##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 20-F (Mark One) o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
 or þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For
the fiscal year ended March 31, 2005.
 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. 35,380,278 Equity Shares were issued and outstanding as of March 31, 2005 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 þ                      No o Indicate by check mark which financial statement item the registrant has elected to follow Item 17 o                      Item 18 þ




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Table of Contents Item
    
    PageCurrency of Presentation and Certain Defined Terms
    
    
    1Forward-Looking Statements May Prove Inaccurate
    
    
    2PART I
    
    
    3Item 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
    
    
    19Item 5. Operating and Financial Review and Prospects
    
    
    33Item 6. Directors, Senior Management and Employees
    
    
    43Item 7. Major Shareholders and Related Party Transactions
    
    
    47Item 8. Financial Information
    
    
    49Item 9. The Offer and Listing
    
    
    50Item 10. Additional Information
    
    
    51Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    63Item 12. Description of Securities Other Than Equity Securities
    
    
    63PART II
    
    
    63Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    63Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    63Item 15. Controls and Procedures
    
    
    63Item 16A. Audit Committee Financial Expert
    
    
    64Item 16B. Code of Ethics
    
    
    64Item 16C. Principal Accountant Fees and Services
    
    
    64Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    65Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    65PART III
    
    
    65Item 17. Financial Statements
    
    
    65Item 18. Financial Statements
    
    
    65Item 19. Exhibits
    
    
    94EXHIBIT 8.1EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 13.2EXHIBIT 15.1
 i




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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 had 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, 2005, the last
business day of March 2005, 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, 2005 was Rs.43.62 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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##### Table of Contents



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 operations data for the five years ended March 31, 2005 and the selected
consolidated balance sheet data as of March 31, 2001, 2002, 2003, 2004 and 2005 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, 2001 and 2002. 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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##### Table of Contents



Fiscal year ended March 312001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005Indian Rupees(1)
    
    
    
    
    
    
    
    
    
    
    U.S. Dollars(2)(In thousands, except share and per share data)Statement of Operations Data:Revenues
    
    
    1,220,524
    
    
    
    1,560,288
    
    
    
    1,959,855
    
    
    
    2,751,623
    
    
    
    3,554,237
    
    
    
    81,482Revenue from related parties
    
    
    4,957
    
    
    
    17,200
    
    
    
    34,345
    
    
    
    49,561
    
    
    
    59,220
    
    
    
    1,357Total Revenue
    
    
    1,225,481
    
    
    
    1,577,488
    
    
    
    1,994,200
    
    
    
    2,801,184
    
    
    
    3,613,457
    
    
    
    82,839Cost of revenues (excluding
depreciation and amortization)
    
    
    1,177,106
    
    
    
    1,192,671
    
    
    
    1,264,101
    
    
    
    1,476,714
    
    
    
    2,023,942
    
    
    
    46,400Selling, general and
administrative expenses (including
provision for doubtful receivables
and advances, depreciation,
impairment of assets and
amortization of intangibles)
    
    
    1,887,324
    
    
    
    1,962,467
    
    
    
    2,038,335
    
    
    
    1,839,956
    
    
    
    2,033,123
    
    
    
    46,609Acquisition expenses
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization/impairment of goodwill
    
    
    931,967
    
    
    
    4,420,644
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock
compensation expense
    
    
    61,451
    
    
    
    9,686
    
    
    
    57,729
    
    
    
    27,946
    
    
    
    10,639
    
    
    
    244Foreign exchange (gain)/loss
    
    
    (162,136
    )
    
    
    (44,520
    )
    
    
    18
    
    
    
    52,148
    
    
    
    (2,595
    )
    
    
    (59
    )Total operating expenses
    
    
    3,895,712
    
    
    
    7,560,948
    
    
    
    3,360,183
    
    
    
    3,396,764
    
    
    
    4,065,109
    
    
    
    93,194Operating loss
    
    
    (2,670,231
    )
    
    
    (5,983,460
    )
    
    
    (1,365,983
    )
    
    
    (595,580
    )
    
    
    (451,652
    )
    
    
    (10,355
    )Other (expense)/income, net
    
    
    242,368
    
    
    
    32,711
    
    
    
    52,948
    
    
    
    144,147
    
    
    
    93,324
    
    
    
    2,140Loss before equity in losses of
affiliates, income taxes and
minority interest
    
    
    (2,427,863
    )
    
    
    (5,950,749
    )
    
    
    (1,313,035
    )
    
    
    (451,433
    )
    
    
    (358,328
    )
    
    
    (8,215
    )Equity in profits/(losses) of
affiliates (including gain on sale
of investments in affiliates)
    
    
    (263,178
    )
    
    
    (1,225,444
    )
    
    
    (26,061
    )
    
    
    80,142
    
    
    
    50,752
    
    
    
    1,164Loss before income taxes and
minority interest
    
    
    (2,691,041
    )
    
    
    (7,176,193
    )
    
    
    (1,339,096
    )
    
    
    (371,291
    )
    
    
    (307,576
    )
    
    
    (7,051
    )Income taxes
    
    
    (1,707
    )
    
    
    
    
    
    
    (2,856
    )
    
    
    (72
    )
    
    
    
    
    
    
    Minority interest
    
    
    11,137
    
    
    
    17,928
    
    
    
    12,564
    
    
    
    79
    
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (2,681,611
    )
    
    
    (7,158,265
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (307,576
    )
    
    
    (7,051
    )Discontinued operations
Income/(loss) from discontinued
operations (3)
    
    
    172,581
    
    
    
    (125,373
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Profit on sale of discontinued
operations, net of direct costs
    
    
    
    
    
    
    81,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (2,509,030
    )
    
    
    (7,202,517
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (307,576
    )
    
    
    (7,051
    )Net profit/ (loss) per equity
share - continuing operations
    
    
    (117.34
    )
    
    
    (308.59
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (8.75
    )
    
    
    (0.20
    )Discontinued operations
    
    
    7.55
    
    
    
    (1.91
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss per share (4)
    
    
    (109.79
    )
    
    
    (310.50
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (8.75
    )
    
    
    (0.20
    )Weighted average equity shares
used in computing net loss per
equity share
    
    
    22,852,600
    
    
    
    23,196,428
    
    
    
    25,988,095
    
    
    
    34,519,545
    
    
    
    35,156,120
    
    
    
    35,156,120
 4




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Fiscal year ended March 312001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2005Indian Rupees(1)
    
    
    
    
    
    
    
    
    
    
    U.S. Dollars(2)(In thousands, except share and per share data)Transitional disclosures
pertaining to adoption of
SFAS 142 Goodwill and
other Intangible AssetsReported net loss
    
    
    (2,509,030
    )
    
    
    (7,202,517
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (307,576
    )
    
    
    (7,051
    )Less: Goodwill amortization
    
    
    931,967
    
    
    
    292,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less: Equity goodwill amortization
    
    
    201,332
    
    
    
    75,210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted net loss
    
    
    (1,375,731
    )
    
    
    (6,834,343
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (307,576
    )
    
    
    (7,051
    )Reported net loss per share
    
    
    (109.79
    )
    
    
    (310.50
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (8.75
    )
    
    
    (0.20
    )Less: Goodwill amortization
    
    
    40.78
    
    
    
    12.63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less: Equity goodwill amortization
    
    
    8.81
    
    
    
    3.24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted net loss per share
    
    
    (60.20
    )
    
    
    (294.63
    )
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (8.75
    )
    
    
    (0.20
    )Balance Sheet Data:Cash and cash equivalents
    
    
    1,414,205
    
    
    
    658,111
    
    
    

    897,596
    
    
    
    1,325,803
    
    
    
    1,323,912
    
    
    
    30,351Total assets
    
    
    11,501,884
    
    
    
    4,146,274
    
    
    
    3,700,387
    
    
    
    3,799,073
    
    
    
    4,020,782
    
    
    
    92,178Long-term debt, including current
installments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    10,588,336
    
    
    
    3,394,113
    
    
    
    2,888,696
    
    
    
    2,715,668
    
    
    
    2,498,589
    
    
    
    57,281Other Financial Data:EBITDA from continuing operations (5)
    
    
    (1,312,887
    )
    
    
    (6,589,135
    )
    
    
    (755,394
    )
    
    
    142,707
    
    
    
    209,029
    
    
    
    4,792Add: Interest and income tax
    
    
    232,706
    
    
    
    49,540
    
    
    
    31,999
    
    
    
    48,187
    
    
    
    52,760
    
    
    
    1,210Income from discontinued operations
    
    
    172,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Profit on sale of discontinued operations
    
    
    
    
    
    
    81,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405,287
    
    
    
    130,661
    
    
    
    31,999
    
    
    
    48,187
    
    
    
    52,760
    
    
    
    1,210Less: Depreciation and amortization
    
    
    1,601,430
    
    
    
    613,890
    
    
    
    601,897
    
    
    
    559,980
    
    
    
    567,426
    
    
    
    13,008Interest and income tax
    
    
    
    
    
    
    4,780
    
    
    
    4,096
    
    
    
    2,198
    
    
    
    1,939
    
    
    
    45Loss from discontinued operations
    
    
    
    
    
    
    125,373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,601,430
    
    
    
    744,043
    
    
    
    605,993
    
    
    
    562,178
    
    
    
    569,365
    
    
    
    13,053Net loss
    
    
    (2,509,030
    )
    
    
    (7,202,517
    )
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (307,576
    )
    
    
    (7,051
    )
 
 Notes1.
    
    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, 2005 of
Rs.43.62 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
equity shares include equity shares held by a depositary 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 income or gain on sale of
discontinued operations. 5




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##### Table of Contents



Exchange Rates The following table sets forth, for each of the months indicated, information concerning the
high and low number of Indian rupees for which one U.S. dollar could be exchanged based on the noon
buying rate in the City of New York for cable transfers in Indian rupees as certified for customs
purposes by the Federal Reserve Bank of New York: Month
    
    High
    
    
    LowRs.
    
    Rs.December 2004
    
    
    44.52
    
    
    
    43.27January 2005
    
    
    43.82
    
    
    
    43.35February 2005
    
    
    43.73
    
    
    
    43.28March 2005
    
    
    43.70
    
    
    
    43.44April 2005
    
    
    43.72
    
    
    
    43.48May 2005
    
    
    43.21
    
    
    
    43.62
 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: Period end
    
    
    Average
    
    
    High
    
    
    LowFiscal Year Ended March 31
    
    Rs.
    
    
    Rs.
    
    
    Rs.
    
    
    Rs.2001
    
    
    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
    
    
    
    43.402005
    
    
    43.62
    
    
    
    44.86
    
    
    
    46.45
    
    
    
    43.27
 On June 27, 2005, the noon buying rate in the city of New York was Rs.43.44 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 Although we commenced operation of our private data network business in April
1998, launched our Internet portal website in October 1998 and Internet service
provider operations in November 1998, we have added a number of new lines of
business in the last five years, including the operation and licensing of
public Internet cafés, as well as the provision of broadband services, security
services and managed network services. It is therefore 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 portal website in October 1998 and Internet service provider operations in November 1998.
We commenced retail Internet services by offering dial-up services from homes in November 1998, and
later began offering public Internet access through a network of cybercafés in March 2000. In June
2003, we launched our high-speed Internet access through a network of 6




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independent Cable Television
Operators, or CTOs. The industry we operate in is still evolving and therefore comparable
  benchmarks are not readily available. As of December 2004, the Internet penetration in India
was only 0.7% according to figures compiled from Telecom Regulatory Authority of Indias, or
TRAIs, Report on Performance of Telecom Industry, March 2005. Due to our relatively short
operating history, it is difficult to evaluate our performance in comparison to companies in other,
more mature industries. You must consider the risks and difficulties frequently encountered by
companies in this stage 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 primary
businesses that we believe are complementary. These three businesses are corporate network/data
services, retail Internet access services and online portal and content offerings. In February
2002, we divested a fourth business (software services) to our former majority stockholder, Satyam
Computer Services. 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, 2005, we incurred a net loss of Rs.307.6 million ($7.1
million). As of March 31, 2005, we had an accumulated deficit of approximately Rs.12,415.5
million ($284.6 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, 2005, we incurred a net loss of Rs.307.6
million ($7.1 million). As of March 31, 2005, we had an accumulated deficit of approximately
Rs.12,415.5 million ($284.6 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, 2004 and 2005, 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 three years, 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. 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, Tata Internet and the
incumbent government-owned telecommunication companies, BSNL and MTNL. Additionally, Reliance
Infocomm, a member of the Reliance Group, is building a nationwide fiber optic network in India and
has launched a range of value added services, including public Internet access and corporate
data/connectivity services. A significant number of competitors have entered Indias liberalized Internet service provider
market, and we expect additional competitors to emerge in the future. As of December 31, 2004,
there were 180 Internet service providers that were operational in India. New entrants into the
national Internet service provider market in India, especially the state run telecommunication
companies, 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 further 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. 7




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The Indian Department of Telecommunications, or DOT, has imposed a license fee for ISPs,
including our company, for providing VPN services. Our company and certain other ISPs have been providing Internet Protocol  Virtual Private
Network, or IP-VPN, services to their customers for a considerable length of time. These services
have been construed to be similar to leased line services offered by national and international
long distance service providers in India, which have objected to the provisioning of these services
by ISPs. The DOT has decided to specifically include IP-VPN services in the ISP license and has
imposed a one-time entry fee for this purpose. In fiscal 2005, we paid Rs.100 million as a
one-time entry fee and submitted a financial bank guarantee of Rs.10 million to the Indian
government as required by the DOT. The DOT also requires ISP licensees to pay an annual fee of 8% of adjusted gross revenues
generated under the ISP license. To date, the DOT has not issued any guidelines or procedures for
implementing this decision. However, it is our understanding that the license fee provisions will
become effective only after amendments to the license. We believe that this will not have any
effect on our net earnings/losses for periods prior to January 11, 2005. The Internet Service
Providers Association of India, or ISPAI, had contested the DOT decision with Telecom Disputes
Settlement and Appellate Tribunal, or TDSAT. In a decision dated May 3, 2005, TDSAT has asked the
DOT to determine the final quantum of license fee and annual fees after receiving recommendations
from TRAI as is required under the procedures established by law for new licenses. The final
recommendation of TRAI, its timing and the licensing conditions, if any, eventually adopted by the
DOT could result in a license fee and could have a significant adverse effect on our financial
performance. We have provided for Rs.5.6 million towards the annual fee on IP-VPN revenue and
Rs.1.5 million towards amortisation of the entry fee for the fiscal year ended March 31, 2005. 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 Sify, iway,SifyOnlineand other key 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
favorable. 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. A number of large stockholders 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 June 28, 2005 and based on reports filed with the Securities and Exchange Commission,
we believe that Satyam Computer Services owned approximately 31.6% of our outstanding equity
shares, SAIF Investment Company Limited owned approximately 5.7% of our outstanding equity shares
and Venture Tech, together with its affiliates, owned approximately 7.8% of our outstanding equity
shares. As a result, these stockholders, if they elect to act together, are presently able to
exercise significant influence over many matters requiring approval by our stockholders, 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 stockholders 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 stockholders and the issuance by our company of
additional shares, tag along rights with respect to the transfer of shares by certain stockholders
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. Under Indian law, a simple majority is
sufficient to control all stockholder action except for those items that require approval by a
special resolution. If a special resolution is required, the number of votes cast in favor 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 stockholders;
    
    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 8




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stockholders or holders of our ADSs. One or more of such stockholders 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 stockholders, including the holders of
our ADSs. On November 10, 2004, we entered into an agreement with Satyam Computer Services, SAIF and
Venture Tech in which we agreed, in part, to facilitate the conversion of our outstanding Indian
equity shares into ADSs and to register such ADSs for resale under the U.S. federal securities
laws. Pursuant to this agreement, Satyam Computer Services, SAIF, Venture Tech and other holders
of our equity shares may dispose of some or all of their equity shares in one or more transactions
under the registration statement on Form F-3, filed by us on December 7, 2004, or other
registration statements that we may file in the future. We have obtained the approval of the Foreign Investment Promotion Board, or FIPB, Department
of Economic Affairs, Ministry of Finance, Government of India, for issuance of up to 15,720,800
ADSs, representing the same number of Indian equity shares, under the Sponsored ADR Programme
subject to a cap of 74% of the paid-up capital of our company. Under the current capital structure of the company, we may issue up to 5,841,297 ADSs,
representing the same number of Indian equity shares, which will increase the foreign holding to
74% of the paid-up capital of the company. To date, we have facilitated the conversion of
1,130,526 Indian equity shares into ADSs. The participating shareholders in this conversion were
Venture Tech (783,326 shares), Government of Singapore Investment Corporation Limited (305,500
shares) and Monetary Authority of Singapore (41,700 shares). 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;
    
    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; 9




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
    
    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. Over the past several years we have experienced significant growth, and
continuing this pace of growth could put excessive strain on our resources,
which in turn could adversely affect our results of operations. Over the last several years, we have experienced a period of significant revenue growth. This
growth has placed, and will continue to place, a significant strain on our managerial, operational,
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. 10




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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 our key personnel, particularly Mr. Ramaraj,
our Chief Executive Officer. Most 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 labor 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. Compliance with new and changing corporate governance and public disclosure requirements
adds uncertainty to our compliance policies and increases our costs of compliance. Changing laws, regulations and standards relating to accounting, corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and, new SEC regulations and Nasdaq
National Market rules, are creating uncertainty for us and similarly situated companies. These new
or changed laws, regulations and standards may lack specificity and are subject to varying
interpretations. Their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. This could result in continuing uncertainty regarding compliance
matters and higher costs of compliance as a result of ongoing revisions to such governance
standards. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and
the related regulations regarding our required assessment of our internal controls over financial
reporting and our independent auditors audit of that assessment will require the commitment of
significant financial and managerial resources. We have formed an internal control steering
committee and adopted a project work plan to assess the adequacy of our internal controls over
financial reporting, remediate any control deficiencies that may be identified, and validate
through testing that our controls are functioning as documented. Our independent auditors may be
unable to issue unqualified attestation reports on managements assessment on the operating
effectiveness of our internal controls over financial reporting. We are committed to maintaining high standards of corporate governance and public disclosure,
and our efforts to comply with evolving laws, regulations and standards in this regard have
resulted in, and are likely to continue to result in, increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to
compliance activities. In addition, the new laws, regulations and standards regarding corporate
governance may make it more difficult for us to obtain director and officer liability insurance.
Further, our board members, Chief Executive Officer, and Chief Financial Officer could face an
increased risk of personal liability in connection with the performance of their duties. As a
result, we may face difficulties in attracting and retaining qualified board members and executive
officers, which could harm our business. If we fail to comply with new or changed laws or
regulations, our business and reputation may be harmed. 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. 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 undisclosed arrangements. More than 300
issuers have been named in similar lawsuits. 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 11




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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, which we estimate to be approximately U.S. $3.9 million. It is possible that
the Federal District Court may not approve the settlement in whole or part. We believe that we
have adequate legal defenses for these actions and that the ultimate outcome of these actions will
not have a material adverse effect on our company. We face risks associated with 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. 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 that 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 theiwaycybercafés are franchised operations that we do not
operate or control. We also provide Internet access services through a network of Cable
Television Operators, or CTOs, whom we do not control. As of March 31, 2005, 2,437 cybercafés, representing substantially all of the iwaycafes, were
franchised by our company. Broadband Internet access to homes was provided through a network of
1,168 CTOs. Our relationships with franchisees and CTOs 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. Our company does not provide any financial support or guarantee
to the franchisees. The legal system in India does not protect intellectual property rights to the
same extent as the legal system 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 12




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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 and equity share holders
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 stockholders 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 CricInfo Limited. At our 2001 Annual General Meeting, our stockholders 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 stockholders 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 preemptive rights and any other factors that we deem
appropriate to consider at the time the decision must be made. We may elect not to file a
registration statement related to preemptive rights otherwise available by law to our stockholders.
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 stockholder 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 13




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you any notice of stockholders 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. 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 stockholder 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 stockholder 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 stockholder 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
stockholders. To date, our practice has been to provide advance notice to our ADS holders of all
stockholder 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 June 24, 2005, 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:  
    
    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;
    
    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;
    
    our failure to integrate successfully our operations with those of any acquired companies;
    
    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 14




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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 reestablish 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. We cannot predict the extent to which an active, liquid public trading market for our ADSs
will continue to 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. The future sales of securities by our company or existing stockholders may reduce the price of our ADSs. 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, sold an additional 1.5
million ADSs in October 2003 and sold and additional 800,000 ADSs in November 2004. In addition,
we understand 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 sold all such shares.
On December 7, 2004, we filed a registration statement on Form F-3 registering the resale of up to
4,538,200 ADSs by certain shareholders named therein, including Venture Tech, the Government of
Singapore, C.M. Jain Impex & Investments Pvt. Ltd., and Mr. R. Ramaraj, our Chief Executive Officer
and Managing Director. Subsequently, based on documents filed with the Securities and Exchange
Commission, we believe that Venture Tech sold 783,326 equity shares in private transactions. We
may in the future file further registration statements registering the resale of these ADSs. 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 15




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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, specific laws and
policies affecting technology companies, foreign investment, currency exchange rates and other
matters affecting investment in our securities could also change. 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
neighboring 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 and continuing through 2005, the United States and
several other countries have 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. 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 annual 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 2003
and 2004. In fiscal 2005, the rupee depreciated in the first six months and thereafter appreciated
considerably. Depreciation 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. 16




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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.
    
