a dividend. Similarly, under our Amended and
Restated Articles of Association, although the shareholders may, at the annual
general meeting, approve a dividend in an amount less than that recommended by
the Board of Directors, they cannot increase the amount of the dividend. In
India, dividends generally are declared as a percentage of the par value of a
company’s equity shares. Any dividend recommended by the Board of Directors
subject to the limitations described above, will be distributed and paid to
shareholders in proportion to the paid up value of their shares within 30 days
of the approval by the shareholders at the annual general meeting. The Board of
Directors may also declare interim dividend and the amount of dividend,
including interim dividend, is required to be deposited in a separate bank
account within five days from the date of declaration of such dividend. If such
dividend, including interim dividend, has not been paid or claimed within 30
days of declaration of such dividend, we are required to transfer the total
amount of dividend which remains unpaid or unclaimed within seven days of the
expiry of the 30 day period, to a special bank account. Under the Companies Act
if a dividend has been declared by a company but has not been paid within 30
days from the date of declaration to any shareholder entitled to the payment of
the dividend, each director of the company, if he is knowingly a




92




party
to the default, will be punishable with imprisonment and also liable to a fine.
Pursuant to our Amended and Restated Articles of Association, our Board of
Directors has discretion to declare and pay interim dividends without
shareholder approval. With respect to Equity Shares issued during a particular
fiscal year (including any Equity Shares underlying ADSs issued to the
Depositary in connection with the offering or in the future), cash dividends
declared and paid for such fiscal year generally will be prorated from the date
of issuance to the end of such fiscal year. Under the Companies Act, dividends
can only be paid in cash to the registered shareholder at a record date fixed on
or prior to the annual general meeting or to his order or his banker’s
order.





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





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





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





·
            the
      balance of reserves after withdrawals shall not fall below 15.0% of its
      paid up capital.





Bonus
Shares





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





Preemptive
Rights and Issue of Additional Shares





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




93




Annual
General Meetings of Shareholders





We
must convene an annual general meeting of shareholders within 15 months of the
previous annual general meeting or within six months after the end of each
fiscal year and may convene an extraordinary general meeting of shareholders
when necessary or at the request of a shareholder or shareholders holding at
least 10.0% of our paid up capital carrying voting rights. The annual general
meeting of the shareholders is generally convened by our company secretary
pursuant to a resolution of the Board. Written notice setting out the agenda of
the meeting must be given at least 21 days (excluding the days of mailing and
receipt) prior to the date of the general meeting to the shareholders of record.
Shareholders who are registered as shareholders on the date of the general
meeting are entitled to attend 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 if
so determined by the Board of Directors. Our registered office is located at 1st
floor, Mahalaxmi Engineering Estate, L. J. First Cross Road, Mahim (West),
Mumbai 400 016.





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





Voting
Rights





At
any general meeting, voting is by show of hands unless a poll is demanded by a
shareholder or shareholders present in person or by proxy holding at least 10.0%
of the total shares entitled to vote on the resolution or by those holding
shares with an aggregate paid up capital of at least Rs.50,000. Upon a show of
hands, every shareholder entitled to vote and present in person has one vote
and, on a poll, every shareholder entitled to vote and present in person or by
proxy has voting rights in proportion to the paid up capital held by such
shareholders.





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





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





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





Pursuant
to Section 192A of the Companies Act, a listed public company has an option to
pass any resolution relating to such businesses as notified by the Central
Government through a postal ballot. Since as of the date of this prospectus, the
Company is not a “listed public company”, the provisions of Section 192A of the
Companies Act do not currently apply to us.





Holders
of our ADSs may exercise voting rights only through a depositary, unlike an
owner of Equity Shares, who can exercise voting rights directly. An owner of
ADSs generally will have the right under the deposit agreement to instruct the
Depositary to exercise the voting rights for the Equity Shares




94




represented
by the ADSs. Owners of ADSs have no rights pursuant to the Companies Act, under
which we were incorporated, and are limited to those rights granted to them
pursuant to the deposit agreement.





It
is our expectation that our Depositary will mail to the owners of ADSs any
notice of shareholders’ meeting timely received from us together with
information explaining how to instruct the Depositary to exercise the voting
rights of the Equity Shares represented by ADSs. If the Depositary timely
receives voting instructions from an owner of ADSs, it will endeavor to vote the
securities represented by those ADSs in accordance with such voting
instructions. In the event that voting takes place by a show of hands, the
depositary bank will cause the custodian to vote all deposited securities in
accordance with the instructions received from owners of a majority of the ADSs
for which the depositary bank receives voting instructions. However, the ability
of the Depositary to carry out voting instructions may be limited by practical
and legal limitations and the terms of the securities on deposit. We cannot
assure that holders of ADSs will receive voting materials in time to enable them
to return voting instructions to the depositary bank in a timely
manner.





Register
of Shareholders; Record Dates; Transfer of Shares





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





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





Following
the introduction of the Depositories Act, 1996, as amended, and the repeal of
Section 22A of the Securities Contracts (Regulation) Act, 1956, as amended,
which enabled companies to refuse to register transfers of shares in some
circumstances, the equity shares of a public company are freely transferable,
subject only to the provisions of Section 111A of the Companies Act. Since we
are a public limited company, the provisions of Section 111A will apply to us.
Our Articles currently contain provisions which give our directors discretion to
refuse to register a transfer of shares in some circumstances. Furthermore, in
accordance with the provisions of Section 111A(2) of the Companies Act, our
directors may refuse to register a transfer of shares if they have sufficient
cause to do so. If our directors refuse to register a transfer of shares, the
shareholder wishing to transfer his, her or its shares may file a civil suit or
an appeal with the Company Law Board constituted under Section 10E of the
Companies Act. Pursuant to Section 111A(3) of the Companies Act, if a transfer
of shares contravenes any of the provisions of the Indian Securities and
Exchange Board of India Act, 1992 or the regulations issued there under or the
Indian Sick Industrial Companies (Special Provisions) Act, 1985 or any other
Indian laws, the Company Law Board may, on application made by the company, a
depository incorporated in India, an investor, the Securities and Exchange Board
of India or other parties, direct the rectification of the register of records.
The Company Law Board may, in its discretion, issue an interim order suspending
the voting rights attached to the relevant shares before making or completing
its investigation into the alleged contravention. Notwithstanding such
investigation, the rights of a shareholder to transfer the shares will not be
restricted.





Under
the Companies Act, unless the shares of a company are held in a dematerialized
form, a transfer of shares is effected by an instrument of transfer in the form
prescribed by the Companies Act and the rules thereunder together with delivery
of the share certificates.





Disclosure
of Ownership Interest





Section
187C of the Companies Act requires beneficial owners of shares of Indian
companies who are not holders of record to declare to us details of the holder
of record and the holder of record to declare details of the beneficial owner.
Any person who fails to make the required declaration within 30 days may be
liable for a fine of up to Rs.1,000 for each day the declaration is not made.
Any lien, promissory note or other collateral agreement created, executed or
entered into with respect to any equity share by its




95




registered
owner, or any hypothecation by the registered owner of any equity share, shall
not be enforceable by the beneficial owner or any person claiming through the
beneficial owner if such declaration is not made. Failure to comply with Section
187C will not affect our obligation to register a transfer of shares or to pay
any dividends to the registered holder of any shares pursuant to which the
declaration has not been made. While it is unclear under Indian law whether
Section 187C applies to holders of ADSs, investors who exchange ADSs for the
underlying Equity Shares will be subject to the restrictions of Section 187C.
The provisions of Section 187C of the Companies Act do not, however, apply to a
trustee holding shares of a company for the benefit of the beneficiaries of a
trust.





Audit
and Annual Report





At
least 21 days before the annual general meeting of shareholders excluding the
days of mailing and receipt, we must distribute to our shareholders a detailed
version of our audited balance sheet and profit and loss account and the related
reports of the Board and the auditors, together with a notice convening the
annual general meeting. Under the Companies Act, we must file the balance sheet
and annual profit and loss account presented to the shareholders within 30 days
of the conclusion of the annual general meeting with the Registrar of Companies
in Mumbai, which is in the State of Maharashtra, India. Our registered office is
located in Mumbai. We must also file an annual return containing a list of our
shareholders and other information, within 60 days of the conclusion of the
meeting.





Company
Acquisition of Equity Shares





Under
the Companies Act, approval of at least 75.0% of a company’s shareholders voting
on the matter and approval of the High Court of the State in which the
registered office of the company is situated is required to reduce a company’s
share capital. A company may, under some circumstances, acquire its own equity
shares without seeking the approval of the High Court. However, a company would
have to extinguish the shares it has so acquired within the prescribed time
period. A company is not permitted to acquire its own shares for treasury
operations. An acquisition by a company of its own shares (without having to
obtain the approval of the High Court) must comply with prescribed rules,
regulations and conditions as laid down in the Companies Act. In addition,
private and unlisted public companies such as ours, would have to comply with
the Private Limited Company and Unlisted Public Limited Company (Buy-back of
Securities) Rules, 1999, notified by the Ministry of Law, Justice and Company
Affairs of the Government of India on July 6, 1999 and public companies which
are listed on a recognized stock exchange in India would have to comply with the
provisions of the Securities and Exchange Board of India (Buy-back of
Securities) Regulations, 1998, or Buy-back Regulations. Since we are not listed
on any recognized stock exchange in India, we would have to comply with the
relevant provisions of the Companies Act and the Private Limited Company and
Unlisted Public Limited Company (Buy-back of Securities) Rules,
1999.





Liquidation
Rights





Subject
to the rights of creditors, workmen and the holders of any shares entitled by
their terms to preferential repayment over the Equity Shares, if any, in the
event of our winding-up the holders of the Equity Shares are entitled to be
repaid the amounts of paid up capital or credited as paid upon those Equity
Shares. Further, in the event of a winding up, the shareholders of the Company
would be liable for an amount not exceeding the aggregate unpaid amount of the
face value of shares of the Company held by such shareholders. All surplus
assets after payments to the holders of any preference shares and other
creditors shall be paid to holders of Equity Shares in proportion to their
shareholdings at the commencement of the winding-up.





Material
Contracts





None.




96




DOCUMENTS
ON DISPLAY





This
annual report and other information filed or to be filed by the Company can be
inspected and copied at the public reference facilities maintained by the SEC
at:





Office
of Investor Education and Assistance


100
F Street, NE


Washington,
D.C. 20549


(202)
551-6551


e-mail:
help@sec.gov





Copies
of these materials can also be obtained from the Public Reference Section of the
SEC, 100 F Street, NE, Washington, D.C. 20549, at prescribed rates.





