TWENTIETH ANNUAL REPORT 2005-06

CONTENTS

Corporate Details ...... 2 Notice ...... 5 Directors’ Report ...... 10 Report on Corporate Governance ...... 21 Declaration by CEO regarding Company’s Code of Conduct and CEO/CFO Certification ...... 36 Auditors’ Certificate on Corporate Governance ...... 37 Financial Ratios ...... 38 Auditors’ Report ...... 39 Balance Sheet ...... 42 Profit & Loss Account ...... 43 Cash Flow Statement ...... 44 Schedules ...... 45 Notes to the Accounts ...... 55 Section 212 of the Companies Act, 1956, related to Subsidiary Companies 73 Consolidated Accounts Auditors’ Report on Consolidated Financial Statements ...... 77 Consolidated Balance Sheet...... 78 Consolidated Profit & Loss Account ...... 79 Consolidated Cash Flow Statement ...... 80 Consolidated Schedules ...... 81 Consolidated Notes to the Accounts ...... 88 Board of Directors ...... 107

Annual General Meeting on Wednesday, September 13, 2006, at MC Ghia Hall, Kalaghoda Mumbai at 11.00 a.m. As a measure of economy, copies of the Annual Report will not be distributed at the Annual General Meeting. Shareholders are requested to kindly bring their copies to the meeting.

1 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CORPORATE DETAILS

BOARD OF DIRECTORS (As on 1st August 2006)

Mr. Subodh Bhargava (Chairman) (Independent)

Mr. N. Srinath (Executive Director)

Mr. Ishaat Hussain (Panatone Nominee)

Mr. Kishor Chaukar (Panatone Nominee)

Mr. Pankaj Agrawala (Government Nominee)

Dr. Mukund Rajan (Panatone Nominee)

Mr. N. Parameswaran (Government Nominee)

Mr. P. V. Kalyanasundaram (Independent)

Dr. V.R.S. Sampath (Independent)

Mr. Amal Ganguli (Independent)

Mr. Satish Ranade Company Secretary & Chief Legal Officer REGISTERED OFFICE Videsh Sanchar Bhavan, Mahatma Gandhi Road, Mumbai – 400 001. CORPORATE OFFICE Lokmanya Videsh Sanchar Bhawan Kashinath Dhuru Marg, Prabhadevi, Mumbai – 400 028.

BANKERS Citibank Inc. Indian Overseas Bank Standard Chartered Bank HDFC Bank Hongkong & Shanghai Banking Corporation State Bank of India ICICI Bank Ltd. LEGAL ADVISORS Messrs ANS Law Associates Messrs Mulla & Mulla and Craigie Blunt & Caroe STATUTORY AUDITORS Messrs S.B. Billimoria & Co., Chartered Accountants REGISTRARS & Messrs Sharepro Services (India) Pvt. Ltd. TRANSFER AGENTS Satam Estate, 3rd Floor, Above Bank of Baroda, Chakala Andheri (East), Mumbai - 400 099.

2 REVENUE EARNED 2005-06

Interest 2%

Other Income 3%

Other Traffic Revenue 9%

Enterprise & Carrier Data 31%

Wholesale Voice 55%

DISTRIBUTION OF REVENUE 2005-06

Staff Cost 5%

Reserve 8%

Dividend 4%

Taxes 5%

Depreciation 9%

Operating & Other Expenses 15%

Network Cost 54%

3 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

AVG. CAPITAL EMPLOYED AND ROCE

70000 40 60000 35 50000 30 41948 40938 38342 25 40000 20 30000 19.73

Rs. in Millions Rs. 15 20000 11.91 10 10000 9.00 5 0 0 2003-04 2004-05 2005-06

Average Capital Employed ROCE

EBIDTA

10000 8759 9000 7691 8000 7000 6000 5154 5000 4000 Rs. in Millions Rs. 3000 2000 1000 0 2003-04 2004-05 2005-06

WHOLESALE VOLUME 7000 6746 6000

5000 4282 4000 2967 3000

Minutes in Millions 2000 1000 0 2003-04 2004-05 2005-06

4 NOTICE NOTICE is hereby given that the Twentieth Annual General Meeting of Videsh Sanchar Nigam Limited will be held at 1100 hours on Wednesday, 13 September 2006, at MC Ghia Hall, Bhogilal Hargovindas Building, Second Floor, 18/20 Kaikhushru Dubash Marg, Kalaghoda, Mumbai – 400 023 to transact the following business: 1. To receive, consider and adopt the Balance Sheet of the Company as on 31 March 2006, the audited Profit and Loss Account for the year ended on that date, the Auditors’ Report thereon and the Report of the Board of Directors. 2. To declare a dividend for the financial year 2005-2006. 3. To appoint a Director in place of Mr. N. Srinath who retires at this Annual General Meeting and being eligible offers himself for reappointment. 4. To appoint a Director in place of Mr. Ishaat Hussain who retires at this Annual General Meeting and being eligible offers himself for reappointment. Special Business 5. To appoint a Director liable to retire by rotation in place of Dr. Mukund Rajan who holds office only up to this Annual General Meeting and in respect of whom a notice under the provisions of Section 257 of the Companies Act, 1956 has been received by the Company from a member signifying his intention to propose Dr. Mukund Rajan as a candidate for the office of director. 6. To appoint a Director liable to retire by rotation in place of Mr. P.V. Kalyanasundaram who holds office only up to this Annual General Meeting and in respect of whom a notice under the provisions of Section 257 of the Companies Act, 1956 has been received by the Company from a member signifying his intention to propose Mr. P.V. Kalyanasundaram as a candidate for the office of director. 7. To appoint a Director liable to retire by rotation in place of Dr. V.R.S. Sampath who holds office only up to this Annual General Meeting and in respect of whom a notice under the provisions of Section 257 of the Companies Act, 1956 has been received by the Company from a member signifying his intention to propose Dr. V.R.S. Sampath as a candidate for the office of director. 8. To appoint a Director liable to retire by rotation in place of Mr. Amal Ganguli who holds office only up to the date of this Annual General Meeting and in respect of whom a notice under the provisions of Section 257 of the Companies Act, 1956 has been received by the Company from a member signifying his intention to propose Mr. Amal Ganguli as a candidate for the office of director. 9. To consider and, if thought fit, to pass with or without modification the following Resolution as a Special Resolution: “RESOLVED THAT pursuant to Section 224 A and other applicable provisions, if any, of the Companies Act, 1956, M/s S.B. Billimoria & Co., Chartered Accountants be and are hereby appointed Statutory Auditors of the Company to hold office from the conclusion of this Annual General Meeting until the conclusion of the next Annual General Meeting and to examine and audit the accounts of the Company for the financial year 2006-2007 on such remuneration as may be mutually agreed upon between the Board of Directors and the Auditors, plus reimbursement of service tax, traveling and out of pocket expenses.” “RESOLVED FURTHER THAT the Auditors of the Company be and are hereby authorized to carry out (either themselves or through qualified associates) the audit of the Company’s accounts maintained at all its branches and establishments (whether now existing or acquired during the financial year ending 31 March 2007) wherever in India or abroad.” 10. To consider and, if thought fit, to pass with or without modification the following Resolution as a Special Resolution: “RESOLVED THAT pursuant to Section 309 and other applicable provisions, if any, of the Companies Act, 1956 (the Act) and pursuant to the provisions of Clause 49 I (B) of the Listing Agreement, a sum not exceeding one percent per annum of the net profits of the Company calculated in accordance with the provisions of Sections 198, 249 and 350 of the Act, be paid to and distributed amongst the Directors of the Company or some or any of them (other than the Whole-time Directors), in such amounts or proportions and in such manner and in all respects as may be directed by the Board of Directors or any Committee formed by the Board of Directors and entrusted with such responsibilities, and such payments shall be made in respect of the profits of the Company for each year of the period of five years commencing 1 April 2005.” By Order of the Board of Directors Satish Ranade Dated : 11 August 2006 Company Secretary Registered Office : & Chief Legal Officer Videsh Sanchar Bhavan M.G. Road, Mumbai - 400 001.

5 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

NOTES : 1. A MEMBER ENTITLED TO ATTEND AND VOTE IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE INSTEAD OF HIMSELF AND THE PROXY NEED NOT BE A MEMBER. THE INSTRUMENT APPOINTING A PROXY SHOULD, HOWEVER, BE DEPOSITED AT THE REGISTERED OFFICE OF THE COMPANY NOT LESS THAN 48 HOURS BEFORE THE COMMENCEMENT OF THE MEETING. 2. Members who hold shares in dematerialized form are requested to bring their DP ID and Client ID numbers for easy identification of attendance at the meeting. 3. The statement of material facts pursuant to Section 173 (2) of the Companies Act, 1956, setting out the material facts in respect of the business under all items except item Nos.1 to 4 is annexed hereto. 4. The details regarding the persons proposed to be appointed as Directors have been given in the Annexure attached to the Notice and their brief resume is published elsewhere in the Annual Report. 5. This may be taken as notice of declaration of dividend for 2005-2006 in accordance with Article 93 of Articles of Association of the Company in respect of dividend for that year when declared. 6. Register of members and transfer books of the Company shall remain closed from 16 August 2006 to 22 August 2006 (both days inclusive) for the purpose of ascertaining eligibility to dividend. 7. The dividend as recommended by the Board of Directors, if declared at this Annual General Meeting, shall be paid on or after Wednesday the 20 September 2006. (i) to those shareholders whose names appear on the Company’s Register of Members after giving effect to all valid share transfers in physical form lodged with the Registrar & Transfer Agents (R&T Agents) of the Company on or before Monday, 14 August 2006. (ii) in respect of shares held in electronic form, to those “deemed members” whose names appear in the statements of beneficial ownership furnished by National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) as at the end of business on Monday, 14 August 2006. In respect of shares held in demat mode, the dividend will be paid on the basis of beneficial ownership as per details to be furnished by NSDL and CDSL for this purpose. 8. Pursuant to the provisions of Section 205A(5) of the Companies Act, 1956, dividends for the financial year ended 31 March 1995 and thereafter, which remain unclaimed in the unpaid dividend account for a period of seven years from the date of transfer of the same, will be transferred to the Investor Education and Protection Fund established by the Central Government. The Members and Shareholders who have not encashed their dividend warrant(s) so far for the financial year ended 31 March 1999 or any subsequent financial years are requested to make their claim to the R&T Agents of the Company. According to the provisions of the Act, no claims shall lie against the said Fund or the Company for the amounts of dividend so transferred nor shall any payment be made in respect of such claims. The summary of the unpaid dividend for the past years and the date on which the outstanding amount shall be transferred to Investor Education and Protection Fund on the dates as given in the table below: Date of Balance as on Dividend for Transfer to Investor AGM/Board 30 June 2006 the year Remarks Education & Protection Fund 30 Sept 1999 40,478.50 1998-99 Final Dividend 11 Nov 2006 10 March 2000 543,486.00 1999-00 Interim Dividend 21 April 2007 26 Sept 2000 339,134.00 1999-00 Final Dividend 7 Nov 2007 27 Sept 2001 2,770,900.00 2000-01 Final Dividend 27 Oct 2008 14 Dec 2001 3,054,084.00 2001-02 Interim Dividend 13 Jan 2009 20 Aug 2002 2,388,446.00 2001-02 Final Dividend 19 Sept 2009 2 Sept 2003 1,422,666.00 2002-03 Final Dividend 2 Oct 2010 2 Sept 2004 854,676.00 2003-04 Final Dividend 2Oct 2011 14 Sept 2005 1,007,380.00 2004-05 Final Dividend 14 Oct 2012 Total 12,421,250.50 9. Consequent upon the introduction of Section 109A of the Companies Act, 1956, shareholders are entitled to make nomination in respect of shares held by them in physical form. Shareholders desirous of making nominations are requested to send their requests in Form No. 2B in duplicate (which will be made available on request) to the R&T Agents of the Company. 10. Members are requested to notify any change in their addresses immediately, in any event not later than Monday, 14 August 2006, so as to enable us to despatch the dividend warrants at the correct addresses: a) In case of physical shares to the R&T Agents, M/s Sharepro Services India Private Limited, Satam Estate, 3rd Floor, Above Bank of Baroda, Chakala, Andheri East, Mumbai-400 099. b) In case of shares held in demat form to their depositary participants (DPs).

6 Annexure to the Notice dated 11 August 2006 The Statement of Material Facts pursuant to Section 173 (2) of the Companies Act, 1956. In respect of Item No. 5 Dr. Mukund Rajan was appointed on 6 May 2005 in casual vacancy of Mr. Ratan Tata who was appointed in the 17th AGM held on 2 September 2003. Mr. Ratan Tata being a director liable to retire by rotation would have retired in the ensuing AGM. Under Section 262 of the Companies Act, 1956 and under Article 66C, Dr. Mukund Rajan holds office up to the date till when Mr. Tata would have held the office i.e. till the date of the forthcoming Annual General Meeting. Dr. Mukund Rajan is eligible for appointment as a Director of the Company and the Company has, pursuant to Section 257 of the Companies Act, 1956, received a notice in writing proposing his candidature for appointment. If appointed, Dr. Mukund Rajan will act as a non-executive Director liable to retire by rotation. None of the Directors other than Dr. Mukund Rajan is concerned or interested in the above Resolution. In respect of Item No. 6 Mr. P.V. Kalyanasundaram was appointed as an Additional Director on the Board with effect from 14 September 2005 under Article 66B of the Articles of Association of the Company. Under Section 260 of the Companies Act, 1956 and under the said Article, Mr. P.V. Kalyanasundaram holds office only up to the date of the forthcoming Annual General Meeting. Mr. P.V. Kalyanasundaram is eligible for appointment as a Director of the Company and the Company has, pursuant to Section 257 of the Companies Act, 1956, received a notice in writing proposing his candidature for appointment. If appointed, Mr. P.V. Kalyanasundaram will act as a non-executive Director liable to retire by rotation. For the purposes of Clause 49 of the Listing Agreement with Indian Stock Exchanges, Mr. Kalyanasundaram would be an Independent Director. None of the Directors other than Mr. P.V. Kalyanasundaram is concerned or interested in the above Resolution. In respect of Item No. 7 Dr. V.R.S. Sampath was appointed as an Additional Director on the Board with effect from 14 September 2005 under Article 66B of the Articles of Association of the Company. Under Section 260 of the Companies Act, 1956 and under the said Article, Dr. V.R.S. Sampath holds office up to the date of the forthcoming Annual General Meeting. Dr. V.R.S. Sampath is eligible for appointment as a Director of the Company and the Company has, pursuant to Section 257 of the Companies Act, 1956, received a notice in writing proposing his candidature for appointment. If appointed, Dr. V.R.S. Sampath will act as a non-executive Director liable to retire by rotation. For the purposes of Clause 49 of the Listing Agreement with Indian Stock Exchanges, Dr. V.R.S. Sampath would be an Independent Director. None of the Directors other than Dr. V.R.S. Sampath is concerned or interested in the above Resolution. In respect of Item No. 8 Mr. Amal Ganguli was appointed as an Additional Director on the Board with effect from 17 July 2006 under Article 66B of the Articles of Association of the Company. Under Section 260 of the Companies Act, 1956 and under the said Article, Mr. Ganguli holds office only up to the date of the forthcoming Annual General Meeting. Mr. Ganguli is eligible for appointment as a Director of the Company and the Company has, pursuant to Section 257 of the Companies Act, 1956, received a notice in writing proposing his candidature for appointment. If appointed, Mr. Ganguli will act as a non- executive Director liable to retire by rotation. For the purposes of Clause 49 of the Listing Agreement with Indian Stock Exchanges, Mr. Ganguli would be an Independent Director. None of the Directors other than Mr. Ganguli is concerned or interested in the above Resolution. In respect of Item No. 9 Section 224A of the Companies Act, 1956 provides that the appointment or reappointment of an Auditor or Auditors of the Company at each Annual General Meeting shall be by way of a special resolution if the company is one in which not less than 25% of the subscribed share capital is held singly or in combination thereof by the Central Government, public financial institutions, etc. The Central Government holds about 26.12% of the subscribed and paid-up capital of the Company; and hence, reappoinment of M/s. S. B. Billimoria & Co., Chartered Accountants, the Statutory auditors, is required to be made by way of a Special Resolution. As required under Section 224 of the Act, necessary certificates have been received from them to the effect that their appointment, if made, will be in accordance with the limits specified in Section 224 (1B) of the Act. The Board commends the resolution for acceptance by the members. None of the Directors is interested in this resolution.

7 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

In respect of Item No. 10 Taking in to account the responsibilities of Directors, it is proposed that in terms of Section 309(4) of the Companies Act, 1956, the directors (apart from the the Whole-time Directors) be paid, for each of the financial years of the Company commencing from 1 April 2005, remuneration not exceeding one percent per annum of the net profits of the Company computed in accordance with the provisions of the Companies Act, 1956. Such remuneration can be paid by way of commission with the prior approval of shareholders whereas the same would require prior approval of government if it is paid by way of monthly or periodical payments. The remuneration will be distributed amongst all or some of the Directors in accordance with the directions given by the Board or any sub-committee of the Board formed for the purpose. Under the provisions of Clause 49 I (B) of the Listing Agreement, all fees / compensation (except sitting fees), if any, paid to the non-executive directors including independent directors shall be fixed by the board of directors and shall require previous approval of shareholders in general meeting. The consent of the members and shareholders of the Company is therefore being sought pursuant to the said provisions of the Listing Agreement and the Act. All the Directors of the Company, except the Whole-time Directors, are concerned or interested to the extent of the remuneration that may be received by them. By Order of the Board of Directors Satish Ranade Dated : 11 August 2006 Company Secretary Registered Office : & Chief Legal Officer Videsh Sanchar Bhavan M.G. Road, Mumbai - 400 001.

8 Brief resume of Directors Seeking Appointment/Re-Appointment at the 20th Annual General Meeting

Particulars Mr. N. Srinath Mr. Ishaat Dr. Mukund Mr. P.V. Dr. V.R.S. Mr. Amal Ganguli Hussain Rajan Kalyanasundaram Sampath

Date of Birth 8 July 1962 2 September 5 April 1968 25 February 12 August 1956 17 October 1939 1947 1958

Date of Appointment 13 February 1 July 2002 6 May 2005 9 September 9 September 17 July 2006 2002 2005 2005

Qualifications Graduated as a Graduated in Bachelor of Bachelor of Arts Bachelor of Arts Fellow of the Institute of Mechanical Economics Technology degree in degree in Chartered Accountants in Engineer from from St. from IIT Delhi, history, from History from England and Wales, Fellow IIT (Madras), Stephens Masters and the New the Presidency of Institute of Chartered Post Graduate College, Delhi, Doctorate in College, College, Accountants of India, Diploma in Fellow of the International Chennai, Bachelor of Law Fellow of British Institute Management Institute of Relations from Bachelor of Law degree from of Management, member from IIM Chartered Oxford degree from Madras Law of New Delhi Chapter of (Calcutta), Tata Accountants in University, Tata Madras Law College, Master Institute of Internal Administrative England and Administrative College. of Law degree Auditors, Florida, USA, Services Officer Wales, attended Service Officer and a PHD from Alumnus of IMI, Geneva Advanced the University Management of Madras. Program at Master of Arts Harvard degree in Business School History from the Madurai Kamaraj University

Expertise in Specific Functional General Financial General Eminent Eminent Accounting and Area Management Management Management Lawyer Lawyer Audit

Directorships held in other Tata Tata Sons Tata Arni Vegetable Hughes Communications Public Companies (excluding Teleservices Limited,Tata Teleservices Oil Ltd India Ltd., Flextronics foreign and private companies) Limited, VSNL Steel Ltd., Titan Limited, Software Systems Ltd., Broadband Industries Ltd. , Piem Hotels Tube Investments of India Limited Voltas Ltd, Tata Limited Ltd., HCL Technologies Teleservices Ltd., Samtel Colour Ltd., Ltd.,Tata New Delhi Television Ltd., Industries Ltd., Century Textiles and Tata AIG Industries Ltd., Avtec Ltd., General ICRA Ltd., Maruti Udyog Insurance Co. Ltd. Ltd., Tata AIG Life Insurance Co. Ltd., CMC Limited, Tata Sky Ltd,Tata Refractories Limited

Memberships/Chairmanships of Audit Tata Audit Committee Committees in other Public Committee Teleservices Felxtronics Software Companies Tata Steel Ltd., Limited – Share Systems Ltd., HCL Titan Industries Transfer Technologies Ltd., Samtel Ltd. , Tata Committee Colour Ltd., New Delhi Industries Television Ltd., Century Limited, Tata Textiles and Industries Trustee Ltd., Maruti Udyog Ltd. Company Ltd.,Tata AIG General Insurance Co. Ltd., Tata Teleservices Limited Tata AIG Life Insurance Co. Ltd.