    In December 2004, the Government of India issued guidelines for
license to offer Virtual Private Network, or VPN, services by ISPs.
Consequently, we applied for the license, and the Government of India
issued a letter of intent to our company on December 30, 2004 for
amendment of our existing ISP license to include provision of VPN
services. In January 2005, we paid Rs.100 million as a one-time entry
fee and submitted a financial bank guarantee of Rs.10 million as
required by the letter of intent. The one-time entry fee of Rs.100
million is evenly amortized over the 15-year estimated life of the
licence of 15 years.On January 11, 2005, we received provisional permission from the DOT,
Government of India to offer VPN service in accordance with the new
guidelines. Final permission to offer VPN service will be effective
only after we sign the amendment to the license agreement. However,
the provisional permission does not carry any terms and conditions
relating to the license.The Indian Department of Telecommunications, or DOT, also requires the
ISP licensees to pay an annual fee of 8% of the adjusted gross
revenues generated under the ISP license. To date, the DOT has not
issued any guidelines or procedures for implementing this decision.
However, it is our understanding that the license fee provisions will
become effective only after amendments to the license.The Internet Service Provider Association of India, or ISPAI, had
filed an appeal against this license with the Telecom Disputes
Settlement and Arbitration Tribunal, or TDSAT. TDSAT directed
Government of India to consult with TRAI before finalizing the license
conditions.We have reserved Rs.5.6 million towards the annual license fee for the
period January 11, 2005 through March 31, 2005. This is computed on
the basis of 8% of the revenue earned on VPN services we provided. The
exact quantum of annual license fee payable may vary significantly
from the provision depending on the conditions to the final license
agreement to be issued by DOT.
    
    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. 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 was 35.0% during fiscal 2005 and was subject
to a 2.5% surcharge and 2% education cess, resulting in an effective tax rate of 36.6%. For fiscal
year 2006, the corporate income tax rate has been reduced to 30%, subject to a surcharge of 10% and
education cess of 2%, resulting in an effective tax rate of 33.7%. 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. The Finance Minister of India has recently introduced a
fringe benefits tax that would be levied on employers. Under this fringe benefits tax, employers
would be required to pay a tax of 30% exclusive of applicable surcharge and cess on the taxable
value of the fringe benefits or privileges that are provided or deemed to be provided to employees
on a collective, rather than individual, basis. We are assessing the impact of this tax, which will
increase our tax liability and increase any loss or decrease any profits we might have in the
future. 17




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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 (kilobytes per second, or thousands of bits of data per second) or Mbps (megabytes 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 TRAI has recently issued a notification giving recommendations on a reduction in
peak international and domestic bandwidth prices by 70% from the current ceiling. However, the
recommendation on international bandwidth prices has been contested by some of the major incumbent
players in the respective segments, and therefore it is unclear whether the TRAI recommendations
will be implemented. 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 centers, which we refer to as cybercafés, under the iway brand name. As
of March 31, 2005, 2,437 iwaycybercafés were franchised and 34 iwaycybercafés 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;
    
    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. 18




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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 businesses in India to exchange information, communicate and transact
business electronically. We conduct substantially all of our business in India. Our subsidiaries
include Safescrypt Limited, Indiaworld Communications Limited, Sify International Inc. and Sify
Networks 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. 19




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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. In March 2000, we launched our network of public Internet cafés called iwaysto cater to the
needs of Indians who do not have access to the Internet. In September 2000, we commenced our
hosting services from our Tier-I data center at Vashi, Mumbai to provide colocation and managed
services to our clients. In June 2001, we obtained permission to provide wireless connectivity on
the 5.7 GHz spectrum from the Wireless Planning Commission. This enabled us to convert all our
iwaysfrom ISDN connectivity on the last mile to wireless connectivity. This technology also
enabled us to commence our high-speed/broadband access to homes, which began in March 2003. To
enable quicker access to homes, we developed a model of partnering with Cable Television Operators,
or CTOs, who already interface with households for providing cable television facilities to
millions of households in India. In April 2002, ISPs were permitted to provide restricted Internet telephony limited to
outbound calls to International destinations and PC-to-PC calls in India. We started providing this
service through our network of cybercafés, and later on through Internet telephony booths located
in large commercial areas and corporate office complexes across major cities in India. From the time we launched our corporate services in 1997, we have constantly upgraded our
technology to provide data services to corporate clients. We were the first Internet service
provider in India to make our entire network IP-based and subsequently Multi Protocol Label
Switching (MPLS)-enabled, which permitted us to continue to grow our corporate customer base. As of
March 31, 2005, we provide data connectivity services to more than 1,000 corporate clients in
industries ranging from information technology, manufacturing, banking and financial services
industry, pharmaceuticals, retail distribution and the government. 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 under 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 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 an investor rights 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 October 2004, Mr. Sandeep Reddy, a nominee
of Venture Tech, was appointed as the Chairman of our Board of Directors, in the place of Mr
Srinivasa C. Raju. The investor rights 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. 20




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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 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). Sify Networks Private Limited (formerly E Alcatraz Consulting Private 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.32.6
million. 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.
    
    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 addition, we offer public Internet access to consumers
through a retail chain of iwaycybercafés. We also have tie-ups with certain cable
television operators through which we offer Internet access through cable. As of
March 31, 2005, we had approximately 800,000 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 for various organizations by
digitizing and uploading content to facilitate the same . We began providing corporate network/data services to businesses in April 1998, and as of
March 31, 2005 we had more than 1,000 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 21




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competition. We also operate
online portals, www.sify.comand 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, 2005, we operated 99 points of presence serving more than 250 cities across
India, which we believe represents an estimated 95% 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 service 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 legacy 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 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. 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 is not regulated by 22




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the
Government of India, although it has the power to do so through policy directives. However, the
interconnection charges between service providers are regulated by the TRAI. 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 and Wireless delivery on the
last mile. We operate a large national Internet protocol data network in India. As

of March 31, 2005, we owned or operated 99 points of presence serving more than 250
cities across India, which we believe represents an estimated 95% 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. A significant portion of our last mile delivery for corporates,
and almost the entire iWay cybercafe network and hispeed / broadband delivery to
homes, is on the wireless mode, thereby enabling us to implement and deliver superior
services compared to the wireline medium.
    
    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.
    
    Managed Infrastructure services and Managed Security Services. We have customer
engagements in all aspects of infrastructure services, networks security and hosting,
with digital certificates based authentication service. We have extensive experience
in providing information assurance and compliance certification, following frameworks
such as COSO/COBIT and standards such as BS7799 and SAS 70. Our Managed Infrastructure
and Security services leverages on our rich experience and skill sets to provide
constant value to our customers  namely better service levels and reduced costs. We
constantly look at ways to efficiently manage customer assets remotely thus providing
focused superior service at lower cost. 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, 2005, we have leased an STM-1 from VSNL landing at Mumbai
(Bombay) and another landing at Kochi (Cochin), in addition to an STM-1 leased from
Bharti on the i2i cable landing at Chennai. We believe that as the size and capacity
of our network infrastructure grows, its large scale and national coverage will create
economies of scale. 23




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
    
    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, 2005, we had
approximately 800,000 retail Internet subscribers and 2,471 cybercafés, of which 34
were owned and 2,437 were franchised. Approximately 99% of these iwaysare 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 cybercafés. We are also
actively promoting our broadband services to homes through cable television operators.
As of March 31, 2005, we had tie-ups with more than 1,168 cable television operators
across 52 cities. We believe that increased focus on delivery of broadband services by
the TRAI will drive this business forward in the 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 iwaysfrom 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 in April 2002, video conferencing, e-mail designed for regional
Indian dialects, a user customized portal site and micro-payments.
    
    Provide more value added services by leveraging on the rapid growth of wireless
Internet and mobile services in India and strengthen our Internet portal with more
content tailored to Indian interests worldwide.Our portals, www.sify.comand
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.During the course of 2004-05, we also developed a broadband channel, Sify Max,
that provides audio visual content to Sify subscribers. We also created a short code
4545 for downloading ringtones and sending SMS to tap the growing mobile user market.
To expand our short code product offering, we are also forming business alliances with
copyright owners and mobile service providers. 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 SifyOnlineInternet 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 will 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 to 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, 24




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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. The services include a comprehensive range of Internet protocol
based Virtual Private Network, or IPVPN, offerings, including intranets, extranets and remote
access applications to both small and large corporate customers. There is a strong focus on
industry verticals such as IT/ITES (IT enabled services), banking and financial services industry
(BFSI), government, manufacturing, pharmaceutical and FMCG. We were the first service provider in
India to provide MPLS-enabled IPVPNs on its entire network. We also have recently entered into a
strategic partnership with the Power Grid Corporation of India (PGCIL) to provide enterprise
network services to end customers across the country. We provide last mile connectivity in over 102
locations throughout India. Our entire network is MPLS enabled with built in redundancy with world
class design and service standards. Frost & Sullivan, in its report on IPVPN service offerings in
India, reported that we had emerged as the single largest player in the IPVPN space in India with
48.7% market share. We were also awarded the Frost & Sullivan Market Leadership Award for IPVPNs
in India in August 2004. SecureConnect is our comprehensive offering of secure, reliable and scalable IPVPN solutions
that meet both mission-critical data networking and converged voice, video and data connectivity
needs. It offers a variety of intranet and extranet configurations for connecting offices, remote
sites, traveling employees and business partners, whether in India or abroad. Our platform of
services includes:  
    
    SiteConnect, which offers site-to-site managed MPLS-enabled IPVPN
solutions, ideal for securely connecting regional and large branch
offices within India to the corporate Intranet.
    
    GlobalSiteConnect which is an international site-to-site managed
MPLS-enabled IPVPN solution, ideal for securely connecting
international branch offices to the corporate Intranet. It
provides connectivity anywhere in the world through Sifys
alliances and partnerships with global overseas service providers
such as Global Crossing (GC), Asia Net Com (ANC), and BtNA to name
a few.
    
    ExpressConnect, which offers a premium range of high-performance
Internet bandwidth solutions and is ideal for connecting regional
offices, branch offices and remote locations to the corporate
network. These solutions perfectly complement our SiteConnectrange
of MPLS enabled IPVPN solutions, provide high-speed bandwidth in
those situations where basic connectivity and cost are the top
concerns
    
    RoamConnect is our national and international remote access VPN,
ideal for securely connecting employees, while they are traveling,
to the corporate intranet; features single number access to
SifyNet from anywhere in the country and provides access from
anywhere in the world through Sifys alliances with overseas
service providers such as MCI, GRIC, IPASS and Fiberlink.
    
    PartnerConnect is our remote access VPN offering, ideal for
providing secure and restricted dial-up access to business
partners such as dealers, distributors and suppliers to the
corporate extranet. 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. 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 e-mail 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. Application Services. We offer value-added services to organisations such as website design,
development, content management, search engine optimisation, hosting and management services,
including domain name management, secure socket layer (SSL) certificate for websites, and server
space in required operating system and database. We provide state of the art messaging and
collaboration services and solutions such as e-mail servers, LAN mail solutions, anti-spam
appliances, bulk mail services, instant messaging, and also offer solutions and services to enable
data & access security over the Internet. We also offer web-applications such as online
merchandising with on-line payment gateways, sales force automation, supply chain management,
intranet and extranets, workflow engine and knowledge management systems. We also provide
infrastructure-based services on demand, including on-line testing engine and network management.
On-line 25




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testing services include test management software, required servers and proctored
examination facilities at Sifys iwaycybercafés. On-line exam engine offered allows a secure and
flexible way of conducting examinations involving a wide range of question patterns. Security and Assurance services.We offer a comprehensive suite of security solutions
including security design, procurement and integration services for infrastructure security,
vulnerability assessment and penetration testing. Implementation services include implementation
of security equipment, such as firewalls, intrusion detection systems, content security,
authentication tools and VPN services. We also provide assurance services centered around
auditing, risk assessment, policies and procedures, business continuity/disaster recovery planning. Data Centers. We operate Indias first level 3 Internet data centers in Mumbai (Bombay) and
Chennai (Madras) designed to act as reliable secure and scalable facilities to host
mission-critical applications. We offer co-location services which allow customers to bring in
their own rack-mountable servers and house them in shared racks, hire complete racks, and rent secure cages at the hosting facility to meet their
application requirements. We also offer a wide variety of managed hosting services, such as
storage, back-up and restoration, performance monitoring and reporting hardware and software
procurement and configuration, network configuration as well as spares and replacement. The Fort
Knox platform for security management of hosted servers offers Service Level Agreement (SLA)-based
security services to protect servers. Our Infrastructure Data Management Services (IDMS) service
provides specific services related to building data centers, leveraging on our proven expertise to
build world-class infrastructure. 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. Remote Management services. This service provides continuous proactive management and support
of customer operating systems, applications and database layers through specialized monitoring
tools and infrastructure experts to ensure that our customers infrastructure is performing
optimally. Our corporate network/data services division accounted for approximately 50.0%, 49.8% and
56.0%, respectively, of our revenues in fiscal years 2003, 2004 and 2005. We believe that
corporate services will continue to be the largest part of our business for the immediate future. Internet access services. Our Internet access services for retail consumers include high-speed/broadband access to homes
over cable, public Internet access from our network of iwaycybercafés, Internet telephony and
dial-up access to homes. Public Internet Access.We provide public Internet access to the large segment of the Indian
population that does not own a personal computer through our network of iwaycybercafés. Sify
operates these iwaycybercafés on a franchisee model. As of March 31, 2005, we had 2,471 iwaysin
90 cities, of which 2,437 cybercafés were franchised and 34 cybercafés were owned and operated by
our company. We believe we are the largest branded network of cybercafés in India. 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. 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 of the cybercafé and linking it to one of our broadcasting
towers;
    
    obtaining the regulatory approvals 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 furnishings; and
    
    providing an operations manual with instructions and guidelines for running the cybercafé. 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
staff. The franchisee is responsible for the maintenance of the premises and interface with
customers. We provide the complete back-end support, including bandwidth, the authentication/usage
engine and the billing/collection system. The prices to be charged to the customers and the
services that can be rendered are controlled by Sify. On average, these iways have about 7 to 8
PCs and operate in an area of about 250 square feet. All iwaysoperate on a prepaid subscription
model, and the end customer has the ability to browse from any 26




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of the iwaysusing the roaming
facility that Sify provides. The billing system allows Sify the option of charging different prices
based on the services used, time of usage and the place of use. Most of these cafés are
connected through the wireless mode, on the 5.7 ghz spectrum, with a subscriber unit placed on the
top of the building and connected to an access point in a tower that is within a 5 kilometre radius
from this location. We believe the iwaysoffer a superior browsing experience compared to other
cybercafés that operate on either a leased line or an ISDN facility. Today, iwaysare being used
for a multitude of services including Internet telephony, video conferencing, online examination
centres, online games and also as an e-distribution points. Voice Over Internet Protocol. VOIP can be used in India for making International calls. Sify
has leveraged on its extensive network of iwaysto offer Internet telephony. As of March 31, 2005,
more than 1,500 of the iwayshad the capability to provide Internet telephony. We have also started
providing these services through standalone Internet telephony booths at various strategic
locations (338 of them) in major cities. Sify offers the ability of making international calls to
more than 165 countries, and has partnered with a few international carriers for carrying the
traffic. These services are offered at prices significantly lower than those offered by the
international long distance operators, and therefore provide a distinct value advantage to the end
user. We use MPLS enabled technology that ensures voice clarity. Based on statistics provided by
the various ISPs to TRAI, Sify had more than 20% share of the Internet telephony market for the
year ended March 31, 2005. Broadband/high-speed Internet Access. Over the last two years, we have increasingly focused on
various modes of delivering high-speed Internet service, to provide a superior browsing experience
to the end customer than what he could experience from traditional dial-up access. The availability
of wireless connectivity enabled us to overcome the hurdles associated with the last mile access
in India. Initially, we focused on providing high-speed service to large apartment complexes in
the major cities, especially in Mumbai and Delhi, and subsequently moved to partnerships with the
cable television operators (CTOs). In India, we estimate there are more than 40,000 CTOs that
provide cable access to more than 60 million households across the country. By leveraging on this existing network
of CTOs that are close to the household, we could reach out to the target market more easily, while
ensuring that our Internet service was
branded separately and distinctly from the cable TV business of the CTO. The service is
delivered to homes using a unique combination of wireless optic fibre
and Ethernet cable. While the subscriber unit at
the CTO premises is connected to the Sify base station on the wireless mode, the individual
subscriber is connected using optical fibre that is laid by the CTO across its area of operation.
We believe we are a leader in this medium of broadband delivery to homes. We collect an initial
charge for installing the Ethernet card in a customers PC and for laying the initial cable
infrastructure that includes the optical cable backbone, the switches and hubs that are required
for the connection. Sify offers these services through 3 types of service plans  hourly, unlimited
and download-based  to suit various requirements of individual users. Dial-up access.This was our first retail offering after the Internet service market was
deregulated in India in November 1998. We offer dial-up Internet access through convenient online
registration and user-friendly software. 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 subsidize their Internet
service offering by bundling Internet services with basic telephony services. We have, however,
tried to differentiate our service to our subscribers by offering better and a more extensive range
of services, with an emphasis on ease of use. 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. 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 center at our company. We expect the market for consumer Internet access to remain highly price competitive. This
would be especially true of the high-speed and broadband service,s which are the focus of attention
of both the government and our competitors. The incumbent government owned telephone companies,
BSNL and MTNL, along with the large private sector telephone companies, including Bharti, Tata
Internet and Reliance, are focused on growing the broadband market in India, using DSL and cable as
the medium of delivery. Contemporaneously, the government is trying to encourage growth by
reducing the ceiling on the prices that can be charged for both international and domestic
bandwidth. Our Internet access services division accounted for approximately 33.8%, 38.9% and 38.9%,
respectively, of our revenues in fiscal years 2003, 2004 and 2005. The increase in Internet access
services division revenues as a percentage of total revenues from fiscal year 2003 to fiscal year
2005 was due to the revenues from our iwaysand 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 online portals, primarily consisting of the group of websites under www.sify.com
and 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 five 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. 27




