##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  
 FORM 20-F (Mark One)o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
 or x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended March 31, 2004.
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.For the transition period from
 to
 Commission file number 000-27663 Sify Limited  Not Applicable
(Translation at Registrants name into English) Republic of India
(Jurisdiction of incorporation or organization) Tidel Park, 2nd Floor
No. 4, Canal Bank Road
Taramani, Chennai 600 113 India
(91) 44-2254-0770
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act:
None Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares, each representing one Equity Share, par value
Rs.10 per share Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report. 34,900,993 Equity Shares were issued and outstanding as of March 31, 2004 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes    x    No    o Indicate by check mark which financial statement item the registrant has
elected to follow Item 17    o    Item 18    x




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TABLE OF CONTENTS  Currency of Presentation and Certain Defined TermsForward-Looking Statements May Prove InaccuratePART IItem 1. Identity of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on the CompanyItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description of Securities Other Than Equity SecuritiesPART IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15. Controls and proceduresItem 16A. Audit Committee financial expertItem 16B. Code of EthicsItem 16C. Principal Accountant Fees and ServicesPART IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsSIGNATURESExhibit IndexEXHIBIT 4.2EXHIBIT 4.3EXHIBIT 8.1EXHIBIT 11.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  Item
    
    PageCurrency of Presentation and Certain Defined Terms
    
    1Forward-Looking Statements May Prove Inaccurate
    
    2PART IItem 1.
    
    Identity of Directors, Senior Management and Advisers
    
    3Item 2.
    
    Offer Statistics and Expected Timetable
    
    3Item 3.
    
    Key Information
        
    3Item 4.
    
    Information on the Company
    
    20Item 5.
    
    Operating and Financial Review and Prospects
    
    34Item 6.
    
    Directors, Senior Management and Employees
    
    45Item 7.
    
    Major Shareholders and Related Party Transactions
    
    50Item 8.
    
    Financial Information
    
    52Item 9.
    
    The Offer and Listing
    
    52Item 10.
    
    Additional Information
    
    53Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    66Item 12.
    
    Description of Securities Other Than Equity Securities
    
    66PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    66Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    66Item 15.
    
    Controls and Procedures
    
    66Item 16A.
    
    Audit committee financial expert
    
    66Item 16B.
    
    Code of ethics
    
    67Item 16C.
    
    Principal Accountant Fees and Services
    
    67PART IIIItem 17.
    
    Financial Statements
    
    68Item 18.
    
    Financial Statements
    
    68Item 19.
    
    Exhibits
    
    98




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Currency of Presentation and Certain Defined Terms Unless the context otherwise requires, references in this annual report to
we, us, the company, Sify or Satyam Infoway are to Sify Limited, a
limited liability company organized under the laws of the Republic of India.
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. Until December 2002, we were a majority-owned subsidiary of
Satyam Computer Services Limited, a leading Indian information technology
services company which is traded on the New York Stock Exchange and the major
Indian stock exchanges. In January 2003, we changed the name of our company
from Satyam Infoway Limited to Sify Limited. Satyam is a trademark owned by
Satyam Computer Services, which has licensed the use of the Satyam trademark
to us subject to specified conditions. Sify.com, Sify, Sify iway,
SifyOnline,SatyamOnline, Satyam. Net, satyamonline.com and Satyam
iway are trademarks used by us for which we have registration applications
pending in India. All other trademarks or trade names used in this annual
report are the property of their respective owners. In this annual report, references to $, Dollars or U.S. dollars are
to the legal currency of the United States, references to Rs., rupees or
Indian rupees are to the legal currency of India and references to GBP are
to the legal currency of the United Kingdom. References to a particular
fiscal year are to our fiscal year ended March 31 of that year. For your convenience, this annual report contains translations of some
Indian rupee amounts into U.S. dollars which should not be construed as a
representation that those Indian rupee or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Indian rupees, as the case may be,
at any particular rate, the rate stated below, or at all. Except as otherwise
stated in this annual report, all translations from Indian rupees to U.S.
dollars contained in this annual report have been based on the noon buying rate
in the City of New York on March 31, 2004, the last business day of March 2004,
for cable transfers in Indian rupees as certified for customs purposes by the
Federal Reserve Bank of New York. The noon buying rate on March 31, 2004 was
Rs.43.40 per $1.00. Our financial statements are prepared in Indian rupees and presented in
accordance with United States generally accepted accounting principles, or U.S.
GAAP. In this annual report, any discrepancies in any table between totals and
the sums of the amounts listed are due to rounding. Information contained in our websites, including our corporate website,
www.sifycorp.com, is not part of this annual report. 1




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Forward-Looking Statements May Prove Inaccurate IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
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. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT
TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
SECTION ENTITLED ITEM 3. KEY INFORMATIONRISK FACTORS, ITEM 5. OPERATING
AND FINANCIAL REVIEW AND PROSPECTS AND ELSEWHERE IN THIS ANNUAL REPORT. YOU
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENTS ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL REPORT.
IN ADDITION, YOU SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL
REPORT AND IN OUR QUARTERLY REPORTS AND OTHER DOCUMENTS FILED WITH THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION, OR SEC, FROM TIME TO TIME. OUR
FILINGS WITH THE SEC ARE AVAILABLE ON ITS WEBSITE, WWW.SEC.GOV. 2




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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 Selected Financial Data You should read the selected consolidated financial data below in
conjunction with the consolidated financial statements, the related notes and
Item 5. Operating and Financial Review and Prospects, all of which are
included elsewhere in this Annual Report. The selected consolidated statements
of income data for the five years ended March 31, 2004 and the selected
consolidated balance sheet data as of March 31, 2000, 2001, 2002, 2003 and 2004
have been derived from our audited consolidated financial statements and
related notes, which have been prepared and presented in accordance with U.S.
GAAP. In addition, the selected consolidated historical financial data presented
herein includes transitional disclosures pertaining to adoption of SFAS 142,
Goodwill and other Intangible Assets, for the years ended March 31, 2002, 2003,
and 2004. The selected consolidated historical financial data includes a
presentation of EBITDA from continuing operations. EBITDA from continuing
operations represents earnings (loss) from continuing operations before
interest, taxes, depreciation and amortization, and gain on sale of
discontinued operations. EBITDA is neither an Indian GAAP measure nor a U.S.
GAAP measure and should not be considered in isolation or as an alternative to
net income as an indicator of operating performance or as an alternative to
cash flow as a measure of liquidity. Our presentation below also includes a
reconciliation of EBITDA from continuing operations to net loss, which we
believe to be the most comparable financial measure under U.S. GAAP. EBITDA
from continuing operations is presented because it is a basis upon which our
management assesses our financial performance and because we believe some
investors find it to be a useful tool for measuring a companys ability to fund
operating obligations and capital expenditure. Investors evaluating our
financial performance or analyzing our discounted cash flows based on EBITDA
from continuing operations should consider financing activities and
non-recurring charges that are not included in the calculation of EBITDA. Our
calculation includes significant charges recorded to reflect the impairment of
goodwill. Investors should also review carefully Item 5. Operating and
Financial Review and Prospects included elsewhere in this annual report for
further information regarding the underlying financial performance of our
company. While EBITDA is frequently reported by many companies as a
supplemental measure of operations, it is not necessarily comparable to other
similarly titled captions of other companies due to potential inconsistencies
in the method of calculation. 3




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Fiscal year ended March 312000
    
    2001
    
    2002
    
    2003
    
    2004
    
    2004Indian Rupees
    
    U.S. Dollars(In thousands, except share and per share data)Statement of Operations Data:Revenues
    
    
    618,467
    
    
    
    1,200,833
    
    
    
    1,493,636
    
    
    
    1,862,585
    
    
    
    2,517,873
    
    
    
    58,016Initial services charges
    
    
    
    
    
    
    19,691
    
    
    
    66,652
    
    
    
    97,270
    
    
    
    233,750
    
    
    
    5,386Revenue from related parties
    
    
    4,258
    
    
    
    4,957
    
    
    
    17,200
    
    
    
    34,345
    
    
    
    49,561
    
    
    
    1,142Total Revenue
    
    
    622,725
    
    
    
    1,225,481
    
    
    
    1,577,488
    
    
    
    1,994,200
    
    
    
    2,801,184
    
    
    
    64,544Cost of revenues (excluding depreciation and
amortization)
    
    
    281,431
    
    
    
    1,177,106
    
    
    
    1,192,671
    
    
    
    1,264,101
    
    
    
    1,476,714
    
    
    
    34,026Selling, general and administrative expenses
(including provision for doubtful receivables
and advances, depreciation, impairment of
assets and amortization of intangibles)
    
    
    650,222
    
    
    
    1,887,324
    
    
    
    1,962,467
    
    
    
    2,038,335
    
    
    
    1,839,956
    
    
    
    42,395Acquisition expenses
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Amortization / impairment of goodwill
    
    
    115,992
    
    
    
    931,967
    
    
    
    4,420,644
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock compensation
expense
    
    
    20,627
    
    
    
    61,451
    
    
    
    9,686
    
    
    
    57,729
    
    
    
    27,946
    
    
    
    644Foreign exchange (gain)/loss
    
    
    (5,414
    )
    
    
    (162,136
    )
    
    
    (44,520
    )
    
    
    18
    
    
    
    52,148
    
    
    
    1,202Total operating expenses
    
    
    1,062,858
    
    
    
    3,895,712
    
    
    
    7,560,948
    
    
    
    3,360,183
    
    
    
    3,396,764
    
    
    
    78,267Operating loss
    
    
    (440,133

    )
    
    
    (2,670,231
    )
    
    
    (5,983,460
    )
    
    
    (1,365,983
    )
    
    
    (595,580
    )
    
    
    (13,723
    )Other (expense)/income, net
    
    
    71,852
    
    
    
    242,368
    
    
    
    32,711
    
    
    
    52,948
    
    
    
    144,147
    
    
    
    3,321Loss before equity in losses of affiliates,
income taxes and minority interest
    
    
    (368,281
    )
    
    
    (2,427,863
    )
    
    
    (5,950,749
    )
    
    
    (1,313,035
    )
    
    
    (451,433
    )
    
    
    (10,402
    )Equity in profits/(losses) of affiliates
(including gain on sale of investments in
affiliates)
    
    
    
    
    
    
    (263,178
    )
    
    
    (1,225,444
    )
    
    
    (26,061
    )
    
    
    80,142
    
    
    
    1,847Loss before income taxes and minority interest
    
    
    (368,281
    )
    
    
    (2,691,041
    )
    
    
    (7,176,193
    )
    
    
    (1,339,096
    )
    
    
    (371,291
    )
    
    
    (8,555
    )Income taxes
    
    
    1,478
    
    
    
    (1,707
    )
    
    
    
    
    
    
    (2,856
    )
    
    
    (72
    )
    
    
    (2
    )Minority interest
    
    
    1,799
    
    
    
    11,137
    
    
    
    17,928
    
    
    
    12,564
    
    
    
    79
    
    
    
    2Loss from continuing operations
    
    
    (365,004
    )
    
    
    (2,681,611
    )
    
    
    (7,158,265
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (8,555
    )Discontinued operationsIncome / (loss) from discontinued operations (3)
    
    
    (16,893
    )
    
    
    172,581
    
    
    
    (125,373
    )
    
    
    
    
    
    
    
    
    
    
    Profit on sale of discontinued operations, net
of direct costs
    
    
    
    
    
    
    
    
    
    
    81,121
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (381,897
    )
    
    
    (2,509,030
    )
    
    
    (7,202,517
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (8,555
    )Net profit/ (loss) per equity share -
continuing operations
    
    
    (19.68
    )
    
    
    (117.34
    )
    
    
    (308.59
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (0.25
    )Discontinued operations
    
    
    (0.91
    )
    
    
    7.55
    
    
    
    (1.91
    )
    
    
    
    
    
    
    
    
    
    
    Net loss per share (4)
    
    
    (20.59
    )
    
    
    (109.79
    )
    
    
    (310.50
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (0.25
    )Weighted average equity shares used in
computing net loss per equity share
    
    
    18,545,399
    
    
    
    22,852,600
    
    
    
    23,196,428
    
    
    
    25,988,095
    
    
    
    34,519,545
    
    
    
    34,519,545
 4




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Fiscal year ended March 312000
    
    2001
    
    2002
    
    2003
    
    2004
    
    2004Indian Rupees
    
    U.S. Dollars(In thousands, except share and per share data)Transitional disclosures pertaining to adoption of
SFAS 142 Goodwill and other Intangible AssetsReported net loss
    
    
    (381,897
    )
    
    
    (2,509,030
    )
    
    
    (7,202,517
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (8,555
    )Less: Goodwill amortization
    
    
    115,992
    
    
    
    931,967
    
    
    
    292,964
    
    
    
    
    
    
    
    
    
    
    
    Less: Equity goodwill amortization
    
    
    
    
    
    
    201,332
    
    
    
    75,210
    
    
    
    
    
    
    
    
    
    
    
    Adjusted net loss
    
    
    (265,905
    )
    
    
    (1,375,731
    )
    
    
    (6,834,343
    )
    

    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (8,555
    )Reported net loss per share
    
    
    (20.59
    )
    
    
    (109.79
    )
    
    
    (310.50
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (0.25
    )Less: Goodwill amortization
    
    
    6.25
    
    
    
    40.78
    
    
    
    12.63
    
    
    
    
    
    
    
    
    
    
    
    Less: Equity goodwill amortization
    
    
    
    
    
    
    8.81
    
    
    
    3.24
    
    
    
    
    
    
    
    
    
    
    
    Adjusted net loss per share
    
    
    (14.34
    )
    
    
    (60.20
    )
    
    
    (294.63
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (0.25
    )Balance Sheet Data:Cash and cash equivalents
    
    
    7,284,568
    
    
    
    1,414,205
    
    
    
    658,111
    
    
    
    897,596
    
    
    
    1,325,803
    
    
    
    30,548Total assets
    
    
    10,634,004
    
    
    
    11,501,884
    
    
    
    4,146,274
    
    
    
    3,700,387
    
    
    
    3,799,073
    
    
    
    87,536Long-term debt, including current installments
    
    
    215,537
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    9,927,840
    
    
    
    10,588,336
    
    
    
    3,394,113
    
    
    
    2,888,696
    
    
    
    2,715,668
    
    
    
    62,573Other Financial Data:EBITDA from continuing operations (5)
    
    
    (191,979
    )
    
    
    (1,312,887
    )
    
    
    (6,589,135
    )
    
    
    (755,394
    )
    
    
    142,707
    
    
    
    3,289Add: Interest and income tax
    
    
    74,165
    
    
    
    232,706
    
    
    
    49,540
    
    
    
    31,999
    
    
    
    48,187
    
    
    
    1,110Income from discontinued operations
    
    
    
    
    
    
    172,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Profit on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    81,121
    
    
    
    
    
    
    
    
    
    
    
    74,165
    
    
    
    405,287
    
    
    
    130,661
    
    
    
    31,999
    
    
    
    48,187
    
    
    
    1,110Less: Depreciation and amortization
    
    
    247,190
    
    
    
    1,601,430
    
    
    
    613,890
    
    
    
    601,897
    
    
    
    559,980
    
    
    
    12,903Interest and income tax
    
    
    
    
    
    
    
    
    
    
    4,780
    
    
    
    4,096
    
    
    
    2,198
    
    
    
    51Loss from discontinued operations
    
    
    16,893
    
    
    
    
    
    
    
    125,373
    
    
    
    
    
    
    
    
    
    
    
    264,083
    
    
    
    1,601,430
    
    
    
    744,043
    
    
    
    605,993
    
    
    
    562,178
    
    
    
    12,954Net loss
    
    
    (381,897
    )
    
    
    (2,509,030
    )
    
    
    (7,202,517
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (8,555
    )
 Notes  1.
    
    Certain prior-year data has been reclassified to conform to the current year presentation.2.
    
    Convenience translation to U.S. Dollars done at the noon buying rate on March 31, 2004 of Rs 43.40 per $1.00, which should not be construed as a representation that
those Indian rupee or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Indian rupees, as the case may be, at this rate or at all.3.
    
    There is no goodwill associated with discontinued operations and no extraordinary items.4.
    
    Reference to shares and per share amounts refer to our equity shares. Our outstanding shares include shares held by a depositary representing equity shares underlying
our ADSs. Effective September 24, 2002, one ADS represented one equity share. Our 1-for-4 reverse ratio change on September 24, 2002 did not have any effect on our equity
shares or per equity share amounts, as the underlying shares representing ADSs were unchanged.5.
    
    EBITDA from continuing operations represents earnings (loss) from continuing operations before interest, taxes, depreciation and amortization, and gain on sale of
discontinued operations. 5




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Exchange Rates The following table sets forth, for each of the months indicated,
information concerning the number of Indian rupees for which one U.S. dollar
could be exchanged based on the average of the noon buying rate in the City of
New York on the last day of each month during each of such months for cable
transfers in Indian rupees as certified for customs purposes by the Federal
Reserve Bank of New York: High
    
    LowMonth
    
    Rs.
    
    Rs.December 2003
    
    
    45.77
    
    
    
    45.50January 2004
    
    
    45.68
    
    
    
    45.29February 2004
    
    
    45.32
    
    
    
    45.22March 2004
    
    
    45.32
    
    
    
    43.40April 2004
    
    
    44.52
    
    
    
    43.40May 2004
    
    
    45.57
    
    
    
    44.55
 The following table sets forth, for the fiscal years indicated,
information concerning the number of Indian rupees for which one U.S. dollar
could be exchanged based on the average of the noon buying rate in the City of
New York on the last day of each month during the period for cable transfers in
Indian rupees as certified for customs purposes by the Federal Reserve Bank of
New York: Fiscal Year Ended
    
    Period end
    
    Average
    
    High
    
    LowMarch 31
    
    Rs.
    
    Rs.
    
    Rs.
    
    Rs.2000
    
    
    43.63
    
    
    
    43.34
    
    
    
    43.82
    
    
    
    42.202001
    
    
    46.85
    
    
    
    45.70
    
    
    
    46.91
    
    
    
    43.562002
    
    
    48.83
    
    
    
    47.71
    
    
    
    48.91
    
    
    
    46.582003
    
    
    47.53
    
    
    
    48.49
    
    
    
    49.14
    
    
    
    47.392004
    
    
    43.40
    
    
    
    43.46
    
    
    
    47.46
    
    
    
    43.40
 On June 28, 2004, the noon buying rate in the city of New York was Rs.45.99 per
$1.00. Capitalization and indebtedness Not applicable. Reasons for the offer and use of proceeds Not applicable. Risk Factors Any investment in our ADSs involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this annual report, before you make an
investment decision regarding our ADSs. If any of the following risks actually
occurs, our company could be seriously harmed. In any such case, the market
price of our ADSs could decline, and you may lose all or part of the money you
paid to buy our ADSs. Risks Related to Sify Limited Because we commenced operation of our private data network business in April
1998 and launched our Internet portal website in October 1998 and Internet service provider operations in November 1998, it is difficult
to evaluate our company based on our historical results of operations. We commenced operation of our private data network business in April 1998
and launched our Internet service provider operations in November 1998 and Internet portal
website in October 1998. Accordingly, we have a limited operating history to
evaluate our business and during this period our business has not been
profitable. You must consider the risks and difficulties frequently 6




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encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving Internet service markets. These
risks and difficulties include our ability to:  
    
    continue to develop and upgrade our technology;
    
    maintain and develop strategic relationships with business partners;
    
    offer compelling online services and content; and
    
    promptly address the challenges faced by early stage companies, which
do not have an experience or performance base to draw on. Not only is our operating history short, but we have determined to compete
in three businesses that we believe are complementary. These three businesses
are corporate network/data services, Internet access services and online portal
and content offerings. In February 2002, we divested a fourth business
(software services) to our former majority shareholder, Satyam Computer
Services. We do not yet know whether our three remaining businesses will prove
complementary. We cannot assure you that we will successfully address the
risks or difficulties described above. Failure to do so could lead to an
inability to attract and retain corporate customers for our network services
and subscribers for our Internet services as well as the loss of advertising
revenues. For the fiscal year ended March 31, 2004 we incurred a net loss of
Rs.371.3 million ($8.6 million). As of March 31, 2004, we had an
accumulated deficit of approximately Rs.12,109.1 million ($279.0 million).
We anticipate incurring additional losses in the future because our
business plan, which is unproven, calls for additional corporate customers
and subscribers to attain profitability. Since our founding, we have not been profitable and have incurred
significant losses and negative cash flows. For the fiscal year ended March
31, 2004 we incurred a net loss of Rs.371.3 million ($8.6 million). As of
March 31, 2004, we had an accumulated deficit of approximately Rs.12,109.1
million ($279.0 million). We may continue to incur operating losses as we
expand our services, advertise and promote our brand and respond to
competition. Our business plan assumes that businesses in India will demand
private network and related services. Our business plan also assumes that an
increasing number of consumers and corporate customers in India will be
attracted to and use Internet access services, content available on the
Internet and other connectivity services offered by us. This business model is
not yet proven in India, and we cannot assure you that we will ever achieve or
sustain profitability or that our operating losses will not increase in the
future. During fiscal 2003 and 2004 our highest operational priority was to reduce
cash burn incurred to build our company and infrastructure to support our rapid
growth, which has now stabilized. Although we have significantly reduced our
cash burn over the last eight quarters and believe that these reductions are
permanent, we do not know whether these measures, or other measures which we
may undertake in the future, will be successful in improving cash flow in
future periods. As a result of its former control by the Government of India, Videsh
Sanchar Nigam Limited or VSNL has established relationships with
international bandwidth suppliers and a large customer base, which provide
VSNL with a competitive advantage over our company. VSNL is a provider of international telecommunications services in India
that, until recently, was controlled by the Government of India. While VSNL was
controlled by the Government of India, it had a number of significant
competitive advantages over our company, including direct access to network
infrastructure and greater financial resources. VSNL leveraged these
competitive advantages and its longer service history to develop relationships
with international bandwidth suppliers to develop a large subscriber base. In
February 2002, the Government of India sold a 25% stake in VSNL to the TATA
group, reducing the Government of Indias ownership of VSNL to 26%. Although it
is no longer controlled by the Government of India, the Government of India
maintains a substantial equity interest in VSNL and this relationship, combined
with VSNLs relationships with international bandwidth suppliers and large
customer base, continues to provide it with competitive advantages over our
company. As a result of VSNLs competitive position, we believe that we will
continue to face difficult market conditions in the Internet access services
business. These competitive issues may prevent us from attracting and retaining
subscribers and generating advertising revenue. This could result in loss of
market share, price reductions, reduced margins or larger losses from our
operations. We may be required to further modify the rates we charge for our services
in response to new pricing models introduced by new and existing
competition which would significantly affect our revenues. Our corporate network/data services business faces significant competition
from well-established companies, including Bharti Broadband, HCL Infinet and
Tata Internet. Reliance Infocom, a member of the Reliance Group, is building a
nationwide 7




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fiber optic network in India and has announced plans to provide a range of
value-added services, including corporate connectivity services expected to be
launched in 2004. A significant number of competitors have entered Indias liberalized
Internet service provider market, and we expect additional competitors to
emerge in the near future. As of December 31, 2003, there were 189 Internet
service providers who were operational in India. New entrants into the national
Internet service provider market in India may enjoy significant competitive
advantages over our company, including greater financial resources, which could
allow them to charge prices that are lower than ours in order to attract
subscribers. These factors have resulted in periods of significant reduction in
actual average selling prices for consumer ISP services. We expect the market
for Internet access and other connectivity services to remain extremely price
competitive. Increased competition may result in reduced operating margins or operating
losses, loss of market share and diminished value in our services, as well as
different pricing, service or marketing decisions. We cannot assure you that
we will be able to successfully compete against current and future competitors. Our marketing campaign to establish brand recognition and loyalty for the
SifyOnline,Sify andiwaybrands could be unsuccessful. In order to expand our customer base and increase traffic on our websites,
we must establish, maintain and strengthen the SifyOnline, Sify and iway
brands. We plan to continue to incur significant marketing expenditure to
establish brand recognition and brand loyalty. If our marketing efforts do not
produce a significant increase in business to offset our marketing expenditure,
our losses will increase or, to the extent that we are generating profits, our
profits will decrease. Furthermore, our Internet portal will be more
attractive to advertisers if we have a large audience of consumers with
demographic characteristics that advertisers perceive as favourable.
Therefore, we intend to introduce additional and enhanced content, interactive
tools and other services and features in the future in an effort to retain our
current subscribers and users and attract new ones. Our reputation and brand
name could be adversely affected if we are unable to do so successfully. 8




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A number of large shareholders of our company and us are party to an
Investor Rights Agreement, which governs the composition of our Board of
Directors and other important corporate matters. As of April 30, 2004 and based on reports filed with the Securities and
Exchange Commission, we believe that Satyam Computer Services owned
approximately 31.9% of our outstanding equity shares, SAIF Investment Company
Limited owned approximately 8.0% of our outstanding equity shares and Venture
Tech, together its affiliates, owned approximately 10.1% of our outstanding
equity shares. As a result, these shareholders, if they elect to act together,
are presently able to exercise significant control over many matters requiring
approval by our shareholders, including the election of directors and approval
of significant corporate transactions, such as the sale of our company, change
in the capital structure of the company, merger, acquisition or winding up of
the company and any change in the nature or material modification of the
business undertaken by the company. These shareholders are also party to an
agreement with us relating to the composition of our Board of Directors and
other important corporate matters such as a right of first refusal with respect
to the transfer of shares by certain shareholders and the issuance by our
company of additional shares, tag along rights with respect to the transfer of
shares by certain shareholders and drag along rights. Pursuant to this
agreement each of Satyam Computer Services, SAIF and Venture Tech is entitled
to nominate two members of our Board of Directors so long as it holds at least
10% of our outstanding share capital and one member of our Board of Directors
so long as it holds at least 5% of our outstanding share capital. In addition,
Venture Tech and SAIF, can jointly nominate the Chairman of our Board of
Directors so long as they jointly hold at least 15% of our outstanding share
capital. In January 2004, Mr Srinivasa C Raju, a nominee of Venture Tech, was
appointed as the Chairman of our Board of Directors. Under Indian law, a simple
majority is sufficient to control all shareholder action except for those items
that require approval by a special resolution. If a special resolution is
required, the number of votes cast in favour of the resolution must not be less
than three times the number of votes cast against it. Examples of actions that
require a special resolution include:  
    
    altering our Articles of Association;
    
    issuing additional shares of capital stock, except for pro rata issuances to existing shareholders;
    
    commencing any new line of business; and
    
    commencing a liquidation. Circumstances may arise in which the interests of Satyam Computer
Services, SAIF, Venture Tech or a subsequent purchaser of the shares currently
owned by any such holder, could conflict with the interests of our other
shareholders or holders 9




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of our ADSs. One or more of such shareholders could delay or prevent a
change of control of our company or other important transactions even if a
transaction of that sort would be beneficial to our other shareholders,
including the holders of our ADSs. Our largest shareholder, Satyam Computer Services, has stated its intention
not to invest any further funds in our company and to explore opportunities
to divest its stake in our company. In October 2001, our largest shareholder, Satyam Computer Services,
publicly announced that it had determined that it would not invest any further
funds in our company and that it had decided to explore opportunities to divest
its stake in our company. In September 2003, Satyam Computer Services sold one
million equity shares to Venture Tech Assets Limited in a private transaction.
Although no longer our majority shareholder, Satyam Computer Services continued
to own approximately 31.9% of our outstanding equity shares as of the date of
this annual report. Any significant sale of our equity shares might reduce the
price of our ADSs and make it more difficult for us to sell equity securities
or ADSs in the future at a time and at a price that we deem appropriate.
Although Mr. Ramalinga Raju, the Chairman of Satyam Computer Services, has
resigned as our Chairman, Satyam Computer Services continues to be entitled to
nominate two members of our Board of Directors. As of the date of this report,
Messrs. V. Srinivas and Manish Mehta serve on our Board of Directors as the
nominees of Satyam Computer Services. In October 2003, Mr. S. Srinivasan resigned as a member of our Board of
Directors. Mr. Srinivasa C Raju was appointed, as a nominee of Venture Tech, to
fill the vacancy created by Mr. Srinivasans resignation. Mr. Raju is a former
Director of our company and the brother-in-law of Mr. B. Ramalinga Raju, the
Chairman of the Board of Directors of Satyam Computer Services. In January
2004, Mr. Srinivasa C Raju was appointed as the Chairman of our Board of
Directors. Through its stock ownership and representation on our Board of
Directors, Satyam Computer Services is able to influence our business. If
Satyam Computer Services divests its interest in our company, the purchaser of
that interest could also influence our business significantly. If our efforts to retain our customers through past investment in network
infrastructure and ongoing investment in online content offerings and
customer and technical support are unsuccessful, our revenues will decrease
without a corresponding reduction in costs. Our sales, marketing and other costs of acquiring new customers are
substantial, relative to the fees actually derived from these customers.
Accordingly, our long-term success depends to a great extent on our ability to
retain our existing customers, while continuing to attract new customers. We
have invested significant resources in our network infrastructure and continue
to invest in online content offerings and in our customer and technical support
capabilities to provide high levels of customer service. We cannot be certain,
however, that these investments will maintain or improve subscriber retention.
We believe that intense competition from our competitors has caused, and may
continue to cause, some of our customers to switch to our competitors
services. In addition, some new customers use the Internet only as a novelty
and do not become consistent users of Internet services, and therefore are more
likely to discontinue their service. Any decline in our customer retention
rate would likely decrease the revenues generated by our Internet access
services division. Therefore, we may not be able to realize sufficient future
revenues to offset our past investment in network infrastructure and our
ongoing investment in online content offerings and technical support or achieve
positive cash flow or profitability in the future. Despite cost-reduction measures, our future operating results could fluctuate
in part because our expenses are relatively fixed in the short-term while
future revenues are uncertain, and any adverse fluctuations could negatively
impact the price of our ADSs. Our revenues, expenses and operating results have varied in the past and
may fluctuate significantly in the future due to a number of factors, many of
which are outside our control. A significant portion of our investment and
cost base is relatively fixed in the short term. Our revenues for the
foreseeable future will depend on many factors, including the following:  
    
    the range of network/data services provided by us and the usage thereof by our customers; and
    
    the number of subscribers to our Internet service provider service and the prevailing prices charged Our future revenues are difficult to forecast and, in addition to the
foregoing, will depend on the following:  
    
    the timing and nature of any agreements we enter into with strategic
partners of our corporate network/data services division;
    
    services, products or pricing policies introduced by our competitors;
    
    capital expenditure and other costs relating to our operations; 10




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
    
    the timing and nature of our marketing efforts;
    
    our ability to successfully integrate operations and technologies from
any acquisitions, joint ventures or other business combinations or
investments;
    
    the introduction of alternative technologies; and
    
    technical difficulties or system failures affecting the
telecommunication infrastructure in India, the Internet generally or
the operation of our websites. We plan to continue to expand and develop content and enhance our
technology. Many of our expenses are relatively fixed in the short-term. We
cannot assure you that our revenues will increase in proportion to the increase
in our expenses. We may be unable to adjust spending quickly enough to offset
any unexpected revenues shortfall. This could lead to a shortfall in revenues
in relation to our expenses. You should not rely on yearly comparisons of our results of operations as
indicators of future performance. It is possible that in some future periods
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our ADSs will likely fall. Because we lack full redundancy for our computer systems, a systems failure
could prevent us from operating our business. We rely 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 lines leased from telecom
operators. We have a back-up data facility, but we do not have full redundancy
for all of our computer and telecommunications facilities. As a result,
failure of key primary or back-up systems to operate properly could lead to a
loss of customers, damage to our reputation and violations of our Internet
service provider license and contracts with corporate customers. A loss of
customers or damage to our reputation would result in a decrease in the number
of our subscribers, which would cause a material decrease in revenues. A
violation of our Internet service provider license could result in the
suspension or termination of that license, which would prevent us from carrying
on a significant portion of our operations and materially adversely affect our
operating results. Violations of our contracts with corporate customers could
result in the termination of these contracts, which would cause a decrease in
the revenues generated by our corporate data/network services division. Any of
these failures could also lead to a decrease in value of our ADSs, significant
negative publicity and litigation. From time to time, a number of large
Internet companies have suffered highly publicized system failures resulting in
adverse reactions to their stock prices, significant negative publicity and, in
some instances, litigation. We have at times suffered service outages. We guarantee to a number of
our corporate customers that our network will meet or exceed contractual
reliability standards, and our Internet service provider license requires that
we provide an acceptable level of service quality and that we remedy customer
complaints within a specified time period. Our computer and communications
hardware are protected through physical and software safeguards. However, they
are still vulnerable to fire, storm, flood, power loss, telecommunications
failures, physical or software break-ins and similar events. We do not carry
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. Security breaches could damage our reputation or result in liability to us. Our facilities and infrastructure must remain secure, and be perceived by
our corporate and consumer customers to be secure, because we retain
confidential customer information in our database. Despite the implementation
of security measures, our infrastructure may be vulnerable to physical
break-ins, computer hacking, computer viruses, programming errors or similar
disruptive problems. If a person circumvents our security measures, he or she
could jeopardize the security of confidential information stored on our
systems, misappropriate proprietary information or cause interruptions in our
operations. We may be required to make significant additional investments and
efforts to protect against or remedy security breaches. A material security
breach could damage our reputation or result in liability to us, and we do not
carry insurance that protects us from this kind of loss. The security services that we offer in connection with our business
customers networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to contractually
limit our liability in such instances, the occurrence of these problems could
result in claims against us or liability on our part. These claims, regardless
of their ultimate outcome, could result in costly litigation and could damage
our reputation and hinder our ability to attract and retain customers for our
service offerings. 11




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If we are unable to manage our rapid growth over the past several years, our
results of operations will be adversely affected. Over the last several years, we have experienced a period of significant
growth. This growth has placed, and will continue to place, a significant
strain on our managerial, operational, and financial and information systems
resources. We will have to implement new operational and financial systems and
procedures and controls, expand our office facilities, train and manage our
employee base and maintain close coordination among our technical, accounting,
finance, marketing, sales and editorial staff. If we are unable to manage our
growth effectively, we will be unable to implement our strategy, upon which the
success of our business depends. We face a competitive labor market for skilled personnel and therefore are
highly dependent on our existing key personnel and on our ability to hire
additional skilled employees. Our success depends upon the continued service of several of our key
personnel, particularly Mr. Ramaraj, our Chief Executive Officer. Substantially
all of our employees are located in India. Each of our employees may
voluntarily terminate his or her employment with us. We do not carry key
person life insurance on any of our personnel, other than our Chief Executive
Officer. Our success also depends on our ability to attract and retain
additional highly qualified technical, marketing and sales personnel. The
labour market for skilled employees in India is extremely competitive, and the
process of hiring employees with the necessary skills is time consuming and
requires the diversion of significant resources. While we have not experienced
difficulty in employee retention or integration to date, we may not be able to
continue to retain or integrate existing personnel or identify and hire
additional 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 qualified personnel, could disrupt the
implementation of our business strategy, upon which the success of our business
depends. In February 2002, we entered into Executive Employment Agreements with
each of Mr. Ramaraj and Mr. George Zacharias, our Chief Operating Officer.
These agreements provide for base and bonus compensation and additional
benefits and require that we indemnify these officers for specified expenses
incurred by them in connection with their employment by our company. These
agreements also contain confidentiality and invention assignment provisions.
In addition, these agreements provide for specified payments in connection with
a termination of employment after a change of control of our company or in
certain other circumstances. Our agreement with Mr. Ramaraj has a term of
approximately five years, and our agreement with Mr. Zacharias has a term of
three years. We may not comply with local laws of other countries. As part of our international business we may negotiate with and enter into
contracts with strategic partners, clients, suppliers, employees and other
third parties in various countries. We have little or no experience conducting
business in many of these countries and our failure to comply with their laws
may result in lawsuits or penalties, which could adversely affect our business
or results of operations. We are highly dependent on our relationships with strategic partners to provide key services to our customers. We rely on our arrangements with strategic partners to provide key network
services to our business clients. Some of these relationships can be
terminated by our partners under certain circumstances. We also rely on some
of our strategic partners to provide us with access to their customer base. We
are a strategic partner of UUNet Technologies in India and provide dial-up
access to UUNet Technologies roaming international clients in India. UUNet
Technologies is a unit of MCI, Inc., formerly WorldCom, Inc., which in July
2002 filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code. We do not know whether we will be able to maintain our
strategic partnership with UUNet Technologies, which accounted for
approximately 6.7% and 3.5% of our revenues in fiscal 2003 and 2004
respectively. If there is an adverse outcome in the class action litigation that has been
filed against us, our business may be harmed. Our company and certain of our officers and directors are named as
defendants in a securities class action lawsuit filed in the United States
District Court for the Southern District of New York. This action, which is
captioned In re Satyam Infoway Ltd. Initial Public Offering Securities
Litigation, also names as defendants several of the underwriters involved in
our initial public offering of American Depositary Shares. This class action
is brought on behalf of a purported class of purchasers of our ADSs from the
time of our IPO in October 1999 through December 2000. The central allegation
in this action is that the underwriters in our IPO solicited and received
undisclosed commissions from, and entered into undisclosed arrangements with,
certain investors who purchased our ADSs in the IPO and the aftermarket. The
complaint also alleges that we violated the United States federal securities
laws by failing to disclose in the IPO prospectus that the underwriters had
engaged in these allegedly 12




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undisclosed arrangements. More than 300 issuers have been named in
similar lawsuits. In October 2002, our executive officers who were named as
defendants in this action were dismissed from the action without prejudice. In
February 2003, the Court in this action issued its decision on defendants
omnibus motion to dismiss. This decision denied the motion to dismiss the
Section 11 claim as to Sify and virtually all of the other issuer defendants.
The decision also denied the motion to dismiss the Section 10(b) claim as to
numerous issuer defendants, including Sify. In June 2003, the plaintiffs in
the consolidated IPO class action lawsuits currently pending against us and
more than 300 other issuers who went public between 1998 and 2000 announced a
proposed settlement with us and the other issuer defendants. The proposed
settlement provides that the insurers of all settling issuers will guarantee
that the plaintiffs recover $1.0 billion from non-settling defendants,
including the investment banks who acted as underwriters in those offerings.
In the event that the plaintiffs do not recover $1.0 billion, the insurers for
the settling issuers will make up the difference. We believe that we have
sufficient insurance coverage to cover the maximum amount that we may be
responsible for under the proposed settlement. It is possible that the Federal
District Court may not approve the settlement in whole or part. We face risks associated with our joint venture with Refco Sify Securities
India Private Limited, our strategic partnership with VeriSign, our investment
in E Alcatraz Consulting Private Limited and with other potential acquisitions,
investments, strategic partnerships or other ventures, including whether any
such transactions can be identified, completed and the other party integrated
with our business on favorable terms. In May 2000, we entered into a strategic partnership with Verisign to
provide managed digital certificate-based authentication services in India. In
June 2000, we acquired a 25% stake in CricInfo Limited and made an investment
in Refco Sify Securities India Private Limited. In July 2000, we completed our
investment in CricInfo Limited. In March 2004, we acquired E Alcatraz
Consulting Private Limited, a company engaged in the business of providing
security services to corporate customers, for a consideration of Rs.32.63
million. These alliances may not provide all or any portion of the anticipated
benefits. Due to a general decline in market valuations for technology
companies during fiscal 2002, we reassessed, in accordance with our accounting
policy, the goodwill to be carried forward relating to these acquisitions. As
a result, we recorded a Rs.4,127.7 million charge in fiscal 2002 relating to
the impairment of goodwill. In February 2003, CricInfo Limited sold its
business to Wisden CricInfo Limited and, in connection with that transaction,
our loan to CricInfo was fully repaid and we acquired 33% of the equity in
Wisden CricInfo Limited. In February 2004, we sold our investment in Wisden
Cricinfo Limited for a total consideration of Rs.61.2 million ($1.4
million)(GBP 0.7 million) which includes repayment of loans made to Wisden
Cricinfo of Rs.22.9 million ($0.5 million)(GBP 0.3 million). We may attempt to grow our business through acquisitions. We are actively
seeking opportunities to expand our corporate services business, including
through possible acquisition transactions in India, the United States or
elsewhere. We may acquire or make investments in other complementary
businesses, technologies, services or products, or enter into additional
strategic partnerships with parties who can provide access to those assets, if
appropriate opportunities arise in the future. From time to time we have had
discussions and negotiations with a number of companies regarding our
acquiring, investing in or partnering with their businesses, products, services
or technologies, and we regularly engage in such discussions and negotiations
in the ordinary course of our business. Some of those discussions also
contemplate the other party making an investment in our company. We may not
identify suitable acquisition, investment or strategic partnership candidates
in the future, or if we do identify suitable candidates, we may not complete
those transactions on commercially acceptable terms or at all. In addition,
the key personnel of an acquired company may decide not to work for us. If we
make other types of acquisitions, we could have difficulty in integrating the
acquired products, services or technologies into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses, which could adversely affect our operating
results and cause the price of our ADSs to decline. Furthermore, we may incur
indebtedness or issue additional equity securities to pay for any future
acquisitions. The issuance of additional equity securities would dilute the
ownership interests of the holders of our ADSs. Our financial results are impacted by the financial results of entities that we do not control. We have a significant, non-controlling minority interest in Refco Sify
Securities India Private Limited that is accounted for under U.S. GAAP using
the equity method of accounting. Under this method, we generally are obligated
to report as Equity in losses (gains) of affiliates a pro rata portion of the
financial results of any such company in our statement of operations even
though we do not control the other company, subject to limitations in the case
of losses that exceed our cost of investment. Thus, our reported results of
operations can be significantly increased or decreased depending on the results
of Refco Sify Securities India Private Limited or other companies in which we
may make similar investments even though we may have only a limited ability to
influence these activities. A significant majority of the iway cybercafés are franchised operations
that we do not operate or control. We also provide Internet access
services through a network of Cable Television Operators (CTOs) whom we do
not control. 13