The
SEC maintains a website at www.sec.gov that contains reports and other
information regarding registrants that make electronic filings with the SEC
using its EDGAR system. With effect from November 4, 2002, the SEC has issued a
Rule mandating use of EDGAR system of filing for all international filers. The
Company has accordingly been following the Rule.





Additionally,
documents referred to in this Form 20-F may be inspected at our registered
office, which is located at Mahalaxmi Engineering Estate, 1st Floor, L.J. First
Cross Road, Mahim (West), Mumbai 400 016, India.








97




EXHIBIT
INDEX










Exhibit
      No.
            
            Description of
      Document*1.1
            
            Articles
      of Association, as amended.*1.2
            
            Memorandum
      of Association, as amended.*1.3
            
            Certificate
      of Incorporation, as amended.*2.1
            
            Form
      of Deposit Agreement among Rediff.com, Citibank, N.A., and holders from
      time to time of American Depository Receipts issued thereunder (including
      as an exhibit, the form of American Depository
Receipt).*2.2
            
            Rediff.com’s
      specimen certificate for equity shares.*2.3
            
            Amended
      and Restated Shareholder Rights Agreement dated February 24, 2000 between
      Rediff.com and the shareholders of Rediff.com.*4.1
            
            1999
      Employee Stock Option Plan.*4.2
            
            1999
      Associate Stock Option Plan.***4.3
            
            2002
      Stock Option Plan.****4.4
            
            2004
      Stock Option Plan.*******4.5
            
            2006
      Employee Stock Option Plan.********4.6
            
            2006
      ADR Linked Employee Stock Option Plan.*4.7
            
            Form
      of Indemnification Agreement.*******4.8
            
            Indemnification
      Agreement dated November 8, 2005 between Rediff.com and Sridar A.
      Iyengar.*******4.9
            
            Indemnification
      Agreement dated November 8, 2005 between Rediff.com and Ashok
      Narasimhan.*******4.10
            
            Indemnification
      Agreement dated November 8, 2005 between Rediff.com and Pulak Chandan
      Prasad.*******4.11
            
            Indemnification
      Agreement dated November 8, 2005 between Rediff.com and Joy
      Basu.*4.12
            
            Sublease
      dated July 5, 1999 between Shreenathji Balaji Computech Private Limited
      and Rediff.com.*4.13
            
            Letter
      Agreement dated December 28, 1998 between Rediffusion-Dentsu, Young &
      Rubicam Limited and Rediff.com.*4.14
            
            Promoters
      Agreement dated January 9, 1996 between Ajit Balakrishnan and Diwan Arun
      Nanda.**4.15
            
            Stock
      Purchase Agreement among Rediff.com, ValuCom and shareholders of ValuCom
      dated March 21, 2001.**4.16
            
            Stock
      Purchase Agreement among Rediff.com, India Abroad and shareholders of
      India Abroad dated March 21, 2001, as amended on April 27,
      2001.**4.17
            
            Amended
      and Restated Agreement and Plan of Reorganization among Rediff.com,
      Thinkindia.com, Inc., Rediff Holdings, Inc., the principal stock holders
      of Think India and certain other parties thereto dated February 27,
      2001.*****4.18
            
            Agreement
      for sale of assets of Value Communications Corporation dated April 8,
      2004.******4.19
            
            Underwriting
      Agreement dated November 9, 2005 between Rediff.com and Deutsche Bank
      Securities Inc.†12.1
            
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.†12.2
            
            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.†13.1
            
            Certification
      of Principal Executive Officer pursuant to 18. U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




98




†13.2
            
            Certification
      of Principal Financial Officer pursuant to 18. U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.








*
            Incorporated
      by reference to exhibits filed with the Registrant’s Registration
      Statement on Form F-1 (File No. 333-37376).*
            Incorporated
      by reference to exhibits filed with the Registrant’s Form 20-F for the
      fiscal year ended March 31, 2001.***
            Incorporated
      by reference to exhibits filed with the Registrant’s Form 20-F for the
      fiscal year ended March 31, 2003.****
            Incorporated
      by reference to exhibits filed with the Registrant’s Form S-8 filed on
      December 30, 2004.*****
            Incorporated
      by reference to exhibits filed with the Registrant’s Form 20-F for the
      fiscal year ended March 31, 2004.******
            Incorporated
      by reference to exhibits filed with the Registrant’s Form 6-K filed on
      November 9, 2005.*******
            Incorporated
      by reference to exhibits filed with the Registrant’s Form 20-F for the
      fiscal year ended March 31, 2006.********
            Incorporated
      by reference to exhibits filed with the Registrant’s Form 20-F for the
      fiscal year ended March 31, 2007.†
            Filed
      herewith.








99




INDEX
TO FINANCIAL STATEMENTS








Page(s)Reports
      of Independent Registered Public Accounting Firm on the Consolidated
      Financial Statements
            F-2
      – F-3Consolidated
      Balance Sheets as of March 31, 2007 and 2008
            F-4Consolidated
      Statements of Operations for the years ended March 31, 2006, 2007 and
      2008
            F-5Consolidated
      Statements of Changes in 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 Consolidated Financial Statements
            F-8
      – F-30








F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
the Board of Directors and Shareholders of


Rediff.com
India Limited


Mumbai,
India




We
have audited the accompanying consolidated balance sheets of Rediff.com India
Limited and subsidiaries (the “Company”) as of March 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders’ equity and cash
flows for each of the three years in the period ended March 31, 2008. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2008
and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.




We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of March 31, 2008, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated September 26,
2008, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.




As
described in Note 2 (b) to the consolidated financial statements, these
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
differ in certain material respects from accounting principles generally
accepted for companies in India, which form the basis of the Company’s general
purpose financial statements.










/s/
DELOITTE HASKINS & SELLS


Chartered
Accountants


Mumbai,
India





September
26, 2008




F-2




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
  To
the Board of Directors and Shareholders of
 Rediff.com
India Limited
 Mumbai,
India
 
 We
have audited the internal control over financial reporting of Rediff.com India
Limited (the Company) 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. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in Item 15 under Controls
and Procedures of the accompanying Form 20-F titled Management’s Annual Report
on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed
risk and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.





A
company's internal control over financial reporting is a process designed by or under the supervision of, the
company’s principal executive and principal
financial officers or persons performing similar functions and effected by the
company’s board of directors, management and other
personnelto provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.





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




In
our opinion, the Company has maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2008, based on the
criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.





We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets as
of March 31, 2008 and 2007, and the related consolidated statements of
operations, shareholders’ equity and cash flows for each of the three years in
the period ended March 31, 2008 of the Company and our report dated
September 26, 2008, expressed an unqualified opinion on those financial
statements.










/s/
DELOITTE HASKINS & SELLS


Chartered
Accountants


Mumbai,
India





September
26, 2008




F-3





REDIFF.COM INDIA
      LIMITEDCONSOLIDATED
      BALANCE SHEETSas
      of March 31, 2007 and 20082007
            
            2008US$
            
            US$AssetsCurrent
      AssetsCash
      and cash equivalents
            
            53,546,300
            
            59,032,690Trade
      accounts receivable, (net of allowances of US$ 2,697,334 and US$3,540,173
      as at March 31, 2007 and 2008, respectively)
            
            10,671,318
            
            12,036,874Prepaid
      expenses and other current assets (See Note 3)
            
            1,633,588
            
            3,538,545Total
      current assets
            
            65,851,206
            
            74,608,109Property,
      plant and equipment - net (See Note 4)
            
            9,963,029
            
            14,384,360Investments,
      at costs
            
            581,054
            
            581,054Goodwill
      (See Note 5)
            
            7,314,468
            
            7,314,468Recoverable
      income taxes
            
            1,833,709
            
            4,278,241Other
      assets (See Note 6)
            
            949,265
            
            683,677Total
      assets
            
            86,492,731
            
            101,849,909Liabilities
      and Shareholders' equityCurrent
      liabilitiesAccounts
      payable and accrued liabilities
            
            7,644,191
            
            9,313,979Customer
      advances and unearned revenues
            
            1,288,902
            
            1,684,186Total
      current liabilities
            
            8,933,093
            
            10,998,165Other
      liabilities
            
            336,889
            
            701,273Total
      liabilities
            
            9,269,982
            
            11,699,438Commitments
      and contingencies (See Note 16 )Shareholders'
      equityEquity
      shares: par value -- Rs.5, Authorized:24,000,000
      shares at March 31, 2007 and 2008;Issued
      and outstanding: 14,603,800 shares and
              14,615,800
      shares at March 31, 2007 and 2008,
              respectively
      (See Note 8)
            
            1,733,604
            
            1,735,105Additional
      paid in capital
            
            123,942,398
            
            125,849,756Accumulated
      other comprehensive (loss) / income
            
            -806,979
            
            5,303,652Accumulated
      deficit
            
            -47,646,274
            
            -42,738,042Total
      shareholders' equity
            
            77,222,749
            
            90,150,471Total
      liabilities and shareholders' equity
            
            86,492,731
            
            101,849,909See
      accompanying notes to consolidated financials
  statements





F-4





REDIFF.COM INDIA LIMITEDCONSOLIDATED
      STATEMENTS OF OPERATIONSFor
      each of the years ended March 31, 2006, 2007 and 2008Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Operating
      revenuesIndia
      Online
            
            12,174,927
            
            20,759,227
            
            23,649,363U.S.
      Publishing
            
            6,525,753
            
            7,916,298
            
            8,599,840Total
      revenues
            
            18,700,680
            
            28,675,525
            
            32,249,203Cost
      of revenuesIndia
      Online
            
            1,593,894
            
            2,357,178
            
            2,961,442U.S.
      Publishing
            
            3,445,540
            
            3,059,138
            
            3,038,119Total
      cost of revenues
            
            5,039,434
            
            5,416,316
            
            5,999,561Operating
      expensesSales
      and marketing
            
            3,474,971
            
            5,856,640
            
            6,892,522Product
      development
            
            2,578,339
            
            3,845,304
            
            5,983,067General
      and administrative
            
            6,629,657
            
            10,493,022
            
            14,891,783Total
      operating expenses
            
            12,682,967
            
            20,194,966
            
            27,767,372Operating
      income / (loss)
            
            978,279
            
            3,064,243
            
            -1,517,730Other
      income / (expense), net:Interest
      income
            
            1,225,416
            
            3,726,222
            
            5,509,753Foreign
      exchange gain / (loss), net
            
            -975,488
            
            133,873
            
            -601,137Miscellaneous
      income including net gains on sale of investments
            
            2,253
            
            121,264
            
            1,950,720252,181
            
            3,981,359
            
            6,859,336Income
      before income taxes
            
            1,230,460
            
            7,045,602
            
            5,341,606Income
      tax expense
            
            -17,603
            
            -83,074
            
            -433,374Net
      income
            
            1,212,857
            
            6,962,528
            
            4,908,232Weighted
      average number of equity shares -- basic
            
            13,487,212
            
            14,543,360
            
            14,606,660Weighted
      average number of equity shares -- Diluted
            
            13,763,989
            
            14,924,267
            
            14,772,824Earning
      per share – basic
            
            Cents
      8.99
            
            Cents
      47.88
            
            Cents
      33.60Earning
      per share –diluted
            
            Cents
      8.81
            
            Cents
      46.66
            
            Cents
      33.22Earning
      per ADS -- (where 2  ADSs are equal
              to
      1 equity share) – basic
            