Shareholding In VSNL NIL NIL 15 NIL NIL NIL

9 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

DIRECTORS’ REPORT Dear Shareholders, The directors are pleased to present the annual report and Dividend audited accounts for the financial year ended March 31, The directors are pleased to recommend a dividend of 2006. Rs.4.50 per share for the financial year ended March 31, FINANCIAL PERFORMANCE 2006. The directors propose that profits be appropriated During financial year 2005-06, your Company succeeded in the following manner: in growing each one of its business segments. A total of TABLE 2 3.8 billion voice minutes were carried by the India business (Rs. in Million) which translates into a volume increase of 36% over the previous year. The revenue in the Wholesale Voice segment DESCRIPTION Amount grew by 15.25%, from Rs.18.77 billion to Rs.21.63 billion. The pressure on margins continued during this year as Amount available for appropriation well. The Enterprise and Carrier Data segment reported - balance carried forward 11,859.08 revenue of Rs.12.62 billion, a growth of 12.95% over the - Profit for the year 4,795.42 16,654.50 previous year. The revenues in the ‘Other Services’ segment, which includes TV uplinking, transponder leasing services, Less: retail internet, etc., reported a growth of 15.24% over the - Dividend @45% on the previous year. Consequent to substantial increases in the paid-up capital of Rs.2,850 million 1,282.50 complexities of the Company’s businesses, and its focus - Tax on total dividend 179.87 on growth and globalisation, total expenditure at Rs.32.66 billion in FY 05-06 was higher by 17.57% (Rs.27.78 billion - Transfer to general reserve 479.54 in FY 04-05). VSNL’s profit before tax and exceptional items Surplus carried to balance sheet 14,712.59 increased from Rs.6.33 billion in FY 04-05 to Rs.7.54 billion in FY 05-06. CONSOLIDATED FINANCIAL PERFORMANCE In the previous year, your Company had substantial For the first time, your Company is reporting the exceptional earnings from the disposal of its investments consolidated financial results. The results of the key made in earlier years in international satellite acquisitions made during the year - Tyco Global Network, companies. Teleglobe, and VSNL Broadband Limited - are included in A summary of VSNL’s financial performance for the year is the Company’s consolidated results from their respective as follows: acquisition dates. TABLE 1 For 2005-06, the Company’s total income on a consolidated Audited financial results for the year 2005-2006 (Rs. in Million) basis was Rs.47.97 billion, EBIDTA Rs.6.23 billion and profit Description 2005-06 2004-05 % Change before tax and exceptional items Rs.3.45 billion. Income from operations STRATEGIC OVERVIEW - Wholesale Voice 21,626 18,765 15.25 - Enterprise & Carrier Data 12,618 11,170 12.95 Your Company is evolving into India’s first truly global - Other services 3,565 3,095 15.24 telecommunications company. Today, VSNL is among the world’s top three providers of international wholesale voice Other income 2,288 1,075 113.04 services, and the number one wholesale Voice over Internet Total Revenue 40,097 34,105 17.57 Protocol provider (according to independent published EBITDA margins before exceptional items (%) 23.16 23.28 (0.52) reports). Your Company provides seamless connectivity Depreciation 3,594 2,440 47.30 across the globe to both carriers and enterprises, supported Prior years adjustment – by a state-of-the-art network infrastructure. VSNL’s net expense/(income) (109) - - submarine cable network of over 2,00,000 route kilometres Exceptional items – is one of the world’s largest. Your Company already offers expense/(income) 676 (4,214) (116.04) telecommunication services in Sri Lanka and Nepal, and Profit before tax 6,867 10,540 (34.85) has received the licence to be a strategic partner and Tax 2,072 2,976 (30.38) investor in South Africa’s Second National Operator (SNO). Profit after tax 4,795 7,564 (36.61) As of June 30, 2006, VSNL had 52 subsidiaries in 21 Earnings per share (Rs.) 16.83 26.54 (36.59) countries and about 25% of its employees are located Net worth outside India. (Excluding Capital Reserve) 58,554 55,220 6.04 Meanwhile, in India, your Company continues to be the Normal dividend per share (Rs.) 4.50 4.50 - country’s largest player in international telecommunication Special dividend per share (Rs.) - 1.50 - services and has a strong pan-India domestic backbone. Previous year’s figures have been regrouped wherever necessary. Your Company is also a leading player in the Indian

10 enterprise data market, offering customers a range of WHOLESALE VOICE telecommunication solutions, such as Private Leased Your Company’s largest revenue segment in India is the Circuits, Managed Data Networks and Virtual Private traditional wholesale voice business consisting of Network services. In the retail space, VSNL remains a International Long Distance (ILD) and National Long premier Internet Service Provider, offering a variety of Distance (NLD) voice services. services including connectivity, messaging and Internet telephony. Having pioneered the use of the Internet in International Long Distance (ILD) Voice India, your Company is now a key player in India’s emerging ILD voice services have been traditionally the core business broadband revolution. of your Company. Over the last four years, the international telephony market in India has been pressured by increased VSNL has transformed itself over the last few years by competition, falling rates and lower margins. During 2005- reworking its strategies and repositioning itself. During the 06, VSNL acquired international wholesale voice service year, your Company completed the acquisition of the Tyco provider Teleglobe International Holdings for an enterprise Global Network which is a robust network of international value of US$239 million. Your Company has transformed submarine cable systems and Teleglobe which was one of itself from a single-country operator to a globally the leading global long distance voice and wholesale data competitive, large-scale player, backed by assets that can players. Domestically, your Company acquired Tata Power support its businesses across the globe. VSNL is now Broadband, now known as VSNL Broadband Limited, having among the top three wholesale voice providers in the about 1000 kilometres of optical fibre infrastructure in world, and owns and operates world’s one of the largest Mumbai and Pune; acquired the assets of 7 Star.com Pvt. international networks with coverage to more than 240 Limited, a suburban cable operator in Mumbai offering countries and territories. Your Company also has over 415 broadband services and acquired Direct Internet Limited direct and bilateral relationships with leading international which provides internet and related services voice telecommunication providers and carries over 20 predominantly to small and medium sector enterprise billion minutes of international wholesale voice traffic on customers. Your Company’s overall strategy remains to: annualised basis. • Maintain its leadership in wholesale services with a VSNL retains its position as India’s top ILD services provider, global footprint, new products and enhanced service offering telephone services to more than 200 international levels. destinations. During 2005-06, international settlement rates • Diversify and de-risk its business model and ensure (determining ILD services payments between telecom high growth, by expanding into high-potential newer providers of different countries) remained more or less businesses like enterprise and carrier value added data stable. However, both tariffs and interconnect rates and broadband services. (determining VSNL’s revenues for international calls passed to or from other domestic telecom networks) declined, • Extend and strengthen its global presence in different sustaining the pressure on margins. ways, such as by delivering network and During 2005-06, the Telecom Regulatory Authority of India communication solutions globally, and by expanding (TRAI) reduced the Access Deficit Charge (ADC) on into overseas telecom markets through greenfield incoming ILD calls from Rs.3.25 per minute to Rs.1.60 per ventures or through acquisitions. minute and on outgoing ILD calls from Rs.2.50 per minute • Support all its businesses by selective and strategic to Rs.0.80 per minute. However, from March 1, 2006 expansion and modernisation of its state-of-the-art onwards, telecom operators must also pay a revenue share infrastructure network. of 1.5% of the Adjusted Gross Revenue (AGR) towards ADC. Meanwhile, the Department of Telecommunications (DoT) • Fully leverage synergies with other Tata Group relaxed the licence conditions for international and companies in the telecom and software sectors, to national long distance services, and reduced the entry fee give customers a range of end-to-end solutions. for these businesses from Rs. 250 million and Rs. 1 billion • Continuously improve efficiency, competitiveness and respectively to Rs.25 million each, effective January 1, 2006. customer satisfaction through initiatives such as The licence fee payable by all long distance service quality, cost rationalisation and profit enhancement. providers to the DoT has also been reduced to a uniform 6% of the AGR, effective January 1, 2006. These changes OPERATIONAL REVIEW may serve to raise traffic volumes, although they also raise Your Company operates under three business segments in competitive pressures. India – Wholesale Voice, Enterprise and Carrier Data and From February 13, 2004, VSNL ceased to be the preferred Other Services. VSNL’s investments internationally are carrier for outbound traffic from the public sector access through its wholly owned subsidiary headquartered in providers Bharat Sanchar Nigam Limited (BSNL) and Singapore. Your Company now has major operations spread Mahanagar Telephone Nigam Limited (MTNL). Despite this, across Singapore, Canada, the United States of America, the during 2005-06, outgoing traffic volumes stayed at more United Kingdom, France and other key commercial and or less the same level as in the previous year, while strategically important locations across the globe. incoming traffic volumes increased by 67%.

11 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

This business is now characterised by increased NLD services to all subscribers of TTSL. This attempts to fill competition and falling rates and margins, both in India an important gap in VSNL’s access to end customers. and internationally. Therefore, your Company’s focus is on (Please see Management Discussion and Analysis for increasing volumes and thus revenues, while improving details.) margins by cutting costs. VSNL is capitalising on its long- Calling Cards standing relationships with international carriers, offering them flexible solutions. Your Company has signed Your Company launched Tata Indicom calling cards in 2004. interconnect agreements/arrangements with all domestic While the ‘Global’ calling card was targeted at Indian cellular service providers and private basic operators for outbound travellers and overseas residents, ‘Hello Duniya’ direct termination and pick up of ILD traffic. Simultaneously, was aimed at Indian customers for cheaper and convenient VSNL is restructuring its costs through negotiations with NLD/ILD calling. VSNL stopped the ‘Hello Duniya’ outbound suppliers and carriers, better efficiencies, and re- calling service in March 2005, as directed by TRAI on the engineering of its networks. Your Company is also in the grounds that only access providers (basic service license process of offering higher margin and higher value services or unified access service license holders) can provide such to improve profits in this segment. For example, VSNL is services. In May 2006, the Telecom Dispute Settlement and now a major player in the mobile signalling business Appellate Tribunal (TDSAT) rejected your Company’s globally, supplying wholesale services to mobile operators petition maintaining that VSNL cannot access subscribers for their international roaming and messaging needs. directly and provide outbound calling cards under its NLD/ Your Company believes that its strategic advantage in this ILD license. Your Company believes that calling cards are a business comes from its volumes, reach, and robust globally recognized mechanism for operators to offer retail networks, which are all difficult to replicate. long distance services, and in the absence of CAC / CPS, the only mechanism available to provide customers with A key concern in the ILD voice business is the illegal market choice in India. Your Company is examining its option to (please see Management Discussion and Analysis for a appeal against this TDSAT ruling in the Supreme Court. discussion of regulatory issues). In the past, VSNL had undertaken major initiatives to combat grey traffic, ENTERPRISE AND CARRIER DATA supporting the enforcement authorities who have been The Indian enterprise data market continues to grow at tracking and shutting down illegal operators. These efforts, an annualised rate of 60-70% each year. VSNL’s Enterprise if consistently enforced, will help to curb the grey market. Business Unit serves large, mid-sized and small businesses, National Long Distance (NLD) Voice and its industry-specific solutions encompass banking and financial services, information technology/IT enabled In September 2002, your Company entered the NLD services, industrial and distribution, pharma, petroleum, services market to offer national long distance services to media and entertainment, travel, and Government verticals. its customers, as a logical extension of its international With voice, data and video communications converging, telephony expertise. NLD services now account for a the demand for enterprise data services is growing. In significant component of VSNL’s voice services, and addition to international and national private leased volumes in this segment increased from 1.4 billion minutes circuits (IPLCs and NPLCs), your Company offers a wide in 2004-05 to 2.9 billion minutes in 2005-06. From March range of Internet Protocol (IP) services encompassing 1, 2006, TRAI abolished the per-minute ADC of a uniform internet telephony, MPLS VPNs (Virtual Private Networks), 30 paise per minute on all NLD calls; however, it introduced internet access, managed hosting and other data centre a revenue share-based ADC of 1.5% of the AGR. VSNL services, internet leased lines, mail and messaging services, welcomes the reduction in ADC, which has contributed to video conferencing, website hosting services with security a substantial increase in call volumes and benefits the end back-up and database management services and network customer with lower tariffs. management. Your Company has a robust national network infrastructure VSNL’s telecom service offerings can be seamlessly and interconnect agreements with all basic and cellular integrated across products and geographies, and mobile service operators in the country to carry NLD traffic customised to meet the varied requirements of the to their networks. enterprise sector. The Company continues to extend its The delay in implementing Direct Customer Access reach in the main global markets to provide IP-VPN mechanisms such as Carrier Access Code (CAC) or Carrier services. Pre-Selection (CPS) have resulted in VSNL continuing to VSNL has progressed up the value chain to deliver be absent from the retail voice market. Your Company is consulting and managed solutions to customers. During dependent on its relationships with access providers (fixed 2005-06, the Company significantly expanded its VPN and line and cellular) for wholesale long distance traffic. In this data centre offerings, establishing state-of-the-art regard, your Company’s equity investment in Tata Asynchronous Transfer Mode (ATM) and Multi Protocol Teleservices Ltd. (TTSL) has enabled VSNL to offer ILD and Label Switching (MPLS) networks.

12 after it acquired the narrowband and broadband business VSNL also launched several new offerings. In November of Dishnet, and now serves 125,000 broadband and high- 2005, it introduced the Tata Indicom Web Conferencing speed Internet customers in 43 cities. The Government’s Service powered by the Microsoft Office Live Meeting 2004 broadband policy estimates that India will have 20 Platform. Microsoft and VSNL also announced an alliance million broadband subscribers by end-2010. During 2005- to create rich solutions and services targeted at the 06, VSNL’s broadband business grew by well over 100%, enterprise, small and medium business and consumer keeping pace with the industry’s high growth. VSNL aims segments. to be the forerunner in this service which offers great In July 2005, VSNL announced its intention to partner with growth potential. Thomson, the leading technology and service provider in VSNL has licensed content and services from some of the the media and entertainment space. The two companies best content owners in India and abroad, providing access will offer high quality services and new technologies to to videos, live news, radio channels, feeds from religious the Indian media and entertainment market and also institutions, over 4,200 education modules, more than explore opportunities in managing and delivering content 300,000 music downloads, online tests, games, e-books, for third parties, and developing end-to-end solutions for mobile ring-tones and a host of other services. Additionally, network operators as well as content management and for business users, VSNL offers services like domain distribution solutions. registration, website hosting, Web2SMS, Mail SMS alerts To further strengthen its customer value proposition, VSNL and Bulk Web2SMS. partners with TCS and CMC, the software companies of Last-mile access to the customer is a crucial factor in the the Tata Group, for integrated joint product and service success of a broadband business. Therefore, VSNL is offerings. VSNL also partners with TCS in the international building a Metropolitan Area Network (MAN) in key cities market to leverage TCS’s existing relationships with and continues to evaluate and test newer access and numerous Fortune 500 companies globally. Your Company application technologies. also markets its services through indirect channels catering Wi-Fi and Cybercafes to the small and medium enterprise market. VSNL is now one of India’s largest public broadband access VSNL is extending its services beyond India to enterprises providers, using Wi-Fi hotspots and a chain of cybercafés. globally, through its subsidiaries in different geographies. (Wireless Fidelity or Wi-Fi enables computers, PDAs and The aim is to make inroads into the large and lucrative other computing devices to use high speed Internet global market by developing differentiated services and without any wires or cables, at places which are Wi-Fi offering competitive pricing. This is made possible by enabled, called hotspots.) Today VSNL provides access at VSNL’s low-cost global infrastructure, and by capitalising more than 100 hot spot locations across the country, upon its existing international organisation and employees including railway stations, airports, five star hotels, coffee for sales and marketing initiatives. shops and restaurant chains. VSNL is also tying up domestic OTHER SERVICES and international roaming agreements, through which VSNL was the first company to introduce retail internet VSNL will provide public access to travellers into India and services in India in 1995. Since then, VSNL has been a offer access to VSNL customers at around 50,000 hotspots premier Internet Service Provider, offering a variety of internationally. services including connectivity, messaging and internet Internet Telephony telephony. VSNL is now a significant broadband player and Effective April 2002, the Government of India permitted is currently extending its broadband services infrastructure, Internet Service Providers to offer voice telephony over including last mile connectivity and a content and services the Internet using the Voice over Internet Protocol (VoIP). portal, across all major Indian cities. VSNL has deployed its unique, fully owned internet Dial Up Internet Service telephony infrastructure. This self-managed network allows VSNL continues to lead the dial up market in India in terms VSNL to offer enhanced features, flexibility in billing and of innovations and services for the customer, and offers plans and superior voice quality. VSNL offers both corporate services in 300 towns and cities. However, this business is and retail net telephony services, complementing its voice undergoing fundamental changes, as higher-end users business. Low tariffs in Internet telephony could encourage migrate to similarly-priced broadband services, while low- usage and increase international call volumes. end users are being targeted by basic telephony operators INTERNATIONAL INITIATIVES who have direct access to customers and offer post-paid VSNL’s international operations (VSNL International) are or pay-as-you-use services. VSNL’s strategy in this segment headquartered out of Singapore, through its wholly owned is to retain customers with excellent service and value subsidiary, VSNL Singapore Pte. Limited (VSPL). As on 30 addition, while also capturing those that wish to convert June 2006, your Company has 52 subsidiaries in 21 to broadband. countries and has a direct operating presence with over Broadband Business 1000 employees in several countries in North America, VSNL began offering broadband services in April 2004 soon 13 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Europe and Asia, offering services to both wholesale and later part of 2006. The South African market is a large and enterprise customers. VSNL International is rapidly growing exciting opportunity in its own right, and also provides a its global footprint, with offices currently in Virginia, New future gateway to the rest of Africa. VSNL SNOSPV Pte. Jersey, London, Paris, Madrid, Amsterdam, Frankfurt, Ltd., a wholly-owned subsidiary of VSNL incorporated in Singapore and Tokyo. Singapore, is the investment vehicle for all investments In a parallel international initiative, your Company also aims made by VSNL in the SNO venture. to leverage its expertise to operate telecom services in VSNL Lanka Limited (VLL) countries that are liberalising and opening up their telecom markets. VSNL already participates in a Joint Venture that In June 2003, VSNL Lanka Ltd., a wholly owned subsidiary provides telecom services in Nepal and has a subsidiary set up by VSNL in Sri Lanka, received an External Gateway which holds an External Gateway Operators licence in Sri Operator (EGO) licence. The EGO licence allows VLL to offer Lanka. VSNL, as reported last year, will soon offer telecom ILD voice and data services, which it began providing in services in South Africa through its participation in the February 2004. The Sri Lankan market, growing at an Second National Operator (SNO) process. estimated 20%-25% every year, allows VSNL to increase its sub-continental presence and extend offerings in the VSNL Singapore Pte. Ltd. (VSPL) region to international carriers. VLL has witnessed Your Company set up VSPL in January 2004 as a wholly substantial growth in its very short existence. It was able owned subsidiary. VSPL manages and maintains the to earn cash profits within the first six months of its Singapore landing for the Tata Indicom Cable (TIC). The operations and recorded net profits in the first year of its company also acquires and sells other cable capacity operations. throughout the Asia Pacific region. VSPL has obtained the required FBO license from the Singapore authorities to CUSTOMER SERVICE own and operate facilities used in the provision of telecom VSNL has transformed itself into a customer-focused services. VSPL is also the holding company for all of VSNL’s organisation. The charter of the Customer Service international operations, including TGN and Teleglobe. Organization is to support the entire customer life cycle Acquisition of Tyco Global Network from service delivery to service assurance, including retention and growth. In July 2005, your Company completed the acquisition of TGN, a state-of-the-art undersea cable network that spans To support VSNL’s international presence, the Company is 60,000 kilometres (37,280 miles) and the continents of defining and implementing stringent service delivery North America, Europe and Asia. With the acquisition of standards that adhere to global best practices. In addition, TGN for US$130 million, VSNL is now one of the world’s VSNL has created a dedicated team to bring focus to its largest submarine cable system owners, providing relationship with other carrier partners. submarine cable bandwidth to its customers in multiple In order to support the enterprise and international continents. business functions, VSNL has established a centralized 24x7 Acquisition of Teleglobe International Holdings Limited call centre. Retail and broadband customers are supported In February 2006, your Company completed its acquisition by two other outsourced call centres. The organisation is of Bermuda-based Teleglobe International Holdings Ltd. also providing its expertise in setting up the entire VSNL will leverage Teleglobe’s network and capabilities as customer service function including customer impacting part of its strategy to deliver key mobile, data and voice processes and systems, to support the SNO initiative in offerings to global enterprise customers. Teleglobe serves South Africa. as the product brand for the voice, mobile and IP transit HUMAN RESOURCES wholesale services. VSNL International is the product brand for the Company’s wholesale IPL and ethernet offerings, VSNL has been constantly reviewing its HR policies in order as well as the full enterprise portfolio. to keep pace with the market changes and has embarked on a range of initiatives focusing on creating a positive South Africa -Second National Operator (SNO) work environment that provides employees with ample In February 2005, the South African government selected opportunities for growth and development as well as a consortium of VSNL and Tata Africa Holdings Ltd., the ensuring high levels of motivation and engagement. investment arm of the Tata Group in South Africa, as the Manpower Planning strategic investor in that country’s proposed SNO structure. The equity partners in the SNO are Eskom, Transnet and The manpower requirements are assessed on a regular Nexus and a holding company with 51% stake. VSNL will basis keeping in view the competitive nature of our hold its stake in this holding company with two other industry and talent induction has been done in areas like private consortia. This new venture is allowed to provide Customer Service, Sales, Networks, Finance, etc. Also efforts domestic and international voice and data services, except have been put in to ensure creation of an internal talent mobile services. The SNO received its license in December pool by recruiting and training Graduate Engineer Trainees 2005 and expects to make a business launch during the and Management Trainees.

14 VSNL employed 2,926 employees on March 31, 2006, 5.12 terabits per second. With an estimated life of 25 years, against 2,479 on March 31, 2005. Of these, 2,258 are the new cable enhances significantly India’s connectivity executives and 668 are non-executives. into the Asia-Pacific region and the U.S, via the Pacific. Training and Leadership Development SEA-ME-WE4 The changing business scenario necessitates continuous VSNL is one of the founding members of SEA-ME-WE4, a development of employees in terms of skills and consortium of 16 parties that has set up a cable system competencies in line with the Company’s requirements. between France and Singapore with Mumbai as one of In-house training programs as well as programs with the the landing points. The cable has a design system capability help of external faculty were conducted covering of 1.28 terabits per second with initial capacity of 160 functional, behavioural and management areas. The gigabits per second. This system has an estimated life of Company has implemented a systematic process for 25 years. This new cable enhances significantly India’s orientation and training of new recruits. connectivity into the Asia-Pacific region, Middle East, Europe and the U.S, both via the Atlantic and the Pacific Compensation and benefit practices Ocean. VSNL has been assigned the crucial responsibility Compensation and benefit practices which the Company of network administration and the operation of the had evolved during the period under review aim to be centralised network operating centre located at Mumbai competitive, attractive and innovative and is either global to manage the entire system, thereby giving credibility to or local in orientation depending on what best drives your Company’s skills and technical expertise. The system business performance and rewards individual contribution. was inaugurated for service in November 2005. Performance based pay and performance linked incentive VSNL is already utilising SEA-ME-WE2, SEA-ME-WE3, SAFE, are some of the initiatives that have contributed to attract FLAG and TIC submarine cable systems as part of its and retain key talent, foster a superior performance culture international network out of India. and accomplishment of targets. The benefit packages and VSNL’s submarine cable landing stations in India are personnel policies are continuously being reviewed to give integrated with its domestic NLD network and provide our employees comparable industry and market practices. customers with a choice of bandwidth options. VSNL offers redundancy on the intra Asia, Trans Pacific, Trans Atlantic, Employee Relations continental Europe and U.S long distance routes. VSNL also During the year, harmonious relationships were maintained benefits from mutual restoration agreements between with the employee representative bodies. A significant cable systems in which it participates. These arrangements milestone was the introduction of a Performance help reduce or eliminate the cost of restoration, driving Management System for non-executives, as a consequence down the cost to customers and increasing reliability and of a three-year accord reached on productivity-linked customer service. A cable restoration agreement for VSNL’s incentive and performance linked pay. TIC cable with i2i, a parallel Chennai-Singapore cable, came The Company conducted its second employee satisfaction into force in June 2005. survey in January 2006. Based on the findings, VSNL has NLD Backbone taken up various enterprise and team level issues to VSNL’s domestic long distance network infrastructure enhance satisfaction. includes a 37,000 kilometre fibre optic network and a new INFRASTRUCTURE MPLS based IP-VPN backbone linking over 120 points of presence, which is integrated with the Company’s One of the biggest strengths of your Company is its global, international MPLS network thereby enabling multinational robust, scalable network, with the unique advantage of companies to seamlessly connect deep into India. Your diversity and multiple connectivity options internationally. Company has rolled out its metro ethernet services in eight Your Company operates a total of 26 switches: 5 major cities. international gateway switches and 21 NLD switches. VSNL has over 50 earth stations, ownership in over 100 sub-sea Last Mile and terrestrial cable systems with 200,000 kilometres of In view of the fact that the last mile was not readily fibre and cable, 275 points of presence in 25 countries and available, in order to be able to provide IP VPN services to access to five geo-stationary satellites. Your Company also corporate clients as a part of its ISP offering your Company has seven data centres globally. has invested substantially in Wireless last mile on Multipoint Microwave Distribution System(MMDS) Tata Indicom Cable (TIC) technology and fiber as well as through arrangements with In March 2005, VSNL operationalised its own Tata Indicom cable operators to provide broadband services. In view of Cable (TIC). The state-of-the-art 3,100 km submarine cable the recent amendments in the telecom licenses, the IP VPN system between Chennai and Singapore is VSNL’s first fully services have now become a part of the NLD license and owned undersea cable with an initial capacity of 320 the MMDS as well as the other last mile network can now gigabits per second that can be ultimately scaled up to be utilised for providing services under the NLD license.