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As of March 31, 2004, 1,691 cybercafés were franchised and 34 cybercafés
were owned and operated by our company. Broadband internet access to homes was
provided through a network of around 435 CTOs. These relationships are subject
to a number of special risks. For example, we do not operate or control our
franchisees or CTOs, and they may not meet their obligations under our
agreements with them. The failure of a franchisee or CTO to provide quality
services to its customers could result in end user dissatisfaction with our
company. We may become involved in disputes with our franchisees or CTOs,
which may result in litigation or the termination of one or more of our
agreements. Our franchisees or CTOs could attempt to organize themselves into
unions in order to negotiate more favorable terms in our agreements. Any
failure to continue our relationships with our franchisees or CTOs on favorable
terms could reduce the size of our market share for Internet access in India
and decrease the revenues generated by our Internet access services division. The legal system in India does 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. 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. We
hold no patents, and our competitors may independently develop similar
technology or duplicate our services. Unauthorized parties may infringe upon
or misappropriate our services or proprietary information. In addition, the
laws of India do not protect proprietary rights to the same extent as laws in
the United States, and the global nature of the Internet makes it difficult to
control the ultimate destination of our services. For example, the legal
processes to protect service marks in India are not as effective as those in
place in the United States. 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. In
the future, 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
websites or other service offerings overlap with competitive offerings.
Defending against these claims, even if not meritorious, could be expensive and
divert managements attention from operating our company. If we become liable
to third parties for infringing their intellectual property rights, we could be
required to pay a substantial damage award 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. Our platform infrastructure and its scalability are not proven, and our current
systems may not accommodate increased use while maintaining acceptable overall
performance. Currently, only a relatively limited number of customers use our corporate
network, our Internet service provider services and our Internet portal. We
must continue to adapt our network infrastructure to accommodate additional
users, increasing transaction volumes and changing customer requirements. We
may not be able to project accurately the rate or timing of increases, if any,
in the use of our websites or upgrade our systems and infrastructure to
accommodate such increases. Our systems may not accommodate increased use
while maintaining acceptable overall performance. Service lapses could cause
our users to use the online services of our competitors. We do not plan to pay dividends in the foreseeable future. We do not anticipate paying cash dividends to the holders of our ADSs in
the foreseeable future. Accordingly, investors must rely on sales of their
ADSs after price appreciation, which may never occur, as the only way to
realize a positive return on their investment. Investors seeking cash
dividends should not purchase our ADSs. Risks Related to the ADSs and Our Trading Market Holders of ADSs are restricted in their ability to exercise preemptive rights
under Indian law and thereby may suffer future dilution of their ownership
position. Under the Companies Act, 1956 of India, or Companies Act, a public 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, whether on a show of hands or on a poll, holding not less than
three times the number of votes, if any, cast against the resolution. At our
2000 Annual General Meeting, our shareholders approved a special resolution
permitting us to issue up to one million equity shares in connection with
acquisitions. We issued virtually all of these equity shares in connection
with our acquisitions of India World Communications, Indiaplaza.com and
Kheladi.com and our investment in 14




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CricInfo Limited. At our 2001 Annual General Meeting, our shareholders
approved a special resolution permitting us to issue up to four million
additional equity shares in connection with acquisitions or capital raising
transactions, and our ADS holders are deemed to have waived their preemptive
rights with respect to these shares. At our December 2002 Extraordinary
General Meeting, our shareholders approved a special resolution permitting us
to issue up to 12.5 million additional equity shares in connection with the
sale of equity shares to SAIF and Venture Tech, and our ADS holders are deemed
to have waived their preemptive rights with respect to these shares. U.S. holders of ADSs may be unable to exercise preemptive rights for
equity shares underlying ADSs unless approval of the Ministry of Finance of the
Government of India is obtained and a registration statement under the
Securities Act of 1933, as amended, 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 holders of our ADSs
to exercise their pre-emptive 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 future issuance, the new
securities may be issued to our depositary, which may sell the securities for
the benefit of the holders of the ADSs. The value, if any, our depositary
would receive upon the sale of such securities cannot be predicted. To the
extent that holders 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. Holders of ADSs may be restricted in their ability to exercise voting rights
and the information provided with respect to shareholder meetings. As a holder of ADSs, you generally have the right under the deposit
agreement to instruct the depositary bank to exercise the voting rights for the
equity shares represented by your ADSs. At our request, the depositary bank
will mail to you any notice of shareholders meeting received from us together
with information explaining how to instruct the depositary bank to exercise the
voting rights of the securities represented by ADSs. If the depositary bank
timely receives voting instructions from a holder of ADSs, it will endeavour to
vote the securities represented by the holders ADSs in accordance with such
voting instructions. However, the ability of the depositary bank to carry out
voting instructions may be limited by practical and legal limitations and the
terms of the securities on deposit. We cannot assure you that you will receive
voting materials in time to enable you to return voting instructions to the
depositary bank in a timely manner. Under Indian law, subject to the presence in person at a shareholder
meeting of persons holding equity shares representing a quorum, all resolutions
proposed to be approved at that meeting are voted on by a show of hands unless
a shareholder present in person and holding at least 10% of the total voting
power or on which an aggregate sum of not less than Rs.50,000 has been paid-up,
at the meeting demands that a poll be taken. Equity shares not represented in
person at the meeting, including equity shares underlying ADSs for which a
holder has provided voting instructions to the depositary bank, are not counted
in a vote by show of hands. As a result, only in the event that a shareholder
present at the meeting demands that a poll be taken will the votes of ADS
holders be counted. Securities for which no voting instructions have been
received will not be voted on a poll. As a foreign private issuer, we are not subject to the SECs proxy rules,
which regulate the form and content of solicitations by United States-based
issuers of proxies from their shareholders. To date, our practice has been to
provide advance notice to our ADS holders of all shareholder meetings and to
solicit their vote on such matters through the depositary, and we expect to
continue this practice. The form of notice and proxy statement that we have
been using does not include all of the information that would be provided under
the SECs proxy rules. The market price of our ADSs has been and may continue to be highly volatile. The market price of our ADSs has fluctuated widely and may continue to do
so. For example, since our initial public offering in October 1999 through May
31, 2004, the trading price of our ADSs has ranged from a high of $452 per ADS
to a low of $0.88 per ADS. Many factors could cause the market price of our
ADSs to rise and fall. Some of these factors include:  
    
    our failure to integrate successfully our operations with those of acquired companies;
    
    perception of the level of political and economic stability in India;
    
    actual or anticipated variations in our quarterly operating results;
    
    announcement of technological innovations;
    
    conditions or trends in the corporate network/data services, Internet and electronic commerce industries; 15




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
    
    the competitive and pricing environment for corporate network/data services and Internet access services
in India and the related cost and availability of bandwidth;
    
    the perceived attractiveness of investment in Indian companies;
    
    acquisitions and alliances by us or others in the industry;
    
    changes in estimates of our performance or recommendations by financial analysts;
    
    market conditions in the industry and the economy as a whole;
    
    introduction of new services by us or our competitors;
    
    changes in the market valuations of other Internet service companies;
    
    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
    
    additions or departures of key personnel; and
    
    other events or factors, many of which are beyond our control. The financial markets in the United States and other countries have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly Internet-related companies, have been and
continue to be extremely volatile with negative sentiment prevailing.
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. Such litigation could result in substantial
costs and a diversion of our managements attention and resources. We may not be able to maintain our Nasdaq National Market listing. In order to maintain the listing of our ADSs on the Nasdaq National
Market, we are required to comply with, or obtain an exemption from, the
continuing listing requirements of Nasdaq, including the $1.00 minimum bid
price requirement. In fiscal 2003, the price of our ADSs on the Nasdaq
National Market closed below $1.00 for more than 30 consecutive days.
Effective September 24, 2002, our equity share-to-ADS exchange ratio was
adjusted to one-to-one in order to re-establish compliance with Nasdaqs
minimum bid price requirement. There are also material changes to the listing
requirements of the Nasdaq National Market relating to implementation of the
Sarbanes-Oxley Act of 2002 and other reforms that have been or will be
implemented. These requirements have and will continue to impose significant
additional substantive and administrative requirements on all public companies
listed on the Nasdaq National Market, including foreign private issuers. We do
not know whether we will be able to maintain our Nasdaq National Market listing
in the future. An active or liquid market for the ADSs is not assured, particularly in light
of Indian legal restrictions on equity share conversion. We cannot predict the extent to which an active, liquid public trading
market for our ADSs will exist. 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 underlying shares that are publicly held by unrelated
parties. Although ADS holders are entitled to withdraw the equity shares
underlying the ADSs from the depositary at any time, there is no public market
for our equity shares in India or the United States. 16




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The future sales of securities by our company or existing shareholders may reduce the price of our ADSs. The market price of our ADSs could decline as a result of sales of a large
number of equity shares or ADSs or the perception that such sales could occur.
In October 2001, our former parent company, Satyam Computer Services, publicly
announced that it had determined that it would not invest any further funds in
our company and that it had decided to explore opportunities to divest its
stake in our company. In September 2003, Satyam Computer Services sold one
million equity shares to Venture Tech Assets Limited in a private transaction.
Pursuant to the subscription agreements we entered into in October 2002, we
sold an aggregate of 7.6 million ADSs to SAIF and an aggregate of 4.1 million
equity shares (including 1,017,441 ADSs) to Venture Tech and an affiliate. The
resale of the ADSs sold to SAIF and an affiliate of Venture Tech is covered by
registration statements on Form F-3, and such ADSs are freely tradable. Based
on documents filed with the Securities and Exchange Commission, we believe that
SAIF sold 2.0 million ADSs in May 2003, sold an additional 1.25 million ADSs in
July 2003 and sold an additional 1.5 million ADSs in October 2003. In
addition, we believe that Venture Tech has sold 1.0 million ADSs acquired from
us and 1.0 million ADSs acquired from Satyam Computer Services. We filed a
registration statement covering the resale of 3.6 million ADSs held by SASISP
Holdings Limited, and we believe that SASISP subsequently sold all such shares.
Any significant sales of our equity shares or ADSs might reduce the price of
our ADSs and make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. We may issue
additional equity shares and ADSs to raise capital and to fund acquisitions and
investments, and the parties to any such future transactions could also decide
to sell them. Forward-looking statements contained in this annual report may not be realized. This annual report contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risks faced
by us described above and elsewhere in this annual report. We do not intend to
update any of the forward-looking statements after the date of this annual
report to conform such statements to actual results. Risks Related to Investments in Indian Companies We are incorporated in India, and a significant majority of our assets and
employees are located in India. Consequently, our financial performance and
the market price of our ADSs will be affected by changes in exchange rates and
controls, interest rates, Government of India policies, including taxation
policies, as well as political, social and economic developments affecting
India. Political instability in India and around the world could halt or delay the
liberalization of the Indian economy and adversely affect business and economic
conditions in India generally and our business in particular. During the past decade, the Government of India has pursued policies of
economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Indian central and state
governments in the Indian economy as producers, consumers and regulators has
remained significant. The Government of India has changed six times since
1996, including most recently in May 2004. 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 deregulation policies could adversely
affect business and economic conditions in India generally and our business in
particular. Conflicts in South Asia and terrorist attacks in the United States, South Asia
and around the world could adversely affect the economy and cause our business
to suffer. South Asia has from time to time experienced instances of civil unrest and
hostilities among neighbouring countries, including between India and Pakistan.
In April 1999, India and Pakistan conducted long-range missile tests. Since
May 1999, military confrontations between India and Pakistan have occurred in
the Himalayan region of Kargil and other border areas. In October 1999, the
leadership of Pakistan changed as a result of a coup led by the military. In
September 2001, terrorist attacks were conducted in the United States, which
caused various adverse consequences, including adverse economic consequences.
In addition, in October 2001 the United States commenced military operations
against targets located in Afghanistan. In December 2001, terrorist attacks
were conducted on the Indian Parliament building resulting in heightened
diplomatic and military tension between India and Pakistan. In 2003, the
United States and several other countries conducted military operations against
targets in Iraq. Events of this nature could influence the Indian and/or
global economy and could have a material adverse effect on the market for
securities of Indian companies, including our ADSs, and the market for our
services. We are subject to foreign investment restrictions under Indian law that limit
our ability to attract foreign investors which, together with the lack of a
public market for our equity shares, may adversely impact the value of our
ADSs. 17




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Currently, there is no public trading market for our equity shares in
India or elsewhere nor can we assure you that we will take steps to develop
one. Our equity securities are only traded on Nasdaq through the ADSs as
described in this report. Under prior Indian laws and regulations our
depositary could not accept deposits of outstanding equity shares and issue
ADRs evidencing ADSs representing such equity shares without prior approval of
the Government of India. The Reserve Bank of India has announced fungibility
regulations permitting, under limited circumstances, the conversion of ADSs to
equity shares and the reconversion of equity shares to ADSs provided that the
actual number of ADSs outstanding after such reconversion is not greater than
the original number of ADSs outstanding. 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 and, under present law, likely will not be permitted to
reconvert those equity shares to ADSs. If in the future a market for our equity shares is established in India or
another market outside of the United States, those shares may trade at a
discount or premium to the ADSs. Under current Indian regulations and
practice, the approval of the Reserve Bank of India is required for the sale of
equity shares underlying ADSs by a non-resident of India to a resident of India
as well as for renunciation of rights to a resident of India, unless the sale
of equity shares underlying the ADSs is through a recognized stock exchange or
in connection with the offer made under the regulations regarding takeovers.
Since exchange controls still exist in India, the Reserve Bank of India will
approve the price at which the equity shares are transferred based on a
specified formula, and a higher price per share may not be permitted. Holders
who seek to convert the rupee proceeds from a sale of equity shares in India
into foreign currency and repatriate that foreign currency from India will have
to obtain Reserve Bank of India approval for each transaction. We cannot
assure you that any required approval from the Reserve Bank of India or any
other government agency can be obtained. Because we operate our business in India, exchange rate fluctuations may affect
the value of our ADSs independent of our operating results. The exchange rate between the rupee and the U.S. dollar has changed
substantially in recent years and may fluctuate substantially in the future.
Historically, the value of the rupee has declined against the U.S. dollar,
although the rupee appreciated against the dollar in late 2002, 2003 and early
2004. Devaluations of the rupee will result in higher expenses to our company
for the purchase of capital equipment, such as servers, routers, modems and
other telecommunications and computer equipment, which is generally
manufactured in the U.S. In addition, our market valuation could be materially
adversely affected by the devaluation of the rupee if U.S. investors analyze
our value based on the U.S. dollar equivalent of our financial condition and
results of operations. Appreciation of the rupee against the U.S. dollar will
result in foreign exchange losses to the extent we hold excess cash in U.S.
dollar-denominated investments. The Government of India may change its regulation of our business or the terms
of our license to provide Internet access services without our consent, and any
such change could decrease our revenues and/or increase our costs, which would
adversely affect our operating results. Our business is subject to government regulation under Indian law and to
significant restrictions under our Internet service provider license issued by
the Government of India. These regulations and restrictions include the
following:  
    
    Our Internet service provider license has a term of 15 years and was
originally issued in 1998. Our Internet service provider license was
reissued in 2002 enabling us to offer telephony services over the
Internet. We have no assurance that the license will be renewed in the
future. If we are unable to renew our Internet service provider
license for any reason, we will be unable to operate as an Internet
service provider in India and will lose one of our primary sources of
revenue.
    
    The Telecom Regulatory Authority of India, or TRAI, a statutory
authority constituted under the Telecom Regulatory Authority of India
Act, 1997, maintains the right to regulate the prices we charge our
subscribers. The success of our business model depends on our ability
to price our services at levels we believe are appropriate. If the
TRAI sets a price floor, we may not be able to attract and retain
subscribers. Likewise, if the TRAI sets a price ceiling, we may not be
able to generate sufficient revenues to fund our operations.
Similarly, an action of the Indian Parliament may impact our ability
to set the prices for our services.
    
    The Government of India maintains the right to take over our entire
operations or revoke, terminate or suspend our license for national
security and similar reasons without compensation to us. If the
Government of India were to take any of these actions, we would be
prevented from conducting all or part of our business. The charges for international gateways and other services presently being
provided by VSNL are the subject of a dispute, which is before the TRAI, and
the Telecom Disputes Settlement and Appellate Tribunal between VSNL and private
Internet service providers, including our company, represented by the Internet
Service Providers Association of India, or ISPAI. VSNL has priced these
services at levels that we believe are inconsistent with the terms and
conditions on which VSNL has 18




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secured the bandwidth for its international gateways. The Telecom
Disputes Settlement and Appellate Tribunal remanded the matter back to the
TRAI, which decided against the ISPAI. The ISPAI has not yet decided on a
further course of action. We are currently paying for bandwidth from VSNL at
the higher rates. We presently do not believe that the outcome of this dispute
will be material to our business provided that the international gateway
services market continues to be opened to competition. Changes in Indian income taxes will increase our tax liability and decrease any
profits we might have in the future. The statutory corporate income tax rate in India is currently 35.0%. For
fiscal year 2004, this tax rate was subject to a 2.5% surcharge resulting in an
effective tax rate of 35.9%. There is no change in the tax rate or tax
surcharge for fiscal year 2005. We cannot assure you that the surcharge will be
in effect for a limited period of time or that additional surcharges will not
be implemented by the Government of India. Risks Related to the Internet Market in India Our success will depend in large part on the increased use of the Internet
by consumers and businesses in India. However, our ability to exploit the
Internet service provider and other data service markets in India is inhibited
by a number of factors. If Indias limited Internet usage does not grow
substantially, our business may not succeed. The success of our business depends on the acceptance of the Internet in India,
which may be slowed or halted by high bandwidth costs and other technical
obstacles in India. Bandwidth, the measurement of the volume of data capable of being
transported in a communications system in a given amount of time, remains very
expensive in India, especially when compared to bandwidth costs in the United
States. Bandwidth rates are commonly expressed in terms of Kbps (kilobits per
second, or thousands of bits of data per second) or Mbps (megabits per second,
or millions of bits of data per second). Although prices for bandwidth in
India have declined recently, they are high due to, among other things,
capacity constraints and lack of competition. The limited installed personal computer base in India limits our pool of
potential customers and restricts the amount of revenues that our Internet
access services division may generate. The market penetration rates of personal computers and online access in
India are far lower than such rates in the United States. Alternate methods of
obtaining access to the Internet, such as through set-top boxes for
televisions, are currently not popular in India. There can be no assurance
that the number or penetration rate 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. While the personal computer
penetration level in India is relatively low, we are addressing the demand for
public Internet access through the establishment of a retail chain of public
Internet access centres, which we refer to as cybercafés, under the iway
brand name. As of March 31, 2004, 1,691 iway cybercafés were franchised and
34 iway cybercafés were owned and operated by our company. Although this
service creates a larger market, it also imposes on the operator of the
cybercafé the considerable costs of providing the consumer access to a personal
computer and related hardware and software. The high cost of accessing the Internet in India limits our pool of potential
customers and restricts the amount of revenues that our Internet access
services division might generate. The growth of our consumer services is limited by the cost to Indian
consumers of obtaining the hardware, software and communications links
necessary to connect to the Internet in India. If the costs required to access
the Internet do not significantly decrease, most of Indias population will not
be able to afford to use our services. The failure of a significant number of
additional Indian consumers to obtain affordable access to the Internet would
make it very difficult to execute our business plan. The success of our business depends on the acceptance and growth of electronic
commerce in India, which is uncertain, and, to a large extent, beyond our
control. Many of our existing and proposed services are designed to facilitate
electronic commerce in India, although there is relatively little electronic
commerce currently being conducted in India. Demand and market acceptance for
these services by businesses and consumers, therefore, are highly uncertain.
Many Indian businesses have deferred purchasing Internet access and deploying
electronic commerce initiatives for a number of reasons, including the
existence or perception of, among other things:  
    
    inconsistent quality of service;
    
    the need to deal with multiple and frequently incompatible vendors;
    
    inadequate legal infrastructure relating to electronic commerce in India; 19




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
    
    a lack of security of commercial data, such as credit card numbers; and
    
    low number of Indian companies accepting credit card numbers over the Internet. If usage of the Internet in India does not increase substantially and the
legal infrastructure and network infrastructure in India are not developed
further, we are not likely to realize any benefits from our investment in the
development of electronic commerce services. Risks Related to the Internet We may be liable to third parties for information retrieved from the Internet. Because users of our Internet service provider service and visitors to our
websites may distribute our content to others, third parties may sue us for
defamation, negligence, copyright or trademark infringement, personal injury or
other matters. We could also become liable if confidential information is
disclosed inappropriately. These types of claims have been brought, sometimes
successfully, against online services in the United States and Europe. Others
could also sue us for the content and services that are accessible from our
websites through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards. We do not carry
insurance to protect us against these types of claims, and there is no
precedent on Internet service provider liability under Indian law. Further,
our business is based on establishing our network as a trustworthy and
dependable provider of information 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. The success of our strategy depends on our ability to keep pace with technological changes. Our future success depends, in part, upon our ability to use leading
technologies effectively, to continue to develop our technical expertise, to
enhance our existing services and to develop or otherwise acquire new services
that meet changing customer requirements. The markets for our service are
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new service introductions. We may not
successfully identify new opportunities and develop and bring new services to
market in a timely manner. Our business may not be compatible with delivery methods of Internet access services developed in the future. We face the risk that fundamental changes may occur in the delivery of
Internet access services. Currently, Internet services are accessed primarily
by computers and are delivered by modems using telephone lines. As the
Internet becomes accessible by cellular telephones, personal data assistants,
television set-top boxes and other consumer electronic devices, and becomes
deliverable through other means involving digital subscriber lines, coaxial
cable or wireless transmission mediums, we will have to develop new technology
or modify our existing technology to accommodate these developments. Our
pursuit of these technological advances, whether directly through internal
development or by third party license, may require substantial time and
expense. We may be unable to adapt our Internet service business to alternate
delivery means and new technologies may not be available to us at all. Our service offerings may not be compatible with industry standards
developed in the future. Our ability to compete successfully depends upon the continued
compatibility and inter-operability of our services with products and
architectures offered by various vendors. Although we intend to support
emerging standards in the market for Internet access, industry standards may
not be established and, if they become established, we may not be able to
conform to these new standards in a timely fashion or maintain a competitive
position in the market. The announcement or introduction of new services by us
or our competitors and any change in industry standards could cause customers
to deter or cancel purchases of existing services. 
 Item 4. Information on the Company History and Development Our company, Sify Limited (formerly known as Satyam Infoway Limited), was
organized as a limited liability company under the laws of the Republic of
India pursuant to the provisions of the Companies Act on December 12, 1995.
Until December 2002, we were a majority-owned subsidiary of Satyam Computer
Services, a leading Indian information technology services company traded on
the New York Stock Exchange and the principal Indian stock exchanges. Our
company was formed as a separate business unit of Satyam Computer Services to
develop and offer connectivity-based corporate services allowing 20




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businesses in India to exchange information, communicate and transact
business electronically. We conduct substantially all of our business in
India. Our subsidiaries include Sify eLearning Limited, Safescrypt Limited,
Satyam Webexchange Limited, Sify Plasticscommerce Limited, Indiaworld
Communications Limited, Sify International Inc. and E Alcatraz Consulting
Private Limited. The address of our principal executive office is Tidel Park,
2nd Floor, No. 4, Canal Bank Road, Taramani, Chennai 600 113 India, and our
telephone number is (91) 44-2254-0770. From December 1995 through 1997, we focused on the development and testing
of our private data network. In 1997, we began forming strategic partnerships
with a number of leading technology and electronic commerce companies,
including UUNet Technologies, in order to broaden our service offerings to our
corporate customers. In March 1998, we obtained network certification for
conformity with Indian and international network operating standards from the
Technical Evaluation Committee of India. In April 1998, we began offering
private network services to businesses in India. Our initial services included
electronic data interchange, e-mail and other messaging services, virtual
private networks and related customer support. In October 1998, we initiated our online content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started development
of www.sify.com, our online portal, and other related content sites for
personal finance, movies and automobiles with the goal of offering a
comprehensive suite of websites offering content specifically tailored to
Indian interests worldwide. On November 6, 1998, the Indian government opened the Internet service
provider market place to private competition. Capitalizing on our existing
private data network, we launched our Internet service provider business,
SifyOnline(formerly known as SatyamOnline), on November 22, 1998 and became
the first private national Internet service provider in India. We began
offering SifyOnlineInternet access and related services to Indias consumer
market as a complement to the network services offered to our business
customers. Our SifyOnlineservice was the first in India to offer ready-to-use
CD-ROMs enabling online registration and immediate usage. Initial Public Offering and Subsequent Financing Transactions In October 1999, we completed our initial public offering on the Nasdaq
National Market and issued 4,801,250 ADSs at a price of $18.00 per ADS. We
received approximately $79.2 million, net of underwriting discounts,
commissions and other offering costs. In connection with our initial public
offering, we received the benefit of exemptions from the Nasdaq corporate
governance rules relating to shareholder meeting quorum, solicitation of
proxies and shareholder approval for issue of shares other than in a public
offering, Nasdaq Rules 4350(f), 4350(g) and 4350(i)(1)(D) respectively. In February 2000, we completed a secondary offering and issued 467,175
ADSs at a price of $320.00 per ADS. We received approximately $141.2 million,
net of underwriting discounts, commissions and other costs. In October 2002, we agreed to sell an aggregate of 7,558,140 ADSs to SAIF
for consideration of $13.0 million and to sell an aggregate of 2,034,884 equity
shares to VentureTech for consideration of $3.5 million. This transaction was
approved by our shareholders at our Extraordinary General Meeting held on
December 9, 2002. In December 2002, we completed the sale of the ADSs to SAIF
and the sale of 2,034,883 equity shares to VentureTech. In connection with
this transaction, Mr. Ramalinga Raju resigned as the Chairman of our Board of
Directors. In April 2003, we sold an additional 1,017,442 equity shares to
VentureTech. In July 2003 we sold an additional 1,017,441 ADSs to an affiliate
of Venture Tech. In connection with this financing, the parties entered into a shareholders
agreement providing for, among other things, a Board of Directors comprised of
nine directors. Each of Satyam Computer Service, SAIF and Venture Tech, is
entitled to nominate two members of the Board so long as it holds at least 10%
of our outstanding share capital and one member of the Board so long as it
holds at least 5% of our outstanding share capital. In addition, Venture Tech
and SAIF can jointly nominate the Chairman of our Board of Directors so long as
their joint holding is not less than 15% of our outstanding share capital. In
January 2004, Mr. Srinivasa C. Raju, a nominee of Venture Tech, was appointed
as the Chairman of our Board of Directors. The shareholders agreement has also
granted the investors consent rights with respect to specified corporate
transactions. Investment Strategy We may attempt to grow our business through acquisitions. In evaluating
investment opportunities, we consider important factors, such as strategic fit,
competitive advantage and financial benefit, through a formal net present value
evaluation. There is no significant difference in the analysis undertaken in
connection with an investment in an affiliate compared to other uses of cash.
Our investment strategy has not undergone major changes in the last three
years. IndiaWorld Communications Limited In June 2000, we acquired IndiaWorld Communications, a private company
organized under the laws of the Republic of India, through the payment of
Rs.3,767.4 million in cash and issuance of 268,500 equity shares. In fiscal
2002, due to a 21




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general decline in market valuations for technology companies, we
reassessed, in accordance with our accounting policy, the goodwill to be
carried forward relating to this acquisition. As a result, we recorded a
charge relating to the impairment of goodwill arising in connection with this
acquisition in fiscal 2002. CricInfo Limited and Wisden Cricinfo Limited In July 2000, we acquired a 25% stake in CricInfo Limited, a private
company incorporated in the United Kingdom, through the issuance of 551,180
ADSs. In October 2001, we entered into a loan transaction with CricInfo Limited
for the issuance of unsecured convertible notes by CricInfo with a principal
amount of up to GBP 1.0 million, subject to the satisfaction of certain
performance measures by CricInfo. These notes, which provided for an interest
rate of 8.0% per annum, were convertible into CricInfo shares by us at any time
and redeemable by CricInfo on October 5, 2004. On May 17, 2002, we entered into
an Amended Subscription Agreement for an additional principal amount of notes
up to GBP 0.6 million that were subject to the same terms as the original
issue, thereby increasing our total subscription to GBP 1.6 million. We also
entered into a Term Loan Agreement with CricInfo granting a term loan facility
of GBP 100,000. The term loan carried an interest rate of 4% per annum, with
interest payable on the last day of each six month period. The term loan was
repayable on December 31, 2004. The term loan and the convertible loan were
secured by a debenture document executed by CricInfo. In February 2003, CricInfo transferred its net assets, other than the loan
payable to our company and miscellaneous current assets and liabilities to a
newly formed company incorporated in the United Kingdom, Wisden Cricinfo
Limited. In consideration of its contribution of assets, CricInfo Limited
received a 33% equity stake in Wisden Cricinfo Limited and GBP 1.8 million.
CricInfo Limited repaid our loan, including accrued interest of Rs.107.0
million, and transferred its 33% stake in Wisden Cricinfo Limited to us for a
consideration of Rs.22.6 million (GBP 0.3 million). Contemporaneously we
advanced Rs.23.0 million (GBP 0.3 million) to Wisden Cricinfo Limited. In February 2004, we sold our investment in Wisden Cricinfo Limited for a
total consideration of Rs.61.2 million (GBP 0.7 million) which includes
repayment of loan given to Wisden Cricinfo of Rs 22.9 million (GBP 0.3
million). Kheladi.com In July 2001, we completed our acquisition of Kheladi.com through the
issuance of 19,073 equity shares. Kheladi.com is a sports portal promoted by
Geet Sethi, the six times World Billiards Champion and a well-known sports
personality in India. The terms of the agreement include contingent payments
upon the achievement of specified profitability and revenue targets. As of
March 31, 2004, these contingencies were not met and no payments have been
made. In fiscal 2003 we recorded a charge relating to the impairment of
goodwill arising in connection with this acquisition. WIPRO Limited Customers In July 2002, we entered into an agreement with WIPRO Limited, pursuant to
which, among other things, WIPRO Limited assigned its service contracts with
its corporate connectivity customers to us in exchange for a cash payment based
on the historical revenues generated by these customers. E Alcatraz Consulting Private Limited In March 2004, we acquired E Alcatraz Consulting Private Limited or EAP,
a company engaged in the business of providing security services to corporate
customers, for a consideration of Rs.32.6 million. We believe that this will be
complementary to our security services. Business Overview We are one of the largest integrated Internet, network and electronic
commerce services company in India, offering end-to-end solutions with a
comprehensive range of services delivered over a common Internet backbone
infrastructure. Our services enable our business and consumer customers to
communicate, transmit and share information, access online content and conduct
business remotely using our private data network or the Internet. Our Internet
and network services include the following:  
    
    Corporate Network/Data Services. We offer a suite of
technology and network-based services that provide our corporate
customers with comprehensive Internet and private network access.
Our services enable our corporate customers to offer a full range
of business-to-business and electronic commerce related services. 22




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
    
    Internet Access Services. We offer dial-up Internet
access, email and web page hosting to consumers in India through
convenient online registration and user-friendly software. In
addition, we offer public Internet access to consumers through a
retail chain of iway cybercafés. We also have tie-ups with certain
Cable television operators through which we offer Internet access
through cable television. As of March 31, 2004, we had more than
680,000 retail internet access subscribers.
    
    Online Portal and Content Offerings. We operate an
online portal, www.sify.com, that functions as a principal entry
point and gateway for accessing the Internet by providing useful
web-related services and links. We also offer related content
sites specifically tailored to Indian interests worldwide.
    
    Others. We facilitate web based learning to various
organizations by uploading content to facilitate the same. We began providing corporate network/data services to businesses in April
1998, and as of March 31, 2004 we had more than 850 corporate customers. We
launched our Internet service provider business in November 1998, becoming the
first private Internet service provider to begin service after the Indian
government opened the market to private competition. We also operate online portals,
 www.sify.com and www.samachar.com, and related content sites specifically tailored
for Indian interests worldwide. Sify.comis one of Indias leading portals
with services in areas such as news, travel, finance, health and shopping in
addition to e-mail, chat and search. We currently operate a large national private data network in India. Our
network utilizes Internet protocol, which is an Internet industry standard for
tracking Internet addresses, routing outgoing messages and recognizing incoming
messages. In February 2002, we became the first Indian company to be certified
ISO 9001: 2000 for network services, data center operations and customer
relationship management. The ISO 9001: 2000 certification from Det Norske
Veritas (DNV), Netherlands under the RvA accreditation scheme provides
recognition for self-defined benchmarks against international companies with
respect to facilities, metrices, processes and practices. In fiscal year 2003
our Enterprise Solutions division was also certified ISO 9001:2000 for
provisioning of corporate VPNs, Internet bandwidth, voice-over-IP (VOIP) and
integrated security solutions including pre-sales, sales, order processing and
project management. As of March 31, 2004, we owned and operated 67 points of presence serving
more than 250 cities across India, representing an estimated 90% of the
installed personal computer base in India. Points of presence are
telecommunications facilities located in a particular market which allow our
customers to connect to the Internet through a local telephone call. Although
our Internet services provider license permits us to establish and maintain our
own direct connection to the international Internet, we no longer maintain
satellite gateways. We intend to provide international bandwidth by leasing
capacity of multiple oceanic systems. We continue to seek to be the premier integrated Internet, network and
electronic commerce solutions provider to businesses and consumers in India.
We believe that demand for our services is significant in India and growing
rapidly as businesses and consumers seek alternatives to the communications
services offered by telecom providers that were formerly controlled by the
government of India. We intend to continue to focus on providing superior
network performance and high levels of customer service and technical support
to increase our customer base and maximize customer satisfaction. Industry Overview Development of the Internet. We believe that the large and increasing
number of home and office computers linked to the Internet, advances in network
design, increased availability of Internet-based software and applications, the
emergence of useful content and electronic commerce technologies, and
convenient, fast and inexpensive Internet access will continue to drive
Internet growth and usage in the near future. Special Communications Needs of Businesses. As the Internet becomes more
developed and reliable, businesses are increasingly utilizing the Internet for
functions critical to their core business strategies, such as sales and
marketing, customer service and project coordination. The Internet presents a
compelling profit opportunity for businesses by enabling them to reduce
operating costs, access valuable information and reach new markets. To
maintain a significant presence on the Internet, businesses typically purchase
Internet access services and establish a website. Internet access provides a
company with its basic gateway to the Internet, allowing it to transfer e-mail,
access information and connect with employees, customers and suppliers. A
website provides a company with a tangible identity and an interactive presence
on the Internet. Many corporations are also converting their information
systems and databases to web-enabled systems. The Opportunity in India. As with many developing nations, the
telecommunications infrastructure in India had, until recently, been controlled
by government-controlled telecom providers. The resulting service remains
inferior to service in developed countries. At the same time, however, the
Indian economy continues to modernize and expand, particularly in sectors such
as software development that are dependent on a reliable communications
network. The growth of these industries is 23




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leading to an increasing base of personal computers and wired homes and
businesses in India with a resulting increased demand for Internet services. We
believe these trends, which mirror trends in more mature economies, will
continue to develop in India. The ability to exploit the Internet service provider and other data
service markets in India is currently inhibited by bandwidth limitations
imposed by cost and technical obstacles. Generally, bandwidth remains very
expensive in India. Prices for bandwidth are set by two agencies in India, the
Department of Telecommunications, or DOT, and the TRAI and have remained high
due to, among other things, capacity constraints. The entry of private sector
providers into the market for bandwidth in India has not yet impacted
prevailing bandwidth prices. We expect the growth in personal computers and Internet users to increase
the demand for Internet content directed towards domestic Indian consumers as
well as the amount of electronic commerce in India. Private market participants historically have not been able to exploit the
market opportunities in India because the regulatory environment in India
largely prevented any competition with the national government-controlled
telecom providers. Until November 1998, the only Internet service provider
permitted in India was VSNL, which began providing Internet access on August
15, 1995. On November 6, 1998, the government opened the Indian Internet
service provider market to private competition and granted Internet service
provider licenses. The licensees include cable television operators and joint
ventures between local companies and large international telecom providers.
Internet service provider licenses are granted for 15 years, with only nominal
license fees. Currently, pricing of Internet service provider services is not
regulated by the Government of India, although it has the power to elect to do
so through policy directives. The prices Internet service providers charge
their subscribers and the interconnection charges between service providers are
regulated by the TRAI. The charges for international gateways and other
services presently being provided by VSNL are the subject of a dispute pending
before the TRAI and the Telecom Disputes Settlement and Appellate Tribunal
between VSNL and private Internet service providers, including our company.
VSNL has priced these services at levels, which we believe are inconsistent
with the terms and conditions on which VSNL has secured the bandwidth for its
international gateways. The Telecom Disputes Settlement and Appellate Tribunal
remanded the matter back to the TRAI, which decided against the ISPAI. The
ISPAI has not yet decided on a further course of action. We are currently
paying for bandwidth from VSNL at the higher rates and do not believe that the
outcome of this dispute will be material to our business provided that the
international gateway services market continues to be open to competition. Sify Business Model We believe that the growth of the Internet and other network services in
India has been inhibited by relatively high costs and poor user experiences
caused by an inadequate telecommunications infrastructure and slow network
connection speeds. We are committed to expanding and enhancing our private
network backbone and to providing high quality technical support to attract
users to our services. We believe that our services provide our customers with
the ability to exchange information, communicate and transact business over the
Internet with speed, efficiency, reliability and security superior to other
Internet service providers. Key advantages of the Sify business model include:  
    
    End-to-end network solutions for business customers.We
provide our business customers with a comprehensive range of
Internet, connectivity, security and consulting, hosting and managed
service solutions complemented by a broad base of web-based business
applications. Our corporate services range from dial-up and
dedicated Internet access, virtual private networks, security, web
implementation, electronic commerce solutions and web hosting. Our
end-to-end solutions enable our corporate customers to address their
networking and data communication needs efficiently without having
to assemble products and services from different value-added
resellers, Internet service providers and information technology
firms.
    
    National private Internet protocol network backbone. We
operate a large national Internet protocol data network in India.
As of March 31, 2004, we owned and operated 67 points of presence
serving more than 250 cities across India, representing an estimated
90% of the installed personal computer base in India. Our network
provides the platform for the national delivery of Internet access
to consumers as well as the backbone for our full range of corporate
network/data services. Our private network infrastructure allows
corporations to establish virtual private networks without dealing
directly with the government telecom providers.
    
    Internet content and electronic commerce websites customized
for the Indian market. We view the Indian market as a series of
specific market segments with unique cultural and topical interests,
rather than an extension of a homogeneous, worldwide Internet
market. We have assembled a team of India-based employees familiar
with the local culture, language and business environments in our
markets to develop Internet content and electronic commerce websites
tailored for the Indian market. We regularly incorporate new and
original third-party content suited to our local and regional
audiences to enhance our customers online experience and to attract
new users both within India and abroad. As a result of our local
market knowledge, we have been able to increase traffic flow to our
websites and to create brand awareness for our SifyOnlineaccess
service. 24




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Strategy Our goal is to become the premier integrated Internet, network and
electronic commerce solutions provider to businesses and consumers in India.
Our principal business strategies to accomplish this objective are:  
    
    Invest in the continued enhancement and expansion of our
network infrastructure to support customer growth, enter new markets
and accommodate increased customer usage.We intend to continue to
increase the capacity and geographic reach of our network in order
to support subscriber growth, enter new markets and accommodate
increased customer usage. We are committed to using proven
technologies and equipment and to providing superior network
performance. We have deployed asynchronous transfer mode, or ATM,
switches on nine points of presence along our network. The rest of
our network is based on Internet Protocol, or IP, and we are the
first Indian service provider to have made our network Multi
Protocol Label Switching (MPLS) compliant. We plan to procure
international bandwidth by leasing capacity of multiple oceanic
systems. As of March 31, 2004, we have leased an STM-1 from VSNL
landing at Mumbai (Bombay) and another landing at Cochin. We believe
that as the size and capacity of our network infrastructure grows,
its large scale and national coverage will create economies of
scale.
    
    Increase penetration in our existing markets by expanding
awareness of the Sify brand name to capitalize on our first mover
advantage in India.We intend to capitalize on our first-to-market
advantage in India to establish national service and a brand name in
advance of other private competitors. As of March 31, 2004, we had
more than 680,000 retail Internet subscribers and 1,725 iway
cybercafés, of which 34 were owned and 1,691 were franchised.
Approximately 98% of these iways are on broadband, which provides
the user with significantly faster access speeds. Our marketing
strategy includes print, television and radio advertising, direct
mailing campaigns targeting personal computer owners and operating
with cybercafés. We are also actively promoting our broadband
services to homes by either the multi dwelling route or through
cable television operators. As of March 31, 2004, we had tie-ups
with more than 400 cable television operators across 15 cities. We
believe that increased focus on delivery of broadband services by
the TRAI will drive this business forward in the immediate future.
    
    Expand our services with new technologies to enable our
customers to use the Internet more effectively.We continually seek
to expand the breadth of our service offerings with new
technologies. For example, we launched a new generation billing
software in our cybercafés where the user can pay by the minute,
which distinguishes our iways from the cybercafés operated by our
competitors. Our cybercafés prominently display the Sify and
SifyOnlinebrands and offer a full range of our Internet
connectivity services. We also introduced a number of other
services, including Internet telephony at select cybercafés in April
2002, video conferencing, e-mail designed for regional Indian
dialects, a user customized portal site and micro-payments.
    
    Strengthen our Internet portal and other Internet content
websites with more content tailored to Indian interests worldwide.
Our portals, www.sify.com and www.samachar.com, function as initial
gateways to the Internet, the users starting point for web browsing
and other Internet services, for our consumer Internet service
provider subscribers and cybercafé users. Our portals are media
rich, user friendly, interactive websites offering hyperlinks to a
wide variety of websites and services, including our own websites.
Our websites cater to a variety of Indian interests within and
outside of India. To achieve our goal of developing the premier
Internet portal focused on the Indian market, we intend to continue
to expand and improve the quality of www.sify.com, and are
developing additional content oriented towards topical and cultural
interests of Indians worldwide. In addition, we are forming
strategic alliances with several offline media partners to deliver
content to our users. As the availability of Internet access expands
in India, we believe that increasing numbers of Internet users will
be attracted to our high quality websites and online content
designed specifically for the Indian consumer. We will seek to
attract advertisers, electronic commerce merchants and third-party
content providers trying to reach our users in order to generate
additional revenues for sify.com.
    
    Expand our customer distribution channels through strategic
alliances to take advantage of the sales and marketing capabilities
of our strategic partners .We intend to continue to expand our
customer acquisition channels, for both our consumer Internet access
and corporate network/data services. We have arrangements with
leading personal computer manufacturers to bundle our SifyOnline
Internet access service with the sale of their personal computers in
India.
    
    Pursue selective strategic investments, alliances and
acquisitions to expand our customer base, increase utilization of
our network and add new technologies to our service mix.We believe
that our growth can be supplemented by selective acquisitions of
complementary businesses. We may seek to expand our market presence
in our corporate network business through the acquisition of web
hosting, data center, web implementation and/or systems integration
companies serving India, the United States or other markets. We
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also consider acquisitions of Internet service providers that have a
significant or growing customer base in our current or targeted
markets.
    
    Expand into international markets for providing managed network
services.Our network and application level support can be
provided remotely with a minimum of on-site presence. We are seeking
to provide these services to international markets. The tools
utilized to provide these services were developed in-house on
Linux/open source platforms and we plan to upgrade these tools in
the future to meet customer requirements. We expect our expertise in
network management, to enable us perform these services to
international customers at lower costs. We also intend to provide managed security solutions, including
monitoring and vulnerability assessment, in addition to managed firewall and intrusion detection services.
    