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As a portal provider, 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. Over the last two
quarters of the year ended March 31, 2005, we also launched our Broadband Channel, which provides
audiovisual content to our subscribers. Today, there are probably more non-resident Indians, or NRIs, than Indians residing
domestically who have access to the Internet. As a result, many content sites, including
www.samachar.comand www.sify.com, have more users located outside of India than within. Sify also
launched its NRI Finance site to cater to increasing financial needs of the NRI community. This
caters to their various information needs as well as provides them with expert advice on issues
pertaining to their investments. We believe that the market for content and services within India
will develop rapidly. The community channels of Sify like Discussions, Blogs and Groups have
provided a forum for the Sify subscribers to interact with each other. Sifys mobile telephone
short code 4545 gained in popularity over the past year. By the year ended March 31, 2005, mobile
telephone users could use the short code for a variety of tasks like downloading ringtones to
accessing the latest cricket scores on their phone. In fiscal years 2002, 2003, 2004 and 2005, our online portal and content offerings division
accounted for approximately 13.1%, 8.3%, 3.0% and 2.9%, 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 2005 was due to a decrease in advertising revenues as a result
of decreasing advertising expenditures by our customers combined with lower advertising rates. The
broadband site has content covering 27 categories, ranging from news to movies to music. Our
objective is to attract as many users as possible to generate revenues from advertising,
sponsorship fees and electronic commerce transaction commissions. 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 information technology enabled services (ITES), banking financial services
and insurance (BFSI), publishing, retail, pharmaceuticals and manufacturing. Our corporate
customer base has grown to over 1,000 customers. Based on fiscal year 2005 revenues generated by
our corporate network/data services division, our ten largest corporate customers were The Oriental
Insurance Company Limited, GE Capital Services India, Sigma Distributors (P) Limited, MCI, UCO
Bank, Satyam Computer Services Ltd., Whirlpool of India Limited, Wipro Limited, Hutchison Essar
South Limited and Wipro Spectramind Services Private Limited. No single customer accounted for more
than 10% of our revenues in fiscal year 2005. The increased scope of the services we offer,
particularly the provision of broadband services to our existing customers and International IPVPN
services along with the increased reach of our network, 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 99 cities in which we have a point of presence. Our web-based help desk and
MIS system provide 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, 2005, we had 170 employees dedicated to sales and marketing exclusively for our
corporate offerings. 28




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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. Technology and Network Infrastructure We operate a national Internet protocol private data network with 99 points of presence
serving more than 250 cities and towns across India, which we believe represents an estimated 95%
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 99 of the largest markets in
India via a local phone call on dial-up 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), Kochi (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 have additional points of
presence, or secondary nodes/base stations, in 87 other towns and cities. 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 contain 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 5.8 or 2.5 gigahertz range
which we have licensed from the Wireless Planning Commission. Sify also uses the 2.4 ghz radios,
which do not require an operating license, in some locations. 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 and Hewlett-Packard. The primary nodes on the backbone network are connected by multiple high-speed fiber optic
lines that we lease from long distance operators. The secondary nodes are connected by 2 Mbps or
higher 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. 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. 29




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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. For
Internet access, the main competitors are Bharti Televentures, Reliance Infocomm and VSNL, whereas
for domestic VPN, the main competition includes terrestrial network providers, such as Bharti,
Reliance and Tata Indicom, and satellite communications agencies, such as Bharti BT (which recently
bought Comsat Max) and HCL Comnet. For international MPLS VPN, the main competition is from MCI,
AT&T and Bharti BT. Internet Access Services. As of December 31, 2004, approximately 180 companies were
operational with an Internet service provider license in India. During the last few years, BSNL and
MTNL, the leading government owned telecom providers, have grown their dial-up businesses
significantly by bundling their Internet services with basic telephony services. Their subscriber
base grew by around 55% during the year 2004, while the subscriber base of the private operators
(other than VSNL) grew by only 4%. BSNL and MTNL have approximately 48% of the market share as of
December 31, 2004. While the dial-up segment will grow, we expect the market for broadband Internet
services to grow rapidly in the future due to additional telecom providers emerging as competitors.
We expect the market for consumer Internet access to remain extremely price competitive as late
market entrants attempt to acquire customers. There is no single significant competitor in the cybercafé space. Reliance Infocomm, a member
of the Reliance group, has around 225 webworlds. Currently, the market is highly fragmented and
dominated by individual entrepreneurs who own Internet cafés, with a few PCs connected to the
Internet through a leased line or ISDN line. With considerably lower overheads, these individuals
are able to offer Internet access 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.
The market is dominated by Sify.com, Rediff.com, Indiatimes.com, Yahoo.co.in, MSN.co.in and
Google.com. Most of the services offered on these portals are similar with very little
differentiation. Google established an office in India and began operations this year. All the above mentioned portals are fighting for a share of the online services market in
India, which is dominated by online advertising, mobile telephone short code revenues and
e-commerce. In terms of the share of the online advertising market, Sify is one of the leading
companies. However, we lag competitors in mobile telephony short code and e-commerce services. Most of our online portal competitors enjoy the following advantages compared to our company:  
    
    larger production and technical staff;
    
    greater name recognition and larger marketing budgets and resources; and
    
    substantially greater financial, technical and other resources. To be competitive, we must constantly innovate and introduce new services to the market
quickly. We also need to keep pace with rapidly changing technology in this area. Increased
competition could result in loss of market share, reduced prices or reduced margins, any of which
could adversely affect our business . 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 a number of trademark applications for
registering our product and service offerings. These applications are currently pending with
regulatory authorities. 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 30




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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, (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. 31




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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 network equipment, 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. In December 2004, the Government of India imposed new requirements on Internet Service
Providers wishing to offer Virtual Private Network services. Consequently, we applied for
permission to offer VPN services, and the Government of India issued a letter of intent to us on
December 30, 2004 regarding amendment of our existing ISP license to include provision of VPN
services. In January 2005, we paid Rs.100 million as a one time entry fee and submitted a financial
bank guarantee of Rs.10 million as required by the letter of intent. The one-time entry fee of
Rs.100 million is evenly amortized over the estimated 15-year life of the license. The Indian Department of Telecommunications, or DOT, also requires ISP licensees to pay an
annual fee of 8% of the adjusted gross revenues generated under the ISP license. To date, the DOT
has not issued any guidelines or procedures for implementing this decision. On January 11, 2005, we received provisional permission from the DOT, Government of India to
offer VPN service in accordance with the new requirements. Final permission to offer VPN service
shall be effective only after we sign the amendment to the license agreement. The provisional
permission does not carry any terms and conditions relating to the license. The Internet Service Provider Association of India, or ISPAI. had filed an appeal against this
license with the Telecom Disputes Settlement and Arbitration Tribunal, or TDSAT. TDSAT directed
DOT, Government of India to consult with TRAI before finalizing the license conditions. We have reserved Rs.5.6 million towards the annual license fee for the period January 11, 2005
through March 31, 2005, which was computed on the basis of 8% of the revenue we earned by providing
VPN services. The exact amount of the annual license fee may vary significantly from the reserve
depending on the conditions to the final license agreement to be imposed by the DOT. Seasonality We believe that our operations and businesses are not seasonal in nature. Organization Structure The company is not part of any group. A list of subsidiaries and relevant information about
them is provided in Exhibit 8.1. 32




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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. We own or operate POPs in 99 towns/cities across India. 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. 
 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 are:  
    
    corporate network/data services, which include private network services,
messaging services, security services, remote management 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. Revenues Corporate network/data services Our corporate network/data services revenues primarily include connectivity services revenue
and, to a lesser extent, 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. Our connectivity services include IPVPN services, Internet connectivity, last mile
connectivity (predominantly through wireless), messaging services, security services and web
hosting for businesses. We provide these services for a fixed period of time at a fixed rate
regardless of usage, with the rate for the services determined based on the type of service
provided, scope of the engagement and the Service Level Agreement, or SLA. Our web hosting service
revenues are primarily generated from co-location services and connectivity services. Our security
services revenues include revenue from consulting services, vulnerability assessment and
penetration testing. Internet access services Internet access services revenues are generated from the Internet connectivity we provide to
our retail customers through public access and home access services. Home access services are
provided through dial-up packs and broadband connectivity, which is provided through arrangements
with cable television operators, or CTOs. Our public access services are provided through
franchised and company-owned cybercafés. Additionally, we generate revenue by providing
voice-over-Internet protocol, or VOIP, services, allowing customers to make international telephone
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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. Revenues also accrue from commissions earned on products and services rendered through
www.sifymall.com, and also from value-added services that are rendered using Sifys mobile
telephone short code, 4545. Other services Other services include revenue from e-learning. We develop and upload content for e-learning
to facilitate web-based learning in various organizations. We provide e-learning services on a
time-and-materials or on a fixed-price bases. From time to time, we have experienced pricing pressure from our clients, which have affected
our revenues and margins. For example, clients often expect that they will receive volume
discounts as they do more business with us. Additionally, clients sometimes ask for fixed-price
arrangements or reduced rates. We have been aggressive in the prices charged to our customers in
both the retail broadband and corporate connectivity segments as we seek to grow these businesses,
which we believe are in the nascent stage of growth in India. 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. 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. In addition, the Government of India has recently
imposed an annual license fee of 8% of the adjusted gross revenue generated from the provision of
IPVPN services under our ISP license. 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 iwaysand 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. 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 cost of ringtones downloaded by using Sifys
mobile telephone short code 4545. Selling, General and Administrative expenses 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 (ASOP). As of March 31, 2005, we had outstanding an aggregate of 765,243 options (net
of 863,742 options that have been forfeited by employees or expired) under our ASOP with a weighted
average exercise price equal to approximately Rs.177.62 ($4.07) per equity share. The unamortized
deferred compensation expense related to these grants amounted to Rs.3.4 million ($0.1 million) as
of March 31, 2005. 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, 34




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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 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.61.2 million (GBP 0.7 million), which includes repayment of loan made to Wisden Cricinfo of
Rs.22.9 million (GBP 0.3 million). Certain prior-years amounts have been reclassified to conform to the current years
presentation. Results of Operations Year ended March 31, 2005 compared to year ended March 31, 2004 Revenues. We recognized Rs.3,613.5 million ($82.8 million) in revenues for the year ended
March 31, 2005, as compared to Rs.2,801.2 million for the year ended March 31, 2004, representing
an increase of Rs.812.3 million, or 29.0%. The revenues generated by our corporate network/data services businesses increased by Rs.627.9
million, or 45.0%, over the same period in the prior year. The increase is attributable to
increases in connectivity revenues of Rs.289.3 million, installation revenues of Rs.107.1 million,
security consultancy revenues of Rs.66.6 million (as a result of the acquisition of Sify Networks
Private Limited, formerly E Alcatraz Consulting Private Limited) and hardware and software sales of
Rs.164.9 million. The corporate network/data services businesses successfully obtained a
significant number of new orders and a large number of incremental orders from customers with
operations throughout India for providing IPVPN and Internet connectivity. We currently have more
than 1,000 corporate customers of our connectivity services. Sale of
hardware includes Rs.36.5 million revenue recognized against sales-type leases. We are not
focused on such sales-type lease transactions. The increase in consumer Internet access revenues was Rs.316.4 million, or 29.1%, over the
previous year. The increase was as a result of an increase in public Internet access revenues by
Rs.205.8 million, or 57.0%, increased revenues of Rs.74.9 million, or 53.6%, from voice-over-IP
services and increased revenues from home based broadband subscribers of Rs.193.3 million. These
increases were partially offset by a decrease of Rs.156.0 million in the revenues from the dial-up
business and Rs.6.9 million from sale of hardware. The franchise fees recognized were marginally
higher at Rs.108.0 million for the year ended March 31, 2005, compared with Rs.102.7 million for
the year ended March 31, 2004. During the course of the year, the number of cybercafés increased
from 1,725 to 2,471 whereas the number of iwaysin operation
was only 844 as of March 31, 2003. We
experienced a more than a 100% increase in the number of VoIP calls made from our cybercafés during
the year, which we believe was due in part to our competitive pricing. Our dial-up business
continued to decline with a decrease in the number of subscribers as well as the usage minutes.
Bundling of services offered by the public sector telephone companies resulted in a marked decline
in the market share of private ISPs in the dial-up market segment. Our online portal and content offerings division accounted for Rs.103.1 million of revenues
for the year ended March 31, 2005, as compared to Rs.84.2 million for the year ended March 31,
2004, representing an increase of Rs.18.9 million, or 22.4%. There was an increase of Rs.23.7
million on account of increased revenues from advertising, revenue from commission earned from
e-commerce, value-added services like downloadable ring tones and mobile content. This increase
was offset by a decrease of Rs.4.8 million pertaining to Indiaplaza, which resulted from the sale
of substantially all of the assets of Indiaplaza to a third party in June 2003. Revenues from our other businesses decreased by Rs.150.9 million, or 64.8%. This decrease can
be attributed to the loss of revenues from Element K, which was the largest customer of our
e-learning division in the previous financial year. Revenues from Element K accounted for 0.4% of
our revenues during the year ended March 31, 2005, compared with 8.0% of our revenues for the year
ended March 31, 2004. This division continues its operations serving other customers. Cost of Revenues. Cost of revenues was Rs.2,023.9 million ($46.4 million) for the year ended
March 31, 2005, compared to Rs.1,476.7 million for the year ended March 31, 2004, representing an
increase of Rs.547.2 million, or 37.1%. This increase was due to a Rs.138.6 million increase in
cost of goods sold, Rs.165.6 million increase in revenue share paid to franchisees of our
cybercafés and CTOs, Rs.91.2 million increase in personnel expenses, a Rs.87.4 million increase in 35




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lease line expenses and a Rs.64.4 million increase in other expenses. Cost of good sold includes
Rs.5.6 million towards annual license fee payable towards the revenue earned on VPN Services we
provided. Selling, general and administrative expenses. Selling, general and administrative expenses
were Rs.1,418.8 million ($32.5 million) for the year ended March 31, 2005, compared to Rs.1,208.9
million for the year ended March 31, 2004, representing an increase of Rs.209.9, million or 17.4%.
This increase was due to an increase of Rs.185.7 million in administration and other expenses, an
increase of Rs.87.2 million in personnel expenses due to increase in number of employees, partially
offset by a decrease of Rs.63.0 million in marketing and promotion expenses. Provision for doubtful receivables and advances.Provision for doubtful receivables and
advances was Rs.57.6 million ($1.3 million) for the year ended March 31, 2005, compared to Rs.76.5
million for the year ended March 31, 2004, representing a decrease of Rs.18.9 million, or 24.7%.
This decrease is mainly on account of reduction of older debts due to improved collection. Depreciation.Depreciation for the year ended March 31, 2005 was Rs.502.9 million ($11.5
million), as compared to Rs.481.8 million for the year ended March 31, 2004, representing an
increase of Rs.21.1 million, or 4.4%. This increase is due to the increase in capital equipment
deployed in our network infrastructure. Amortization of intangible assets.Amortization of intangible assets was Rs.53.9 million ($1.2
million) for the year ended March 31, 2005, compared to Rs.50.2 million for the year ended March
31, 2004, representing an increase of Rs.3.7 million, or 7.4%. The increase is due to an increase
of Rs.6.3 million ($0.1 million) on amortization of customer contract intangibles that arose during
our acquisition of Sify Networks Private Limited (formerly E Alacatraz Consulting Private Limited)
and an increase of Rs.1.5 million ($0.03 million) on amortisation of IPVPN licence fees paid during
the year, offset by a decrease resulting from certain intangible assets being fully written off. Amortization of deferred stock compensation expenses.Amortization of deferred stock
compensation expenses was Rs.10.6 million ($0.2 million) for the year ended March 31, 2005,
compared to Rs.27.9 million for the year ended March 31, 2004, representing a decrease of Rs.17.3
million, or 62.0%. The decrease was due to a major portion of option grants being fully amortized
by March 31, 2004 and also due to a lower number of option grants during the year ended March 31,
2005 as compared to the year ended March 31, 2004. Equity in profit of affiliates.Equity in the profit of affiliates was Rs.50.8 million ($1.2
million) for the year ended March 31, 2005, compared to Rs.17.1 million for the year ended March
31, 2004, representing an increase of Rs.33.7 million, or 197.1%. The increase is on account of
sale of our stake in Wisden Cricinfo in February 2004. Our share of the loss of Wisden CricInfo for
the year ended March 31, 2004 was Rs.21.6 million. The increase is also on account of
better performance of our affiliate Refco-Sify during the year ended March 31, 2005. During
the year ended March 31, 2005, Refco-Sify completed a rights issue. The Company chose not to
participate in the rights issue. As a result, our equity ownership in Refco-Sify has been reduced
from 40% to 30%. Due to additional issuance of shares, we recorded Rs.1.1 million as gain on
dilution through stockholders equity as per Staff Accounting Bulletin 51, Accounting For Sales Of
Stock By A Subsidiary (SAB 51). We do not have any intention of further investment or dilution of
our investment in Refco-Sify. Foreign exchange (gain)/loss.Foreign exchange gain for the year ended March 31, 2005 was
Rs.2.6 million ($0.1 million), compared to a foreign exchange loss of Rs.52.1 million for the year
ended March 31, 2004, representing an increase in gain of Rs.54.7 million, or 105.0%. This is as a
result of the appreciation of U.S. Dollar to the Indian Rupee as compared to March 31, 2004, which
impacted the value of our U.S. Dollar denominated cash deposits. Other income (net). Other income was Rs.93.3 million ($2.1 million) for the year ended March
31, 2005, compared to Rs.144.1 million for the year ended March 31, 2004, representing a decrease
of Rs.50.8 million, or 35.2%. The decrease in other income is on account of the profit on the sale
of investment in Dr Reddys Bio-Sciences Limited (formerly Satyam Institute of E Business Limited)
of Rs.75.6 million and the Rs.3.7 million profit on the sale of substantially all of the assets of
Indiaplaza, which were both recognised during the year ended March 31, 2004. During the year ended
March 31, 2005, the balance of Rs.15.7 million on the sale of investment in Dr. Reddys
Bio-Sciences Limited was recognised consequent to a court verdict that was settled in favour of the
company after an injunction order was vacated. Net Loss. Our net loss was Rs.307.6 million ($7.1 million) for the year ended March 31, 2005,
compared to a net loss of Rs.371.3 million for the year ended March 31, 2004. Excluding the impact
of the one time profit pertaining to profit on sale of our investment in Dr Reddys Biosciences
Limited for both the relevant periods, our net loss for the year ended March 31, 2005 would have
been Rs.323.3 million ($7.4 million) compared to a net loss of Rs.446.9 million for the year ended
March 31, 2004. Year ended March 31, 2004 compared to year ended March 31, 2003 Revenues. We recognized Rs.2,801.2 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 36




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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. The increase in Internet access revenues was primarily due to an increase in revenues earned
from iwaycustomers as the iwaynetwork was expanded from 844 cafés in 15 cities as of March 31,
2003 to 1,725 cafés in 55 cities in March 31, 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 2004 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 was Rs.1,476.7 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 cybercafés 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 leased 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 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 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 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 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 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 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 U.S. dollar against the Indian Rupee, which impacted cash held in
foreign currency. 37