15 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Another significant change brought about by the VSNL’s Revenue Assurance function aims to proactively amendment is that the NLD service provider is permitted prevent revenue leakages and ensure robust internal to make its own arrangements for laying the last mile to controls and processes that keep pace with increasing serve its customers directly for provision of leased circuits business complexities, thus moving towards zero tolerance and CUG’s, which was hitherto not permitted. This of revenue leakages. A Revenue Assurance charter and amendment removes a major hurdle in terms of availability manual have been formulated to further structure these of the last mile to VSNL. activities. INTERNAL INITIATIVES Business Process Improvement Your Company continues with various internal initiatives In its constant endeavour for excellence, your Company such as organisation restructuring, profit enhancement, has initiated an exercise to streamline internal processes cost optimisation, quality, customer care and information and institutionalise a culture of continuous improvement. technology to compete effectively, improve organisational The internal audit and revenue assurance teams actively flexibility and respond quickly to customers. Some contribute to sustaining process improvement efforts. important initiatives are: Senior management regularly tracks implementation of improvement ideas. Business Excellence Your Company has been re-inventing its business model Enterprise Risk Management and transforming itself in tandem with business and VSNL is establishing an enterprise-wide risk management regulatory changes. To help drive the transformation, VSNL (ERM) framework to take advantage of opportunities and is implementing the Tata Business Excellence Model optimally manage risks, as well as to duly comply with (TBEM), a framework that lays down best practices in areas clause 49 of the Listing Agreement. In line with VSNL’s like leadership, strategy, customer and market focus, commitment to delivering sustainable value, this knowledge management, human resources, process framework aims to provide an integrated and organised management planning, customer service and social approach for evaluating and managing risks. responsibility. During the past year, VSNL has made further FIXED DEPOSITS progress in implementing TBEM, with many continuous improvement projects underway and extensive employee VSNL has not accepted nor does it hold any public participation. deposits. Amongst the many initiatives undertaken, your Company STATUTORY INFORMATION AND DISCLOSURES became the world’s first telecom service provider to obtain Information in accordance with the provisions of Section the TL 9000 certification (a set of quality system metrics 217 (2A) of the Companies Act, 1956, read with the designed for the telecom industry, encompassing ISO 9001 Companies (Particulars of Employees) Rules, 1975, as and other best practices). Your Company is also the first amended, regarding employees is given in Annexure ‘II’ to telecom service provider in India to obtain the BS7799 the Directors’ Report. There are no particulars to be certification. disclosed pertaining to the year under review, in respect In line with a Tata Group priority, your Company has been of R&D and technology absorption as required under actively promoting innovations. In the first year of the Companies (Disclosure of Particulars in the Report of the initiative, VSNL has registered six copyrights for innovation Board of Directors) Rules, 1988. For the purpose of Form ‘C’ done by its employees. VSNL is also a member of the Tata under the said rules, foreign exchange earnings were Knowledge Centre, a key initiative started by Tata Quality equivalent to Rs.17,120 million and foreign exchange Management Services (TQMS) this year. outgo was equivalent to Rs. 7,958 million. There are no qualifications contained in the report of the statutory Your Company is successfully running the Six Sigma Green auditors for the year 2005-06. Belt and Black Belt programmes, and has completed more than 100 projects over the last year, with many more in SUBSIDIARIES the pipeline. The Statement pursuant to section 212 of the Companies Compliance with section 404 of Sarbanes Oxley Act, Act, 1956 containing details of the Company’s subsidiaries 2002 is attached. The consolidated financial statements of the Company and its subsidiaries, prepared in accordance with Pursuant to its listing on the New York Stock Exchange, accounting standard 21 (AS 21) prescribed by The Institute VSNL must comply with section 404 of the Sarbanes Oxley of Chartered Accountants of India, form part of the annual Act by March 2007, which lays down requirements for internal control over financial reporting in the Company. report and accounts. The Company has been granted VSNL continues to make rapid progress towards exemption from attaching the accounts etc., of its compliance with these stringent requirements. subsidiary companies with the balance sheet of the parent company. These documents will be provided on request Revenue Assurance and Cost Reduction to any shareholder wishing to have a copy, on receipt of VSNL continues with its ongoing cost reduction exercise such request by the deputy company secretary at the that began in September 2002, and has successfully registered office of the Company. These documents will completed several cost reduction projects as a part of its also be available for inspection by any shareholder at the continuous improvement activities. registered office of the Company.

16 THE BOARD OF DIRECTORS VSNL is sensitive towards environmental, ecological and biodiversity concerns arising out of its operations. Towards The VSNL Board presently consists of ten Directors. that end, VSNL has also become the first telecom service Mr. Subodh Bhargava took over as Chairman of VSNL with provider in India to obtain ISO 14001 Certification. effect from April 11, 2005. Dr. Mukund Rajan joined the Board on May 6, 2005. Mr. N. Parameswaran, Government MANAGEMENT OF BUSINESS ETHICS (MBE) Nominee Director, joined the Board with effect from August 30, 2005 and on September 14, 2005, Mr. P.V. Consistent with the Group’s policy, VSNL is systematically Kalyanasundaram and Dr. V.R.S. Sampath, Independent implementing the Tata Code of Conduct. VSNL has put in Directors, joined the Board. On 17 July 2006, Mr. Amal place an organisational structure and a process to Ganguli, Independent Director, joined the Board of VSNL. implement and improve ethical standards and practices, and began implementing the Tata Code of Conduct in On April 11, 2005, Mr. Ratan Tata resigned as a Director of 2003-04. VSNL conducts regular seminars, quiz VSNL; on August 10, 2005, Mr. Rakesh Kumar, government competitions, ethics awareness campaigns and workshops nominee Director, resigned as Director of VSNL; on to sustain the momentum and to strengthen ethical values September 9, 2005, Mr. Vivek Singhal and Dr. Ashok and practices among various stakeholders. Jhunjhunwala, Independent Directors, resigned as Directors of VSNL; on November 25, 2005, Mr. F.A. Vandrevala, Director, DIRECTORS’ RESPONSIBILITY STATEMENT resigned as Director of VSNL and on March 21, 2006, Mr. Pursuant to Section 217(2AA) of the Companies Act, 1956, Suresh Krishna, Independent Director, resigned and they the Directors, based on the representations received from accordingly ceased to be Directors on the Board of VSNL the operating management, confirm that- from the respective dates. For details about the Directors, please refer to Point 2 of the Report on Corporate • In the preparation of the annual accounts, the Governance below. The Board places on record its applicable accounting standards have been followed appreciation for the services rendered by the outgoing and there are no material departures; Directors. • They have, in the selection of the accounting policies, In accordance with the provisions of the Companies Act, consulted the statutory auditors and have applied 1956 and the Company’s Articles of Association, Mr. N. them consistently and made judgements and Srinath and Mr. Ishaat Hussain retire by rotation at the estimates that are reasonable and prudent so as to ensuing annual general meeting and being eligible, offer give a true and fair view of the state of affairs of the themselves for reappointment. Company at the end of the financial year and of the profit of the Company for that period; In accordance with the provisions of the Companies Act, 1956 and the Company’s Articles of Association, Dr. • They have taken proper and sufficient care, to the Mukund Rajan, Mr. P.V. Kalyanasundaram, Dr. V.R.S. Sampath best of their knowledge and ability, for the and Mr. Amal Ganguli hold office only up to this Annual maintenance of adequate accounting records in General Meeting; notices under the provisions of section accordance with the provisions of the Companies Act, 257 of the Companies Act, 1956 have been received by 1956, for safeguarding the assets of the Company and the Company from members signifying their intention to for preventing and detecting fraud and other propose them as a candidate for the office of Director. irregularities; None of the Company’s directors are disqualified from • They have prepared the annual accounts on a going being appointed as Directors as specified in Section 274 concern basis. of the Companies Act, 1956 as amended by the Companies ACKNOWLEDGMENTS (Amendment) Act, 2000. The Directors would like to express their thanks for the CORPORATE GOVERNANCE hard work and dedication of every employee. The Directors Pursuant to Clause 49 of the listing agreements with the appreciate the support of various Ministries and stock exchanges, a Management Discussion and Analysis, departments of the Government of India and the DoT. The Corporate Governance Report and Auditors’ Certificate Directors are also grateful to the Company’s stakeholders regarding compliance of conditions of Corporate and partners including its customers, shareholders, bankers, Governance are made a part of the annual report. solicitors, suppliers and foreign telecom administrations CORPORATE SUSTAINABILITY INITIATIVES for their support. As a member of the Tata family, VSNL is committed to the On behalf of the Board of Directors Group’s philosophy of improving the quality of life in the communities we serve. VSNL has a Corporate Social Subodh Bhargava Responsibility (CSR) Policy and is a member of the Tata Dated: 11 August 2006 Chairman Council for Community Initiatives (TCCI). The Company fosters an internal culture of volunteerism and contributes Registered Office : to the socio-economic development of the communities Videsh Sanchar Bhavan it operates in, through financial and other assistance to M. G. Road, various causes and organisations. Mumbai - 400 001.

17 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

ANNEXURE 1: MANAGEMENT DISCUSSION AND ANALYSIS

INDUSTRY ANALYSIS capability of Indian corporates to deliver goods and The Indian telecom industry has changed significantly over services on a global basis is opening up new customers the last decade with all its segments opening to and geographies for this business. Second, there is competition. This market is now highly competitive, significant growth in the existing customers’ end complex and evolving rapidly, with numerous service businesses. Banking and financial services (BFSI), offerings of different kinds, including fixed-line, mobile, information technology (IT), and BPOs/ Call Centres are internet, long distance and various data services. India’s some examples of high growth sectors. telecom market is growing rapidly and by 2010, telecom A combination of these two factors has created a platform is expected to be a Rs.1,380 billion sector, contributing for VSNL’s Enterprise Business Unit to expand the existing 5.4% to India’s GDP. business and create a new portfolio of services. According to the latest figures from TRAI, during 2005-06, Internet and Broadband Services the mobile subscriber base increased approximately 73%, Broadband in India is a developing story with strong from 52 million to over 90 million, while the fixed growth expected over the next few years. Broadband subscriber base increased approximately 8% from 46 services to residential homes emerged in early 2005. million to 50 million. During the year, the subscriber base Although the growth in broadband subscribers has been for internet services grew 25%, from 5.5 million to 6.94 slow in comparison to mobile, predominantly due to the million. Broadband subscribers exceeded 1.3 million as on inability to demonstrate a unique value proposition to the March 31, 2006. STD charges fell substantially after market other than to enterprises and a small group of announcement of new Interconnect Usage Charge (IUCs) users. However, due to the recent focus of broadband with effect from March 1, 2006, international private leased players on bundled services like the introduction of IPTV, circuit charges dropped by between 35-70%, and the market may achieve higher growth rates within a broadband tariffs fell by 40-50%. The rapid growth in this couple of years. By the end of March 2006, the pace of market, combined with falling tariffs, offers great potential broadband deployments had already quickened and the demand for various services of VSNL. total number of broadband subscribers in the country International Long Distance Voice (ILD) crossed the one million mark for the first quarter of 2006. The combined ILD traffic to and from India has grown from India’s entertainment industry is large, with cable revenues about seven billion minutes in 2004-05 to about 10 billion alone estimated at Rs.157 billion in 2005. The right mix of minutes in 2005-06, an increase of approximately 50%, with content and information could help to proliferate a total revenue of nearly Rs.20 billion. The increase in broadband usage among Indian consumers in the future. outgoing traffic is an effect of the dramatic increase in PREMATURE TERMINATION OF MONOPOLY AND mobile subscribers coupled with the decrease in ILD calling COMPENSATION rates. At the same time, the increased global expansion of Indian corporates and emergence of India as a global The Government of India (GoI) allowed private players into services center has led to an increase in incoming ILD the ILD business from April 1, 2002, terminating VSNL’s traffic. exclusivity two years ahead of schedule, and compensated VSNL with a package of benefits. GoI had given assurance National Long Distance Voice (NLD) prior to disinvestment that GoI would consider additional The increased mobile penetration has also resulted in compensation if found necessary on a detailed review, significant growth in the NLD traffic. The NLD traffic has when undertaken. However, prior to the disinvestment of grown by over 70% from 30 billion minutes in 2004-05 to VSNL in February 2002, GoI granted a dispensation as full 48 billion minutes in 2005-06. The increased competition and final settlement of every sort of claim against along with regulatory initiatives has reduced the gap preponing of ILD de-monopolisation of VSNL by two years. between NLD and local tariffs. Further reduction in coming VSNL had been pursuing GoI for considering additional years is expected to drive growth further, with NLD traffic compensation. Since legalities warranted the filing of a expected to almost double to 80 billion minutes (TRAI plaint with the High Court within the stipulated time to forecasts) over the next year. ensure that the claim is not barred by limitation, VSNL has Enterprise Data Services filed a claim in the Mumbai High Court. Meanwhile, the Indian corporate segment has also been DEMERGER OF SURPLUS LAND growing at a very healthy rate, with enterprise data Under the terms of the share purchase and shareholders’ volumes growing almost 100%. Even coupled with the 35- agreements signed between the parties at the time of 40% price drop, the industry growth in revenue terms has privatisation, it was agreed that certain identified lands been a healthy 20-30% in the past financial year. There are would be demerged into a separate company. It was two key drivers for this growth. First, the enhanced further agreed that if for any reason the Company cannot

18 hive off or demerge the land into a separate entity, or through services like calling cards. alternative courses as stipulated in the share purchase and Delay in Implementation of CAC Regime shareholders’ agreement would be explored. A draft scheme of demerger has been presented to the VSNL The Carrier Access Code (CAC) regime was to have been Board, and the parties to the shareholders’ agreement are implemented in phases for different segments of the long currently examining the legality and feasibility of distance sector, with the final implementation of Carrier implementing the scheme. The land identified for Pre Selection (CPS) to be completed by December 2003. demerger at different locations measures 773.13 acres, and Carrier selection gives subscribers the option to either pre- carries a book value (as indicated in the accounts) of Rs.1.64 select a long distance carrier for all ILD calls, or choose a million. provider for each call by dialling a carrier access code before making a call. Customers can then freely choose IMPORTANT HISTORICAL EVENTS AT VSNL their long distance carrier based on competitiveness and Disinvestment quality, rather than the choice being made by access VSNL ceased to be a Public Sector Undertaking (PSU) on operators, as is the case at present. February 13, 2002 when the Government of India, which However, implementation of the CAC regime has been owned 52.97% of VSNL’s equity, divested 25% stake to the delayed due to technical and other reasons. In view of the Tata Group as a strategic partner along with the right to intense competition and the fact that other players are manage the Company. Following its subsequent open offer integrated service providers, early implementation of the for a further 20% of VSNL’s equity, the Tata Group is the CAC regime is important to allow a stand-alone long Company’s biggest shareholder with a holding of over 45% distance operator such as VSNL to develop its own as of June 30, 2006, while GoI is VSNL’s second-largest customer base. The delay in implementation of the CAC shareholder with a 26.12% stake. regime is a cause of concern for VSNL. The Company hopes Investment in TTSL that this regime, which is essential to the survival of stand- alone ILD and NLD operators and is a fair entitlement of In 2002, VSNL was entirely dependent on the public sector subscribers seeking competitive service options, will be incumbent access providers and other cellular and basic implemented at the earliest. service providers to route their traffic through VSNL. It became imperative for VSNL to acquire an end-customer Regulatory Environment and Tariffs base of its own. The VSNL Board had accordingly decided Most of VSNL’s services including ILD, NLD and internet to invest in Tata Teleservices Ltd. (TTSL). At the time the services are operated under licences from the DoT, and investment was approved, TTSL was present in crucial the Company is subject to the terms and conditions telecom circles across India that yielded over 65% of the included therein. As India continues to liberalise its telecom country’s telecom revenues. TTSL has subsequently taken sector and the regulatory regime keeps pace with the additional licences that will give it nation-wide coverage. changing telecom scenario, it is possible that there may VSNL’s investment in TTSL now gives the Company be interpretational differences on the guidelines, licence substantial access to end customers across the entire conditions etc. leading to the need for VSNL to defend its country. VSNL’s total investment in TTSL’s equity as on position in case of any notice etc. from the regulator or March 31, 2006 stood at Rs.10.11 billion (16.14%). VSNL’s licensor. effective holding in TTSL stands at 14.14% as of March 31, TRAI has recommended norms for a Unified Licensing 2006. Regime (ULR), which the DoT is considering. If RISKS AND CONCERNS implemented, these norms may increase competitive Like all companies, VSNL is exposed to certain risks and pressures. concerns in the course of its business: The telecom environment in the country has been further End Customer Ownership liberalized with significant changes in the NLD and ILD Licenses. Pursuant to the Press Note No. 5 dated November An important concern for the Company on its voice 3, 2005 issued by the Department of Industrial Policy and business continues to be VSNL’s lack of direct access to Promotion, Ministry of Commerce and Industry, end customers. VSNL is dependent on cellular and basic Government of India, the DoT vide its directives dated telecommunication service providers to route the national December 14, 2005 conveyed certain amendments to the long distance and international calls of their customers ILD and NLD licenses. The foreign Direct Investment ceiling through VSNL. Some of these operators are also has been enhanced from 49% to 74 % with some stringent competitors of VSNL in the long distance and other guidelines regarding remote access and the same has been markets. It would be a serious disadvantage to VSNL not made applicable to all telecom service providers to have access to a large base of customers in order to irrespective of the level of foreign direct investment. This compete for its business. VSNL has also been pursuing will affect the efficient monitoring and maintenance of implementation of Direct Customer Access either through international networks. The entry barriers for the telecom the long awaited Carrier Access Code (CAC, which allows licenses have also been substantially reduced by subscribers to choose their long distance provider) regime prescribing an entry fee of Rs. 2.5 crores each for ILD and

19 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

NLD licenses which is expected to lead to a number of International Long distance services by the players entering the field leading to adverse effect on Department of Telecommunications effective January Company’s margins. 1, 2006 is likely to intensify competition in these The tariffs charged by telecommunication service providers sectors. in India including VSNL are subject to TRAI regulations. Integration of International Acquisitions VSNL periodically renegotiates interconnect agreements with various domestic mobile service operators and basic VSNL has embarked on an aggressive growth strategy in telecom service providers; and settlement rates with which acquisitions play an important role. Further, a large international carriers. The consequent revisions could have part of VSNL’s operations are now in international markets. a material effect on VSNL’s operations and financial Integrating the acquisitions and managing operations in condition. diverse international locations would be critical to the success of VSNL’s plans. The grey market and the IUC regime On January 24, 2003, the Telecom Regulatory Authority of Economic Conditions India (TRAI) decided to introduce the interconnection Downturns in the Indian, regional and global economies usage charge (IUC) regime to govern inter-operator could have a material adverse effect on the Company’s settlements for calls passed between different networks short-term business and prospects. VSNL’s operations could and implemented the system from May 1, 2003. The IUC be affected by adverse developments in the operations of includes the cost of the origination/termination of a call some of its key overseas business associates. and an inbuilt Access Deficit Charge (ADC), which makes up for below-cost monthly rentals and local call charges Exchange Rate Parity for fixed telephone connections in rural areas. A significant portion of Company’s revenues is received in High ADCs had encouraged grey market ILD services, foreign exchange. Similarly, a large portion of its costs is especially in the larger cities. Illegal international route incurred in foreign exchange. Hence, the parity of the rupee operators offer cheaper services since they do not pay ADC. to the US dollar and the SDR to the US dollar can have According to various market estimates these operators take significant impact on the Company’s revenues. Therefore, a share of as much as 30%-40% of the incoming the Company partially hedges its foreign exchange risk. international long distance traffic into India. These INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY illegitimate operators take away the business of licensed providers and deprive the Government of income since VSNL has a well-developed internal control system and licence fees are revenue based; they also pose a threat to has also implemented the SAP system for accounting. the security of the country since such grey calls cannot be Internal control systems for the newly acquired businesses monitored. are being reviewed and will be streamlined. The financial powers of various executives are clearly defined in the During 2005-06, TRAI reduced the ADCs on incoming ILD calls from Rs. 3.25 to Rs. 1.60 per minute and from Rs.2.50 delegation of powers. Technical and financial operations to Rs.0.80 per minute on outgoing ILD calls, and abolished are controlled by state-of-the-art technology and systems. the per minute based ADC on NLD calls of Rs.0.30 per The accounts of the Company are subjected to statutory minute, effective March 1, 2006. However, a revenue share audit. based ADC of 1.5% of the AGR has been introduced CAUTIONARY STATEMENT effective from March 1, 2006. The reductions may have an impact on curbing illegal operations and increasing Statements in the directors’ report and management volumes of legitimate carriers like VSNL. discussion and analysis describing the Company’s Increased Competition objectives, projections, estimates and expectations may be ‘forward-looking statements’ within the meaning of The de-regulation of the Indian telecom market exposes applicable securities laws and regulations. Actual results the Company to increased competition: could differ substantially or materially from those • The Internet Service Provider (ISP) business is intensely expressed or implied. Important factors that could make a competitive and has a large number of players. difference to the Company’s operations include economic • ISPs are allowed to provide Internet telephony calls conditions affecting demand/supply and price conditions overseas. Though, the quality of such service may not in the domestic and overseas markets in which the be comparable to traditional ILD calls, it may be Company operates, changes in government regulations, affecting VSNL’s ILD business as also the Company’s policies, tax laws and other incidental factors. Further, the own Internet telephony services. Company retains the flexibility to respond to fast-changing • VSNL has entered new businesses such as the national market conditions and business imperatives. Therefore, the long distance and broadband businesses, where there Company may need to change any of the plans and are several potential and existing competitors. projections that have been outlined in this report, Relaxation of licensing conditions for National and depending on market conditions. *** 20 REPORT ON CORPORATE GOVERNANCE FOR THE YEAR 2005-06 (In accordance with clause 49 of the listing agreement with Indian stock exchanges)

Corporate governance is the system by which business implements. To ensure this, a high level Corporate corporations are directed and controlled. The corporate Governance Council has been formed to ensure that the governance structure specifies the distribution of rights best practices of Corporate Governance are adopted. and responsibilities among different participants in the corporation, such as the board, managers, shareholders and VSNL’s operations and accounts are audited at three levels: other stakeholders, and spells out the rules and procedures an internal audit; a statutory audit by an Indian accounting for making decisions on corporate affairs. By doing this, it firm under Indian accounting requirements and their also provides the structure through which the company restatement by an internationally recognised accounting objectives are set, and the means of attaining those firm according to US GAAP. The Company communicates objectives and monitoring performance. regularly with its shareholders through bulletins, presentations and meetings with analysts and investors. 1. CORPORATE GOVERNANCE PHILOSOPHY AND PRACTICE 2. BOARD OF DIRECTORS VSNL has evolved from a monopoly ILD player to a multi- The Company is managed exclusively by and under the national corporation having its presence felt across the directions of the Board. The composition of the Board is globe. Its businesses are no longer confined within the governed by the applicable laws and regulations as well boundaries of India but are now spread across the globe as the Articles of Association of the Company. The powers offering a wide spectrum of basic and value added services. delegated by the Board to the Managing Director and by The challenge for VSNL for governance lies in designing a the Managing Director to the sub-ordinate officers are model addressing the specific and unique needs of documented in the Delegation of Powers (DoP). The DoP geographies and yet strengthening and aligning the overall is revised periodically. business objectives and goals. Nine out of ten directors are non-executive directors, The Company believes that total business risk elimination forming more than half of the total number of directors. is never possible but can be minimized by consistently VSNL has four independent directors and one executive developing and following the best practices of Corporate director. Governance. To this end, the Company focuses on None of the directors hold directorships in more than the developing and implementing higher standards of permissible number of companies under the applicable accountability to enable optimum returns to all provisions. Similarly, none of the directors on the board’s stakeholders. The company is installing new state-of-the sub-committees hold membership of more than ten art systems including integrated financial accounting and committees of boards, nor is any director a chairman of budgeting systems and through a systematic process of more than five committees of boards. training and development has increased the quality of its personnel. The names and categories of the directors on the board, their attendance at board meetings during the year and Fairness in words, actions and deeds with all stakeholders at the last annual general meeting, and the number of are the pillars of corporate governance philosophy of the directorships and committee memberships held by them Company. Corporate Governance in substance rather than in other companies as of 31 March 2006 (with Directorships form is what the Company believes in and actively updated as of 30 July 2006) are given below:

Attendance No. of Directorships No. of Committee Positions Board Meetings at the last AGM in Public Companies held in Public Companies Name of Director Category during the tenure (14.09.2005) Including VSNL Including VSNL

Held Attended Chairman Member Chairman Member

Directors in Office Mr. Subodh Bhargava Independent [Chairman : w.e.f. Non Executive 11 11 Yes 2 10 3 5 11.04.05] Mr. N. Srinath Not Independent Executive 11 11 Yes NIL 3 NIL NIL Mr. Ishaat Hussain Not Independent Non Executive 11 10 Yes 1 11 3 6 Mr. Kishore A. Chaukar Not Independent Non Executive 11 10 Yes NIL 12 4 3