            Cents
      4.50
            
            Cents
      23.94
            
            Cents
      16.80Earning
      per ADS -- (where 2 ADSs are equal
              to
      1 equity share) -- diluted
            
            Cents
      4.41
            
            Cents
      23.33
            
            Cents
      16.61See
      accompanying notes to consolidated financials
  statements





F-5





REDIFF.COM
      INDIA LIMITED
                  
                  CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY
                  For
      each of the years ended March 31, 2006, 2007
      and  2008Equity
      Shares
                  (See
      Note 8)Number
      of Shares
                
                Amount
                  US$
                
                Additional
      Paid in Capital
                  US$
                
                Accumulated
      other Comprehensive Loss
                  US$
                
                Deferred
      Compensation Expense
                  US$
                
                Accumulated
      Deficit
                  US$
                
                Total
                  US$Balance,
      as of April 1, 2005
                12,880,050
                
                1,543,938
                
                77,270,439
                
                (3,195,953)
                
                (262)
                
                (55,821,659)
                
                19,796,503Amortization
      of compensation related to stock option grants
                --
                
                --
                
                --
                
                --
                
                262
                
                --
                
                262Issue
      of shares and options
                1,659,550
                
                182,380
                
                44,963,202
                
                --
                
                --
                
                --
                
                45,145,582Net
      income
                --
                
                --
                
                --
                
                --
                
                --
                
                1,212,857
                
                1,212,857Other
      comprehensive income translation adjustment
                --
                
                --
                
                --
                
                715,072
                
                --
                
                --
                
                715,072Balance,
      as of March 31, 2006
                14,539,600
                
                1,726,318
                
                122,233,641
                
                (2,480,881)
                
                --
                
                (54,608,802)
                
                66,870,276Amortization
      of compensation related to stock option grants
                --
                
                --
                
                --
                
                --
                
                --
                
                --
                
                --Stock
      compensation
                --
                
                --
                
                1,233,127
                
                --
                
                --
                
                --
                
                1,233,127Stock
      options exercised
                64,200
                
                7,285
                
                475,630
                
                --
                
                --
                
                --
                
                482,915Net
      income
                --
                
                --
                
                --
                
                --
                
                --
                
                6,962,528
                
                6,962,528Other
      comprehensive income translation adjustment
                --
                
                --
                
                --
                
                1,673,904
                
                --
                
                --
                
                1,673,904Balance,
      as of March 31, 2007
                14,603,800
                
                1,733,604
                
                123,942,398
                
                (806,979)
                
                --
                
                (47,646,274)
                
                77,222,749Amortization
      of compensation related to stock option grants
                -
                
                -
                
                -
                
                -
                
                -
                
                
                
                -Stock
      compensation
                -
                
                -
                
                1,876,008
                
                -
                
                -
                
                
                
                1,876,008Stock
      options exercised
                12,000
                
                1,501
                
                31,350
                
                -
                
                -
                
                
                
                32,851Net
      income
                -
                
                -
                
                -
                
                -
                
                -
                
                4,908,232
                
                4,908,232Other
      comprehensive income translation adjustment
                -
                
                -
                
                -
                
                6,110,631
                
                -
                
                
                
                6,110,631Balance,
      as of March 31, 2008
                14,615,800
                
                1,735,105
                
                125,849,756
                
                5,303,652
                
                -
                
                (42,738,042)
                
                90,150,471




F-6





REDIFF.COM
      INDIA LIMITED
              
              CONSOLIDATED
      STATEMENTS OF CASH FLOWS
              For
      each of the years ended March 31, 2006, 2007 and 2008Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Cash
      flows from operating activities
            1,212,857
            
            6,962,528
            
            4,908,232Net
      incomeAdjustments
      relating to continuing operations to
              reconcile
      net (loss)/ profit to net cash (used in) /
              generated  from
      continuing operations:Depreciation
      and  amortization
            1,514,471
            
            3,105,878
            
            5,902,705Provision
      for doubtful debts
            401,818
            
            930,910
            
            842,839Loss
      / (gain) on sale of investments
            -
            
            113,556
            
            -1,950,720Loss
      / (gain) on sale of property, plant and equipment
            25,125
            
            17,096
            
            -331Stock
      based compensation expenses
            262
            
            1,233,127
            
            1,876,008Changes
      in assets and liabilities:Trade
      accounts receivable  (gross)
            -2,684,819
            
            -6,225,855
            
            -2,208,394Prepaid
      expenses and other current assets
            191,196
            
            32,092
            
            -1,904,957Accounts
      payable and accrued liabilities
            824,440
            
            1,904,774
            
            2,034,172Customer
      advances and unearned revenues
            534,891
            
            125,211
            
            395,284Recoverable
      income taxes
            -237,805
            
            -1,317,874
            
            -2,444,532Other
      assets
            -117,053
            
            -336,652
            
            265,588Net
      cash generated
      from  continuing  operations
            1,663,403
            
            6,544,790
            
            7,715,894Net
      cash generated from discontinued operations
            13,737
            
            -
            
            -Net
      cash generated from operating  activities
            1,677,140
            
            6,544,790
            
            7,715,894Cash
      flows from investing activitiesPayments
      to acquire property, plant and equipment
            -4,618,379
            
            -7,801,821
            
            -10,332,440Purchase
      of investments
            -
            
            -581,054
            
            -Cash
      received from sale of investments
            -
            
            113,656
            
            1,950,720Proceeds
      from sales of property, plant and  equipment
            33,645
            
            20,276
            
            8,735Net
      cash used in investing activities
            -4,584,737
            
            -8,248,943
            
            -8,372,985Cash
      flows from financing activitiesNet
      proceeds from issue of equity shares and exercise of stock
      options
            45,145,582
            
            482,915
            
            32,851Net
      cash provided by financing activities
            45,145,582
            
            482,915
            
            32,851Effect
      of exchange rate changes on cash
            786,291
            
            1,673,903
            
            6,110,630Net
      increase in cash and cash equivalents
            43,024,279
            
            452,665
            
            5,486,390Cash
      and cash equivalents at the beginning of the year
            10,069,356
            
            53,093,635
            
            53,546,300Cash
      and cash equivalents at the end of the year
            53,093,635
            
            53,546,300
            
            59,032,690Supplemental
      disclosure of cash flow information:Income
      taxes paid
            30,053
            
            50,405
            
            1,551,462




F-7




REDIFF.COM INDIA
LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








1.
            Organization
      and Business





Rediff.com
India Limited (the "Company") was incorporated as a private limited company in
India on January 9, 1996 under the Indian Companies Act, 1956 and was converted
to a public limited company on May 29, 1998. The Company’s American Depository
Shares (“ADSs”) are listed on the NASDAQ Global Market (formerly the NASDAQ
National Market).





In
February 2001, the Company established Rediff Holdings, Inc. ("RHI"), a Delaware
Corporation, as a wholly-owned subsidiary to be a holding company for certain of
its investments in the United States of America. On February 27, 2001, RHI
acquired thinkindia.com, Inc ("thinkindia"), later renamed Rediff.com, Inc. On
April 27, 2001, RHI acquired India Abroad Publications, Inc. ("India Abroad"),
an offline and online news company.





The
Company is in the business of providing online internet based services, focusing
on India and the global Indian community. Its websites consists of interest
specific channels relevant to Indian interests such as cricket, astrology,
matchmaker and movies, content on various matters like news and finance, search
facilities, a range of community features such as e-mail, chat, messenger,
e-commerce, broadband wireless content and wireless short messaging services to
mobile phone subscribers in India. Additionally, the Company publishes a weekly
newspaper, India Abroad, in the United States and Canada.





2.
            Significant
      accounting policies





(a)Principles of
consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly – owned subsidiaries RHI, India Abroad, Rediff.com, Inc. and ValuCom, in
which a controlling interest is maintained and which have been consolidated from
their respective dates of acquisition. There are no Variable Interest Entities
to be consolidated in accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 46(R), Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, FIN 46(R). All significant inter-company accounts
and transactions are eliminated on consolidation.





(b)Basis of preparation of financial
statements





The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("U.S.
GAAP"). All amounts have been stated in U.S. dollars. U.S. GAAP differs in
certain material respects from accounting principles generally accepted in
India, which form the basis of the Company's general-purpose financial
statements. Principal differences insofar as they relate to the Company include
consolidation of subsidiaries, accounting for business combinations, valuation
of investments, accounting for deferred income taxes, stock based compensation,
website development costs and the presentation and format of the financial
statements and related notes.





(c)Use of estimates





The
preparation of consolidated 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 on the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, the Company evaluates its estimates,
including those related to uncollectible receivables, goodwill, deferred tax
assets and retirement benefits. Actual results could differ from those
estimates.




F-8




(d)Revenue
recognition





India
Online business





India
Online business includes revenues from online advertising and fee based
services. Online advertising includes advertisement and sponsorships. Fee based
services include e-commerce, subscription services and wireless short messaging
services. E-commerce revenues primarily consist of commission earned on sale of
items to customers who shop online while subscription services consist of
subscriptions received for using e-mail and other subscriber services. Wireless
short messaging services include revenues derived from providing value added
short messaging services and other related products to mobile phone
users.





Advertisement
and sponsorship income is derived from customers who advertise on the Company's
website or to whom direct links from the Company's website to their own websites
are provided and, income earned from sending targeted emails to Rediffmail
subscribers.





Revenue
from advertisement and sponsorships is recognized ratably over the contractual
period of the advertisement, commencing when the advertisement is placed on the
website. Revenues are also derived from sponsor buttons placed in specific areas
of the Company's website, which generally provide users with direct links to
sponsor websites. These revenues are recognized ratably over the period in which
the advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations may include guarantees of a minimum number of impressions, or times,
that an advertisement appears in pages viewed by users of the Company's website.
To the extent that minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the guaranteed impression
levels are achieved. The Company also earns revenues from the sending of e-mail
messages to its users on behalf of advertisers and such revenues are recognized
ratably over the contracted period.





E-commerce
revenue primarily consists of commission from the sale of books, music, apparel,
confectionery, gifts and other items to retail customers who shop at the
Company's online store.