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Amortization of Deferred Stock Compensation expenses.Amortization of deferred stock
compensation expenses was Rs.28.0 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 income/loss of affiliates.Equity in income of affiliates was Rs.80.1 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 Rs.106.2 million. 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 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 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. 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 the fiscal years 2003 and 2004, we received Rs.792.0 million and Rs.166.9 million,
respectively, in net cash proceeds from the issuance of equity securities. During fiscal year
2005, we received Rs.78.8 million in net cash proceeds from the issuance of shares to employees
upon exercise of their stock options. 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 included 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 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Indian Rupees
    
    
    U.S. Dollars(in thousands)Net loss
    
    
    (1,329,388
    )
    
    
    (371,284
    )
    
    
    (307,576
    )
    
    
    (7,051
    )Net decrease (increase) in working capital
    
    
    52,320
    
    
    
    52,199
    
    
    
    202,293
    
    
    
    4,638Other adjustments for non-cash items
    
    
    1,038,795
    
    
    
    593,070
    
    
    
    556,235
    
    
    
    12,751Net cash provided by (used in) operating activities
    
    
    (238,273
    )
    
    
    273,985
    
    
    
    450,952
    
    
    
    10,338Net cash provided by (used in) investing activities
    
    
    (273,674
    )
    
    
    11,327
    
    
    
    (523,504
    )
    
    
    (12,001
    )Net cash provided by (used in) financing activities
    
    
    758,777
    
    
    
    189,958
    
    
    
    69,182
    
    
    
    1,586Effect of exchange rate changes on cash and cash
equivalents
    
    
    (7,345
    )
    
    
    (47,063
    )
    
    
    1,479
    
    
    
    34Net increase (decrease) in cash and cash equivalents
    
    
    239,485
    
    
    
    428,207
    
    
    
    (1,891
    )
    
    
    (43
    )
 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 the development of our 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.
Since the expansion into additional points of presence in India was not a priority and since the
network had sufficient capacity to handle the traffic during 2003 and 2004, there were no
significant sums expended on plant and equipment during those years, other than equipment required
to provide broadband access through wireless technologies on the last mile. As a result, we
incurred Rs.284.3 million and Rs.342.6 million for capital expenditures for the fiscal years ending
March 31, 2003 and 2004, respectively. During the course of 2004-05, we increased our capital
expenditure to expand our network reach to cover 99 points of presence, to meet the needs of our
growing client base. We incurred Rs.533.2 million for capital expenditures during fiscal 2005. 38




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Although we have 99 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 through 2005, 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 three years. We believe that the reductions achieved on account of the
above are permanent reductions. We intend to continue to focus on generation of cash surplus in fiscal year 2006.
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.1,323.9 million
($30.4 million) as of March 31, 2005, excluding restricted cash included in current assets of
Rs.24.9 million ($0.6 million) and restricted cash included in non-current assets of Rs.7.3 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.551.0 million, Rs.555.7 million and Rs.293.2
million as of March 31, 2003, 2004 and 2005, respectively. Cash balances held in Indian currency
were Rs.521.2 million, Rs.881.8 million and Rs.1,062.9 million as of March 31, 2003, 2004 and 2005,
respectively. These amounts include cash and cash equivalents and restricted cash. Foreign exchange
loss during fiscal 2003 and 2004 were Rs.0.02 and Rs.52.2 million, respectively, and foreign
exchange gain during fiscal 2005 was Rs.2.6 million. This foreign exchange gain or loss is on
account of cash held in foreign currency impacted by appreciation or depreciation of the U.S.
Dollar against the Indian Rupee. Cash provided by operating activities during fiscal year 2005 was Rs.451.0 million ($10.3
million). This is mainly attributable to non-cash depreciation charge of Rs.567.4 million,
provision for doubtful receivables of Rs.57.6 million, increase in trade accounts payable by
Rs.310.6 million, increase in other liabilities by Rs.74.2 million, decrease in prepaid expenses by
Rs.19.8 million and loss on sale of plant and equipment of Rs.2.8 million, offset by net loss from
operations of Rs.307.6 million, increase in accounts receivable by Rs.178.9 million, increase in
inventories by Rs.4.8 million, decrease in advances received from customers by Rs.14.2 million,
increase in other assets by Rs.26.2 million and gain on sale of investments of Rs.15.7 million.
Cash provided by operating activities during fiscal year 2004 was Rs.274.0 million. This is mainly
attributable to a Rs.582.5 million non-cash depreciation charge, Rs.76.5 million provision for
doubtful receivables, a Rs.43.0 million increase in trade accounts payable by Rs.120.6 million, an
increase in advances received from customers by Rs.57.5 million, a decrease in other assets, a
Rs.17.8 million decrease in prepaid expenses, and a Rs.17.8 million decrease in inventories, offset
by a Rs.371.3 million net loss from operations, an increase in accounts receivable by Rs.223.1
million, a decrease in other liabilities by Rs.42.0 million, gain on sale of plant and equipment of
Rs.2.0 million and gain on sale of investments of Rs.99.0 million. Cash used in operating
activities during fiscal year 2003 was Rs.238.3 million. Cash used in operating activities of
operations for fiscal year 2003 was attributable to a Rs.1,329.4 million net loss from 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 during fiscal year 2005 was Rs.523.5 million ($12.0
million), principally as a result of expenditure on purchase of routers, modems, ports, servers and
other capital equipment in connection with the expansion of our network of Rs.533.2 million ($12.2
million) and purchase of intangible assets of IPVPN License fee of Rs.100.0 million ($2.3 million),
partially offset by proceeds from sale of investments of Rs.15.0 million, movement in restricted
cash by Rs.79.5 million and proceeds from sale of plant and equipment for Rs.15.2 million. Cash
provided by investing activities of operations during fiscal year 2004 was Rs.11.3 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 of
Rs.342.6 million on purchase of routers, modems, ports, servers and other capital equipment in
connection with the expansion of our network, purchase of intangible assets of Rs.23.3 million and
purchase consideration for the acquisition of 39




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Sify Networks Private Limited (formerly E Alcatraz Consulting Private Limited) for Rs.32.8 million. Cash used in
investing activities of operations during fiscal year 2003 was Rs.273.7 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, purchase of intangible assets of
Rs.16.9 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, proceeds from sale of investments of Rs.8.6 million and
proceeds from sale of investments in affiliates of Rs.29.2 million. Cash provided by financing activities for fiscal year 2005 was Rs.69.2 million ($1.6 million),
which consisted of net proceeds from issuance of common stock to employees on exercise of stock
options of Rs.78.8 million ($1.8 million), partly offset by repayment of principal under capital
lease obligations of Rs.9.6 million. Cash provided by financing activities for fiscal year 2004
was Rs.190.0 million and consisted of net proceeds from issuance of common stock of Rs.166.9
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 provided by financing activities for fiscal year
2003 was Rs.758.8 million consisted of net proceeds from issuance of common stock of Rs.760.5
million, offset by repayment of principal under capital lease obligations of Rs.1.7 million. 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 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, 2005, we had spent approximately Rs.2,194.4 million ($50.3 million) to develop
and deploy our network infrastructure. As of March 31, 2005, our future contractual obligations
and commercial commitments were as follows: Payments Due by Period
    
    
    Rs.MillionMoreContractual
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    than 5Obligations
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsCapital Lease Obligations
    
    
    10.4
    
    
    
    6.5
    
    
    
    3.9
    
    
    
    
    
    
    
    Total Contractual
Obligations
    
    
    10.4
    
    
    
    6.5
    
    
    
    3.9
    
    
    
    
    
    
    
    
 Amount of Commitment Expiration Per Period
    
    
    Rs.millionOther Commercial
    
    Total Amounts
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    Over 5Commitments
    
    Committed
    
    
    year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsStandby Letters of Credit
    
    
    180.5
    
    
    
    180.5
    
    
    
    
    
    
    
    
    
    
    
    Guarantees
    
    
    99.3
    
    
    
    26.4
    
    
    
    72.7
    
    
    
    0.2
    
    
    
    Other Commercial
Commitments
    
    
    76.9
    
    
    
    76.9
    
    
    
    
    
    
    
    
    
    
    
    Total Commercial
Commitments
    
    
    356.7
    
    
    
    283.8
    
    
    
    72.7
    
    
    
    0.2
    
    
    
    
 40




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Recent Accounting Pronouncements SFAS No. 123 (revised) In December 2004, the Financial Accounting Standards Board issued FASB Statement No. 123
(revised 2004), Share Based Payment, requiring companies to change their accounting policies to
record the fair value of stock options issued to employees as an expense. Currently, we do not
deduct the expense of the employee stock options grants from our income statement based on the fair
value method as we had adopted the proforma disclosure provisions of SFAS No. 123. We are required
to adopt SFAS No. 123 (revised) on April 1, 2006. The unamortized stock compensation expense as of
March 31, 2005, determined under the fair value method, is approximately $199. We are evaluating
the impact of the standard on the existing grants of employee stock options and future grants, if
any. Critical Accounting Policies Critical accounting policies are defined as those that in our view are most important to the
portrayal of our 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 Effective July 1, 2003, we adopted EITF Issue No. 00-21 for all revenue arrangements entered
into on or after that date. Based on this guidance, we recognize revenues on the delivered products
or services only if:  
    
    the revenue recognition criteria applicable to the unit of accounting is met;
    
    the delivered element has value to the customer on a standalone basis;
    
    the delivered unit will have value on a standalone basis if it is being sold
separately by other vendors or the customer could resell the deliverable on a
standalone basis;
    
    there is objective and reliable evidence of the fair value of the undelivered
item(s); and
    
    if the arrangement includes a general right of return relative to the delivered
item, 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. The revenue recognized for the delivered items is limited to the amount that is not
contingent upon the delivery or performance of the undelivered items. In certain cases, the
application of the contingent revenue provisions of EITF Issue No. 00-21 could result in
recognizing a loss on the delivered element. In such cases, the cost recognized is limited to the
amount of non-contingent revenues recognized and the balance of costs are recorded as an asset and
are reviewed for impairment based on the estimated net cash flows to be received for future
deliverables under the contract. These costs are subsequently recognized on recognition of the
revenue allocable to the balance of deliverables. Assessments about whether the delivered units have a value to the customer on a standalone
basis, impact of forfeiture and similar contractual provisions, and determination of fair value of
each unit would affect the timing of revenue recognition and would impact our results of
operations. We recognize revenue only on collectibility being probable and hence credit losses do not have
an impact on our revenue recognition policy. Our provisions are based on the age of our
receivables. No one client has contributed significantly to credit losses. We have had no
significant changes in our collection policies or payment terms. Corporate network/data services 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, and the
revenue attributable to hardware and software is recognized on delivery. Installation consists of
commissioning of the last mile connectivity to the customer premises either through the Companys
wireless mode of broadband delivery or through the carrier exchange (primarily Bharat Sanchar Nigam
Limited, or BSNL, a Government of India entity), and usually takes 4-6 weeks. However, once
commissioned, this last mile connectivity can be used by the customer to access any other service
provider. 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 41




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the installation work. Revenue from ancillary services such as e-mail, fax 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 and 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. Security services are provided on either a time-and-materials or fixed-price, fixed-timeframe
basis. Revenues from services provided on a time-and-materials basis are recognized as the related
services are performed. Revenues from services provided on a fixed-price, fixed-timeframe basis
are recognized pursuant to the percentage of completion method. 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 enter 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 franchisee fee
revenue recognized during the fiscal years ended March 31, 2004 and 2005 were Rs.102.14 million and
Rs.108.0 million, respectively. As of March 31, 2005, we owned 34 of the 2,471 cybercafés.
Internet access revenue is recognized based on usage by the customer. VOIP revenues are are recognized on the basis of usage. 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. Revenue is recognized based on actual
impressions, click-throughs and leads delivered. There are no performance obligations or minimum
guarantees. Revenues from electronic commerce transactions are recognized when the transactions are
completed. Other services Our e-learning software development services are provided on either a time-and-materials or
fixed-price, fixed-timeframe basis. Revenues from services provided on a time-and-materials basis
are recognized as the related services are performed. Revenues from services provided on a
fixed-price, fixed-timeframe basis are recognized pursuant to the percentage of completion 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). 42




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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 US 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 executive of our company as of June 9, 2005: Name
    
    Age
    
    DesignationR. Ramaraj
    
    
    55
    
    
    Chief Executive Officer and Managing DirectorGeorge Zacharias
    
    
    46
    
    
    Chief Operating OfficerAnil Ahuja
    
    
    54
    
    
    Chief Financial OfficerShrikant Joshi
    
    
    48
    
    
    President  Access MediaJohn Devasahayam
    
    
    47
    
    
    Managing Director, SafescryptRahul Swarup
    
    
    45
    
    
    President, Enterprise SolutionsJ. Avinash
    
    
    43
    
    
    President, Internet Data CentersRustom Irani
    
    
    42
    
    
    Chief Technology OfficerGeorge A. Ajit
    
    
    45
    
    
    Chief Human Resources OfficerSrinivasa C Raju
    
    
    43
    
    
    DirectorSandeep Reddy (1) (2)
    
    
    36
    
    
    Chairman of the Board of DirectorsV. Srinivas
    
    
    45
    
    
    DirectorT.H. Chowdary (1) (2)
    
    
    72
    
    
    DirectorB Rama Raju
    
    
    46
    
    
    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 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 43




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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. Anil Ahuja has served as Chief Financial Officer of our company since June 2004. Prior to
2003, Mr. Ahuja held a variety of management positions in Finance and Corporate Development with
the Bell Canada Enterprises group of companies in Montreal, Canada. From 1996 to 2003, Mr. Ahuja
was Vice President, Corporate Development (Bell Canada International) and led several strategic corporate initiatives, and managed finances for
operations in NorthAmerica, Asia & Latin America. During 1996 and 1997, he was Senior Vice
President and CFO for Tata Teleservices Limited, a joint venture project of Bell Canada and Indias
Tata Group. Mr. Ahuja has a B.Tech Degree in Mechanical Engineering from IIT, Kanpur and a PGDM
from IIM, Calcutta. Shrikant Joshi has 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. John Devasahayam has served as Managing Director, Safescrypt at our company since July
2003. Previously, he was Senior Vice President at Satyam Computer Services Limited, 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. 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. Sandeep Reddy has served as a Director of our company since December 2002 and was appointed
Chairman of the Board of Directors in October 2004. 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. 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. Previously, 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. 44




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B Rama Raju is the Managing Director of Satyam Computer Services Limited and has served as a
Director of our company since October 2004. Mr Rama Raju obtained a Masters Degree from Madras
Loyola College and later attended Texas A&M International University, where he received a MBA with
specialization in International Trade. Director Compensation Our Articles of Association provide that each of our directors may receive a sitting fee not
exceeding Rs.2,000 for each Board and Committee meeting. In fiscal year 2005, 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, after obtaining requisite Governmental permission for the
same. Other than Mr. Ramaraj, none of our directors is a party to a service contract providing for
benefits upon termination of employment with the company. Officer Compensation The following table sets forth all compensation paid by us during the fiscal year ended March
31, 2005 to our executive officers. Summary Compensation Table
(Rs. Million) StockName
    
    Salary
    
    
    Bonus
    
    
    CompensationR Ramaraj
    
    
    4.73
    
    
    Nil
    
    
    
    2.07George Zacharias
    
    
    6.03
    
    
    
    1.50
    
    
    
    1.46Shrikant Joshi
    
    
    3.77
    
    
    
    0.50
    
    
    
    0.35Rahul Swarup
    
    
    4.30
    
    
    
    1.50
    
    
    
    0.81J Avinash
    
    
    2.23
    
    
    
    0.75
    
    
    
    0.29Rustom Irani
    
    
    3.28
    
    
    
    1.24
    
    
    
    0.62George A. Ajit
    
    
    3.09
    
    
    
    1.11
    
    
    
    0.62John Devasahayam
    
    
    3.64
    
    
    
    0.75
    
    
    
    0.12Part of the yearAnil Ahuja
    
    
    4.52
    
    
    Nil
    
    
    
    0.80
 The following table sets forth all stock options granted by us during the fiscal year
ended March 31, 2005 to our executive officers. Equity Shares UnderlyingName
    
    Option Grant

    
    Exercise Price (Rs.)

    
    Expiration DateAnil Ahuja
    
    
    75,000
    
    
    
    228.74
    
    
    August 18, 2007
 The following table sets forth all stock options exercised by our executive officers during
the fiscal year ended March 31, 2005. Name
    
    No. of shares
    
    
    Exercise PriceRs.1. R. Ramaraj
    
    97,395
    
    164.22. George Zacharias
    
    66,270
    
    164.33. Rahul Swarup
    
    34,545
    
    164.54. Ajit Abraham
    
    27,420
    
    164.55. Shrikant Joshi
    
    24,200
    
    155.46. J. Avinash
    
    12,465
    
    166.67. Rustom Irani
    
    30,200
    
    164.98. John Devasahayam
    
    7,500
    
    163.4
 45




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Mr Ramarajs term of office as Managing Director has a term of five years and expires on March 31,
2008. 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 six 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 an Investor Rights 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 October 2004, Mr. Sandeep Reddy, a nominee
of Venture Tech, was appointed as Chairman of our Board of Directors in the place of Mr. Srinivasa
C. Raju. The Investor Rights Agreement has also granted the investors, consent rights with respect
to specified corporate transactions. Messrs. Sandeep Reddy and Srinivasa C. Raju are the nominees of VentureTech and Messrs. V.
Srinivas and B. Rama Raju are the nominees of Satyam Computer Services. The terms of Messrs. V.
Srinivas and Srinivasa C. Raju will expire at our Annual General Meeting to be held in 2005. The
terms of Messrs. T. H. Chowdary and B. Rama Raju will expire at our Annual General Meeting to be
held in 2006. The term of Mr. Sandeep Reddy will expire at our Annual General Meeting to be held in
2007, and the term of Mr. R. Ramaraj ends March 31, 2008. There are no family relationships between any of the directors or executive officers of our
company. Until approximately November 5, 2004, we qualified as a controlled company under applicable
Nasdaq rules, which provided an exemption from certain independent director requirements of Nasdaq
Rule 4350(c), which will become effective July 31, 2005 for foreign private issuers such as Sify.
Under Nasdaq rules, a company that ceases to qualify as a controlled company is permitted to
phase-in independent nomination and compensation committees and a majority independent board on the
same schedule as companies listing in conjunction with their initial public offering. Accordingly,
our Board of Directors will be reconstituted to comply with all applicable Nasdaq independent
director rules prior to November 5, 2005. 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. Until April
19, 2005, the members of our Audit Committee were Messrs. Sandeep Reddy, Ravi Chandra Adusumalli
and T. H. Chowdary. Mr. Adusumalli resigned from our board effective April 19, 2005, leaving a
vacancy on our Audit Committee. Accordingly, our Audit Committee does not currently comply with
Nasdaq rules. We intend to fill Mr. Adusumallis position in July 2005 when we reconstitute our
Audit Committee to comply with the July 31, 2005 implementation deadline associated with Nasdaqs
heightened corporate governance rules. 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. Until April 19,
2005, the members of our Compensation Committee were Messrs. Sandeep Reddy, Ravi Chandra Adusumalli
and T. H. Chowdary. We intend to fill Mr. Adusuamllis position in July 2005 when we reconstitute
our Compensation Committee to comply with the July 31, 2005 implementation deadline associated with
Nasdaqs heightened corporate governance rules. Employees As of March 31, 2005, we had 1,663 employees, compared with 1,210 employees, 1,068 employees,
and 887 employees, as of March 31, 2004, March 31, 2003 and March 31, 2002, respectively. Of our
current employees, 91 are administrative, 448 form our sales and marketing staffs, 180 are in
product and content development, 870 are dedicated to technology and technical support, and 74 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. Stock Ownership The following table sets forth information with respect to the beneficial ownership of our
equity shares as of June 28, 2005 by each director and our senior management executives. The table
gives effect to equity shares issuable within 60 days of
June 28, 2005 upon the exercise of all
options and other rights beneficially owned by the indicated shareholders on 46