21 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Attendance No. of Directorships No. of Committee Positions Board Meetings at the last AGM in Public Companies held in Public Companies Name of Director Category during the tenure (14.09.2005) Including VSNL Including VSNL

Held Attended Chairman Member Chairman Member

Directors in Office Mr. Pankaj Agrawala1 Not Independent Non Executive 11 8 No NIL 2 NIL 3 Dr. Mukund Rajan Not Independent [w.e.f. 06.05.05]. Non Executive 10 9 Yes NIL 3 NIL NIL

Mr. N. Parameswaran1 Not Independent [w.e.f. 30.08.05] Non Executive 8 7 Yes NIL 2 NIL NIL

Mr. P.V. Kalyanasundaram Independent [w.e.f. 14.09.05] Non Executive 7 6 N/A NIL NIL NIL 1 Dr. V.R.S. Sampath Independent [w.e.f. 14.09.05] Non Executive 7 6 N/A NIL 2 NIL 1

Mr. Amal Ganguli Independent [w.e.f. 17.07.06] Non Executive N/A N/A N/A NIL 11 3 4 Directors served during the year Mr. R.N. Tata Not Independent [Until 11.04.05] Non Executive 1 1 N/A 12 2 NIL 8

Mr. Rakesh Kumar1 Not Independent [Until 10.08.05] Non Executive 3 3 N/A NIL NIL NIL NIL

Mr. Suresh Krishna Independent [Until 21.03.06] Non Executive 10 3 No 6 3 2 3

Mr. Vivek Singhal Independent [Until 09.09.05] Non Executive 4 1 N/A NIL 6 1 1

Dr. Ashok Jhunjhunwala Independent [Until 09.09.05] Non Executive 4 4 N/A NIL 8 NIL 8

Mr. F.A. Vandrevala Not Independent [Until 25.11.05] Non Executive 5 5 Yes 2 13 NIL 2

1 Nominee director of the Government of India.

Notes : (a) None of the directors is related to any other director. (b) None of the directors has any business relationship with the company. (c) None of the directors received any loans and advances from the company during the year. (d) The information as required under Annexure IA to Clause 49 is being made available to the board. (e) The company did not have any pecuniary relationship or transactions with non-executive directors during 2005-06. (f) The detailed resume of each director and the details of the directors proposed to be appointed/reappointed at the 20th Annual General Meeting are published elsewhere in the Annual Report. (g) The gap between two board meetings did not exceed four months. The dates on which the 11 board meetings were held are as follows: 11 April 2005 9 June 2005 28 July 2005 30 August 2005 14 September 2005 7 October 2005 25 October 2005 7 December 2005 31 January 2006 1 March 2006 31 March 2006

22 3. AUDIT COMMITTEE 3 June 2005 8 June 2005 28 July 2005 The audit committee consists of four members. The (Informal meeting) Chairman of the committee is Mr. Subodh Bhargava, an 24 October 2005 31 January 2006 1 February 2006 independent director, who earlier served as the Chairman and Managing Director of Eicher Motors and has necessary 4. REMUNERATION COMMITTEE and sufficient financial and accounting background. a) Constitution and Terms of Reference The other members of the committee are Mr. Pankaj Agrawala, Government Nominee Director, Mr. P.V. The Remuneration Committee consists of two members. Kalyanasundaram, Independent Director and Mr. Amal The Chairman of the Committee is Mr. Kishor Chaukar, Ganguli, Independent Director. Mr. Satish Ranade, Company Mr. Subodh Bharagava is the other member on the Secretary and Chief Legal Officer is the audit committee’s Secretary. Mr. Ishaat Hussain, Director (Finance), Tata Sons Committee. Mr. Satish Ranade, Company Secretary and Limited, who was a member of the Audit Committee till Chief Legal Officer is the Remuneration Committee’s 24 October 2005, is a special invitee for Audit Committee Convener. In January 2006, the Remuneration Committee meetings. through a circular resolution had recommended certain changes in the terms of appointment of the executive The audit committee has adequate powers and detailed director. One meeting of the Remuneration Committee terms of reference to play an effective role as required under the provisions of the Companies Act, 1956 and was held on 26 June 2006. clause 49 of VSNL’s listing agreement with the stock The broad terms of reference of the Remuneration exchanges. Committee are to review the performance of the Whole- Attendance at the Audit Committee Meetings time Directors, after considering the Company’s Name of Member Audit Committee performance and recommend to the Board Meetings during the tenure remuneration including salary, perquisites and commission to be paid to the Company’s Whole-time Held Attended Directors within the overall ceilings approved by the Mr. Subodh Bhargava 6 6 shareholders.

Mr. Pankaj Agrawala 6 5 b) Remuneration Policy

Mr. P.V. Kalyanasundaram The non-executive Directors were not paid any [W.e.f. 24.10.05] 3 2 remuneration till 2004-05 except payment by way of sitting fees. For the financial year 2005-06, subject to Mr. Amal Ganguli th [W.e.f. 17.07.06] N/A N/A approval of shareholders at the 20 Annual General Meeting, the Company proposes to pay remuneration Mr. Ishaat Hussain (Special to the non-executive directors (NEDs) by way of Invitee) [Member till 24.10.05] 3 1 commission at a rate not exceeding 1% per annum of the profits of the Company (computed in accordance Mr. Vivek Singhal with Section 309(5) of the Companies Act, 1956). The [Until 09.09.05] 3 2 distribution of commission amongst the NEDs is placed Dr. Ashok Jhunjhunwala before the Board. The commission to NEDs is proposed [Until 09.09.05] 3 2 to be distributed broadly on the basis of their attendance and contribution at the Board and certain Committee At the Annual General Meeting held on September 14, meetings as well as the time spent on operational 2005, the Chairman of the Audit Committee, Mr. Subodh matters other than at the meetings. Bhargava was present. During the last financial year, the Audit Committee held five formal meetings and one The Company pays sitting fees of Rs.10,000/- (Rs.5000/- informal meeting and not more than four months had till 1 March 2006) per meeting to the non-executive elapsed between any two meetings. The dates of meetings directors for attending the meetings of the Board and of the Audit Committee are as follows: Committee meetings.

23 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

The Company pays remuneration by way of salary, d) The details of remuneration to the whole-time director perquisites and allowances (fixed component) and during the year 2005-06 are as follows: commission (variable component) to the whole time (Amount in Rs.) director. Salary is paid within the range approved by the Name Salary Perquisites & Commission* shareholders. Annual increments, recommended by the Allowances Remuneration Committee are approved by the Board. Mr. N. Srinath 44,85,035 375042 25,00,000 Within the prescribed ceiling, the perquisites package is approved by the Remuneration Committee. Commission Total 44,85,035 375042 25,00,000 is calculated with reference to net profits of the Company * Commission payable will be paid only after the date of in a particular financial year and is determined by the the Annual General Meeting. Board of Directors at the end of the financial year based 5. INVESTOR GRIEVANCE COMMITTEE on the recommendations of the remuneration committee, subject to overall ceilings stipulated in The committee consists of three members. The Chairman Sections 198 and 309 of the Companies Act, 1956. of the Committee is Mr. Kishor A. Chaukar who is the Specific amount payable to the whole-time director is Managing Director of Tata Industries Limited. The other based on the performance criteria laid down by the members are Mr. Pankaj Agrawala, nominee Director of Board which broadly takes in to account the profits the Government and Dr. V.R.S. Sampath, Independent earned by the Company for the year. Director. Mr. Satish Ranade, Company Secretary and Chief c) The details of commission proposed to be paid to the Legal Officer is the Investor Grievance Committee’s non-executive directors for the year 2005-06, subject to secretary. During the last financial year, the Committee held approval of the shareholders at the Annual General three meetings. Meeting are as follows: (Amount in Rs.) The details of grievances received from the shareholders during the year and their status on 31 March 2006 is given Name of the Director Commission Sitting Fees below: Mr. Subodh Bhargava (Chairman Board/Audit) 8,23,500 1,15,000 Sr. Nature of Complaints No. of Complaints Mr. Ishaat Hussain 2,37,900 70,000 No. Received Pending Mr. Kishor Chaukar 3,01,950 95,000 1. SEBI/Stock Exchange Mr. Pankaj Agrawala 2,65,350 NIL Complaint 2 NIL Dr. Mukund Rajan 1,64,700 50,000 Mr. N. Parameswaran 1,28,100 NIL 2. Direct/Miscellaneous/ Other Complaint 17 NIL Mr. P.V. Kalyanasundaram 1,46,400 45,000 Dr. V.R..S. Sampath 1,37,250 55,000 TOTAL 19 NIL Mr. R.N. Tata This committee has been delegated the powers to approve (Chairman Board) the issue of Duplicate Share Certificates and approve [Till 11 April 2005] 45,750 5,000 transfer/transmission of shares exceeding 500 shares per Mr. Rakesh Kumar folio. The Registrar and Transfer Agents have been [Till 10 August 2005] 54,900 NIL authorised to issue Duplicate Share Certificates and Mr. Suresh Krishna approve transfer/transmission up to a maximum of 500 [Till 21 March 2006] 54,900 20,000 shares per folio, limited only to routine day-to-day work. Mr. Vivek Singhal As the shares of the company are under compulsory [Till 9 September 2005] 54,900 15,000 dematerialized trading for all investors, this delegation is considered adequate. All the shares received for transfer Dr. Ashok Jhunjhunwala till March 31, 2006 have been duly processed. [Till 9 September 2005] 2,10,450 70,000 Mr. F.A. Vandrevala 6. ETHICS AND COMPLIANCE COMMITTEE [Till 25 November 2005] 1,46,400 40,000 In accordance with the Securities and Exchange Board of Total 27,72,450 5,80,000 India (Prohibition of Insider Trading) Regulations, 1992, as

24 amended, the Board of Directors of the Company adopted investment decisions with regard to the Company’s the “VSNL Code Of Conduct For Prevention of Insider securities. Trading and Code of Corporate Disclosure Practices” to be In terms of the said code, an Ethics and Compliance followed by “Directors”, “Designated Employees”, Committee was constituted in 2003. The present “Designated Persons” and “Insiders”. The code is based on committee consists of three members. The Chairman of the principle that Directors, Designated Employees, the committee is Mr. Kishor A. Chaukar, who is the Designated Persons and Insiders should not have undue Managing Director of Tata Industries Limited, Mr. Pankaj advantage over other shareholders, in their personal Agrawala, government nominee director and Dr. V.R.S. security transactions, due to their possible advance Sampath, Independent Director are the members. Mr. Satish knowledge of Price Sensitive Information. The code, Ranade, Company Secretary and Chief Legal Officer is the therefore, seeks to ensure timely and adequate disclosure convener of the Committee. of Price Sensitive Information to the investor community Three meetings of the committee were held during the by the Company to enable them to take informed year 2005-06.

7. GENERAL BODY MEETINGS The location and time of the last three general body meetings are as follows: Meeting Date Location, Description and Type of Resolutions Voting 1 March 2006 An Extraordinary General Meeting was Both the resolutions were put to vote held at 1500 hours at Birla Matushri Sabhagar, by show of hands and were carried New Marine Lines, Mumbai - 400020. unanimously. There were two resolutions, both of which were Special.

14 September 2005 The 19th Annual General Meeting was held at 1100 hours All the resolutions were put to at Birla Matushri Sabhagar, New Marine Lines, vote by show of hands and were Mumbai – 400020. carried unanimously. There were Six resolutions (1 special and 5 ordinary).

2 September 2004 The 18th Annual General Meeting was held at 1100 hours All the resolutions were put to at Birla Matushri Sabhagar, New Marine Lines, vote by show of hands and were Mumbai - 400020. carried unanimously. There were Six resolutions (1 special and 5 ordinary).

2 April 2004 An Extraordinary General Meeting was held at 1500 hours Both the resolutions were put at Birla Matushri Sabhagar, New Marine Lines, to vote by show of hands and were Mumbai - 400020. carried unanimously. There were two resolutions, both of which were Special.

2 September 2003 The 17th Annual General Meeting was held at 1100 hours All the resolutions were put to vote at Birla Matushri Sabhagar, New Marine Lines, by show of hands and were carried Mumbai - 400020. unanimously. There were ten resolutions (2 special and 8 ordinary).

8. DISCLOSURES i) There were no significant related-party transactions penalties or strictures have been imposed on the of the company with its promoters, directors or company by SEBI, any stock exchange or any statutory management, their subsidiaries or relatives that may authority on any matter related to capital markets have potential conflict with the interest of the during the last three years. company at large. Note number B.20 of the Notes on Accounts may also be referred to in this respect. No ii) The Company has adopted a Whistle Blower Policy non-compliance notice has been issued and no and has established necessary mechanisms for

25 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

employees to report concerns about unethical a. The Company has setup a Remuneration behaviour. No person has been denied access to the Committee. Please see the paragraph on Audit Committee. Remuneration Committee. iii) SECRETARIAL AUDIT b. REGULATORY AUDIT A qualified practicing Company Secretary carried out Though not required under any statutory quarterly secretarial audit to reconcile the total obligations but in the interest of better Corporate admitted capital with National Securities Depository Governance and benchmarking, VSNL is Limited (NSDL) and Central Depository Services (India) undergoing a voluntary Regulatory Audit. The Limited (CDSL) and the total issued and listed capital. Audit is being carried out by M/s. Ernst and Young The audits confirm that the total issued/paid-up Pvt. Ltd., an external agency. capital is in agreement with the total number of shares in physical form and the total number of c. The Auditor’s Report on the financial statements dematerialized shares held with NSDL and CDSL. of the Company is unqualified. iv) The Company fulfilled the following non-mandatory requirements:

9. DISCLOSURE REQUIRED BY CLAUSE 32 OF THE LISTING AGREEMENT Amount of loans and advances in the nature of loans outstanding from subsidiaries during the year ended 31 March 2006 Name of the Company Outstanding Maximum Investment in Investment as at amount shares of the in shares of 31 March, 2006 outstanding Company subsidiaries of during the year the Company Rupees ‘000 Rupees ‘000 No of shares No of Shares

a) Subsidiaries

(i) VSNL Broadband Ltd. ----

(ii) VSNL America Inc. 233,226 233,226 - *

(iii) VSNL Lanka Ltd ----

(iv) VSNL Singapore Pte Ltd. 2,519,256 6,479,889 - **

(v) VSNL SNOSPV Pte. Ltd ----

Name of the Subsidiary No of Shares

* VSNL UK Ltd 1

** VSNL Netherlands BV 16,718,000

** VSNL Bermuda Ltd 1,200,000

** VSNL Japan K.K 300

** VSNL Telecommunications (Bermuda) Ltd. 1,200,000

** VSNL HongKong Ltd 1

26 Name of the Subsidiary No of Shares Subsidiaries of VSNL Netherlands B.V

VSNL International (US) Inc 3,000

VSNL Telecommunications(UK) Inc 6,500,002

VSNL France SAS 1,847,000

VSNL Spain Srl 2,053,006

VSNL (Portugal) Unipessoal Limitada 1,055,000

VSNL Belgium BVBA 186

VSNL(Germany) GMBH 1

VSNL International (Portugal) Instalacao e Manutencao de Redes LDA 12,447,000

Subsidiaries of VSNL Telecommunications (Bermuda)Ltd

Teleglobe Bermuda Ltd. 1,200,000

TLGB Luxembourg Holdings S.ar.l 500

Subsidiary of VSNL Telecommunications(US) Inc.

VSNL International (Guam) Llc NA

Subsidiaries of TLGB Luxembourg Holdings S. ar.l

TLGB Netherlands Holdings B.V 18,000

Subsidiaries of Teleglobe Bermuda Ltd

VSNL International(Poland) Sp. Zo.o 1

ITXC IP Holdings S.a.r.l 500

Teleglobe International Ltd 8,416,801

Teleglobe International HongKong Ltd 10,000

VSNL International Australia Pty. Ltd 555,001

VSNL International GBRM Ltd 1,200,000

VSNL International Puerto Rico Inc 1,000

Teleglobe Asia Pte. Ltd 100,000

Teleglobe Asia Data Transport Pte. Ltd 100,000

ITXC Global Japan YK 120

Teleglobe International Luxembourg S.a.r.l 500

27 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Name of the Subsidiary No of Shares ITXC Global UK Ltd. (Under liquidation) 100

ITXC (UK)Ltd. (Under liquidation) 100

ITXC Global HongKong Ltd. (Under liquidation) 1,180,000

Subsidiary of TLGB Netherlands Holdings B.V

VSNL International(ITXC) Corp. 1,000

Subsidiaries of Telelobe International Luxembourg S.a.r.l

Teleglobe International Belgium S.P.R.L 1

Teleglobe Italy S.r.l 500

Teleglobe Netherlands B.V 22,000

Subsidiaries of Teleglobe Netherlands B.V

Teleglobe Italy S.r.l 9,500

Teleglobe France International S.A.S 37,000

TLGB International Germany GmbH 1

Teleglobe Spain Communications S.L 278,939

Teleglobe International Belgium S.P.R.L 99

Teleglobe Canada ULC 402

VSNL International(Poland) Sp. Zo.o 999

VSNL International ( Nordics) AS 1,000

Subsidiary of VSNL Portugal Unipessol Limitada

VSNL International (Portugal) Instalacao e Manutencao de Redes LDA 12,447,000

Subsidiaries of VSNL International (ITXC) Corp.

Teleglobe America Inc 100

VSNL International (Global) Corp. 100

Enhanced Services Inc (Under liquidation) NA

Subsidiaries of VSNL International (Global) Corp.

ITXC Global Zagreb d.o.o (Under liquidation) 20,000

Subsidiaries of Teleglobe America Inc

VSNL International IPCO LLC NA

28 10. MEANS OF COMMUNICATION DIVIDEND PAYMENT VSNL’s quarterly results are published in the Indian Express The dividend as recommended by the Board of Directors, and Loksatta among others, and are also hosted on VSNL’s if declared at this Annual General Meeting, shall be paid website: www.vsnl.in. The company’s press releases, details on or after Wednesday the 20 September 2006: of significant developments and investor updates are also (i) to those shareholders whose names appear on the made available on the website. The company generally Company’s Register of Members after giving effect to holds a press conference/investors’ meet after the all valid share transfers in physical form lodged with half-yearly results are taken on record by the board relating the Registrar & Transfer Agents (R&T Agents) of the to the period ending September 30th and March Company on or before Monday, 14 August 2006. 31st every year. (ii) in respect of shares held in electronic form, to those The management discussion and analysis forms part of “deemed members” whose names appear in the the directors’ report and is included in the annual report statements of beneficial ownership furnished by for the year 2005-06. Segmental information may be National Securities Depository Limited (NSDL) and referred to in Note number B.19 of the Notes on Accounts. Central Depository Services (India) Limited (CDSL) as at the end of business on Monday, 14 August 2006. In 11. SHAREHOLDER INFORMATION respect of shares held in demat mode, the dividend DATE AND VENUE OF THE AGM will be paid on the basis of beneficial ownership as per details to be furnished by NSDL and CDSL for this The twentieth annual general meeting of Videsh Sanchar purpose. Nigam Limited will be held at 1100 hours on Wednesday, 13 September 2006, at MC Ghia Hall, Bhogilal Hargovindas BANK DETAILS Building, Second Floor, 18/20 Kaikhushru Dubash Road In order to provide protection against fraudulent Marg, Kalghoda, Mumbai - 400023. encashment of dividend warrants, members are requested FINANCIAL CALENDAR to provide, if they have not already provided, their bank account numbers, bank account type and names and Fiscal year ending : March 31, 2006 addresses of bank branches, quoting folio numbers, to the R&T agents (in case of physical shareholding) to enable Annual General Meeting : September 13, 2006 them to incorporate the same on the dividend warrants. In case of dematerialised holding the bank account details KEY FINANCIAL REPORTING DATES FOR THE FINANCIAL should be intimated and updated with the shareholder’s YEAR 2006-07 Depository Participant. First quarter ending June 30, 2006 : July 29, 2006 LISTING ON STOCK EXCHANGES IN INDIA AND LISTING Second quarter ending Sept 30, 2006: On or before FEES October 31, 2006 The company’s shares are listed on the stock exchanges at Third quarter ending Dec 31, 2006 : On or before Mumbai (BSE) and National Stock Exchange (NSE) in India. Annual listing fees as due to each of the above stock January 31, 2007 exchanges for 2006-2007 have been paid.

Fourth quarter ending : On or before April LISTING ON STOCK EXCHANGE OUTSIDE INDIA

March 31, 2007 30, 2007 or if The Company’s ADRs are listed on the New York Stock audited, on or Exchange (NYSE) and have been traded on the NYSE since August 15, 2000. The annual listing fee payable to the NYSE before is being paid regularly.

June 30, 2007. DEPOSITORY BANK FOR ADR HOLDERS BOOK CLOSURE DATES FOR THE PURPOSE OF DIVIDEND The Bank of New York, 101, Barclays Street, 22nd Floor West, New York, NY 10286, Telephone: +1 (212) 815 8365, VSNL’s register of members and share transfer books will Facsimile: +1 (212) 571 3050 remain closed from 16 August 2006 to 22 August 2006 (both days inclusive), to determine the entitlement of Local Address : The Bank of New York, Express Towers, shareholders to receive the final dividend as may be 12th Floor, Nariman Point, Mumbai 400 021, Telephone: declared for the year ended March 31, 2006. (022) 2204 4941/43, Facsimile: (022) 2204 4942.

29 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CUSTODIAN FOR THE DEPOSITORY IN INDIA New York Stock Exchange : VSL ISIN No. for equity shares : INE151A01013 ICICI Bank Limited, Securities Markets Services, 1st Floor, ISIN No. for ADRs : US92659G6008 Empire Complex, 414 Senapati Bapat Marg, Lower Parel, CUSIP No. for ADRs : 92659G600 Mumbai – 400013. Telephone: 91-22-5667 2026, 5667 2030 Facsimile: 91-22-5667 2779/2740. Reuters Codes STOCK CODE VSNL.BO (BSE) VSNL.NS (NSE) Bombay Stock Exchange : 500483 VSNLq.L (LSE). National Stock Exchange : VSNL

STOCK MARKET DATA RELATING TO SHARES LISTED IN INDIA Monthly high and low quotations and volume of shares/ADRs traded at BSE, NSE & NYSE for 2005-2006 are:

BSE Share Price NSE Share Price NYSE ADR Price in USD Month High Low Volume High Low Volume High Low Volume

Apr-05 218.00 180.00 1891929 208.60 194.80 5837756 10.04 7.83 1702200

May-05 215.00 196.00 1070946 209.15 206.65 3440165 9.61 8.30 820700

Jun-05 251.90 206.50 4107489 246.65 207.10 10368247 9.85 9.20 2959000

Jul-05 444.00 243.00 41461082 417.50 250.90 107345506 11.35 9.45 5012000

Aug-05 444.70 347.15 44967171 433.05 357.70 111947988 19.70 11.33 4234400

Sep-05 408.70 328.00 15851379 404.30 345.30 46120535 19.94 16.29 2223500

Oct-05 372.40 270.10 15636391 369.75 272.90 44314645 18.23 15.30 2531200

Nov-05 379.90 287.00 20765253 377.05 291.90 59428570 17.15 12.15 2649600

Dec-05 430.55 355.50 35435974 424.50 367.30 95856103 16.35 12.95 1808500

Jan-06 406.20 351.00 14028299 398.50 358.20 39864907 18.95 16.15 1963800

Feb-06 402.45 362.50 9176451 392.90 364.95 29363269 18.19 16.01 1200600

Mar-06 493.45 362.00 30940616 470.75 366.20 57258468 18.25 16.16 2672600

Total 235332980 611146159 29778100

30 VSNL Closing Share Price at BSE V/S Sensex Close

500 12000

450 10000 400

350 8000 300

250 6000

200

4000 Sensex Closing 150 Closing Share Price at BSE Price Closing Share 100 2000 50

0 0 1-Apr-05 07-Jul-05 09-Jan-06 08-Jun-05 07-Oct-05 10-Feb-06 08-Sep-05 02-Mar-06 31-Mar-06 09-Dec-05 10-Nov-05 08-Aug-05 02-May-05 Close (Rs.) Close (Rs.) Sensex Close

VSNL Closing Share Price at NSE V/S Nifty Close

500 4000

450 3500 400 3000 350 2500 300

250 2000

200 Nifty Close 1500

Closing Share Price Closing Share 150 1000 100 500 50

0 0 1-Apr-05 08-Jul-05 06-Jan-06 10-Jun-05 14-Oct-05 03-Feb-06 02-Sep-05 03-Mar-06 31-Mar-06 09-Dec-05 11-Nov-05 05-Aug-05 13-May-05 NSE Closing Share Price Nifty Close

31 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

VSNL Closing ADR Price at NYSE V/S NYSE Composite Index 25 8500

20 8000

15 7500

10 7000 NYSE Composite Index Composite NYSE 5

VSNL Closing Price at NYSE (USD) at NYSE VSNL Closing Price 6500

0 6000 1-Jul-05 3-Jan-06 3-Oct-05 1-Feb-06 1-Sep-05 1-Jun-05 1-Apr-05 1-Nov-05 1-Mar-06 1-Aug-05 1-Dec-05 2-May-05 31-Mar-06

VSNL ADR Closing Price NYSE Composite Index

SHARE TRANSFER SYSTEM Share transfers in physical form can be lodged with the R&T agents of VSNL. The transfers are normally processed within 15 days from the date of receipt if the documents are complete in all respects. The Investor Grievances Committee is empowered to approve the share transfers. However, in the interests of shareholder friendliness, the R&T Agents have been empowered to approve the share transfers up to 500 shares per folio per transfer. DISTRIBUTION OF SHAREHOLDING

Number of Shareholders Number of ordinary shares held 31.03.2006 31.03.2005

1 to 500 51536 59450

501 to 1000 1295 1751

1001 to 10000 1624 2154

Over 10000 183 115

Total 54638 63470

Dematerialisation of Shares and Liquidity Approx 99.9% of the company’s share capital available in the market is dematerialised as on March 31, 2006. The company’s shares are regularly traded on the Bombay Stock Exchange Limited and the National Stock Exchange, as is evident from the table containing stock market data.