Customers
directly place orders with vendors through the Company's website. When an order
is placed, the Company informs the vendor through an intranet and also confirms
whether payment has already been collected by the Company through credit
card/debit card or checks, or whether the payment is to be made by the customer
on cash-on-delivery (“COD”) basis. The vendor then dispatches the products to
the customers. The vendor sends a periodic summary of the transactions executed
for which the Company has collected payments on its behalf. The Company makes
payment to the vendor after deduction of its share of margin and costs. The
Company recognizes as revenues the commission earned on these transactions and
shipping costs recovered from customers.





Revenues
from E-commerce services also include one time sign up fees for creating,
designing and hosting the vendors' product information on the Company's
website.





Subscription
service revenues primarily include income from various paid e-mail and other
service products that cater to a cross section of the Company's registered user
base. The revenue for subscription based services is recognized ratably over the
period of subscription.





Wireless
short messaging services (SMS) revenues are derived from providing value added
short messaging services (SMS) such as e-mail and other related products to
mobile phone users. The Company contracts with third-party mobile phone
operators for sharing revenues from these services. SMS based revenues are
recognized when the service is performed.





U.S.
Publishing business





U.S.
Publishing business primarily includes advertising and sponsorship revenues and
consumer subscription revenues earned from the publication of India Abroad, a
weekly newspaper distributed




F-9




primarily
in the United States and Canada. It also includes the advertising revenues of
Rediff India Abroad, the website catering to the Indian community in the
U.S.





Advertising
revenues are recognized at the time of publication of the related advertisement.
Subscription income is deferred and recognized pro rata as fulfilled over the
terms of such subscription.





Revenues
from banners and sponsorships are recognized over the contractual period of the
advertisement, commencing when the advertisement is placed on the website,
provided that no significant obligations remain and collection of the resulting
receivable is probable. Obligations may include guarantee of a minimum number of
impressions, or times that an advertisement appears in pages viewed by users of
the Company's website. To the extent that minimum guaranteed impressions are not
met, the Company defers recognition of the corresponding revenues until the
guaranteed impression levels are achieved.





(e)Costs and
expenses





Costs
and expenses have been classified according to their primary functions within
the enterprise in the following categories:





Cost
of revenues





Cost
of revenues primarily include cost of content for the Rediff websites, editorial
costs, printing and circulation costs for the India Abroad and India in New York
newspapers and Fee Based services related costs. During the fiscal year ended
March 31, 2007 and 2008, the Company wrote back certain old accruals, which were
no longer payable and which were earlier charged to costs of revenues amounting
to US$66,296 and US$168,514 respectively.





Sales
and marketing





Sales
and marketing expenses primarily include employee compensation for sales and
marketing personnel, advertising and promotion expenses and market research
costs. During the fiscal year ended March 31, 2006, 2007 and 2008, the Company
wrote back certain old accounts payable and accruals amounting to US$54,000,
US$39,306 and US$312,309, respectively, which were no longer payable and which
were earlier charged to sales and marketing expenses.





Product
development





Product
development costs primarily include internet communication costs, software usage
fees, software development expenses and compensation to product development
personnel. Product development expenses include bandwidth costs of US$1,115,023,
US$1,686,600 and US$2,791,919 for the years ended March 31, 2006, 2007 and 2008,
respectively.





During
the fiscal year ended March 31, 2006, 2007 and 2008, the Company wrote back
certain old accounts payable amounting to US$25,000, US$21,364 and US$8,387
respectively, which were no longer payable and which were earlier charged to
product development expenses.





General
and administrative





These
costs primarily include employee compensation of administrative, operations and
supervisory staff whose time is mainly devoted to strategic and managerial
functions, depreciation, rent, insurance premiums, electricity,
telecommunication costs, legal and professional fees, valuation allowances,
stock based compensation costs and other general expenses.





During
the fiscal years ended March 31, 2006, 2007 2008, the Company wrote back certain
old accruals amounting to US$30,000, US$446,367 and US$360,448 respectively,
which were no longer payable and which were earlier charged to general and
administrative costs.




F-10




(f)Cash and cash
equivalents





The
Company considers all highly liquid investments with a remaining maturity at the
date of purchase of three months or less to be cash equivalents Cash and cash
equivalents consist of cash on hand and cash on deposit with banks.





Cash
and cash equivalents include short term bank deposits at March 31, 2007 and
2008, of US$51,020,141 and US$53,312,182, respectively, which have a remaining
maturity of less than one year, but which are redeemable without penalty on
demand.





(g)Property, plant and
equipment





Property,
plant and equipment are stated at cost less depreciation. The Company computes
depreciation for all property, plant and equipment using the straight-line
method over the estimated useful lives of assets. The estimated useful lives of
assets are as follows:





Furniture
      and fixtures
            10
      yearsComputer
      equipment and software
            3
      yearsOffice
      equipment
            3
      to 10 yearsVehicles
            8
      yearsLeasehold
      improvements
            6
      yearsWebsite
      development costs
            3
      years





(h)Website development
costs





Costs
incurred in the operations stage that provides additional functions or features
to the Company's website are capitalized and amortized over their estimated
useful life of three years. Maintenance expenses or costs that do not result in
new features or functions are expensed as product development costs as incurred.
Costs incurred for website development are accounted for in accordance with EITF
00-2 - "Accounting for Website development costs".





(i)Investments





Equity
securities with readily determinable fair market values that are not classified
as held-to-maturity are classified as available-for-sale and recorded at fair
value.





Equity
securities that do not have readily determinable market values are accounted for
at original cost. The fair values of these securities are not estimated if there
are no events or changes in circumstances that may have a significant effect on
the fair value.





Unrealized
gains and losses on such securities, net of applicable taxes, are reported in
other comprehensive income, a separate component of shareholders’
equity.





Securities
for which there is no readily determinable fair value are recorded at cost,
subject to an impairment charge for any other than temporary decline in value.
The impairment is charged to statement of operations.





(j)Goodwill





The
Company capitalizes goodwill resulting from business combinations.





In
accordance with the two-step methodology required by SFAS No. 142 "Goodwill and
other Intangible Assets", the Company tests the carrying balances of goodwill
and intangible assets that do not have a finite life for impairment annually or
earlier upon the occurrence of a triggering event.





F-11




Where
the management concludes that the carrying amounts are impaired, the impairment
loss is recognized in the statement of operations.





(k)Foreign currency
translation





The
accompanying financial statements are reported in U.S. dollars. The functional
currency of the parent is the Indian Rupee ("Rs." or "Rupee") while that of its
subsidiaries is the U.S. Dollar. For the purposes of presenting the consolidated
financial statements, Rupees have been converted into U.S. dollars for balance
sheet accounts using the exchange rate in effect at the balance sheet date, and
for revenue and expense accounts using a weighted-average exchange rate for the
respective periods. The gains or losses resulting from such translation are
reported as other comprehensive income or loss, which is a separate component of
shareholders' equity.





Transactions
in foreign currency are recorded at the original rates of exchange in force at
the time the transactions are effected. Monetary items denominated in a foreign
currency are restated using the exchange rates prevailing at the date of the
balance sheet. Exchange differences arising on settlement of transactions and
restatement of assets and liabilities at the balance sheet date are recognized
in operations.





(l)Earnings/ Loss per
share





The
Company reports basic and diluted earnings/ loss per share in accordance with
SFAS No. 128, Earnings per Share. Basic earnings / loss per share from
continuing operations and net income/ loss has been computed by dividing the
income/ loss from continuing operations and net income/loss, respectively for
the year by the weighted average number of equity shares outstanding during the
period, including equity share equivalents for ADSs issued. Diluted earnings/
loss per share is computed using the weighted average number of equity shares
including equity share equivalents for ADSs issued and dilutive potential equity
shares outstanding during the period, using the treasury stock method for
options and warrants, except where the results would be anti-dilutive. The
determination as to whether a potential equity share is anti-dilutive is based
on the income/ loss per share from continuing operations. The Company also
reports earnings/loss per ADS, where two ADSs are equal to one equity
share.





(m)Income taxes





Income
taxes consist of current income taxes and the change in the deferred tax
balances during the year. Deferred tax assets and liabilities are recognized for
each entity and taxing jurisdiction for future tax consequences attributable to
temporary differences between the carrying amounts of assets and liabilities and
their respective tax bases and operating loss carry-forwards, measured using the
enacted tax rates expected to apply in the years in which such temporary
differences are expected to be recovered or settled. The effect of changes in
tax rates is recognized in income in the period that includes the enactment
date. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits for which future realization is
uncertain.





The
Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No.
48 (FIN 48), Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109, on April 1, 2007. FIN 48 provides specific guidance on
the financial statement recognition, measurement, reporting and disclosure of
uncertain tax positions taken or expected to be taken in a tax return. FIN 48
addresses the manner in which tax positions, either permanent or temporary,
should be reflected in the financial statements.





The
Company evaluates each tax positions to determine if it is more likely than not
that a tax position is sustainable, based on its technical merits. If a tax
position does not meet the more likely than not standard, a liability is
recorded. Additionally, for a position that is determined to, more likely than
not, be sustainable, the Company measure the benefit at the highest cumulative
probability of being realized and establish a liability for the remaining
portion. A material change in the tax liabilities could have an impact on the
results of the Company.




F-12




The
Company recognizes potential interest and penalties related to unrecognized tax
benefits in income tax expense.





(n)Impairment or disposal of long-lived
assets





The
Company evaluates its long lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of tangible long
lived assets may not be recoverable, the Company subjects such long lived assets
to a test of recoverability, based on the undiscounted cash flows expected from
use or disposition of such assets. Such events or circumstances would include
changes in the market, technological obsolescence, and adverse changes in
profitability or regulation. If the asset is impaired, the Company recognizes an
impairment loss based on the estimated fair values using discounted cash flows
and the carrying value of the asset. Assets to be disposed of are reported at
the lower of the carrying value or the fair value less the cost to
sell.