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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
    
    
    416,875
    
    
    
    1.1Srinivasa C. Raju
    
    
    
    
    
    
    Sandeep Reddy (1)
    
    
    2,750,000
    
    
    
    7.8V. Srinivas (2)
    
    
    11,182,600
    
    
    
    31.6B Rama Raju (3)
    
    
    11,182,600
    
    
    
    31.6T. H. Chowdary
    
    
    
    
    
    
    George Zacharias
    
    
    31,250
    
    
    
    *Shrikant Joshi
    
    
    12,500
    
    
    
    *John Devasahayam
    
    
    4,167
    
    
    
    *Rahul Swarup
    
    
    15,625
    
    
    
    *J. Avinash
    
    
    3,125
    
    
    
    *Rustom Irani
    
    
    12,500
    
    
    
    *George A. Ajit
    
    
    12,500
    
    
    
    *
 
 *
    
    Less than 1%(1)
    
    Consists of 2,750,000 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.(2)
    
    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.(3)
    
    Consists of 11,182,600 equity shares beneficially owned by Satyam Computer Services Limited.
Mr. B. Rama Raju is the Managing Director of Satyam Computer Services Limited. Mr. Rama Raju
disclaims beneficial ownership of the equity shares owned by Satyam Computer Services Limited. 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, 2005, we had outstanding aggregate of 765,243 options (net of
863,742 options forfeited by employees or that have expired) under our ASOP with a weighted average
exercise price equal to approximately Rs.177.62 ($4.07) per equity share. 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. 
 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 June 28, 2005 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
June 28, 2005 upon the exercise of
all options and other rights beneficially owned by the indicated shareholders on that date. 47




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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 former
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. 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 B Rama Raju, directors of our company, are affiliated with
Satyam Computer Services. Equity SharesBeneficially ownedBeneficial Owner
    
    Number
    
    PercentSatyam Computer Services Limited 
          Mayfair Centre, S P Road 
          Secunderabad 500 003 
          India
    
    
    11,182,600
    
    
    
    31.6SAIF Investment Company Limited 
          Suite 307, St. James Court 
          St. Denis Street, Port Louis
          Mauritius
    
    
    2,008,140
    
    
    
    5.7VentureTech Solutions Private Limited
          12, Subba Rao Avenue
          Chennai 600006
          India
    
    
    2,750,000
    
    
    
    7.8
 Control of Registrant Satyam Computer Services, SAIF and VentureTech collectively beneficially owned approximately
45% of our equity shares as of June 28, 2005. 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 October 2004, Mr Sandeep Reddy, a nominee of Venture Tech, was
appointed as Chairman of our Board of Directors in the place of Mr Srinivasa C Raju. The Investor
Rights Agreement has also granted consent rights in connection with specified corporate
transactions. These shareholders are presently able to exercise significant influence 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. 48




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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. United States Shareholders As of March 31, 2005, 18,298,439 of our ADSs were held in the United States and we had
approximately 29,000 shareholders of record in the United States. Each ADS represents one equity
share. 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 2005, we
billed an aggregate of Rs.48.7 million ($1.11 million) in services to Satyam Computer Services and
its affiliates. For fiscal years 2003 and 2004 the corresponding figures were Rs.34.3 million and
Rs.51.5 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. 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, after obtaining
requisite Governmental permission for the same. On November 10, 2004, we entered into an agreement with Satyam Computer Services, SAIF and
Venture Tech in which we agreed, in part, to facilitate the conversion of our outstanding Indian
equity shares into ADSs and to register the ADSs for resale under the U.S. federal securities laws.
Pursuant to this agreement, Satyam Computer Services, SAIF, Venture Tech and other holders of our
equity shares may dispose of some or all of their equity shares in one or more transactions under
the registration statement on Form F-3, filed by us on December 7, 2004, or additional registration
statements that we may file in the future. 
 Item 8.Financial Information Financial Statements We have elected to provide financial statements pursuant to Item 18 of Form 20-F. No
significant change has occurred since the date of our annual financial statements for fiscal 2005. 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 several of the underwriters involved in our initial public offering of
American Depositary Shares as defendants. This class action is brought on behalf of a purported
class of purchasers of our ADSs from the time of our Initial Public Offering (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. On June 26, 2003, the plaintiffs in the
consolidated IPO class action lawsuits currently pending against us and over 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 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 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 it may be
responsible for under the proposed settlement. Although the Federal District Court has
preliminarily approved the settlement, it is possible that the Court may not finally approve the
settlement in whole or part. We believe the maximum financial exposure under this settlement, in
the event that the plaintiffs recover nothing from the non-settling defendants, is approximately
U.S. $3.9 million, an amount we believe is fully recoverable from Sifys insurer. We are party to additional legal actions arising in the ordinary course of business. Based on
the available information, as at March 31, 2005, we believe that we have adequate legal defenses
for these actions and that the ultimate outcome of these actions will not have a material adverse
effect on our company. 49




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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. 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 High
    
    
    LowFiscal year ended
    
    $
    
    
    $March 31, 2001
    
    
    256.00
    
    
    
    11.76March 31, 2002
    
    
    17.60
    
    
    
    2.88March 31, 2003
    
    
    6.44
    
    
    
    0.88March 31, 2004
    
    
    9.25
    
    
    
    3.75March 31, 2005
    
    
    8.62
    
    
    
    3.82
 Quarters of Prior Fiscal Years High
    
    
    LowFiscal year ended March 31, 2004
    
    $
    
    
    $First Quarter
    
    
    7.70
    
    
    
    3.75Second Quarter
    
    
    9.25
    
    
    
    5.21Third Quarter
    
    
    7.27
    
    
    
    4.31Fourth Quarter
    
    
    9.25
    
    
    
    5.60
 High
    
    
    LowFiscal year ended March 31, 2005
    
    $
    
    
    $First Quarter
    
    
    8.62
    
    
    
    5.61Second Quarter
    
    
    6.23
    
    
    
    3.82Third Quarter
    
    
    7.13
    
    
    
    5.48Fourth Quarter
    
    
    6.10
    
    
    
    4.34
 Prior Six months Price rangeHigh
    
    
    LowMonth
    
    $
    
    
    $December 2004
    
    
    6.96
    
    
    
    5.95January 2005
    
    
    6.10
    
    
    
    4.84February 2005
    
    
    5.10
    
    
    
    4.66March 2005
    
    
    5.06
    
    
    
    4.34April 2005
    
    
    4.22
    
    
    
    3.91May 2005
    
    
    4.47
    
    
    
    3.90
 50




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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 June 8, 2005, 35,380,278 equity
shares were issued and outstanding. 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 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 stockholders 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, 2005, we had outstanding an aggregate of 765,243 options
(net of 863,742 options that have been forfeited by employees or have expired) under our ASOP with
a weighted average exercise price equal to approximately Rs.177.63 ($4.02) per equity share. The
unamortized deferred compensation related to these grants amounted to Rs.3.4 million as of March
31, 2005. 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 October 2004, Mr. Sandeep Reddy, a nominee
of Venture Tech, was appointed as Chairman of our Board of Directors in the place of Mr. Srinivasa
C. Raju. 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 51




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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), 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:  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. Board of Directors In terms of the provisions of the Articles of Association of the Company and the Indian
Companies Act, 1956:  (a)
    
    no director of the company can vote on a proposal, arrangement or
contract in which he is materially interested;(b)
    
    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;(c)
    
    the directors of the company can not vote on a proposal in the
absence of an independent quorum for compensation to themselves or their body;(d)
    
    the directors are empowered to borrow moneys through board meetings
upto the prescribed limit and beyond that with the approval of the stockholders
through a General Meeting; 52




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(e)
    
    retirement of directors are determined by rotation and not based on
age limit; and(f)
    
    no director is required to hold any qualification shares. For additional information, please see Item 6. Director, Senior Management and Employees
- Board Composition, -Board Committees and -Director Compensation, 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. 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. 2005 Annual General Meeting Our Annual General Meeting for the fiscal year 2005 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 Ninth 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. 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. Limitations on the Rights to Own Securities The limitations on the rights to own securities of Indian companies, including the rights of
non-resident or foreign shareholders to hold securities, are discussed in the section entitled
Risk Factors  Risks Related to the ADSs and Our Trading Market in this Annual Report. 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. 53




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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 under Indian law, 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. 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. Redemption of Equity Shares Under the Indian Companies Act, equity shares are not redeemable. 54




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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. In December 2004, the Government of India through DOT imposed new requirements on Internet
Service Providers wishing to offer Virtual Private Network services. Consequently, we applied for
permission to offer VPN services, and the DOT, Government of India issued a letter of intent to us
on December 30, 2004 regarding amendment of our existing ISP license to include provision of VPN
services. In January 2005, we paid a Rs.100 million one time entry fee and submitted a financial
bank guarantee of Rs.10 million as required by the letter of intent. The one time entry fee of
Rs.100 million is evenly amortized over the estimated 15-year life of the license. On January 11, 2005, we received provisional permission from the DOT, Government of India to
offer VPN service in accordance with the new requirements. Final permission to offer VPN service
shall be effective only after we sign the amendment to the license agreement. However the
provisional permission does not carry any terms and conditions relating to the license. The Indian Department of Telecommunications, or DOT, also requires ISP licensees to pay an
annual fee of 8% of the adjusted gross revenues generated under the ISP license. To date, the DOT
has not issued any guidelines or procedures for implementing this decision. However, it is our
understanding that the license fee provisions will become effective only after amendments to the
license. The Internet Service Provider Association of India, or ISPAI, had filed an appeal against
this license with the Telecom Disputes Settlement and Arbitration Tribunal, or TDSAT. TDSAT
directed GOI to consult with TRAI before finalizing the license conditions. We have reserved Rs.5.6 million towards the annual license fee for the period January 11, 2005
through March 31, 2005, which was computed on the basis of 8% of the revenue we earned by providing
VPN services. The exact amount of the annual license fee may vary significantly from the reserve
depending on the conditions to the final license agreement to be imposed by the DOT. Sponsored ADR Program On November 10, 2004, we entered into an agreement with Satyam Computer Services, SAIF and
Venture Tech in which we agreed, in part, to facilitate the conversion of our outstanding Indian
equity shares into ADSs and to register the ADSs for resale under the U.S. federal securities laws.
Pursuant to this agreement, Satyam Computer Services, SAIF, Venture Tech and other holders of our
equity shares may dispose of some or all of their equity shares in one or more transactions under the registration statement on Form F-3, filed by us on December 7, 2004, or
additional registration statements that we may file in the future. 55




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Investor Rights Agreement 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 October
2004, Mr. Sandeep Reddy, a nominee of Venture Tech, was appointed as Chairman of our Board of
Directors in the place of Mr. Srinivasa C. Raju. The Investor Rights Agreement provides certain of
the shareholders with consent rights in connection with specified corporate transactions. 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. 56




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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
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. 57




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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 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. 58




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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
    
    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. 59




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Fringe Benefit Tax: The Finance Minister of India has recently introduced a fringe benefits
tax that will be levied on employers. Under this fringe benefits tax, employers will be required to
pay a tax of 30% exclusive of applicable surcharge and cess on the taxable value of the fringe
benefits or privileges that are provided or deemed to be provided to employees on a collective,
rather than individual, basis. We are assessing the impact of this tax on our company. 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 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. 60




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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 10.2%. Income Tax Matters As of March 31, 2005, we had a business loss carry forward of approximately Rs.4,475 million
($102.6 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 2005, the rate
of corporate income tax was 35% plus a surcharge of 2.5% and 2% education cess thereon, resulting
in an effective tax rate of 36.6%. For fiscal year 2006, the corporate income tax rate has been
reduced to 30%, subject to a surcharge of 10% and education cess of 2%, resulting in an effective
tax rate of 33.7%. 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. 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 a 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 61




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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 our 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. 62




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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.162 million, Rs.44.5 million, Rs.0.02 million, Rs.(52.1) million and Rs.2.6 million for fiscal
years 2001, 2002, 2003, 2004 and 2005, 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 We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the U.S. Securities and Exchange Commissions rules
and forms, and that such information is accumulated and communicated to our management, to allow
timely decisions regarding required disclosures. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and, in reaching a reasonable level of assurance, management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Also, we have investments in certain unconsolidated entities. As we do not control or
manage these entities, our disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those we maintain with respect to our consolidated
subsidiaries. We have carried out an evaluation, under the supervision and with the participation of our
Chief Executive Officer, Chief Financial Officer and other management, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective
at the reasonable assurance level as of March 31, 2005, the end of the period
covered by this Annual Report. 63




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Changes in internal controls There were no changes in our internal controls over financial reporting that occurred during
the fiscal year ended March 31, 2005, the period covered by this Annual Report on Form 20-F, that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. 
 Item16A. Audit Committee financial expert As of March 31, 2005, 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 requirements to be imposed by Nasdaq on foreign private
issuers, such as Sify, commencing on July 31, 2005. We intend to comply with these rules and
designate a director who will serve as the audit committee financial expert no later than the
effective date of the 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. Type of Service
    
    Fiscal year endedMARCH 31, 2004
    
    MARCH 31, 2005(a) Audit Fees
    
    Rs.8.0 million
    
    Rs.7.4 million(b) Audit Related Fees
    
    Nil
    
    Nil(c) Tax Fees
    
    Nil
    
    Nil(d) All Other Fees
    
    Rs.0.1 million
    
    Nil
 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 changed our US GAAP auditors from KPMG, an Indian partnership (KPMG, India), to KPMG,
LLP, a UK limited liability partnership (KPMG, UK), for the fiscal year ended March 31, 2004 at
the request of KPMG, India. As contemplated and disclosed in the Form 6-K we filed on June 24,
2004, the appointment of KPMG, UK as our US GAAP auditors was expected to be transitory with the
re-appointment of KPMG, India as our US GAAP auditors anticipated upon completion of KPMG, Indias
registration with the U.S. Public Company Accounting Oversight Board (the PCAOB). KPMG, India has notified us of its registration with the PCAOB. The appointment of KPMG, India
as our US GAAP auditors for the fiscal year ended March 31, 2005 has been approved by our audit
committee. We report financial results in accordance with both US GAAP and Indian GAAP. Under the rules
promulgated by the US Securities and Exchange Commission (the SEC), the change from KPMG, UK to
KPMG, India for fiscal year ended March 31, 2005 constitutes a change in the registrants
certifying accountants. The reports of KPMG, UK on our financial statements for each of the fiscal years ended March
31, 2003 and 2004 did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended March 31, 2003 and 2004 and through the date of change of
auditors, there were no disagreements with KPMG, UK 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, UK, would have caused them to make reference to the subject matter in
connection with their reports on the Companys financial statements for such years. There were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. 64




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Our Audit Committee requires pre-approval of all audit and permissible non-audit services to
be performed for the company by its independent auditors, subject to the de-minimus exception for
non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange act of 1934. 
 Item 16D.Exemptions from the Listing Standards for Audit Committees Not applicable. 
 Item 16E.Purchase of Equity Securities by the Issuer and Affiliated Purchasers None. 
 PART III 
 Item17. Financial Statements Not applicable. 
 Item 18. Financial Statements 65




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Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Sify Limited We have audited the accompanying consolidated balance sheets of Sify Limited (formerly known as
Satyam Infoway Limited) and subsidiaries as of March 31, 2005 and 2004, 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, 2005. 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, 2005 and
2004, and the results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2005, in conformity with U.S. generally accepted accounting
principles. The accompanying consolidated financial statements as of and for the year ended March 31, 2005 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
India April 19, 2005 66




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SIFY LIMITED (formerly known as Satyam Infoway Limited) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and as otherwise stated) 
 As at March 31,
    
    
    As at March 31,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    Rs.
    1,325,803
    
    
    Rs.
    1,323,912
    
    
    $
    30,351Cash restricted
    
    
    101,587
    
    
    
    24,904
    
    
    
    571Accounts receivable
    
    
    493,980
    
    
    
    615,286
    
    
    
    14,106Due from employees
    
    
    
    
    
    
    2,063
    
    
    
    47Due from related parties
    
    
    13,030
    
    
    
    33,524
    
    
    
    769Inventories
    
    
    20,759
    
    
    
    29,194
    
    
    
    669Prepaid expenses
    
    
    106,957
    
    
    
    87,162
    
    
    
    1,998Net investment in leases
    
    
    
    
    
    
    9,430
    
    
    
    216Other current assets
    
    
    123,571
    
    
    
    140,285
    
    
    
    3,216Total current assets
    
    
    2,185,687
    
    
    
    2,265,760
    
    
    
    51,943Cash restricted
    
    
    10,146
    
    
    
    7,336
    
    
    
    168Net investment in leases
    
    
    
    
    
    
    19,735
    
    
    
    453Property, plant and equipment-net
    
    
    1,249,798
    
    
    
    1,270,621
    
    
    
    29,129Goodwill and other intangible assets
    
    
    125,622
    
    
    
    171,732
    
    
    
    3,937Investments in affiliated companies
    
    
    140,508
    
    
    
    192,357
    
    
    
    4,410Other assets
    
    
    87,312
    
    
    
    93,241
    
    
    
    2,138Total assets
    
    Rs.
    3,799,073
    
    
    Rs.
    4,020,782
    
    
    $
    92,178LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current installments of capital lease obligations
    
    
    5,851
    
    
    
    6,089
    
    
    
    140Trade accounts payable
    
    
    220,322
    
    
    
    454,466
    
    
    
    10,419Accrued liabilities
    
    
    317,228
    
    
    
    393,727
    
    
    
    9,026Deferred revenue
    
    
    341,953
    
    
    
    409,244
    
    
    
    9,382Due to employees
    
    
    326
    
    
    
    2,326
    
    
    
    53Advances from customers
    
    
    83,670
    
    
    
    69,429
    
    
    
    1,592Other current liabilities
    
    
    56,182
    
    
    
    117,876
    
    
    
    2,702Total current liabilities
    
    
    1,025,532
    
    
    
    1,453,157
    
    
    
    33,314Capital lease obligations, excluding current installments
    
    
    5,151
    
    
    
    3,814
    
    
    
    87Other liabilities
    
    
    51,127
    
    
    
    63,627
    
    
    
    1,459Total liabilities
    
    
    1,081,810
    
    
    
    1,520,598
    
    
    
    34,860Minority interest
    
    
    1,595
    
    
    
    1,595
    
    
    
    37Stockholders equityCommon
stock, Rs.10 par value: 37,500,000 equity shares
authorized; Issued and outstanding: 34,900,993 shares as
of March 31, 2004 and 35,380,278 shares as of March 31,
2005
    
    
    349,010
    
    
    
    353,803
    
    
    
    8,111Additional paid-in capital
    
    
    14,490,037
    
    
    
    14,563,734
    
    
    
    333,877Deferred compensation - employee stock offer plan
    
    
    (14,326
    )
    
    
    (3,416
    )
    
    
    (78
    )Accumulated deficit
    
    
    (12,109,053
    )
    
    
    (12,415,532
    )
    
    
    (284,629
    )Total stockholders equity
    
    
    2,715,668
    
    
    
    2,498,589
    
    
    
    57,281Total liabilities and stockholders equity
    
    Rs.
    3,799,073
    
    
    Rs.
    4,020,782
    
    
    $
    92,178
 (See accompanying notes to consolidated financial statements) 67




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SIFY LIMITED (formerly known as Satyam Infoway Limited) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data and as otherwise stated) 
 Year ended March 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Revenues
    