32 CATEGORIES OF SHAREHOLDERS AS OF 31 MARCH

Category Number of Voting Strength Number of Shares Held

Shareholders (Percentage)

2006 2005 2006 2005 2006 2005

PROMOTERS

Tata Group

- Panatone Finvest Limited 2 2 40.61 45.00 115738857 128250000

- Tata Sons Limited 2 2 3.64 1.58 10360497 4494497

- The Tata Power Company Limited 1 0 0.90 0 2575837 0

- The Tata Iron & Steel Company Limited 0 0 0.00 0 0 0

- Tata Industries Limited 0 0 0.00 0 0 0

Central Government 1 1 26.12 26.12 74446885 74446885

NON-PROMOTERS

Indian Public Financial Institutions 43 47 9.36 9.13 26686978 26010736

Indian nationalised banks 12 9 0.09 0.16 248448 466485

Foreign Financial Institutions 88 34 9.66 2.35 27528395 6696329

Foreign companies (shares held by The Bank of New York as depository for ADRs) 2 2 5.99 11.25 17081284 32071857

Non-resident individuals / Overseas Corporate Bodies 446 393 0.05 0.06 144635 178508

Other Indian Bodies Corporate 1730 1420 0.88 0.74 2494521 2101892

Indian Public 52310 61559 2.70 3.61 7691428 10280576

In transit demat shares 1 1 0.00 0.00 2235 2235

Total 54638 63470 100 100 285000000 285000000

33 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Outstanding ADRs 8540642 ADRs (each representing two ordinary share of the company) are outstanding as of March 31, 2006. In respect of these ADRs, the option to convert into shares is alive. SHARE CAPITAL HISTORY Details of share capital history since incorporation is as follows:

Dates Particulars of Issue Number of Total Number Nominal Value Shares of Shares of Shares (Rs.) 19.3.86 Allotted as Purchase consideration for assets & liabilities of OCS 126 126 126,000

1.4.86 Allotted as Purchase consideration for assets & liabilities of OC +599,874 600,000 600,000,000 March’91 Shares of Rs.1000/- each subdivided into shares of Rs.10/- each NIL 60,000,000 600,000,000

06.02.92 Bonus of 1:3 issued to Government of India. +20,000,000 80,000,000 800,000,000

Jan-Feb 92 12 million shares disinvested in favour of Indian Financial Institutions by GOI @ Rs.123/- per share NIL 80,000,000 800,000,000

1994-95 2,382,529 Shares transferred to disinvested parties as bonus shares NIL 80,000,000 800,000,000

27.03.97 VSNL raised its share capital by way of GDR Issue, and also GOI Divested 39 lakh shares in GDR markets @ US$13.93 per GDR equivalent to Rs.1000 per share. +12,165,000 92,165,000 921,650,000

04.04.97 VSNL raised its capital by way of GDR Issue Green Shoe option @ US$13.93 per GDR equivalent Rs.1000 per share. +2,835,000 95,000,000 950,000,000

Feb. 1999 10million shares divested by GOI in GDR markets @ US$9.25 per GDR equivalent to Rs.786.25 per share. NIL 95,000,000 950,000,000

May 1999 396,991 shares Divested by GOI by way of offer of shares to employees of VSNL @ Rs.294 per share locked in for a period of 3 years. NIL 95,000,000 950,000,000

Sept’99 10 lakh shares Divested by GOI in domestic markets @ Rs.750 per share. NIL 95,000,000 950,000,000

15 August Listing of ADRs on New York Stock Exchange NIL 95,000,000 950,000,000 2000 24.11.2000 Bonus shares in the ratio of 2:1. +190,000,000 285,000,000 2,850,000,000 27.9.2001 VSNL declares dividend @ 500% i.e. Rs.50/- per share at 15 AGM. NIL 285,000,000 2,850,000,000 January VSNL pays special interim Dividend of 750% 2002 i.e. Rs.75/- per share NIL 285,000,000 2,850,000,000

34 Dates Particulars of Issue Number of Total Number Nominal Value Shares of Shares of Shares (Rs.) 13.02.2002 25% of VSNL Stake transferred to Tata Group’s investment vehicle Panatone Finvest Ltd. Govt holdings reduced to 27.97% from 52.97%. VSNL ceases to be a Government of India Enterprise NIL 285,000,000 2,850,000,000 21.02.2002 5264555 shares Divested by GOI by way of offer of shares to employees of VSNL @ Rs.47.85 per share locked in for a period of 1 year. NIL 285,000,000 2,850,000,000 10.04.02 Open Offer by Panatone Finvest Limited in accordance with SEBI guidelines to acquire upto 57 million shares @ Rs.202/- per share NIL 285,000,000 2,850,000,000 08.06.02 Open offer complete with Panatone holding total of 128249910 shares including 57 million shares as above. NIL 285,000,000 2,850,000,000

Locations of Other Offices Regional Offices : Mumbai, Chennai, Kolkata and New Delhi. Branches : Ambattur, Arvi, Bangalore, Bhubaneswar, Chandigarh, Coimbatore, Dehradun, Ernakulam, Gandhinagar, Goa, Guwahati, Hyderabad, Indore, Jaipur, Jalandhar, Kanpur, Patna, Pondicherry, Pune, Thiruvananthapuram. Address for Correspondence Registered Office Corporate Office Videsh Sanchar Bhavan (VSB) Lokmanya Videsh Sanchar Bhavan (LVSB) Mahatma Gandhi Road, Kashinath Dhuru Marg Mumbai - 400 001. Prabhadevi Mumbai – 400 028. Tel : +91 (22) 6657 8765 Tel : +91 (22) 6657 8765 Fax : +91 (22) 6639 5162 Fax : +91 (22) 6639 5162 Email : [email protected] Email : [email protected] Website : www.vsnl.in Website : www.vsnl.in Compliance Officer Mr. Satish Ranade Company Secretary & Chief Legal Officer Any shareholder complaints/queries may be addressed Lokmanya Videsh Sanchar Bhavan to: Kashinath Dhuru Marg, Prabhadevi, Registrar and Transfer Agents Mumbai - 400 028. M/s. Sharepro Services (India) Pvt. Ltd. Tel : +91 (22) 6657 8765 Unit : Videsh Sanchar Nigam Limited Fax : +91 (22) 6659 1962 Satam Estate, 3rd Floor, Email : [email protected] Above Bank of Baroda, Chakala, Andheri (East), Any queries relating to financial statements of the Mumbai - 400 099. Company may be addressed to: Tel : +91 (22) 2821 5168 Investor Relations Cell Fax : +91 (22) 2837 5646 Videsh Sanchar Nigam Limited E-mail : [email protected] Lokmanya Videsh Sanchar Bhavan Kashinath Dhuru Marg, Opposite Kirti College, Prabhadevi, Mumbai - 400 028. Tel : +91 (22) 66578765 Fax: +91 (22) 66395162 Email: [email protected]

35 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

DECLARATION REGARDING COMPLIANCE BY BOARD MEMBERS AND SENIOR MANAGEMENT PERSONNEL WITH THE COMPANY’S CODE OF CONDUCT

This is to confirm that the Company has adopted a Code of Conduct for its Board Members and senior management of the Company.

I confirm that the Company has in respect of the financial year ended March 31, 2006, received from the senior management team of the Company and the Members of the Board a declaration of compliance with the Code of Conduct as applicable to them.

Place: Mumbai N. Srinath Date: 27 July 2006 Executive Director

CHIEF EXECUTIVE OFFICER (CEO) AND CHIEF FINANCIAL OFFICER (CFO) CERTIFICATION

17 July 2006

As required under Clause 49(V) of the Listing Agreement with Indian Stock Exchanges, the under signed hereby confirm the following:

a) We have reviewed financial statements and the cash flow statement for the year and that to the best of our knowledge and belief :

i) these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; ii) these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

b) There are, to the best of our knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct.

c) We accept responsibility for establishing and maintaining internal controls for financial reporting and that we have evaluated the effectiveness of internal control systems of the company pertaining to financial reporting and have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which we are aware and the steps we have taken or propose to take to rectify these deficiencies.

d) We have indicated to the auditors and the Audit committee the following:

i) significant changes in internal control over financial reporting during the year, if any; ii) significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements, if any; and iii) There have been no instances of significant fraud of which we have become aware.

Rajiv Dhar N. Srinath (Chief Financial Officer) (Executive Director)

36 AUDITORS’ CERTIFICATE ON COMPLIANCE WITH THE CONDITIONS OF CORPORATE GOVERNANCE UNDER CLAUSE 49 OF THE LISTING AGREEMENTS To the Members of VIDESH SANCHAR NIGAM LIMITED We have examined the compliance of conditions of corporate governance by VIDESH SANCHAR NIGAM LIMITED (“the Company”), for the year ended on 31 March, 2006, as stipulated in Clause 49 of the Listing Agreement of the said Company with stock exchanges. The compliance of conditions of Corporate Governance is the responsibility of the management. Our examination was been limited to a review of the procedures and implementation thereof, adopted by the Company for ensuring compli- ance with the conditions of corporate governance. It is neither an audit nor an expression of opinion on the financial statements of the Company. In our opinion and to the best of our information and according to the explanations given to us and the representations made by the Directors and the Management, we certify that the Company has complied with the conditions of corporate governance as stipulated in the above mentioned Listing Agreement. We further state that such compliance is neither an assurance as to the future viability of the Company nor the efficiency or effectiveness with which the management has conducted the affairs of the Company. For S. B. BILLIMORIA & CO. Chartered Accountants N VENKATRAM Partner Membership No: 71387 Mumbai: 11 August, 2006

37 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

FINANCIAL RATIOS 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 Profitability ratios EBIDTA Margin 22.85 25.13 16.29 23.28 23.16 Cash Profit Margin 21.62 19.26 16.30 29.33 20.92 Net Profit Margin 19.79 16.21 11.20 22.18 11.96 Return on Average Capital Employed 25.15 15.29 9.00 19.73 11.71 Return on Net Worth 24.20 14.73 7.05 13.88 8.14 Total Expenditure/Total Income 70.83 73.93 83.62 81.45 81.19 Figures are in % BUSINESS CHARCTERISTICS Debt to Equity Ratio 0.11 0.06 0.01 - 0.02 Tax rate (%) 32.14 37.81 30.48 28.24 30.17 Revenue to Capital Ratio 1.21 0.77 0.64 0.59 0.64 Income/Debtors Ratio 4.78 5.76 7.19 5.42 5.13 Income/Avg Assets Ratio 2.59 1.56 1.12 1.19 1.04 Net Working Capital as part of TCE % 66.00 61.00 37.00 39.00 15.81 Current Ratio 2.90 3.37 1.77 1.99 1.32 Quick Ratio 2.90 3.37 1.77 1.99 1.32 Cash and Equivalents/Total Assets Ratio 42.96 37.89 19.99 24.18 4.12 Depreciation/Gross Block % 4.60 4.46 7.31 7.67 8.77 GROWTH(% OVER PRECEDING YEARS) Growth in Turnover (10.72) (32.33) (29.95) 1.17 17.57

Growth in FE Earnings (14.16) (31.79) (51.45) 41.06 (11.08)

Growth in PBIDT (excl other income) (15.25) (29.81) (54.81) 49.22 13.88

Growth in PAT (20.88) (44.57) (51.59) 100.28 (36.60)

Growth in Cash Profit (19.07) (39.74) (40.72) 82.09 (16.14)

PER SHARE DATA

Earnings (Rs.) 49.38 27.37 13.25 26.54 16.83

Dividend % 875.00 85.00 45.00 60.00 45.00 Book Value (Rs.) 176.98 194.75 181.30 200.98 212.67 P/E (as of Year End) 3.79 2.67 15.46 7.05 27.38

38 AUDITORS’ REPORT TO THE MEMBERS OF VIDESH SANCHAR NIGAM LIMITED

1. We have audited the attached balance sheet of (iv) in our opinion, the balance sheet, profit and loss VIDESH SANCHAR NIGAM LIMITED as at 31 March, account and cash flow statement dealt with by 2006, and also the profit and loss account and the this report comply with the accounting standards cash flow statement for the year ended on that date referred to in sub-section (3C) of Section 211 of both annexed thereto. These financial statements are the Companies Act, 1956; the responsibility of the Company’s Management. Our (v) on the basis of written representations received responsibility is to express an opinion on these from the directors, as on 31 March, 2006, and financial statements based on our audit. taken on record by the Board of Directors, we 2. We conducted our audit in accordance with auditing report that none of the directors is disqualified standards generally accepted in India. Those standards as on 31 March, 2006 from being appointed as require that we plan and perform the audit to obtain a director in terms of clause (g) of sub-section reasonable assurance about whether the financial (1) of Section 274 of the Companies Act, 1956; statements are free of material misstatement. An audit and includes examining, on a test basis, evidence (vi) in our opinion and to the best of our information supporting the amounts and disclosures in the and according to the explanations given to us, financial statements. An audit also includes assessing the said accounts give the information required the accounting principles used and significant by the Companies Act, 1956, in the manner so estimates made by the management, as well as required and give a true and fair view in evaluating the overall financial statement conformity with the accounting principles presentation. We believe that our audit provides a generally accepted in India: reasonable basis for our opinion. (a) in the case of the balance sheet, of the state 3. As required by the Companies (Auditor’s Report) of affairs of the Company as at 31 March, Order, 2003 issued by the Central Government of India 2006; in terms of sub-section (4A) of Section 227 of the Companies Act, 1956, we enclose in the Annexure a (b) in the case of the profit and loss account, of statement on the matters specified in paragraphs 4 the profit for the year ended on that date; and 5 of the said Order to the extent applicable. and 4. Further to our comments in the Annexure referred to (c) in the case of the cash flow statement, of in paragraph 3 above, we report that: the cash flows for the year ended on that date. (i) we have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit; For S. B. BILLIMORIA & Co. (ii) in our opinion, proper books of account as Chartered Accountants required by law have been kept by the Company so far as appears from our examination of those books; N VENKATRAM Partner (iii) the balance sheet, profit and loss account and Membership No: 71387 cash flow statement dealt with by this report are in agreement with the books of account; Mumbai, 26 June, 2006

39 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

ANNEXURE TO THE AUDITORS’ REPORT (Referred to in paragraph 3 of our report of even date)

(i) (a) The Company has maintained proper records (v) (a) To the best of our knowledge and belief and showing full particulars including quantitative according to the information and explanations details and situation of fixed assets. given to us, we are of the opinion that the transactions that need to be entered into the (b) As explained to us, physical verification of a register maintained under Section 301 of the major portion of fixed assets as at 31 March, Companies Act, 1956 have been so entered. 2006 was conducted by the Management during the year. In our opinion, the frequency (b) In our opinion and having regard to our of physical verification is reasonable. Having comments in paragraph (iv) above, and regard to the size of the operations of the according to the information and explanations Company and on the basis of explanations given to us, transactions made in pursuance of received, in our opinion, the net differences contracts or arrangements entered in the found on physical verification were not register maintained under Section 301 of the significant. Companies Act, 1956 and exceeding the value of Rupees five lakhs in respect of any party (ii) (a) As explained to us, the stocks of stores and during the year have been made at prices which spares have been verified during the year. In are reasonable having regard to prevailing our opinion, the frequency of verification is market prices at the relevant time, where such reasonable. market prices are available. (b) In our opinion and according to the information (vi) In our opinion and according to the information and and explanations given to us, the procedures explanations given to us, the Company has not of physical verification of stocks followed by the accepted deposits from the public to which the Management are reasonable and adequate in provisions of Section 58A, 58AA or any other relevant relation to the size of the Company and the provisions of the Companies Act, 1956 are applicable nature of its business. during the period covered by our audit report. (c) In our opinion and according to the information (vii) In our opinion, the Company has an internal audit and explanations given to us, the Company is system commensurate with the size and nature of maintaining proper records of inventory. The its business. discrepancies noticed on verification between the physical stocks and the book records were (viii) We have broadly reviewed the books of account and not material having regard to the size of the records maintained by the Company relating to operations of the Company. telecommunication activities pursuant to the Rules made by the Central Government for the (iii) The Company has not taken or granted any loans maintenance of cost records under Section 209 (1) during the year to parties covered in the register (d) of the Companies Act, 1956 and, are of the maintained under Section 301 of the Companies Act, opinion that prima facie, the prescribed accounts and 1956. records have been made and maintained. We have not, however, made a detailed examination of the (iv) In our opinion and according to the information records with a view to determining whether they and explanations given to us, there is adequate are accurate or complete. internal control system commensurate with the size of the Company and the nature of its business (ix) (a) According to the information and explanations for the purchase of inventory and fixed assets and given to us, the Company is generally regular for rendering of services. During the course of our in depositing with appropriate authorities audit, we have not observed any major weakness undisputed statutory dues including provident in the internal controls in relation to purchase of fund, investor education and protection fund, inventory, fixed assets and for rendering of income tax, sales tax, wealth tax, service tax, services. customs duty, excise duty, cess and other

40 material statutory dues applicable to it. The in or trading in shares, securities, debentures and Company has received exemption from the other investments. Accordingly, the provisions of operation of Employees’ State Insurance Act, clause 4 (xiv) of the Companies (Auditor’s Report) 1948. Order, 2003 are not applicable to the Company. (b) According to the information and explanations (xv) In our opinion and according to the information and given to us, no undisputed amounts payable in explanations given to us, the terms and conditions respect of income tax, wealth tax, sales tax, on which the Company has given guarantee for service tax, customs duty, excise duty and cess loans taken by others from banks or financial were in arrears, as at 31 March, 2006 for a period institutions are not prejudicial to the interest of the of more than six months from the date they Company. became payable. (xvi) In our opinion and according to the information (c) According to the information and explanations and explanations given to us, no term loans have given to us, details of dues of sales tax, income been raised during the financial year covered by tax, excise duty and service tax which have not our audit. been deposited on account of any dispute are (xvii) In our opinion and according to the information and given below: explanations given to us, and on an overall Particulars Period to which Forum where Amount examination of the balance sheet of the Company, the amount relates the dispute is in Rs. ‘000 pending we report that no funds raised on short-term basis Sales Tax 1989-90, 1996-97, Tribunal 100,385 have been used for long-term investment. 1997-98, 1998-99, 1999-00, 2000-01, (xviii) According to the information and explanations given 2001-02, 2003-04 to us, the Company has not made any preferential Sales Tax 2001-02, 2002-03 Asst. Commissioner 10,705 allotment of shares to parties and companies

Sales Tax 2001-02, 2002-03, High Court 14,689 covered in the register maintained under Section 2003-04, 2004-05 301 of the Companies Act, 1956. TDS 2002-03, 2003-04 Commissioner 1,038 (xix) In our opinion and according to the information Entry Tax 2002-03, 2004-05 High Court 59,392 and explanations given to us, the Company has not issued any secured debentures during the (x) The Company does not have accumulated losses. period covered by our report. Accordingly, the The Company has not incurred cash losses during provisions of clause 4 (xix) of the Companies the financial year covered by our audit and the (Auditor’s Report) Order, 2003 are not applicable immediately preceding financial year. to the Company. (xi) In our opinion and according to the information and (xx) During the period covered by our audit report, the explanations given to us, the Company has not Company has not raised any money by public issues. defaulted in repayment of dues to a financial institution, bank or debenture holder. (xxi) To the best of our knowledge and belief and according to the information and explanations (xii) The Company has not granted any loans and given to us, no fraud on or by the Company has advances on the basis of security by way of pledge been noticed or reported during the course of our of shares, debentures and other securities during audit. the year. Accordingly, the provisions of clause 4 (xii) of the Companies (Auditor’s Report) Order, 2003 are not applicable to the Company. For S. B. BILLIMORIA & Co. (xiii) In our opinion, the Company is not a chit fund or a Chartered Accountants nidhi/mutual benefit fund/society. Accordingly, the provisions of clause 4 (xiii) of the Companies (Auditor’s Report) Order, 2003 are not applicable to N VENKATRAM the Company. Partner Membership No: 71387 (xiv) In our opinion and according to the information and explanations given to us, the Company is not dealing Mumbai, 26 June, 2006

41 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

BALANCE SHEET AS AT 31 MARCH, 2006 As at Schedule 31 March, 2005 Rupees’000 Rupees’000 FUNDS EMPLOYED: 1 SHARE CAPITAL 1 2,850,000 2,850,000 2 RESERVES AND SURPLUS 2 57,761,671 54,430,468 3 TOTAL SHAREHOLDERS’ FUNDS 60,611,671 57,280,468 4 UNSECURED LOANS 3 982,501 — 5 DEFERRED TAX LIABILITY (NET) 750,926 996,796 (Refer Note B15, Schedule 20) 62,345,098 58,277,264 APPLICATION OF FUNDS: 6 FIXED ASSETS 4 (a) Gross Block 40,996,363 31,826,824 (b) Less: Accumulated Depreciation/Amortisation 10,910,817 8,356,542 (c) Net Block 30,085,546 23,470,282 (d) Capital work-in-progress 1,478,094 5,131,681 31,563,640 28,601,963 7 INVESTMENTS 5 24,993,393 12,005,839 8 A. CURRENT ASSETS (a) Inventories 6 38,019 19,651 (b) Sundry Debtors 7 7,375,710 5,140,573 (c) Cash and Bank Balances 8 2,568,815 14,091,243 (d) Other Current Assets 9 983,025 752,809 10,965,569 20,004,276 B. LOANS AND ADVANCES 10 13,063,532 14,892,865 24,029,101 34,897,141 9 Less: CURRENT LIABILITIES AND PROVISIONS (A) Current Liabilities 11 15,674,824 14,535,221 (B) Provisions 12 2,566,212 2,692,458 18,241,036 17,227,679 10 NET CURRENT ASSETS [(8) less (9)] 5,788,065 17,669,462 11 TOTAL ASSETS (NET) 62,345,098 58,277,264 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 20 As per our report attached For and on behalf of the Board For S.B. BILLIMORIA & CO. Chartered Accountants