    Superior end-user performance and customer support.We
provide a high level of customer service, network performance and
technical support to maximize customer satisfaction. A significant
number of our employees are engaged in our customer service or
technical support departments, which operate 24-hours-a-day,
seven-days-a-week. Our network engineers continually monitor
network traffic and congestion points to deliver consistent, high
quality network performance. Our backend processes are ISO
9001:2000 compliant for network operations, data center operations
and customer care. Our strategy of providing superior network
performance and customer service is designed to result in
significant customer growth from referrals and industry recognition. Service Offerings Corporate network/data services. Our corporate network/data services
division addresses the network, security and application services needs of
Indian enterprises by leveraging our national Tier 1 IP network infrastructure.
We offer end-to-end integrated solutions that address critical needs of our
corporate customers, such as wide area network, or WAN, services, security
services and application services. We offer a comprehensive range of Internet
protocol, or IP, virtual private network, or VPN, offerings, including
intranets, extranets and remote access applications. We also offer a suite of
security solutions, including security design, audit, procurement and
integration. Our enterprise solutions portfolio includes a range of application
services, such as enterprise class email platforms, audio and video
conferencing solutions and business web services. Contracts for these services
are negotiated on an individual basis to provide specifically tailored
network/data services to each customer. In February 2002, we became the first Indian company to be certified ISO
9001: 2000 for network services, data center operations and customer
relationship management. The ISO 9001: 2000 certification from Det Norske
Veritas (DNV), Netherlands under the RvA accreditation scheme provides
recognition for self-defined benchmarks against international companies with
respect to facilities, metrices, processes and practices. Our corporate
network/data services were also certified 9000:2001 compliant for pre-sales,
sales, project management and backend operations in September 2003. VPN Services. We offer VPN services for both small and large corporate
customers. We offer virtual private network based on IPSec and MPLS, which
provide corporate connectivity for transaction-based VPNs as well as high
bandwidth transfers. We are the first service provider in India to provide
MPLS-based quality of service in India on its entire network. We provide
complex solutions to various clients enabling them to run their mission
critical applications on our backbone. Through VPN services, we provide
intranet and extranet connectivity covering the various constituents of an
enterprise  including regional and branch offices, mobile employees and the
demand and supply value chain. Intranets are corporate networks that rely on
Internet-based technologies to provide secure links between corporate offices
and secure access to internal company data. Extranets expand the network to
selected business partners through secure links on the Internet. We offer international IP VPNs for customers to connect with their
international partners, offices or customers. This connectivity is provided
using our Business Class Internet Bandwidth with quality of service built in
through our MPLS offering. The connectivity is a robust Service Level backed up
by multiple international paths built on diverse cable systems. We are a partner of MCI in India and provide dial-up access to MCIs
roaming international clients in India. Through our partnership, we enable MCI
customers traveling in India to connect to their corporate network and systems
resources using the Internet. We offer Internet access through a local phone
call in all locations in India that are serviced by our network points of
presence. Our service allows Internet connectivity from India without
incurring international telephone charges. For providing our network services,
we receive a portion of the fees paid by MCIs customers when using its service
in India. Web-based services. We offer web-hosting accounts for companies and other
organizations that wish to create their own websites without maintaining their
own web servers and Internet connections. Our web hosting services feature
advanced web servers for high speed and reliability, high capacity connections
to the Internet and specialized customer support and security features. Our
co-location services accommodate customers who prefer to own their servers, but
require the high performance and reliability of our Internet data center.
Co-location customers are typically larger enterprises employing more
sophisticated Internet hardware and software and having the expertise to
maintain their websites and related equipment. Security services.We offer security services for audits, consulting,
implementation and managed services. Consulting services include consulting
for security audits, policy design, vulnerability and risk management services.
Implementation 26




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services include implementation of security equipment, such as firewalls,
intrusion detection systems, content security, authentication tools and VPN
services. Data Center.Our data centers in Mumbai (Bombay) and Chennai (Madras) have
been designed to act as reliable secure and scalable facilities to host
mission-critical applications with the capacity to host over 8,000 servers.
Through these data centers, which are connected to the DOTs telecom backbone
by redundant fiber optic links, we offer co-location and hosting services with
an uptime of 99%. Safescrypt Limited. In partnership with Verisign, a leading provider of
Internet trust services, we have formed a wholly owned subsidiary, Safescrypt
Limited, to provide managed digital certificate-based authentication services
in India. Safescrypt Limited is the principal affiliate of Verisign in India
and is a member of Verisigns Global Affiliate Network. Safescrypt Limited was
accredited as the first Certifying Authority for issuance of Certificate for
Digital Signature by the Ministry of Information Technology, Government of
India. Our corporate network/data services division accounted for approximately
48.4%, 49.6%, 50.0% and 49.8%, respectively, of our revenues in fiscal years
2001, 2002, 2003 and 2004. Recent trends cause us to believe that corporate
services will continue to be the largest part of our business for the immediate
future. Internet access services. We offer dial-up Internet access, e-mail and web page hosting to consumers
in India through convenient online registration and user-friendly software.
In November 1998 after deregulation of the Internet service provider market in
India, we launched our Internet service provider business and became the first
private Internet service provider in India. Dial-up internet access is sold to
customers either for a specified number of hours or for an unlimited usage
within a specified period of time. Our unlimited usage service allows a user up to six hours of Internet access per day.
This business has been under increasing
pressure from incumbent telecom operators who provide basis telephony services
by bundling Internet services with basic telephony services, these providers
are able to subsidize their Internet service offerings. In the last two years, we have been focusing more on providing public
Internet access to consumers through cybercafés, which we refer to as iways.
Because the personal computer penetration rate in India is relatively low,
iways are designed to provide public Internet access to the significant portion
of the Indian population that does not own a personal computer. As of March
31, 2004, we had 1,725 iways in 55 cities, of which 1,691 cybercafés were
franchised and 34 cybercafés were owned and operated by our company. We
believe that iways will expand access to our portal and websites to consumers
who do not own a personal computer or have Internet access at home. iways offer
a full range of Internet connectivity services, including VoIP. As of March 31,
2004, we had more than 1,000 iways, that were enabled for providing VoIP. In connection with our franchised iways, we grant each franchisee a
non-exclusive license to operate the cybercafé using our logo, brand and trade
names. We enter into an agreement with the franchisee establishing the rights
and obligations of each party. The cybercafés are owned and operated by the
franchisees. The franchisee procures the retail space, invests in furniture,
interior decor, PCs, point of sale signage and employs/trains the franchisee
staff. The franchisee is responsible for the maintenance of the premises and
interface with customers. We provide the complete backend support, including
bandwidth, the authentication/usage engine and the billing/collection system.
In connection with the establishment of a franchised iway, we receive an
initial franchise fee that covers the following upfront services rendered by
our company:  
    
    conducting a market survey and deciding on the best
location for the cybercafé;
    
    installing the broadband receiver equipment on the roof
top of the cybercafé and connecting it to one of our
broadcasting towers;
    
    obtaining the regulatory approvals for clearance of the
site for wireless transmission at the allotted frequency range;
    
    installing the wiring from the receiver unit to the individual PCs;
    
    assistance in obtaining facilities, including computers and interiors; and
    
    providing the operations manual with instructions and guidelines for running the cybercafé. We are also promoting our broadband services to homes by either the
multi-dwelling route or through cable television operators or CTOs. As of March
31, 2004, we had tie-ups with approximately 435 CTOs and had wired more than
600 multi-dwelling units across 15 cities. Until recently, the largest national Internet service provider in India
was VSNL, which had been majority-owned by the Indian government. In February
2002, the Government of India sold a 25% stake in VSNL to the TATA group. The
Government of India retained a 26% interest in VSNL. The TATA group has
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Our strategy is to offer better and more extensive services to our
subscribers than our competitors, with an emphasis on ease of use. Our
subscribers purchase a ready-to-use CD-ROM available at bookstores, computer
stores and universities, or bundled with a personal computer, to access our
service immediately. Our online registration process is available to initiate
service and purchase renewals. We also support our subscribers with a
24-hour-a-day, seven-day-a-week call center staffed with trained technicians. We expect the market for consumer Internet access to remain highly price
competitive as late market entrants attempt to acquire customers. Our dial up service offerings come in a number of packages, designed to
attract beginning Internet users and service the needs of advanced users. Our
efforts are to provide more and more value added services to our customers. All
our customers are supported by 24-hour-a-day, seven-day-a-week customer
service. Our services are offered only on a prepaid basis and can be renewed
online. The current monthly charge for Internet access is Rs.199, which allows a user up to six hours of
Internet browsing per day. We also offer a three month subscription
for Rs.499, which also allows up to six hours of Internet browsing per day.
Subscribers can access a single number for customer service and
technical support. Subscribers can also e-mail their questions directly to a
customer service and technical support address at our company. The most common connection technique is for subscribers to dial-up to our
system using a personal computer configured with a modem. A subscriber who is
within local dialing range of one of our points of presence can access the
Internet with a local telephone call. In addition to paying for Internet
access, the customer is responsible for the cost of the call, which currently
is Rs.1.3 (2.7¢) per 3 minutes. We estimate that substantially all of our
subscribers access our services with a local telephone call. Subscribers who
access our services with a long-distance telephone call are responsible for the
long-distance charges. We believe that a critical element of consumer
satisfaction is to have an adequate number of access lines available to assure
prompt and reliable connection to our service. Our Internet access services division accounted for approximately 38.3%,
32.7%, 33.8% and 38.9%, respectively, of our revenues in fiscal years 2001,
2002, 2003 and 2004. The decrease in Internet access services division
revenues as a percentage of total revenues from fiscal year 2001 to fiscal year
2002 was due to competition and pricing pressures in the market for dial up
services and the growth of our corporate customer base. The increase in
Internet access services division revenues as a percentage of total revenues
from fiscal year 2002 to fiscal year 2004 was due to the revenues from our
iways and from our broadband offerings, which were sufficient to offset a
declining contribution to total revenues from the dial up segment. Online portal and content offerings. We operate an online portal, primarily consisting of the group of websites
under www.sify.comand www.samachar.com, that function as principal entry
points and gateways for accessing the Internet by providing useful web-related
services and links. We also offer related content sites specifically tailored
to Indian interests worldwide in four local Indian languages. Our portal site,
www.sify.com, is designed to be the initial launch screen for all of our
SifyOnlinecustomers and Iwayusers, but can also be accessed by Internet users
worldwide. As a portal, we provide a gateway to the Internet by offering information
services, directory tools, e-mail, contests, Internet chat and electronic
commerce activities such as online shopping and classified ads. We also allow
the user to personalize the www.sify.comstart page to include links to the
users most frequently used features on the Internet, including particular
search engines, free mail providers and favorite content sites. We allow
online merchants to create their own e-commerce store hosted on our
www.sify.comvirtual shopping mall web page. Our customization features
encourage users to make www.sify.comtheir first stop on the Internet and allow
us to provide special privileges and benefits to our Internet service provider
subscribers compared to users who access www.sify.comthrough another service
provider. Our objective is to attract as many users as possible to generate
revenues from advertising, sponsorship fees and electronic commerce transaction
commissions. Content on the sites has been grouped into separate
categories, including News & Info,
Connect, Entertainment,
Lifestyle, Services, Finance, Sports and
Interactives. 28




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Today, there are probably more NRIs than Indians residing domestically who
have access to the Internet. As a result, many content sites, including
www.samachar.com and www.sify.com, have more users located outside of India than within. However,
we believe that the market for content and services within India will develop
rapidly. A number of new channels including Sify Discussions, Blogs, Groups, Itihaas (Indian history and culture), Astrology, Classifieds
and Vacations were added to cater to a burgeoning section of Internet users that will also help build a loyal community of users. We have also launched
Sify Mobiles 4545, through which one can get news, sports coverage, entertainment news, stock quotes, ring-tons and logos for mobile phones and Samachar Money Transfer.
To expand usage of our services domestically, we believe that we must
provide more services with daily value, such as the ability to buy groceries or
movie tickets online or to check an up-to-date movie review before buying a
ticket. In fiscal years 2001, 2002, 2003 and 2004, our online portal and content
offerings division accounted for approximately 11.8%, 13.1%, 8.3% and 3.0%,
respectively, of our total revenues. The decrease in online portal and content
offerings division revenues as a percentage of total revenues from fiscal year
2002 to fiscal year 2004 was due to a decrease in advertising revenues as a
result of decreasing advertising expenditures by our customers combined with
lower advertising rates. Strategic Vendor Partnerships We maintain a number of strategic relationships with key vendors of
Internet-related hardware, software and services. Some of these relationships
are exclusive to us in India, subject in some cases to minimum sales
thresholds. These relationships result in two significant benefits. First,
they provide us with the ability to offer valuable services to our customers in
India. In addition, these relationships help us market our services by
providing us with access to our partners customer bases. Our network and
related services are focused on meeting the needs of corporate customers,
particularly in manufacturing and service organizations, which have a need to
coordinate their activities with satellite operations such as dealers,
distributors, agents and suppliers. For additional information regarding our
relationships with these companies, please see Item 10. Additional
InformationMaterial Contracts. Corporate Customers We have established a diversified base of corporate customers in a variety
of data intensive industries, including financial services, publishing, retail,
shipping and manufacturing. Our corporate customer base has grown to over 850
customers. Based on fiscal year 2004 revenues generated by our corporate
network/data services division, our largest corporate customers were
MCI, GE Capital Services India, Wipro Limited, Gric Communication, I
Pass Inc., Whirlpool of India Limited, Satyam Computer Services Ltd., Hutchison
Essar South Limited, Ranbaxy Laboratories Limited, Indian Railway Catering and
Tourism Corporation Limited, Pidilite Industries Limited, ITC Infotech India
Ltd., Tata Consultancy Services, Mumbai and North Delhi Power Limited. No
single customer accounted for more than 10% of our revenues in fiscal year
2004. The increased scope of the services we offer, particularly the provision
of broadband services to our existing customers, and our acquisition of Wipros
corporate customers has increased our market base. Customer Service and Technical Support We believe that excellent customer support is critical to our success in
attracting and retaining subscribers. We currently provide customer service and
technical support via a local telephone call in all 67 cities in which we have
a point of presence. Our web-based help desk and MIS system provides online
information to our clients. Subscribers can also e-mail their questions
directly to a customer service and technical support address at our company.
Our customer service and technical support staff handles all questions
regarding a subscribers account and the provision of our services and is
available 24-hours-a-day, seven-days-a-week. Sales and Marketing Corporate Offerings. The principal focus of our sales and marketing staff
is existing and potential corporate customers. We seek to penetrate this market
through trade publication ads, industry trade shows and seminars for the
benefit of industry associations and potential customers. As of March 31, 2004,
we had 135 employees dedicated to sales and marketing exclusively for our
corporate offerings. Consumer Offerings. A key element of our business strategy is to increase
our brand awareness and market penetration among consumers through a number of
means including an expanded advertising campaign focused primarily on print
advertising, direct mail and free software to consumers who become subscribers. In addition, we intend to continue to operate cybercafés under the iway
brand name, and to enter into relationships with independent cybercafés to
co-brand our websites with their businesses, in order to expand access to our
portal and websites by consumers who do not own a personal computer or have
Internet access at home. To increase Internet access and use of our websites
by personal computer buyers, we have entered into arrangements with a leading
PC manufacturers to have our Internet access software bundled with their
computers sold in India. 29




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Technology and Network Infrastructure We operate a national Internet protocol private data network with 67
points of presence serving more than 250 cities across India, representing an
estimated 90% of the installed personal computer base in India. A point of
presence is commonly defined as the ability to access online services in a
market through a local telephone call or local leased lines. We operate our
network facilities and customer service operations, which gives us greater
control over the utilization and quality of our network. We have designed and
built our network using advanced technologies and equipment which allows us to
continue to expand the geographic range of our network, integrate improved data
processing technologies and enhance speed and capacity with little or no
disruption to our customers. Geographic Coverage. Through our national network of points of presence,
our business and consumer Internet access customers are able to access the
Internet in 67 of the largest markets in India via a local phone call on dialup
or through our cybercafé chain or local leased lines. We have backbone points
of presence, or POPs, in Ahmedabad, Bangalore, Bhopal, Kolkata (Calcutta),
Chennai (Madras), Cochin, Chandigarh, Delhi, Hyderabad, Lucknow, Mumbai
(Bombay) and Pune. These backbone points of presence, or primary nodes, reside
at the core of a larger Internet protocol network with a partially meshed
topology architecture. We also have additional points of presence, or
secondary nodes, in Agra, Ajmer, Allahabad, Amritsar, Aurangabad, Baroda,
Belgaum, Bhilai, Bhubaneshwar, Calicut, Coimbatore, Cuttack, Davengere,
Ghaziabad, Goa, Gurgaon, Guwahati, Gwalior, Hubli, Indore, Jabalpur, Jaipur,
Jalandhar, Jamnagar, Jamshedpur, Jodhpur, Kanpur, Kakinada, Karnal, Kota,
Ludhiana, Madurai, Mangalore, Meerut, Mysore, Nagpur, Nasik, Patiala, Patna,
Pondicherry, Raipur, Rajkot, Ranchi, Salem, Shimoga, Siliguri, Surat, Tirupur,
Thiruvananthapuram, Tiruvalla, Trichy, Udaipur, Varanasi, Vijayawada and
Vishakapatnam. Each point of presence contains data communications equipment
housed in a secure facility owned, leased or operated on an infrastructure
co-location basis by our company located near a Bharat Sanchar Nigam Limited
(BSNL), Mahanagar Telephone Nigam Limited (MTNL) or private basic service
operator (BSO) telephone switching station. Most points of presence contains a
modem bank which receives and aggregates incoming calls from customers who
access our system by modem connection through a local call on the public
telephone system. The last mile of the Internet could be a leased line, ISDN
or point-to-multipoint radio link in the 5.7 gigahertz range which we have
licensed from the Wireless Planning Commission. Our larger corporate customers
access the point of presence directly through leased lines or wireless links. Network Architecture. We ensure network reliability through several
methods and have invested in proven technologies. We use Cisco routers to
route traffic between nodes interconnected using a high speed interface. Most
of our applications and network verification servers are manufactured by Sun,
Dell and Hewlett-Packard. The primary nodes on the backbone network are connected by up to 42 Mbps
high-speed fiber optic lines that we lease from long distance operators. The
secondary nodes are connected by 2 Mbps or lower leased lines. A number of
nodes are accessible from at least two other nodes, allowing us to reroute
traffic in the event of failure on one route. We reduce our exposure to
failures on the local loop by usually locating our points of presence within
one segment of the central telephone exchange and purchasing connectivity from
multiple exchanges. To further maximize our network uptime, we are continuing
to install fiber optic connections directly from each of our primary nodes to
the central exchange. In addition to a fundamental emphasis on reliability, our network design
philosophy has focused on compatibility, interoperability and scalability. We
use Internet protocol to transmit data, thus ensuring that our network is
completely interoperable with other networks and systems and that we may port
any application onto our network. The modular design of our network is fully
scalable, allowing us to expand without changing the network design or
architecture, thus ensuring little or no service disruption. Network Operations Center. We maintain a network operation center located
in Chennai (Madras) and a backup secondary facility in Mumbai (Bombay). The
Chennai facility houses our central network servers as well as our network
staff which monitors network traffic, service quality and equipment at all our
points of presence to ensure a reliable Internet service. These operation
centers are staffed 24-hours-a-day, seven-days-a-week. We have backup power
generators and software and hardware systems designed to prevent network
downtime in the event of system failures. In the future, we may add additional
facilities to supplement or add redundancy to our current network monitoring
capability. 30




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Competition General. We face competition in each of our markets and expect that this
competition will intensify as the markets in India for corporate network/data
services, Internet access services and online content develop and expand. We
compete primarily on the basis of service, reliability and customer support.
Price and ease of use are also competitive factors. Corporate network/data services. Our competitors for many private network
services include government services, companies that have built and operate
their own private data networks, satellite communications agencies, such as
Bharti BT, Comsat, HCL Comnet and Hughes, and terrestrial network providers,
such as Bharti Broadband, HCL Infinet and Tata Internet. Internet Access Services. As of December 31, 2003, approximately 189
companies were operational with an Internet service provider license in India.
Our principal competitor was VSNL, a telecom provider that was controlled by
the Government of India until recently. During 2003-04, BSNL and MTNL, the
leading government owned telecom providers, have grown significantly by
bundling their Internet services with basic telephony services. These operators
had approximately 41% of the market share as of December 31, 2003 and have
today emerged as the largest Internet service providers. Subscribers to private
ISPs have dropped by approximately 19% from December 2002 to December 2003. We
expect other telecom providers to emerge as competitors in the future. We also
expect prices to continue to fall as more competitors enter the market.
Further, we believe that it is inevitable that the large, foreign Internet
service providers will eventually attempt to enter the Indian market through
local joint ventures or other means. We expect the market for consumer Internet
access to remain extremely price competitive as late market entrants attempt to
acquire customers. In the past, VSNL aggressively reduced consumer Internet access prices
despite the lack of offsetting reductions in prevailing bandwidth tariffs
payable by private competitors, such as our company. We believe that these
practices constitute an improper cross-subsidy funded by VSNLs present
monopoly in long distance telephone service. The charges for international
gateways and other services presently being provided by VSNL are the subject of
a dispute pending before the TRAI and the Telecom Disputes Settlement and
Appellate Tribunal between VSNL and private Internet service providers,
including our company. The Telecom Disputes Settlement and Appellate Tribunal
remanded the matter back to the TRAI, which decided against the ISPAI. The
ISPAI has not yet decided on a further course of action. We are currently
paying for bandwidth from VSNL at the higher rates and do not believe that the
outcome of this dispute will be material to our business provided that the
international gateway services market continues to be open to competition. In
addition, we could face competition from companies that develop new and
innovative techniques to access the Internet. There is no single significant competitor in the cybercafé space. Reliance
Infocom, a member of the Reliance group, has publicly expressed its intent to
enter the cybercafé business through its WebWorld business. Currently, the
market is highly fragmented and dominated by individual entrepreneurs who own
internet cafes, with a few PCs connected to the Internet through a leased line
or ISDN line. With considerably low overheads on building and managing the
café, these individuals are able to offer browsing at lower rates. We compete
by offering faster browsing speeds, improved overall ambience at our iways,
convenient billing systems and roaming facilities. Online Portal. There are several other companies in India that have
developed websites, including rediff.com which completed its initial public
offering in the United States in June 2000 and others, that are designed to act
as Internet portals. These sites currently have greater traffic than our site
and offer some features that we do not. Further, the dominant Internet portals
continue to be the online services and search engine companies based in the
United States, such as America Online, Yahoo!, Microsoft Network and Lycos.
These companies have been developing specially branded or co-branded products
designed for audiences in specific markets. We expect that these companies
will deploy services that are targeted at the Indian market. For example,
Yahoo! launched an Indian service in June 2000. Many of our existing or potential competitors in each of our markets enjoy
substantial competitive advantages compared to our company, including:  
    
    the ability to offer a wider array of services;
    
    larger production and technical staff;
    
    greater name recognition and larger marketing budgets and resources;
    
    larger subscriber bases; and
    
    substantially greater financial, technical and other resources. To be competitive, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors
innovations by continuing to enhance our services, as well as our sales and
marketing channels. 31




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Increased competition could result in loss of market share, reduced prices
or reduced margins, any of which could adversely affect our business.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Intellectual Property 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. We have filed trademark applications for SifyOnline,
Sify.Net, Sifyonline.com, Sify.com and Sifyiway in India. These
applications are currently pending. Our efforts to protect our intellectual property may not be adequate. We
hold no patents, and our competitors may independently develop similar
technology or duplicate our services. Unauthorized parties may infringe upon or
misappropriate our services or proprietary information. In addition, the laws
of India do not protect proprietary rights to the same extent as laws in the
United States, and the global nature of the Internet makes it difficult to
control the ultimate destination of our services. For example, the legal
processes to protect service marks in India are not as effective as those in
place in the United States. 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. In the
future, 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
websites or other service offerings overlap with competitive offerings.
Defending against these claims, even if not meritorious, could be expensive and
divert managements attention from operating our company. If we become liable
to third parties for infringing their intellectual property rights, we could be
required to pay a substantial damage award 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. We also rely on a variety of technologies that are licensed from third
parties. We use software developed by these and other companies to perform key
functions. These third-party licenses may not be available to us on
commercially reasonable terms in the future. The loss of 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, results of
operations and financial condition. Government Regulation Our business is subject to comprehensive regulation by the Ministry of
Communications through the Telecom Commission and the Department of Telecommunication, or DOT, pursuant to the
provisions of the Indian Telegraph Act of 1885, or Telegraph Act, the India
Wireless Telegraphy Act, 1933, or Wireless Act, and the terms of our Internet
service provider license issued by the DOT under which we operate. Pursuant to
the Telegraph Act, the provision of any telecommunications services in India
requires a license from the Government of India, obtained through the DOT.
While the Telegraph Act sets the legal framework for regulation of the
telecommunications sector and the Wireless Act regulates the possession of
wireless telegraphy equipment, much of the supervision and regulation of our
company is implemented more informally through the general administrative
powers of the DOT, including those reserved to the DOT and other governmental
agencies under our license. In March 1997, the Government of India established the TRAI, an
independent regulatory authority, under the provisions of the Telecom
Regulatory Authority of India Act. The TRAI is an autonomous body consisting
of a chairperson and at least two and not more than four members. Under the Telecom Regulatory Authority of India Act, the functions of the
TRAI are to:  
    
    make recommendations on (i) the need and timing for the
introduction of new service providers, (ii) the terms and conditions
of licenses granted to service providers, (iii) the revocation of
licenses for non-compliance, (iv) measures to facilitate competition
and promote efficiency in the operation of telecommunications
services so as to facilitate growth in such services, (v)
technological improvements in the services provided by service
providers, (vi) the type of equipment to be used by service
providers, (vii) measures for the development of telecommunications
technology and the telecommunications industry and (viii) the
efficient management of the available spectrum;
    
    discharge the following functions: (i) ensure compliance of
the terms and conditions of licenses, (ii) fix the terms and
conditions of interconnectivity between service providers, (iii)
ensure technical compatibility and effective interconnection between
service providers, (iv) regulate revenue sharing arrangements
between service providers, 32




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(v) establish standards of quality of service, (vi) establish time
periods for providing local and long distance telecommunications
circuits between service providers, (vii) maintain and keep for public
inspection a register of interconnect agreements and (viii) ensure
effective compliance of universal service obligations;
    
    levy fees and other charges at such rates and in respect of
such services as may be determined by regulation; and
    
    perform such other functions as may be entrusted to it by the
Government of India or as may be necessary to carry out the
provisions of the Telecom Regulatory Authority of India Act. The TRAI also has the authority to, from time to time, set the rates at
which domestic and international telecommunications services are provided in
India. The TRAI does not have authority to grant licenses to service providers
or renew licenses, functions that remain with the DOT. The TRAI, however, has
the following powers:  
    
    to call on service providers to furnish information relating to their operations;
    
    to appoint persons to make official inquiries;
    
    to inspect the books of service providers; and
    
    to issue directives to service providers to ensure their proper functioning. Failure to follow TRAI directives may lead to the imposition of fines.
Decisions of the TRAI may be appealed to the Telecom Disputes Settlement and
Appellate Tribunal. We began offering Internet access services on November 22, 1998, and as of
March 31, 2004, we operated 67 Internet access nodes. In November 1998, the
Government of India opened the Internet service provider market to private
competition, and the DOT instituted a mandatory license requirement for the
provision of Internet services. We entered into a license agreement with the
DOT on November 12, 1998 with effect on the same day, under which we were
granted a license to provide national Internet services on a non-exclusive
basis. The terms and conditions of our license are generally consistent with
the policy for licensing Internet service providers. The term of our license is
15 years. Our license can be revoked by the DOT if we breach the terms and
conditions of the license. The DOT retains the right to take over our network
and to modify, revoke, terminate or suspend the terms and conditions of the
license at any time if, in its opinion, it is necessary or expedient to do so
in the interest of general public, or for the proper operation of the
telecommunications sector or for security considerations. The DOT also retains
the right to review the terms of our license based on changes in national
telecommunications policy. We are not allowed to assign or transfer our rights
under our license without the prior written consent of the DOT. The Government of India has revised foreign investment policies
permitting up to 74% foreign equity in an Internet service provider that
operates its own international gateways. We currently do not operate any
international gateways and are technically allowed to have 100% foreign equity
in our company, subject to all clearances and approvals. Our license also requires us to ensure that objectionable, obscene and
unauthorized content, or any other content, messages or communications
infringing copyrights, intellectual property rights and domestic and
international cyber laws or which is inconsistent with the laws of India, is
not carried on our network. Although under the terms of our license we are free to fix the prices we
charge our subscribers, the TRAI may set prices for the provision of Internet
access services generally. We are permitted to use encryption to safeguard
information transmitted over our network. However, if we use a higher level of
encryption than that specified by the Government of India, our license requires
us to deposit a set of keys with the Government of India. License fees are
waived through October 31, 2003, and a nominal license fee of Re.1 per annum is
payable from November 1, 2003. Our obligations under the license are secured
by a performance bank guarantee in the amount of Rs.10.0 million ($0.2
million). We may be required to import into India computer hardware and Internet
related software purchased from foreign manufacturers for business purposes.
These imports will be subject to the Export and Import Policy as declared by
the Ministry of Commerce. At the time of import, we will be required to pay a
customs duty pursuant to the Customs Tariff Act, 1975. Seasonality Given the early stage of the development of the Internet in India, the
rapidly evolving nature of our business and our limited operating history, we
cannot predict to what extent, if at all, our operations will prove to be
seasonal. Organization Structure 33




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The company is not part of any group. A list of subsidiaries and relevant
information about them is given in Exhibit 8.1. Property, plant and equipment We own our approximately 100,000 square foot corporate headquarters
located in Chennai (Madras), India and an approximately 20,000 square foot regional office in Mumbai (Bombay). We lease an approximately 3,500 square
foot network operations center in Chennai, a 20,000 square
foot data center in Vashi, Mumbai and a 6,000 square foot office
space in Prabhadevi, Mumbai. Our Chennai facility houses our
central network servers as well as our network staff which monitors network
traffic, service quality and equipment at all our points of presence, or POPs,
to ensure a reliable Internet service. Most of our POPs are staffed
24-hours-a-day, seven-days-a-week. Our POPs average approximately 750 square
feet at each location. We have backup power generators and software and
hardware systems designed to prevent network downtime in the event of system
failures. In the future, we may add additional facilities to supplement or add
redundancy to our current network monitoring capability. We have POPs in Agra,
Ahmedabad, Ajmer, Allahabad, Amritsar, Aurangabad, Bangalore, Baroda, Belgaum,
Bhilai, Bhopal, Bhubaneshwar, Kolkata (Calcutta), Calicut, Chandigarh, Cochin,
Coimbatore, Cuttack, Davengere, Delhi, Goa, Gurgaon, Guwahati, Hubli,
Hyderabad, Indore, Jabalpur, Jaipur, Jalandhar, Jamnagar, Jamshedpur, Jodhpur,
Kakinada, Karnal, Kota, Kanpur, Lucknow, Ludhiana, Madurai, Mangalore, Meerut,
Nagpur, Nasik, Patiala, Patna, Pondicherry, Pune, Raipur, Rajkot, Ranchi,
Salem, Shimoga, Siliguri, Surat, Tirupur, Thiruvananthapuram, Tiruvalla,
Trichy, Udaipur, Varanasi and Vijayawada. As we expand our operations, we
anticipate leasing additional facilities in each city in which we develop a
point of presence. 
 Item 5. Operating and Financial Review and Prospects Investors are cautioned that this discussion contains forward-looking
statements that involve risks and uncertainties. When used in this discussion,
the words believe, estimate, intend, will and expect and other
similar expressions as they relate to our company or its business are intended
to identify such forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Actual results, performance or
achievements could differ materially from those expressed or implied in such
forward-looking statements. Factors that could cause or contribute to such
differences include those described under the heading Risk Factors in this
report. Readers are cautioned not to place undue reliance on these
forward-looking statements that speak only as of their dates. The following
discussion and analysis should be read in conjunction with our financial
statements included herein and the notes thereto. Overview Please see the section entitled Item 4. Information on the
CompanyBusiness Overview in this annual report. Operating Results The primary operating segments of our company include:  
    
    corporate network/data services, which include private
network services, messaging services and web hosting for
businesses;
    
    internet access services;
    
    online portal services and content offerings; and
    
    other services, such as development of content for e learning. In Note 27 to our consolidated financial statements, we provide
supplemental segment data, which provides separate revenue and operating income
(loss) information for each of these business segments. This information is
available in Item 18   Financial Statements of this annual report and is
incorporated herein by reference. Revenues Corporate network/data services Corporate network/data services revenues primarily include connectivity
services and, to a lesser extent, the revenues from the sale of hardware and
software purchased from third party vendors, installation of the link and other
ancillary services, such as e-mail, fax and domain registration. Generally,
these elements are sold as a package consisting of all or some of the elements. The revenue attributable to hardware/software is recognized on delivery.
The revenue attributable to the installation of the link is recognized on
completion of the installation work. Revenue from ancillary services, such as
email facilities, fax facility and domain registration, are recognized over the
period such facilities are provided. All revenues are shown exclusive of sales
tax and service tax and net of applicable discounts and allowances. 34




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Web hosting service revenues primarily include co-location services and
connectivity services. On occasion, we also sell related hardware/software to
our web hosting customers. Revenue from these sales is recognized on delivery.
Revenue from hosting services is recognized over the period during which the
service is provided. Internet access services Internet access services include dial-up Internet access revenues, public
Internet access revenues and revenues from broadband delivery through cable
television operators, or CTOs and multi dwelling units, or MDUs. Dial-up
internet access is sold to customers either for a specified number of hours or
for an unlimited usage within a specified period of time. Customers purchase a
CD-ROM that enables them to access the Internet. The amounts received from
customers on the sale of these CD-ROMs are not refundable. We recognize
revenue from sale of CD-ROMs based on usage by the customer. At the end of the
specified period, the remaining unused hours, if any, are recognized as
revenue. Revenue from unlimited internet access and electronic mail access is
recognized over the specified period. Public Internet access is provided to customers through a chain of
franchisee cybercafé outlets and, to a lesser extent, Sify-owned cybercafés.
Initial franchise fee revenue is recognized at the time of commencement of
operations by the franchise. Broadband delivery to homes is provided to
customers through a network of CTOs and directly to MDUs. Online portal services and content offerings Online portal services and content offerings revenues include advertising
revenues from the various channels of our internet portal, www.sify.com. We
enter into contracts with customers to serve advertisements in the portal, and
we are paid on the basis of impressions, click-throughs or leads. Other services Other services include revenue from our subsidiary, Sify E-learning
Limited. We upload content for e learning to facilitate web-based learning in
various organizations. Revenue from such projects is recognized on the
proportionate performance method. Expenses Corporate network/data services Cost of revenues for the corporate network/data services division consists
of telecommunications costs necessary to provide services, customer support
costs, cost of goods in respect of communication hardware and security services
sold and the cost of providing network operations. Telecommunications costs
include the costs of international bandwidth procured from VSNL and satellite
gateway providers and are required for access to the Internet, providing local
telephone lines to our points of presence, the costs of using third-party
networks pursuant to service agreements, leased line costs and costs towards
spectrum fees payable to Wireless Planning Commission (WPC) for provision of
spectrum in the 5.7 ghz range to enable connectivity to be provided on the
wireless mode for the last mile. Depreciation of plant and equipment has not
been included in the cost of revenues since a significant part of the fixed
assets are not directly identifiable. Internet access services Cost of revenues for the Internet access services division consists
primarily of recurring telecommunications costs necessary to provide service to
subscribers, direct costs paid to franchisees for running the iways and to
Cable television operators for providing Internet services through cable to
customers. Another recurring cost included in cost of revenues is the personnel
and related operating expenses associated with customer support and network
operations. We expect that customer support and network operations expenses
will decrease as a percentage of revenues as we more efficiently utilize these
capabilities across a larger customer base and across multiple business
segments. Online portal services and content offerings Cost of revenues for the online portal and content offerings division
includes the cost of procuring and managing content for the websites and the
cost of third-party software. Selling, General and Administrative expenses 35




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Selling, general and administrative expenses consists of salaries and
commissions for sales and marketing personnel, salaries and related costs for
executive, financial and administrative personnel, sales, marketing,
advertising and other brand building costs, travel costs, and occupancy and
overhead costs. A total of 1.8 million equity shares are reserved for issuance under our
Associate Stock Option Plan. As of March 31, 2004, we had outstanding an
aggregate of 1,259,500 options (net of 758,770 options forfeited by employees
or expired) under our ASOP with a weighted average exercise price equal to
approximately Rs.175.54 ($4.04) per equity share. The unamortized deferred
compensation related to these grants amounted to Rs.14.3 million ($0.32
million) as of March 31, 2004. We depreciate our tangible assets on a straight-line basis over the useful
life of assets, ranging from two to five years and, in the case of buildings,
28 years. Historically, we have amortized the goodwill recognized in
acquisition transactions on a straight-line basis over five years. Subsequent
to our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, we no
longer amortize goodwill or indefinite lived intangible assets. In accordance
with our accounting policy, during fiscal 2002, our management assessed the
goodwill that we were carrying on our books in connection with the significant
acquisitions and investments made by us in Internet content and commerce
companies in 1999 and 2000, including IndiaWorld Communications and
IndiaPlaza.com. Based on that evaluation, which was measured at the enterprise
level, we concluded that these intangible assets were impaired. Accordingly,
during the fiscal 2002, we recorded a non-cash charge of Rs.4,112.7 million to
write-off all of the goodwill related to these acquisitions. Impairment of
Rs.15.0 million was recognized in fiscal 2002 in respect of other investments.
In addition, during fiscal 2002, we recorded a non-cash charge of Rs.1,089.9
million to reflect an impairment of investment in affiliate related to our
investment in CricInfo Limited. We assess for impairment of long-lived assets
under SFAS No. 144. The carrying value of long-lived assets are compared with
the adjusted estimated future cash flows at the identifiable business segment
level. If the sum of such undiscounted cash flows is less than the aggregate
carrying amount, the asset is not recoverable and the impairment loss is
recognized. During fiscal 2004, we recorded an impairment charge of Rs.22.6
million ($0.5 million). In addition to our operations and those of our consolidated subsidiaries,
our financial statements include our pro ratashare of the financial results of
those companies in which we have significant, non-controlling minority
interests, such as Wisden Cricinfo Limited and Refco Sify Securities Private
Limited. These investments are accounted for under the equity method of
accounting. In December 2002, we divested our entire stake in Placements.com
Private Limited. In February 2004, we sold our investments in Wisden Cricinfo
Limited for a total consideration of Rs.61.21 million (GBP
0.74 million), which
includes repayment of loan made to Wisden Cricinfo of Rs.22.9 million (GBP 0.3
million). Since our inception till fiscal 2003, we have experienced negative cash
flow from operating activities and have incurred net losses. Our ability to
generate positive cash flow from operations and achieve profitability is
dependent on our ability to continue to grow our revenues base and achieve
further operating efficiencies. For fiscal 1999 through 2003, we incurred
negative cash flow from continuing operations of approximately, Rs.172.1
million, Rs.596.9 million, Rs.1,133.4 million, Rs.775.7 million, and Rs.238.3
million respectively. During fiscal 2004, we generated cash from operating
activities of Rs 274.0 million ($6.3 million). For fiscal years 1999 through
2004, we incurred net losses of approximately Rs.187.4 million, Rs.381.9
million, Rs.2,509.0 million, Rs.7,202.5 million, Rs.1,329.4 million and
Rs.371.3 million ($8.6 million), respectively. We may not be able to realize
sufficient future revenues to recover our present investment in network
infrastructure and online content offerings or continue achieving positive cash
flow or profitability in the future. As of March 31, 2004, we had an
accumulated deficit of approximately Rs.12,109.1 million ($279.0 million). For
additional information, see Item 3. Key InformationRisk Factors. Certain prior-years amounts have been reclassified to conform to the
current years presentation. Results of Operations Year ended March 31, 2004 compared to year ended March 31, 2003 Revenues. We recognized Rs.2,801.2 million ($64.5 million) in revenues
for the fiscal year ended March 31, 2004, as compared to Rs.1,994.2 million for
the fiscal year ended March 31, 2003, representing an increase of Rs.807
million, or 40.5%. This increase was attributable to a Rs.414.1 million
increase in revenues generated by our Internet access services business and a
Rs.397.5 million increase in revenues generated by our corporate network/data
services business. Our corporate network/data services business obtained a significant number
of new orders from prominent customers with operations throughout India,
especially those operating in the BPO segment. There was also a large increase
in additional business from existing customers as they continued to increase
network connectivity for connecting their offices in India and abroad. 36