    Rs.
    1,959,855
    
    
    Rs.
    2,751,623
    
    
    Rs.
    3,554,237
    
    
    $
    81,482Revenue from related parties
    
    
    34,345
    
    
    
    49,561
    
    
    
    59,220
    
    
    
    1,357Total Revenue
    
    
    1,994,200
    
    
    
    2,801,184
    
    
    
    3,613,457
    
    
    
    82,839Cost of revenues
    
    
    1,264,101
    
    
    
    1,476,714
    
    
    
    2,023,942
    
    
    
    46,400Selling, general and administrative expenses
    
    
    1,090,935
    
    
    
    1,208,884
    
    
    
    1,418,757
    
    
    
    32,525Provision for doubtful receivables and advances
    
    
    156,233
    
    
    
    76,487
    
    
    
    57,579
    
    
    
    1,320Impairment of assets
    
    
    246,999
    
    
    
    22,551
    
    
    
    
    
    
    
    Depreciation
    
    
    474,261
    
    
    
    481,810
    
    
    
    502,897
    
    
    
    11,529Amortisation of intangible assets
    
    
    69,907
    
    
    
    50,224
    
    
    
    53,890
    
    
    
    1,235Amortisation of deferred stock compensation expense
    
    
    57,729
    
    
    
    27,946
    
    
    
    10,639
    
    
    
    244Foreign exchange (gain)/loss
    
    
    18
    
    
    
    52,148
    
    
    
    (2,595
    )
    
    
    (59
    )Total operating expenses
    
    
    3,360,183
    
    
    
    3,396,764
    
    
    
    4,065,109
    
    
    
    93,194Operating loss
    
    
    (1,365,983
    )
    
    
    (595,580
    )
    
    
    (451,652
    )
    
    
    (10,355
    )Other income, net
    
    
    52,948
    
    
    
    144,147
    
    
    
    93,324
    
    
    
    2,140Loss before taxes, equity in losses of affiliates
and minority interest
    
    
    (1,313,035
    )
    
    
    (451,433
    )
    
    

    (358,328
    )
    
    
    (8,215
    )Equity in (losses)/profits of affiliates
    
    
    (50,689
    )
    
    
    17,083
    
    
    
    50,752
    
    
    
    1,164Gain on sale of investment in affiliates
    
    
    24,628
    
    
    
    63,059
    
    
    
    
    
    
    
    Minority interest
    
    
    12,564
    
    
    
    79
    
    
    
    
    
    
    
    Losses before income taxes
    
    
    (1,326,532
    )
    
    
    (371,212
    )
    
    
    (307,576
    )
    
    
    (7,051
    )Taxes
    
    
    (2,856
    )
    
    
    (72
    )
    
    
    
    
    
    
    Net loss
    
    Rs.
    (1,329,388
    )
    
    Rs.
    (371,284
    )
    
    Rs.
    (307,576
    )
    
    $
    (7,051
    )Net loss per share
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (8.75
    )
    
    
    (0.20
    )Weighted equity shares used in computing loss per
equity share
    
    
    25,988,095
    
    
    
    34,519,545
    
    
    
    35,156,120
    
    
    
    35,156,120
 (See accompanying notes to consolidated financial statements) 68




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SIFY LIMITED (formerly known as Satyam Infoway Limited) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data and as otherwise stated) 
 Year ended March 31,2003
    
    
    2004
    
    
    2005
    
    
    2005Net loss
    
    Rs.
    (1,329,388
    )
    
    Rs.
    (371,284
    )
    
    Rs.
    (307,576
    )
    
    $
    (7,051
    )Adjustments to reconcile net loss to net cash provided
by/(used in) operating activities:Depreciation, impairment and amortization of intangible
assets and deferred stock compensation
    
    
    854,182
    
    
    
    582,531
    
    
    
    567,426
    
    
    
    13,008Equity in losses/(profits) of affiliates
    
    
    26,061
    
    
    
    (17,083
    )
    
    
    (50,752
    )
    
    
    (1,164
    )Gain on sale of investments
    
    
    (1,495
    )
    
    
    (98,948
    )
    

    
    (15,710
    )
    
    
    (360
    )Loss/(gain) on sale of property, plant and equipment
    
    
    2,552
    
    
    
    (1,990
    )
    
    
    2,757
    
    
    
    63Provision for doubtful receivables and advances
    
    
    156,233
    
    
    
    76,487
    
    
    
    57,579
    
    
    
    1,320Minority interest
    
    
    (12,564
    )
    
    
    (79
    )
    
    
    
    
    
    
    Translation (gain)/loss on cash and cash equivalents
    
    
    7,345
    
    
    
    47,063
    
    
    
    (1,479
    )
    
    
    (34
    )Others
    
    
    6,481
    
    
    
    5,089
    
    
    
    (3,586
    )
    
    
    (82
    )Changes in assets and liabilities:Accounts receivable
    
    
    (65,793
    )
    
    
    (223,074
    )
    
    
    (178,885
    )
    
    
    (4,101
    )Due from employees
    
    
    62,552
    
    
    
    4,870
    
    
    
    4,250
    
    
    
    97Due from related parties
    
    
    (7,879
    )
    
    
    2,986
    
    
    
    (20,494
    )
    
    
    (470
    )Inventories
    
    
    (11,265
    )
    
    
    17,805
    
    
    
    (4,849
    )
    
    
    (111
    )Prepaid expenses
    
    
    (10,030
    )
    
    
    17,828
    
    
    
    19,795
    
    
    
    454Other assets
    
    
    (24,962
    )
    
    
    43,034
    
    
    
    (26,246
    )
    
    
    (602
    )Net investment in sales-type leases
    
    
    
    
    
    
    
    
    
    
    (29,165
    )
    
    
    (669
    )Trade accounts payable and accrued liabilities
    
    
    (78,836
    )
    
    
    120,621
    
    
    
    310,643
    
    
    
    7,122Deferred revenue
    
    
    144,778
    
    
    
    52,656
    
    
    
    67,291
    
    
    
    1,543Advances from customers
    
    
    10,851
    
    
    
    57,499
    
    
    
    (14,241
    )
    
    
    (326
    )Other liabilities
    
    
    32,904
    
    
    
    (42,026
    )
    
    
    74,194
    
    
    
    1,701Net cash provided by/(used in) operating activities
    
    Rs.
    (238,273
    )
    
    Rs.
    273,985
    
    
    Rs.
    450,952
    
    
    $
    10,338Cash flows from investing activities:Expenditure on property, plant and equipment
    
    
    (284,346
    )
    
    
    (342,584
    )
    
    
    (533,197
    )
    
    
    (12,224
    )Proceeds from sale of property, plant and equipment
    
    
    12,055
    
    
    
    12,955
    
    
    
    15,200
    
    
    
    349Expenditure on intangible assets
    
    
    (16,891
    )
    
    
    (2,331
    )
    
    
    (100,000
    )
    
    
    (2,293
    )Expenditure on investment in affiliates
    
    
    29,162
    
    
    
    56,737
    
    
    
    
    
    
    
    Expenditure on acquisition of minority interest
    
    
    
    
    
    
    (940
    )
    
    
    
    
    
    
    Net movement in cash - restricted
    
    
    (22,233
    )
    
    
    62,889
    
    
    
    79,493
    
    
    
    1,823Purchase consideration for acquisition, net of cash
    
    
    
    
    
    
    (32,755
    )
    
    
    
    
    
    
    Proceeds from sale of investments
    
    
    8,579
    
    
    
    257,356
    
    
    
    15,000
    
    
    
    344Net cash provided by/(used in) investing activities
    
    Rs.
    (273,674
    )
    
    Rs.
    11,327
    
    
    Rs.
    (523,504
    )
    
    $
    (12,001
    )Cash flows from financing activities:Acquisition related debt
    
    
    

    
    
    
    30,355
    
    
    
    
    
    
    
    Principal payments under capital lease obligations
    
    
    (1,695
    )
    
    
    (7,317
    )
    
    
    (9,579
    )
    
    
    (220
    )Net proceeds from issuance of common stock
    
    
    760,472
    
    
    
    166,920
    
    
    
    78,761
    
    
    
    1,806Net cash provided by financing activities
    
    Rs.
    758,777
    
    
    Rs.
    189,958
    
    
    Rs.
    69,182
    
    
    $
    1,586Effect of exchange rate changes on cash and cash equivalents
    
    
    (7,345
    )
    
    
    (47,063
    )
    
    
    1,479
    
    
    
    34Net increase/(decrease) in cash and cash equivalents
    
    
    239,485
    
    
    
    428,207
    
    
    
    (1,891
    )
    
    
    (43
    )Cash and cash equivalents at the beginning of the period
    
    
    658,111
    
    
    
    897,596
    
    
    
    1,325,803
    
    
    
    30,394Cash and cash equivalents at the end of the period
    
    Rs.
    897,596
    
    
    Rs.
    1,325,803
    
    
    Rs.
    1,323,912
    
    
    $
    30,351Supplementary InformationCash paid towards interest
    
    
    795
    
    
    
    2,126
    
    
    
    832
    
    
    
    19Cash paid towards taxes
    
    
    20,048
    
    
    
    (29,468
    )
    
    
    12,698
    
    
    
    291Additions to property, plant and equipment represented by
capital lease obligations
    
    
    3,251
    
    
    
    9,737
    
    
    
    7,272
    
    
    
    167
 (See accompanying notes to consolidated financial statements) 69




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##### Table of Contents



SIFY LIMITED (formerly known as Satyam Infoway Limited) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share data and as stated otherwise) Common Stock
    
    
    Additional paid In
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Deferred
    
    
    Accumulated
    
    

Total
Stockholderscapital
    
    
    income
    
    
    other
    
    
    compensation 
    
    
    deficit
    
    
    equityComprehensive
    
    
    employee stockShares
    
    
    Par Value
    
    
    
    
    
    
    
    
    
    

    Income
    
    
    Offer planBalance as of March 31, 2002
    
    
    23,202,176
    
    
    Rs.232,022
    
    Rs.13,649,325
    
    
    
    
    
    (Rs.3,891)
    
    Rs.(74,961)
    
    Rs.(10,408,381)
    
    Rs.3,394,114Issue of common stock
    
    
    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
    
    
    
    
    
    
    
    62,997Comprehensive 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
    
    
    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 investment, 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
    )
    
    
    2,715,668Issue of common stock
    
    
    479,285
    
    
    
    4,793
    
    
    
    73,968
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,761Compensation related to stock option grants
    
    
    
    
    
    
    
    
    
    
    2,287
    
    
    
    
    
    
    
    
    
    
    
    (2,287
    )Amortization of compensation related to stock
option grants
    
    
    
    
    
    
    
    
    
    
    (2,558
    )
    
    
    
    
    
    
    
    
    
    
    13,197
    
    
    
    
    
    
    
    10,639Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307,576
    )
    
    
    
    
    
    
    
    
    

    
    (307,576
    )



    
    
    (307,576
    )Other comprehensive incomeSAB 51 gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,097
    

    
    
    1,097Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307,576
    )Balance as of March 31, 2005
    
    
    35,380,278
    
    
    
    353,803
    
    
    
    14,563,734
    
    
    
    
    
    
    
    
    
    
    
    (3,416
    )
    
    
    (12,415,532
    )
    
    
    2,498,589(7,026
    )Balance as of March 31, 2005 (in U.S.$)
    
    
    35,380,278
    
    
    
    8,111
    
    
    
    333,877
    
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    (284,629
    )
    
    
    57,281
 (See accompanying notes to consolidated financial statements) 70




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##### Table of Contents



SIFY LIMITED (formerly known as Satyam Infoway Limited) and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data and as as stated otherwise)  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, 2005 have been translated into United
States dollars at the noon buying rate in New York City on March 31, 2005 for cable
transfers in Indian rupees, as certified for customs purposes by the Federal Reserve Bank of
New York of U.S. $1 = Rs.43.62. 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, 2005 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, Goodwill and Other Intangible Assets(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, if any. 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. 71




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##### Table of Contents



Revenue recognitionThe operating segments of the Company are:  
    
    Corporate network/data services, which provides private network services, messaging
services and web hosting to businesses;
    
    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 services Corporate 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 e-mail, fax and
domain registration. Generally, these elements are sold as a package consisting of all or
some of the elements. These multiple element arrangements are 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 Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables(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 either through the Companys wireless mode of
broadband delivery or through the carrier exchange (primarily Bharat Sanchar Nigam Limited,
or BSNL, a Government of India entity). However, once commissioned this last mile
connectivity 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. Revenue from
ancillary services such as e-mail, fax 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 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. 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 ratably over the specified period. 72




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##### Table of Contents



Public Internet access is provided to customers through a chain of franchisee operated
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, 2004 and March 31, 2005 were Rs.102.14
million and Rs.107.96 million, respectively. As of March 31, 2005, Sify owned 34 of the 2,471 cybercafés. Internet access revenue is
recognized based on usage by the customer. Online portal services The 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 services The 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 revenues Cost 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. Inventories Inventories 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 equipment Property, 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
expensed 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 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 assets The Company adopted the provisions of SFAS No. 141, Business Combinations(SFAS No. 141),
initiated after June 30, 2001, which requires that all business combinations be accounted
for under the purchase method. 73




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The Company adopted the provisions of SFAS No. 142 effective April 1, 2002. Under SFAS No.
142, the Company no longer amortizes 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
make such assessment, 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 translations The functional and reporting currency of the Company is the Indian Rupee, except that of the
United States subsidiary whose functional currency is the U.S. Dollar. The translation of
the U.S. 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 transactions Assets 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 share In accordance with SFAS No. 128, Earnings per Share, 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 taxes Income 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 costs Advertising costs incurred during the year have been expensed. The total amount of
advertising costs expensed was, Rs.29,329, Rs.40,009 and Rs.42,391 for the years ended
March 31, 2003, 2004 and 2005, respectively. Retirement benefits to employees Provident fund In 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. Gratuity The 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 74




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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, Employers Accounting for Pensions. Stock-based compensation The 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 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 SFAS No. 123 to stock based
employee compensation. Year ended March 31,2003
    
    
    2004
    
    
    2005Net Loss  As reported
    Rs.
    (1,329,388)
    Rs.
    (371,284)
    Rs.
    (307,576)Add: Stock based compensation
expense included in reported
net loss
    
    
    57,729
    
    
    
    27,946
    
    
    
    10,639Less: Total stock based
employee compensation expense
determined under fair value
based method for all awards
    
    
    181,600
    
    
    
    65,461
    
    
    
    55,025Pro forma net loss
    
    
    (1,453,259
    )
    
    
    (408,799
    )
    
    
    (351,962
    )Loss Per Share:Basic and Diluted  as reported
    
    
    (51.15
    )
    
    
    (10.76
    )
    
    
    (8.75
    )Basic and Diluted  pro forma
    
    
    (55.92
    )
    
    
    (11.84
    )
    
    
    (10.01
    )
 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 31,2003
    
    
    2004
    
    
    2005Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    105
    %
    
    131% to 157.3%
    
    103.4% to 116.6%Risk-free interest rate
    
    
    6
    %
    
    
    4.5-5.25
    %
    
    
    7.50
    %Expected term
    
    12-36 months
    
    12-36 months
    
    12-36 months
 Impairment of long-lived assets and long-lived assets to be disposed of The Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets,effective 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 securities The 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, 75




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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 PronouncementsSFAS No. 123(R)Recently, the Financial Accounting Standards Board issued FASB Statement No. 123 (revised
2004), Share Based Payment(SFAS No. 123R), requiring companies to
change their accounting policies to record the fair value of stock options issued to
employees as an expense. Currently, the Company does not deduct the expense of employee
stock option grants from its income statement based on the fair value method as the Company
had adopted the pro forma disclosure provisions of SFAS No. 123. The Company is required to
adopt SFAS No. 123R on April 1, 2006. The unamortized stock compensation expense as of March
31, 2005, determined under the fair value method is approximately Rs. 8,680 ($199). The
Company is evaluating the impact of the standard on the existing grants of employee stock
options and future grants, if any.ReclassificationsCertain prior-years amounts have been reclassified to conform to the current years
presentation.3.
    
    Business acquisitionsSify Network Private Limited ( formerly known as E Alcatraz Consulting Private Limited)The Company acquired the business of Sify Network Private Limited for cash on March 1, 2004.
As a result of this acquisition, the Company offers value-added consulting services, such
as security risk assessment, security policy and procedure consulting and managed security
services, which provide end-to-end security solutions to the Companys corporate clients.
During the fiscal year ended March 31, 2005, the total purchase price has been allocated to
the acquired assets and assumed liabilities as follows: Purchase price
    
    Rs.32,630Direct transaction costs
    
    
    12532,755Allocated to:Net current assets
    
    
    2,909Tangible assets
    
    
    762Intangible assets relating to customer relationship
    
    
    29,084Rs.32,755
  The Company has considered the provisions of SFAS No. 141 and relevant interpretive guidance
for allocation of the purchase price and has estimated the fair value of the customer
contracts, and customer relationship at Rs.29,084 with a weighted average useful life of
five years.4.
    
    InvestmentsIn June 2003, Sify International Inc., a subsidiary of the Company, sold its U.S. 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 (formerly known
as Satyam Institute of E-Business Limited) for a consideration of Rs.277,462. The
Company received Rs.250,000 during the year ended March 31, 2004 and the balance amount has
been withheld by the buyer against a dispute on the land held by the former subsidiary.
After deferring Rs.18,000, the Company recognized a gain of Rs.76,065 on the sale of its
investment. During the year ended March 31, 2005, the company received Rs.150,000 from the
buyer upon vacation of an injuction filed by the aggrieved party and the company recognized
the balance gain of Rs.15,710, net of expenses. 76




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During the year ended March 31, 2004, the Company purchased the remaining shareholding in
Sify Plastics Commerce Limited. No goodwill/intangibles arose on account of this
transaction.5.
    
    Cash and cash equivalentsCash and cash equivalents as on March 31, 2005 amounted to Rs.1,323,912 (Rs.1,325,803 as on
March 31, 2004). This excludes cash-restricted included in current assets of Rs.24,904
(Rs.101,587 as on March 31, 2004) and cash-restricted included in non-current assets of
Rs.7,336 (Rs.10,146 as on March 31, 2004), 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 31,2004
    
    
    2005Letter of Credit
    
    Rs. 25,336
    
    
    Rs. 12,409Against future performance obligation
    
    
    76,251
    
    
    
    12,495Rs.101,587
    
    Rs.24,904
 Cash Restricted  Non current Years ended March 31,2004
    
    
    2005Against future performance obligation
    
    Rs.10,146
    
    Rs.7,336Rs.10,146
    
    Rs.7,336
  The fair values of cash and cash equivalents approximate their carrying values.6.
    
    Accounts receivableAccounts receivable as of March 31, 2004 and 2005 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 31,2004
    
    
    2005Rs.
    
    
    Rs.Due from customers
    
    
    546,513
    
    
    
    724,663Less: Allowance for doubtful debts
    
    
    52,533
    
    
    
    109,377Balance at the end of the year
    
    
    493,980
    
    
    
    615,286
 The activity in the allowance for doubtful accounts receivable is given below: Years ended March 31,2004
    
    
    2005Rs.
    
    
    Rs.Balance at the beginning of the year
    
    
    165,879
    
    
    
    52,533Add : Additional provision
    
    
    76,487
    
    
    
    57,579Less : Bad debts written off
    
    
    189,833
    
    
    
    735Balance at the end of the year
    
    
    52,533
    
    
    
    109,377
 77




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7.
    