N. VENKATRAM SUBODH BHARGAVA N. SRINATH Partner Chairman Executive Director

RAJIV DHAR SATISH RANADE Chief Financial Officer Company Secretary & Chief Legal Officer MUMBAI MUMBAI DATED: 26 June, 2006 DATED: 26 June, 2006

42 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2006 Schedule Year ended 31 March, 2005 Rupees’000 Rupees’000 INCOME: 1 REVENUES FROM TELECOMMUNICATION SERVICES 13 37,809,525 33,030,391 2 OTHER INCOME 14 1,334,228 519,873 3 INTEREST INCOME 15 389,302 554,938 4 INTEREST ON INCOME TAX REFUNDS 564,218 — 5 TOTAL INCOME 40,097,273 34,105,202 EXPENDITURE: 6 SALARIES AND RELATED COSTS 16 2,090,591 1,412,808 7 NETWORK COSTS 17 20,958,674 20,030,893 8 OPERATING AND OTHER EXPENSES 18 6,001,739 3,895,660 9 INTEREST EXPENSE 18,027 779 10 DEPRECIATION AND AMORTISATION 4 3,595,572 2,441,535 Less: TRANSFER FROM CAPITAL RESERVE (1,846) (1,859) 11 PRIOR PERIOD ADJUSTMENTS (NET) 19 (109,004) — 12 TOTAL EXPENDITURE 32,553,753 27,779,816 PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 7,543,520 6,325,386 13 EXCEPTIONAL ITEMS: (a) Profit from sale of long term investment, net of licence fee — 4,687,303 (b) Provision for recoverable pension obligation (Refer Note B6, Schedule 20) (64,220) (472,866) (c) Fixed Assets written off (Refer Note B8, Schedule 20) (612,127) — PROFIT BEFORE TAXES 6,867,173 10,539,823 14 TAXES (a) CURRENT TAX (2,275,260) (2,050,519) (b) DEFERRED TAX 245,870 (925,630) (c) FRINGE BENEFIT TAX (42,363) — PROFIT AFTER TAXES 4,795,420 7,563,674 15 BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR 11,859,083 7,004,890 AMOUNT AVAILABLE FOR APPROPRIATIONS 16,654,503 14,568,564 16 APPROPRIATIONS : (a) PROPOSED DIVIDEND (Refer Note B3, Schedule 20) 1,282,500 1,710,000 (b) TAX ON DIVIDEND 179,871 243,114 (c) GENERAL RESERVE 479,542 756,367 BALANCE CARRIED TO BALANCE SHEET 14,712,590 11,859,083 EARNINGS PER SHARE (EPS) 17 Basic/Diluted earnings per share, before exceptional items (Rs.) 18.40 14.34 (Refer Note B18, Schedule 20) 18 Basic/Diluted earnings per share, including exceptional items (Rs.) 16.83 26.54 (Refer Note B18, Schedule 20) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 20 As per our report attached For and on behalf of the Board For S.B. BILLIMORIA & CO. Chartered Accountants

N. VENKATRAM SUBODH BHARGAVA N. SRINATH Partner Chairman Executive Director

RAJIV DHAR SATISH RANADE Chief Financial Officer Company Secretary & Chief Legal Officer MUMBAI MUMBAI DATED: 26 June, 2006 DATED: 26 June, 2006 43 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH, 2006 Year ended 31 March, 2005 (Rupees in ‘000) (Rupees in ‘000) 1 CASH FLOWS FROM OPERATING ACTIVITIES PROFIT BEFORE TAX AND EXCEPTIONAL ITEMS 7,543,520 6,325,386 Adjustments for: Depreciation 3,595,572 2,441,535 Transfer from capital reserve (1,846) (1,859) Loss/(Profit) on sale of fixed assets 21,131 (11,111) Interest income (389,302) (554,938) Interest expense 18,027 366 Fixed assets written down - 32,547 Interest on income tax refunds (564,218) - Dividend income/profit on sale of current investments (483,069) (287,445) Exchange difference on cash and cash equivalents 886 (4,673) Valuation loss on current investments - 149 Dividend income from long-term investments - (6,331) OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 9,740,701 7,933,626 Inventories (18,368) 4,440 Sundry debtors (2,231,725) (1,634,425) Other current assets (360,068) 121,419 Loans and advances (113,156) (25,059) Current liabilities and provisions 2,290,637 589,198 Cash generated from operations before tax 9,308,021 6,989,199 Income taxes refunds / (paid ) 265,563 (3,756,751) Interest on income tax refunds 564,218 - NET CASH FROM OPERATING ACTIVITIES 10,137,802 3,232,448 2 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (7,969,579) (10,605,756) Purchase of long-term investments (1,755,180) (2,354,000) Investments in preference share capital of subsidiaries (1,083,052) - Investments in equity share capital of subsidiaries (2,037,776) (202,880) (Purchase)/Sale of current investments (net of mutual funds dividend re-invested) (net) (6,142,630) 8,570,632 Payment made for acquisition of Seven Star Dot Com business (Refer note 3, Schedule 11) (30,483) Proceeds from sale of fixed assets 7,023 733,930 Proceeds from sale of long-term investment ( net of licence fee ) - 7,789,383 Proceeds from liquidation of subsidiaries - 221 Sale of investments in subsidiary 525 - Advances paid for equity investments in subsidiaries - (226,237) Loans to subsidiaries (net) (2,175,146) (1,881,735) Dividend income on long term investments - 6,331 Dividend income on current investments 44,264 56,850 Fixed deposits (net) 11,750,682 (1,702,391) Interest received 449,417 580,089 NET CASH FROM / (USED IN) INVESTING ACTIVITIES (8,941,935) 764,437 3 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from unsecured loan (net) 982,501 - Repayment of unsecured loans (net) - (630,000) Dividends paid including dividend tax (1,949,693) (1,450,549) Interest paid (5,072) (366) CASH FLOW FROM / (USED IN) FINANCING ACTIVITIES (972,264) (2,080,915) NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 223,603 1,915,970 CASH AND CASH EQUIVALENTS AS AT 1 APRIL, 2005 2,222,581 301,938 (Refer note B14, Schedule 20) Exchange difference on cash and cash equivalents (886) 4,673 CASH AND CASH EQUIVALENTS AS AT 31 MARCH, 2006 2,445,298 2,222,581 (Refer note B14, Schedule 20) Notes : 1. Figures in brackets represent outflows. 2. Advances paid for equity investments in VSNL Singapore Pte.Ltd. and VSNL Lanka Ltd. of Rs.226,237 thousands have been converted into equity during the year ended 31 March,2006. 3. Loans to Subsidiaries of Rs.1,304,400 thousands have been converted into equity during the year ended 31 March,2006. As per our report attached For and on behalf of the Board For S.B. BILLIMORIA & CO. Chartered Accountants

N. VENKATRAM SUBODH BHARGAVA N. SRINATH Partner Chairman Executive Director

RAJIV DHAR SATISH RANADE Chief Financial Officer Company Secretary & Chief Legal Officer MUMBAI MUMBAI DATED: 26 June, 2006 DATED: 26 June, 2006

44 SCHEDULES FORMING PART OF THE BALANCE SHEET SCHEDULE - 1 As at As at 31 March, 2006 31 March, 2005 SHARE CAPITAL Rupees ‘000 Rupees ‘000 AUTHORISED 300,000,000 (2005:300,000,000) Equity Shares of Rs.10 each 3,000,000 3,000,000

ISSUED, SUBSCRIBED AND PAID UP 285,000,000 (2005: 285,000,000) Equity Shares of Rs.10 each, fully paid-up 2,850,000 2,850,000

Notes: 1) 60,000,000 (2005: 60,000,000) shares have been allotted as fully paid up, pursuant to the contract without payment being received in cash 2) 210,000,000 (2005: 210,000,000) shares have been allotted as fully paid bonus shares by capitalisation of General Reserve 3) 15,000,000 (2005:15,000,000) shares are allotted as fully paid up by way of Euro issue represented by 30,000,000 American Depository Receipts (ADRs)

SCHEDULE - 2 RESERVES AND SURPLUS (a) CAPITAL RESERVE (Refer Note B2, Schedule 20) Balance at the beginning of the year 2,059,898 2,061,757 Less : Transferred to profit and loss account (1,846) (1,859) 2,058,052 2,059,898 (b) Securities Premium Account Balance at the beginning of the year 8,348,834 8,348,834 8,348,834 8,348,834 (c) General Reserve Balance at the beginning of the year 32,162,653 31,406,286 Add: Transferred from profit and loss account 479,542 756,367 32,642,195 32,162,653 (d) PROFIT AND LOSS ACCOUNT Balance carried forward 14,712,590 11,859,083 57,761,671 54,430,468

SCHEDULE - 3 UNSECURED LOANS Short Term Foreign Currency Loans From Banks 982,501 — 982,501 —

45 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006 28,601,963 (Rupees ‘000) 5,131,681 1,478,094 31,563,640 2006 2006 2005 n Adjustments Expense reduction in cost of gross block and corresponding reductionreduction in in cost of gross block 15,577,519 thousands and Rs. Rs. aggregating depreciation accumulated net reduction in carryingThe cost 6,013,426 thousands respectively. Securities Premium debited to 9,564,093 thousands was Rs. aggregating of the shareholders with the terms of the approval in accordance Account at Bombay. and the High Court of Judicature Rs. 934 thousands (2005: Rs. 11,283 thousands) on account of increase in of increase 11,283 thousands) on account Rs. 934 thousands (2005: Rs. rates. exchange in foreign fluctuations to liabilities consequent circuits telecommunication domestic and international for (IRUs) 2,638,393 thousands). Rs. 2,056,664 thousands (2005: Rs. 6 year. the previous for in italics are Figures 3 net of are in Progress Work and Machinery/ Plant to Capital Additions 4 and machinery Rights of Use includes the net block of Indefeasible Plant 5 included 2004, ended 31 March the year Deduction/adjustments for SCHEDULES FORMING PART OF THE BALANCE SHEET OF SCHEDULES FORMING PART 2005 Adjustments 2006 2005 Amortisatio 16,974 - (400) 16,574 9,178 1,453 (311) 10,320 6,254 7,796 16,574 2,254 (935) 17,893 10,320 1,383 (595) 11,108 6,785 6,254 782,327 -325,564 - 114,950307,994 782,327 58,930 (8,216) 28,023 432,298 (2,117) 364,807 100,161 8,286 28,065 90,307 - (5,306) 17,059 36,309 122,920 (927) 746,018 309,378 106,439 754,304 225,403 258,368 217,687 432,298 47,541 (1,163) 478,676 122,920 52,072 (761) 174,231 304,445 309,378 364,807 28,370 (5,230) 387,947 106,439 18,706 (1,584) 123,561 264,386 258,368 2,576,781 4,059 (4,241) 2,576,5991,406,186 290,371 146,411 40,871 (18,270)1,019,514 1,534,327 (837) - 509,516 330,405 2,246,194 (50,000) 287,794 2,286,410 969,514 (10,194) 787,116 16,992 747,211 200,903 896,670 - 217,895 751,619 1,002,522 17,076,708 8,799,631 (725,961) 25,150,378 4,890,151 1,857,104 (2,117) 6,745,138 18,405,240 12,186,557 23,512,048 9,123,981 (809,205) 31,826,824 5,934,699 2,441,535 (19,692) 8,356,542 23,470,282 17,577,349 registered. assets acquired on or after 2001. 8,384 thousands) pertains to 31 March Rs. (2005: executed. not been have in respect of which agreements New Delhi space at (including advances capital for 37,821 Rs. expenditure 30,874 thousands 2005:Rs. TOTAL 31,826,824 10,847,325 (1,677,786) 40,996,363 8,356,542 3,595,572 (1,041,297) 10,910,817 30,085,546 23,470,282 PROGRESS thousands) GRAND TOTAL (i) is not done. of which conveyance 2,558 thousands in respect Rs. (ii) Land in Srinagar respect Leasehold of which lease deed is not available. (iii) executed/ has not been of which lease agreement 12,079 thousands in respect Rs. (iv) 1,640 thousands identified as Surplus Land. Rs. (i) 18,414 thousands of which Rs. leasehold office space, 77,888 thousands for Rs. (ii) Societies under formation. cost of flats in Co-operative 4,398 thousands being Rs. (iii) office 10,030 thousands for and Rs. at Mumbai flats 335,181 thousands for Rs. (a) LAND 782,327 - - 782,327 36,309 8,286 - 44,595 737,732 746,018 (d) FURNITURE AND FIXTURES (b) BUILDINGS 2,576,599(e) OFFICE EQUIPMENTS 18,035(f) COMPUTERS (268) 2,594,366 330,405 1,534,327 452,526 41,154 (32,507) 1,954,346 (12) 787,116 371,547 2,222,819 287,374 2,246,194 (29,988) 1,044,502 909,844 747,211 (h) GOODWILL 969,514 161,888 - 1,131,402 217,895 194,601 - 412,496 718,906 751,619 (c) PLANT AND MACHINERY 25,150,378 10,136,711 (1,637,683) 33,649,406 6,745,138 2,991,996(g) (1,008,357) VEHICLES MOTOR 8,728,777 24,920,629 18,405,240 (i) WORK-IN- CAPITAL SL.NO. FIXED ASSETS BLOCK GROSS 1 April, Additions Deductions/March, 31 1 April, Depreciation/ Deductions/DEPRECIATION/AMORTISATION ACCUMULATED March, 31 March, 31 March, 31 NET BLOCK SCHEDULE - 4 FIXED ASSETS NOTES: 1This includes: 638,340 thousands under lease. Land includes Rs. 2 block of buildings include: Gross

46 SCHEDULES FORMING PART OF THE BALANCE SHEET SCHEDULE - 5 Number of shares As at As at 31 March, 2006 31 March, 2005 INVESTMENTS Rupees ‘000 Rupees ‘000 I. TRADE INVESTMENTS (At Cost) A. Fully paid Equity Shares (Unquoted) (a) Tata Teleservices Ltd. 952,812,000 10,113,180 8,358,000 (117,012,000 equity shares of Rs 10 each subscribed during the year) (Refer Note B4, Schedule 20) (b) New ICO Global Communications (Holdings) Limited 180,373 65 65 (Class A common stock of US$ 0.01 each) (c) United Telecom Limited - Joint Venture 3,732,400 233,275 233,275 (Equity shares of NRS 100) (Refer Note B5, Schedule 20) B. Investment in Subsidiary Companies (Unquoted) (a) VSNL Lanka Limited 15,179,358 82,382 73,396 (1,586,159 equity shares of LKR 10 each subscribed during the year) (b) VSNL Singapore Pte Limited (i) 35,000,000 equity shares of US$ 1 each subscribed during the year 40,000,000 1,747,873 226,170

(ii) 24,205,250 10% cumulative convertible redeemable Preference Shares of US$1 each subscribed during the year 24,205,250 1,083,052 — (Refer Note B23, Subnote (3), Schedule 20) (c) VSNL America Inc. 3,000 13,125 13,125 (3,000 equity shares of US$ 0.01 each) (d) VSNL Bermuda Limited — — 525 (During the year 1,200,000 equity shares of US$ 0.01 sold to VSNL Singapore Pte Limited) (e) VSNL SNOSPV Pte. Ltd. 401,655 16,786 — (401,655 equity shares of US$ 1.00 each subscribed during the year) (Refer Note B11, Schedule 20) (f) VSNL Broadband Ltd (formerly known as Tata Power Broadband Company Limited) 70,000,000 2,020,937 — (70,000,000 equity shares of Rs. 10 each acquired during the year) (Refer Note B12, Schedule 20) 15,310,675 8,904,556

47 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULE - 5 No of Units As at As at 31 March, 2006 31 March, 2005 INVESTMENTS (Contd.) Rupees ‘000 Rupees ‘000 II. OTHERS INVESTMENTS IN MUTUAL FUNDS (Unquoted) (a) Liquid Dividend Plan (including dividend reinvestment) Birla Cash Plus-Daily Dividend 10,119,643 101,394 — DSP Merrill Lynch Liquid Fund-Daily Dividend 395,563 395,642 — Principal Cash Management Fund- Liquid Option Institutional Premium Plan- Dividend Reinvestment Plan — — 200,073 Prudential ICICI Sweep Cash Option Daily Dividend 13,557,797 135,578 — Standard Chartered Liquidity Manager-Plus-Daily Dividend 450,186 450,211 — TATA Liquidity Management Fund-Daily Dividend 558,906 560,138 — UTI Liquid Cash Plan Institutional Daily Income Option — — 105,144 UTI Money Market Fund-Daily dividend option 38,094,837 663,813 — (b) Fixed Maturity Plan ABN AMRO Fixed Term Plan Series 2 Quarterly Plan A Dividend 30,000,000 300,000 — ABN AMRO Fixed Term Series-Regular Growth 10,000,000 100,000 — Birla FMP Quarterly Series 3- Plan A Dividend payout — — 239,851 Birla FTP-Quarterly Series 1 Dividend Payout 30,000,000 300,000 — Birla FTP-Quarterly Series 2 Dividend Payout 30,000,000 300,000 — Chola FMP- Series 2 (Quarterly Plan-I)-Dividend 20,000,000 200,000 — Chola FMP-Series 2 (Quarterly Plan II)-Dividend 20,000,000 200,000 — Chola FMP-Series 3 (Quarterly Plan I)-Dividend 20,000,000 200,000 — Deutsche Fixed Term Fund Series 8-Dividend Option 20,000,000 200,000 — DSP Merrill Lynch -Fixed Term Plan-Series 1B Dividend 301,224 301,225 — DSP Merrill Lynch-Fixed Term Plan -Series 2-Dividend 30,195,924 301,960 — HDFC Fixed Investment Plan- June2004 — — 250,031 HDFC FMP 3M March06 10,000,000 100,000 — HSBC Fixed Term Series-3-Dividend 30,124,644 301,246 — HSBC Fixed Term Series-7-Dividend 30,177,059 301,771 — JM Fixed Maturity Plan QSA 5- Dividend — — 252,192 Kotak FMP Series 20-Dividend 20,000,000 200,000 — Kotak FMP Series 23 -Dividend 10,000,000 100,000 — Kotak FMP Series XV-Dividend 25,275,700 252,758 — Kotak FMP Series XVIII-Dividend 30,000,000 300,000 — Principal Deposit Fund (FMP-3) 91 Days- Dividend Reinvestment Plan — — 201,654 Principal Deposit Fund (FMP-3-20) 91 Days Plan 40,255,495 402,556 — Principal Pnb Fixed Maturity Plan 91 Days SeriesII 30,147,799 301,479 — Prudential ICICI FMP- Quarterly Dividend Series — — 150,000 Prudential ICICI FMP-Yearly Series XXIV Dividend 30,107,619 301,077 — Prudential ICICI FMP-Yearly Series XXV Dividend 60,808,800 608,088 — SBI Magnum Debt Fund Series 180 Days (December 04) Dividend Option — — 201,672 SBI Magnum Debt Fund Series 180 Days (November 04) Dividend Option — — 150,666 Standard Chartered Fixed Maturity- 4th Plan Dividend 20,077,000 200,770 — Standard Chartered Fixed Maturity-3 rd Plan Dividend 30,165,000 301,650 — Sundaram Fixed Term Plan Series 1 Feb 06 (100 days)-Dividend Plan 20,000,000 200,000 — TATA Fixed Horizon Fund-Series 2B Option (18 Months) Growth 10,000,000 100,000 —

48 SCHEDULE - 5 No of Units As at As at 31 March, 2006 31 March, 2005 INVESTMENTS (Contd.) Rupees ‘000 Rupees ‘000 TATA Fixed Horizon Fund Series 2 Plan A (13 Months)-Growth 10,000,000 100,000 — TATA Fixed Horizon Fund Series 3 Scheme 2 B (18 Months)-Growth 10,000,000 100,000 — TATA Fixed Horizon Fund Series 3 Scheme D (13 Months)-Growth 10,000,000 100,000 — TATA Fixed Horizon Fund Series 3 Scheme F (18 Months)-Growth 10,000,000 100,000 — TATA Fixed Horizon Fund Series 5 Scheme B (6 Months)-Dividend 30,136,030 301,362 — TATA Fixed Horizon Fund Yearly Growth (August 04) — — 100,000 TATA Fixed Horizon Fund Yearly Growth (November 04) — — 50,000 TATA Fixed Horizon Fund Yearly Growth (September 04) — — 500,000 UTI Fixed Maturity Plan - Qfmp (SeriesIX) Dividend Plan — — 200,000 UTI Fixed Maturity Plan - Qfmp (SeriesVIII) Dividend Plan — — 300,000 UTI-Fixed Maturity Plan (QFMP/0206/11) Dividend Plan 30,000,000 300,000 — (c) Income Plan JM equity and derivative fund — — 200,000 9,682,718 3,101,283 24,993,393 12,005,839 Notes : (1) Book Value of unquoted investments 24,993,393 12,005,839 (2) All investments other than investments in Mutual Funds are long-term investments (3) Current Investment bought and sold during the year

Scheme Name Face Value No. of Units Purchase Cost In Rs. Rs. in ‘000

Birla FMP- Series 2- Quarterly- Dividend Payout 10 39,968,425 400,000 DSP ML Quarterly Fixed Maturity Plan Dividend Reinvestment 10 50,641,021 506,411 Grindlays Fixed Maturity Plan-Quarterly Dividend Reinvestment 10 25,000,000 250,000 Grindlays Fixed Maturity Plan Quarterly Series 18- Dividend 10 20,000,000 200,000 ING Vysya Quarterly Fixed Maturity Plan Series IV- Dividend 10 45,000,000 450,000 JM Fixed Maturity Fund QSE 7- Dividend Option 10 20,238,808 202,388 JM Fixed Maturity Fund QSA5- Dividend Option 10 80,282 803 JM Fixed Maturity Plan QSF 6- Dividend Option 10 20,000,000 200,000 JM Fixed Maturity Fund- QSG7- Dividend Option 10 20,000,000 200,000 Kotak FMP Series XII Dividend 10 50,580,686 505,810 Principal Fixed Maturity Plan Quarterly 10 68,764 688 Prudential ICICI FMP Quarterly Series XXV- Dividend 10 165,126 1,651 SBI Magnum Debt Fund Series II - Monthly Dividend Reinvestment 10 145,440 1,473 SBI Magnum Debt Fund Series I - Monthly Dividend Reinvestment 10 221,676 2,253 UTI Fixed Maturity Plan- QFMP 1105/ II 10 40,000,000 400,000 UTI Fixed Maturity Plan- QFMP 1205/ II 10 50,000,000 500,000 JM Floater Short term plan Fortnightly Dividend Reinvestment 10 94,795,864 954,147

49 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULE 5 (3): Current Investment bought and sold during the year (Contd.)