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The increase in Internet access revenues was primarily due to an increase
in revenues earned from iwaycustomers as the iwaynetwork was expanded from
844 cafes in 15 cities as of March 31, 2003 to 1,725 cafes in 55 cities in
March 2004. The increase in Internet access revenues can also be attributed to
revenues from broadband delivery through a network of CTOs. We commenced our
broadband access operations through CTOs in the current year and as of March
31, 2004, we had arrangements with 465 CTOs. In addition the number of MDUs
receiving our services increased from 350 in the previous year to 650 in the
current year. Our online portal and content offerings division accounted for Rs 84.2
million of revenues for the fiscal year ended March 31, 2004, as compared to
Rs.164.9 million for the fiscal year ended March 31, 2003, representing a
decrease of Rs.80.7 million, or 48.9%. The decrease can be primarily attributed
to decrease in revenues consequent to the sale of IndiaPlaza. Revenues generated by our other businesses and subsidiaries increased by
Rs.76.1 million, or 48.4%, primarily as a result of revenues generated by our
eLearning division. This division primarily derived its revenues from the
design and development of content for Element K, a company based in the United
States that provides tutorials over the web. This division has also entered
into a number of new contracts for content development with other companies in
the United States and Europe. In accordance with an agreement that we entered
into with Element K, approximately 175 personnel working for our eLearning
division were transferred to the newly established Element K development centre
in Chennai in January 2004. Although our work for Element K has
substantially ended, the eLearning division continues to do business with other customers. Cost of Revenues. Cost of revenues were Rs.1,476.7 million ($34.0
million), or 52.7% of revenues, for the fiscal year ended March 31, 2004,
compared to Rs.1,264.1 million, or 63.4% of revenues, for the fiscal year
ended March 31, 2003, representing an increase of Rs.212.6 million, or 16.8%.
This increase was due to a Rs.175.8 million increase in cost of goods sold
primarily due to an increase in direct expenses paid to franchisees for
operating franchised cybercafes and direct costs paid to CTOs for providing
broadband delivery through cable, an increase in direct personnel costs by
Rs.37.0 million and an increase in international bandwidth and lease line
charges by Rs 23.8 million offset by a Rs.24.0 million decrease in other costs.
The marginal increase in bandwidth costs is a combination of increased revenues
from value added and other services and a decrease in bandwidth rates, both as
a result of lower rates negotiated on higher volumes as well as the result of
competitive forces that have driven down costs both in the international and
national bandwidth costs. Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.1,208.9 million ($27.9 million) for the fiscal
year ended March 31, 2004, compared to Rs.1,090.9 million for the fiscal year
ended March 31, 2003, representing a increase of Rs.118.0 million, or 10.8%.
This increase was largely on account of Rs.117.7 million increase in
administrative and other expenses, and an increase in marketing promotion
expenses by Rs.19.1 million offset by a decrease in personnel expenses by
Rs.18.8 million. The increase in other expenses is mainly on account of
amortization of employee loans of Rs.57.6 million. Provision for doubtful debts.Provision for doubtful debts was Rs.76.5
million ($1.8 million) for the fiscal year ended March 31, 2004, compared to
Rs.156.2 million for the year ended March 31, 2003, representing a decrease of
Rs.79.7 million, or 51%. The decrease is mainly on account of reduction in
older debts. Impairment of assets.Impairment of assets was Rs.23.0 million ($0.5
million) for the fiscal year ended March 31, 2004, compared to Rs.247.0 million
for the year ended March 31, 2003, representing a decrease of Rs.224 million,
or 90.7%. Depreciation.Depreciation was Rs.481.8 million ($11.1 million) for the
fiscal year ended March 31, 2004, compared to Rs.474.3 million for the year
ended March 31, 2003, representing an increase of Rs.7.5 million, or 1.6%. Amortization of intangible assets.Amortization of intangible assets was
Rs.50.2 million ($1.2 million) for the fiscal year ended March 31, 2004,
compared to Rs.69.9 million for the year ended March 31, 2003 representing a
decrease of Rs.19.7 million, or 28.2%. Foreign exchange loss.Foreign exchange loss was Rs.52.2 million ($1.20
million) for the fiscal year ended March 31, 2004, compared to Rs.0.02 million
for the year ended March 31, 2003. This loss is mainly on account of
depreciation of the US dollar against the Indian Rupee, which impacted cash
held in foreign currency. Amortization of Deferred Stock Compensation expenses.Amortization of
deferred stock compensation expenses was Rs.28.0 million ($0.6 million) for the
year ended March 31, 2004, compared to Rs.57.7 million for the year ended March
31, 2003, representing a decrease of Rs.29.7 million. Equity in loss of affiliates.Equity income of affiliates was Rs.80.1
million ($1.9 million) for the year ended March 31, 2004, compared to equity in
losses of affiliates of Rs 26.1 million for the year ended March 31, 2003,
representing a decrease of 37




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Rs.106.2 million, or 406.9%. This is primarily on account of increase of
equity in profit of affiliates of Rs.67.8 million and an increase in gain on
sale of investments of Rs.38.5 million. Other income (net). Other income was Rs.144.1 million ($3.3 million) for
the year ended March 31, 2004, compared to Rs.52.9 million for the year ended
March 31, 2003, representing an increase of Rs.91.2 million, or 172.2%. The
increase was primarily on account of the gain on the sale of securities held
for sale amounting to Rs.6.7 million and the sale of a subsidiary company
amounting to Rs.76.1 million. Net Loss. Our net loss was Rs.371.3 million ($8.5 million) for the year
ended March 31, 2004, compared to a net loss of Rs.1,329.4 million for the year
ended March 31, 2003. Year ended March 31, 2003 compared to year ended March 31, 2002 Revenues. We recognized Rs.1,994.2 million ($42.0 million) in revenues
for the year ended March 31, 2003, as compared to Rs.1,577.5 million for the
year ended March 31, 2002, representing an increase of Rs.416.7 million, or
26.4%. This increase was attributable to a Rs.215.2 million increase in
revenues generated by our corporate network/data services business and a
Rs.158.4 million increase in revenues generated by our Internet access services
business. Our corporate network/data services business obtained a significant
number of new orders from prominent customers with operations throughout India.
The increase in Internet access revenues was mainly on account of an increase
in prices charged to customers in the dial-up business and increased revenues
from iwaycafes. Our online portal and content offerings division accounted for
Rs 164.9 million of revenues for the year ended March 31, 2003, as compared to
Rs.207.1 million for the year ended March 31, 2002, representing a decrease of
Rs.42.2 million, or 20.4%. Revenues generated by our other businesses and
subsidiaries increased by Rs.85.3 million, or 119%, primarily as a result of
revenues generated by our wholly owned subsidiary, Sify eLearning Limited. Sify
eLearning Limited, which derives its revenues from the design and development
of content for Element K, a company based in the United States that provides
tutorials over the web. The contract between Satyam Education Services Limited
and Element K expires in September 2003. The renewal of the contract is under
discussion and continued revenues from this business will depend on the terms
of this renewal agreement. Cost of Revenues. Cost of revenues were Rs.1,264.1 million ($26.6
million), or 63.4% of revenues, for the year ended March 31, 2003, compared to
Rs.1,192.7 million, or 75.6% of revenues, for the year ended March 31, 2002,
representing an increase of Rs.71.4 million, or 6.0%. This increase was due to
a Rs.99.8 million increase in cost of goods sold as result of a Rs.50.5 million
increase in direct expenses paid to franchisees for operating franchised iway
cafes and an increase in direct personnel costs of our eLearning subsidiary as
we hired additional employees, offset by a Rs.76.4 million decrease in
international bandwidth and leased line costs resulting from our negotiations
with suppliers and marginal changes in direct personnel and other costs. Selling, general and administrative expenses.Selling, general and
administrative expenses were Rs.1,090.9 million ($23.0 million) for the year
ended March 31, 2003, compared to Rs.1,256.8 million for the year ended March
31, 2002, representing a decrease of Rs.165.9 million, or 13.2%. This decrease
was largely on account of Rs.115.0 million decrease in administrative and other
expenses, a decrease in marketing promotion expenses by Rs.43.4 million and a
decrease in personnel expenses by Rs.7.5 million. These decreases in expenses
are mainly on account of reduction in expenses incurred. Provision for doubtful receivables and advances.Provision for doubtful
receivables and advances was Rs.156.2 million ($3.3 million) for the year
ended March 31, 2003, compared to Rs.101.5 million for the year ended March 31,
2002 representing an increase of Rs.54.7 million, or 53.9%. This increase is
on account of change in our credit and provisioning policy. Amortization / Impairment of goodwill. Amortization / Impairment of
goodwill for the fiscal year ended March 31, 2003 was nil, compared to an
impairment of Rs.4,127.7 million and an amortization of Rs.293.0 for the fiscal
year ended March 31, 2002. With the adoption of SFAS No. 142, we no longer
amortize goodwill for indefinite lived assets. Goodwill was tested and assessed
with no charge for impairment for the year ended March 31, 2003. Impairment of assets.Impairment of assets was Rs.247.0 million ($5.2
million) for the year ended March 31, 2003, compared to nil for the year ended
March 31, 2002. This impairment charge relates to certain assets identified to
have carrying value not considered to be recoverable. Depreciation.Depreciation was Rs.474.3 million ($10.0 million) for the
year ended March 31, 2003, compared to Rs.574.9 million for the year ended
March 31, 2002, representing a decrease of Rs.100.6 million, or 17.5%. Amortization of intangible assets.Amortization of intangible assets was
Rs.69.9 million ($1.5 million) for the year ended March 31, 2003, compared to
Rs.29.3 million for the year ended March 31, 2002 representing a decrease of
Rs.40.6 million, or 138.6%. 38




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Amortization of Deferred Stock Compensation expenses.Amortization of
deferred stock compensation expenses was Rs.57.7 million for the year ended
March 31, 2003, compared to Rs.9.7 million for the year ended March 31, 2002,
representing an increase of Rs.48.0 million. Equity in loss of affiliates.Equity in loss of affiliates was Rs.26.1
million for the fiscal year ended March 31, 2003, compared to Rs.1,225.5
million for the fiscal year ended March 31, 2002, representing a decrease of
Rs.1,199.4 million, or 97.9%. This decrease was primarily due to an
impairment charge of investments amounting to Rs.1,089 million during the
previous year. The decrease in operating losses in the affiliates is a result
of the sale of certain investments during the year and an improvement in the
performance of certain investments of our company. We also recorded a gain on
sale of investments during the year amounting to Rs.24.6 million. Other income (net). Other income was Rs.52.9 million for the fiscal year
ended March 31, 2003, compared to Rs.32.7 million for the fiscal year ended
March 31, 2002, representing an increase of Rs.20.2 million, or 61.8%. Net Loss. Our net loss was Rs. 1,329.4 million for the fiscal year ended
March 31, 2003, compared to a net loss of Rs.7,202.5 million for the fiscal
year ended March 31, 2002. This decrease is attributable to a Rs.416.7 million
increase in revenue, improved operating margins and non-impairment and
non-amortization of goodwill and investments in affiliates. Amortization and
impairment of goodwill during the fiscal year ended March 31, 2002 was Rs.
4,127.7 million and Rs. 293.0 million. Income/loss from discontinued operations. Loss from discontinued
operations for the fiscal year ended March 31, 2003 was nil, compared to
Rs.44.3 million for the fiscal year ended March 31, 2002. This is on account of
a Rs. 125.4 million loss from discontinued operation offset by a Rs. 81.1
million gain on the sale of discontinued business. Sify sold its software
services division to Satyam Computer Services Limited in February 28, 2002.
These transactions have been disclosed as discontinued operation. Liquidity and Capital Resources Prior to 1998, we financed our operations through funding from Satyam
Computer Services, our former parent company. No further funding is expected
from Satyam Computer Services in the future. Since 1998, we have financed our
operations through equity sales and borrowings from institutions and banks.
During fiscal years 1998, 1999 and 2000, we received Rs.38.5 million, Rs.307.5
million and Rs.10,220.0 million, respectively, in net cash proceeds from the
sale of equity securities. We did not issue any equity shares in financing
transactions in fiscal year 2001 or fiscal year 2002. During fiscal year 2003,
we received Rs.792.0 million in net cash proceeds from the sale of equity
securities. During fiscal year 2004, we received Rs.166.9 million in net cash
proceeds from the sale of equity securities. In February 2002, we divested our software services business to Satyam
Computer Services for Rs.349.2 million equivalent of $6.9 million. The
objective of the divestment was to permit our company to concentrate on our
core business of Internet services. This transaction was approved by at least
75% of our shareholders at an extraordinary general meeting held on February
28, 2002. In July 2003, we sold our investment in one of our subsidiaries for
consideration of Rs. 277.5 million ($ 6.4 million). In February 2004, we sold
our entire investment in Wisden CricInfo for a total consideration of Rs 61.2
million ($1.4 million) (GBP 0.74 million) which includes repayment of loans
made to Wisden Cricinfo of Rs 22.9 million ($0.5 million)(GBP 0.3 million). The following table summarizes our statements of cash flows for the
periods presented: Fiscal year ended, and as of March 31,2002
    
    2003
    
    2004
    
    2004Indian Rupees(in thousands)
    
    U.S DollarsNet loss from continuing operations
    
    
    (7,158,265
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (8,555
    )Net decrease (increase) in working capital
    
    
    27,232
    
    
    
    52,320
    
    
    
    52,199
    
    
    
    1,203Other adjustments for non-cash items
    
    
    6,355,353
    
    
    
    1,038,795
    
    
    
    593,070
    
    
    
    13,665Net cash provided by (used in) operating activities- continuing operations
    
    
    (775,680
    )
    
    
    (238,273
    )
    
    
    273,985
    
    
    
    6,313- discontinued operations
    
    
    237,531
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities-continuing operations
    
    
    (481,136
    )
    
    
    (273,674
    )
    
    
    11,327
    
    
    
    261
 39




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Fiscal year ended, and as of March 31,2002
    
    2003
    
    2004
    
    2004Indian Rupees(in thousands)
    
    U.S Dollars- discontinued operations
    
    
    (71,279
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of discontinued operations
    
    
    349,165
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (9,097
    )
    
    
    758,777
    
    
    
    189,958
    
    
    
    4,376Effect of exchange rate changes on cash
    
    
    (5,598
    )
    
    
    (7,345
    )
    
    
    (47,063
    )
    
    
    (1,084
    )Net increase (decrease) in cash and cash equivalents
    
    
    (756,094
    )
    
    
    239,485
    
    
    
    428,207
    
    
    
    9,866
 Our principal capital and liquidity needs historically have related to
developing our network infrastructure and our corporate network and electronic
commerce services, establishing our customer service and support operations,
developing our sales and marketing activities and for general working capital
needs. We have also expended significant funds on acquisitions and
investments. A significant part of our development of 67 points of presence in India
and our related network and infrastructure was completed during fiscal year
2001. During fiscal year 2001, we invested approximately Rs.500.0 million in
moving to new owned office space in Chennai and Mumbai. During fiscal year
2001, we also invested approximately Rs.173.0 million in property located in
Hyderabad for one of our subsidiaries. We sold this property during fiscal 2004. Since the expansion into additional points of presence in India is not
presently a priority and since the network has sufficient capacity to handle
the traffic during 2003 and 2004, there were no significant sums expended on
plant and equipment during the years, other than equipment required to provide
broadband access through wireless technologies on the last mile. In the light
of reduced capital expenditure for our business, we incurred Rs.284.3 million
for capital expenditures for the fiscal year ending March 31, 2003. We
incurred Rs.342.6 million for capital expenditures for fiscal 2004. Although we have 67 points of presence in India, a need for expansion into
smaller towns could arise as our corporate and data network services grow.
There are many ISPs and data/network service providers exiting the business
and, depending on pricing and other terms, we may acquire one or more of these
third parties. In that event, we will need to invest in technologies to
increase the speed of the backbone and edge networks. We will also have to
invest in wireless and wire line methods of last mile Internet access delivery. During fiscal years 2003 and 2004, our highest operational priority was to
reduce cash burn incurred to build our organization and infrastructure to
support our rapid growth, which has now stabilized. We pursued several
initiatives to reduce our cash burn. The first focus was toward reducing the
working capital required by our business. This was done by enhanced focus on
collecting receivables and advancing the billing for the customers of our
corporate data/network services division to the beginning of the quarter from
the end of the quarter. Our improved collection efforts and change in policy
to collect fees for certain services in advance resulted in a decrease in net
receivables in recent periods. The second focus was toward reducing bandwidth
costs. This was achieved by leveraging on the demonopolization of VSNL,
negotiation with a range of suppliers, including VSNL, availability of national
bandwidth (both intercity and intracity) from private telecom providers at
lower rates and increasing the role of fixed wireless mode of delivery in the
last mile. As a result of these initiatives, we have significantly reduced our
cash burn over the last eight quarters. We believe that the reductions achieved
on account of the above are permanent reductions. We intend to continue to focus on the reduction of our cash burn in fiscal
year 2005. Nonetheless, we expect to incur continued losses in the near
future. Based upon our present business and funding plans, we believe that our
cash and cash equivalents of Rs.1,325.8 million ($30.6 million) as of March 31,
2004, excluding restricted cash included in current assets of Rs.101.6 million
($2.3 million) and restricted cash included in non-current assets of Rs.10.1
million ($0.2 million), is sufficient to meet our currently known requirements
for at least the next 12 months. In light of the highly dynamic nature of our
business, however, we cannot assure you that our capital requirements and
sources will not change significantly in the future. Cash balances held in foreign currency were Rs.252.8 million, Rs.551.0
million and Rs.555.7 million as of March 31, 2002, 2003 and 2004, respectively.
Cash balances held in Indian currency were Rs.557.7 million, Rs.521.2 million
and Rs.881.8 million as of March 31, 2002, 2003 and 2004, respectively. These
amounts include cash and cash equivalents and restricted cash. Foreign exchange
gain in fiscal 2002 was Rs.44.5 million and foreign exchange loss during fiscal
2003 and 2004 were Rs.0.02 and Rs.52.2 million respectively. This foreign
exchange gain or loss is on account of cash held in foreign currency impacted
by appreciation or depreciation of the US dollar against the Indian Rupee. Cash provided by operating activities during fiscal year 2004 was Rs.274.0
million ($6.3 million). This is mainly attributable to non cash depreciation
charge of Rs.582.5 million, provision for doubtful receivables of Rs.76.5
million, increase in trade accounts payable by Rs.120.6 million, and increase
in advances received from customers by Rs.57.5 million, offset by net loss from
continuing operations of Rs.371.2 million, increase in accounts receivable by
Rs 223.1 million, increase in inventories by Rs.17.8 million, increase in
prepaid expenses by Rs.17.8 million, increase in other assets by Rs.43.0
million, decrease in other 40




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liabilities by Rs.42.0 million, gain on sale of plant and equipment of
Rs.20.0 million and gain on sale of investments of Rs.99.0 million Cash provided by investing activities of continuing operations during
fiscal year 2004 was Rs.11.3 million ($0.3 million), principally as a result of
proceeds from sale of investments for Rs.257.4 million, movement in restricted
cash by Rs.62.9 million, proceeds from sale of investment in affiliates for
Rs.56.7 million and proceeds from sale of plant and equipment for Rs.13.0
million offset by expenditure on purchase of routers, modems, ports, servers
and other capital equipment in connection with the expansion of our network of
Rs.342.6 million ($7.9 million), purchase of intangible assets of Rs.23.3
million ($0.5 million) and purchase consideration for acquisition of E
Alcatraz Consulting Private Limited for Rs.32.8 million Cash provided by financing activities for fiscal year 2004 was Rs.190.0
million ($4.4 million) consisted of net proceeds from issuance of common stock
of Rs.166.9 million ($3.9 million) and acquisition related debts of Rs.30.4
million offset by repayment of principal under capital lease obligations of
Rs.7.3 million. Cash used in operating activities during fiscal year 2003 was Rs.238.3
million ($5.0 million). Cash used in operating activities of continuing
operations for fiscal year 2003 was attributable to a Rs.1,329.4 million ($28.0
million) net loss from continuing operations, a Rs.78.8 million decrease in
trade accounts payable, a Rs.65.8 million increase in accounts receivable, a
Rs.25.0 million increase in other assets, a Rs.12.6 million increase in
minority interest, a Rs.11.3 million increase in inventories, a Rs.10.0 million
increase in prepaid expenses, a Rs.7.9 million increase in amounts due from
related parties and a Rs.1.5 million gain in sale of investments, offset a
Rs.2.6 million loss on sale of plant and equipment, a Rs.6.7 million write-off
of inventory, a Rs.10.9 million increase in advances from customers, a Rs.26.1
million loss on equity in loss of affiliates, a Rs.32.9 million increase in
other liabilities, a Rs.62.6 million decrease in due from officers and
employees, a Rs.144.8 million increase in deferred revenue, a Rs.156.2 million
against provision for doubtful receivables and advances and a Rs.854.2 million
of depreciation and amortization. Cash used in investing activities of
continuing operations during fiscal year 2003 was Rs.273.7 million ($5.8
million), principally as a result of the purchase of routers, modems, ports,
servers and other capital equipment in connection with the expansion of our
network of Rs.284.3 million ($6.0 million), purchase of intangible assets of
Rs.16.9 million ($0.4 million) and a Rs.22.2 million increase in restricted
cash, offset by proceeds from sale of plant and equipment of Rs.12.1 million
($0.3 million), proceeds from sale of investments of Rs.8.6 million ($0.3
million) and proceeds from sale of investments in affiliates of Rs.29.2 million
($0.6 million). Cash provided by financing activities for fiscal year 2003 was
Rs.758.8 million ($16.0 million) consisted of net proceeds from issuance of
common stock of Rs.760.5 million ($16.0 million), offset by repayment of
principal under capital lease obligations of Rs.1.7 million. Cash used in operating activities during fiscal year 2002 was Rs.538.1
million attributable to cash used in continuing operations of Rs.775.7 million,
partially offset by cash provided by discontinued operation of Rs.237.6
million. Cash used in operating activities of continuing operations for fiscal
year 2002 was attributable to a Rs.7,158.3 million net loss from continuing
operations, a Rs.17.9 million minority interest, a Rs.15.9 million increase in
account receivables, a Rs.84.4 million decrease in advances from customers, a
Rs.15.7 million decrease in other liabilities, a Rs.14.5 million decrease in
accrued liabilities and a Rs.39.5 million decrease in deferred revenue, offset
by depreciation, amortization and write off of goodwill of Rs.4,978.0 million,
impairment of investment in affiliate of Rs.1,089.9 million, equity in losses
of affiliates of Rs.178.2 million, loss on sale of plant and equipment of
Rs.3.7 million, provision for doubtful debts of Rs.101.5 million, inventory
write down of Rs.22.0 million, a Rs.50.5 million decrease in inventories, a
Rs.26.1 million decrease in due from officers and employees, a Rs.26.0 million
decrease in other assets and a Rs.94.6 million decrease in prepaid expenses.
Cash used in investing activities of continuing operations during fiscal year
2002 was Rs.481.1 million, principally as a result of the purchase of routers,
modems, ports, servers and other capital equipment in connection with the
expansion of our network of Rs.181.2 million, investment in affiliates of
Rs.119.7 million, payment of license fees of Rs.59.2 million, an increase of
Rs.122.3 million in restricted cash and purchase consideration for acquisition
of Rs.11.2 million, offset by proceeds from sale of plant and equipment of
Rs.12.5 million. Cash provided by proceeds from sale of our software services
division was Rs.349.2 million. Cash used in investing activities of
discontinued operations was Rs.71.3 million. Cash used in financing activities
for fiscal 2002 was Rs.9.1 million and represented the repayment of principal
under capital lease obligations. In the ordinary course of our business we regularly engage in discussions
and negotiations relating to potential investments, strategic partnerships and
acquisitions. We will continue to be aggressive in our efforts to identify one
or more investment or acquisition opportunities. However, we cannot assure you
that we will be able to identify or complete any such transaction on favorable
terms, or at all. Government of India policies previously limited the total foreign equity
in an Internet service provider to 49%. In May 2001, the Department of
Commerce and Industry increased the limit on foreign direct investment for
Internet companies from 49% to 74%. Our license was reissued in April 2002,
increasing the maximum permitted level of foreign equity investment in our
company to 74% and also permitting us to provide Internet telephony, subject to
the terms of operation as detailed in the license. This limit of 74% is the
maximum foreign equity investment that was permitted for ISPs that operate
their own international gateways. We currently do not operate our own
international gateways , and consequently, the limits applicable to foreign
equity investment in our company can be removed after all necessary approvals
and permissions are received. If additional funds are 41




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raised through the issuance of equity or convertible debt securities, the
percentage ownership of our shareholders and the holders of our ADSs will be
reduced and these securities may have rights, preferences or privileges senior
to those of our shareholders and the holders of our ADSs. We cannot assure you
that additional 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 and expand our operations, take advantage of
unanticipated opportunities, develop or enhance Internet content, features or
services, or otherwise respond to competitive pressures will be significantly
limited. Our business, results of operations and financial condition could be
materially adversely affected by any such limitation. Please see Item 3. Key
InformationRisk FactorsForward-looking statements contained in this annual
report may not be realized. As of March 31, 2004, we had spent approximately Rs.1,847.0 million to
develop and deploy our network infrastructure. As of March 31, 2004, our
future contractual obligations and commercial commitments were as follows: Payments Due by Period
    
    Rs. millionContractualObligations
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsCapital Lease Obligations
    
    
    11.9
    
    
    
    6.5
    
    
    
    5.4
    
    
    
    
    
    
    
    Total Contractual
Obligations
    
    
    11.9
    
    
    
    6.5
    
    
    
    5.4
    
    
    
    
    
    
    
    
 Amount of Commitment Expiration Per Period
    
    Rs. millionOther Commercial
    
    Total AmountsCommitments
    
    Committed
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    Over 5 yearsStandby Letters of Credit
    
    
    71.1
    
    
    
    71.1
    
    
    
    
    
    
    
    
    
    
    
    Guarantees
    
    
    94.7
    
    
    
    83.8
    
    
    
    0.9
    
    
    
    10.0
    
    
    
    Other Commercial
Commitments
    
    
    34.4
    
    
    
    34.4
    
    
    
    
    
    
    
    
    
    
    
    Total Commercial
Commitments
    
    
    200.2
    
    
    
    189.3
    
    
    
    0.9
    
    
    
    10.0
    
    
    
    
 Recent Accounting Pronouncements EITF Issue No.00-21 In November 2002, the EITF issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. This issue addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how arrangement consideration should be measured and
allocated to the separate units of accounting. We adopted EITF Issue No. 00-21
in respect of all revenue arrangements entered into on or after July 1, 2003.
The adoption of EITF Issue No. 00-21 did not have any impact on our
consolidated financial statements. SFAS No.143 In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligation.SFAS No. 143 requires us to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development, and/or normal use of
the assets. We also would record a corresponding asset that is depreciated over
the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation would be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. The standard is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No.143 had no effect on our
consolidated financial statements. SFAS No.146 In June 2002, FASB issued Statement No.146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No.146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of
Statement 146 were effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. The adoption of SFAS
No.146 had no effect on our consolidated financial statements. SFAS No. 150 42




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In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.SFAS No.150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
Statement also includes required disclosures for financial instruments within
its scope. SFAS No.150 is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. We currently do not have
any financial instruments that are within the scope of SFAS No.150. FIN 46R In December 2003, FASB has published a revision to Interpretation 46 to
clarify some of the provisions of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, and to exempt certain entities from its
requirements. The additional guidance is issued in response to input received
from constituents regarding certain issues arising in implementing
Interpretation 46. The revision does not have any impact on our accounting or
disclosure policies. SFAS No. 132 (revised) In December 2003, FASB issued SFAS No. 132 (revised), Employers
Disclosures about Pensions and Other Postretirement Benefit. SFAS No. 132
(revised) prescribes employers disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. The Statement retains and revises the disclosure requirements
contained in the original SFAS No. 132. It also requires additional disclosures
about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other postretirement benefit plans. The SFAS
No.132 (revised) generally is effective for fiscal years ending after December
15, 2003. Our disclosures in note 22 incorporates the requirements of SFAS No.
132 (revised), to the extent applicable. Critical Accounting Policies Critical accounting policies are defined as those that in our view are
most important to the portrayal of the Companys financial condition and
results and that are most demanding on our calls on judgment. We believe that
the accounting policies discussed below are the most critical accounting
policies. Revenue recognition (a) Corporate network/data services Corporate network/data service revenues primarily include connectivity
services and, to a lesser extent, the revenues from the sale of hardware and
software purchased from third party vendors, installation of the link, and
other ancillary services such as email, efax and domain registration.
Generally, these elements are sold as a package consisting of all or some of
the elements. This multiple element arrangement is recognized as separable
elements because each element constitutes a separate earnings process, each
element has a fair value that is reliable, verifiable and objectively
determinable, and the undelivered element is not essential to functionality of
the delivered elements. In this arrangement involving delivery of multiple
elements, in accordance with EITF 00-21, the units of accounting are determined
based on whether the delivered items have a value to the customer on a stand
alone basis, whether there is objective and reliable evidence of fair value of
the undelivered elements and if the arrangement includes a general right of
return relative to the delivered item, whether delivery or performance of the
undelivered item(s) is considered probable and substantially in our control.
The arrangement consideration is allocated to the units of accounting based on
their fair values. Revenue on delivered items is recognized when the revenue
recognition criteria applicable to that unit of accounting are met. We provide connectivity for a fixed period of time at a fixed rate
regardless of usage. Connectivity is the last element that is provided in the
case of a bundled contract. The connectivity charges are the same when sold
alone or as part of a package. The revenue attributable to connectivity
services is recognized ratably over the period of the contract. The hardware
and software are standard products that are being freely traded in and
purchased from the market, have standard specifications and are not otherwise
customized for the specific needs of a customer. The software sold by us is
off-the-shelf software, such as antivirus utilities and firewalls. The fair
value for the hardware and software is available from the market. The revenue
attributable to hardware/software is recognized on delivery. Installation
consists of commissioning of the last mile connectivity to the customer
premises from the carrier exchange (primarily Bharat Sanchar Nigam Limited, or
BSNL, a Government of India entity). However, once commissioned this
connection can be used by the customer to access any other service provider.
The installation normally takes 4-6 weeks. When the customer has such last
mile connectivity, we do not charge any installation fee. The revenue
attributable to the installation of the link is recognized on completion of the
installation work. When installation and 43




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connectivity services are provided as a package, the value of the
installation service is determined using the residual method as provided in
EITF 00-21. Revenue from ancillary services such as email facilities, fax
facility and domain registration are recognized over the period such facilities
are provided. All revenues are shown exclusive of sales tax and service tax
and net of applicable discounts and allowances. Web hosting service revenues primarily include co-location services and
connectivity services. On occasion, we also sell related hardware/software to
our web-hosting customers. At all times, such hardware and software belongs to
the customer. This hardware and software is purchased from outside vendors and
is freely traded in the market. We treat each element of the arrangement as a
separate earnings process. The value of the hosting service is determined based
on vendor specific objective evidence from similar services sold separately by
us. When hardware and/or software is also included with hosting services and
sold as a package the vendor specific objective evidence of the undelivered
element is considered to arrive at the residual value of the delivered element.
Revenue from hosting services is recognized over the period during which the
service is provided. (b) Internet access services Dial-up Internet access is sold to customers either for a specified number
of hours or for an unlimited usage within a specified period of time. Customers
purchase a CD that allows them to access the Internet. The amounts received
from customers on the sale of these CDs are not refundable. We recognize
revenue from sale of CDs based on usage by the customer. At the end of the
specified period, the remaining unutilized hours, if any, are recognized as
revenue. Revenue from unlimited Internet access and electronic mail access is
recognized over the specified period. Public Internet access is provided to customers through a chain of
franchisee cybercafé outlets and, to a lesser extent, Sify-owned cybercafés.
We enters into an arrangement with franchisees that provides for the payment of
an initial non-refundable franchisee fee in consideration for establishing the
franchisee relationship and providing certain initial services. These initial services consist of a number of activities, including
installing the broadband receiver equipment at the cybercafé and connecting
it to one of our broadcasting towers, obtaining regulatory approvals for
clearance of the site for wireless transmission at the allotted frequency range
and other ancillary services. Initial franchisee fee revenue is recognized at the time of commencement
of operations by the franchisee, in accordance with SFAS No. 45, Accounting for
Franchisee Fee Revenue, because we believe that substantial performance for
which these non-refundable payments are received is completed at the time of
commencement of operations and no uncertainty exists with regard to the
collection of such fees. The amount of initial franchise fee revenue recognized
during the fiscal years ended March 31, 2003 was Rs.12.82 million and March 31,
2004 was Rs.102.14 million. As of March 31, 2004, we owned 34 of the 1,725
cybercafés. Internet access revenue is recognized based on usage by the
customer. Online portal services We enter into contracts with customers to serve advertisements in the
portal and we are paid on the basis of impressions, click-throughs or leads and
in each case the revenue is recognized based on actual
impressions/click-throughs/ leads delivered. There are no performance
obligations or minimum guarantees. Revenues from electronic commerce
transactions are recognized when the transactions are completed. Other services We provide e-learning software development services to facilitate
web-based learning in various organizations. Revenue from such projects is
recognized on the proportionate performance method. Impairment of long-lived assets We assess for impairment of long-lived assets under SFAS No. 144.
Estimated future cash profits are adjusted for taxes, normal capital
expenditure and any inflow from sale or divestment of a business. We use the
undiscounted adjusted cash flows in evaluating the impairment of long-lived
assets under SFAS 144. We first assess the recoverability test (and the
measurement of impairment loss, if necessary) at the identifiable business
segments level that benefit from common assets of our company. If the sum of
such undiscounted cash flows is less than the aggregate carrying amount, an
impairment charge is recognized. The carrying amount of the long-lived assets
within the business segment is added to the carrying amount of the common
asset. We compare that aggregate carrying amount with the sum of the cash
flows from the business segments as calculated above, which includes the cash
outlays the entity expects to incur at the common asset level. If the sum of
such undiscounted cash flows is less than the aggregate carrying amount, the
common asset is not recoverable and the impairment loss is recognized. During
fiscal 2004, we recorded an impairment charge of Rs.22.5 million ($0.5
million). 44




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Deferred Stock Compensation We apply the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, including FASB Interpretation No.
44, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, issued in March 2000, to account for our
fixed-plan stock options. Under this method, compensation expense is recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, we have elected to continue to apply the
intrinsic-value-based method of accounting described above, and have adopted
only the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure. Accounting estimates We prepare financial statements in conformity with U.S. GAAP, which
requires us to make a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements. Some of the more significant estimates include allowances for
doubtful accounts, depreciation and amortization of long-lived assets and the
valuation allowance for deferred tax assets. Actual results could differ from
those estimates. We continually evaluate these estimates and assumptions based on the most
recently available information, our own historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Since the use of estimates are an integral component of the financial
reporting process, actual results could differ from those estimates. 
 Item 6. Directors, Senior Management and Employees Board of Directors and Senior Management Executives The following table sets forth the name, age and position of each director
and senior management executives of our company as of April 30, 2004: Name
    
    Age
    
    DesignationR. Ramaraj
    
    
    54
    
    
    Chief Executive Officer and
Managing DirectorGeorge Zacharias
    
    
    45
    
    
    Chief Operating OfficerShrikant Joshi
    
    
    47
    
    
    President  Access MediaV.V. Kannan
    
    
    45
    
    
    President  Interactive ServicesJohn Devasahayam
    
    
    46
    
    
    Managing Director, SafescryptRahul Swarup
    
    
    44
    
    
    President, Enterprise SolutionsJ. Avinash
    
    
    42
    
    
    President, Internet Data CentersRustom Irani
    
    
    41
    
    
    Chief Technology OfficerGeorge A. Ajit
    
    
    44
    
    
    Chief Human Resources OfficerSrinivasa C Raju
    
    
    42
    
    
    Chairman of the Board of DirectorsRavi Chandra Adusumalli (1) (2)
    
    
    28
    
    
    DirectorSandeep Reddy (1) (2)
    
    
    35
    
    
    DirectorV. Srinivas
    
    
    44
    
    
    DirectorT.H. Chowdary (1) (2)
    
    
    71
    
    
    DirectorManish Mehta
    
    
    47
    
    
    Director
  (1)
    
    Member of the Compensation Committee.(2)
    
    Member of the Audit Committee. R. Ramaraj has served as Chief Executive Officer of our company since
April 1998. Mr. Ramaraj has served as a Director since August 1996, prior to
which he served as an advisor to our company since June 1996. From 1992 to
1996, Mr. Ramaraj served as a Director of Sterling Cellular Limited, a mobile
telephone company based in India. Mr. Ramaraj is a Director 45




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of Universal Print Systems Ltd., a publicly held printing company based in
India. Mr. Ramaraj received a B.Tech in Chemical Engineering from the
University of Madras and a PGDM from the Indian Institute of Management,
Kolkata (Calcutta). George Zacharias has served as Chief Operating Officer of our company
since March 2000. From May 1997 to March 2000, Mr. Zacharias was the President
of Madura Garments, a clothing manufacturer. Prior to joining Madura Garments,
Mr. Zacharias was the Vice PresidentMarketing, Consumer Thread, of Madura
Coats. From February 1994 to March 1995, he was Marketing Director, Coats
Tootal Lanks, a subsidiary of Coats Viyella Plc., UK. Mr. Zacharias received a
B. Tech from Nagpur University in 1980 and a PGDBM from XLRI, Jamshedpur in
1982. Shrikant Joshi served as President  Access Media since December 2001.
Mr. Joshi served as Head of Sales of Heinz from July 2000 to November 2001.
From 1996 to 2000, Mr. Joshi served as Head of Domestic appliances and Personal
Care Business of Phillips India Ltd. Mr. Joshi started his career with WIPRO in
1983 and held various senior positions across different businesses of WIPRO.
Mr. Joshi received a Bachelors degree from IIT Delhi and a PGDM from IIM
Ahmedabad. V.V. Kannan has served as President  Interactive Services since May 2002.
Mr. Kannan served as Vice President, Internet Sales of our company from July
1999 to April 2002. From 1996 to 1999, Mr. Kannan was Vice President,
Marketing of G.M. Pens International Limited, a manufacturing company. From
1995 to 1996, he was Vice President, Retail Sales of Real Value Marketing Sales
Limited, and from 1992 to 1995 he was Marketing Manager of ITC Agri Business
Division, a manufacturing company. John Devasahayam joined our company in July 2003 from Satyam Computer
Services Limited where he was SeniorVice President heading the Microsoft
Competency Group and Microsoft Relationship Management Group since August 1996.
Prior to Satyam Computers, he was with Zenith Computers as Senior Vice
President Sales and Marketing. He holds a Masters Degree in Social Work from
Loyola College, Chennai. Rahul Swarup has served as President, Enterprise Solutions of our company
since April 2001. From September 1999 to March 2001, Mr. Swarup served as
Chief Technology Officer of our company. From 1989 to 1999, he was Vice
President of Citicorp Global Technology Infrastructure. Mr. Swarup received a
B.E. in Electrical Engineering from IIT Kanpur. J. Avinash has served as President, Internet Data Centers of our company
since March 2000. From October 1999 to March 2000, Mr. Avinash served as our
General Manager, Hosting Services. From 1994 to 1999, he served as Chief
Consultant for Infosynth. Rustom Irani has served as Chief Technology Officer of our company since
April 2001. From December 1999 to March 2001, Mr. Irani served as our Vice
President, Technology. From August 1999 to December 1999, he was Vice
President, Technology and Chief Information Officer of GE Capital International
Services, Hyderabad. From 1987 to August 1999, Mr. Irani was Vice President,
Technology of Citibank N.A. Mr. Irani received a B.Sc. in Chemistry from the
Arts & Sciences College, Secunderabad and a diploma in Computer Programming
from Data Network Consultants, Mumbai. George A. Ajit has served as Chief Human Resources Officer of our company
since May 1999. From 1998 to 1999, Mr. Ajit was Vice President, Human
Resources of Mobil India, an oil company. From 1996 to 1998, he was General
Manager, Human Resources, of Mahindra Holidays and Resorts. From 1994 to 1996,
Mr. Ajit was Deputy General Manager, BioProducts Division of E.I.D. Parry, a
manufacturing company. Srinivasa C Raju served as a Director of our company from February 1996
until his resignation in December 2002. He rejoined the Board of our company
in October 2003 and was appointed Chairman in January 2004.. He is also a
Director of I labs Limited, I labs Hyderabad Technology Centre (P) Limited,
Chintalapati Holdings Private Limited and Ivision News Private Limited. Ravi Chandra Adusumalli has served as a Director of Sify since December
2002. Mr. Adusumalli is a Principal with the Softbank Asia Infrastructure Fund
(SOFTBANK). Prior to joining SOFTBANK, Mr. Adusumalli was an Associate Partner
with Mobius Venture Capital in Silicon Valley, an early stage venture capital
firm with $2.3 billion under management. Prior to Mobius, Mr. Adusumalli was an
Associate with Softbank Capital Partners, a private equity firm with $1.25
billion under management. Prior to Softbank Capital Partners, Mr. Adusumalli
worked with Credit Suisse First Boston and Wasatch Funds. Mr. Adusumalli holds
a B.A. in Economics and Government from Cornell University. Sandeep Reddy has served as a Director of our company since December 2002.
Mr. Reddy is a London based professional. Mr. Reddy is a Director in
VentureTech Solutions Private Limited, or VentureTech, which has invested in a
diversified portfolio of companies spanning telecom, life sciences, network and
software companies. Mr. Reddy holds an MBA from IMD Switzerland. 46




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V. Srinivas has served as a Director of Sify since December 2002. Mr.
Srinivas has been Senior Vice President and Chief Financial Officer of Satyam
Computer Services Limited since November 2000. Prior to this, Mr. Srinivas was
Vice President and Chief Financial Officer of Satyam Computer Services Limited
since 1998. Before this, he was General Manager, Finance of Satyam Computer
Services Limited. Mr. Srinivas is a fellow member of the Institute of Chartered
Accountants of India and the Institute of Company Secretaries of India. He is
also an associate member of the Institute of Cost and Works Accountants of
India. Mr. Srinivas is also a director of Satyam Asia Pte Limited and Nipuna
Services Limited. In addition, Mr. Srinivas holds a bachelor of law degree and
a master of commerce degree from Osmania University. T.H. Chowdary has served as a Director of our company since February 1996.
Dr. Chowdary retired as the Chief Executive Officer of VSNL. Dr. Chowdary is
also a director in Icomm, Softsol India Limited and Tera Software Limited. Manish Mehta has been a Director of our company since April 2004. He has
served as Senior Vice President  Head HCU-SAP ES and GIS of Satyam Computer
Services Ltd. since March 1997. He holds a M.Sc. (Honrs.) (Chem.) and a M.E. in
Industrial Development. Board Composition Our Articles of Association set the minimum number of directors at two and
the maximum number of directors at 12. We currently have seven directors. The
Companies Act and our Articles of Association require the following:  
    
    at least two-thirds of our directors shall be subject to re-election by
our shareholders; and  
    
    at least one-third of our directors who are subject to re-election
shall be up for re-election at each annual meeting of our shareholders. In December 2002, we entered into a Shareholders agreement with SAIF
Investment Company Limited, or SAIF, VentureTech Solutions Private Limited, or
VentureTech and Satyam Computer Services providing for, among other things, a
Board of Directors comprised of nine directors. Each of Satyam Computer
Services, SAIF and Venture Tech is entitled to nominate two Members of the
Board so long as it holds at least 10% of our outstanding share capital and one
Member of the Board so long as it owns 5% of our outstanding share capital. In
addition Venture Tech and SAIF, can jointly nominate the Chairman of our Board
of Directors so long as their joint holding is not less than 15% of our
outstanding share capital. In January 2004, Mr. Srinivasa C Raju, a nominee of
Venture Tech, was appointed as the Chairman of our Board of Directors. The
Investor Rights Agreement has also granted the investors, consent rights with
respect to specified corporate transactions. Mr. Ravi Chandra Adusumalli is the nominee of SAIF, Messrs. Sandeep Reddy
and Srinivasa C Raju are the nominees of VentureTech and Messrs. V Srinivas and
Manish Mehta are the nominees of Satyam Computer Services. Messrs. Srinivasa C.
Raju and Manish Mehta are proposed to be appointed at our Annual General
Meeting scheduled to be held in 2004 as they were appointed during the year as
additional directors. The terms of Messrs. R. Ramaraj and T. H. Chowdary
will expire at our Annual General Meeting to be held in 2004. The term of Mr.
Ravi Chandra Adusumalli will expire at our Annual General Meeting to be held in
2005. The terms of Messrs. Sandeep Reddy and V. Srinivas will expire at our
Annual General Meeting to be held in 2006. There are no family relationships
between any of the directors or executive officers of our company. Board Committees 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. The members of the
Audit Committee are Messrs. Sandeep Reddy, Ravi Chandra Adusumalli and T. H.
Chowdary. The Compensation Committee of the Board of Directors determines the
salaries, benefits and stock option grants for our employees, consultants,
directors and other individuals compensated by our company. The Compensation
Committee also administers our compensation plans. The members of the
Compensation Committee are Messrs. Sandeep Reddy, Ravi Chandra Adusumalli and
T. H. Chowdary. Director Compensation Our Articles of Association provide that each of our directors receives a
sitting fee not exceeding Rs.2,000 for every Board and Committee meeting. In
fiscal year 2004, we did not pay any fees to our non-employee directors. Mr.
Ramaraj, who is employed as our Chief Executive Officer, does not receive any
additional compensation for his service on our Board of Directors. Directors
are reimbursed for travel and out-of-pocket expenses in connection with their
attendance at Board and Committee meetings. T. H. Chowdary, a Director of our
company, has been receiving Rs.20,000/- per month effective February 1, 2004
for the technical services rendered by him to the company. 47




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Officer Compensation The following table sets forth all compensation paid by us during the fiscal year
ended March 31, 2004 to our executive officers. Summary Compensation Table (Rs.Million)All Other CompensationUnder ExecutiveEmployment
    
    DeferredName
    
    Salary
    
    Bonus
    
    agreement
    
    CompensationR. Ramaraj
    
    
    4.47
    
    
    Nil
    
    Nil
    
    
    4.60George Zacharias
    
    
    6.24
    
    
    
    1.35
    
    
    Nil
    
    
    3.30Shrikant Joshi
    
    
    3.19
    
    
    
    1.10
    
    
    Nil
    
    
    0.65V V Kannan
    
    
    2.85
    
    
    
    0.53
    
    
    Nil
    
    
    0.62Rahul Swarup
    
    
    4.24
    
    
    
    1.24
    
    
    Nil
    
    
    1.83J. Avinash
    
    
    2.20
    
    
    
    0.90
    
    
    
    3.50
    
    
    
    0.76Rustom Irani
    
    
    3.52
    
    
    
    0.90
    
    
    Nil
    
    
    1.40Ajit Abraham
    
    
    2.87
    
    
    
    1.07
    
    
    Nil
    
    
    1.40Part of the YearJohn Devasahayam
    
    
    2.31
    
    
    Nil
    
    Nil
    
    
    0.21TR Santhanakrishnan
    
    
    8.43
    
    
    
    0.82
    
    
    NilKS Dasaratharaman
    
    
    6.88
    
    
    
    0.81
    
    
    Nil
 The following table sets forth all stock options granted by us during the fiscal
year ended March 31, 2004 to our executive officers. Option Grant Table Equity Shares UnderlyingName
    
    Option Grant
    
    Exercise Price (Rs.)
    