(o)Stock based
compensation




The
Company has adopted the provisions of Statement of Financial Accounting Standard
No. 123(R) Share-Based Payment(“SFAS 123R”) with effect from 1st April,
2006. Accordingly, the fair value method is used to account
for   the compensation cost of stock options awards granted to
officers, employees , retainers in full time service of the Company and
non-employee directors for their services as directors. Until March 31, 2006,
the Company used the intrinsic value method specified under Accounting
Principles Board Opinion No. 25 Stock Issued to Employeesto
account for the compensation cost of stock options and awards granted to
officers, employees and retainers in full time service of the Company and
non-employee directors for their services as directors and the fair value method
specified in SFAS 123R to account for the compensation cost of stock options and
awards granted to associates of the Company. Had compensation cost for the
Company's stock based compensation plan been determined in a manner consistent
with the fair value approach the Company's net income and basic and diluted
(loss) in 2006 earnings per share as reported would have been revised to the pro
forma amounts indicated below:





2006US$Net
      income as reported
            1,212,857Add:
            Stock
      compensation expenses included in reported net income
            262Less:
            Total
      stock-based  employee compensation expense determined under fair
      value based method for all awards
            (979,155)Adjusted
      pro forma
            233,964Earnings
      per share –
              As
      reportedBasic
            Cents
      8.99Diluted
            Cents
      8.81Adjusted
      pro formaBasic
            Cents
      1.73Diluted
            Cents
      1.70





The
adoption of SFAS 123(R) has resulted in recognition of US$1,233,127 and US
$1,876,008 as stock-based compensation cost for the fiscal year ended March 31,
2007 and 2008 respectively. The impact on the consolidated financial statements
of the Company for the fiscal year ended March 31, 2007 and 2008 due to adoption
of the standard is given below:





Year
      ended March 31,2007
            
            2008US$
            
            US$Income
      before income tax
            
            (1,233,127)
            
            (1,876,008)




F-13




Net
      income
            
            (1,233,127)
            
            (1,876,008)Earnings
      per equity share in cents—basic
            
            (8.48)
            
            (12.84)Earnings
      per equity share in cents—diluted
            
            (8.26)
            
            (12.70)Earnings
      per ADS in cents—basic
            
            (16.96)
            
            (25.68)Earnings
      per ADS in cents—diluted
            
            (16.53)
            
            (25.40)





The
fair value of each option is estimated on the date of grant using the
Black-Scholes model with the following assumptions:





Years
      ended March 31,2006
            
            2007
            
            2008Dividend
      yield
            0%
            
            0%
            
            0%Expected
      life
            1-4
      Years
            
            4-5
      Years
            
            3-5
      yearsRisk
      free interest rates
            4.23%
            
            4.43-4.56%
            
            3.73%-3.97%Volatility
            104%
            
            91.68-97.63%
            
            56.51%-69.42%





See
Note 14 - "Stock based compensation" for other disclosures.





(p)Allowances for doubtful accounts
receivable and other recoverables





Allowances
are established for doubtful accounts receivable and for other recoverables for
estimated losses resulting from the inability of customers to make contractually
agreed payments. All receivables which are outstanding for 180 days or more and
not confirmed by customers are provided for. Allowances are also set up for a
specific account receivable or other recoverable if the facts and circumstances
indicate that such account receivable or other recoverable is unlikely to be
collected.





(q)Classification





Certain
prior years' balances have been reclassified to conform to the current year's
presentation. These have no effect on previously reported results of operations
or shareholders' equity.





3.
            Prepaid
      Expenses and Other Current Assets





Prepaid
expenses and other current assets comprise of:





As
      of March 31,2007
            
            2008US$
            
            US$Prepaid
      expenses
            633,478
            
            1,740,897Vendor
      advances
            201,913
            
            130,429Rent
      deposits
            328,001
            
            654,229Other
      advances and deposits
            96,207
            
            621,527Loans
      to employees
            86,062
            
            130,568Accrued
      interest
            287,927
            
            260,8951,633,588
            
            3,538,545




F-14




4.
            Property,
      Plant and Equipment





Property,
plant and equipment comprise of:





As
      of March 31,2007
            
            2008US$
            
            US$Furniture
      and fixtures
            480,443
            
            523,228Computer
      equipment and software
            17,103,372
            
            25,987,850Office
      equipment
            354,500
            
            438,361Vehicles
            305,538
            
            398,892Leasehold
      improvements
            420,452
            
            479,244Website
      development costs
            1,304,536
            
            2,253,961Capital
      work in progress
            1,930,655
            
            2,745,909Property,
      plant and equipment, cost
            21,899,496
            
            32,827,445Accumulated
      depreciation and amortization
            (11,936,467)
            
            (18,443,085)Property,
      plant and equipment, net
            9,963,029
            
            14,384,360





The
depreciation and amortization charge for the years ended March 31, 2006, 2007
and 2008 was US$1,514,471, US$3,105,878 and US$5,902,705,
respectively.





5.
            Goodwill





The
Company's goodwill amounts as of March 31, 2007 and 2008 arise from its
acquisition of India Abroad. The goodwill related to India Abroad has been
allocated to the U.S. Publishing reporting unit which is also the reporting
segment. The Company's business in India has been treated as a single reporting
unit, and since none of the components in India benefited from the synergies
from acquisitions in the United States, no goodwill was allocated to this
reporting unit. The segment realignment did not effect the determination of
reporting units or the allocation of goodwill. The Company has tested each
reporting unit for impairment of goodwill annually, or earlier upon the
occurrence of a triggering event.





India
Abroad





In
the fourth quarter of fiscal years  2006, 2007 and 2008  the
Company performed its annual impairment test for goodwill of India Abroad.
Management determined the fair value of the business using the discounted cash
flow method in all years and established that the fair value of the reporting
unit exceeded its carrying value indicating that goodwill was not further
impaired.





6.
            Other
      Assets





Other
assets comprise of rental deposits which at the balance sheet date are due after
more than one year and the non current portion of loans to employees. Other
assets also include an amount of US$67,955 representing a recoverable from the
insurance carrier of the Company's D&O policy.





7.
            Related
      Party Transactions





The
Company’s principal related parties are its founder shareholders and companies
that the founder shareholders control. The Company enters into transactions with
such related parties in the normal course of business.





Five
of the Company’s largest shareholders beneficially hold approximately 59.9% of
the Company’s equity share capital in aggregate. As a result, such shareholders,
if they were to act collectively, could exercise control or significantly
influence most matters requiring shareholder approval, including significant
corporate transactions.




F-15




Included
in the determination of net income are the following significant transactions
with related parties:





Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Advertising
      and mobile revenues
            43,299
            
            31,281
            
            --Product
      development expenses (including amount capitalized)
            
            
            385,667
            
            310,094





Balances with related parties include:


As
      of March 31,2007
            
            2008US$
            
            US$Receivable
      for advertising income
            5,129
            
            5,853Payable
      for product development expenses
            --
            
            39,146Loans
      to officers
            172,020
            
            231,336





The
Company grants unsecured loans to employees for acquiring assets such as housing
property and vehicles and also for other personal purposes. These are recovered
from the employees’ salaries. The rate at which the loans are
made  is  2% per annum.





The
required repayments of loans by employees are as follows:





Years
      ended March 31,
            
            US$2009
            120,9682010
              2011
      and thereafter
            73,673
              36,695Total
      payments
            231,336





8.
            Shareholders'
      Equity





During
the fiscal year ended March 31, 2007, the Company also issued 128,400 ADSs
representing 64,200 equity shares on account of the exercise of stock options
pertaining to the 2002 and 2004 Stock Option plans at various grant prices, the
aggregate proceeds of which were US$482,915.





During
the fiscal year ended March 31, 2008, the Company also issued 12,000 equity
shares on account of the exercise of stock options pertaining to the 1999 ASOP
plan at various grant prices, the aggregate proceeds of which were
US$32,851.





9.
            Retirement
      Benefits





Gratuity





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





The
following tables set out the status of the gratuity plans and the amounts
recognized in the Company’s financial statements for the fiscal years ended
March 31, 2006, 2007 and 2008. The measurement date used is March 31 of the
relevant fiscal year.




F-16




Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Change
      in benefit obligationBenefit
      obligation at the beginning of the year......
            96,524
            
            105,679
            
            198,777Actuarial
      loss
            5,618
            
            81,386
            
            12,708Service
      cost
            21,479
            
            21,769
            
            53,468Interest
      cost
            7,210
            
            7,950
            
            20,639Benefits
      paid
            (22,942)
            
            (23,997)
            
            (17,504)Effect
      of exchange rate changes
            (2,210)
            
            5,990
            
            18,436Benefit
      obligation at the end of the year
            105,679
            
            198,777
            
            286,524Unrecognized
      net actuarial loss
            2,976
            
            -
            
            -Accrued
      liability
            108,655
            
            198,777
            
            286,524





Net
gratuity cost for the years ended March 31, 2006, 2007 and 2008 comprise of the
following:





Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Service
      cost
            21,479
            
            21,769
            
            53,468Interest
      cost
            7,210
            
            7,950
            
            20,639Recognized
      net actuarial loss
            5,618
            
            81,386
            
            12,708Net
      gratuity cost
            34,307
            
            111,105
            
            86,815





The
assumptions used in accounting for gratuity in the years ended March 31, 2006,
2007 and 2008 were as follows:





Years
      ended March 31,2006
            
            2007
            
            2008Discount
      rate
            8%
            
            10%
            
            9.25%Rate
      of increase in compensation
            8%
      for first 2 years and 5% thereafter
            
            10%
      for first 5 years and 7% thereafter
            
            10%
      for first 4 years and 7% thereafter





The
Company assesses these assumptions with its projected long-term plans of growth
and prevalent industry standards. Unrecognized actuarial gain/ loss is amortized
over the average remaining service period of the active employees expected to
receive benefits under the Plan.





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





Years ending March
      31,
            US$2009
            17,0882010
            25,4942011
            33,1752012
            43,7832013-2018
            549,712





The
expected benefits are based on the same assumptions used to measure the
Company’s benefit obligations as of March 31, 2008.




F-17




Provident
Fund





Employees
based in India and the Company each contributes at the rate of 12% of salaries
to a provident fund maintained by the Government of India for the benefit of
such employees. The provident fund is a defined contribution plan. Accordingly,
the Company expenses such contributions as incurred. Amounts contributed by the
Company to the provident fund, in the aggregate, were US$113,222, US$166,314 and
US$242,259 for the years ended March 31, 2006, 2007 and 2008,
respectively.





Compensated
absences





The
Company provides for the cost of vacation earned based on the number of days of
unutilized leave at each balance sheet date.





10.
            Operating
      Leases





The
Company leases office space, computer equipment, high-speed telephone lines and
residential apartments for employees under various operating leases. Operating
lease expense that has been included in the determination of the net income is
as follows:





Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Office
      space
            443,955
            
            505,465
            
            759,589Computers
      and equipments
            36,863
            
            36,720
            
            18,000Residential
      apartments for employees
            106,079
            
            185,315
            
            246,889Total
      operating lease expense
            586,937
            
            727,500
            
            1,024,478





The
minimum annual rental commitments under the above operating leases that have
initial or remaining terms in excess of one year are as follows:





As
      at March 31,
            US$2009
            611,1422010
            376,8072011
      and after
            1,929,312





11.
            Income
      Taxes





The
income tax expense consists of:





Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$Current
      taxes — including foreign (State tax)
            17,603
            
            83,074
            
            433,374Deferred
      taxes, net of allowance
            —
            
            —
            
            —Net
      income tax expense
            17,603
            
            83,074
            
            433,374




F-18




The
tax effects of significant temporary differences that resulted in deferred tax
assets and liabilities are as follows:





As
      of March 31,2007
            
            2008US$
            
            US$Depreciation
      and amortization
            3,301,215
            
            3,733,711Net
      operating loss carry forwards
            7,140,587
            
            6,981,003Bad
      debt allowance
            892,667
            
            1,225,763Retirement
      benefits
            226,847
            
            273,766Others
            7,202
            
            7,37711,568,518
            
            12,221,620Less:
      Valuation allowance
            (11,568,518)
            
            (12,221,620)Net
      deferred tax asset
            —
            
            —





The
Company increased the valuation allowance by US$653,102 for the fiscal year
ended March 31, 2008.