Scheme Name Face Value No. of Units Purchase Cost In Rs. Rs. in ‘000 Deutsche Floating Rate Fund - Weekly Dividend Reinvestment 10 8,830,561 90,707 Grindlays Floating Rate Fund “Plan C” Daily Dividend Reinvestment 10 14,124,962 141,255 Kotak Floater Long Term- Weekly Dividend Reinvestment 10 6,082,993 60,863 Prudential ICICI Long Term Floating Rate Plan B Dividend 10 59,246,179 595,542 TATA Floater Fund Dividend Reinvestment 10 20,070,451 200,705 TATA Floating Rate Short Term Institutional Plan- Daily Dividend Reinvestment 10 50,801,425 508,552 UTI Floating Rate Fund Short Term Plan Daily Dividend Reinvestment 10 196,245,982 1,975,266 Birla Cash Plus Institutional Premium Plan Daily Dividend Reinvestment 10 261,777,929 2,622,884 Birla Sunlife Cash Manager Institutional Plan- Daily Dividend Reinvestment 10 152,375,909 1,523,987 DSP ML Liquidity Institutional Plan Daily Dividend Reinvestment 1000 3,740,658 3,741,406 Deutsche Insta Cash Plus- IP- Daily Dividend Reinvestment 10 149,887,680 1,501,800 Grindlays Cash Fund SIP “Plan C” Daily Dividend Reinvestment 10 231,032,836 2,310,333 Grindlays Liquidity Manager- Daily Dividend Reinvestment 10 218,330,652 2,183,515 HDFC Cash Management Fund- Savings Daily Dividend Reinvestment 10 16,454,791 175,020 HDFC Cash Management Savings Plus- Weekly Dividend Reinvestment 10 17,790,074 178,209 ING Vysya Liquid Institutional Premium Plan Daily Dividend Reinvestment 10 571,952,243 5,720,673 JM High Liquidity- Super Institutional Plan Daily Dividend Reinvestment 10 215,994,355 2,163,507 Kotak Liquid Institutional Premium Plan- Daily Dividend Reinvestment 10 76,232,633 932,180 Kotak Liquid Institutional Premium Plan Growth 10 29,968,832 400,000 Principal Cash Management LO Institutional Premium Plan Daily Dividend Reinvestment 10 295,909,851 2,959,292 Prudential Liquid Super Institutional Plan- Daily Dividend Reinvestment 10 21,443,498 254,137 Prudential Liquid Institutional Premium Plan- Daily Dividend Reinvestment 10 278,848,282 3,097,869 Prudential ICICI Liquid Sweep Daily Dividend Reinvestment 10 15,000,000 150,000 Sundaram Liquid Super Institutional Plan- Daily Dividend Reinvestment 10 139,587,332 1,409,176 TATA Liquid Super High Investment Plan- Daily Dividend Reinvestment 1000 5,705,326 6,358,591 Templeton India Treasury Management Account Institutional Plan- Daily Dividend Reinvestment 1000 262,522 262,531 UTI Liquid Cash Plan Institutional - Daily Income Option 1000 9,555,971 9,704,430 UTI Liquid Cash Fund Institutional Plan- Growth 1000 459,772 500,000 UTI Liquid Cash Fund Institutional Plan Daily Dividend Reinvestment 1000 1,056,708 1,073,412 UTI Money Market Fund Daily Dividend Reinvestment 10 70,577,652 1,229,835 Birla Bond Plus- Institutional- Fortnightly Dividend Reinvestment 10 5,823,218 60,960 Deutsche Short Maturity Fund- Weekly Dividend Reinvestment 10 18,938,290 194,094 Kotak Short Term Bond Fund- Monthly Dividend 10 6,126,834 61,633 Principal Short term Income Plan- Weekly Dividend 10 27,962,081 305,704 Prudential ICICI Short Term Plan Inst Plan- Fortnightly Dividend 10 47,131,572 514,823 TATA Short Term Bond Fund- Dividend 10 106,162,234 1,157,784 Templeton Short Term Income Plan- Weekly Dividend Reinvestment 1000 132,078 144,009 Templeton Short Term Income Fund Institutional Plan Weekly Dividend 1000 144,941 144,942 Templeton Short Term Income Fund Institutional Plan Weekly Dividend 1000 121,757 121,758 Templeton Short Term Income Plan- Weekly Dividend Reinvestment 1000 110,952 120,932

50 SCHEDULES FORMING PART OF THE BALANCE SHEET As at As at 31 March, 2006 31 March, 2005 SCHEDULE - 6 Rupees ‘000 Rupees ‘000 INVENTORIES Equipment for resale 10,174 26,334 Less: Provision for obsolescence (85) (9,926) 10,089 16,408 Consumable stores and spares 27,930 3,243 38,019 19,651

SCHEDULE - 7 SUNDRY DEBTORS (a) Over six months (Unsecured) Considered good 705,867 411,495 Considered doubtful 1,249,820 1,310,532 1,955,687 1,722,027 Less: Provision for doubtful debts (1,249,820) (1,310,532) 705,867 411,495 (b) Other debts (unsecured) Considered good 6,669,843 4,729,078 7,375,710 5,140,573 Note: (1) Includes amounts due from subsidiaries of Rs. 1,572,655 thousands (2005: Rs. 229,075 thousands)

SCHEDULE - 8 CASH AND BANK BALANCES (a) Cash in hand 440 890 (b) Cheques in hand 1,635,070 28,620 (c) Remittances in transit 630,265 — (d) Current accounts with Scheduled Banks 190,831 193,071 (e) Deposit accounts with Scheduled Banks 112,209 13,868,662 2,568,815 14,091,243 Note: (1) Deposit accounts include Rs. Nil (2005: Rs. 5,972,069 thousands) representing unutilised monies from GDR issue

SCHEDULE - 9 OTHER CURRENT ASSETS (a) Interest receivable 91,192 151,307 (b) Service tax recoverable 306,076 279,453 (c) Pension contributions recoverable from Government of India (net of provision of Rs. 537,086 thousands; 2005: Rs. 472,866 thousands) (Refer note B6, Schedule 20) 74,424 74,424 (d) NLD licence fees reimbursement recoverable from Government of India 511,158 245,608 (e) Others 175 2,017 983,025 752,809 Note: (1) Interest receivable includes interest due from subsidiaries of Rs. 54,986 thousands (2005: Rs. 25,588 thousands)

51 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULES FORMING PART OF THE BALANCE SHEET As at As at SCHEDULE - 10 31 March, 2006 31 March, 2005 LOANS AND ADVANCES Rupees ‘000 Rupees ‘000 (a) Unsecured - Considered good (i) Staff advances (note 1) 113,157 135,171 (ii) Deposits with public bodies 49,417 40,953 (iii) Other deposits 124,612 71,904 (iv) Other loans and advances (note 2) 829,158 754,228 (v) Prepaid expenditure 265,481 270,225 (vi) Advance payment of tax (net of provision for tax) 8,929,226 11,512,412 (vii) Advance against equity investments in subsidiaries — 226,237 (viii) Loans to subsidiaries 2,752,481 1,881,735 13,063,532 14,892,865 (b) Unsecured - Considered doubtful Other loans and advances 73,786 73,786 Less: Provision for doubtful advances (73,786) (73,786) 13,063,532 14,892,865 Notes: (1) Staff Advances includes loans due by an officer of the Company Rs. 151 thousands (2005:Rs. 176 thousands) (Maximum amount outstanding during the year Rs. 176 thousands (2005: Rs. 199 thousands)) (2) Other loans and advances includes amounts due from subsidiaries of Rs.378,522 thousands (2005: Rs. 242,174 thousands) SCHEDULE - 11 CURRENT LIABILITIES (a) Sundry Creditors: (i) Creditors for interconnect charges 4,431,513 3,504,086 (ii) Others (note 3) 4,905,910 5,721,507 (b) Unearned income and deferred revenues 3,212,198 2,972,834 (c) Liability towards Investors Education and Protection Fund under Section 205C of the Companies Act 1956 (not due): Unpaid dividend 11,906 11,772 (d) Government of India Current Account 205,747 210,393 (e) Other liabilities (note 4) 2,894,595 2,114,629 (f) Interest accrued but not due on short term foreign currency loans from banks 12,955 — 15,674,824 14,535,221 Notes: (1) Rs.173 thousands dues to Indochem Industries, a small scale industrial undertaking, for more than 30 days (2) Dividends are not outstanding for a period exceeding seven years. (3) Sundry creditors includes Rs. 140,250 thousands payable on purchase of ISP business of Seven Star Dot Com Pvt. Ltd. (Refer Note B13, Schedule 20) (4) Includes Rs. 248,849 thousands overdrawn book bank balance (2005:Rs. 74,556 thousands) (5) Sundry creditors includes Rs. 77,699 thousands (2005: Rs. 525 thousands) due to subsidiaries

SCHEDULE - 12 PROVISIONS (a) Provisions for employee benefits 917,365 701,893 (b) Provision for proposed dividend 1,282,500 1,710,000 (c) Tax on dividend 179,871 239,828 (d) Provision for contingencies (Refer Note B22, Schedule 20) 186,476 40,737 2,566,212 2,692,458

52 SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNT Year ended Year ended SCHEDULE - 13 31 March, 2006 31 March, 2005 REVENUES FROM TELECOMMUNICATION SERVICES Rupees ‘000 Rupees ‘000 (a) Telephone 21,638,671 18,784,022 (b) Leased channel 7,618,766 7,191,914 (c) Frame relay 1,639,859 1,382,652 (d) Internet 6,258,623 4,953,008 (e) Other traffic revenues 653,606 718,795 37,809,525 33,030,391

SCHEDULE-14 OTHER INCOME (a) Dividend income from current investments 406,515 278,419 (b) Dividend income from long term investments — 6,331 (c) Profit on sale of of current investments (net) 76,554 9,026 (d) Profit on sale of fixed assets (net) — 11,111 (e) Rent 102,226 48,786 (f) Exchange gain (net) 70,872 — (g) Provisions no longer required written back 344,039 13,761 (h) Other 334,022 152,439 1,334,228 519,873 SCHEDULE-15 INTEREST INCOME (a) Interest income- i. Bank deposits 275,235 520,800 (Tax deducted at source Rs.58,603 thousands, 2005:Rs.93,487 thousands) ii. Other loans and advances 114,067 34,138 (Tax deducted at source Rs.12,742 thousands 2005:Rs.1,648 thousands) 389,302 554,938 Note: (1) Interest income includes Rs. 106,157 thousands (2005: Rs. 25,588 thousands) from subsidiaries. Tax deducted at source on such income is Rs. 11,446 thousands (2005: Nil)

SCHEDULE - 16 SALARIES AND RELATED COSTS (a) Salaries and bonus 1,677,249 1,165,971 (b) Contributions to provident,gratuity and other funds 156,028 56,217 (c) Staff welfare expenses 257,314 190,620 2,090,591 1,412,808

53 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNT Year ended Year ended SCHEDULE-17 31 March, 2006 31 March, 2005 NETWORK COSTS Rupees ‘000 Rupees ‘000 (a) Rent of satellite channels 882,408 1,084,800 (b) Rent of landlines 279,345 1,193,634 (c) Administrative lease charges 117,606 95,389 (d) Royalty and licence fee to Department of Telecommunications 2,037,868 2,112,526 (e) Charges for use of transmission facilities (i) Telephone [net of excess provision written back Rs. 82,400 thousands 15,192,527 14,064,532 (2005: Rs.118,489 thousands)] (ii) Leased channel 664,936 137,286 (iii) Frame relay 377,990 196,101 (iv) Internet 836,470 856,555 (v) Others 569,524 290,070 20,958,674 20,030,893

SCHEDULE - 18 OPERATING AND OTHER EXPENSES (a) Consumption of stores 19,517 16,507 (b) Light and power 369,235 335,325 (c) Repairs and Maintenance: (i) Buildings 121,553 54,300 (ii) Plant and Machinery 1,594,333 1,074,857 (iii) Others 156,444 90,212 (d) Bad debts written off 175,506 526,909 (e) Provision for doubtful debts written back (60,712) (582,138) (f) Provision for doubtful advances - 35,677 (g) Rent 176,976 123,204 (h) Rates and taxes 98,294 83,673 (i) Travelling expenses 246,274 149,601 (j) Telephone and telex 118,159 67,268 (k) Printing, postage and stationery 35,924 27,511 (l) Security expenses 11,227 56,939 (m) Computer software and maintenance 40,295 56,591 (n) Legal and professional fees 496,428 323,046 (o) Advertising and publicity 1,095,010 642,537 (p) Commissions 200,791 77,244 (q) Water charges 10,104 10,774 (r) Insurance 53,070 38,735 (s) Donations 27,867 1,029 (t) Loss on sale of fixed assets (net) 21,131 — (u) Exchange loss (net) — 151,617 (v) Services rendered by third parties 683,170 227,533 (w) Other expenses 311,143 306,709 6,001,739 3,895,660 SCHEDULE - 19 PRIOR PERIOD ADJUSTMENTS (NET) INCOME: Revenues from telecommunication services 67,005 — EXPENSES: Charges for use of transmission facilities, written back (186,904) — Repairs and maintenance 8,157 — Other expenses 2,738 — (109,004) —

Note : Figures in brackets are credits

54 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS SCHEDULE 20 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS A. SIGNIFICANT ACCOUNTING POLICIES 1. Basis of preparation The financial statements are prepared under the historical cost convention, in accordance with the accounting standards issued by the Institute of Chartered Accountants of India and in accordance with the applicable requirements of the Companies Act, 1956. 2. Use of estimates The preparation of financial statements requires the management of the Company to make estimates and assumptions that affect the reported balances of assets and liabilities and disclosures relating to the contingent liabilities as at the date of the financial statements and reported amounts of income and expenses during the period. Examples of such estimates include provisions for doubtful debts and advances, employee retirement benefit obligations, provision for income taxes, impairment of assets and useful lives of fixed assets. 3. Fixed assets a) Fixed assets are stated at cost less accumulated depreciation. Cost includes freight, duties, taxes and all incidental expenses incurred to bring the assets to their present location and condition. b) Fixed assets received as gifts from other Foreign Telecom Administrations are capitalised and credited to capital reserve on the basis of notional cost (cost assessed by customs authorities). Cost includes freight, insurance and customs duty. c) Intangible assets in the nature of Indefeasible Rights of Use (IRUs) for international and domestic telecommunication circuits are recorded as fixed assets. IRU agreements transfer substantially all the risks and rewards of ownership. d) Jointly owned assets are capitalised in proportion to the Company’s ownership interest in such assets. e) Consideration for purchase of business in excess of the value of net assets acquired is recognised as goodwill. f) Assets acquired pursuant to an agreement for exchange of similar assets are recorded at the net book value of the asset given up, with an adjustment for any balancing receipt or payment of cash or other consideration. 4. Depreciation Depreciation is provided on straight line basis (SLM), at the rates and in the manner prescribed in Schedule XIV to the Companies Act, 1956 except as follows: Assets Rates of depreciation/ period of amortisation i) Plant and Machinery a. Land cables 6.33 % b. Earth station and switches 7.92 % c. Other networking equipment 11.88 % d. Overhead fibre cables 19.00 % ii) Goodwill 60 months iii) Indefeasible Rights of Use (IRU’s) Life of IRU or period of agreement, whichever is lower iv) Leasehold land Over the lease period 5. Operating lease Lease arrangements where the risk and rewards incident to ownership of an asset substantially vests with the lessor are classified as operating lease. Rental income and rental expense on assets given or obtained under operating lease arrangements are recognised on a straight - line basis over the term of the lease. The initial direct costs relating to operating leases are recorded as expense as they are incurred.

55 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

6. Impairment At each balance sheet date, the Company reviews the carrying amounts of its fixed assets to determine whether there is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Recoverable amount is the higher of an asset’s net selling price and value in use. In assessing the value in use, the estimated future cash flows expected from the continuing use of the asset and from its ultimate disposal are discounted to their present values using a pre-determined discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. 7. Investments Long-term investments are valued at cost less provision for diminution in value. Provision for diminution in the value is made to recognise a decline, which is other than temporary. Current investments comprising investments in mutual funds are stated at the lower of cost or fair value, determined on an individual investment basis. 8. Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined on a weighted average basis. 9. Retirement Benefits a) Provision for unutilised leave due to employees, gratuity and pension contribution are actuarially determined as at the balance sheet date. b) Contributions to Employees’ Provident Fund and other defined contribution plans are recognised in the profit and loss account in the period when such contributions are made. 10. Revenue recognition a) Revenues from telephony services are recognised at the end of each month based upon minutes of incoming or outgoing traffic completed in such month. Substantial portion of revenues are on account of recoveries from Foreign Telecommunication Administrations for incoming traffic and recovery from domestic carriers for delivery of calls on foreign networks. b) Revenues from data services are recognised over the lease period based on contracted fee schedules. c) Revenues from internet services are recognised based on usage. d) Dividend from investments is recognized when the right to receive payment is established and no significant uncertainty as to measurability or collectibility exists. e) Transactions relating to exchange or swapping of capacities, which results in little or no consideration, represent the exchange of productive assets not held for sale in the ordinary course of business. Such exchanges do not result in the culmination of the earnings process and hence the Company does not recognize any revenue for these types of transactions. 11. Taxation Current tax expense is determined in accordance with the provisions of the Income Tax Act, 1961. Deferred tax assets and liabilities are measured using the tax rates, which have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are recognised for future tax consequences attributable to timing differences between the taxable and accounting income. Deferred tax assets in respect of unabsorbed depreciation and carry forward tax losses are recognised if there is virtual certainty that there will be sufficient future taxable income available to realise such losses. Deferred tax assets in respect of other timing differences are recognised if there is a reasonable certainty that sufficient future taxable income will be available to realise such assets. 12. Foreign currency transactions a) Foreign currency transactions are converted into Indian Rupees at rates of exchange approximating those prevailing at the transaction date. Foreign currency monetary assets and liabilities are translated to Indian

56 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

Rupees at the closing rate prevailing on the balance sheet date. Exchange differences, other than on foreign currency liabilities to purchase fixed assets from countries outside India are recognised in the profit and loss account. Exchange differences on translation of foreign currency liabilities incurred to purchase fixed assets from countries outside India are adjusted in the cost of such assets. b) Premium or discount on forward contracts is amortised over the life of such contracts and is recognised in the profit and loss account, except in respect of forward contracts taken for liabilities for fixed assets where such amortisation is adjusted in the carrying cost of fixed assets. Forward contracts outstanding as at the balance sheet date are stated at exchange rate prevailing at the reporting date and any gains or losses are recognised in the profit and loss account. Profit or loss arising on cancellation or renewal of forward exchange contract is recognised in the profit and loss account in the period of such cancellation or renewal, except in case of a forward contract relating to liabilities for purchase of fixed assets from countries outside India, in which case such profit or loss is adjusted to the carrying cost of such fixed assets.

B. NOTES TO ACCOUNTS 1. The Company was incorporated on 19 March, 1986. The Government of India vide its Order No. G 25015/6/86-OC dated 27 March, 1986, transferred all the assets and liabilities of the OCS (part of the Department of Telecommunications, Ministry of Communications) as appearing in the Balance Sheet as at 31 March, 1986 to the Company with effect from 1 April,1986. As per the letter no. G-25015/6/86-OC dated 23 October, 2001 of Government of India, Department of Telecommunications, there was no requirement to register a formal transfer deed or deed of sale in the matter of such transfer of assets. 2. Capital reserve includes Rs. 2,052,161 thousands (2005:Rs. 2,052,161 thousands) in respect of foreign exchange gains on unutilised proceeds from Global Depository Receipts credited to Capital Reserve in a previous year. 3. The Board of Directors recommended a dividend of Rs. 4.5 (2005: Rs. 6.0 including Rs. 1.5 special dividend) per share for the year ended 31 March, 2006. 4. The Company has an investment of Rs. 10,113,180 thousands in Tata Teleservices Ltd.(“TTSL”) representing an equity interest of 16.14 percent in the issued and paid-up capital of TTSL. TTSL has accumulated losses, which have significantly eroded its net worth. In the opinion of the management, having regard to the long gestation period inevitable to the nature of its business, there is no permanent diminution in value of the investment. During the current financial year, TTSL issued equity shares to certain other investors at a price that is higher than the carrying value of the equity shares in the books of the Company. 5. The Company has an investment of Rs. 233,275 thousands in United Telecom Ltd. Nepal (“UTL”) representing an equity interest of 26.66 percent in the issued and paid-up capital of UTL. UTL has accumulated losses, which have significantly eroded its net worth. In the opinion of the management, having regard to the long gestation period inevitable to the nature of its business and future business projections, there is no permanent diminution in value of the investment. 6. As at 1 April, 2004 proportionate share of pension obligation and payments to erstwhile OCS employees of Rs.547,290 thousands were recoverable from the Government of India (“the Government”). Pursuant to discussions with the Government, the Company had made a provision of Rs. 472,866 thousands in the year ended 31 March, 2005. In the current year, consequent to an actuarial valuation, the pension obligation towards the erstwhile OCS employees has increased by Rs. 64,220 thousands. Pending resolution of the matter and recovery of this amount from the Government, the Company has provided for the additional amount recoverable in the Profit and Loss account. 7. During the year, a consortium owned, high-capacity fibre-optic submarine cable system, SEA-ME-WE 4, was commissioned. The SEA-ME-WE 4 cable system links France to Singapore with Mumbai, India as one of its landing points. As part of the consortium, the Company has capitalised an amount of Rs.1,689,728 thousands as contribution towards the construction of the cable system.

57 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

8. During the year the Company has charged to the Profit and Loss account a sum of Rs.612,127 thousands towards write off of certain fixed assets having a gross value and accumulated depreciation of Rs. 1,594,407 thousands and Rs. 982,280 thousands respectively. In the opinion of the management, these assets do not have future economic use consequent to technological changes and product related advancements.

9. On 30 June, 2005 the Company, through its wholly owned subsidiary VSNL Singapore Pte. Limited (“VSPL”), completed the acquisition of Tyco Global Network (“TGN”) through the purchase of certain net assets and shares of certain companies formed by Tyco International Ltd (“Tyco”) pursuant to the Stock and Asset Purchase Agreement dated 1 November, 2004, for a total purchase consideration of Rs. 6,143,243 thousands ($137.7 million).

10. On 13 February, 2006, the Company through its wholly owned subsidiary VSPL, completed its acquisition of Teleglobe by acquiring 100% of the common shares of Teleglobe pursuant to the Agreement and Plan of Amalgamation dated 25 July, 2005, amongst Teleglobe, the Company and VSNL Telecommunications (Bermuda) Ltd - a wholly-owned subsidiary of VSPL for a total purchase consideration of Rs.8,186,336 thousands ($183.5 million).

11. The Company has incorporated a wholly owned subsidiary, VSNL SNO SPV Pte. Ltd.(“SNOSPV”), which has invested 47 percent in the issued and paid-up share capital of SEPCO Communications Pty. Ltd.(“SEPCO”).

SEPCO is an investment company which has acquired 51 percent controlling stake in the issued and paid-up share capital of SNO Telecommunications (Pty.) Ltd. (“SNO”), the licensed second network operator in South Africa.

12. On 31 October, 2005, the Company completed its acquisition of VSNL Broadband Ltd. (“VBL”) (formerly Tata Power Broadband Ltd.) by purchasing 100% of the common shares of VBL for a cash consideration of Rs.2,020,937 thousands.

13. On 1 March, 2006, the Company purchased the internet service provider (ISP) business of Seven Star Dot Com Pvt. Ltd. (“Seven Star”) under a slump sale agreement. The Company acquired net assets of Rs. 8,795 thousands for a purchase consideration of Rs. 170,683 thousands. Consequently, an amount of Rs. 161,888 thousands has been recognised as goodwill and included under Fixed Assets. The valuation of fixed assets amounting to Rs. 13,543 thousands acquired under the slump sale agreement has been determined by the management based on an independent valuation. Legal formalities relating to transfer of assets and contracts in the name of the Company are pending completion.

14. Cash and cash equivalents represent:- As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Cash and Cheques on hand and balances held with scheduled banks 1,826,341 222,581 Remittances in transit 630,265 - Deposit accounts held with scheduled banks 112,209 13,868,662 2,568,815 14,091,243 Deposits with original maturity over three months (111,709) (11,862,391) Current Account / Deposits held for unpaid dividends (11,808) (6,271) Cash and cash equivalents 2,445,298 2,222,581

58 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

15. Deferred tax liability: As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Deferred tax liability Difference between accounting and tax depreciation 1,816,193 1,857,787 Deferred tax assets Provision for doubtful debts 420,689 441,125 Expenditure on Voluntary retirement schemes 138,634 210,369 Expenditure incurred on NLD license fees (Refer Note (a) below) 265,737 - Unearned income and deferred revenues 181,781 177,169 Others 58,426 32,328 1,065,267 860,991 Net deferred tax liability 750,926 996,796

Note: a. In March 2002, the Company paid a one time entry fee of Rs. 1,000,000 thousands to the Department of Telecommunications for providing National Long Distance (“NLD”) service. The Company commenced its NLD operations with effect from September 2002. Owing to uncertainty relating to the allowability of the one time entry fee paid under Sec 35 ABB of the Income Tax Act, 1961, the Company did not consider the deduction in the provision for tax and consequently did not set up a deferred tax asset. During the current year the Company has setup a deferred tax asset of Rs. 265,737 thousands consequent to the deduction being allowed in its income tax assessment for A.Y. 2003-2004.