    Expiration Date1. R Ramaraj
    
    
    225,000
    
    
    
    163.40
    
    
    May 4, 20062. George Zacharias
    
    
    150,000
    
    
    
    163.40
    
    
    May 4, 20063. Shrikant Joshi
    
    
    60,000
    
    
    
    163.40
    
    
    May 4, 20064. V V Kannan
    
    
    15,000
    
    
    
    163.40
    
    
    May 4, 20065. Rahul Swarup
    
    
    75,000
    
    
    
    163.40
    
    
    May 4, 20066. J Avinash
    
    
    15,000
    
    
    
    163.40
    
    
    May 4, 20067. Rustom Irani
    
    
    60,000
    
    
    
    163.40
    
    
    May 4, 20068. George A Ajit
    
    
    60,000
    
    
    
    163.40
    
    
    May 4, 20069. John Devasahayam
    
    
    20,000
    
    
    
    163.40
    
    
    May 4, 2006
 The following table sets forth all stock options exercised by our
executive officers during the fiscal year ended March 31, 2004. Name
    
    No. of shares
    
    Exercise PriceRs.1. R Ramaraj
    
    
    13,020
    
    
    
    169.302. George Zacharias
    
    
    10,020
    
    
    
    169.303. Rahul Swarup
    
    
    6,420
    
    
    
    169.304. Ajit Abraham
    
    
    4,620
    
    
    
    169.30
 In February 2002, we entered into Executive Employment Agreements with
each of Messrs. Ramaraj and Zacharias. Our agreement with Mr. Zacharias has a
term of two years. Our agreement with Mr. Ramaraj expired in March 2003 and our
shareholders approved an extension of Mr. Ramarajs tenure as Chief Executive
Officer and Managing Director for an additional five years, effective April 1,
2003, retaining the terms of the Executive Employment Agreement. 48




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Stock Ownership The following table sets forth information with respect to the beneficial
ownership of our equity shares as of April 30, 2004 by each director and our
senior management executives. The table gives effect to equity shares issuable
within 60 days of April 30, 2004 upon the exercise of all options and other
rights beneficially owned by the indicated shareholders on that date.
Beneficial ownership is determined in accordance with the rules of the SEC and
includes voting and investment power with respect to equity shares. Unless
otherwise indicated, the persons named in the table have sole voting and sole
investment control with respect to all equity shares beneficially owned. Equity SharesBeneficially OwnedBeneficial Owner
    
    Number
    
    PercentR. Ramaraj (1)
    
    
    395,000
    
    
    
    1.1Srinivasa C. Raju
    
    
    
    
    
    
    Ravi Chandra Adusumalli (2)
    
    
    2,808,140
    
    
    
    8.0Sandeep Reddy (3)
    
    
    3,533,326
    
    
    
    10.1V Srinivas (4)
    
    
    11,182,600
    
    
    
    31.9Manish Mehta (5)
    
    
    11,182,600
    
    
    
    31.9T H Chowdary
    
    
    
    
    
    
    George Zacharias
    
    
    5,000
    
    
    
    Shrikant Joshi
    
    
    
    
    
    
    V.V. Kannan
    
    
    
    
    
    
    John Devasahayam
    
    
    3,333
    
    
    
    Rahul Swarup
    
    
    
    
    
    
    J. Avinash
    
    
    5,920
    
    
    
    Rustom Irani
    
    
    
    
    
    
    George A. Ajit
    
    
    
    
    
    
    
  (1)
    
    Excludes options to purchase (1) 2,500 equity shares with an exercise
price of $135.45 per share granted in January 2000 and (2) 20,000
equity shares with an exercise price of $74.70 per share granted in June
2000.(2)
    
    Consists of 2,808,140 ADSs beneficially owned by SAIF Investment Company
Limited. Mr. Adusumalli is a Principal of Softbank Asia Infrastructure
Fund, an affiliate of SAIF Investment Company Limited. Mr. Adusumalli
disclaims beneficial ownership of the ADSs owned by SAIF Investment
Company Limited, except to the extent of his pecuniary interest therein.(3)
    
    Consists of 3,533,326 equity shares beneficially owned by VentureTech
Solutions Private Limited. Mr. Reddy is a Director of VentureTech
Solutions Private Limited. Mr. Reddy disclaims beneficial ownership of
the equity shares owned by VentureTech Solutions Private Limited, except
to the extent of his pecuniary interest therein.(4)
    
    Consists of 11,182,600 equity shares beneficially owned by Satyam
Computer Services Limited. Mr. Srinivas is a Senior Vice President and
Chief Financial Officer of Satyam Computer Services Limited. Mr. Srinivas
disclaims beneficial ownership of the equity shares owned by Satyam
Computer Services Limited, except to the extent of his pecuniary interest
therein.(5)
    
    Consists of 11,182,600 equity shares beneficially owned by Satyam
Computer Services Limited. Mr. Mehta is a Senior Vice President of Satyam
Computer Services Limited. Mr. Mehta disclaims beneficial ownership of
the equity shares owned by Satyam Computer Services Limited, except to the
extent of his pecuniary interest therein. As of April 30, 2004, we had 35,035,478 outstanding equity shares. As of
March 31, 2004, there were approximately 30,000 record holders of ADRs
evidencing 19,314,579 ADSs. Employee Stock Option Plan We have an Associate Stock Option Plan, or ASOP, which provides for the
grant of options to employees of our company. The ASOP was approved by our
Board of Directors and our shareholders in March 1999. A total of 1.8 million
equity shares are reserved for issuance under our Associate Stock Option Plan.
As of March 31, 2004, we had outstanding an aggregate of 1,259,500 options (net
of 758,770 options forfeited by employees or expired) under our ASOP with a
weighted average exercise price equal to approximately Rs.171.30 ($3.60) per
equity share. 49




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##### Table of Contents



The ASOP is administered by the Compensation Committee of our Board of
Directors. On the recommendation of the Compensation Committee, we will issue
option letters to identified employees, with the right to convert the issued
options into our equity shares at the rates indicated in the options. The
consideration for transfer of the options will be Rs.1 per option to be paid by
the employee before transfer of the options. An employee holding options may apply for conversion of the options on a
date specified therein which is referred to as the conversion date. The
options are not transferable by an employee. The options lapse in the event of
cessation of employment due to reasons of non-performance or otherwise. The
equity shares transferred to the employee after conversion from options is the
absolute property of the employee and will be held by the employee. A
registration statement on Form S-8 covering the shares to be issued under the
ASOP has been filed and the participants in the ASOP will be able to receive
ADSs upon exercise of their options. Employees As of March 31, 2004, we had 1,210 employees. We anticipate maintaining
the current size of our employee base over the next year. We had 1,068
employees, 887 employees, and 1,185 employees, respectively, as of March 31,
2003, March 31, 2002 and March 31, 2001. The 231 employees previously engaged
in our software services division have been transferred to Satyam Computer
Services in connection with the sale of that division in fiscal 2002. In
February 2004, 175 employees of our eLearning division were transferred to
Element K pursuant to an agreement that we entered into with Element K. Of our
current employees, 91 are administrative, 407 form our sales and marketing
staffs, 135 are in product and content development, 507 are dedicated to
technology and technical support, and 70 are in business process and customer
care. None of our employees are represented by a union. We believe that our
relationship with our employees is good. 
 Item 7. Major Shareholders and Related Party Transactions Principal Shareholders The following table sets forth information with respect to the beneficial
ownership of our equity shares as of April 30, 2004 by each person or group of
affiliated persons who is known by us based on our review of public filings to
beneficially own 5% or more of our equity shares. The table gives effect to
equity shares issuable within 60 days of April 30, 2004 upon the exercise of
all options and other rights beneficially owned by the indicated shareholders
on that date. Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting and investment power with respect to equity
shares. Unless otherwise indicated, the persons named in the table have sole
voting and sole investment control with respect to all equity shares
beneficially owned. The information below is based on a review of filings made
by such persons with the SEC. Messrs. Anthony J. Castellanos, Ronald David Fisher, Reaz Noormamode,
Denis Sek Sum and Andrew Y. Yan, directors of SAIF Investment Company Limited,
exercise voting control and dispositive power over the equity shares owned by
SAIF Investment Company Ltd. Mr. Ravi Chandra Adusumalli, a director of our
company, is affiliated with SOFTBANK Asia Infrastructure Fund. Messrs. Sandeep Reddy and N. Mal Reddy, directors of VentureTech Solutions
Private Limited, exercise voting control and dispositive power over the equity
shares owned by VentureTech Solutions Private Limited. Mr. Sandeep Reddy, a
director of our company, is a Director of VentureTech. Messrs. B. Ramalinga Raju and B. Rama Raju, directors of Satyam Computer
Services Limited, exercise voting control and dispositive power over the equity
shares owned by Satyam Computer Services. Messrs. V. Srinivas and Manish
Mehta, directors of our company, are affiliated with Satyam Computer Services. 50




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Equity SharesBeneficially ownedBeneficial Owner
    
    Number
    
    PercentSatyam Computer Services LimitedMayfair Centre, S P RoadSecunderabad 500 003India
    
    
    11,182,600
    
    
    
    31.9SAIF
Investment Company Limited

Suite 307, St. James CourtSt. Denis Street, Port LouisMauritius
    
    
    2,808,140
    
    
    
    8.0VentureTech Solutions Private Limited12, Subba Rao AvenueChennai 600006India
    
    
    3,533,326
    
    
    
    10.1
    %
 Control of Registrant Satyam Computer Services, SAIF and VentureTech collectively beneficially
owned approximately 50 % of our equity shares as of April 30, 2004. These
shareholders are parties to an Investor Rights Agreement with our company dated
October 7, 2002. The Investor Rights Agreement provides for, among other
things, a Board of Directors comprised of nine directors. Each of these
shareholders is entitled to nominate two Members of our Board so long as it
holds at least 10% of our outstanding share capital and one Member of our Board
so long as it owns at least 5% of our outstanding share capital. In addition,
Venture Tech and SAIF, can jointly nominate the Chairman of our Board of
Directors so long as their joint holding is not less than 15% of our
outstanding share capital. In January 2004, Mr. Srinivasa C. Raju, a nominee of
Venture Tech, was appointed as the Chairman of our Board of Directors. The
Investor Rights Agreement has also granted consent rights in connection with
specified corporate transactions. These shareholders are presently able to exercise control over many
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. If a special
resolution is required, the number of votes cast in favor of the resolution
must be not less than three times the number of votes cast against it.
Examples of actions that require a special resolution include:  
    
    altering our Articles of Association;  
    
    issuing additional shares of capital stock, except for pro rataissuances to existing shareholders;  
    
    commencing any new line of business; and  
    
    commencing a liquidation. Circumstances may arise in which the interests of Satyam Computer
Services, SAIF and / or VentureTech or a subsequent purchaser of their
respective shares could conflict with the interest of our other shareholders or
holders of our ADSs. These shareholders could prevent or delay a change in
control of our company even if a transaction of that sort would be beneficial
to our other shareholders, including the holders of our ADSs. Related Party Transactions Our company has a stated policy on related party transactions, which
states whenever Sify enters into any transaction with a related party the
Company shall perform these transactions on terms no less favorable to the
Company than could have been obtained from independent third parties. Until December 2002, Satyam Computer Services was our parent company. In
fiscal year 2004, we billed an aggregate of Rs.51.5 million ($1.19 million) in
services to Satyam Computer Services and its affiliates. For fiscal years 2002
and 2003 the corresponding figures were Rs 17.2 million and Rs 34.3 million
respectively. We believe that these transactions with Satyam Computer Services
and its affiliates were on terms no less favorable to our company than could
have been obtained from independent third parties. 51




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Item 8. Financial Information Financial Statements We have elected to provide financial statements pursuant to Item 18 of
Form 20-F. Legal Proceedings Our company and certain of our officers and directors are named as
defendants in a securities class action lawsuit filed in the United States
District Court for the Southern District of New York. This action, which is
captioned In re Satyam Infoway Ltd. Initial Public Offering Securities
Litigation, also names as defendants several of the underwriters involved in
our initial public offering of American Depositary Shares. This class action is
brought on behalf of a purported class of purchasers of our ADSs from the time
of our IPO in October 1999 through December 2000. The central allegation in
this action is that the underwriters in our IPO solicited and received
undisclosed commissions from, and entered into undisclosed arrangements with,
certain investors who purchased our ADSs in the IPO and the aftermarket. The
complaint also alleges that we violated the United States federal securities
laws by failing to disclose in the IPO prospectus that the underwriters had
engaged in these allegedly undisclosed arrangements. More than 300 issuers
have been named in similar lawsuits. In October 2002, our executive officers
who were named as defendants in this action were dismissed from the action
without prejudice. In February 2003, the Court in this action issued its
decision on defendants omnibus motion to dismiss. This decision denied the
motion to dismiss the Section 11 claim as to Sify and virtually all of the
other issuer defendants. The decision also denied the motion to dismiss the
Section 10(b) claim as to numerous issuer defendants, including Sify. In June
2003, the plaintiffs in the consolidated IPO class action lawsuits currently
pending against us and more than 300 other issuers who went public between 1998
and 2000 announced a proposed settlement with us and the other issuer
defendants. The proposed settlement provides that the insurers of all settling
issuers will guarantee that the plaintiffs recover $1.0 billion from
non-settling defendants, including the investment banks who acted as
underwriters in those offerings. In the event that the plaintiffs do not
recover $ 1.0 billion, the insurers for the settling issuers will make up the
difference. We believe that we have sufficient insurance coverage to cover the
maximum amount that we may be responsible for under the proposed settlement. It
is possible that the Federal District Court may not approve the settlement in
whole or part. The charges for international gateways and other services presently being
provided by VSNL are the subject of a dispute pending before the TRAI and the
Telecom Disputes Settlement and Appellate Tribunal between VSNL and private
Internet service providers, including our company, represented by the Internet
Service Providers of India (ISPAI). VSNL has priced these services at levels,
which we believe are inconsistent with the terms and conditions on which VSNL
has secured the bandwidth for its international gateways. The Telecom Disputes
Settlement and Appellate Tribunal remanded the matter back to the TRAI, which
decided against the ISPAI. The ISPAI has not yet decided on a further course of
action. We are currently paying for bandwidth from VSNL at the higher rates
and do not believe that the outcome of this dispute will be material to our
business. We are party to additional legal actions arising in the ordinary course of
business. Based on information available to us as of March 31, 2004, we
believe that we have adequate legal defenses or insurance coverage for these
actions and that the ultimate outcome of these actions will not have a material
adverse effect on our company. Dividends We have not declared or paid any cash dividends on our equity shares since
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. Investors seeking cash dividends should not
purchase our ADSs. Under Indian law, a corporation may pay dividends upon a recommendation by
its Board of Directors and approval by a majority of its shareholders. Any
future cash dividends on our equity shares represented by ADSs will be paid to
the depositary in rupees and will generally be converted into dollars by the
depositary and distributed to holders of ADSs, net of the depositarys fees and
expenses. 
 Item 9. The Offer and Listing Trading Markets There is no public market for our equity shares in India, the United
States or any other market. Our ADSs evidenced by American Depositary
Receipts, or ADRs, are traded in the United States on the Nasdaq National
Market. Each ADS represents one equity share. The ADRs evidencing ADSs were
issued by our depositary, Citibank, N.A., pursuant to a Deposit Agreement. 52




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The number of outstanding equity shares in our company as of April 30,
2004 was 35,035,478. As of April 30, 2004, there were approximately 30,000
record holders of ADRs holding 16,506,439 ADSs. Price History Our ADSs commenced trading on the Nasdaq National Market on October 19,
1999. The tables below set forth, for the periods indicated, high and low
trading prices for our ADSs: Prior Fiscal Years Fiscal year ended
    
    High
    
    Low$
    
    $March 31, 2000 (beginning October 19, 1999)
    
    
    452.00
    
    
    
    30.00March 31, 2001
    
    
    256.00
    
    
    
    11.76March 31, 2002
    
    
    17.60
    
    
    
    2.88March 31, 2003
    
    
    6.44
    
    
    
    0.88March 31, 2004
    
    
    9.25
    
    
    
    3.75
 Quarters of Prior Fiscal Years Fiscal year ended March 31, 2003
    
    High
    
    Low$
    
    $First Quarter
    
    
    6.44
    
    
    
    2.00Second Quarter
    
    
    3.00
    
    
    
    0.88Third Quarter
    
    
    4.95
    
    
    
    0.90Fourth Quarter
    
    
    5.30
    
    
    
    2.27
 Fiscal year ended March 31, 2004
    
    High
    
    Low$
    
    $First Quarter
    
    
    7.70
    
    
    
    3.75Second Quarter
    
    
    9.25
    
    
    
    5.21Third Quarter
    
    
    7.27
    
    
    
    4.31Fourth Quarter
    
    
    9.25
    
    
    
    5.60
 Prior Six months Price rangeMonth
    
    High
    
    Low$
    
    $December 2003
    
    
    5.59
    
    
    
    4.50January 2004
    
    
    9.25
    
    
    
    6.16February 2004
    
    
    7.15
    
    
    
    6.20March 2004
    
    
    7.36
    
    
    
    5.60April 2004
    
    
    8.62
    
    
    
    6.54May 2004
    
    
    8.10
    
    
    
    4.55
 The initial public offering of our ADSs was priced on October 18, 1999 at a price of $18.00 per ADS. 
 Item 10. Additional Information Memorandum and Articles of Association Sify Limited was organized as a limited liability company under the laws
of the Republic of India pursuant to the provisions of the Companies Act on
December 12, 1995. Our authorized share capital is 37,500,000 shares, par value
Rs.10 per share. As of April 30, 2004, 35,035,478 equity shares were issued
and outstanding. 53




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The equity shares are our only class of share capital. Some of the share
capital is represented by American Depository Receipts issued by our company in
accordance with the applicable laws and regulations. Our 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. The term shareholders and shareholders have the same
meaning in this annual report since the Indian Companies Act only defines a
shareholder. A total of 1.8 million equity shares are reserved for issuance under our
Associate Stock Option Plan, or ASOP. As of March 31, 2004, we had outstanding
an aggregate of 1,259,500 options (net of 758,770 options forfeited by
employees or expired) under our ASOP with a weighted average exercise price
equal to approximately Rs.171.30 ($3.60) per equity share. The unamortized
deferred compensation related to these grants amounted to Rs.14.3 million as of
March 31, 2004. Under our Memorandum of Association, the main objectives of our
company include:  
    
    developing, servicing and selling or leasing data through
direct or electronic media, developing a wide area of communications
network and providing value-added services on the network for the
development, service, purchase or sale of computers, software and
related products in order to provide marketing services; and  
    
    designing and developing systems and application software for
sale in and outside of India, and designing and developing systems
and applications software for or on behalf of manufacturers, owners
and users of computer systems and digital or electronic equipment. On February 5, 1999, we entered into the Stockholders Agreement with
Satyam Computer Services, SARF and Mr. B. Ramalinga Raju, which was
subsequently amended effective September 14, 1999. The Stockholders Agreement
grants tag-along rights to SARF in the event of a sale of our equity shares
by Satyam Computer Services as well as customary information and inspection
rights. The Stockholders Agreement with SARF provides that upon the
occurrence of specified events, SARF may require Satyam Computer Services to
repurchase our equity shares owned by SARF. The Stockholders Agreement also
granted to Satyam Computer Services and SARF warrants to purchase up to an
aggregate of 750,000 of our equity shares. Upon the completion of our initial
public offering in October 1999, Satyam Computer Services and SARF exercised
these warrants for an exercise price equal to approximately 67% of our initial
public offering price, or $12.00 per equity share, and we issued an aggregate
of 150,000 and 600,000 equity shares to Satyam Computer Services and SARF,
respectively. In October 2002, we entered into an Investor Rights Agreement with Satyam
Computer Services, SAIF and VentureTech providing for, among other things, a
Board of Directors comprised of nine directors. . Each of these shareholders is
entitled to nominate two Members of our Board so long as it holds at least 10%
of our outstanding share capital and one Member of our Board so long as it owns
at least 5% of our outstanding share capital. In addition, Venture Tech and
SAIF, can jointly nominate the Chairman of our Board of Directors so long as
their joint holding is not less than 15% of our outstanding share capital. In
January 2004, Mr. Srinivasa C. Raju, a nominee of Venture Tech, was appointed
as the Chairman of our Board of Directors. The Investor Rights Agreement also
provides certain of the shareholders with consent rights in connection with
specified corporate transactions. 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
Articles, although the shareholders may, at the annual general meeting, approve
a dividend in an amount less than that recommended by the Board, 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. The
dividend recommended by the Board, and thereafter approved by the shareholders
in general meeting, if any, and subject to the limitations described above, is
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. Pursuant to our Articles, our Board 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 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 greater than 10%
of the par value of its equity shares, a company is required under the
Companies Act to transfer to its reserves a minimum percentage of its profits
for that year, ranging from 2.5% to 10% 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: 54




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   
the rate of dividend to be declared may not exceed 10% 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 may not exceed an amount
equivalent to 10% 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% of
its paid up capital. For additional information, please see Item 8. Financial
InformationDividends. 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 are similar to a
stock dividend. The Companies Act also permits the issuance of bonus shares
from a share premium account. Bonus shares are distributed to shareholders in
the proportion recommended by the Board. 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, a 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. At our 2000 Annual General Meeting, our shareholders
approved a special resolution pursuant to which we may issue up to one million
equity shares (equivalent to one million ADSs) in connection with acquisitions,
268,500 of which we issued in connection with our acquisition of IndiaWorld
Communications, 551,180 of which we issued in connection with our acquisition
of a 25% stake in CricInfo Limited and 113,798 of which we issued in connection
with our acquisition of IndiaPlaza.com. At our 2001 Annual General Meeting,
our shareholders approved a special resolution permitting us to issue up to
four million additional equity shares in connection with acquisitions or
capital raising transactions, and ADS holders are deemed to have waived their
preemptive rights with respect to these shares. At our December 2002
Extraordinary General Meeting, our shareholders approved a special resolution
permitting us to issue up to 12.5 million additional equity shares (equivalent
to 12.5 million ADSs) in connection with the sale of equity shares to SAIF and
VentureTech, and our ADS holders are deemed to have waived their preemptive
rights with respect to these shares and our Board of Directors may approve the
issuance of these shares without further action of our shareholders. Each of our directors is entitled to receive a sitting fee not exceeding
Rs.2,000 for every Board and Committee meeting as well as all traveling and
out-of-pocket expenses incurred in attending such meetings. Our Board of
Directors may from time to time or at any time at its discretion raise or
borrow any sum of money for use by our company. Unless otherwise determined by
our company in a general meeting, our directors are not required to hold any
shares of our companys capital stock to qualify to serve. For additional
information, please see Item 6. Director, Senior Management and Employees 
Board Composition,  Board Committees and  Director and Officer
Compensation. Annual General Meetings of Shareholders We must convene an annual general meeting of shareholders 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% of our paid up capital
carrying voting rights. The annual general meeting of the shareholders is
generally convened by our 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. Effective April 3, 2003 our
registered office is located at 2nd Floor, Tidel Park, 4, Canal Bank Road,
Taramani, Chennai 600 113, India. Our Articles provide that a quorum for a general meeting is the presence
of at least five shareholders in person. 55




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2004 Annual General Meeting Our Annual General Meeting for the fiscal year 2004 will be held at the
registered office of our company, 2nd Floor, Tidel Park, 4 Canal Bank Road,
Taramani, Chennai 600 113, India. The matters to be brought in front of our
shareholders at this meeting shall be described in the Notice of the Eighth
Annual General Meeting, which will be mailed to the shareholders and shall also
be filed with the Commission on Form 6-K. Please see that filing for a
description of the matters to be considered by our shareholders at the meeting.
At the Annual General Meeting, each of the proposals shall be put up for
approval, by our shareholders. 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% 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. Our Chairman of the Board has a deciding vote in the case of any
tie. 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 does
not participate at the time of show of hands but the proxy is entitled to vote
on a poll being taken. 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 Articles 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. Register of Shareholders; Record Dates; Transfer of Shares We maintain a register of shareholders as required under the Companies
Act, 1956. 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, and the repeal
of Section 22A of the Securities Contracts (Regulation) Act, 1956, 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 company, the provisions of Section 111A will apply to us. Our
Articles currently contain provisions, that give our directors discretion to
refuse to register a transfer of shares in some circumstances. According to
our Articles, our directors are required to exercise this right in the best
interests of our company. While our directors are not required to provide a
reason for any such refusal in writing, they must give notice of the refusal to
the transferee within two months after receipt of the application for
registration of transfer by our company. In accordance with the provisions of
Section 111A(2) of the Companies Act, our directors may exercise this
discretion 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, or
CLB. Pursuant to Section 111A(3), if a transfer of shares contravenes any of
the provisions of the Securities and Exchange Board of India Act, 1992 or the
regulations issued thereunder or the Sick Industrial Companies (Special
Provisions) Act, 1985 or any other Indian laws, the CLB may, on application
made by the company, a depositary incorporated in India, an investor, the
Securities and Exchange Board of India or other parties, direct the
rectification of the register of records. The CLB 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. Our transfer agent is
Citibank, N.A. -  Mumbai branch. 56




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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. These materials are also
generally made available at our corporate website, www.sifycorp.com. 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 Tamil Nadu, India,
which is the state in which our registered office is located. 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% votes in favor, of a
companys shareholders present in person or by proxy as the case may be, 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. Generally, 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
and the Securities and Exchange Board of India (Buy-back of Securities)
Regulations, 1998, or Buy-back Regulations. Liquidation Rights Subject to the rights of creditors, employees 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 up
on those equity shares. All surplus assets after payments due to the holders
of any preference shares at the commencement of the winding-up shall be paid to
holders of equity shares in proportion to their shareholdings. Material Contracts You should read the following description of our material contracts in
conjunction with the descriptions of our acquisitions and investments and our
relationships with strategic partners as described under Item 4.Information
on the Company. Internet Service Provider License.We entered into a license agreement
with the DOT on November 12, 1998 with effect on the same day, under which we
were granted a license to provide national Internet services on a non-exclusive
basis. The terms and conditions of our license are generally consistent with
the policy for licensing Internet service providers. The term of our license is
15 years. Our license can be revoked by the DOT if we breach the terms and
conditions of the license. The DOT retains the right to take over our network
and to modify, revoke, terminate or suspend the terms and conditions of the
license at any time if, in its opinion, it is necessary or expedient to do so
in the interest of general public, or for the proper operation of the
telecommunications sector or for security considerations. The DOT also retains
the right to review the terms of our license based on changes in national
telecommunications policy. We are not allowed to assign or transfer our rights
under our license without the prior written consent of the DOT. Government of India policies permit a maximum level of foreign equity
investment of 74% in Internet service providers having their own gateways. Our
license was reissued in April 2002, allowing us a maximum level of foreign
equity investment of 74% and also permitting us to provide Internet telephony,
subject to the terms of operation as detailed in the license. We currently do
not own any international gateways and are technically permitted to have a 100%
foreign holding in our company subject to Government regulations. Our license also requires us to ensure that objectionable, obscene and
unauthorized content, or any other content, messages or communications
infringing copyrights, intellectual property rights and domestic and
international cyber laws or which is inconsistent with the laws of India, is
not carried on our network. Although under the terms of our license we are
free to fix the prices we charge our subscribers, the TRAI may set prices for
the provision of Internet access services generally. We are permitted to use
encryption to safeguard information transmitted over our network. However, if
we use a higher level of encryption than that specified by the Government of
India, our license requires us to deposit a set of keys with the Government of
India. License fees were waived through October 31, 2003, and a nominal
license fee of Re.1 per annum is payable from November 1, 2003. Our
obligations under the license are secured by a performance bank guarantee in
the amount of Rs.10 million ($0.2 million) as of March 31, 2004. Investor Rights Agreement 57




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Our company, Satyam Computer Services, SAIF and VentureTech are parties to
an Investor Rights Agreement dated October 7, 2002. The Investor Rights
Agreement provides for, among other things, a Board of Directors comprised of
nine directors. . Each of these shareholders is entitled to nominate two
Members of our Board so long as it holds at least 10% of our outstanding share
capital and one Member of our Board so long as it owns at least 5% of our
outstanding share capital. In addition, Venture Tech and SAIF, can jointly
nominate the Chairman of our Board of Directors so long as their joint holding
is not less than 15% of our outstanding share capital. In January 2004, Mr.
Srinivasa C. Raju, a nominee of Venture Tech, was appointed as the Chairman of
our Board of Directors. The Investor Rights Agreement provides certain of the
shareholders with consent rights in connection with specified corporate
transactions. Executive Employment Agreements In February 2002, we entered into Executive Employment Agreements with
each of Messrs. Ramaraj and Zacharias. Our agreement with Mr. Ramaraj had a
term of approximately 13 months, and our agreement with Mr.Zacharias has a term
of three years. Our shareholders approved an extension of Mr. Ramarajs tenure
as Managing Director for an additional five years, effective April 1, 2003,
retaining the terms of the Executive Employment Agreement. The material terms
of the agreement between us and the executives, are:  
    
    during the term of employment, the executive shall be
entitled to compensation and benefits, subject to deduction of
tax per applicable law, as provided in the agreement;  
    
    the executive agreed not to disclose confidential
information and trade secrets to any third party except when
mandated by law and not to use such information for any purpose
except in the performance of his work for Sify;  
    
    the executive agreed that all work of a copyrightable
or patentable nature done in the course of work for Sify belongs
to Sify and undertook to help in every way to duly register
Sifys ownership of such copyrights and patents;  
    
    Sify agreed to indemnify the executive, his executors,
administrators or assigns for all expenses which the executive
incurs or becomes legally obligated to pay in connection with any
proceedings;  
    
    executive is entitled to full compensation and benefits
(excluding the performance bonus) up to the date of termination
of his employment, including a pro rated performance bonus up to
the date of termination of his employment in the event that
executives employment is terminated for good reason or within
one year after a change of control; and  
    
    executive is entitled to certain additional terminal
compensation of base salary in the event of the termination of
executives employment by Sify for any reason or by executive for
good reason. Cricinfo Limited & Wisden Cricinfo Limited Convertible notes of CricInfo Limited. On October 5, 2001, we entered into
an agreement to subscribe for unsecured convertible loan notes, or loan notes,
to be issued by CricInfo Limited in an aggregate amount of up to GBP 1.6
million to meet CricInfos short-medium term working capital requirements over
the ensuing year. These loan notes were redeemable on October 5, 2004, and the
terms of the loan note instrument provided for the payment of interest on the
principal amount at the rate of 8% per annum. We also entered into a Term Loan
Agreement with CricInfo for granting a term loan facility of GBP 0.1 million.
The loan carried an interest rate of 4% per annum and was repayable on December
31, 2004. This term loan and the convertible loan were secured by a debenture
executed by CricInfo. In February 2003, CricInfo transferred its net assets (other than the loan
payable to our company and miscellaneous current assets and liabilities) to a
newly formed company incorporated in the United Kingdom, Wisden Cricinfo
Limited. In consideration of its contribution of assets, CricInfo received a
33% equity stake in Wisden Cricinfo Limited and GBP 1.8 million. CricInfo
repaid our loan, including accrued interest of Rs.107.0 million, and
transferred its 33% stake in Wisden Cricinfo Limited to our company for a
consideration of Rs.22.6 million (GBP 0.3 million). Contemporaneously, we
advanced Rs. 23.0 million (GBP 0.3 million) to Wisden Cricinfo Limited. Also in February 2003, we entered into a shareholders agreement providing
for, among other things, put and call options. The options were exercisable at
any time during three months from the year ended September 30, 2004, 2005 and
2006 or within three months of a material breach or in the event a liquidator
being appointed. The option price was based on a factor of profits and is fixed
at a minimum price of GBP 0.6 million and a maximum price of GBP 1.0 million. 58




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In fiscal year 2004, we sold our stake in Wisden Cricinfo for Rs.61.2
million ($1.4 million)(GBP 0.7 million) which includes repayment of loan made
to Wisden Cricinfo of Rs.22.9 million ($0.5 million)(GBP 0.3 million). Exchange Controls General Prior to June 1, 2000, investment in Indian securities was regulated by
the Indian Foreign Exchange Regulation Act, 1973. Under Section 29(1)(b) of
the Indian Foreign Exchange Regulation Act, 1973, no person or company resident
outside India that is not incorporated in India (other than a banking company)
could purchase the shares of any company carrying on any trading, commercial or
industrial activity in India without the permission of the Reserve Bank of
India. Also, under Section 19(1)(d) of the Indian Foreign Exchange Regulation
Act, 1973, the transfer and issuance of any security of any Indian company to a
person resident outside India required the permission of the Reserve Bank of
India. Under Section 19(5) of the Indian Foreign Exchange Regulation Act,
1973, no transfer of shares in a company registered in India by a non-resident
to a resident of India was valid unless the transfer was confirmed by the
Reserve Bank of India upon application filed by the transferor or the
transferee. Furthermore, the issuance of rights and other distributions of
securities to a non-resident also requires the prior consent of the Reserve
Bank of India. However, the Reserve Bank of India has issued notifications
over the past few years relaxing the restrictions on foreign investment in
Indian companies. As of June 1, 2000, the Indian Foreign Exchange Regulation Act, 1973 was
replaced by the Indian Foreign Exchange Management Act, 1999, or FEMA. The
Indian Foreign Exchange Management Act, 1999 contains provisions regarding
current account convertibility and amendments to the definition of a resident
of India. However, some of the preexisting controls and restrictions on
capital account transactions remain in force. While many of the restrictions
imposed by the Indian Foreign Exchange Regulation Act, 1973 have been relaxed
under this new legislation, the RBI continues to exercise control over capital
account transactions, which alter the assets or liabilities, including
contingent liabilities, of persons. The RBI has issued regulations under FEMA
to regulate various kinds of capital account transactions, including aspects of
the purchase and issuance of shares of Indian companies. Therefore,
transaction involving foreign investment in Indian securities is regulated by
the provisions of the Indian Foreign Exchange Management Act, 1999 and
continues to be regulated by the Reserve Bank of India. ADR Guidelines Shares of Indian companies represented by ADSs, subject to sectoral limits
and the guidelines issued thereunder, are no longer required to be approved for
issuance to foreign investors by the either 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
modified from time to time, notified by the Government of India. This change
was effected through the guidelines for ADR and GDR issues by Indian companies
issued by the Ministry of Finance on January 19, 2000 and a notification issued
by the Reserve Bank of India. Hence we do not require the approval of the
Ministry of Finance and the Reserve Bank of India under the Issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt
Mechanism) Scheme, 1993. However, we will be required to furnish full
particulars of the issue, including the underlying equity shares representing
the ADRs, to the Ministry of Finance and the Reserve Bank of India within 30
days of the completion of an offering. Further, pending utilization of foreign exchange resources raised by issue
of ADRs, Indian companies may invest the proceeds in foreign exchange in: (a) deposits with or certificates of deposit or other instruments of banks
who have been rated not less than A1+ by Standard and Poor or B1 by Moodys for
short term obligations; (b) deposits with branches outside India of an authorized dealer in India;
and (c) treasury bill and other monetary instruments with a maturity or
unexpired maturity of the instrument of one year or less. The Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme
is distinct from other policies or facilities, as described below, relating to
investments in Indian companies by foreign investoRs.The issuance of ADSs
pursuant to the Issue of Foreign Currency Convertible Bonds and Ordinary Shares
Scheme also affords to owners of ADSs the benefits of Section 115AC of the
Indian Income-tax Act, 1961 for purposes of the application of Indian tax law.
For additional information, please see Taxation  Indian Taxation. 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, and overseas corporate bodies at least 60%
owned by such persons, or overseas corporate bodies, in Indian companies do not
require the specific prior approval of the Foreign Investment Promotion 59




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Board, or FIPB, a body formed by the Government of India to negotiate with
large foreign companies interested in making long-term investments in India.
Furthermore, henceforth no prior approval of the Reserve Bank of India is
required although a post-investment declaration in giving details of the
foreign investment in the company pursuant to the ADR issue must be filed with
the Reserve Bank of India within thirty days of our ADR offering. However, the
waiver of approval by the FIPB and the RBI is unavailable in certain
industries, which have been identified by the Government of India. The waiver
of approval would not apply in the following cases:  
    
    foreign investment in industries that require an industrial
license;  
    
    foreign investment being more than 24% in the equity capital
of manufacturing items reserved for small scale industries;  
    
    all proposals in which the foreign collaboration has a previous venture/tie-up in India in the relevant sector;  
    
    all proposals relating to acquisition of shares in an existing company by a foreign investor;  
    
    all proposals for investment in the industries specified by the Government of India; and  
    
    all proposals for investment in specified industries where
the proposed investment is in excess of the sectoral caps specified
therein. In cases where FIPB approval is obtained, no prior approval of the Reserve
Bank of India is required, although a declaration in the prescribed form as
mentioned above must be filed with the Reserve Bank of India once the foreign
investment is made in the Indian company. In cases where no prior approval of
the FIPB is required, prior approval of the Reserve Bank of India would also
not be required. However, a declaration in the prescribed form giving details
of the foreign investment must be filed with the Reserve Bank of India once the
foreign investment is made in the Indian company. In May 1994, the Government of India announced that purchases by foreign
investors of ADSs and foreign currency convertible bonds of Indian companies
would be treated as foreign direct investment in the equity issued by Indian
companies for such offerings. In November 1998, the Reserve Bank of India issued a notification to the
effect that foreign investment in preferred shares will be considered as part
of the share capital of a company and the provisions relating to foreign direct
investment in the equity shares of a company discussed above would apply.
Investments in preferred shares are included as foreign direct investment for
the purposes of sectoral caps on foreign equity, if such preferred shares carry
a conversion option. If the preferred shares are structured without a
conversion option, they would fall outside the foreign direct investment limit. The discussion on the foreign direct investment regime in India set forth
above applies only to a new issuance of shares made by Indian companies, not to
a transfer of shares. Notwithstanding the foregoing, Government of India policies permit a
maximum level of foreign equity investment of 74% in Internet service providers
having their own gateways. Our license was reissued in April 2002, allowing us
a maximum level of foreign equity investment of 74% and also permitting us to
provide Internet telephony, subject to the terms of operation as detailed in
the license. We currently do not own any international gateways and are
technically permitted to have 100% foreign holding in our company subject to
Government regulations. Investment by Non-Resident Indians and Overseas Corporate Bodies A variety of special facilities for making investments in India in shares
of Indian companies are available to individuals of Indian nationality or
origin residing outside India, or non-resident Indians, and to overseas
corporate bodies, or OCBs, at least 60% owned by such persons. These
facilities permit non-resident Indians and overseas corporate bodies to make
portfolio investments in shares and other securities of Indian companies on a
basis not generally available to other foreign investors. These facilities are
different and distinct from investments by foreign direct investors described
above. Apart from portfolio investments in Indian companies, non-resident Indians
and overseas corporate bodies may also invest in Indian companies through
foreign direct investments. For additional information, please see Foreign Direct Investment. Under the foreign direct investment rules,
non-resident Indians and overseas corporate bodies may invest up to 100% in
high-priority industries in which other foreign investors are permitted to
invest only up to 50%, 51%, 74% or 100%, depending on the industry category. 60