The
Company has provided a full valuation allowance against the deferred tax asset
since it is uncertain that the asset will be recovered. The Company's net
operating loss carry forwards for its Indian operations aggregating
approximately US$15.1 million as of March 31, 2008 will expire between April 1,
2009 and March 31, 2014. The Company also has unabsorbed depreciation carry
forwards as at March 31, 2008 aggregating to approximately US$7.8
million.





Recoverable
income taxes mainly consist of tax deducted at source on income from advertising
services and interest income, which the Company will claim as
refund.





As
of March 31, 2008, ValuCom has net operating loss carry forwards available to
offset future federal taxable income of US$2.9 million, which expire in years
2021 through 2026.





As
of March 31, 2008, Rediff Holdings, Inc., has net operating loss carry forwards
of approximately US$5.4 milion, for federal income tax purposes, which expire in
years 2020 through 2027.





Realization
of the future tax benefits related to the deferred income asset is dependent on
many factors, including the Company's ability to generate taxable income within
the net operating loss carry forward period. Management has considered these
factors and believes that a full valuation allowance is required for each of the
periods presented.





Effective
April 1, 2007, the Company adopted the provisions of FIN 48. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes” and prescribes a recognition threshold of more-likely-than-not
to be sustained upon examination. The implementation of FIN 48 did not have any
material impact on the financial statements.





The Company’s two major tax
jurisdictions are India and the U.S., though the Company also files tax returns
in other foreign jurisdiction. In India, the assessment is not yet completed for
fiscal year 1999 and onwards. The Company’s U.S. federal and state tax returns
pertaining to fiscal year 2005 onwards remain open subject to examination in
accordance with the statute of limitation prescribed by the relevant
authorities.





12.
            Segments





The
Company has two reportable segments, namely, the India Online business and the
U.S. Publishing business.




F-19




(i)
            India
      Online business primarily includes revenues from online advertising and
      fee based services. Online advertising includes advertisements and
      sponsorships and designing and managing customers' websites. Fee based
      services include e-commerce, subscription services and wireless short
      messaging services.





(ii)
            U.S.
      Publishing business primarily includes subscription and advertising
      revenues from the publication of India Abroad, a weekly newspaper
      published in the United States and Canada. It also includes the
      advertising revenues of Rediff India Abroad, the website catering to the
      Indian community in the U.S.A.





During
the year ended March 31, 2004, the Company discontinued its earlier practice of
allocating the operating expenses to its segments as management does not use
this information to measure the performance of these operating segments. The
Company believes that allocating these expenses is no longer meaningful in
evaluating segment performances since the Chief Operating Decision Maker's (the
Company’s Chairman and Managing Director) measure for segment results is the
profits of the segment before operating expenses.






F-20




Following
are the segment results and segment assets for the years ended March 31, 2006,
2007 and 2008.





2006
              
              2007
              
              2008
 India
      Online Business
                      
                      U.S.
      Publishing Business
                      
                      Total
                      
                      India
      Online Business
                      
                      U.S.
      Publishing Business
                      
                      Total
                      
                      India
      Online Business
                      
                      U.S.
      Publishing Business
                      
                      TotalUS$
                      
                      US$
                      
                      US$
                      
                      US$
                      
                      US$
                      
                      US$
                      
                      US$
                      
                      US$
                      
                      US$Revenues
      from external customers:Advertising
                      8,502,520
                      
                      5,931,028
                      
                      14,433,548
                      
                      16,176,418
                      
                      7,113,880
                      
                      23,290,298
                      
                      17,397,492
                      
                      8,012,081
                      
                      25,409,573Fee
      based services
                      3,672,407
                      
                      594,725
                      
                      4,267,132
                      
                      4,582,808
                      
                      802,419
                      
                      5,385,227
                      
                      6,251,871
                      
                      587,759
                      
                      6,839,63012,174,927
                      
                      6,525,753
                      
                      18,700,680
                      
                      20,759,227
                      
                      7,916,299
                      
                      28,675,525
                      
                      23,649,363
                      
                      8,599,840
                      
                      32,249,203Inter
      segment revenues:Advertising
                      7,029
                      
                      -
                      
                      7,029
                      
                      246
                      
                      -
                      
                      246
                      
                      -
                      
                      -
                      
                      -Total
      revenues
                      12,181,956
                      
                      6,525,753
                      
                      18,707,709
                      
                      20,759,473
                      
                      7,916,299
                      
                      28,675,771
                      
                      23,649,363
                      
                      8,599,840
                      
                      32,249,203Cost
      of revenues
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      -
                      
                      --Third-party
                      1,593,894
                      
                      3,445,539
                      
                      5,039,434
                      
                      2,357,178
                      
                      3,059,138
                      
                      5,416,316
                      
                      2,961,442
                      
                      3,038,119
                      
                      5,999,561-Inter
      segment
                      -
                      
                      -
                      
                      -
                      
                      -
                      
                      -
                      
                      -
                      
                      -
                      
                      -
                      
                      -Total
      cost of revenues
                      1,593,894
                      
                      3,445,539
                      
                      5,039,434
                      
                      2,357,178
                      
                      3,059,138
                      
                      5,416,316
                      
                      2,961,442
                      
                      3,038,119
                      
                      5,999,561Segment
      Results
                      10,588,062
                      
                      3,080,214
                      
                      13,668,276
                      
                      18,402,295
                      
                      4,857,161
                      
                      23,259,455
                      
                      20,687,921
                      
                      5,561,721
                      
                      26,249,642Segment
      Assets
                      64,417,947
                      
                      9,563,787
                      
                      73,981,735
                      
                      75,351,008
                      
                      11,060,461
                      
                      86,411,469
                      
                      88,919,825
                      
                      12,849,478
                      
                      101,769,303





The
following is a reconciliation of the segment results to the income from
operations before income taxes of the Company for the years ended March 31,
2006, 2007 and 2008.





2006
            
            2007
            
            2008US$
            
            US$
            
            US$Segment
      Result
            13,668,276
            
            23,259,455
            
            26,249,642Inter
      segment expenses
            7,029
            
            246
            
            -Operating
      expenses
            12,682,967
            
            20,194,540
            
            27,767,372Other
      Income
            252,181
            
            3,981,359
            
            6,859,336Net
      income before income taxes from  operations
            1,230,460
            
            7,045,602
            
            5,341,606





The
following is a reconciliation of the segment assets to the total assets as at
March 31, 2007 and 2008.





As
      at March 31,2007
            
            
            2008US$
            
            
            US$India
      online business
            
            
            75,351,008
            
            
            
            88,919,825US
      Publishing business
            
            
            11,060,461
            
            
            
            12,849,47886,411,469
            
            
            
            101,769,303Phone
      card business
            
            
            81,262
            
            
            
            80,606Total
      assets
            
            
            86,492,731
            
            
            
            101,849,909





Revenues
derived from customers are as follows:





Years
      ended March 31,2006
            
            2007
            
            2008US$
            
            US$
            
            US$United
      States
            5,853,947
            
            7,507,998
            
            8,003,947India
            12,536,571
            
            20,890,345
            
            23,865,583Rest
      of the world
            310,162
            
            277,182
            
            379,673Total
      revenues
            18,700,680
            
            28,675,525
            
            32,249,203





Net
property, plant and equipment by location are as follows:





As
      of March 31,2007
            
            2008US$
            
            US$United
      States and Canada
            
            118,847
            
            118,548India
            
            9,844,182
            
            14,265,812Total
            
            9,963,029
            
            14,384,360





13.
            Concentration
      of credit risk





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash, cash equivalents and accounts receivable. The
Company maintains the majority of its cash and cash equivalents in Indian Rupees
/ United States Dollar with reputed banks in India and the United
States.





The
Company's advertising revenues from the India Online business are primarily
derived from large corporate clients in India. Advertising revenues from the
U.S. Publishing business are primarily derived from corporate clients and retail
customers in the United States and Canada. The Company's fee




F-21




based
revenues from the India Online business and U.S. Publishing business are
primarily derived from retail customers in India, the United States and Canada.
These do not expose the Company to any material concentrations of credit
risk.





Significant
clients





Only
one client accounted for more than 10% of total revenues for the year ended
March 31, 2007.  No single client accounted for 10 percent or more of
the total revenues for the year ended March 31, 2006 and 2008.  As of
March 31, 2007, one customer accounted for more than 10% of the accounts
receivable balance. As of March 31, 2008, no one customer accounted for 10
percent or more of the accounts receivable balance.





14.
            Stock-based
      compensation





1999
Stock Option Plans





On
February 22, 1999, the Company approved the Employee Stock Option Plan 1999
("1999 ESOP") and the Associate Stock Option Plan 1999 ("1999 ASOP")
(collectively "Option Plans") which cover present and future employees,
retainers in full time service of the Company and certain associates of the
Company. The 1999 ESOP and 1999 ASOP have similar terms. Under the terms of the
1999 ESOP, a committee of the board may award stock options to eligible
employees in the form of warrants. Such options vest at the rate of 25% on each
successive anniversary of the grant date, until fully vested. Under the terms of
the 1999 ASOP, a committee of the board may award stock options to eligible
associates in the form of warrants. Such warrants vest at the rates set forth in
each warrant.





Each
allotted warrant carries with it the right to purchase a specified number of the
Company's equity shares at the exercise price during the exercise period, which
expires five years from the date of grant.


The
exercise price is determined by the awarding committee, and is intended to be at
least the fair value of the Company's equity shares on the date of the
grant.





Under
the Option Plans, the Company reserved 280,000 equity shares for the 1999 ESOP
and 198,000 equity shares for the 1999 ASOP, respectively. The Option Plans also
permit the Board of Directors to reserve additional warrants under either plan
to be issued to eligible parties on such terms and conditions as may then be
decided by the board at its absolute discretion.