    InventoriesInventories consist of: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.CDs
    
    
    501
    
    
    
    213Communication hardware
    
    
    17,646
    
    
    
    26,600Application software
    
    
    1,169
    
    
    
    1,696Others
    
    
    1,443
    
    
    
    68520,759
    
    
    
    29,194
  8.
    
    Sales-Type LeasesThe Companys leasing arrangement consist of leasing various types of routers, modems and
other equipment for establishing virtual private networks and providing bandwidth to its
customers in its corporate connectivity business. The leases are classified as sales-type
leases and expire after a period of three years.The following lists the components of the net investment in sales-type leases as of March
31, 2005: Minimum lease payments receivable
    
    Rs.31,930Less: Unearned income
    
    Rs.  2,765Net investment in sales-type leases
    
    Rs.29,165
 The minimum lease payments for each of the fiscal years are as follows: For the year endingMarch 31,2006
    
    Rs.10,9712007
    
    
    10,9712008
    
    
    9,988
  The Companys leasing operations include sales-type leases with Satyam Computer Services
Limited, a related party, for leasing networking equipment over a period of 3 years with an
annual minimum lease payment of Rs.300.9.
    
    Other current assetsOther current assets consist of: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Vendor advances and deposits
    
    
    34,442
    
    
    
    40,898Advances for expenses
    
    
    15,595
    
    
    
    26,040Accrued income
    
    
    2,028
    
    
    
    2,284Interest earned but not due
    
    
    24,061
    
    
    
    12,491Tax deposits
    
    
    45,875
    
    
    
    58,572Others
    
    
    1,570
    
    
    
    123,571
    
    
    
    140,285
 78




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Vendor advances and deposits is net of a provision of Rs.439 and Rs.Nil for
non-recoverability for the years ended March 31, 2004 and 2005, 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,
which is refundable to the Company.10.
    
    Investments in affiliatesRefco-Sify Securities India Private LimitedThe Company was holding 40% of the outstanding equity share capital of Refco-Sify Securities
India Private Limited (Refco-Sify). During the year ended March 31, 2005, Refco-Sify had a
rights issue, in which the Company chose not to participate. As a result, the Companys
equity ownership in Refco-Sify has been reduced from 40% to 30%. In accordance with the
Companys accounting policy, the Company accounted the difference in the carrying value of
its investment and its share of the book value of net assets as gain through stockholders
equity in accordance with Staff Accounting Bullettin 51 (SAB 51). Due to additional issuance
of Refco-Sify shares, the Company recorded Rs.1,097 as gain on dilution through
stockholders equity. The Company accounted its proportionate share of profit in accordance
with its applicable equity ownership in Refco-Sify.Refco-Sify earned a net income of Rs.97,949 for the year ended March 31, 2005, compared to a
net income of Rs.151,779 for the year ended March 31, 2004. The carrying value of the
investment in Refco-Sify as of March 31, 2004 and 2005 was Rs.140,508 and Rs.192,357,
respectively. Sifys equity in the profit of Refco-Sify for the years ended March 31, 2004
and March 31, 2005 was Rs.38,715 and Rs.50,752, respectively.The summarised unaudited financial information as to assets, liabilities and results of
operations of Refco-Sify is presented below: Balance Sheet As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Current assets
    
    
    3,688,043
    
    
    
    17,60,432Current liabilities
    
    
    (3,398,035
    )
    
    
    (11,85,618
    )Net current assets
    
    
    290,008
    
    
    
    578,814Non-current assets
    
    
    70,007
    
    
    
    69,847Net assets
    
    
    360,015
    
    
    
    644,661Other liabilities
    
    
    
    
    
    
    (3,471
    )Stockholders equity
    
    
    360,015
    
    
    
    641,190
 Statement of Operations For the year ended March 31,2004
    
    
    2005Rs.
    
    
    Rs.Revenues
    
    
    472,280
    
    
    
    507,105Net Profit
    
    
    151,779
    
    
    
    99,785
  Cricinfo Limited and Wisden Cricinfo LimitedThe Company previously held 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. 79




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In February 2003, Cricinfo transferred its net assets (other than the loan payable to the
Company) to a newly formed company incorporated in the United Kingdom, Wisden Cricinfo
Limited. In consideration of such transfer, Cricinfo Limited received a 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 the Company
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, the
Company 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. The Company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 year ended March 31, 2004, the Company sold its entire investments in Wisden
Cricinfo Limited and recognised a gain of Rs.63,059, which was 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. The Company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.11.
    
    Property, plant and equipmentProperty, plant and equipment consist of: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Land
    
    
    5,132
    
    
    
    5,132Building
    
    
    485,156
    
    
    
    485,156Leasehold improvements
    
    
    122,154
    
    
    
    133,937Plant and machinery
    
    
    2,093,116
    
    
    
    2,433,759Computer equipment
    
    
    133,548
    
    
    
    194,266Office equipment
    
    
    67,442
    
    
    
    80,606Furniture and fixtures
    
    
    106,870
    
    
    
    127,690Vehicles
    
    
    19,980
    
    
    
    20,487Software
    
    
    172,533
    
    
    
    204,464Construction-in-progress
    
    
    3,556
    
    
    
    20,8093,209,487
    
    
    
    3,706,306Accumulated depreciation
    
    
    (1,959,689
    )
    
    
    (2,435,685
    )1,249,798
    
    
    
    1,270,621
  Depreciation expense amounted to Rs.474,261, Rs.481,810 and Rs.502,897 for the years ended
March 31, 2003, 2004 and 2005, respectively, which include amortization expense on software
of Rs.41,144, Rs.49,126 and Rs.30,497 for the years ended March 31, 2003, 2004 and 2005,
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 totalling 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. 80




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|12. |  | Goodwill and other intangible assets, net       
|--- |  | ------------------------------------------------
|   
|    |  | Goodwill and other intangible assets consist of:

As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Goodwill
    
    
    14,596
    
    
    
    14,596Technical know-how
    
    
    85,633
    
    
    
    85,633Portals and web content
    
    
    100,360
    
    
    
    100,360Customer contracts and others
    
    
    56,084
    
    
    
    56,084IPVPN Licence fee
    
    
    
    
    
    
    100,000Total
    
    
    256,673
    
    
    
    356,673Less: Accumulated amortization and impairment
    
    
    131,051
    
    
    
    184,941125,622
    
    
    
    171,732




| |  | 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, 2003, 2004 and 2005
was Rs.69,907, Rs.50,224 and Rs.53,890, 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 March 31, 2004,
respectively.
|
| |  | At March 31, 2005, the Companys goodwill and other intangible assets amounted to Rs.14,596
and Rs.342,077, respectively.                                                                                                                                                                                                                                                          



|                                         |  |                  |                      |  |                       |     |         |                           |  |     |         | 
|---------------------------------------- |  | ---------------- | -------------------- |  | --------------------- | --- | ------- | ------------------------- |  | --- | ------- | 
|Acquired and amortized intangible assets |  |                  | As at March 31, 2005 | 
|                                         |  | Weighted average |                      |  | Gross carrying amount |     |         | Accumulated amortization/ | 
|                                         |  | life             |                      |  |                       |     |         | impairment                | 
|Technical know-how fees                  |  |                  | 4.89                 |  |                       | Rs. | 85,633  |                           |  | Rs. | 65,569  | 
|Portals and web content                  |  |                  | 5.00                 |  |                       |     | 100,360 |                           |  |     | 86,839  | 
|IPVPN licence fee                        |  |                  | 15.00                |  |                       |     | 100,000 |                           |  |     | 1,481   | 
|Customer contracts and
others            |  |                  | 4.04                 |  |                       |     | 56,084  |                           |  |     | 31,052  | 
|                                        
|                                         |  |                  |                      |  |                       | Rs. | 342,077 |                           |  | Rs. | 184,941 | 
|                                        



| |  | IPVPN licence fee paid is amortized over 15 years, which is the estimated life of the
licence.
| |  | ----------------------------------------------------------------------------------------------
|
| |  | Estimated amortization expense                                                                



|                   |  |     |        | 
|------------------ |  | --- | ------ | 
|For the year ended |  |     |        | 
|March 31,          |  |     |        | 
|2006               |  | Rs. | 42,141 | 
|2007               |  |     | 18,642 | 
|2008               |  |     | 12,503 | 
|2009               |  |     | 11,999 | 
|2010               |  |     | 6,667  | 

81



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13.
    
    Other assetsOther assets consist of: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Deposits
    
    
    86,110
    
    
    
    92,843Staff advances recoverable after one year
    
    
    1,202
    
    
    
    39887,312
    
    
    
    93,241
  14.
    
    Deferred revenueDeferred revenue includes the amount of unearned income for the following segments: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Corporate network/data services
    
    
    166,648
    
    
    
    234,496Internet access services
    
    
    157,241
    
    
    
    161,765Online portal services
    
    
    2,895
    
    
    
    1,073Other services
    
    
    15,169
    
    
    
    11,910341,953
    
    
    
    409,244
  15.
    
    Capital lease obligationsThe gross amounts and related accumulated depreciation recorded for assets acquired under
capital leases are as follows: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Vehicles
    
    
    19,975
    
    
    
    20,485Less: Accumulated depreciation
    
    
    5,504
    
    
    
    6,39614,471
    
    
    
    14,089
  The following is a schedule of future minimum capital lease commitments as at March 31,
2005: Due for the year ended March 31,

    
    Rs.2006
    
    
    6,5062007
    
    
    3,2022008
    
    
    736Total minimum lease payments
    
    
    10,444Less: Interest
    
    
    541Present value of net minimum capital leases payments
    
    
    9,903Less: Current installments of obligations under capital leases
    
    
    6,089Obligations under capital leases, excluding current installments
    
    
    3,814
 82




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16.
    
    Accrued and Other liabilitiesAccrued liabilities principally comprise of provisions for expenses amounting to Rs.293,369
and Rs.311,247 as at March 31, 2004 and 2005, respectively. Other liabilities include
deposits received from sales partners amounting to Rs.50,877 and Rs.63,376 as at March 31,
2004 and 2005, respectively.17.
    
    Income taxThe provision for income taxes consists of: Year ended March 31,2003
    
    
    2004
    
    
    2005Rs.
    
    
    Rs.
    
    
    Rs.Current tax
    
    
    (2,856
    )
    
    
    (72
    )
    
    
    Deferred tax
    
    
    
    
    
    
    
    
    
    
    (2,856
    )
    
    
    (72
    )
    
    
    
 Pre-tax income and income taxes for the years ended March 31, 2003, 2004 and 2005 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 31,2003
    
    
    2004
    
    
    2005Rs.
    
    
    Rs.
    
    
    Rs.Net loss from operations before taxes
    
    
    (1,326,532
    )
    
    
    (371,212
    )
    
    
    (307,576
    )Enacted tax rates in India
    
    
    36.75
    %
    
    
    35.88
    %
    
    
    36.59
    %Computed expected tax benefit
    
    
    (487,501
    )
    
    
    (133,191
    )
    
    
    (112,550
    )Differences not deductible for tax purposes
    
    
    81,596
    
    
    
    11,225
    
    
    
    15,357Change in valuation allowance
    
    
    405,079
    
    
    
    (152,719
    )
    
    
    142,777Tax rate change of investment in affiliates
    
    
    
    
    
    
    201,170
    
    
    
    7,310Others
    
    
    53,413
    
    
    
    24,230
    
    
    
    (5,440
    )Effect of tax rate change
    
    
    (49,731
    )
    
    
    49,357
    
    
    
    (47,454
    )Total income tax expense
    
    
    2,856
    
    
    
    72
    
    
    
    
  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, 2005 amount to Rs.4,475,488 and expire as follows: Year ending March 31,
    
    Rs.2007
    
    
    101,2372008
    
    
    256,1792009
    
    
    332,4702010
    
    
    1,125,7302011
    
    
    1,099,3622012
    
    
    679,2802013 and thereafter
    
    
    881,230
 83




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##### Table of Contents



Significant components of deferred tax assets and liabilities included in the balance sheet
are as follows: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Deferred tax assets:Carry forward business loss
    
    
    1,502,195
    
    
    
    1,637,693Property, plant and equipment
    
    
    14,469
    
    
    
    22,736Accrual and expenses currently not allowed for tax purposes
    
    
    6,100
    
    
    
    14,161Investment in affiliates
    
    
    339,787
    
    
    
    343,985Carry forward capital loss
    
    
    14,614
    
    
    
    15,279Intangible assets
    
    
    35,623
    
    
    
    Others
    
    
    453
    
    
    
    Accounts receivables
    
    
    18,849
    
    
    
    40,108Total deferred tax assets
    
    
    1,932,090
    
    
    
    2,073,962Less: valuation allowance
    
    
    (1,932,090
    )
    
    
    (2,073,962
    )Net deferred tax assets
    
    
    
    
    
    
    
  18.
    
    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 did not have any effect on the Companys
equity shares or per equity share amounts, as the underlying shares representing ADSs were
unchanged.19.
    
    Common stockVotingEach 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 an
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 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. 84




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##### Table of Contents



20.
    
    Other income, netOther income consists of: For the year ended March 31,2003
    
    
    2004
    
    
    2005Rs.
    
    
    Rs.
    
    
    Rs.Interest expense
    
    
    (1,240
    )
    
    
    (2,126
    )
    
    
    (1,938
    )Other finance charges
    
    
    (8,519
    )
    
    
    (8,882
    )
    
    
    (11,281
    )Interest income
    
    
    31,999
    
    
    
    48,187
    
    
    
    52,759Gain on sale of investments
    
    
    
    
    
    
    82,758
    
    
    
    15,710Others
    
    
    30,708
    
    
    
    24,210
    
    
    
    38,074Other (expense)/income, net
    
    
    52,948
    
    
    
    144,147
    
    
    
    93,324
  21.
    
    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 31,2004
    
    
    2005Rs.
    
    
    Rs.Accumulated benefit obligation
    
    
    8,968
    
    
    
    10,600Change in projected benefit obligationProjected benefit obligation at the beginning of the year
    
    
    11,659
    
    
    
    16,093Service cost
    
    
    4,593
    
    
    
    5,688Interest cost
    
    
    929
    
    
    
    1,100Divestiture/acquisition
    
    
    309
    
    
    
    Actuarial (gain)/loss
    
    
    (1,274
    )
    
    
    (4,057
    )Benefits paid
    
    
    (123
    )
    
    
    (684
    )Projected benefit obligation at the end of the year
    
    
    16,093
    
    
    
    18,140Change in plan assetsFair value of plan assets at the beginning of the year
    
    
    3,720
    
    
    
    4,436Actual return on plan assets
    
    
    269
    
    
    
    267Employer contributions
    
    
    263
    
    
    
    697Acquisition
    
    
    309
    
    
    
    Benefits paid from plan assets
    
    
    (124
    )
    
    
    (684
    )Fair value of plan assets at the end of the year
    
    
    4,437
    
    
    
    4,716Funded status of the plans
    
    
    11,656
    
    
    
    13,424Unrecognized transition obligation (asset)
    
    
    
    
    
    
    Unrecognized prior service cost (benefit)
    
    
    
    
    
    
    Unrecognized net actuarial gain/(loss)
    
    
    3,048
    
    
    
    6,698Accrued benefit cost
    
    
    14,704
    
    
    
    20,122
 85




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##### Table of Contents



For the year ended March 31,2003
    
    
    2004
    
    
    2005The components of net gratuity costs are reflected below:Service cost
    
    
    3,876
    
    
    
    4,593
    
    
    
    5,688Interest cost
    
    
    789
    
    
    
    929
    
    
    
    1,100Expected returns on plan assets
    
    
    (320
    )
    
    
    (351
    )
    
    
    (543
    )Recognized net actuarial (gain)/ loss
    
    
    
    
    
    
    (57
    )
    
    
    (130
    )Net gratuity costs
    
    
    4,345
    
    
    
    5,114
    
    
    
    6,115Principal actuarial assumptions:Discount rate
    
    
    8
    %
    
    
    7
    %
    
    
    8
    %Long-term rate of compensation increase
    
    
    7
    %
    
    
    6
    %
    
    
    6
    %Rate of return on plan assets
    
    
    7.5
    %
    
    
    6
    %
    
    
    6
    %
  The company estimates the long-term return on plan assets at 6% based on the average
long-term rate of return expected to prevail over the next 15 to 20 years on the types of
investments held with LIC.The employers best estimate of contributions expected to be paid to the plan during the year
20052006 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 31,2006
    
    Rs.
    14792007
    
    
    1,6782008
    
    
    2,3812009
    
    
    2,8812010
    
    
    5,0112011 to 2015
    
    
    31,620
  Provident fundThe Company contributed Rs.17,902, Rs.23,137 and Rs.28,242 towards the provident fund during
the years ended March 31, 2003, 2004 and 2005 respectively.22.
    
    Related Party TransactionsThe Company has entered into transactions with the following related parties:  
    
    Satyam Computer Services Limited (formerly the Companys parent company), where the
Company provides connectivity services and software development services for certain
e-learning projects;
    
    Affiliated companies; and
    
    Employees of the Company.  Given below is an analysis of transactions with Satyam Computer Services Limited: As at March 31,2003
    
    
    2004
    
    
    2005Rs.
    
    
    Rs.
    
    
    Rs.Due (to)/from Satyam Computer Services Limited at
beginning of the year
    
    
    8,137
    
    
    
    16,016
    
    
    
    13,030Allocation of facilities costs
    
    
    
    
    
    
    (4,408
    )
    
    
    (1,647
    )Expenses incurred on behalf of the Company
    
    
    (2,897
    )
    
    
    
    
    
    
    Capital expenses incurred on behalf of the Company
    
    
    (9,713
    )
    
    
    (5,376
    )
    
    
    Billings to Satyam Computer Services Limited
    
    
    34,345
    
    
    
    51,455
    
    
    
    48,713Collections from Satyam Computer Services Limited
    
    
    (13,856
    )
    
    
    (44,657
    )
    
    
    (36,005
    )Payment to Satyam Computer Services Limited
    
    
    
    
    
    
    
    
    
    
    9,433Due (to)/from Satyam Computer Services Limited
    
    
    16,016
    
    
    
    13,030
    
    
    
    33,524
 86




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##### Table of Contents



The following is a summary of significant transactions with other related parties: Year ended March 31,2003
    
    
    2004
    
    
    2005Rs.
    
    
    Rs.
    
    
    Rs.Sales to affiliates
    
    
    4,194
    
    
    
    
    
    
    
    Interest on loans
    
    
    1,066
    
    
    
    1,411
    
    
    
    
 The Company has the following amounts due from related parties: As at March 31,2004
    
    
    2005Rs.
    
    
    Rs.Employee loans
    
    
    2,408
    
    
    
    2,461
  The estimated fair value amounts of other employee loans were Rs.2,095 and Rs.2,235 as of
March 31, 2004 and 2005, respectively. These amounts are determined using available market
information and appropriate valuation methodologies. Considerable judgment 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: 2006
    
    Rs.1,8982007
    
    
    337
  23.
    