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Investment by Foreign Institutional Investors In September 1992, the Government of India issued guidelines which enable
foreign institutional investors, including institutions such as pension funds,
investment trusts, asset management companies, nominee companies and
incorporated/institutional portfolio managers, to make portfolio investments in
the securities of listed and unlisted companies in India. Under the
guidelines, foreign institutional investors must obtain an initial registration
from the Securities and Exchange Board of India to make these investments.
Foreign institutional investors must also comply with the provisions of the
Securities Exchange Board of India Foreign Institutional Investors Regulations,
1995. When it receives the initial registration, the foreign institutional
investor also obtains general permission from the Reserve Bank of India to
engage in transactions regulated under the Indian Foreign Exchange Regulation
Act. Together, the initial registration and the Reserve Bank of Indias
general permission enable the registered foreign institutional investor to buy,
subject to the ownership restrictions discussed below, and freely sell
securities issued by Indian companies whether or not they are listed, to
realize capital gains on investments made through the initial amount invested
in India, to subscribe or renounce rights offerings for shares, to appoint a
domestic custodian for custody of investments held and to 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. The foreign institutional investor regulations also set out the
general obligations and responsibilities and investment conditions and
restrictions applicable to foreign institutional investors. One such
restriction is that unless the foreign Institutional Investor is registered as
a debt fund with the Securities Exchange Board of India, the total investment
in equity and equity-related instruments should not be less than 70% of the
aggregate of all investments of a foreign institutional investor in India. Apart from making portfolio investments in Indian companies as described
above, foreign institutional investors may direct foreign investments in Indian
companies. For additional information, please see Foreign Direct Investment. Ownership Restrictions The Securities and Exchange Board of India and Reserve Bank of India
regulations restrict portfolio investments in Indian companies by foreign
institutional investors, non-resident Indians and overseas corporate bodies,
all of which we refer to as foreign portfolio investors. The Reserve Bank of
India issued a circular in August 1998 stating that foreign institutional
investors in aggregate may hold no more than 30% of the equity shares of an
Indian company and non-resident Indians and overseas corporate bodies in
aggregate may hold no more than 10% of the shares of an Indian company through
portfolio investments. Under current Indian law, foreign institutional
investors in the aggregate may hold no more than 24% of the equity shares of an
Indian company, and non-resident Indians and overseas corporate bodies in
aggregate may hold no more than 10% of the shares of an Indian company through
portfolio investments. The 24% limit referred to above may be increased to 49%
if the shareholders of the company pass a special resolution to that effect.
The Reserve Bank of India circular also states that no single foreign
institutional investor may hold more than 10% of the shares of an Indian
company and no single non-resident Indian or overseas corporate body may hold
more than 5% of the shares of an Indian company. Foreign institutional investors are urged to consult with their Indian
legal and tax advisers about the relationship between the foreign institutional
investor regulations and the ADSs and any equity shares withdrawn upon
surrender of ADSs. Under the Securities and Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 approved by the Securities and
Exchange Board of India in January 1997 and notified by the Government of India
in February 1997, which replaced the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Resolutions, upon the
acquisition (directly or indirectly) of more than 5% of the outstanding shares
(the aggregate of the existing shares and the newly acquired shares) of a
listed public Indian company, a purchaser is required to notify the company,
and the company is required to notify all the stock exchanges on which the
shares of the company are listed, of the purchasers shareholdings or voting
rights in that company within four working days of (a) the receipt of allotment
information or (b) the acquisition of shares or voting rights, as the case may
be. Before the acquisition of 15% or more of such shares or a change in
control of the company, either by himself or with others acting in concert the
purchaser is required to make annual disclosures of the purchasers holdings in
the company and 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 new regulations. A purchaser who
holds between 15.0% and 75.0% of a companys shares cannot acquire additional
shares or voting rights that would entitle the purchaser to exercise an
additional 5.0% of the voting rights in any 12 month period unless such
purchaser makes a public announcement offering to acquire an additional 20% of
the companys shares. Upon conversion of ADSs into equity shares, an ADS
holder will be subject to the Takeover Code. The Takeover Code does not apply
to purchases involving the acquisition of shares (i) by allotment in a public,
rights and preferential issue, (ii) pursuant to an underwriting agreement,
(iii) by registered stockbrokers in the ordinary course of business on behalf
of customers, (iv) in unlisted companies, (v) pursuant to a scheme of
reconstruction or amalgamation or (vi) pursuant to a scheme under Section 18 of
the Sick Industrial Companies (Special Provisions) Act, 1985. The Takeover
Code does not apply to purchases in the ordinary course of business by public
financial institutions either on their own account or as a pledgee. In
addition, the Takeover Code does not apply to the purchase of ADSs so long as
they are not converted into equity shares. However, since we are an unlisted
company, the provisions of the new 61




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regulations will not apply to us. If our shares are listed on an Indian
stock exchange in the future, the new regulations will apply to the holders of
our ADSs. Open market purchases of securities of Indian companies in India by
foreign direct investors or investments by non-resident Indians, overseas
corporate bodies and foreign institutional investors above the ownership levels
set forth above require Government of India approval on a case-by-case basis. Voting Rights of Deposited Equity Shares Represented by ADSs Holders of ADSs generally have the right under the deposit agreement to
instruct the depositary bank to exercise the voting rights for the equity
shares represented by the related ADSs. At our request, the depositary bank
will mail to the holders of ADSs any notice of shareholders meeting received
from us together with information explaining how to instruct the depositary
bank to exercise the voting rights of the securities represented by ADSs. If the depositary bank timely receives voting instructions from a holder
of ADSs, it will endeavor to vote the securities represented by the holders
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 by
holders of a majority of the ADSs for which the depositary bank receives voting
instructions. Please note that the ability of the depositary bank to carry out voting
instructions may be limited by practical and legal limitations and the terms of
the securities on deposit. We cannot assure you that ADS holders will receive
voting materials in time to enable them to return voting instructions to the
depositary bank in a timely manner. Securities for which no voting
instructions have been received will not be voted except as discussed above. Under Indian law, subject to the presence in person at a shareholder
meeting of persons holding equity shares representing a quorum, all resolutions
proposed to be approved at that meeting are voted on by a show of hands unless
a shareholder present in person at the meeting demands that a poll be taken.
Equity shares not represented in person at the meeting, including equity shares
underlying ADSs for which a holder has provided voting instructions to the
depositary bank, are not counted in a vote by show of hands. As a result, only
in the event that a shareholder present at the meeting demands that a poll be
taken will the votes of ADSs holders be counted. Securities for which no
voting instructions have been received will not be voted on a poll. As a foreign private issuer, we are not subject to the SECs proxy rules,
which regulate the form and content of solicitations by United States-based
issuers of proxies from their shareholders. To date, our practice has been to
provide advance notice to our ADS holders of all shareholder meetings and to
solicit their vote on such matters, through the depositary, and we expect to
continue this practice. The form of notice and proxy statement that we have
been using does not include all of the information that would be provided under
the SECs proxy rules. Taxation Indian Taxation General. The following relates to the principal Indian tax consequences
for holders of ADSs and equity shares received upon withdrawal of such equity
shares who are not resident in India, whether of Indian origin or not. We
refer to these persons as non-resident holders. The following is based on the
provisions of the Income-tax Act, 1961, including the special tax regime
contained in Section 115AC and the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993. The
Income-tax Act is generally amended or changed by amendments carried out
through the Finance Act enacted every year as a part of the budget approvals. This section is not intended to constitute a complete analysis of the
individual tax consequences to non-resident holders under Indian law for the
acquisition, ownership and sale of ADSs and equity shares. Personal tax
consequences of an investment may vary for non-resident holders in various
circumstances, and 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 the law of the jurisdiction
of their residence and any tax treaty between India and their country of
residence. Residence. For purposes of the Income-tax Act, an individual is
considered to be a resident of India during any fiscal year if he or she is in
India in that year for:  
    
    a period or periods amounting to 182 days or more; or 62




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    60 days or more and, in case of a citizen of India or a person of
Indian origin, who, being outside India, comes on a visit to India, is in
India for 182 days or more effective April 1, 1995 and in each case
within the four preceding years has been in India for a period or periods
amounting to 365 days or more. A company is a resident of India if it is registered in India or the control
and the management of its affairs is situated wholly in India. A firm or other
association of persons is resident in India except where the control and
management of its affairs is situated wholly outside India. Individuals,
companies, firms and other associations of persons that are not residents of
India would be treated as non-residents for purposes of the Income-tax Act. Taxation of Distributions. The Finance Act, 2003 states that after April
1, 2003, dividend income will be exempt from tax for shareholders and that
domestic companies will be liable to pay a dividend distribution tax at the
rate of 12.5% plus a surcharge at the time of the distribution. Any
distributions of additional ADSs, equity shares or rights to subscribe for
equity shares made to non-resident holders with respect to ADSs or equity
shares will not be subject to Indian tax. Similarly, the acquisition by a
non-resident holder of equity shares upon redemption of ADSs will not
constitute a taxable event for Indian income tax purposes. Such acquisition
will, however, give rise to a stamp duty as described below under Stamp Duty
and Transfer Tax. Taxation of Capital Gains. Any gain realized on the sale of ADSs or
equity shares by a non-resident holder to any non-resident outside India is not
subject to Indian capital gains tax. Since our ADS offerings were approved by the Government of India under the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme,
non-resident holders of the ADSs have the benefit of tax concessions available
under Section 115AC. As a result, gains realized on the sale of ADSs will not
be subject to Indian taxation. The effect of the Scheme in the context of
Section 115AC is unclear as to whether such tax treatment is available to a
non-resident who acquires equity shares outside India from a non-resident
holder of equity shares after receipt of the equity shares upon surrender of
the ADSs. If concessional tax treatment is not available, gains realized on
the sale of such equity shares will be subject to customary Indian taxation on
capital gains as discussed below. The Issue of Foreign Currency Convertible
Bonds and Ordinary Shares Scheme provides that if the equity shares are sold on
a recognized stock exchange in India against payment in Indian rupees, they
will no longer be eligible for such concessional tax treatment. Subject to any relief provided pursuant to an applicable tax treaty, any
gain realized on the sale of equity shares to an Indian resident or inside
India generally will be subject to Indian capital gains tax which is to be
withheld at the source by the buyer. However, the acquisition by non-resident
holders of equity shares in exchange for ADSs will not be subject to Indian
capital gains tax. Under the Issue of Foreign Currency Convertible Bonds and
Ordinary Shares Scheme, the cost of acquisition of equity shares received in
exchange for ADSs will be the cost of the underlying 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. In the case of companies listed
in India, the cost of acquisition of the equity shares would be the price of
the equity shares prevailing on the Stock Exchange, Mumbai or the National
Stock Exchange on the date the depositary gives notice to the custodian of the
delivery of the equity shares in exchange for the corresponding ADSs. However,
the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme and
Section 115AC do not provide for determination of the cost of acquisition for
the purposes of computing capital gains tax where the shares of the Indian
company are not listed on the Stock Exchange, Mumbai or the National Stock
Exchange in India. Therefore, in the case of our company, which is not listed
on either the Stock Exchange, Mumbai or the National Stock Exchange, the mode
of determination of the cost of acquisition of equity shares is unclear.
Therefore, the original cost of acquisition of the ADSs may be treated as the
cost of acquisition for the purposes of determining the capital gains tax.
According to the Issue of Foreign Currency Convertible Bonds and Ordinary
Shares Scheme, a non-resident holders holding period for purposes of
determining the applicable Indian capital gains tax rate in respect of equity
shares received in exchange for ADSs commences on the date of the notice of the
redemption by the depositary to the custodian. The India-U.S. Treaty does not
provide an exemption from the imposition of Indian capital gains tax. Under Section 115AC, taxable gain realized in respect of equity shares
held for more than 12 months, or long-term gain, is subject to tax at the rate
of 10%. Taxable gain realized in respect of equity shares held for 12 months
or less, or short-term gain, is subject to tax at variable rates with a maximum
rate of 48%. In addition, non-corporate foreign assessees are subject to a
surcharge of 5.0%. The actual rate of tax on short-term gain depends on a
number of factors, including the residential status of the non-resident holder
and the type of income chargeable in India. Buy-back of Securities. Currently, Indian companies are not subject to
any tax in respect of the buy-back of their shares. However, the shareholders
will be taxed on any gain at the long-term or short-term, as applicable,
capital gains rates. For additional information, please see Taxation of
Capital Gains. Stamp Duty and Transfer Tax. Upon issuance of the equity shares
underlying our ADSs, we are required to pay a stamp duty of 0.1% of the
aggregate value of the shares issued, provided that the issue of dematerialized
shares is not subject to Indian stamp duty. A transfer of ADSs is not subject
to Indian stamp duty. However, upon the acquisition of equity shares from 63




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the depositary in exchange for ADSs, the non-resident holder will be
liable for Indian stamp duty at the rate of 0.5% of the market value of the
equity shares on the redemption date. Similarly upon a sale of shares in
physical form, stamp duty at the rate of 0.5% of the market value of the equity
shares on the trade date is payable, although customarily such duty is borne by
the purchaser. Our equity shares, if and when issued and traded in
dematerialized form, are not subject to Indian stamp duty. Wealth Tax. The holding of the ADSs in the hands of non-resident holders
and the holding of the underlying equity shares by the depositary as a
fiduciary will be exempt from Indian wealth tax. Non-resident holders are
advised to consult their own tax advisers in this context. Gift Tax and Estate Duty. Indian gift tax was abolished in October 1998.
In India, there is no estate duty law. As a result, no estate duty would be
applicable in India. Non-resident holders are advised to consult their own tax
advisors in this context. Service Tax. Brokerage or commissions paid to stockbrokers in connection
with the sale or purchase of shares is subject to a service tax of 8.0%. Income Tax Matters As of March 31, 2004, we had a business loss carry forward of
approximately Rs.4,186.74 million ($ 96.5 million) for financial reporting
purposes. Under Indian law, loss carry forwards from a particular year may be
used to offset taxable income over the next eight years. The statutory corporate income tax rate and the surcharge thereon are
subject to change in line with the changes announced in the Union Budget each
year. For the fiscal ended 2004, the rate of corporate income tax was 35% with
a surcharge of 2.5% thereon, resulting in an effective tax rate of 35.9%. We
cannot assure you that the current income tax rate will remain unchanged in the
future. We also cannot assure you that the surcharge will be in effect for a
limited period of time or that additional surcharges will not be levied by the
Government of India. Until April 1, 2002, dividends declared, distributed or
paid by an Indian corporation were subject to a dividend tax of 10.2%,
including the applicable surcharge for fiscal 2002, of the total amount of the
dividend declared, distributed or paid. This tax is not paid by shareholders
nor is it a withholding requirement, but rather it is a direct tax payable by
the corporation before distribution of a dividend. Effective April 1, 2002,
Indian companies were no longer to be taxed on declared dividends. The Finance
Act, 2003 proposed that after April 1, 2003, dividend income will be exempt
from tax for shareholders and that domestic companies will be liable to pay a
dividend distribution tax at the rate of 12.5% plus a surcharge at the time of
the distribution. United States Federal Taxation The following is a summary of the material U.S. federal income and estate
tax consequences that may be relevant with respect to the acquisition,
ownership and disposition of equity shares or ADSs. This summary addresses the
U.S. federal income and estate tax considerations of holders that are U.S.
persons, i.e.,citizens or residents of the United States, partnerships or
corporations created in or under the laws of the United States or any political
subdivision thereof or therein, estates, the income of which is subject to U.S.
federal income taxation regardless of its source and trusts for which a U.S.
court exercises primary supervision and a U.S. person has the authority to
control all substantial decisions and that will hold equity shares or ADSs as
capital assets. We refer to these persons as U.S. holders. This summary does
not address tax considerations applicable to holders that may be subject to
special tax rules, such as banks, insurance companies, dealers in securities or
currencies, tax-exempt entities, persons that hold equity shares or ADSs as a
position in a straddle or as part of a hedging or conversion transaction
for tax purposes, persons that have a functional currency other than the U.S.
dollar or holders of 10% or more, by voting power or value, of the stock of our
company. This summary is based on the tax laws of the United States as in
effect on the date of this annual report and on United States Treasury
Regulations in effect or, in some cases, proposed, as of the date of this
annual report, as well as judicial and administrative interpretations thereof
available on or before such date and is based in part on representations of the
depositary and the assumption that each obligation in the deposit agreement and
any related agreement will be performed in accordance with its terms. All of
the foregoing are subject to change, which change could apply retroactively and
could affect the tax consequences described below. Each prospective investor should consult his, her or its own tax advisor
with respect to the U.S. Federal, state, local and foreign tax consequences of
acquiring, owning or disposing of equity shares or ADSs. Ownership of ADSs. For U.S. federal income tax purposes, holders of ADSs
should be treated as the owners of equity shares represented by such ADSs. However, the United States Treasury had expressed concerns that parties to
whom ADSs are pre-released may be taking actions inconsistent with the claiming of the reduced rate of tax applicable to dividends
received by certain non-corporate holders, as described below. Accordingly, the availability of the lower rate of tax applicable to dividends could be affected by actions
that may be taken by the United States Treasury. 64




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Dividends. Subject to special rules discussed below governing passive
foreign investment companies, distributions of cash or property (other than equity shares, if any, that are distributed pro rata
to all shareholders of our company, including holders of ADSs, and also meet certain conditions) with respect to equity
shares will be includible in income by a U.S. holder as foreign source dividend income at the time of receipt,
which in the case of the U.S. holder of ADSs generally will be the date of receipt by the depositary, to the extent such distributions are made
from the current or accumulated earnings and profits of our company as determined under U.S. federal income tax principles. Such dividends will
not be eligible for the dividends received deduction generally allowed to corporate U.S. holders. To the extent, if any, that the amount
of any distribution by our company exceeds our companys current and accumulated earnings and profits, it will be treated first as a tax-free
return of the U.S. holders tax basis in the equity shares or ADSs and thereafter as capital gain. With respect to non-corporate
taxpayers for taxable years beginning before January 1, 2009, dividends may be taxed at the lower applicable capital gains rate provided that
(1) ADSs or equity shares are readily tradable on an established
securities market in the United States, (2) we are not a passive foreign investment company (as discussed below) for either out taxable year in which
the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. It
is not clear if any Indian tax imposed upon distributions paid to a
U.S. holder with respect to ADSs or equity shares would be eligible
for credit against the U.S. holders federal income tax liability (or alternatively, a deduction in computing taxable income).
Dividends paid by our company generally will constitute passive
income for purposes of the foreign tax credit (or, in the case
of certain holders, financial services income). If dividends are paid in Indian rupees, the amount of the dividend
distribution includible in the income of a U.S. holder will be in the U.S.
dollar value of the payments made in Indian rupees, determined at a spot
exchange rate between Indian rupees and U.S. dollars applicable to the date
of distribution, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, gain or
loss, if any, resulting from currency exchange fluctuations during the period
from the date the dividend is paid to the date such payment is converted into
U.S. dollars will be treated as ordinary income or loss. Sale or Exchange of equity shares or ADSs. A U.S. holder generally will
recognize gain or loss on the sale or exchange of equity shares or ADSs equal
to the difference between the amount realized on such sale or exchange and the
U.S. holders tax basis in the equity shares or ADSs. Subject to special rules
described below governing passive foreign investment companies, such gain or
loss will be capital gain or loss, and will be long-term capital gain or loss
if the equity shares or ADSs were held for more than one year. Gain or loss,
if any, recognized by a U.S. holder generally will be treated as U.S. source
gain or loss for U.S. foreign tax credit purposes. The deductibility of
capital losses may be subject to limitation. Estate Taxes. An individual shareholder who is a citizen or resident of
the United States for U.S. federal estate tax purposes will have the value of
the equity shares or ADSs owned by such holder included in his or her gross
estate for U.S. federal estate tax purposes. Passive Foreign Investment Company. A non-U.S. corporation will be
classified as a passive foreign investment company for U.S. Federal income tax
purposes if either:     75% or more of its gross income for the taxable year is passive income;
or     on a quarterly average for the taxable year by value (or, if it is not
a publicly traded corporation and so elects, by adjusted basis) 50% or
more of its assets produce or are held for the production of passive
income. We do not believe that we satisfy either of the tests for passive foreign
investment company status. If we were to be a passive foreign investment
company for any taxable year, U.S. holders would be required to either:     pay an interest charge together with tax calculated at maximum ordinary
income rates on excess distributions, which is defined to include gain
on a sale or other disposition of equity shares;     if a qualified electing fund election is made, include in their taxable
income their pro rata share of undistributed amounts of our income; or     if the equity shares are marketable and a mark-to-market election is
made, mark-to-market the equity shares each taxable year and recognize
ordinary gain and, to the extent of prior ordinary gain, ordinary loss
for the increase or decrease in market value for such taxable year. Backup Withholding Tax and Information Reporting Requirements. Dividends
paid on equity shares to a holder who is not an exempt recipient, if any, may
be subject to information reporting and, unless a holder either furnishes its
taxpayer identification number or otherwise establishes an exemption, may also
be subject to U.S. backup withholding tax. In addition, information reporting
will apply to payments of proceeds from the sale or redemption of equity shares
or ADSs by a paying agent, including a broker, within the United States to a
U.S. holder, other than an exempt recipient. An exempt recipient includes
a corporation. In addition, a paying agent within the United States will be
required to withhold 31% of any payments of the proceeds from the sale or
redemption of equity shares or ADSs within the United States to a holder, other
than an exempt recipient, if such holder fails to furnish its correct
taxpayer identification number or otherwise fails to comply with such backup
withholding requirements. The above summary is not intended to constitute a complete analysis of all
tax consequences relating to ownership of equity shares or ADSs. You should
consult your own tax advisor concerning the tax consequences of your particular
situation. 65




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Item 11. Quantitative and Qualitative Disclosures About Market Risk Fair value estimates are made at a specific point in time and are based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. We also face market risk relating to foreign exchange rate fluctuations,
principally relating to the fluctuation of U.S. dollar to Indian rupee exchange
rate. Our foreign exchange risk principally arises from accounts payable to
overseas vendors. This risk is partially mitigated as we hold balances in
foreign currency with overseas banks. Our foreign exchange gain/(loss) was
Rs.0.6 million, Rs.5.4 million, Rs.162 million, Rs.44.5 million, Rs.(18.0)
million and Rs (52.1) million for fiscal years 1999, 2000, 2001, 2002, 2003 and
2004 respectively. 
 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 Under the Companies Act, 1956 of India, or 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 shares which are voted on the
resolution. At our 2000 Annual General Meeting, our shareholders approved a
special resolution permitting us to issue up to one million equity shares in
connection with acquisitions. We issued virtually all of these equity shares
in connection with our acquisitions of IndiaWorld Communications and
Indiaplaza.com and our investment in CricInfo Limited. At our 2001 Annual
General Meeting, our shareholders approved a special resolution permitting us
to issue up to four million additional equity shares in connection with
acquisitions or capital raising transactions, and ADS holders are deemed to
have waived their preemptive rights with respect to these shares. At our
December 2002 Extraordinary General Meeting, our shareholders approved a
special resolution permitting us to issue up to 12.5 million additional equity
shares in connection with the sale of equity shares to SAIF and VentureTech,
and our ADS holders are deemed to have waived their preemptive rights with
respect to these shares. Our Board approved the issue of 11.6 million shares out of the 12.5 million approved by the shareholders.
Out of this, 8.6 million was issued as ADSs and 3.0 million as Indian equity shares. We
raised $14.7 million and Rs.253.4 million through the ADS issue and Indian equity share
issue respectively. Of the $14.7 million in proceeds from the
ADS issue, $12.3 million is available as cash, $1.2 million was used for investments
in affiliates, $0.5 million was expended on U.S. branch
operations and $0.7 million was expended on other operating expenses. The total amount of Rs.253.4 million
raised by way of issue of Indian equity shares is available as cash. 
 Item 15. Controls and procedures Evaluation of disclosure controls and procedures Based on their evaluation as of a date within 90 days of the filing of
this Annual Report on Form 20-F, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures as
defined in Rules 13a-14(c) under the Securities Exchange Act of 1934 (the
Exchange Act) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms. Changes in internal controls There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their evaluation. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken. 
 Item 16A. Audit Committee financial expert As of March 31, 2004, no member of our audit committee met the
requirements to be an audit committee financial expert under the SECs
definition. Presently, our company is not yet subject to the new heightened
corporate governance 66




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requirements to be imposed by Nasdaq on foreign private issuers, such as
Sify, commencing in July 2005. Our intention is to appoint to our board a
director who will act as the audit committee financial expert no later than the
effective date of these new Nasdaq rules. 
 Item 16B. Code of Ethics The Company has adopted a Code of Conduct and Conflict of Interest Policy
that is applicable to all officers, directors and employees. The text of the
policy is filed as an Exhibit under Item 19 to this Annual Report. This policy
is available on our website, www.sifycorp.com 
 Item 16C. Principal Accountant Fees and Services The following table sets forth for the fiscal years indicated the fees
paid to our principal accountant and its associated entities for various
services provided us in these periods. Fiscal year endedType of Service
    
    March 31, 2003
    
    March 31,2004(a) Audit Fees
    
    Rs.6.03 million
    
    Rs.8.00 million(b) Audit related fees
    
    Nil
    
    Nil(c) Tax Fees
    
    Nil
    
    Nil(d) All other fees
    
    Nil
    
    Rs.0.10 million
 Fees include out of pocket expenses and applicable taxes. All other fees
accounts for a fee associated with the issuance of a statutorily mandated
certificate. We were notified by our existing US GAAP accountants, KPMG (Registered),
an Indian partnership, (KPMG India) that for the fiscal year ended March 31,
2004, KPMG LLP, a UK limited liability partnership (KPMG LLP) would serve as
the our US GAAP accountants. The change was made at the request of KPMG India and approved by our audit committee.
Under the rules promulgated by the US Securities and Exchange Commission (the
SEC), the change from KPMG India to KPMG LLP for fiscal years ended March 31,
2004 and forward constitutes a change in our certifying accountants. This
change, however, is likely to be temporary, with KPMG India expected to be
re-appointed as our US GAAP accountants once they have successfully completed
registration with the U.S. Public Company Accounting Oversight Board (the
PCAOB). The reports of KPMG India on our financial statements for each of the
fiscal years ended March 31, 2002 and 2003 did not contain an adverse opinion
or disclaimer of opinion, nor were they qualified or modified due to
uncertainty, audit scope or accounting principles. During fiscal years ended March 31, 2002 and 2003 and through the date of
change of accountants, there were no disagreements with KPMG India on any
matter of accounting principle or practice, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of KPMG
India, would have caused them to make reference to the subject matter in
connection with their reports on our financial statements for such years. There
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. 67




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PART III 
 Item 17. Financial Statements Not applicable. 
 Item 18. Financial Statements SIFY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and as otherwise stated) As at March 31,2003
    
    2004
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    Rs.
    897,596
    
    
    Rs.
    1,325,803
    
    
    $
    30,548Cash restricted
    
    
    74,612
    
    
    
    101,587
    
    
    
    2,341Accounts receivable
    
    
    346,270
    
    
    
    493,980
    
    
    
    11,382Due from officers and employees
    
    
    982
    
    
    
    
    
    
    
    Due from related parties
    
    
    16,016
    
    
    
    13,030
    
    
    
    300Inventories
    
    
    39,971
    
    
    
    20,759
    
    
    
    478Prepaid expenses
    
    
    124,785
    
    
    
    106,957
    
    
    
    2,465Other current assets
    
    
    148,291
    
    
    
    123,571
    
    
    
    2,847Total current assets
    
    
    1,648,523
    
    
    
    2,185,687
    
    
    
    50,361Cash restricted
    
    
    100,010
    
    
    
    10,146
    
    
    
    234Property, plant and equipment-net
    
    
    1,542,829
    
    
    
    1,249,798
    
    
    
    28,797Goodwill and other intangible assets
    
    
    166,983
    
    
    
    125,622
    
    
    
    2,895Investments in affiliated companies
    
    
    140,053
    
    
    
    140,508
    
    
    
    3,237Investments in securities
    
    
    1,140
    
    
    
    
    
    
    
    Other assets
    
    
    100,849
    
    
    
    87,312
    
    
    
    2,012Total assets
    
    Rs.
    3,700,387
    
    
    Rs.
    3,799,073
    
    
    $
    87,536LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current installments of capital lease obligations
    
    
    2,482
    
    
    
    5,851
    
    
    
    135Trade accounts payable
    
    
    82,635
    
    
    
    220,322
    
    
    
    5,077Accrued liabilities
    
    
    278,256
    
    
    
    317,228
    
    
    
    7,309Deferred revenue
    
    
    289,297
    
    
    
    341,953
    
    
    
    7,879Due to officers and employees
    
    
    
    
    
    
    326
    
    
    
    7Advances from customers
    
    
    26,171
    
    
    
    83,670
    
    
    
    1,928Other current liabilities
    
    
    60,520
    
    
    
    56,182
    
    
    
    1,295Total current liabilities
    
    
    739,361
    
    
    
    1,025,532
    
    
    
    23,630Capital lease obligations, excluding current installments
    
    
    3,767
    
    
    
    5,151
    
    
    
    119Other liabilities
    
    
    65,864
    
    
    
    51,127
    
    
    
    1,177Total liabilities
    
    
    808,992
    
    
    
    1,081,810
    
    
    
    24,926Minority interest
    
    
    2,699
    
    
    
    1,595
    
    
    
    37Stockholders equityCommon stock, Rs 10 par value; 37,500,000 equity shares
authorized; Issued and outstanding: 32,795,200 shares as
of March 31,2003 and 34,900,993 shares as of March 31,2004
    
    
    327,952
    
    
    
    349,010
    
    
    
    8,042Additional paid-in capital
    
    
    14,326,742
    
    
    
    14,490,037
    
    
    
    333,871Deferred
compensation - employee stock offer plan
    
    
    (24,839
    )
    
    
    (14,326
    )
    
    
    (330
    )Accumulated deficit
    
    
    (11,737,769
    )
    
    
    (12,109,053
    )
    
    
    (279,010
    )Accumulated other comprehensive income
    
    
    (3,390
    )
    
    
    
    
    
    
    Total stockholders equity
    
    
    2,888,696
    
    
    
    2,715,668
    
    
    
    62,573Total liabilities and stockholders equity
    
    Rs.
    3,700,387
    
    
    Rs.
    3,799,073
    
    
    $
    87,536
 See accompanying notes to consolidated financial statements 68




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SIFY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data and as otherwise stated) Year ended March 31,2002
    
    2003
    
    2004
    
    2004Revenues
    
    Rs.
    1,493,636
    
    
    Rs.
    1,862,585
    
    
    Rs.
    2,517,873
    
    
    $
    58,016Initial services charges
    
    
    66,652
    
    
    
    97,270
    
    
    
    233,750
    
    
    
    5,386Revenue from related parties
    
    
    17,200
    
    
    
    34,345
    
    
    
    49,561
    
    
    
    1,142Total Revenue
    
    
    1,577,488
    
    
    
    1,994,200
    
    
    
    2,801,184
    
    
    
    64,544Cost of revenues
    
    
    1,192,671
    
    
    
    1,264,101
    
    
    
    1,476,714
    
    
    
    34,026Selling, general and administrative expenses
    
    
    1,256,763
    
    
    
    1,090,935
    
    
    
    1,208,884
    
    
    
    27,854Provision for doubtful receivables and advances
    
    
    101,500
    
    
    
    156,233
    
    
    
    76,487
    
    
    
    1,762Acquisition expenses
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Amortisation / impairment of goodwill
    
    
    4,420,644
    
    
    
    
    
    
    
    
    
    
    
    Impairment of assets
    
    
    
    
    
    
    246,999
    
    
    
    22,551
    
    
    
    520Depreciation
    
    
    574,867
    
    
    
    474,261
    
    
    
    481,810
    
    
    
    11,102Amortisation of intangible assets
    
    
    29,337
    
    
    
    69,907
    
    
    
    50,224
    
    
    
    1,157Amortisation of deferred stock compensation expense
    
    
    9,686
    
    
    
    57,729
    
    
    
    27,946
    
    
    
    644Foreign exchange (gain) / loss
    
    
    (44,520
    )
    
    
    18
    
    
    
    52,148
    
    
    
    1,202Total operating expenses
    
    
    7,560,948
    
    
    
    3,360,183
    
    
    
    3,396,764
    
    
    
    78,267Operating loss
    
    
    (5,983,460
    )
    
    
    (1,365,983
    )
    
    
    (595,580
    )
    
    
    (13,723
    )Other income, net
    
    
    32,711
    
    
    
    52,948
    
    
    
    144,147
    
    
    
    3,321Loss before taxes, equity in losses of affiliates and minority interest
    
    
    (5,950,749
    )
    
    
    (1,313,035
    )
    
    
    (451,433
    )
    
    
    (10,402
    )Equity in (losses) / profits of affiliatesOperating (losses) / profits
    
    
    (1,225,444
    )
    
    
    (50,689
    )
    
    
    17,083
    
    
    
    394Gain on sale of investment in affiliates
    
    
    
    
    
    
    24,628
    
    
    
    63,059
    
    
    
    1,453Minority interest
    
    
    17,928
    
    
    
    12,564
    
    
    
    79
    
    
    
    2Losses before income taxes
    
    
    (7,158,265
    )
    
    
    (1,326,532
    )
    
    
    (371,212
    )
    
    
    (8,553
    )Taxes
    
    
    
    
    
    
    (2,856
    )
    
    
    (72
    )
    
    
    (2
    )Loss from continuing operations
    
    Rs.
    (7,158,265
    )
    
    Rs.
    (1,329,388
    )
    
    Rs.
    (371,284
    )
    
    $
    (8,555
    )Discontinued operationsIncome / (loss) from discontinued operations
    
    Rs.
    (125,373
    )
    
    
    
    
    
    
    
    
    
    
    Profit on sale of discontinued operations
    
    Rs.
    81,121
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    Rs.
    (7,202,517
    )
    
    Rs.
    (1,329,388
    )
    
    Rs.
    (371,284
    )
    
    $
    (8,555
    )Net loss
per share - continuing operations
    
    Rs.
    (308.59
    )
    
    Rs.
    (51.15
    )
    
    Rs.
    (10.76
    )
    
    $
    (0.25
    )Net loss
per share - discontinued operations
    
    Rs.
    (1.91
    )
    
    
    
    
    
    
    
    
    
    
    Net loss per share
    
    Rs.
    (310.50
    )
    
    Rs.
    (51.15
    )
    
    Rs.
    (10.76
    )
    
    $
    (0.25
    )Weighted equity shares used in
computing loss per equity share
    
    
    23,196,428
    
    
    
    25,988,095
    
    
    
    34,519,545
    
    
    
    34,519,545
 See accompanying notes to consolidated financial statements 69




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##### Table of Contents



SIFY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data and as otherwise stated) Year ended March 31,2002
    
    2003
    
    2004
    
    2004Net loss from continuing operations
    
    Rs.
    (7,158,265
    )
    
    Rs.
    (1,329,388
    )
    
    Rs.
    (371,284
    )
    
    $
    (8,555
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation, amortization and impairment
    
    
    5,020,600
    
    
    
    854,182
    
    
    
    582,531
    
    
    
    13,422Equity in losses of affiliates
    
    
    1,225,444
    
    
    
    26,061
    
    
    
    (17,083
    )
    
    
    (393
    )Gain on sale of investments
    
    
    
    
    
    
    (1,495
    )
    
    
    (98,948
    )
    
    
    (2,280
    )Loss / (gain) on sale of plant and equipment
    
    
    3,652
    
    
    
    2,552
    
    
    
    (1,990
    )
    
    
    (46
    )Provision for doubtful receivables and advances
    
    
    101,500
    
    
    
    156,233
    
    
    
    76,487
    
    
    
    1,762Inventory write down
    
    
    22,085
    
    
    
    6,720
    
    
    
    1,407
    
    
    
    33Minority interest
    
    
    (17,928
    )
    
    
    (12,564
    )
    
    
    (79
    )
    
    
    (2
    )Others
    
    
    
    
    
    
    7,106
    
    
    
    50,745
    
    
    
    1,169Changes in assets and liabilities:Accounts receivable
    
    
    (15,997
    )
    
    
    (65,793
    )
    
    
    (223,074
    )
    
    
    (5,140
    )Due from officers and employees
    
    
    26,152
    
    
    
    62,552
    
    
    
    4,870
    
    
    
    112Due from related parties
    
    
    4,159
    
    
    
    (7,879
    )
    
    
    2,986
    
    
    
    69Inventories
    
    
    50,557
    
    
    
    (11,265
    )
    
    
    17,805
    
    
    
    410Prepaid expenses
    
    
    94,580
    
    
    
    (10,030
    )
    
    
    17,828
    
    
    
    411Other assets
    
    
    21,815
    
    
    
    (24,962
    )
    
    
    43,034
    
    
    
    992Trade accounts payable and accrued liabilities
    
    
    (14,477
    )
    
    
    (78,836
    )
    
    
    120,621
    
    
    
    2,779Deferred revenue
    
    
    (39,484
    )
    
    
    144,778
    
    
    
    52,656
    
    
    
    1,213Advances from customers
    
    
    (84,388
    )
    
    
    10,851
    
    
    
    57,499
    
    
    
    1,325Other liabilities
    
    
    (15,685
    )
    
    
    32,904
    
    
    
    (42,026
    )
    
    
    (968
    )Net cash provided by / (used in) continuing operations
    
    Rs.
    (775,680
    )
    
    Rs.
    (238,273
    )
    
    Rs.
    273,985
    
    
    $
    6,313Net cash provided by discontinued operations
    
    Rs.
    237,531
    
    
    Rs.
    0
    
    
    Rs.
    0
    
    
    $
    0Net cash provided by / (used in) operating activities
    
    Rs.
    (538,149
    )
    
    Rs.
    (238,273
    )
    
    Rs.
    273,985
    
    
    $
    6,313Cash flows from investing activities:Expenditure on plant and equipment
    
    
    (181,217
    )
    
    
    (284,346
    )
    
    
    (342,584
    )
    
    
    (7,894
    )Proceeds from sale of plant and equipment
    
    
    12,559
    
    
    
    12,055
    
    
    
    12,955
    
    
    
    299Expenditure on intangible assets
    
    
    (59,240
    )
    
    
    (16,891
    )
    
    
    (2,331
    )
    
    
    (54
    )Expenditure on investment in affiliates
    
    
    (119,741
    )
    
    
    29,162
    
    
    
    56,737
    
    
    
    1,307Expenditure on acquisition of minority interest
    
    
    
    
    
    
    
    
    
    
    (940
    )
    
    
    (22
    )Net movement
in cash - restricted
    
    
    (122,287
    )
    
    
    (22,233
    )
    
    
    62,889
    
    
    
    1,449Purchase consideration for acquisition, net of cash
    
    
    (11,210
    )
    
    
    
    
    
    
    (32,755
    )
    
    
    (755
    )Proceeds from sale of investments
    
    
    
    
    
    
    8,579
    
    
    
    257,356
    
    
    
    5,930Net cash used in continuing operations
    
    Rs.
    (481,136
    )
    
    Rs.
    (273,674
    )
    
    Rs.
    11,327
    
    
    $
    261Net cash used in discontinued operations
    
    Rs.
    (71,279
    )
    
    Rs.
    0
    
    
    Rs.
    0
    
    
    $
    0Proceeds from sale of discontinued operation
    
    Rs.
    349,165
    
    
    Rs.
    0
    
    
    Rs.
    0
    
    
    $
    0Net cash used in investing activities
    
    Rs.
    (203,250
    )
    
    Rs.
    (273,674
    )
    
    Rs.
    11,327
    
    
    $
    261Cash flows from financing activities:Acquisition related debt
    
    
    
    
    
    
    
    
    
    
    30,355
    
    
    
    699Principal payments under capital lease obligations
    
    
    (9,097
    )
    
    
    (1,695
    )
    
    
    (7,317
    )
    
    
    (169
    )Net proceeds from issuance of common stock
    
    
    
    
    
    
    760,472
    
    
    
    166,920
    
    
    
    3,846Net cash provided by / (used in) continuing operations
    
    Rs.
    (9,097
    )
    
    Rs.
    758,777
    
    
    Rs.
    189,958
    
    
    $
    4,376Net cash used in discontinued operations
    
    Rs.
    0
    
    
    Rs.
    0
    
    
    Rs.
    0
    
    
    $
    0Net cash provided by / (used in) financing activities
    
    Rs.
    (9,097
    )
    
    Rs.
    758,777
    
    
    Rs.
    189,958
    
    
    $
    4,376Effect of exchange rate changes on cash
    
    
    (5,598
    )
    
    
    (7,345
    )
    
    
    (47,063
    )
    
    
    (1,084
    )Net increase / (decrease) in cash and cash equivalents
    
    
    (756,094
    )
    
    
    239,485
    
    
    
    428,207
    
    
    
    9,866Cash and cash equivalents at the beginning of the year
    
    
    1,414,205
    
    
    
    658,111
    
    
    
    897,596
    
    
    
    20,682Cash and cash equivalents at the end of the year
    
    Rs.
    658,111
    
    
    Rs.
    897,596
    
    
    Rs.
    1,325,803
    
    
    $
    30,548Supplementary InformationCash paid towards interest
    
    
    2,838
    
    
    
    795
    
    
    
    2,126
    
    
    
    49Cash paid towards taxes (net of refunds)
    
    
    44,958
    
    
    
    20,048
    
    
    
    (29,468
    )
    
    
    (679
    )Supplemental schedule of non cash financing activityAdditional common stock issued for acquisition of
business
    
    
    49,268
    
    
    
    
    
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements 70




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##### Table of Contents



SIFY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share data and as stated otherwise) DeferredCommon Stock
    
    Additional
    
    Compre-
    
    Accumulated
Other
    
    Compensation-
Employee
    
    
    
    
    
    TotalPaid In
    
    hensive
    
    comprehensive
    
    Stock offer
    
    Accumulated
    
    StockholdersShares
    
    Par Value
    
    Capital
    
    income
    
    income
    
    plan
    
    deficit
    
    EquityBalance as of March
31, 2001
    
    
    23,183,103
    
    
    
    231,831
    
    
    
    13,669,570
    
    
    
    
    
    
    
    (6,096
    )
    
    
    (101,105
    )
    
    
    (3,205,864
    )
    
    
    10,588,336Issue of common
stock for
acquisitions and
investments
    
    
    19,073
    
    
    
    191
    
    
    
    49,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,268Compensation
related to stock
option grants
    
    
    
    
    
    
    
    
    
    
    72,492
    
    
    
    
    
    
    
    
    
    
    
    (72,492
    )
    
    
    
    
    
    
    Amortization of
compensation
related to stock
option grants
    
    
    
    
    
    
    
    
    
    
    (83,962
    )
    
    
    
    
    
    
    
    
    
    
    98,636
    
    
    
    
    
    
    
    14,674Capital transaction
of investee
    
    
    
    
    
    
    
    
    
    
    (57,852
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,852
    )Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,202,517
    )
    
    
    
    
    
    
    
    
    
    
    (7,202,517
    )
    
    
    (7,202,517
    )Other
comprehensive
incomeUnrealized
loss on
investments,
net of nil
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (356
    )
    
    
    (356
    )
    
    
    
    
    
    
    
    
    
    
    (356
    )Foreign
exchange
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,561
    
    
    
    2,561
    
    
    
    
    
    
    
    
    
    
    
    2,561Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,200,312
    )Balance as of March
31, 2002
    
    
    23,202,176
    
    
    
    232,022
    
    
    
    13,649,325
    
    
    
    
    
    
    
    (3,891
    )
    
    
    (74,961
    )
    
    
    (10,408,381
    )
    
    
    3,394,114Issue of common
stock (net of
expenses)
    
    
    9,593,024
    
    
    
    95,930
    
    
    
    664,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    760,472Compensation related
to stock option grants
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    Amortization of
compensation
related to stock
option grants
    
    
    
    
    
    
    
    
    
    
    12,789
    
    
    
    
    
    
    
    
    
    
    
    50,208
    
    
    
    
    
    
    
    62,997Capital transaction
of investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,329,388
    )
    
    
    
    
    
    
    
    
    
    
    (1,329,388
    )
    
    
    (1,329,388
    )Other
comprehensive
incomeUnrealized
loss on
investments,
net of nil
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,253
    )
    
    
    (1,253
    )
    
    
    
    
    
    
    
    
    
    
    (1,253
    )Foreign
exchange
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,754
    
    
    
    1,754
    
    
    
    
    
    
    
    
    
    
    
    1,754Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,328,887
    )Balance as of March
31, 2003
    
    
    32,795,200
    
    
    
    327,952
    
    
    
    14,326,742
    
    
    
    
    
    
    
    (3,390
    )
    
    
    (24,839
    )
    
    
    (11,737,769
    )
    
    
    2,888,696Issue of common
stock (net of
expenses)
    
    
    2,105,793
    
    
    
    21,058
    
    
    
    145,862
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166,920Compensation related
to stock option grants
    
    
    
    
    
    
    
    
    
    
    21,497
    
    
    
    
    
    
    
    
    
    
    
    (21,497
    )
    
    
    
    
    
    
    Amortization of
compensation
related to stock
option grants
    
    
    
    
    
    
    
    
    
    
    (4,064
    )
    
    
    
    
    
    
    
    
    
    
    32,010
    
    
    
    
    
    
    
    27,946Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (371,284
    )
    
    
    
    
    
    
    
    
    
    
    (371,284
    )
    
    
    (371,284
    )Other
comprehensive
incomeUnrealized
loss on
investments,
net of nil
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,129
    
    
    
    2,129
    
    
    
    
    
    
    
    
    
    
    
    2,129Foreign
exchange
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,261
    
    
    
    1,261
    
    
    
    
    
    
    
    
    
    
    
    1,261Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (367,894
    )Balance as of March
31, 2004
    
    
    34,900,993
    
    
    
    349,010
    
    
    
    14,490,037
    
    
    
    
    
    
    
    
    
    
    
    (14,326
    )
    
    
    (12,109,053
    )
    
    
    2,715,668Balance as of March
31, 2004 (in US$)
    
    
    
    
    
    
    8,042
    
    
    
    333,871
    
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    (279,010
    )
    
    
    62,573
 See accompanying notes to consolidated financial statements 71




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    Description of businessSify Limited (Sify) together with its subsidiaries (the Company) and its
affiliates is engaged in providing various services, such as Corporate
Network and Data Services, Internet Access Services, Online Portal and
Content Offerings.2.
    