Activity
in the warrants available to be granted under the 1999 ESOP is as
follows:





Shares
      available to be granted as optionsYears ended March
      31,Employee
      Stock Option Plan 1999:
            2006
            
            2007
            
            2008Available
      to be granted, beginning of year
            11,475
            
            11,475
            
            --Options
      granted
            --
            
            --
            
            --Forfeited
            --
            
            11,475
            
            --Available
      to be granted, end of year
            11,475
            
            --
            
            --





Activity
in the warrants of the 1999 ESOP for the years ended March 31, 2006, 2007 and
2008 is as follows:





Years
      ended March 31,2006
            
            2007
            
            2008Shares
      arising out of options
            
            Weighted
      average price
            
            Shares
      arising out of options
            
            Weighted
      average price
            
            Shares
      arising out of options
            
            Weighted
      average priceOutstanding
      at the beginning of the year
            92,150
            
            US$6.45
            
            Rs.
      281
            
            46,000
            
            US$
      9.49
            
            Rs.
      423
            
            46,000
            
            US$
      9.70
            
            Rs.
      423




F-22




Granted
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            --Lapsed
            (46,150)
            
            US$
      10.43
            
            Rs.
      465
            
            
            
            
            
            
            
            1,000
            
            US$
      10.58
            
            Rs.
      423Forfeited
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            
            
            --
            
            --Outstanding
      at the end of the year
            46,000
            
            US$
      9.49
            
            Rs.
      423
            
            46,000
            
            US$
      9.70
            
            Rs.
      423
            
            45,000
            
            US$
      10.58
            
            Rs.
      423





Activity
in the options available to be granted under the 1999 ASOP is as
follows:





Shares
      available to be granted as optionsYears
      ended March 31,Associate
      Stock Option Plan 1999:
            2006
            
            2007
            
            2008Available
      to be granted, beginning of year
            103,650
            
            103,650
            
            NilOptions
      granted
            --
            
            --
            
            --Forfeited
            --
            
            103,650
            
            NilAvailable
      to be granted, end of year
            103,650
            
            NIL
            
            NIL





Activity
in the warrants of the 1999 ASOP for the years ended March 31, 2006, 2007 and
2008 is as follows:





Year
      ended March 31,2006
            
            2007
            
            2008Shares
      arising
              out
              of
      options
            
            Weighted
              average
              price
            
            Shares
      arising out
              of
      options
            
            Weighted
              average
              price
            
            Shares
      arising
              out
              of
      options
            
            Weighted
              average
              priceOutstanding
      at the beginning of the year
            35,000
            
            US$4.67
            
            Rs.
      204
            
            35,000
            
            US$4.67
            
            Rs.
      204
            
            35,000
            
            US$4.67
            
            Rs.
      204Granted
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            --Lapsed
            --
            
            --
            
            --
            
            --
            
            --
            
            --
            
            (17,000)
            
            US$2.74
            
            Rs.
      109Exercise
            
            
            
            
            
            
            
            
            
            
            
            
            (12,000)
            
            US$2.74
            
            Rs.
      109Outstanding
      at the end of the year
            35,000
            
            US$4.56
            
            Rs.
      204
            
            35,000
            
            US$4.68
            
            Rs.
      204
            
            6,000
            
            US$16.48
            
            Rs.
      659





2002
Stock Option Plan





In
January 2002 the Company's Board of Directors approved the 2002 Stock Option
Plan ("2002 plan"), which provides for the grant of stock options to the
Company's employees. All options under this plan are exercisable for the ADSs of
the Company. Unless terminated sooner, this plan will terminate automatically in
January 2012. A total of 280,000 of the Company's equity shares are currently
reserved for issuance pursuant to 2002 plan.





Under
the terms of the 2002 plan, the board or a committee or a sub-committee of the
board will determine and authorize the grant of options to eligible employees.
Such options vest at the rates set forth in each award. Each option grant
carries with it the right to purchase a specified number of the Company's ADSs
at the exercise price during the exercise period, which expires ten years from
the date of grant. The exercise price is determined by the board (or a committee
or a sub-committee of the board) and shall be no more than 110% of the fair
market value and no less than 50% of the fair market value on the date of the
grant.





For
the 2002 plan, the Company had, during the fiscal year ended March 31, 2003,
obtained necessary approvals from regulators in India. During the fiscal year
ended March 31, 2004, the Company made appropriate filings with the SEC prior to
the first exercise date of the options granted under the 2002 plan.





Activity
in the warrants available to be granted under the 2002 plan is as
follows:




F-23




Shares
      available to be granted as options
              Years
      ended March 31,ADS
      linked Employee Stock Option Plan 2002:
            2006
            
            2007
            
            2008Available
      to be granted, beginning of year
            7,125
            
            13,000
            
            13,000Options
      granted
            --Forfeited
            5,875
            
            --
            
            --Available
      to be granted, end of year
            13,000
            
            13,000
            
            13,000





Activity
in the warrants of the 2002 plan for the fiscal year ended March 31, 2006, 2007
and  2008 is as follows:


Year
      s ended March 31,2006
              
              2007
              
              2008Shares
      arising
                out
                of
      options
              
              Weighted
                average
                Price
              
              Shares
      arising
                out
                of
      options
              
              Weighted
                average
                price
              
              Shares
      arising
                out
                of
      options
              
              Weighted
                average
                priceOutstanding
      at the beginning of the year
              188,025
              
              US$5.22
              
              87,750
              
              US$5.26
              
              62,625
              
              US$4.95Granted
              --
              
              --
              
              --
              
              --
              
              --
              
              --Forfeited
              (5,875)
              
              US$2.28
              
              --
              
              --
              
              --
              
              --Exercised
              (94,400)
              
              US$5.38
              
              (25,125)
              
              US$6.13
              
              --
              
              --Outstanding
      at the end of the year
              87,750
              
              US$5.26
              
              62,625
              
              US$4.95
              
              62,625
              
              US$4.95





2004
Stock Option Plan





In
June 2004, the Company's Board of Directors approved the 2004 Stock Option Plan
("2004 plan"), which provide for the grant of stock options to the Company's
employees. All options under this plan are exercisable for the ADSs of the
Company. Unless terminated sooner, this plan will terminate automatically in
January 2014. A total of 358,000 of the Company's equity shares are currently
reserved for issuance pursuant to 2004 plan.





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





For
the 2004 plan, the Company has obtained necessary approvals. During the fiscal
year ended March 31, 2005, the Company made appropriate filings with the SEC
prior to the first exercise date of the options granted under the 2004
plan.





Activity
in the warrants available to be granted under the 2004 plan is as
follows:





Shares
      available to be granted as options
              Years
      ended March 31,ADS
      linked Employee Stock Option Plan 2004:
            2006
            
            2007
            
            2008Available
      to be granted, beginning of year
            73,500
            
            115,525
            
            81,150Options
      granted
            (5,100)
            
            (46,250)
            
            --Forfeited
            47,125
            
            11,875
            
            16,812






F-24




Available
      to be granted, end of year
            115,525
            
            81,150
            
            97,962





Activity
in the warrants of the 2004 plan for the fiscal year ended March 31, 2006, 2007
and 2008 is as follows:





Year
      s ended March 31,2006
            
            2007
            
            2008Shares
      arising out
              of
      options
            
            Weighted
      average
              Price
            
            Shares
      arising out
              of
      options
            
            Weighted
      average
              price
            
            Shares
      arising out
              of
      options
            
            Weighted
      average
              priceOutstanding
      at the beginning of the year
            284,500
            
            US$
      10.84
            
            190,565
            
            US$
      10.74
            
            185,865
            
            US$
      14.04Granted
            5,100
            
            US$
      14.68
            
            46,250
            
            US$
      23.13
            
            --
            
            --Forfeited
            (47,125)
            
            US$
      10.78
            
            (11,875)
            
            US$
      13.04
            
            (16,812)
            
            US$
      16.23Exercised
            (51,910)
            
            US$
      10.86
            
            (39,075)
            
            US$
      10.83
            
            --
            
            --Outstanding
      at the end of the year
            190,565
            
            US$
      10.74
            
            185,865
            
            US$
      14.04
            
            169,053
            
            US$
      13.54





2006
Stock Option Plan





The
2006 Stock Option Plan (“2006 ESOP”) consists of ADR Linked Employee Stock
Option Plan-2006 and Employee Stock Option Plan-2006. These plans were adopted
and approved by the Compensation committee on June 20, 2006 in accordance with
the approval granted by shareholders on March 31, 2006. A total of 485,000
equity shares were approved for issuance under both the plans.
 
 Under
the terms of the 2006 plans, the board or a committee or a sub-committee of the
board will determine and authorize the grant of options to eligible employees.
Such options vest at the rates set forth in each award. Each option grant
carries with it the right to purchase a specified number of the Company's equity
shares / ADS's at the exercise price during the exercise period, which expires
ten years from the date of grant. The exercise price for the ADR Linked Employee
Stock Option Plan-2006 is determined by the board (or a committee or a
sub-committee of the board) and shall be no more than 110% of the fair market
value and no less than 50% of the fair market value on the date of the grant.
The exercise price for the Employee Stock Option Plan-2006 is also determined by
the board (or a committee or a sub-committee of the board) and shall not be less
than the face value of equity shares.
  For
the 2006 plans, the Company has obtained necessary approvals. In the month of
June, 2007, the Company made appropriate filings with the SEC prior to the first
exercise date of the options granted under the 2006
plans.