    Stock based compensation plansA total of 1.8 million equity shares are reserved for issuance under our Associate Stock
Option Plan (ASOP).Employee 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. 87




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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. Weighted average exercise priceShares arising out of option
    

    
    (in Rupees)Year ended March 31,
    
    
    Year ended March 31,2003
    
    
    2004
    
    
    2005
    
    
    2003
    
    
    2004
    
    
    2005Outstanding at beginning of the year
    
    
    63,300
    
    
    
    2,700
    
    
    
    
    
    
    
    338.15
    
    
    
    350.00
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    60,600
    
    
    
    2,700
    
    
    
    
    
    
    
    337.62
    
    
    
    350.00
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at the end of the year
    
    
    2,700
    
    
    
    
    
    
    
    
    
    
    
    350.00
    
    
    
    
    
    
    
    Exercisable at the end of the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average 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 sixths of the warrants:
    
    At the end of two years from the date of the grantThree sixths 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. 88




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##### Table of Contents



Stock option activity under the ASOP 2000 Plan is as follows: Weighted average exercise priceShares arising out of option
    
    
    (in Rupees)Year ended March 31,
    
    
    Year ended March 31,2003
    
    
    2004
    
    
    2005
    
    
    2003
    
    
    2004
    
    
    2005Outstanding at beginning of the year
    
    
    520,540
    
    
    
    396,500
    
    
    
    151,500
    
    
    
    1,657.99
    
    
    
    1,385.88
    
    
    
    214.20Granted
    
    
    15,480
    
    
    
    8,520
    
    
    
    
    
    
    
    49.98
    
    
    
    182.47
    
    
    
    Forfeited
    
    
    58,120
    
    
    
    29,320
    
    
    
    10,391
    
    
    
    1,170.53
    
    
    
    386.23
    
    
    
    171.40Expired
    
    
    81,400
    
    
    
    153,290
    
    
    
    19,396
    
    
    
    3,025.69
    
    
    
    3,265.89
    
    
    
    281.26Exercised
    
    
    
    
    
    
    70,910
    
    
    
    113,943
    
    
    
    
    
    
    
    93.83
    
    
    
    167.36Outstanding at the end of the year
    
    
    396,500
    
    
    
    151,500
    
    
    
    7,770
    
    
    
    1,385.88
    
    
    
    214.20
    
    
    
    105.91Exercisable at the end of the year
    
    
    177,393
    
    
    
    37,270
    
    
    
    990
    
    
    
    2,001.92
    
    
    
    224.01
    
    
    
    107.52Weighted-average grant date fair
value of grants during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 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 warrant quantity:
    
    At the end of one year from the date of the grantFive sixths of the warrant 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: Weighted average exercise priceShares arising out of option
    
    
    (in Rupees)Year ended March 31,
    
    
    Year ended March 31,2003
    
    
    2004
    
    
    2005
    
    
    2003
    
    
    2004
    
    
    2005Outstanding at beginning of the year
    
    
    
    

    
    
    
    
    
    
    1,108,000
    
    
    
    
    
    
    
    
    
    
    
    170.25Granted
    
    
    
    
    
    
    1,128,060
    
    
    
    90,000
    
    
    
    
    
    
    
    170.13
    
    
    
    254.16Forfeited
    
    
    
    
    
    
    20,060
    
    
    
    69,458
    
    
    
    
    
    
    
    163.69
    
    
    
    189.66Expired
    
    
    
    
    
    
    
    
    
    
    5,727
    
    
    
    
    
    
    
    
    
    
    
    281.26Exercised
    
    
    
    
    
    
    
    
    
    
    365,342
    
    
    
    
    
    
    
    
    
    
    
    163.39Outstanding at the end of the year
    
    
    
    
    
    
    1,108,000
    
    
    
    757,473
    
    
    
    
    
    
    
    170.25
    
    
    
    178.35Exercisable at the end of the year
    
    
    
    
    
    
    
    
    
    
    131,589
    
    
    
    
    
    
    
    
    
    
    
    174.61Weighted-average grant date fair
value of grants during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79.79
    
    
    
    157.78
 89




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##### Table of Contents



The following table summarizes information about warrants outstanding at March 31, 2005: Outstanding shares
    
    
    Weighted averagearising out of plan
    
    
    exercise pricein Rupees1999
    
    
    2000
    
    
    2002
    
    
    1999
    
    
    2000
    
    
    2002
    
    
    
    7,770
    
    
    
    757,473
    
    
    
    
    
    
    
    105.91
    
    
    
    178.35
  The following table summarizes information about fixed price options outstanding at March
31, 2005: Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Weighted
    
    
    average
    
    
    Number
    
    
    averageoutstanding at
    
    
    average
    
    
    remaining
    
    
    exercisable at
    
    
    exerciseRange of exercise price
    
    March 31, 2005
    
    
    exercise price
    
    
    contractual life
    
    
    March 31, 2005
    
    
    priceRs.49  Rs.50
    
    
    4,490
    
    
    
    49.98
    
    
    
    0.53
    
    
    
    560
    
    
    
    49.98Rs.163  Rs.376
    
    
    760,753
    
    
    
    178.37
    
    
    
    1.12
    
    
    
    132,019
    
    
    
    174.64Rs.50  Rs.376
    
    
    765,243
    
    
    
    177.62
    
    
    
    
    
    
    
    132,579
    
    
    
    174.11
  24.
    
    Commitments and contingenciesThe company has outstanding performance guarantees for various statutory purposes and
letters of credit totalling Rs.165,820 and Rs.279,865 as of March 31, 2004 and 2005,
respectively. These guarantees are generally provided to governmental agencies.25.
    
    ISP License MattersIn December 2004, the Government of India (GOI) issued guidelines for permission to offer
Virtual Private Network (VPN) services by Internet Service Providers (ISPs). Consequently,
the Company applied for the permission and the GOI has issued a Letter of Intent (LOI) to
the Company on December 30, 2004 for amendment of the existing ISP license to include
provision of VPN services. In January 2005, the Company paid Rs.100,000 as a one time entry
fee and submitted a financial bank guarantee of Rs.10,000 as required by the LOI. The one
time entry fee of Rs.100,000 is evenly amortized over the estimated life of the licence of
15 years.On January 11, 2005 the GOI issued provisional permission to the Company to offer VPN
service in accordance with the new guidelines. Final permission to offer VPN service shall
be effective only after the Company signs the amendment to the license agreement. However
the provisional permission does not carry any terms and conditions relating to the license.The Indian Department of Telecommunications, or DOT, also requires the ISP licensees to pay
an annual fee of 8% of the adjusted gross revenues generated under the ISP license. To date,
the DOT has not issued any guidelines or procedures for implementing this decision. However,
it is our understanding that the license fee provisions will become effective only after
amendments to the license. We believe that this will not have any effect on Sifys net
earnings / losses for periods prior to January 11, 2005. The Internet Service Providers
Association of India (ISPAI) has been contesting the DOT decision. The company has provided
for Rs.5,611 towards 8% annual fee on VPN revenue. 90




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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 31,2003
    
    
    2004
    
    
    2005Rs.
    
    
    Rs.
    
    
    Rs.RevenueService revenue
    
    
    1,681,371
    
    
    
    2,323,033
    
    
    
    2,858,070Initial franchise fee
    
    
    12,818
    
    
    
    102,138
    
    
    
    107,956Installation service revenue
    
    
    84,452
    
    
    
    131,612
    
    
    
    236,5081,778,641
    
    
    
    2,556,783
    
    
    
    3,202,534Product revenue
    
    
    215,559
    
    
    
    244,401
    
    
    
    410,9231,994,200
    
    
    
    2,801,184
    
    
    
    3,613,457Cost of revenues(excluding depreciation and amortization)Products
    
    
    193,711
    
    
    
    213,957
    
    
    
    357,753Services
    
    
    1,070,390
    
    
    
    1,262,757
    
    
    
    1,660,578Annual fee on IPVPN revenue
    
    
    
    
    
    
    
    
    
    
    5,6111,264,101
    
    
    
    1,476,714
    
    
    
    2,023,942
  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 are:  
    
    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 served. 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:International bandwidth refers to bandwidth that is required for access to sites and offices
outside the country. For all these businesses, bandwidth is allocated based on actual
utilization captured by monitoring traffic per IP pool assigned at the egress points. The
Company has packet shapers in the main locations to monitor bandwidth use by each of the
above categories of users. This information is used in determining norms like bandwidth per
port and bandwidth per PC. The actual utilization are cross validated against
assumptions/norms for each business.National bandwidth refers to the inter-city link bandwidth implemented within the country.
Inter-city link bandwidth was allocated based on the number of subscribers or iway
cybercafés at non gateway points and the bandwidth sold to and used by business
enterprises (determined using packet shapers). However, in order to strengthen its
corporate business, the Company enhanced its national backbone to carry Internet traffic to
the international fibre gateways, shifting from hybrid satellite and fibre gateways to fibre
only gateways for international bandwidth. Local exit of international traffic through the
Companys satellite gateways has been reduced and shifted to the national backbone. National
bandwidth costs are now allocated based on international bandwidth allocation ratios because
most of the traffic carried on the national backbone is directed towards the international
gateways. The Company believes that the resulting allocations are reasonable. 91




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Last mile costs related to dial-up access (E1/R2 costs) and spectrum fees for wireless
connectivity that can be directly identified to businesses are allocated directly. Certain
expenses, such as depreciation and technology, which form a significant component of total
expenses, are not 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.The Companys operating segment information for the years ended March 31, 2005, 2004 and
2003 are presented below: Year ended March 31, 2005
    
    (all in Rupees)Corporate
    
    
    Internet
    
    
    OnlineNetwork/Data
    
    
    Access
    
    
    Portal
    
    
    OtherServices
    
    
    Services
    
    
    Services
    
    
    Services
    
    
    TotalRevenues
    
    
    2,023,412
    
    
    
    1,404,876
    
    
    
    103,053
    
    
    
    82,116
    
    
    
    3,613,457Operating expenses
    
    
    (1,345,254
    )
    
    
    (1,361,140
    )
    
    
    (99,303
    )
    
    
    (74,346
    )
    
    
    (2,880,043
    )Equity in (loss)/profit of
affiliates
    
    
    
    
    
    
    
    
    
    
    50,752
    
    
    
    
    
    
    
    50,752Segment operating
income/(loss)
    
    
    678,158
    
    
    
    43,736
    
    
    
    54,502
    
    
    
    7,770
    
    
    
    784,166Corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (620,235
    )Foreign exchange gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,595Other income/(expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,503Profit from sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (567,426
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,821Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss)/profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307,576
    )
 Year ended March 31, 2004
    
    (all in Rupees)Corporate
    
    
    Internet
    
    
    OnlineNetwork/Data
    
    
    Access
    
    
    Portal
    
    
    OtherServices
    
    
    Services
    
    
    Services
    
    
    Services
    
    
    TotalRevenues
    
    
    1,395,498
    
    
    
    1,088,440
    
    
    
    84,233
    
    
    
    233,013
    
    
    
    2,801,184Operating expenses
    
    
    (846,526
    )
    
    
    (1,188,366
    )
    
    
    (100,935
    )
    
    
    (85,277
    )
    
    
    (2,221,104
    )Equity in (loss)/profit of affiliates
    
    
    
    
    
    
    
    
    
    
    17,083
    
    
    
    
    
    
    
    17,083Minority interest
    
    
    
    
    

    
    
    
    
    
    79
    
    
    
    
    
    
    
    79Segment operating income/(loss)
    
    
    548,972
    
    
    
    (99,926
    )
    
    
    460
    
    
    
    147,736
    
    
    
    597,242Corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (540,981
    )Foreign exchange gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,148
    )Other income/(expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,541Profit from sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,059Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (582,531
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,606Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )Net (loss)/ profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (371,284
    )
 92




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##### Table of Contents



Year ended March 31, 2003
    
    (all in Rupees)Corporate
    
    
    Internet
    
    
    OnlineNetwork/Data
    
    
    Access
    
    
    Portal
    
    
    OtherServices
    
    
    Services
    
    
    Services
    
    
    Services
    
    
    TotalRevenues
    
    
    997,976
    
    
    
    674,370
    
    
    
    164,867
    
    
    
    156,987
    
    
    
    1,994,200Operating expenses
    
    
    (677,108
    )
    
    
    (933,751
    )
    
    
    (211,732
    )
    
    
    (106,079
    )
    
    
    (1,928,670
    )Equity in loss of affiliates
    
    
    
    
    
    
    
    
    
    
    (35,884
    )
    
    
    
    
    
    
    (35,884
    )Minority interest
    
    
    
    
    
    
    1,967
    
    
    
    272
    
    
    
    
    
    
    
    2,239Segment operating income/(loss)
    
    
    320,868
    
    
    
    (257,414
    )
    
    
    (82,477
    )
    
    
    50,908
    
    
    
    31,885Corporate expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (573,915
    )Foreign exchange gain/(Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Other income/(expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,190Impairment of investments in
affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,805
    )Impairment of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (246,999
    )Profit on sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,628Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600,256
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,758Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,856
    )Net (loss)/profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,329,388
    )
  28.
    
    Legal proceedingsThe Company 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 re Satyam 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 ADSs 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 $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 $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. Although the Federal District
Court has preliminarily approved the settlement, it is possible that the Federal District
Court may not finally approve the settlement in whole or part. The Company believes maximum
financial exposure under this settlement, in the event that the plaintiffs recover nothing
from the non-settling defendants, is approximately U.S. $3.9 million, an amount which we
believe is fully recoverable from the Companys insurer.The Company is party to additional legal actions arising in the ordinary course of business.
Based on the available information, as at March 31, 2005 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. 93




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##### Table of Contents



Item19. Exhibits Number
    
    Description1.1
    
    Amended Articles of Association of Sify Limited. (1)1.2
    
    Memorandum of Association of Sify Limited. (2)1.3
    
    Amendment of Memorandum of Association. (3)2.1
    
    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). (4)2.2
    
    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). (4)2.3
    
    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). (5)2.4
    
    Registration Rights Agreement dated as of October 7, 2002 by and
between Sify Limited and SAIF Investment Company Limited. (6)2.5
    
    Subscription Agreement dated as of October 7, 2002 by and between Sify
Limited and SAIF Investment Company Limited. (6)2.6
    
    Subscription Agreement dated as of October 7, 2002 by and between Sify
Limited and VentureTech Solutions Private Limited. (6)2.7
    
    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.(6)4.1
    
    Associate Stock Option Plan 2000 (7)4.2
    
    Associate Stock Option Plan 2002 (7)4.3
    
    Form of Indemnification Agreement. (8)4.4
    
    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. (3)4.5
    
    Bank Guarantee, dated as of November 4, 1998. (2)4.6
    
    UUNet Technologies Strategic Alliance Agreement, dated as of April 18,
1997, by and between Sify Limited and UUNet Technologies. (8)4.7
    
    CompuServe Network Services Strategic Alliance Agreement, dated as of
April 18, 1997, by and between Sify Limited and CompuServe
Incorporated. (8)4.8
    
    User Agreement, effective as of April 1, 1999 by and between Sify
Limited and Satyam Computer Services Limited. (2)4.9
    
    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. (9)4.10
    
    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. (9)4.11
    
    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.
(10)4.12
    
    Agreement for the Sale of Shares in CricInfo Limited by and between
Indigo Holdings Limited and Sify Limited. (11)4.13
    
    Subscription Agreement by and among CricInfo Limited, Sify Limited and
the Senior Management. (11)4.14
    
    Agreed Form of Shareholders Agreement by and among CricInfo Limited,
Sify Limited and the Non-SIL Shareholders. (11)
 94




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##### Table of Contents



Number
    
    Description4.15
    
    Letter Agreement between Sify Limited and Indigo Holdings Limited. (11)4.16
    
    Letter Agreement, dated May 17, 2002, between Sify Limited and
CricInfo Limited. (3)4.17
    
    Business Transfer Agreement, dated March 2002, between Sify Limited
and Satyam Computer Services Limited. (3)4.18
    
    Agreement, dated November 10, 2004, between Sify Limited, Satyam
Computer Services Limited, SAIF Investment Company Limited and Venture
Tech Solutions Pvt. Ltd. (12)8.1
    
    List of Subsidiaries.11.1
    
    Code of Conduct and Conflict of Interest Policy (7)12.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer12.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer13.1
    
    Section 1350 Certification of Chief Executive Officer13.2
    
    Section 1350 Certification of Chief Financial Officer15.1
    
    Consent of KPMG
    (2) 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. (3) 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. (4) 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. (5) 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. (6) 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. (7) Previously filed as an exhibit to the Annual Report on Form 20-F filed with the Commission
on June 29, 2004 and incorporated herein by reference. (8) 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. (9) 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. (10) 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. (11) 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. (12) Previously filed as an exhibit to the Report on Form 6-K filed with the Commission on
November 30, 2005 and incorporated herein by reference. 95




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##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf. SIFY LIMITEDBy:
    
    /s/ R. RamarajName:
    R. RamarajTitle:
    Chief Executive Officer & Managing Director By:
    
    /s/ Anil AhujaName:
    Anil AhujaTitle:
    Chief Financial Officer Date: June 30, 2005 96




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##### Table of Contents



INDEX TO EXHIBITS Number
    
    Description1.1
    
    Amended Articles of Association of Sify Limited. (1)1.2
    
    Memorandum of Association of Sify Limited. (2)1.3
    
    Amendment of Memorandum of Association. (3)2.1
    
    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). (4)2.2
    
    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). (4)2.3
    
    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). (5)2.4
    
    Registration Rights Agreement dated as of October 7, 2002 by and
between Sify Limited and SAIF Investment Company Limited. (6)2.5
    
    Subscription Agreement dated as of October 7, 2002 by and between Sify
Limited and SAIF Investment Company Limited. (6)2.6
    
    Subscription Agreement dated as of October 7, 2002 by and between Sify
Limited and VentureTech Solutions Private Limited. (6)2.7
    
    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.(6)4.1
    
    Associate Stock Option Plan 2000 (7)4.2
    
    Associate Stock Option Plan 2002 (7)4.3
    
    Form of Indemnification Agreement. (8)4.4
    
    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. (3)4.5
    
    Bank Guarantee, dated as of November 4, 1998. (2)4.6
    
    UUNet Technologies Strategic Alliance Agreement, dated as of April 18,
1997, by and between Sify Limited and UUNet Technologies. (8)4.7
    
    CompuServe Network Services Strategic Alliance Agreement, dated as of
April 18, 1997, by and between Sify Limited and CompuServe
Incorporated. (8)4.8
    
    User Agreement, effective as of April 1, 1999 by and between Sify
Limited and Satyam Computer Services Limited. (2)4.9
    
    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. (9)4.10
    
    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. (9)4.11
    
    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.
(10)4.12
    
    Agreement for the Sale of Shares in CricInfo Limited by and between
Indigo Holdings Limited and Sify Limited. (11)4.13
    
    Subscription Agreement by and among CricInfo Limited, Sify Limited and
the Senior Management. (11)4.14
    
    Agreed Form of Shareholders Agreement by and among CricInfo Limited,
Sify Limited and the Non-SIL Shareholders. (11)




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##### Table of Contents



Number
    
    Description4.15
    
    Letter Agreement between Sify Limited and Indigo Holdings Limited. (11)4.16
    
    Letter Agreement, dated May 17, 2002, between Sify Limited and
CricInfo Limited. (3)4.17
    
    Business Transfer Agreement, dated March 2002, between Sify Limited
and Satyam Computer Services Limited. (3)4.18
    
    Agreement, dated November 10, 2004, between Sify Limited, Satyam
Computer Services Limited, SAIF Investment Company Limited and Venture
Tech Solutions Pvt. Ltd. (12)8.1
    
    List of Subsidiaries.11.1
    
    Code of Conduct and Conflict of Interest Policy (7)12.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer12.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer13.1
    
    Section 1350 Certification of Chief Executive Officer13.2
    
    Section 1350 Certification of Chief Financial Officer15.1
    
    Consent of KPMG
    (2) 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. (3) 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. (4) 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. (5) 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. (6) 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. (7) Previously filed as an exhibit to the Annual Report on Form 20-F filed with the Commission
on June 29, 2004 and incorporated herein by reference. (8) 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. (9) 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. (10) 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. (11) 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. (12) Previously filed as an exhibit to the Report on Form 6-K filed with the Commission on
November 30, 2005 and incorporated herein by reference.