    Summary of significant accounting policiesBasis of preparation of financials statementsThe accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (US
GAAP) in Indian Rupees (Rs.), the national currency of India. Solely for
the convenience of the reader, the financial statements as of and for the
year ended March 31, 2004 have been translated into United States dollars
at the noon buying rate in New York City on March 31, 2004 for cable
transfers in Indian rupees, as certified for customs purposes by the
Federal Reserve Bank of New York of US$1 = Rs.43.40. No representation is
made that the Indian rupee amounts have been, could have been or could be
converted into United States dollars at such a rate or at any other rate
on March 31, 2004 or at any other date.Use of estimatesIn conformity with US GAAP, management of the Company has made a number
of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities to prepare these consolidated financial
statements. Some of the more significant estimates include allowances for
doubtful accounts, depreciation and amortization of long-lived assets and
the valuation allowance for deferred tax assets. Actual results could
differ from those estimates.Principles of consolidationThe consolidated financial statements of Sify include financial
statements of its majority-owned subsidiaries, which are more than 50%
owned and where Sify is able to exercise control over the operating and
financial policies of the investees. All material inter-company accounts
and transactions are eliminated on consolidation.Investments in affiliatesThe Company accounts for investments between 20% and
50% or where it would be otherwise able to exercise significant influence
over the operating and financial policies of the investees under the equity method. Prior to the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142,
the excess of cost of the stock of those affiliates over the Companys
share of their net assets at the acquisition date was recognized as
goodwill and was being amortized on a straight-line basis over 5 years.
However, such goodwill was completely written-off prior to the adoption
of the SFAS No. 142. Subsequent to the adoption of SFAS No. 142, the
Company will not amortize any goodwill recognized from an investment in
an affiliate. The Company would recognize a loss when there is a loss in
value in the equity method investment, which is other than a temporary
decline.Cash, cash equivalents and short-term investmentsThe Company considers all highly liquid investments with remaining
maturities, at the date of purchase/investment, of three months or less
to be cash equivalents. Cash and cash equivalents currently consist of
cash and cash on deposit with banks, which are unrestricted as to its
use.Revenue recognitionThe operating segments of the Company include:  
    
    Corporate network/data services, which provides private
network services, messaging services and web hosting to businesses; 72




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
    
    Internet access services;  
    
    Online portal services and content offerings ; and  
    
    Other services such as development of content for e-learning  These segments recognize revenues on the following basis:Corporate network/data servicesCorporate network service revenues primarily include connectivity
services and, to a lesser extent, the revenues from the sale of hardware
and software purchased from third party vendors, installation of the
link, and other ancillary services such as email, efax and domain
registration. Generally, these elements are sold as a package consisting
of all or some of the elements. This multiple element arrangement is
recognized as separable elements because each element constitutes a
separate earnings process, each element has a fair value that is
reliable, verifiable and objectively determinable, and the undelivered
element is not essential to functionality of the delivered elements. In
this arrangement involving delivery of multiple elements, in accordance
with EITF 00-21, the units of accounting are determined based on whether
the delivered items have a value to the customer on a stand alone basis,
whether there is objective and reliable evidence of fair value of the
undelivered elements and if the arrangement includes a general right of
return relative to the delivered item, whether delivery or performance of
the undelivered item(s) is considered probable and substantially in the
control of the Company. The arrangement consideration is allocated to the
units of accounting based on their fair values. Revenue on delivered
items is recognized when the revenue recognition criteria applicable to
that unit of accounting are met.The Company provides connectivity for a fixed period of time at a fixed
rate regardless of usage. Connectivity is the last element that is
provided in the case of a bundled contract. The connectivity charges are
the same when sold alone or as part of a package. The revenue
attributable to connectivity services is recognized ratably over the
period of the contract. The hardware and software are standard products
that are being freely traded in and purchased from the market, have
standard specifications and are not otherwise customized for the specific
needs of a customer. The software sold by the Company is off-the-shelf
software, such as antivirus utilities and firewalls. The fair value for
the hardware and software is available from the market. The revenue
attributable to hardware/software is recognized on delivery.
Installation consists of commissioning of the last mile connectivity to
the customer premises from the carrier exchange (primarily Bharat Sanchar
Nigam Limited, or BSNL, a Government of India entity). However, once
commissioned this connection can be used by the customer to access any
other service provider. The installation normally takes 4-6 weeks. When
the customer has such last mile connectivity, the Company does not charge
any installation fee. The revenue attributable to the installation of the
link is recognized on completion of the installation work. When
installation and connectivity services are provided as a package, the
value of the installation service is determined using the residual method
as provided in EITF 00-21. Revenue from ancillary services such as
email, efax and domain registration are recognized
over the period such facilities are provided. All revenues are shown
exclusive of sales tax and service tax and net of applicable discounts
and allowances.Web hosting service revenues primarily include co-location services and
connectivity services. On occasion, the Company also sells related
hardware/software to its web hosting customers. At all times, such
hardware and software belongs to the customer. This hardware and
software is purchased from outside vendors and is freely traded in the
market. The Company treats each element of the arrangement as a
separate earnings process. The value of the hosting service is determined
based on vendor specific objective evidence from similar services sold
separately by the Company. When hardware and/or software is also
included with hosting services and sold as a package the vendor specific
objective evidence of the undelivered element is considered to arrive at
the residual value of the delivered element. Revenue from hosting
services is recognized over the period during which the service is
provided.Internet access servicesDial-up internet access is sold to customers either for a specified
number of hours or for an unlimited usage within a specified period of
time. Customers purchase a CD that allows them to access the internet.
The amounts received from customers on the sale of these CDs are not
refundable. Sify recognizes revenue from sale of CDs based on usage by
the customer. At the end of the specified period, the remaining
unutilized hours, if any, are recognized as revenue. Revenue from
unlimited internet access and electronic mail access is recognized over
the specified period. 73




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Public Internet access is provided to customers through a chain of
franchisee cybercafé outlets and, to a lesser extent, Sify-owned
cybercafés. Sify enters into an arrangement with franchisees that
provides for the payment of an initial non-refundable franchisee fee in
consideration for establishing the franchisee relationship and providing
certain initial services.These initial services consist of a number of activities, including
installing the broadband receiver equipment at the cybercafé and
connecting it to one of Sifys broadcasting towers, obtaining
regulatory approvals for clearance of the site for wireless transmission
at the allotted frequency range and other ancillary services.Initial franchisee fee revenue is recognized at the time of commencement
of operations by the franchisee, in accordance with SFAS No. 45,
Accounting for Franchisee Fee Revenue, because Sify believes that
substantial performance for which these non-refundable payments are
received is completed at the time of commencement of operations and no
uncertainty exists with regard to the collection of such fees. The amount
of initial franchise fee revenue recognized during the years ended March
31, 2003 was Rs.12.82 million and March 31, 2004 was Rs.102.14 million.
As of March 31, 2004, Sify owned 34 of the 1,725 cybercafés. Internet
access revenue is recognized based on usage by the customer.Online portal servicesThe Company enters into contracts with customers to serve advertisements
in the portal and the Company is paid on the basis of impressions,
click-throughs or leads and in each case the revenue is recognized based
on actual impressions/click-throughs/ leads delivered. There are no
performance obligations or minimum guarantees. Revenues from electronic
commerce transactions are recognized when the transactions are completed.Other servicesThe Company provides e-learning software development services to
facilitate web-based learning in various organizations. Revenue from such
projects is recognized on the proportionate performance method.Cost of revenuesCost of revenues represents direct operating expenses incurred in earning
the revenues consisting of bandwidth cost, salaries, and other direct
expenses but excludes depreciation and amortization.InventoriesInventories are generally stated at the lower of cost as determined using
the first-in-first-out method (FIFO), and net realisable value. The
Company makes a provision for the slow moving inventory on the basis of
age of inventory.Property, plant and equipmentProperty, plant and equipment are stated at cost. Plant and equipment
under capital leases are stated at the present value of minimum lease
payments. The Company computes depreciation for all plant and equipment
using the straight-line method. Leasehold improvements are amortized on
a straight-line basis over the shorter of the primary lease period or
estimated useful life of the asset. Routine repairs and maintenance costs
are expenses as incurred. The estimated useful lives of assets are as
follows: Buildings
    
    28 yearsPlant and machinery
    
    5 yearsComputer equipment
    
    2 yearsOffice equipment
    
    5 yearsFurniture and fixtures
    
    5 yearsVehicles
    
    5 years
  Software for internal use is acquired primarily from third-party vendors
and is in ready-to-use condition. Costs for acquiring such software are
capitalized. Capitalized software costs are amortized on a straight-line
basis over the estimated useful life of the software. Software acquired
for internal use with estimated useful life of less than one year is
expensed upon acquisition. Deposits paid towards the acquisition of
plant and equipment outstanding at each balance 74




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sheet date and the cost of property, plant and equipment not ready to be
put to use are disclosed under Construction-in-progress.Goodwill and intangible assetsThe Company adopted the provisions of SFAS No. 141 for business
combinations initiated after June 30, 2001, which requires that all
business combinations be accounted for under the purchase method.The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets effective April 1, 2002. Under SFAS No. 142 the Company
no longer amortize goodwill or indefinite-lived intangible assets. The
Company has assessed the remaining useful lives of identified intangibles
with definite useful lives and provides for amortization over the
determined useful life of the asset. Goodwill carried in the book is
tested for impairment periodically and diminution in value, if any, is
provided for through a charge in the statement of operations. The Company
does not have any intangible assets with indefinite useful lives.The Company assesses the recoverability of goodwill by reference to the
valuation methodology on the acquisition date. Accordingly, the Company
considers goodwill to be impaired when, in conjunction with its valuation
methodology, its expectations with respect to the acquisitions
deteriorate coupled with adverse market conditions. The Company would
assess, to the extent appropriate, at the enterprise level by comparing
its market capitalization to the carrying value of goodwill.Prior to the adoption of SFAS No. 142, the Company recorded intangible
assets at cost or fair value and amortized such assets on a straight-line
basis over the economic lives of the respective assets. Goodwill was
amortized on a straight-line basis over 5 years.Foreign currency translationsThe functional and reporting currency of the Company is the Indian Rupee,
except that of Sify International Inc (formerly known as IndiaPlaza
Inc., a wholly owned subsidiary incorporated in the United States) whose
functional currency is the US Dollar. The translation of the US dollar
into Indian Rupee is performed for balance sheet accounts using the
exchange rate in effect at the balance sheet date and for revenue and
expense accounts using a monthly simple average exchange rate for the
respective periods. The gains or losses resulting from such translation
are reported in other comprehensive income, a separate component of
shareholders equity.Foreign currency transactionsAssets and liabilities denominated in foreign currencies are expressed in
the functional currency at the rates of exchange as of the balance sheet
date. The unrealized gain or loss resulting from this translation is
reflected in the statements of operations. Income and expenses in
foreign currencies are expressed in the functional currency at exchange
rates prevailing when income is earned or expenses are incurred.Earnings per shareIn accordance with SFAS No. 128, basic earnings per share are computed
using the weighted average number of common shares outstanding during the
period. Disclosure of diluted earnings per share is not applicable as the
potential equity shares are anti-dilutive. The Companys outstanding
shares includes shares held with a depositary to represent equity shares
underlying the Companys ADSs. Effective September 24, 2002, one ADS
represented one equity share.Income taxesIncome taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in 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 realization is not more likely than not.Advertising costsAdvertising costs incurred during the year have been expensed. The total
amount of advertising costs expensed was Rs.25,800, Rs.29,329 and
Rs.40,009 for the years ended March 31, 2002, 2003 and 2004. 75




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Retirement benefits to employeesProvident fundIn accordance with Indian law, all employees receive benefits from a
provident fund, which is a defined contribution plan. Both the employee
and employer make monthly contributions to the plan, each equal to a
specified percentage of employees basic salary. The Company has no
further obligations under the plan beyond its monthly contributions.GratuityThe Company provides for gratuity, a defined benefit retirement plan (the
Gratuity Plan) covering all employees. The Gratuity Plan commenced on
April 1, 1997. The plan provides a lump sum payment to vested employees
at retirement or termination of employment of an amount based on the
respective employees salary and the years of employment with the
Company. The Company provides the gratuity benefit through annual
contributions to a fund managed by the Life Insurance Corporation of
India (LIC). Under this scheme, the settlement obligation remains with
the Company, although the LIC administers the scheme and determines the
contribution premium required to be paid by the Company. The Gratuity
Plan is accounted for in accordance with SFAS No. 87.Stock-based compensationThe Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
including FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25,
issued in March 2000, to account for its fixed-plan stock options. Under
this method, compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has
adopted only the disclosure requirements of SFAS No. 123 as amended by
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure.The Company has adopted pro forma disclosure provisions of SFAS No. 123
and SFAS No. 148. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB statement No. 123, Accounting for Stock
Based Compensationto stock based employee compensation. Year ended March 31,2002
    
    2003
    
    2004Net Loss  As reported
    
    Rs.
    (7,202,517
    )
    
    Rs.
    (1,329,388
    )
    
    Rs.
    (371,284
    )Less: Stock based
compensation expense included
in reported net loss
    
    
    9,686
    
    
    
    57,729
    
    
    
    27,946Add: Total stock based
employee compensation expense
determined under fair value
based method for all awards
    
    
    (306,645
    )
    
    
    (181,600
    )
    
    
    (65,461
    )Pro forma net loss
    
    
    (7,499,476
    )
    
    
    (1,453,259
    )
    
    
    (408,799
    )Loss Per Share:Basic and Diluted  as reported
    
    
    (310.50
    )
    
    
    (51.15
    )
    
    
    (10.76
    )Basic and Diluted  pro forma
    
    
    (323.30
    )
    
    
    (55.92
    )
    
    
    (11.84
    )
  The fair value of each option is estimated on the date of grant using the
Black-Scholes model with the following assumptions: Year ended March 31,2002
    
    2003
    
    2004Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    114
    %
    
    
    105
    %
    
    131% to 157.3
    %Risk-free interest rate
    
    
    7.5-9
    %
    
    
    6
    %
    
    
    4.5-5.25
    %Expected term
    
    12-36 months
    
    12-36 months
    
    12-36 months
  Impairment of long-lived assets and long-lived assets to be disposed of 76




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The Company adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assetseffective April 1, 2002. Long-lived assets,
including amortizable intangibles, are tested for impairment if
impairment triggers occur. If an assessment indicates impairment, the
impaired asset is written down to its fair market value based on the best
information available. Estimated fair market value is generally measured
using discounted estimated cash flows.Investment securitiesThe Company has evaluated its investment policies consistent with the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, and determined that all of its investment
securities are to be classified as available-for-sale. Accordingly, such
securities are carried at fair value with unrealized gains and losses,
net of taxes, reported as other comprehensive income, a separate
component of stockholders equity. Realized gains and losses from the
sale of available-for-sale securities are determined on a
specific-identification basis and included in other income.Fair value of financial instrumentsThe carrying amounts reflected in the balance sheets for cash, cash
equivalents, accounts receivable and accounts payable approximate their
respective fair values due to the short maturities of these instruments.Recent Accounting PronouncementsEITF Issue No.00-21In November 2002, the EITF issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. This issue addresses
determination of whether an arrangement involving more than one
deliverable contains more than one unit of accounting and how arrangement
consideration should be measured and allocated to the separate units of
accounting. The Company adopted EITF Issue No. 00-21 in respect of all
revenue arrangements entered into on or after July 1, 2003. The adoption
of EITF Issue No. 00-21 did not have any impact on the consolidated
financial statements of the Company.SFAS No.143In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligation.SFAS No. 143 requires the Company to record the fair value
of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also would
record a corresponding asset that is depreciated over the life of the
asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation would be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. The standard is effective for fiscal
years beginning after June 15, 2002. The adoption of SFAS No.143 had no
effect on the Companys consolidated financial statements.SFAS No.146In June 2002, FASB issued Statement No.146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No.146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity. The provisions of Statement 146 were effective for
exit or disposal activities initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No.146 had no effect on the
Companys consolidated financial statements.SFAS No. 150In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.SFAS
No.150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities
and equity. The Statement also includes required disclosures for
financial instruments within its scope. SFAS No.150 is effective for
financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The Company currently does not have any
financial instruments that are within the scope of SFAS No.150.FIN 46RIn December 2003, FASB issued a revision to Interpretation 46 to
clarify some of the provisions of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, and to exempt certain
entities from its requirements. The additional guidance is issued in
response to input received from constituents regarding certain issues
arising in implementing Interpretation 46. The revision does not have any
impact on the Companys accounting or disclosure policies.SFAS No. 132 (revised)In December 2003, FASB issued SFAS No. 132 (revised), Employers
Disclosures about Pensions and Other Postretirement Benefit. SFAS No. 132
(revised) prescribes employers disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or
recognition of those plans. The Statement retains 77




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and revises the disclosure requirements contained in the original
SFAS No. 132. It also requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other postretirement benefit plans. The SFAS No.132
(revised) generally is effective for fiscal years ending after December
15, 2003. The Companys disclosures in note 22 incorporates the
requirements of SFAS No. 132 (revised), to the extent applicable.ReclassificationsCertain prior-years amounts have been reclassified to conform to the
current years presentation.3.
    
    Business acquisitionsKheladi.comOn October 12, 2000, Sify entered into an agreement (the Agreement) to
acquire a 100% equity stake in Kheladi.com (India) Private Limited
(Kheladi), a sports portal promoted by sports personalities in India.
Sifys intention is to assimilate the strengths of Kheladi, including the
network of sports personalities, into its sports portal, Khel.com. Sify
issued an aggregate of 19,073 equity shares to the shareholders of
Kheladi on July 20, 2001 of which 5,019 shares and 10,039 shares were
subject to lock-in until September 14, 2001 and September 14, 2002,
respectively. Sify paid Rs 52,291 as consideration for the above
acquisition and the acquisition has been accounted for using the purchase
method.The acquisition was consummated on July 20, 2001 upon completion of
regulatory formalities and the acquisition has been accounted for under
the purchase method. The cost of acquisition has been allocated primarily
to employment contract-based intangible assets and the excess of cost
over fair value of assets acquired has been recognized as goodwill. In
accordance with the provisions of SFAS No. 142, the goodwill has not been
amortized post acquisition. The allocation of purchase price was as
follows:Estimated fair values Assets acquired
    
    Rs.
    196Intangible assets
    
    
    37,500Goodwill
    
    
    14,595Total consideration
    
    Rs.
    52,291
  The intangible assets relate to employment contracts with sports
personalities, which were being amortized over the contract period of 60
months. During the year, based on the assessment of the carrying value
of these contracts in the books, the Company has recorded an impairment
charge of Rs.22,551. The terms of the purchase also provide for
contingent consideration of 3,089 equity shares based on the achievement
of certain specified profitability and revenue targets. As at March 31,
2003 the contingency no longer exists due to the expiry of the period to
achieve the targets and hence no contingent consideration is due to the
erstwhile shareholders of Kheladi.The following unaudited consolidated results of operations are presented
as if the acquisition of Kheladi was made at the beginning of the periods
presented. The proforma-consolidated results of operations reflect the
amortization of intangibles acquired in this transaction. Year ended March 31, 2002Revenues
    
    Rs.
    1,577,488Net loss
    
    
    (7,204,443
    )Loss per equity share
    
    Rs.
    (310.51
    )Weighted average equity share used in computing the loss per equity share
    
    
    23,202,176
  E Alcatraz Consulting Private LimitedThe Company acquired the business of E Alcatraz Consulting Private
Limited (EAP) for cash, on March 1, 2004. Management believes that as
a result of this acquisition, the Company will get into the value added
consulting space like security risk assessment, security policy and
procedure consulting and Managed Security Services, which would serve as
end to end security solutions to the Companys corporate clients. The
purchase consideration includes a waiver of a loan extended to EAP for
Rs.2,400 and the balance amounts will be paid in agreed installments by
September 30, 2004.The total purchase price has been preliminarily allocated to the acquired
assets and assumed liabilities as follows: 78




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Purchase price
    
    Rs.
    32,630Direct transaction costs
    
    
    12532,755Allocated to:Net current assets
    
    
    2,909Tangible assets
    
    
    762Intangible assets pending final allocation
    
    
    29,084Rs.
    32,755
  The purchase consideration has been allocated on a preliminary basis to
the assets acquired and liabilities assumed as of the date of acquisition
based on managements estimates. However, certain independent appraisals
reports are yet to be received by the Company. Finalization of the
purchase price allocation, which is expected to be completed within one
year from the date of acquisition, may result in certain adjustments to
the above-reflected allocations. As the purchase price allocation is
preliminary and as management does not expect the fair values of the
amortizable intangible assets to be material, no amortization expense and
deferred tax liabilities have been recognized as part of the purchase
price allocation.4.
    
    InvestmentsIn June 2003, Sify International Inc., a subsidiary of the Company, sold
its US based portal business operating under the name indiaplaza.com
along with all assets and liabilities. The net assets were sold at a
profit of Rs 3,725 after adjusting the translation losses accumulated in
Other Comprehensive Income. As the sale agreement includes a commitment
to deliver click-throughs for the site sold for value to be received, the
sale does not meet the definition of a discontinued business under SFAS
No. 144.In June 2003, the company sold its stake in the joint venture Sify Baron
Net devices Limited for Rs 100. The carrying value of the assets was Nil.In July 2003, the Company sold its stake in Dr Reddys Bio-Sciences
Limited (erstwhile subsidiary  Satyam Institute of E-Business Limited)
for a consideration of Rs.277,462. The Company received Rs.250,000
during the year and the balance amount has been withheld by the buyer
against a dispute on the land held by the erstwhile subsidiary. After
deferring Rs.18,000, the Company recognized a gain of Rs.76,065 on the
sale of its investment.During the year, the Company purchased the minority interest held by
Plastics Commerce Pte Limited Singapore in the joint venture Sify
Plastics Commerce Limited. In December 2003, 2,820,000 equity shares
representing 47% of the shareholding was acquired for a consideration of
Rs.940. No goodwill/intangibles arose on account of this transaction.5.
    
    Discontinued operationsOn October 24, 2001, Sify announced its proposal to divest its software
services (e-business services) division to its parent company, Satyam
Computer Services Limited. The software services division provided
business-to-business e-commerce and web site development that covered
information technology services in India, Australia and the US. Revenues
from this segment represented approximately 22% of Sifys total revenue
for the year ended March 31, 2002. The objective of the divestment was to
permit Satyam Computer Services to concentrate on its core business of
software services and to permit Sify to concentrate on Internet services.
Sale of this division to Satyam Computer Services was completed for an
aggregate consideration of Rs.332.5 million on February 28, 2002, the
date on which requisite shareholders approval was obtained.The results of operations of the discontinued e-business division for all
periods have been reported separately as Income / (loss) from
discontinued operations. The gain on disposal of the e-business
division amounting to Rs.81,121 net of consultancy and other expenses
incurred in relation to the disposal of Rs.37,510 has been reported
separately in the statements of operations.The summarized information on the results of discontinued operations for
the year ended March 31, 2002 is set forth below: Year ended March 31,2002Revenues
    
    Rs.
    340,718Operating expenses net of other income
    
    
    466,091Net income / (loss) from discontinued operations
    
    Rs.
    (125,373
    )
 79




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6.
    
    Cash and cash equivalentsCash and cash equivalents as on March 31, 2004 amounted to Rs.1,325,803
(Rs.897,596 as on March 31, 2003). This excludes cash-restricted included
in current assets of Rs.101,587 (Rs.74,612 as on March 31, 2003) and
cash-restricted included in non-current assets of Rs.10,146 (Rs.100,010
as on March 31, 2003), representing deposits held under lien against bank
guarantees given by the Company towards future performance obligations
and letters of credit given to suppliers of the Company against purchase
obligations.Cash Restricted  Current Years ended March 31,2003
    
    2004Letter of Credit
    
    Rs.
    40,444
    
    
    Rs.
    25,336Against future performance obligation
    
    
    34,168
    
    
    
    76,251Rs.
    74,612
    
    
    Rs.
    101,587
  Cash Restricted  Non current Years ended March 31,2003
    
    2004Against future performance obligation
    
    Rs.
    100,010
    
    
    Rs.
    10,146Rs.
    100,010
    
    
    Rs.
    10,146
  The fair values of cash and cash equivalents approximate their carrying
values.7.
    
    Accounts receivableAccounts receivable as of March 31, 2003 and 2004 are stated net of
allowance for doubtful accounts. The Company maintains an allowance for
doubtful accounts based on age of the accounts. Accounts receivable are
not collateralised.Accounts receivables consist of: Years ended March 31,2003
    
    2004Customers
    
    Rs.
    512,149
    
    
    Rs.
    546,513Less: Allowance for doubtful debts
    
    
    165,879
    
    
    
    52,533Balance at the end of the year
    
    Rs.
    346,270
    
    
    Rs.
    493,980
  The activity in the allowance for doubtful accounts receivable is given
below: Years ended March 31,2003
    
    2004Balance at the beginning of the year
    
    Rs.
    161,531
    
    
    Rs.
    165,879Add : Additional provision
    
    
    156,233
    
    
    
    76,487Less : Bad debts written off
    
    
    151,885
    
    
    
    189,833Balance at the end of the year
    
    Rs.
    165,879
    
    
    Rs.
    52,533
  8.
    
    Investment securities 80




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There are no investment securities as of March 31, 2004. The available
for sale securities as at March 31, 2003 were sold during the year and a
gain of Rs.304 was recorded after adjusting the unrealized losses
accumulated in Other Comprehensive Income.  The investment securities as at March 31, 2003 consist of; Gross unrealized
    
    Gross unrealizedCost
    
    holding gains
    
    holding losses
    
    Fair valueAvailable for sale:Equity securities
    
    Rs.
    3,245
    
    
    
    
    
    
    Rs.
    2,130
    
    
    Rs.
    1,115Mutual fund units
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Rs.
    3,270
    
    
    
    
    
    
    Rs.
    2,130
    
    
    Rs.
    1,140
  9.
    
    InventoriesInventories consist of: As at March 31,2003
    
    2004CDs
    
    Rs.
    88
    
    
    Rs.
    501Communication hardware
    
    
    26,460
    
    
    
    17,646Application software
    
    
    9,931
    
    
    
    1,169Others
    
    
    3,492
    
    
    
    1,443Rs.
    39,971
    
    
    Rs.
    20,759
  10.
    
    Other current assets  Other current assets consist of: As at March 31,2003
    
    2004Vendor advances and deposits
    
    Rs.
    26,044
    
    
    Rs.
    34,442Advances for expenses
    
    
    13,386
    
    
    
    15,595Accrued income
    
    
    2,375
    
    
    
    2,028Interest earned but not due
    
    
    12,887
    
    
    
    24,061Tax deposits
    
    
    75,343
    
    
    
    45,875Others
    
    
    18,256
    
    
    
    1,570Rs.
    148,291
    
    
    Rs.
    123,571
 Vendor advances and deposits is net of a provision of Rs.16,749 and Rs.439
for non-recoverability for the years ended March 31, 2003 and 2004
respectively. This provision is included in provision for doubtful
receivables in the statement of operations. Tax deposits represent taxes deducted at source by the customer and paid to
the Government.  11.
    
    Investments in affiliatesRefco-Sify Securities India Private Limited The Company holds 40% interest in Refco-Sify Securities India Private
Limited (Refco). Refco is engaged in Internet based trading and research
services. Sify has accounted for its 40% interest in Refco under the equity
method. The carrying value of the investment in Refco as of March 31, 2003
and 2004 was Rs.101,792 and Rs.140,508 respectively. Sifys equity in the 81




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##### Table of Contents



losses of Refco for the year ended March 31, 2003 was Rs.18,137 and equity
in the profits of Refco for the year ended March 31,2004 was Rs.38,715. Cricinfo Limited and Wisden Cricinfo Limited The Company holds 25% of the outstanding shares of Cricinfo Limited
(Cricinfo), a private company incorporated in the United Kingdom and the
Company accounted for its interest in Cricinfo by the equity method. The
Company also provided loans of Rs.123,833 to Cricinfo. In February 2003, Cricinfo transferred its net assets (other than the loan
payable to Sify) to a newly formed company incorporated in the United
Kingdom, Wisden Cricinfo Limited. In consideration of such transfer,
Cricinfo Limited received 33% equity stake in Wisden Cricinfo Limited and
GBP 1.8 million. Cricinfo Limited repaid Sifys loan (including accrued
interest) and transferred its 33% stake in Wisden Cricinfo Limited to Sify
for a consideration of Rs 22,646. Contemporaneously Sify advanced Rs
22,951 to Wisden Cricinfo Limited. As a result of the foregoing transactions including the loan to Wisden
Cricinfo, Sify recognized a gain of Rs 22,628 in the year ended March 31,
2003, being the difference between the proceeds received Rs 126,948 and the
net carrying value of the notes (including accrued interest) of Rs 81,369
and a deferred gain of Rs 22,951. The carrying value of the investment in
Cricinfo as of March 31, 2003 and 2004 were nil. Sifys equity in the
losses of Cricinfo for the years ended March 31, 2003 and 2004 was
Rs.15,104 and nil respectively. During the current year, the Company sold its entire investments in
Wisden Cricinfo Limited and recognised a gain of Rs 63,059 being the
aggregate of the difference between the proceeds received of Rs 61,218
and the net carrying value of the investment of Rs 21,110 and the
release of the deferred gain of Rs 22,951 referred to above. The
carrying value of the investment in Wisden Cricinfo Limited including
loan notes as of March 31, 2003 and 2004 were Rs.38,261 and nil
respectively. Sifys equity in the losses of Wisden Cricinfo Limited
for the years ended March 31, 2003 and 2004 was Rs.4,027 and Rs.21,632
respectively.  12.
    
    Property, plant and equipmentProperty, plant and equipment consist of: As at March 31,2003
    
    2004Land
    
    Rs.
    188,600
    
    
    Rs.
    5,132Building
    
    
    485,156
    
    
    
    485,156Leasehold improvements
    
    
    111,806
    
    
    
    122,154Plant and machinery
    
    
    1,842,829
    
    
    
    2,093,116Computer equipment
    
    
    95,309
    
    
    
    133,548Office equipment
    
    
    54,384
    
    
    
    67,442Furniture and fixtures
    
    
    115,922
    
    
    
    106,870Vehicles
    
    
    16,237
    
    
    
    19,980Software
    
    
    143,524
    
    
    
    172,533Construction-in-progress
    
    
    94,371
    
    
    
    3,5563,148,138
    
    
    
    3,209,487Accumulated depreciation
    
    
    (1,605,309
    )
    
    
    (1,959,689
    )Rs.
    1,542,829
    
    
    Rs.
    1,249,798
 Depreciation expense amounted to Rs.574,867, Rs 474,261 and Rs.481,810
for the years ended March 31, 2002, 2003 and 2004 respectively, which
include amortization expense on software of Rs.29,669, Rs.41,144 and
Rs.49,126 for the years ended March 31, 2002, 2003 and 2004
respectively. During the year ended March 31, 2003, the Company identified certain
assets whose carrying amounts were not recoverable. The Company
assessed recoverability under SFAS No. 144 and recorded asset impairment
charges totaling Rs.125,818 for the year ended March 31, 2003. These
charges included the write-off of assets under development of Rs.87,500
and write-off of computer software costs of Rs.29,178 and other assets
of Rs.8,836. 82




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##### Table of Contents



13.
    
    Goodwill and other intangible assets, net  Goodwill and other intangible assets consist of: As at March 31,2003
    
    2004Goodwill
    
    Rs.
    5,467,062
    
    
    Rs.
    5,467,062Technical know-how
    
    
    90,313
    
    
    
    90,313Portals and web content
    
    
    98,030
    
    
    
    100,360Employment contracts
    
    
    37,500
    
    
    
    37,500Customer contract
    
    
    164,873
    
    
    
    164,873Intangibles pending allocation
    
    
    
    
    
    
    29,084Total
    
    
    5,857,778
    
    
    
    5,889,192Less: Accumulated amortization and impairment
    
    
    5,690,795
    
    
    
    5,763,570Rs.
    166,983
    
    
    Rs.
    125,622
  Amortization/impairment of goodwill during the year ended March 31, 2002
was Rs 4,420,644. The Company has stopped amortizing goodwill pursuant
to SFAS No. 142. The Company has not recognized any impairment of
goodwill during the years ended March 31, 2003 and 2004.The Company has adopted the provisions of SFAS No. 141 and 142, and has
accordingly assessed the remaining useful lives of identified intangibles
with definite useful lives and provides for amortization over the
determined useful life of the asset. The Company does not have any
intangible assets with indefinite useful life.Amortization of other intangible assets during the years ended March 31,
2002, 2003 and 2004 is Rs 29,337, Rs 69,907 and Rs.50,224 respectively.
The Company has periodically assessed the carrying value of intangible
assets in the books and recorded an impairment charge of Rs.121,181 and
Rs.22,551 during the years ended March 31, 2003 and 2004 respectively.At March 31, 2004, the Companys goodwill and other intangible assets
amounted to Rs 14,595 and Rs 111,027 respectively. Acquired and amortized intangible assets
    
    As at March 31, 2004Weighted average
    
    
    
    
    
    Accumulated amortization/life
    
    Gross carrying amount
    
    impairmentTechnical know-how fees
    
    
    4.89
    
    
    
    90,313
    
    
    
    53,525Portals and web content
    
    
    5.00
    
    
    
    100,360
    
    
    
    66,456Customer contracts and
others
    
    
    3.00
    
    
    
    56,084
    
    
    
    15,749Total
    
    
    
    
    
    
    246,757
    
    
    
    135,730
  Estimated amortization expense For the year endedMarch 31,2005
    
    
    46,1082006
    
    
    29,6572007
    
    
    6,1582008
    
    
    20
 As required by SFAS No. 142, the Company identified its reporting units
and assigned assets and liabilities, including goodwill to the reporting
units on the date of adoption. Subsequently, the Company compared the
fair value of the 83




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##### Table of Contents



reporting unit to its carrying value, to determine whether goodwill is
impaired at the date of adoption. Subsequent to the adoption of SFAS No.
142, the Company does not amortize goodwill, but will instead test for
impairment at least annually. The following table discloses what reported
net loss from operations and loss per share would have been in the year
ended March 31, 2002 excluding amortization of goodwill. 2002Reported net loss
    
    Rs.
    (7,202,517
    )Add: Goodwill amortization
    
    
    292,964Add: APB 18 Goodwill
    
    
    75,210Adjusted net loss
    
    
    (6,834,343
    )Reported net loss per share
    
    
    (310.50
    )Add: Goodwill amortization
    
    
    12.63Add: APB 18 Goodwill
    
    
    3.24Adjusted net loss per share
    
    
    (294.63
    )
  There is no goodwill associated with discontinued operations and no
extraordinary items.14.
    
    Other assetsOther assets consist of: As at March 31,2003
    
    2004Deposits
    
    Rs.
    96,138
    
    
    Rs.
    86,110Staff advances recoverable after one year
    
    
    4,711
    
    
    
    1,202Rs.
    100,849
    
    
    Rs.
    87,312
  15.
    
    Deferred revenueDeferred revenue includes the amount of unearned income for the following
segments: As at March 31,2003
    
    2004Corporate network / Data services
    
    Rs.
    107,598
    
    
    Rs.
    166,648Internet access services
    
    
    168,359
    
    
    
    157,241Online portal services
    
    
    927
    
    
    
    2,895Other services
    
    
    12,413
    
    
    
    15,169Rs.
    289,297
    
    
    Rs.
    341,953
  16.
    
    Leases  The gross amounts and related accumulated depreciation recorded for
assets acquired under capital leases are as follows: As at March 31,2003
    
    2004Vehicles
    
    
    16,689
    
    
    
    19,975Less: Accumulated depreciation
    
    
    7,263
    
    
    
    5,504Rs.
    9,426
    
    
    Rs.
    14,471
  The following is a schedule of future minimum capital lease commitments
as at March 31, 2004: Due for the year ended March 31,2005
    
    
    6,5452006
    
    
    4,3302007
    
    
    1,021Total minimum lease payments
    
    
    11,896Less: Interest
    
    
    894Present value of net minimum capital leases payments
    
    
    11,002Less: Current installments of obligations under capital leases
    
    
    5,851Obligations under capital leases, excluding current installments
    
    
    5,151
 84




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##### Table of Contents



17.
    
    Accrued and Other liabilitiesAccrued liabilities principally comprise of provisions for expenses
amounting to Rs.249,273 and Rs.293,369 as at March 31, 2003 and 2004
respectively. Other liabilities include deposits received from sales
partners amounting to Rs.42,663 and Rs.50,877 as at March 31, 2003 and
2004 respectively.18.
    
    Income taxThe provision for income taxes consists of: Year ended March 31,2002
    
    2003
    
    2004Current tax
    
    
    
    
    
    Rs.
    (2,856
    )
    
    Rs.
    (72
    )Deferred tax
    
    
    
    
    
    
    
    
    
    Rs.
    (2,856
    )
    
    Rs.
    (72
    )
  Pre-tax income and income taxes for the years ended March 31, 2002, 2003
and 2004 are substantially all from domestic operations. An amount
considered insignificant is from foreign operations. The reported income
tax expense differed from amounts computed by applying the enacted tax
rates to income from continuing operations before income taxes as set out
below: Year ended March 31,2002
    
    2003
    
    2004Net income from continuing operations before taxes
    
    Rs.
    (7,158,265
    )
    
    Rs.
    (1,326,532
    )
    
    Rs.
    (371,212
    )Enacted tax rates in India
    
    
    35.70
    %
    
    
    36.75
    %
    
    
    35.88
    %Computed expected tax expense / (benefit)
    
    Rs.
    (2,555,501
    )
    
    Rs.
    (487,501
    )
    
    Rs.
    (133,191
    )Differences not deductible for tax purposes
    
    
    1,609,811
    
    
    
    81,596
    
    
    
    11,225Change in valuation allowance
    
    
    860,921
    
    
    
    405,079
    
    
    
    (152,719
    )Tax rate change of investment in affiliates
    
    
    
    
    
    
    
    
    
    
    201,170Other
    
    
    6,599
    
    
    
    53,413
    
    
    
    24,230Effect of tax rate change
    
    
    78,170
    
    
    
    (49,731
    )
    
    
    49,357Total income tax (benefit)/expense
    
    
    
    
    
    Rs.
    2,856
    
    
    Rs.
    72
 85




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##### Table of Contents



The reported income tax expense differed from amounts computed by
applying the enacted tax rates to income from discontinued operations
before income taxes as set out below: Years ended March 31,2002
    
    2003
    
    2004Net gain/loss from discontinued operations before taxes
    
    Rs.
    (44,252
    )
    
    
    
    
    
    
    Enacted tax rates in India
    
    
    35.7
    %
    
    
    
    
    
    
    Computed expected tax expense
    
    
    (15,799
    )
    
    
    
    
    
    
    Valuation allowance
    
    
    15,799Total income tax (benefit)/expense
    
    Rs.
    
    
    
    
    
    
    
    
    
  In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes that it
is more likely, than not, the Company will not realize the benefit of
these deductible differences.  The carry forward losses as of March 31, 2004, amount to Rs.4,186,719 and
it expires as follows: Year endingMarch 31,
    
    Rs.2007
    
    
    256,1802008
    
    
    332,4672009
    
    
    1,269,2442010
    
    
    1,174,6202011
    
    
    702,3912012 and thereafter
    
    
    451,817
  Significant components of deferred tax assets and liabilities included in
the balance sheet are as follows: As at March 31,2003
    
    2004Deferred tax assets:Carry forward business loss
    
    Rs.
    1,440,918
    
    
    Rs.
    1,502,195Property, plant and equipment
    
    
    800
    
    
    
    14,469Accrual and expenses currently not allowed for tax purposes
    
    
    939
    
    
    
    6,100Investment in affiliates
    
    
    554,074
    
    
    
    339,787Carry forward capital loss
    
    
    
    
    
    
    14,614Intangible assets
    
    
    41,548
    
    
    
    35,623Others
    
    
    
    
    
    
    453Accounts receivables
    
    
    60,960
    
    
    
    18,849Total deferred tax assets
    
    
    2,099,239
    
    
    
    1,932,090Less: valuation allowance
    
    
    (2,084,809
    )
    
    
    (1,932,090
    )Net deferred tax assets
    
    Rs.
    14,430
    
    
    Rs.
    