Activity
in the warrants available to be granted under the 2006 plans is as
follows:





Shares
      available to be granted as options
              Years ended March
      31,ADS
      linked Employee Stock Option Plan 2006:
            
            2007
            
            2008Available
      to be granted, beginning of year
            485,000
            224,250Options
      granted
            (263,750)
            (16,250)Forfeited
            3,000
            19,875Available
      to be granted, end of year
            
            224,250
            
            227,875





Activity
in the warrants of the 2006 plans for the fiscal year ended March 31, 2007 and
2008 is as follows:





2007
            
            2008Shares
      arising out
              of
      options
            
            Weighted
      average
              price
            
            Shares
      arising out
              of
      options
            
            Weighted
      average
              priceOutstanding
      at the beginning of the year
            --
            
            US$
      --
            
            260,750
            
            US$
      15.05Granted
            263,750
            
            US$
      14.88
            
            16,250
            
            US$
      31.78




F-25




Forfeited
            (3,000)
            
            US$
      0.23
            
            (19,875)
            
            US$
      11.05Outstanding
      at the end of the year
            260,750
            
            US$
      15.05
            
            257,125
            
            US$
      15.75





The
following table summarizes information about stock options outstanding as at
March31, 2008:





Options
      OutstandingRange of Exercise Price
            
            Number
      of
              shares
              arising
      out
              of
      options
            
            Weighted
              average
              remaining
              contractual
      life
            
            Weighted
      average
              PriceUS$0.25
      – 2.74
            
            361,500
            
            5.74
      years
            
            US$  1.89
            
            Rs.  75.65US$6.79
      – 11.86
            
            138,500
            
            4.45
      years
            
            US$  9.46
            
            Rs.  378.24US$12.50
      – 16.00
            
            333,100
            
            5.93
      years
            
            US$  12.56
            
            Rs.  501.90US$
      16.49 – 32.00
            
            213,750
            
            8.33
      years
            
            US$  28.79
            
            Rs.  1150.61





The
following table summarizes information about stock options exercisable as at
March31, 2008:





Options
      ExercisableRange of Exercise Price
            
            Number
      of
              shares
              arising
      out
              of
      options
            
            Weighted
              average
              remaining
              contractual
      life
            
            Weighted
      average
              PriceUS$0.25
      – 2.74
            
            64,250
            
            6.22
      years
            
            US$  1.73
            
            Rs.   69.24US$6.79
      – 11.86
            
            32,375
            
            3.04
      years
            
            US$  10.66
            
            Rs.  426.01US$12.50
      – 16.00
            
            115,428
            
            5.09
      years
            
            US$  12.56
            
            Rs.  502.18US$
      16.49 – 32.00
            
            52,438
            
            7.61years
            
            US$  27.35
            
            Rs.  1,093.15





15.
            Earnings/
      Loss per share and ADS





For
the year ended March 31, 2006, 2007 and 2008, the following table sets forth the
computation of basic and diluted income per share and ADS:





Year
      ended March 31,2006
            
            2007
            
            2008Numerator:Net
      Income
            US$1,212,857
            
            US$6,962,528
            
            US$4,908,232Denominator:Weighted
      average equity shares
            13,487,212
            
            14,543,360
            
            14,606,660Denominator for basic
      calculations
            13,487,212
            
            14,543,360
            
            14,606,660Weighted
      average effect of dilutive shares:Employee
      Stock Options
            276,778
            
            380,907
            
            157,024Denominator
      for diluted calculations
            13,763,989
            
            14,924,267
            
            14,772,824Earnings
      per share
            -basic
            Cents
      8.99
            
            Cents
      47.88
            
            Cents
      33.60–
      diluted
            Cents
      8.81
            
            Cents
      46.66
            
            Cents
      33.22Earnings
      per ADS
            –
      basic
            Cents
      4.50
            
            Cents
      23.94
            
            Cents
      16.80–
      diluted
            Cents
      4.41
            
            Cents
      23.33
            
            Cents
      16.61




F-26




16.
            Commitments
      and contingencies





Action Relating to Access to
Pornographic Material





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





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





Actions Relating to
Copyright Violation





A
complaint was filed by the IMI, a society representing various music companies
in Magistrate’s Court India, against three of our directors. The complaint
alleges that by providing links to MP3 sites through its directory we have been
guilty of violating Section 51 of the Copyright Act 1957. The complaint alleges
that the MP3 sites to which links were provided permitted downloading of music
which had not been authorized to be so downloaded by copyright owners who are
members of IMI. Our directors were named as parties to the lawsuit because,
according to the complaint, the directors are in charge of our affairs and are
hence deemed to be guilty of committing the offense. Our directors were exempted
from personal appearance. Our directors filed an application for discharge of
the complaint before the Magistrate. On April 24, 2008, the Court dismissed this
lawsuit in our favor.





A
complaint was filed by SCIL, a producer and publisher of sound recordings and
audio visual songs in India, against us and our Chairman/Chief Executive Officer
as well as Ram Gopal Verma Films Private Limited in the High Court of Delhi
(Suit No. C.S. (O.S.) 736 of 2007). The complaint alleges violations of the
Indian Copyright Law of 1957 through our placement on our website of video clips
of certain songs from two Hindi films (Nishabd and Honeymoon Travels Pvt Ltd),
of which SCIL claims to own sole copyrights through an assignment in the audio
visual songs, sound recordings, lyrics and musical composition. The complaint
seeks, among other relief, injunctive relief and damages in the amount of Rs.2.0
million (approximately US$50,000). In June 2007, we filed a written reply and
submitted the following facts that: (i) these song clips were uploaded as an
editorial feature due to the recent release of the two films believing these to
be newsworthy, in the course of our regular activity and not for commercial
purposes; (ii) the clips in question were not downloadable by our users; (iii)
these clips were accompanied by editorial review as normally done for a film’s
release; (iv) these were uploaded on our sites with the permission of the
producer of these films or their publicists who had provided us with such clips
for the




F-27




intended
use; and (v) the use of the these clips on our website was fair use, uploaded
for its newsworthiness for promotional review and was non-commercial in nature.
We have subsequently removed these clips from our website. The matter is pending
before the High Court of Delhi. These actions require management time and cost.
In the event that we are unsuccessful in our defense, we and our Chairman may
face penalties and fines.





Actions Relating to
Trademark Infringement





A
complaint was filed by Cartier International against Lotus Safetywear Ltd.
(“Lotus Safetywear”) and us alleging that Lotus Safetywear has used the
trademark “Cartier” on products that are being sold on our Rediff Shopping
website. Cartier International is seeking a permanent injunction restraining the
defendants, including us, from using without license or permission the “Cartier”
trademark and/or such other identical or deceptively similar marks. Cartier
International is also claiming damages in the amount of Rs.2.0 million
(approximately US$50,000). We have filed our response to Cartier International’s
allegations and among the defenses we have raised are: (a) it is Lotus
Safetywear, and not Rediff.com, that has used the “Cartier” trademark and that
we have not infringed on any of Cartier International’s intellectual property
rights; (b) the Rediff Shopping website only provides an online platform that
enables customers and sellers to enter into sale/purchase transactions and we
are not involved in the sale or purchase of the goods/products listed on our
website; and (c) vendors such as Lotus Safetywear are required to comply with
the terms and conditions we impose on vendors using Rediff Shopping, which
include providing us with the description of their products, prices and product
images, and which also specifically provide that vendors shall not infringe on
third party rights, including third-party intellectual property rights. Although
we believe that we have valid defenses to the charges, if they are unsuccessful
after exhausting all legal remedies, we could be subject to monetary fines or
damages. On August 5, 2008, the Delhi High Court granted the decree restraining
Lotus Safetywear and Rediff.com from using the “Cartier” trademark and further
instructed Rediff.com to ensure that the Cartier advertisement does not appear
on our website.





We
may be subject to additional lawsuits of these natures filed in the future. We
cannot predict the outcome of these lawsuits, nor can we predict the amount of
time and expense that will be required to resolve these lawsuits. If these
lawsuits become time consuming and expensive, or if there are unfavorable
outcomes against us in any of these cases, there could be a material adverse
effect on our business, financial condition and results of operations. We
currently hold insurance policies for the benefit of our directors and officers
(the “D&O Policy”), which provide coverage against certain claims. However,
the amount of coverage may not be sufficient for our needs or the various
exclusions in the D&O Policy could result in denial of coverage, in which
case we would have to self-fund all or a substantial portion of our
indemnification obligations.





Other
contingencies





The
Income Tax authorities in India have disallowed certain expenses claimed by the
Company for certain years and have also levied penalties on some of those
disallowances. The amounts of the penalties are not quantifiable at present and
the Company has lodged appropriate appeal proceedings with the relevant income
tax authorities. The Company expects to prevail in the appellate
proceedings.





The
Company is also subject to other legal proceedings and claims, which have arisen
in the ordinary course of its business. Those actions, when ultimately concluded
and determined, will not, in the opinion of management, have a material effect
on the results of operations, cash flows or the financial position of the
Company.





17.
            New
      Accounting Pronouncements





We
adopted the Financial Accounting Standards Board, or FASB, Interpretation
No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109”, on April 1, 2007. FIN 48
provides specific guidance on the financial statement recognition, measurement,
reporting and disclosure of uncertain tax positions taken or expected to be
taken in a tax return. FIN 48




F-28




addresses
the manner in which tax positions, either permanent or temporary, should be
reflected in the financial statements.





In
December 2007, the Financial Accounting Standards Board issued SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements an amendment of
ARB No. 51” (“SFAS No. 160”). SFAS No. 160 improves the relevance, comparability
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This standard is effective for fiscal years
beginning on or after December 15, 2008. The Company’s management is currently
evaluating the impact on the adoption of SFAS No. 160 will have on the Company’s
financial reporting and disclosures.





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years We have evaluated the impact of this
pronouncement and believe that this does not have a material effect on our
financial position, cash flows or results of operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. 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. This Statement is expected to expand the
use of fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments. The fair value
option established by this Statement permits all entities to choose to measure
eligible items at fair value at specified election dates. We have evaluated the
impact of this pronouncement and believe that this does not have a material
effect on our financial reporting and disclosures.





In December 2007, FASB issued SFAS No.
141 (Revised 2007), Business Combinations (“SFASNo.141R”). This Statement replaces SFAS No. 141, Business
Combinations. SFASNo.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
atfull 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. We 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.





In March 2008, FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities–An Amendment of FASB Statement No. 133
(“SFASNo.161”). SFASNo.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 disclosureson the need of using derivative
instruments, accounting of derivative instruments and related hedged items, if
any, under SFASNo.133 and the effect of such
instruments and related hedge items, if any, on the financial position,
financial performance andcash flows. We will be required to adopt this new Statement prospectively, for
fiscal years beginning after November 15, 2008. We are currently evaluating the
requirements of SFASNo.161 and have not yet
determined the impact this Statement may have on our consolidated financial
statements.





Schedule
of Valuation and Qualifying Accounts





Allowance
for trade accounts receivables




F-29





Description
            Balance
      at Beginning of Period
            Charged
      to cost as expenses
            Write
      offs
            Effect
      of exchange rate changes
            Balance
      at
              end
              of
      periodUS$
            US$
            US$
            US$
            US$Fiscal
      2008
            2,697,334
            848,111
            -
            -5,272
            3,540,173Fiscal
      2007
            1,766,424
            948,934
            -
            -18,024
            2,697,334Fiscal
      2006
            1,434,910
            401,818
            -45,018
            -25,286
            1,766,424








F-30




SIGNATURE








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.





REDIFF.COM
      INDIA LIMITED
              
              
              
              
              
              By: /s/ Ajit
      Balakrishnan
              Name:
      Ajit Balakrishnan
              Title:
      Chairman and Managing Director
              (Principal Executive Officer)








Place:          Mumbai


Date:           September
26, 2008













SIGNATURE








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.




REDIFF.COM
      INDIA LIMITED
                
                
                
                
                
                By: /s/ Joy
      Basu
                Name:
      Joy
      Basu
                Title: ChiefFinancial Officer
                (Principal
      Financial Officer)
  Place:          Mumbai


Date:           September
26, 2008