 86




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##### Table of Contents



As at March 31,2003
    
    2004Deferred tax liabilities:Plant and equipment
    
    Rs.
    4,425
    
    
    Rs.
    Investments
    
    
    1,028
    
    
    
    Intangibles
    
    
    8,977
    
    
    
    Total deferred tax liabilities
    
    
    14,430
    
    
    
    Net deferred tax liability
    
    
    
    
    
    
    
  19.
    
    Stockholders equityThe Company has only one class of Capital stock referred to as equity shares.
All references in these financial statements to the number of shares,
per share amounts and market prices of the Companys equity shares have
been retroactively restated to reflect stock splits made by
the Company.Effective September 24, 2002, one ADS represented one equity share. The
Companys 1-for-4 ADS reverse ratio change on September 24, 2002 does not
have any effect on our equity shares or per equity share amounts, as the
underlying shares representing ADSs were unchanged.20.
    
    Common stockIn October 2002, the Company had entered into a share subscription
agreement with VentureTech Solutions Private Limited (VentureTech).
Pursuant to this agreement, in April 2003, VentureTech paid for and
subscribed to 1,017,442 equity shares. In July 2003, Venture Techs
affiliate paid for and subscribed to 1,017,441 ADSs to complete their
subscription obligation under the agreement.VotingEach holder of equity shares is entitled to one vote per share. The
equity shares represented by American Depositary Shares (ADS) carry
similar rights to voting and dividends as the other equity shares. One
ADS represents one underlying equity share.Share holding agreementThe Company, Satyam Computers Services Limited, SAIF Investment Company
Limited and Venture Tech entered into a subscription agreement dated
October 7, 2002 and entered into a investor rights agreement dated
October 7, 2002 reserving certain rights of consultation and veto for
SAIF Investment Company Limited and Venture Tech.DividendsShould the Company declare and pay dividends, such dividends will be paid
in Indian Rupees. Indian law mandates that any dividend be declared out
of distributable profits only after the transfer of a specified
percentage of net income computed in accordance with current regulations
to a general reserve. Moreover, the remittance of dividends outside India
is governed by Indian law on foreign exchange and is subject to
applicable taxes.LiquidationIn the event of a liquidation of the Company, the holders of common stock
shall be entitled to receive any of the remaining assets of the Company,
after distribution of all preferential amounts. The amounts will be in
proportion to the number of equity shares held by the stockholders.Stock OptionsThere are no voting, dividend or liquidation rights to the holders of
warrants issued under the Companys stock option plan. 87




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##### Table of Contents



21.
    
    Other income, netOther income consists of: For the year ended March 31,2002
    
    2003
    
    2004Interest expense
    
    Rs.
    (4,780
    )
    
    Rs.
    (1,240
    )
    
    Rs.
    (2,126
    )Other finance charges
    
    
    (14,506
    )
    
    
    (8,519
    )
    
    
    (8,882
    )Interest income
    
    
    49,540
    
    
    
    31,999
    
    
    
    48,187Gain on sale of investments
    
    
    
    
    
    
    
    
    
    
    82,758Others
    
    
    2,457
    
    
    
    30,708
    
    
    
    24,210Other (expense)/income, net
    
    Rs.
    32,711
    
    
    Rs.
    52,948
    
    
    Rs.
    144,147
  22.
    
    Employee benefit planGratuityThe following table sets out the funded status of the Gratuity Plan and
the amounts recognized in Sifys balance sheet. As of March 31,2003
    
    2004Accumulated benefit obligation
    
    
    5,902
    
    
    
    8,968Change in projected benefit obligationProjected benefit obligation at the beginning of the year
    
    Rs.
    8,782
    
    
    Rs.
    11,659Service cost
    
    
    3,876
    
    
    
    4,593Interest cost
    
    
    789
    
    
    
    929Divestiture / acquisition
    
    
    
    
    
    
    309Actuarial (gain)/loss
    
    
    (1,606
    )
    
    
    (1,274
    )Benefits paid
    
    
    (182
    )
    
    
    (123
    )Projected benefit obligation at the end of the year
    
    Rs.
    11,659
    
    
    Rs.
    16,093Change in plan assetsFair value of plan assets at the beginning of the year
    
    
    3,309
    
    
    
    3,720Actual return on plan assets
    
    
    66
    
    
    
    269Employer contributions
    
    
    527
    
    
    
    263Acquisition
    
    
    
    
    
    
    309Benefits paid from plan assets
    
    
    (182
    )
    
    
    (124
    )Fair value of plan assets at the end of the year
    
    
    3,720
    
    
    
    4,437Funded status of the plans
    
    
    7,939
    
    
    
    11,656Unrecognized transition obligation (asset)
    
    
    
    
    
    
    Unrecognized prior service cost (benefit)
    
    
    
    
    
    
    Unrecognized net actuarial gain/(loss)
    
    
    1,912
    
    
    
    3,048Accrued benefit cost
    
    Rs.
    9,851
    
    
    Rs.
    14,704
 For the year ended March 31,2002
    
    2003
    
    2004The components of net gratuity costs are reflected below:Service cost
    
    Rs 5,545
    
    Rs 3,876
    
    Rs.
    4,593Interest cost
    
    
    531
    
    
    
    789
    
    
    
    929Expected returns on plan assets
    
    
    (227
    )
    
    
    (320
    )
    
    
    (351
    )Amortization
    
    
    
    
    
    
    
    
    
    
    Recognized net actuarial (gain)/ loss
    
    
    
    
    
    
    
    
    
    
    (57
    )Net gratuity costs
    
    Rs.
    5,849
    
    
    Rs.
    4,345
    
    
    Rs.
    5,114
 88




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##### Table of Contents



As of March 31,2003
    
    
    
    2004Principal actuarial assumptions:Discount rate
    
    
    9
    %
    
    
    8
    %
    
    
    7
    %Long-term rate of compensation increase
    
    
    8
    %
    
    
    7
    %
    
    
    6
    %Rate of return on plan assets
    
    
    9
    %
    
    
    7.5
    %
    
    
    6
    %
  The employers best estimate of contributions expected to be paid to the
plan during the year 2004  2005 amounts to Rs 10,000. Further, the
benefits expected to be paid in each of the next five fiscal years, and
in the aggregate for the five fiscal years thereafter are: For the year endedMarch 31,2005
    
    
    7482006
    
    
    1,6732007
    
    
    1,9192008
    
    
    2,7652009
    
    
    3,6462010 to 2014
    
    
    22,053
  Provident fundSify contributed Rs 19,797, Rs.17,902 and Rs.23,137 towards the Provident
fund during the years ended March 31, 2002, 2003 and 2004 respectively.23.
    
    Related Party TransactionsThe company has entered into transactions with the following related
parties:  
    
    Satyam Computer Services Limited (formerly the parent
company) where Sify provides connectivity services and software
development services for certain e-learning projects.
    
    Affiliated companies
    
    Employees of the Company  Given below is an analysis of transactions with Satyam Computer Services
Limited: As at March 31,2002
    
    2003
    
    2004Due (to)/from Satyam Computer Services Limited at
beginning of the year
    
    Rs.
    12,926
    
    
    Rs.
    8,137
    
    
    Rs.
    16,016Allocation of facilities costs
    
    
    (485
    )
    
    
    
    
    
    
    (4,408
    )Sale of e-business division
    
    
    332,500
    
    
    
    
    
    
    
    Expenses incurred on behalf of the Company
    
    
    (136,230
    )
    
    
    (2,897
    )
    
    
    Capital expenses incurred on behalf of the Company
    
    
    (4,015
    )
    
    
    (9,713
    )
    
    
    (5,376
    )Purchases from Satyam Computer Services Limited
    
    
    (19,061
    )
    
    
    
    
    
    
    Billings to Satyam Computer Services Limited
    
    
    302,521
    
    
    
    34,345
    
    
    
    51,455Collections from Satyam Computer Services Limited
    
    
    (480,019
    )
    
    
    (13,856
    )
    
    
    (44,657
    )Payment to Satyam Computer Services Limited
    
    
    
    
    
    
    
    
    
    
    Due (to) / fromSatyam Computer Services Limited
    
    Rs.
    8,137
    
    
    Rs.
    16,016
    
    
    Rs.
    13,030
 89




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##### Table of Contents



The following is a summary of significant transactions with other related
parties: Year ended March 31,2002
    
    2003
    
    2004Sales to affiliates
    
    Rs.
    52,847
    
    
    Rs.
    4,194
    
    
    Rs.NilInterest on convertible notes
    
    Rs.
    2,245
    
    
    Rs.
    1,066
    
    
    Rs.
    1,411
  The Company has the following amounts due from related parties: As at March 31,2003
    
    2004Loans to affiliates
    
    
    22,951
    
    
    
    Employee loans
    
    
    5,692
    
    
    
    2,408
  The estimated fair value amounts of other employee loans were Rs 4,217
and Rs.2,095 as of March 31, 2003 and 2004 respectively. These amounts
are determined using available market information and appropriate
valuation methodologies. Considerable judgement is required to develop
the estimates of fair value. Thus, the estimates provided herein are not
necessarily indicative of the amounts the Company could realize in the
market.Repayable in the year ending March 31: 2005
    
    
    1,1712006
    
    
    4032007
    
    
    2472008
    
    
    1872009
    
    
    87
  24.
    
    Stock based compensation plansEmployee Stock Offer Plan 1999In fiscal 1999, the Company established the Employee Stock Offer Plan
(ESOP), which provides for the issuance of 825,000 warrants to eligible
employees. The warrants were issued to an employee welfare trust (the
Trust) at Re 1 each on September 28, 1999. The Trust holds the
warrants and transfers them to eligible employees over a period of three
years. The warrants, which are to be transferred to eligible employees at
Re 1 each, entitles the holder to purchase one equity share at an
exercise price determined by the Compensation Committee. The warrants
and the equity shares received upon the exercise of warrants are subject
to progressive vesting over a three-year period from the date of issue of
warrants to employees. Deferred compensation is recorded in the event
that the exercise price of the warrant is determined to be less than the
fair market value of the underlying shares on the date of the grant.
Deferred compensation is amortized over the vesting period of the
warrants. The warrants allotted and the underlying equity shares are not
subject to any repurchase obligations by the Company. 90




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##### Table of Contents



The warrants are to be exercised within a period of one month from the
date of the last vesting. in RupeesShares arising out of option
    
    Weighted average exercise priceYear ended March 31,
    
    Year ended March 31,2002
    
    2003
    
    2004
    
    2002
    
    2003
    
    2004Outstanding at beginning of the year
    
    
    117,500
    
    
    
    63,300
    
    
    
    2,700
    
    
    
    321.49
    
    
    
    338.15
    
    
    
    350.00Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    24,600
    
    
    
    
    
    
    
    
    
    
    
    325.61
    
    
    
    
    
    
    
    Expired
    
    
    29,600
    
    
    
    60,600
    
    
    
    2,700
    
    
    
    282.00
    
    
    
    337.62
    
    
    
    350.00Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at the end of the year
    
    
    63,300
    
    
    
    2,700
    
    
    
    
    
    
    
    338.15
    
    
    
    350.00
    
    
    
    Exercisable at the end of the year
    
    
    39,400
    
    
    
    
    
    
    
    
    
    
    
    337.31
    
    
    
    
    
    
    
    Weighted-average grant date fair
value of grants during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Associate Stock Option Plan 2000In fiscal 2000, the Company established the Associate Stock Option Plan
2000 (the ASOP 2000 Plan), which provides for the issuance of warrants
to eligible employees. The warrants were issued to an employee welfare
trust on May 22, 2000. The Trust transfers these warrants to the
eligible employees at Re. 1 each and each warrant entitles the holder to
purchase one ADS at an exercise price determined by the Compensation
committee.The warrants vest in a graded manner over a period of 3 years as follows: One sixth of the warrants:
    
    At the end of one year from the
date of the grantTwo sixth of the warrants:
    
    At the end of two years from the date of the grantThree sixth of the warrants:
    
    At the end of three years from the date of the grant.
  The warrants are to be exercised within a period of one month from the
date of the last vesting.As the number of warrants that an individual employee is entitled to
receive and the price of the warrants are known at the grant date, the
ASOP 2000 Plan is considered as a fixed grant. Deferred compensation is
recorded in the event that exercise price of the warrant is determined to
be less than the fair market value of the underlying shares on the date
of the grant. Deferred compensation is amortized over the vesting period
of the warrants.The terms of 5,080 stock options with a weighted average exercise price
of Rs.169.30 have been modified. These options are accounted in
accordance with EITF Issue 00-23, as a variable plan. The Company has
not recorded any additional compensation charge under variable
accounting, as the exercise price has been higher than the market price.Stock option activity under the ASOP 2000 Plan is as follows: in RupeesShares arising out of option
    
    Weighted average exercise priceYear ended March 31,
    
    Year ended March 31,2002
    
    2003
    
    2004
    
    2002
    
    2003
    
    2004Outstanding at beginning of the year
    
    
    445,420
    
    
    
    520,540
    
    
    
    396,500
    
    
    
    3,211.86
    
    
    
    1,657.99
    
    
    
    1,385.88Granted
    
    
    276,360
    
    
    
    15,480
    
    
    
    8,520
    
    
    
    174.46
    
    
    
    49.98
    
    
    
    182.47Forfeited
    
    
    163,470
    
    
    
    58,120
    
    
    
    29,320
    
    
    
    2,904.99
    
    
    
    1,170.53
    
    
    
    386.23Expired
    
    
    37,770
    
    
    
    81,400
    
    
    
    153,290
    
    
    
    3,730.73
    
    
    
    3,025.69
    
    
    
    3,265.89Exercised
    
    
    
    
    
    
    
    
    
    
    70,910
    
    
    
    
    
    
    
    
    
    
    
    93.83Outstanding at the end of the year
    
    
    520,540
    
    
    
    396,500
    
    
    
    151,500
    
    
    
    1,657.99
    
    
    
    1,385.88
    
    
    
    214.20Exercisable at the end of the year
    
    
    98,138
    
    
    
    177,393
    
    
    
    37,270
    
    
    
    3,253.82
    
    
    
    2,001.92
    
    
    
    224.01Weighted-average grant date fair
value of grants during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343.27
    
    
    
    34.43
    
    
    
    122.95
  Associate Stock Option Plan 2002In fiscal 2002, the Company established the Associate Stock Option Plan
2002 (the ASOP 2002 Plan), which provides for the issuance of warrants
to eligible employees. On December 9, 2002, the Company issued these
warrants to the eligible employees at Re. 1 each and each warrant
entitles the holder to purchase one ADS at an exercise price determined
by the Compensation committee.The warrants vest in a graded manner over a period of 3 years as follows: One sixth of the Option quantity:
    
    At the end of one year from the date of the grant
 91




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Five sixth of the Option quantity:
    
    At the end of each quarter
during the second and third year from the date of the grant in eight
equal installments.
  The warrants are to be exercised within a period of one month from the
date of the last vesting.  As the number of warrants that an individual employee is entitled to
receive and the price of the warrants are known at the grant date, the
ASOP 2002 Plan is considered as a fixed grant. Deferred compensation is
recorded in the event that exercise price of the warrant is determined to
be less than the fair market value of the underlying shares on the date
of the grant. Deferred compensation is amortized over the vesting period
of the warrants. Stock option activity under the ASOP 2002 Plan is as follows: in RupeesShares arising out of option
    
    Weighted average exercise priceYear ended March 31,
    
    Year ended March 31,2002
    
    2003
    
    2004
    
    2002
    
    2003
    
    2004Outstanding at beginning of the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    1,128,060
    
    
    
    
    
    
    
    
    
    
    
    170.13Forfeited
    
    
    
    
    
    
    
    
    
    
    20,060
    
    
    
    
    
    
    
    
    
    
    
    163.69Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at the end of the year
    
    
    
    
    
    
    
    
    
    
    1,108,000
    
    
    
    
    
    
    
    
    
    
    
    170.25Exercisable at the end of the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average grant date fair
value of grants during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79.79
  The following table summarizes information about warrants outstanding at
March 31, 2004: Outstanding shares
    
    Weighted averagearising out of plan
    
    exercise pricein Rupees1999
    
    2000
    
    2002
    
    1999
    
    2000
    
    2002
    
    
    151,500
    
    
    
    1,108,000
    
    
    
    
    
    
    Rs.
    214.20
    
    
    Rs.
    170.25
  The following table summarizes information about fixed price options
outstanding at March 31, 2004: Weighted
    
    
    
    
    
    WeightedNumber
    
    Weighted
    
    average
    
    Number
    
    averageoutstanding at
    
    average
    
    remaining
    
    exercisable at
    
    exerciseRange of exercise price
    
    March 31, 2004
    
    exercise price
    
    contractual life
    
    March 31, 2004
    
    priceRs.49  Rs.50
    
    
    7,280
    
    
    
    49.98
    
    
    
    1.53
    
    
    
    330
    
    
    
    10.31Rs.163  Rs.376
    
    
    1,248,800
    
    
    
    201.81
    
    
    
    1.47
    
    
    
    33,520
    
    
    
    115.18Rs.723  Rs.941
    
    
    3,420
    
    
    
    723.70
    
    
    
    
    
    
    
    3,420
    
    
    
    114.00Rs.50  Rs.941
    
    
    1,259,500
    
    
    
    236.19
    
    
    
    
    
    
    
    37,270
    
    
    
    112.7
  25.
    
    Commitments and contingenciesThe company has outstanding performance guarantees for various statutory
purposes and letters of credit totaling Rs.174,622 and Rs.165,820 as of
March 31, 2003 and 2004, respectively. These guarantees are generally
provided to governmental agencies. 92




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##### Table of Contents



26.
    
    Products and servicesBreakup of revenues and cost of revenues against products and services
are as follows: Year ended March 31,2002
    
    2003
    
    2004RevenueProducts
    
    Rs.
    204,472
    
    
    Rs.
    215,559
    
    
    Rs.
    244,401Services
    
    
    1,373,016
    
    
    
    1,778,641
    
    
    
    2,556,783Rs.
    1,577,488
    
    
    Rs.
    1,994,200
    
    
    Rs.
    2,801,184Cost of revenues(excluding depreciation and amortization)Products
    
    Rs.
    172,870
    
    
    Rs.
    193,711
    
    
    Rs.
    213,957Services
    
    
    1,019,801
    
    
    
    1,070,390
    
    
    
    1,262,757Rs.
    1,192,671
    
    
    Rs.
    1,264,101
    
    
    Rs.
    1,476,714
  27.
    
    Segment reportingSFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business
enterprises report information about operating segments and related
disclosures about products and services, geographic areas and major
customers. The Companys operations predominantly relate to connectivity
to enterprises and providing Internet access to retail subscribers (both
home access and public access). The Company also operates a portal,
Sify.com, that provides a variety of India-related content to audiences
both in India and abroad, and which generates revenue from advertisements
and other value added services. The Company also has subsidiaries to
exploit other opportunities provided by the Internet in e-learning,
business to business marketplaces, digital signatures and Internet
security.The primary operating segments of the Company include:  
    
    Corporate network/data services, which provides private
network services, messaging services and web hosting to businesses;
    
    Internet access services;
    
    Online portals services and content offerings; and
    
    Other services such as development of e-learning software.  The chief operating decision maker (CODM) evaluates the Companys
performance and allocates resources to various strategic business units
that are identified based on the products and services that they offer
and on the basis of the market catered to. The measure of loss reviewed
by the CODM was Earnings/loss before interest, taxes, depreciation and
amortization. Prior to fiscal 2001, the CODM reviewed segment
information relating to revenues only.Revenue in relation to segments is categorized based on items that are
individually identifiable to that segment. Bandwidth costs, which form a
significant part of the total expenses, are allocated primarily between
the corporate network/data services and Internet access services
businesses as follows:Bandwidth costs in Sify are of three kinds: Last mile, Inter city and
International. Last mile is directly identifiable to the segment. Inter
city bandwidth is allocated based on the number of subscribers or iway
cafes at non-gateway points and the bandwidth sold to and used by
business enterprises (determined using packet shapers). International
bandwidth is allocated amongst user population based on ports used and
estimates of bandwidth per port for retail consumers and bandwidth sold
and peak bandwidth used for corporate consumers. The Company believes that
the resulting allocations are reasonable.Certain expenses, such as depreciation and technology, which form a
significant component of total expenses, are not specifically allocable
to specific segments as the underlying services are used interchangeably.
Management believes that it is not practical to provide segment
disclosure of these expenses and, accordingly, they are separately
disclosed as unallocated and adjusted only against the total income of
the Company.A significant part of the fixed assets used in the Companys business are
not identifiable to any of the reportable segments and can be used
interchangeably between segments. Management believes that it is not
practicable to provide segment disclosures relating to total assets since
a meaningful segregation of the available data is onerous. 93




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The Companys operating segment information for the years ended March 31,
2004, 2003 and 2002 are presented below:  Year ended March 31, 2004 Corporate
    
    Internet
    
    OnlineNetwork /
    
    Access
    
    Portal
    
    Other
    
    Continuing
    
    DiscontinuedData Services
    
    Services
    
    Services
    
    Services
    
    operations
    
    operationsRevenues
    
    
    1,395,498
    
    
    
    1,088,440
    
    
    
    84,233
    
    
    
    233,013
    
    
    
    2,801,184
    
    
    
    Operating expenses
    
    
    (846,526
    )
    
    
    (1,188,366
    )
    
    
    (100,935
    )
    
    
    (85,277
    )
    
    
    (2,221,104
    )
    
    
    Equity in (loss)/ profit of
affiliates
    
    
    
    
    
    
    
    
    
    
    17,083
    
    
    
    
    
    
    
    17,083
    
    
    
    Minority interest
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    79
    
    
    
    Segment operating income /
(loss)
    
    
    548,972
    
    
    
    (99,926
    )
    
    
    460
    
    
    
    147,736
    
    
    
    597,242
    
    
    
    Corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (540,981
    )
    
    
    Foreign exchange gain / (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,148
    )
    
    
    Other income / (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,541
    
    
    
    Profit from sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,059
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (582,531
    )
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,606
    
    
    
    Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    Net (loss)/profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (371,284
    )
    
    
    
 94




---



##### Table of Contents



Year ended March 31, 2003 Corporate
    
    Internet
    
    OnlineNetwork /
    
    Access
    
    Portal
    
    Other
    
    Continuing
    
    DiscontinuedData Services
    
    Services
    
    Services
    
    Services
    
    operations
    
    operationsRevenues
    
    
    997,976
    
    
    
    674,370
    
    
    
    164,867
    
    
    
    156,987
    
    
    
    1,994,200
    
    
    
    Operating expenses
    
    
    (677,108
    )
    
    
    (933,751
    )
    
    
    (211,732
    )
    
    
    (106,079
    )
    
    
    (1,928,670
    )
    
    
    Equity in (loss)/ profit of
affiliates
    
    
    
    
    
    
    
    
    
    
    (35,884
    )
    
    
    
    
    
    
    (35,884
    )
    
    
    Minority interest
    
    
    
    
    
    
    1,967
    
    
    
    272
    
    
    
    
    
    
    
    2,239
    
    
    
    Segment operating income /
(loss)
    
    
    320,868
    
    
    
    (257,414
    )
    
    
    (82,477
    )
    
    
    50,908
    
    
    
    31,885
    
    
    
    Corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (573,915
    )
    
    
    Foreign exchange gain / (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    Other income / (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,190
    
    
    
    Impairment of investments in
affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,805
    )
    
    
    Impairment of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (246,999
    )
    
    
    Profit from sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,628
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600,256
    )
    
    
    Interest income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,758
    
    
    
    Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,856
    )
    
    
    Net (loss)/ profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,329,388
    )
    
    
    
  Year ended March 31, 2002 Corporate
    
    Internet
    
    OnlineNetwork /
    
    Access
    
    Portal
    
    Other
    
    Continuing
    
    DiscontinuedData Services
    
    Services
    
    Services
    
    Services
    
    operations
    
    operationsRevenues
    
    
    782,749
    
    
    
    515,960
    
    
    
    207,105
    
    
    
    71,674
    
    
    
    1,577,488
    
    
    
    340,718Operating expenses
    
    
    (558,538
    )
    
    
    (1,067,927
    )
    
    
    (279,817
    )
    
    
    (125,213
    )
    
    
    (2,031,495
    )
    
    
    (384,365
    )Equity in loss of affiliates
    
    
    
    
    
    
    
    
    
    
    (81,867
    )
    
    
    
    
    
    
    (81,867
    )
    
    
    Minority interest
    
    
    
    
    
    
    16,650
    
    
    
    411
    
    
    
    867
    
    
    
    17,928
    
    
    
    Segment operating income /
(loss)
    
    
    224,211
    
    
    
    (535,317
    )
    
    
    (154,168
    )
    
    
    (52,672
    )
    
    
    (517,946
    )
    
    
    (43,647
    )Corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (538,360
    )
    
    
    Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,520
    
    
    
    Other income / (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,457
    
    
    
    (16
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,127,680
    )
    
    
    Impairment of investments in
affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,089,871
    )
    
    
    Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (961,639
    )
    
    
    (81,710
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,254
    
    
    
    Profit on sale of
discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,121Net (loss)/ profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,158,265
    )
    
    
    (44,252
    )
 95




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28.
    
    OthersThe Company has a line of credit of Rs.100,000 from one of its bankers
for non-fund based working capital requirements. The facility is secured
by inventories, accounts receivables and other current assets of the
Company.29.
    
    Legal proceedingsSify and certain of its officers and directors are named as defendants in
a securities class action lawsuit filed in the United States District
Court for the Southern District of New York. This action, which is
captioned In reSatyam Infoway Ltd. Initial Public Offering Securities
Litigation, also names several of the underwriters involved in Sifys
initial public offering of American Depositary Shares as defendants. This
class action is brought on behalf of a purported class of purchasers of
Sifys ADS from the time of Sifys Initial Public Offering (IPO) in
October 1999 through December 2000. The central allegation in this action
is that the underwriters in Sifys IPO solicited and received undisclosed
commissions from, and entered into undisclosed arrangements with, certain
investors who purchased Sifys ADSs in the IPO and the aftermarket. The
complaint also alleges that Sify violated the United States federal
securities laws by failing to disclose in the IPO prospectus that the
underwriters had engaged in these allegedly undisclosed arrangements.
More than 300 issuers have been named in similar lawsuits.In July 2002, an omnibus motion to dismiss all complaints against issuers
and individual defendants affiliated with issuers was filed by the entire
group of issuer defendants in these similar actions. In October 2002, the
cases against the Companys executive officers who were named as
defendants in this action were dismissed without prejudice. In February
2003, the court in this action issued its decision on defendants omnibus
motion to dismiss. This decision denied the motion to dismiss the Section
11 claim as to the Company and virtually all of the other issuer
defendants. The decision also denied the motion to dismiss the Section
10(b) claim as to numerous issuer defendants, including the Company. On
June 26, 2003, the plaintiffs in the consolidated IPO class action
lawsuits currently pending against Sify and over 300 other issuers who
went public between 1998 and 2000, announced a proposed settlement with
Sify and the other issuer defendants. The proposed settlement provides
that the insurers of all settling issuers will guarantee that the
plaintiffs recover Rs.1 billion from non-settling defendants, including the
investment banks who acted as underwriters in those offerings. In the
event that the plaintiffs do not recover Rs.1 billion, the insurers for the
settling issuers will make up the difference. The Company believes that
it has sufficient insurance coverage to cover the maximum amount that it
may be responsible for under the proposed settlement. It is possible that
the Federal District Court may not approve the settlement in whole
or part.The charges for international gateways and other services presently being
provided by VSNL are the subject of a dispute pending before the Telecom
Regulatory Authority of India (TRAI) and the Telecom Disputes
Settlement and Appellate Tribunal between VSNL and private Internet
service providers, including Sify, represented by the Internet Service
Providers Association of India (ISPAI). VSNL has priced these services
at levels that Sify believes are inconsistent with the terms and
conditions on which VSNL has secured the bandwidth for its international
gateways. The Telecom Disputes Settlement and Appellate Tribunal
remanded the matter back to the TRAI, which decided against the ISPAI.
The ISPAI has not yet decided on a further course of action. Sify is
currently paying for bandwidth from VSNL at the higher rates.Sify is party to additional legal actions arising in the ordinary course
of business. Based on the available information, as at March 31, 2004
Sify believes that it has adequate legal defenses for these actions and
that the ultimate outcome of these actions will not have a material
adverse effect on Sify. 96




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Report of Independent Public Accounting Firm The Board of Directors and Stockholders
Sify Limited We have audited the accompanying consolidated balance sheets of Sify Limited
and subsidiaries as of March 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity and comprehensive income, and
cash flows, for each of the years in the three-year period ended March 31,
2004. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sify Limited and
subsidiaries as of March 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2004, in conformity with U.S. generally accepted accounting principles. The accompanying consolidated financial statements as of and for the year ended
March 31, 2004 have been translated into United States dollars solely for the
convenience of the reader. We have audited the translation and, in our opinion,
the consolidated financial statements expressed in Indian Rupees have been
translated into dollars on the basis set forth in Note 2 of the notes to the
consolidated financial statements. KPMG LLP
Manchester
April 19, 2004 97




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Item 19. Exhibits Number
    
    Description1.1
    
    Articles of Association of Sify Limited. (1)1.2
    
    Amendment to Articles of Association. (11)1.3
    
    Memorandum of Association of Sify Limited. (1)1.4
    
    Amendment of Memorandum of Association. (11)2.1
    
    Share Subscription and Shareholders Agreement, dated as of February
5, 1999 by and among Sify Limited, Satyam Computer Services Limited,
South Asia Regional Fund and Mr. B. Ramalinga Raju. (1)2.2
    
    Amendment No. 1 to Share Subscription and Shareholders Agreement,
dated as of September 14, 1999, by and among Sify Limited, Satyam
Computer Services limited, South Asia Regional Fund and Mr. Ramalinga
Raju. (1)2.3
    
    Deposit Agreement, dated as of October 18, 1999, among Sify Limited,
Citibank, N.A. and holders from time to time of American Depositary
Receipts issued thereunder (including, as an exhibit, the form of
American Depositary Receipt). (5)2.4
    
    Amendment No. 1 to Deposit Agreement among Sify Limited, Citibank,
N.A. and holders from time to time of American Depositary Receipts
issued thereunder (including, as an exhibit, the form of American
Depository Receipt). (5)2.5
    
    Amendment No. 2 to Deposit Agreement among Sify Limited, Citibank,
N.A. and holders from time to time of American Depositary Receipts
issued thereunder (including, as an exhibit, the form of American
Depository Receipt). (10)2.6
    
    Registration Rights Agreement dated as of October 7, 2002 by and
between Sify Limited and SAIF Investment Company Limited. (9)2.7
    
    Subscription Agreement dated as of October 7, 2002 by and between
Sify Limited and SAIF Investment Company Limited. (9)2.8
    
    Subscription Agreement dated as of October 7, 2002 by and between
Sify Limited and VentureTech Solutions Private Limited. (9)2.9
    
    Investor Rights Agreement dated as of October 7, 2002 by and among
Sify Limited, SAIF Investment Company Limited, VentureTech Solutions
Private Limited and Satyam Computer Services Limited.(9)4.1
    
    Associate Stock Option Plan 1999 (including Deed of Trust). (3)4.2
    
    Associate Stock Option Plan 20004.3
    
    Associate Stock Option Plan 20024.4
    
    Form of Indemnification Agreement. (3)4.5
    
    License Agreement for Provision of Internet Service, including
Internet Telephony dated as of April 1, 2002 by and between Sify
Limited and the Government of India, Ministry of Communications and
Information Technology, Department of Telecommunications, Telecom
Commission. (11)4.6
    
    Bank Guarantee, dated as of November 4, 1998. (1)4.7
    
    UUNet Technologies Strategic Alliance Agreement, dated as of April
18, 1997, by and between Sify Limited and UUNet Technologies. (3)4.8
    
    CompuServe Network Services Strategic Alliance Agreement, dated as of
April 18, 1997, by and between Sify Limited and CompuServe
Incorporated. (3)4.9
    
    User Agreement, effective as of April 1, 1999 by and between Sify
Limited and Satyam Computer Services Limited. (1)4.10
    
    Share Purchase Agreement, dated November 29, 1999, by and among Sify
Limited, Indiaworld Communications Private Limited, Mr. Rajesh Jain
and the other shareholders of Indiaworld Communications Private
Limited listed on the signature pages thereto. (4)4.11
    
    Agreement for Option to Purchase Shares, dated November 29, 1999, by
and among Sify Limited, Indiaworld Communications Private Limited,
Mr. Rajesh Jain and the other shareholders of Indiaworld
Communications Private Limited listed on the signature paged thereto.
(4)
 98




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Number
    
    Description4.12
    
    Share Purchase Agreement, dated as of June 30, 2000, by and among
Rajesh Jain, Bhavana R. Jain, C.M. Jain Impex and Investments Private
Limited, Sify Limited and Indiaworld Communications Private Limited.
(7)4.13
    
    Agreement for the Sale of Shares in CricInfo Limited by and between
Indigo Holdings Limited and Sify Limited. (8)4.14
    
    Subscription Agreement by and among CricInfo Limited, Sify Limited
and the Senior Management. (8)4.15
    
    Agreed Form of Shareholders Agreement by and among CricInfo Limited,
Sify Limited and the Non-SIL ShareholdeRs.(8)4.16
    
    Letter Agreement between Sify Limited and Indigo Holdings Limited. (8)4.17
    
    Letter Agreement, dated May 17, 2002, between Sify Limited and
CricInfo Limited. (11)4.18
    
    Executive Employment Agreement, dated February 20, 2002, by and
between Sify Limited and R. Ramaraj. (11)4.19
    
    Executive Employment Agreement, dated February 20, 2002, by and
between Sify Limited and George Zacharias. (11)4.20
    
    Business Transfer Agreement, dated March 2002, between Sify Limited
and Satyam Computer Services Limited. (11)4.21
    
    Executive Employment Agreement, dated February 20, 2002, between Sify
Limited and Ajit Abraham. (11)4.22
    
    Executive Employment Agreement, dated February 20, 2002, between Sify
Limited and Rahul Swarup. (11)4.23
    
    Executive Employment Agreement, dated February 20, 2002, between Sify
Limited and Rustom Irani. (11)8.1
    
    List of Subsidiaries.11.1
    
    Code of Conduct and Conflict of Interest Policy23.1
    
    Consent of KPMG31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
   (1)     Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form F-1 filed with the Commission on October 4, 1999 and
incorporated herein by reference.(2)     Previously filed as an exhibit to the Registration Statement on Form
F-6 filed with the Commission on October 6, 1999 and incorporated herein by
reference.(3)     Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement on Form F-2 filed with the Commission on October 13, 1999 and
incorporated herein by reference.(4)     Previously filed as an exhibit to the Report on Form 6-K filed with
the Commission on December 3, 1999 and incorporated herein by reference.(5)     Previously filed as an exhibit to the Post-Effective Amendment No. 1
to Form F-6 filed with the Commission on January 5, 2000 and incorporated
herein by reference.(6)     Previously filed as an exhibit to the Annual Report on Form 20-F filed
with the Commission on June 29, 2000 and incorporated herein by reference.(7)     Previously filed as an exhibit to the Report on Form 6-K filed with
the Commission on July 12, 2000 and incorporated herein by reference.(8)     Previously filed as an exhibit to the Registration Statement on Form
F-2 filed with the Commission on July 26, 2000 and incorporated herein by
reference. 99




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(9)     Previously filed as an exhibit to the Report on Form 6-K filed with
the Commission on October 25, 2002 and incorporated herein by reference.(10)     Previously filed as an exhibit to the Registration Statement on Form
S-8 (File No. 333-101322) filed with Commission on November 20, 2002 and
incorporated herein by reference.(11)     Previously filed as an exhibit to the Annual Report on Form 20-F
filed with the Commission on July 1, 2002 and incorporated herein by reference. 100




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SIGNATURES The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and authorized the undersigned to sign this annual
report on its behalf. SIFY LIMITEDBy:
    
    /s/ R. RamarajName:
    
    R. RamarajTitle:
    
    Chief Executive OfficerBy:
    
    /s/ K N SrinivasanName:
    
    K N SrinivasanTitle:
    
    Principal Financial OfficerDate: June 29, 2004
 101




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##### Table of Contents



Exhibit Index Number
    
    Description1.1
    
    Articles of Association of Sify Limited. (1)1.2
    
    Amendment to Articles of Association. (11)1.3
    
    Memorandum of Association of Sify Limited. (1)1.4
    
    Amendment of Memorandum of Association. (11)2.1
    
    Share Subscription and Shareholders Agreement, dated as of February
5, 1999 by and among Sify Limited, Satyam Computer Services Limited,
South Asia Regional Fund and Mr. B. Ramalinga Raju. (1)2.2
    
    Amendment No. 1 to Share Subscription and Shareholders Agreement,
dated as of September 14, 1999, by and among Sify Limited, Satyam
Computer Services limited, South Asia Regional Fund and Mr. Ramalinga
Raju. (1)2.3
    
    Deposit Agreement, dated as of October 18, 1999, among Sify Limited,
Citibank, N.A. and holders from time to time of American Depositary
Receipts issued thereunder (including, as an exhibit, the form of
American Depositary Receipt). (5)2.4
    
    Amendment No. 1 to Deposit Agreement among Sify Limited, Citibank,
N.A. and holders from time to time of American Depositary Receipts
issued thereunder (including, as an exhibit, the form of American
Depository Receipt). (5)2.5
    
    Amendment No. 2 to Deposit Agreement among Sify Limited, Citibank,
N.A. and holders from time to time of American Depositary Receipts
issued thereunder (including, as an exhibit, the form of American
Depository Receipt). (10)2.6
    
    Registration Rights Agreement dated as of October 7, 2002 by and
between Sify Limited and SAIF Investment Company Limited. (9)2.7
    
    Subscription Agreement dated as of October 7, 2002 by and between
Sify Limited and SAIF Investment Company Limited. (9)2.8
    
    Subscription Agreement dated as of October 7, 2002 by and between
Sify Limited and VentureTech Solutions Private Limited. (9)2.9
    
    Investor Rights Agreement dated as of October 7, 2002 by and among
Sify Limited, SAIF Investment Company Limited, VentureTech Solutions
Private Limited and Satyam Computer Services Limited.(9)4.1
    
    Associate Stock Option Plan 1999 (including Deed of Trust). (3)4.2
    
    Associate Stock Option Plan 20004.3
    
    Associate Stock Option Plan 20024.4
    
    Form of Indemnification Agreement. (3)4.5
    
    License Agreement for Provision of Internet Service, including
Internet Telephony dated as of April 1, 2002 by and between Sify
Limited and the Government of India, Ministry of Communications and
Information Technology, Department of Telecommunications, Telecom
Commission. (11)4.6
    
    Bank Guarantee, dated as of November 4, 1998. (1)4.7
    
    UUNet Technologies Strategic Alliance Agreement, dated as of April
18, 1997, by and between Sify Limited and UUNet Technologies. (3)4.8
    
    CompuServe Network Services Strategic Alliance Agreement, dated as of
April 18, 1997, by and between Sify Limited and CompuServe
Incorporated. (3)4.9
    
    User Agreement, effective as of April 1, 1999 by and between Sify
Limited and Satyam Computer Services Limited. (1)4.10
    
    Share Purchase Agreement, dated November 29, 1999, by and among Sify
Limited, Indiaworld Communications Private Limited, Mr. Rajesh Jain
and the other shareholders of Indiaworld Communications Private
Limited listed on the signature pages thereto. (4)4.11
    
    Agreement for Option to Purchase Shares, dated November 29, 1999, by
and among Sify Limited, Indiaworld Communications Private Limited,
Mr. Rajesh Jain and the other shareholders of Indiaworld
Communications Private Limited listed on the signature paged thereto.
(4)




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##### Table of Contents



Number
    
    Description4.12
    
    Share Purchase Agreement, dated as of June 30, 2000, by and among
Rajesh Jain, Bhavana R. Jain, C.M. Jain Impex and Investments Private
Limited, Sify Limited and Indiaworld Communications Private Limited.
(7)4.13
    
    Agreement for the Sale of Shares in CricInfo Limited by and between
Indigo Holdings Limited and Sify Limited. (8)4.14
    
    Subscription Agreement by and among CricInfo Limited, Sify Limited
and the Senior Management. (8)4.15
    
    Agreed Form of Shareholders Agreement by and among CricInfo Limited,
Sify Limited and the Non-SIL ShareholdeRs.(8)4.16
    
    Letter Agreement between Sify Limited and Indigo Holdings Limited. (8)4.17
    
    Letter Agreement, dated May 17, 2002, between Sify Limited and
CricInfo Limited. (11)4.18
    
    Executive Employment Agreement, dated February 20, 2002, by and
between Sify Limited and R. Ramaraj. (11)4.19
    
    Executive Employment Agreement, dated February 20, 2002, by and
between Sify Limited and George Zacharias. (11)4.20
    
    Business Transfer Agreement, dated March 2002, between Sify Limited
and Satyam Computer Services Limited. (11)4.21
    
    Executive Employment Agreement, dated February 20, 2002, between Sify
Limited and Ajit Abraham. (11)4.22
    
    Executive Employment Agreement, dated February 20, 2002, between Sify
Limited and Rahul Swarup. (11)4.23
    
    Executive Employment Agreement, dated February 20, 2002, between Sify
Limited and Rustom Irani. (11)8.1
    
    List of Subsidiaries.11.1
    
    Code of Conduct and Conflict of Interest Policy23.1
    
    Consent of KPMG31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
   (1)     Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form F-1 filed with the Commission on October 4, 1999 and
incorporated herein by reference.(2)     Previously filed as an exhibit to the Registration Statement on Form
F-6 filed with the Commission on October 6, 1999 and incorporated herein by
reference.(3)     Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement on Form F-2 filed with the Commission on October 13, 1999 and
incorporated herein by reference.(4)     Previously filed as an exhibit to the Report on Form 6-K filed with
the Commission on December 3, 1999 and incorporated herein by reference.(5)     Previously filed as an exhibit to the Post-Effective Amendment No. 1
to Form F-6 filed with the Commission on January 5, 2000 and incorporated
herein by reference.(6)     Previously filed as an exhibit to the Annual Report on Form 20-F filed
with the Commission on June 29, 2000 and incorporated herein by reference.(7)     Previously filed as an exhibit to the Report on Form 6-K filed with
the Commission on July 12, 2000 and incorporated herein by reference.(8)     Previously filed as an exhibit to the Registration Statement on Form
F-2 filed with the Commission on July 26, 2000 and incorporated herein by
reference.




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##### Table of Contents



(9)     Previously filed as an exhibit to the Report on Form 6-K filed with
the Commission on October 25, 2002 and incorporated herein by reference.(10)     Previously filed as an exhibit to the Registration Statement on Form
S-8 (File No. 333-101322) filed with Commission on November 20, 2002 and
incorporated herein by reference.(11)     Previously filed as an exhibit to the Annual Report on Form 20-F
filed with the Commission on July 1, 2002 and incorporated herein by reference.