16. Included in operating and other expenses: Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Auditors’ remuneration and expenses (i) Audit fees 8,250 5,500 (ii) Tax audit fees 1,500 1,000 (iii) Other professional services 2,635 1,648 (iv) Service tax 1,263 727 Auditors’ remuneration excludes fees of Rs. 4,840 thousands (2005: Rs.2,000 thousands) payable/paid for professional services to a firm of chartered accountants in which some partners of the firm of statutory auditors are partners. 17. Managerial Remuneration a) Managerial Remuneration for whole time director and non-executive directors. The above is inclusive of : Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 (i) Salaries 4,067 3,305 (ii) Contribution to provident and other funds 418 551 (iii) Estimated monetary value of perquisites 375 1,392 (iv) Commission 5,273 2,500 (v) Non-executive directors’ sitting fees 580 615 10,713 8,363

59 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

b) Computation of Net Profit in accordance with Section 309(5) of the Companies Act,1956 Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Profit before taxes as per profit and loss account 6,867,173 10,539,823 Add: Managerial Remuneration 10,713 8,363 Provision for doubtful advances - 35,677 6,877,886 10,583,863 Less: Capital profit on sale of investments - 5,514,486 Provision for doubtful debts written back (net) 60,712 582,138 Net profit as per Section 309(5) of the Companies Act, 1956 6,817,174 4,487,239

c) Commission (i) Whole-time Director 2,500 2,500 (ii) Non-executive Directors 2,773 - Note: The commission payable to whole time director and non-executive directors aggregating to Rs. 5,273 thousands is subject to approval of the shareholders. 18. Earnings per Share

Rupees in 000’s, except Number of Shares and Earnings per share data Year ended Year ended 31 March, 2006 31 March, 2005

Profit before taxes and exceptional items 7,543,520 6,325,386 Income tax expense on profit excluding exceptional items 2,299,411 2,238,229 Profit after tax excluding exceptional items 5,244,109 4,087,157 Exceptional (expense)/ income (net) (676,347) 4,214,437 Income tax benefit/(expense) on exceptional items 227,658 (737,920)

Net Profit after tax and exceptional items 4,795,420 7,563,674

Number of Shares 285,000,000 285,000,000 Earnings per share excluding exceptional items Rs.18.40 Rs.14.34 Earnings per share including exceptional items Rs.16.83 Rs.26.54

60 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

19. Business Segments In the year ended 31 March, 2006, as a result of changes in the form and content of segment information provided to and used by the Management to allocate resources and assess performance and change in the organisational structure, the Company has reviewed and revised its reportable segments. The reportable segments in the current year are “Wholesale Voice”, “Enterprise and Carrier Data” and “Others”. The composition of the reportable segments is as follows - Wholesale Voice: includes International and National Voice services. - Enterprise and Carrier Data: includes corporate data transmission services like IPLC, Frame Relay, ILL and NPLC. - Others: includes Internet, GPSS, Telex, Telegraph, TV up-linking, Transponder lease and other services. In the previous year, “Telephony and related services” which included international and national voice and data services and internet was considered as a reportable segment and other services including transponder lease, television uplinking, gateway packet switching services and video conferencing facilities were reported under “Other Services”. Year ended 31 March, 2006 Rupees ‘000 Wholesale Enterprise and Voice Carrier Data Others Total

Revenues 21,626,466 12,617,977 3,565,082 37,809,525 Segment Profits 4,599,952 10,258,602 862,111 15,720,665 Unallocated expenses (net) 8,286,149 Prior Period Income (net) 109,004 Profit before taxes and exceptional items 7,543,520 Exceptional Items (676,347)

Profit before taxes 6,867,173 Income Taxes 2,071,753

Profit after taxes 4,795,420 Year ended 31 March, 2005 Rupees ‘000 Wholesale Enterprise and Voice Carrier Data Others Total Revenues 18,764,997 11,170,435 3,094,959 33,030,391

Segment Profits 3,095,514 8,738,441 639,468 12,473,423 Unallocated expenses (net) 6,148,037 Profit before taxes and exceptional items 6,325,386 Exceptional Items 4,214,437 Profit before taxes 10,539,823 Income Taxes 2,976,149

Profit after taxes 7,563,674

61 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

i). Revenues and expenses, which are directly identifiable to segments, are attributed to the relevant segment. Expenses on rent of satellite channels and landlines, and royalty and license fee are allocated on the basis of usage. Segment result is segment revenues less segment expenses. Certain costs, including depreciation which are not allocable to segments have been classified as “unallocable expense”. ii). Telecommunication services are provided utilizing the Company’s assets which do not generally make a distinction between the types of services. As a result, fixed assets are used interchangeably between segments. In the absence of a meaningful basis to allocate assets and liabilities between segments, no allocation has been made. iii). Segment information for the year ended 31 March, 2005 has been presented in accordance with the basis of segmentation adopted for the current year for comparative purposes.

Geographical Segment: Segment revenues by Geographical Market Year ended 31 March, 2006 Rupees ‘000 India 20,870,790 United States of America 4,833,240 United Kingdom 3,242,811 United Arab Emirates 2,600,211 Others 6,262,473 37,809,525

Segment revenues by Geographical Market Year ended 31 March, 2005 Rupees ‘000 India 19,075,781 United States of America 3,804,508 United Arab Emirates 2,633,825 Saudi Arabia 1,026,045 Others 6,490,232 33,030,391

For the year ended 31 March, 2006 and 31 March, 2005, revenues from customers, comprise mainly revenues from Wholesale Voice and Enterprise and Carrier data segments under the revised segments.

62 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

20. Related Party Disclosures

(a) List of related parties and relationship: I. Investing party • Panatone Finvest Limited II. Subsidiaries (Held directly) • VSNL Broadband Limited • VSNL America Inc. • VSNL Lanka Ltd. • VSNL Singapore Pte. Ltd. • VSNL SNOSPV Pte. Ltd III. Other Subsidiaries (Held indirectly) • VSNL UK Ltd • VSNL Netherlands BV • VSNL Bermuda Ltd • VSNL Japan K.K • VSNL Telecommunications (Bermuda) Ltd. • VSNL Hong Kong Ltd • ITXC Global Japan YK • ITXC IP Holdings S.a.r.l • Teleglobe America Inc • Teleglobe Asia Data Transport Pte. Ltd • Teleglobe Asia Pte. Ltd • Teleglobe Bermuda Ltd. • Teleglobe Canada ULC • Teleglobe France International S.A.S • Teleglobe International Belgium S.P.R.L • Teleglobe International Hong Kong Ltd • Teleglobe International Ltd • Teleglobe International Luxembourg S.a.r.l • Teleglobe Italy S.r.l • Teleglobe Netherlands B.V • Teleglobe Spain Communications S.L

63 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

• TLGB International Germany GmbH • TLGB Luxembourg Holdings S.a.r.l • TLGB Netherlands Holdings B.V • VSNL (Portugal) Unipessoal Limitada • VSNL Belgium BVBA • VSNL France SAS • VSNL International (Nordics) AS • VSNL International (Global) Corp. • VSNL International (Guam) Llc • VSNL International (Portugal) Instalacao e Manutencao de Redes LDA • VSNL International (US) Inc • VSNL International Australia Pty. Ltd • VSNL International GBRM Ltd • VSNL International IPCO LLC • VSNL International Puerto Rico Inc • VSNL International (ITXC) Corp. • VSNL International(Poland) Sp. Zo.o • VSNL Spain Srl • VSNL Telecommunications(UK) Inc • VSNL(Germany) GMBH • ITXC Global UK Ltd. • ITXC Global Zagreb d.o.o • Enhanced Services Inc • ITXC (UK)Ltd. • ITXC Global HongKong Ltd. IV. Joint Venture • United Telecom Limited V. Joint Venture of wholly owned subsidiary • SEPCO Communications Pty. Ltd. • SNO Telecommunications (Pty) Ltd. (Subsidiary of SEPCO) VI. Key Managerial Personnel • N.Srinath - Executive Director

64 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

(b) Related party transactions (Rupees ‘000) Transactions Investing Subsidiaries Key Joint Joint Venture of Company Managerial Venture wholly owned Personnel subsidiary Dividend paid 694,433 ———— 577,125 ———— Revenues from telecommunication services 3,127,525 — 19,887 — 345,254 — 11,949 — Network cost 416,076 — 9,995 — 60,837 — 180 — Purchase of fixed assets (includes purchase from VSNL Broadband Ltd. Rs. 8,454) 10,036 ——— 3,509 ——— Sale of fixed assets 106 ——— 727,132 ——— Sale of Investment in subsidiary to VSPL 525 ——— ———— Services rendered 12,780 ——— 6,869 ——— Services received 5,968 ——— ———— Equity capital contributions (includes contribution in VSPL Rs. 1,521,703) 1,530,689 ——— 386,839 ——— Preference capital contribution in VSPL 1,083,052 ——— — ——— Interest Income 106,157 ——— 25,588 ——— Loans given(includes loans given to VSPL Rs.15,650,743) 15,767,648 ——— 1,885,244 ——— Loans repaid(includes loans repaid by VSPL Rs.12,904,302) 13,592,502 ——— 3,509 ——— Advances given 1,269,814 ——33,554 441,086 ——— Managerial remuneration — 7,360 —— — 7,748 —— Balances: Receivables 1,627,641 — 16,111 — 237,956 — 9,297 — Payables 77,699 2,500 —— 525 2,500 —— Loans given 2,752,481 ——— 1,907,323 ——— Advances receivable 378,522 ——33,554 459,529 ——— Deferred Revenue 423,935 ——— — ——— Guarantee on behalf of subsidiaries 10,160,045 ——— 98,656 ——— Letter of Comfort on behalf of VSPL 8,029,800 ——— ———— Note: Figures in italic are in respect of the previous year

65 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

(c ) Disclosure in respect of material transactions with related parties Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Revenues from telecommunication services VSNL UK Ltd. 1,225,296 86,061 VSNL America Inc. 1,112,191 - VSNL Singapore Pte. Ltd. 449,472 109,826 Network cost VSNL Singapore Pte. Ltd. 313,722 18,235 VSNL Lanka Ltd. 51,820 41,344 Interest Income VSNL Singapore Pte. Ltd. 74,176 15,378 VSNL Bermuda Ltd. 20,983 9,084 VSNL America Inc. 10,998 1,126

21. Operating lease arrangements: (a) As lessee : Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Minimum lease payments under operating leases recognized as expense in the year 882,408 1,232,160

At the balance sheet date, minimum lease payments under non- cancellable operating leases fall due as follows: Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Due not later than one year 518,117 713,384 Due later than one year but not later than five years 714,936 903,041 Later than five years 45,198 92,885

1,278,251 1,709,310

Operating lease payments represent rentals payable by the Company for certain buildings and satellite channels.

66 (b) As lessor: (i) The Company has leased under operating lease arrangements certain IRU’s with gross carrying amount and accumulated depreciation of Rs. 874,174 thousands and Rs. 57,787 thousands respectively as at 31 March, 2006. Depreciation expense of Rs. 43,389 thousands (2005: Rs. 14,397 thousands) in respect of these assets has been recognised in the profit and loss account for the year ended 31 March, 2006. In respect of the above, rental income of Rs.42,470 thousands (2005: Rs. 18,150 thousands) has been recognised in the profit and loss account for the year ended 31 March, 2006. Future lease rental receipts will be recognised in the profit and loss account of subsequent years as follows:

Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000

Not later than one year 68,303 36,370 Later than one year but not later than five years 273,212 145,480 Later than five years 622,420 345,550 963,935 527,400

(ii) The Company has leased certain premises under operating lease arrangements. Future lease rental income in respect of these leases will be recognised in the profit and loss account of subsequent years as follows: Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Not later than one year 46,873 50,058 Later than one year but not later than five years 12,357 34,804 Later than five years 325 - 59,555 84,862

Lease rental income of Rs. 64,777 thousands (2005: Rs. 32,419 thousands) in respect of the above leases have been recognised in the profit and loss account for the year ended 31 March, 2006. 22. Provision for Contingencies: Asset Retirement Obligation (“ARO”) Others Total Rupees ‘000 Rupees ‘000 Rupees ‘000

Balance as on 1 April, 2005 40,737 - 40,737 Provision made during the year 19,934 125,805 145,739 Provision written back during the year - - -

Balance as on 31 March, 2006 60,671 125,805 186,476 Notes: 1) Provision for ARO has been made in respect of under-sea cables and switches owned by the Company. 2) Contingent liabilities as at 1 April, 2005, included approximately Rs. 172,000 thousands relating to an escalation claim by a creditor. During the year, consequent to an arbitration award the Management has provided Rs. 90,000 thousands towards such liability. 3) Rs. 35,805 thousands has been provided in respect of a carrier claim, which is under dispute.

67 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

23. Contingent Liabilities and capital commitments A. Contingent Liabilities As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Letters of Credit 207,989 292,532 Guarantees 2,550,452 3,683,246 Guarantees given on behalf of subsidiaries 10,160,045 - i. Claims for taxes on income (Refer Note 1 ) (a) Income tax disputes where the department is in appeal against the Company 1,935,518 1,694,521 (b) Income tax disputes where the Company has a favourable decision in other assessment year for the same issue 78,248 1,860,194 (c ) Income tax disputes other than the above 9,257,720 9,593,879 ii. Claims for other taxes 211,961 229,135 iii. Other claims 3,974,458 381,738

Notes:

(1) Significant claims by the revenue authorities in respect of income tax matters are in respect of:

(a) expenditure on licence fees for the Assessment Year 1995-96 disallowed by the revenue authorities. The Company’s appeal was allowed at the Tribunal stage, and the matter is now pending before the High Court. The Company has obtained favourable decisions in other assessment years, which have not been contested by the revenue authorities, and the Company is of the view that the claims will eventually be decided in its favour.

(b) deductions claimed under Section 80 IA of the Income Tax Act,1961 from Assessment years 1996-97 onwards have been disallowed by the revenue authorities. The Company has contested the disallowance and has preferred appeals.

(c) reimbursement by the Department of Telecommunications (DoT) of income tax paid by the Company on the DoT levy during 1994-95, that was taxed by the revenue authorities. The Commissioner of Income Tax (Appeals) has upheld the disallowance. The Company is in appeal with the Income Tax Appellate Tribunal.

(2) A claim of Rs.66,915,000 thousands (US $ 1,500 million) have been made against the Company by a strategic business alliance associate for breach of contract relating to access and sale of bandwidth capacity on the Company’s TGN network acquired during the year. The claim has been made in the US Federal District Court for the Southern District of New York. The Company has filed its reply to the complaint denying all liability and believes that the probability of the claim succeeding is remote.

(3) During the year, the Company issued Letters of Comfort for credit facility agreements, aggregating to Rs. 8,029,800 thousands (USD $ 180 million) availed by VSPL from different banks to finance the acquisition of TGN and for its working capital requirements. The Company has undertaken to the lenders of VSPL that it shall retain management control in VSPL so long as amounts are due to the lenders.

B. Capital commitments

Estimated amount of contracts remaining to be executed on capital account and not provided for Rs.1,307,914 thousands (2005 Rs. 5,365,977 thousands).

68 24. Value of Imports on C.I.F. basis As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Stores and spares 111,490 52,869 Capital goods 1,639,867 5,966,872 25. Expenditure in foreign currencies As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 i. Charges for use of transmission facilities 5,941,900 5,465,237 ii. Rent of satellite channels 882,408 1,219,098 iii. Administrative lease charges 117,080 88,809 iv. Repairs and maintenance 589,208 646,429 v. Advertisement 1,263 1,740 vi. Legal and professional fees 349,476 66,516 vii. Travel expenditure 41,206 24,744 viii. Others 35,541 35,040

7,958,082 7,547,613

26. Earnings in foreign currencies

As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 i. Revenues from telecommunications services 16,938,734 13,954,610 ii. Profit on sale of long-term investments - 5,514,486 iii. Interest income 106,157 26,495 iv. Other income 75,175 23,286

17,120,066 19,518,877

27. Value of imported and indigenous stores/spares consumed

Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Value % Value % Imported 111,805 90.00 571 3.00 Indigenous 12,283 10.00 18,159 97.00

124,088 100.00 18,730 100.00

69 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

28. UTL is a Joint Venture between the Company, Mahanagar Telephone Nigam Limited, Telecommunications Consultant India Limited and Nepal Ventures Private Limited. The Company has 26.66 percent equity ownership in UTL. UTL operates basic telephony services in Nepal based on Wireless-in-local loop technology. The Company’s share in income, expenses, assets and liabilities of UTL for the year ended 31 March, 2006 are as follows: As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Income 71,846 54,613 Expenses 137,565 118,656 As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000

Assets 328,837 380,497 Liabilities 248,573 239,977

Contingent liability in respect of claims of taxes and duties Rs. Nil (2005: Rs.28,283 thousands).

29. Net Dividend remitted to non-resident shareholders in foreign currency The Company has not remitted any amount in foreign currencies on account of dividends during the year and does not have information as to the extent to which remittances, if any, in foreign currencies on account of dividends have been made by/on behalf of non – resident shareholders. The particulars of final dividends for the year ended 31 March, 2005 paid to non – resident shareholders, for which dividends were declared during the year, are as under: As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 i. Number of non-resident shareholders 383 293 ii. Number of shares held by them 41,265,837 38,042,841 iii. Year to which dividend relates 2004-2005 2003-2004 iv. Amount remitted net of tax (in Rupees 000s) 247,595 171,192 30. Subsequent Events (i) On 8 May, 2006, the Company signed a Share Purchase Agreement (SPA) to acquire Direct Internet Limited (‘‘DIL’’)and its wholly-owned subsidiary, Primus Telecommunications India Limited (‘‘PTIL’’) for a total purchase consideration of Rs. 942,351 thousands. The acquisition was completed on 23 June, 2006. (ii) On 24 May, 2006, an Arbitration Tribunal of the International Chamber of Commerce (ICC), International Court of Arbitration issued a ruling on certain issues in a matter initiated by FLAG Telecom Group Limited (FLAG) in December 2004. FLAG also claimed damages to compensate it for the loss of revenue and/or market. The Tribunal by majority decision has ordered the Company to grant FLAG access to the Mumbai cable landing station of the FEA cable system for various purposes. The Tribunal has retained jurisdiction to determine the financial consequences, if any, of its findings. The Company is not in a position to make a reliable estimate of the obligation. 31. Previous year’s figures have been regrouped and reclassified wherever necessary.

70 Balance Sheet Abstract and Company’s General Business Profile in terms of Part IV of Schedule VI to the Companies Act, 1956. I. Registration Details Registration No. 39266 State Code 11 (REFER CODE LIST) Balance Sheet Date 3 1 0 3 2006 Date Month Year II. Capital Raised during the year (Amount in Rs. Thousands) Public Issue Right Issue NIL NIL Bonus Shares Private Placement NIL NIL III. Position of Mobilisation and Deployment of Funds (Amount in Rs. Thousands) Total Liabilities Total Assets 80586134 80586134 Source of Funds Paid-up Capital Reserves & Surplus 2850000 57761671 Secured Loans Unsecured Loans NI L 982501 Deferred Tax Liability 750926 Application of Funds Net Fixed Assets Investments 31563640 24993393

*Net Current Assets Misc. Expenditure 5788065 NI L Accumulated Losses NIL IV. Performance of Company (Amount in Rs. Thousands) Turnover Total Expenditure 40097273 32553753 + - Profit/Loss Before Tax + - Profit/Loss After Tax + 6867173 + 4795420 (Please tick appropriate box + for Profit, - for Loss) Earning per Share in Rs. Dividend% 16 . 83 45

71 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

V. Generic Names of Three Principal Products/Services of Company (as per monetary terms) Item Code No. (ITC Code) Product Description I N T E R N A T I O N A L T E L E C O M MUN I C A T I ON S S E R V I C E S Item Code No. (ITC Code) Product Description Item Code No. (ITC Code) Product Description

* Note : For ITC code of products please refer to the publication Indian Trade Classification based on harmonized commodity description and coding system by Ministry of Commerce, Directorate General of Commercial Intelligence & Statistics, Calcutta - 700 001 ANNEXURE I Code List 1 : State Codes

State Code State Name State Code State Name 01 Andhra Pradesh 02 Assam 03 Bihar 04 Gujarat 05 Haryana 06 Himachal Pradesh 07 Jammu & Kashmir 08 Karnataka 09 Kerala 10 Madhya Pradesh 11 Maharashtra 12 Manipur 13 Meghalaya 14 Nagaland 15 Orissa 16 Punjab 17 Rajasthan 18 Tamil Nadu 20 Uttar Pradesh 21 West Bengal 22 Sikkim 23 Arunachal Pradesh 24 Goa 52 Andaman Islands 53 Chandigarh 54 Dadra Islands 55 Delhi 56 Daman & Diu 57 Lakshwadeep 58 Mizoram 59 Pondicherry

For and on behalf of the Board of directors Videsh Sanchar Nigam Limited

SUBODH BHARGAVA N. SRINATH Chairman Executive Director

RAJIV DHAR SATISH RANADE Chief Financial Officer Company Secretary & Chief Legal Officer MUMBAI DATED: 26th JUNE, 2006

72 - 9,421) - ofit before for Provision after Profit Propsed rnover Taxation Taxation Taxation Dividend in the (except in case of investment subsidiaries) Total Investment Total Pr 451,821,385 - 148,976,760 2,035,919 - 2,035,919 - 522,745,214 - - (5,606,323) - (5,606,323) - 807,006,902 829,589,005 - 168,611,455 1,890,593 - 1,890,593 - (466,493) 41,065,957 (15,597,993) - - (462,136) - (462,136) - (80,069,583) (45,942,092) 34,127,485 - 52,906,115 (80,069,583) - (80,069,583) - (104,372,907) 3,138,031 3,615,192 - - (469,284) - (469,284) - 725,637 4,476,379 355,917,487 350,715,470 - 100,455,017 737,748 - 737,748 - e Capital ReservesAssets Total 57,130,443 13,383,000 (407,417,513) 616,621,678 1,010,656,191 - 1,231,893,753 (346,106,276) 371,713 (345,734,563) - 380,077,200 (2,942,898,221) 8,170,701,858 10,733,522,880 25,276,377 1,616,284,658 (209,899,421) - (209,89 905,314,457 (436,632,097) 11,096,863,297 10,628,180,937 - - (15,512,832) - (15,512,832) - 9,112,843,167 (494,739,165) 19,579,927,505 10,961,823,503 - 2,273,592,180 (102,667,990) - (102,667,990) - 3,857,590,642 937,858,067 5,462,065,425 666,616,715 - 20,642,363 (6,665,144) - (6,665,144) - 44.61 20,746,327 (129,079,907) 343,487,805 44.61 429,014,569 (198,661,236) 1,609,520,452 1,379,167,119 - 618,044,212 (8,876,867) - (8,876,867) - INR 1.00 700,000,000 209,891,549 1,817,853,495 907,961,946 52,659,652 191,789,674 85,246,591 7,573,915 77,672,676 - USD 44.61 54,531,087 (77,113,190) USD 44.61 103,895,746 USD 44.61 1,945,914 (81,058,057) 223,881,653 302,993,797 - 41,094,943 (13,478,240) - (13,478,240) - USD 44.61 52 (274,639) 73,325 347,912 - - 618 - 618 - USD 44.61 4,315,007,576 (774,019,108) 9,227,889,790 5,686,901,321 - - (155,707,827) - (155,707,827) - ting Exchange Shar * USD 44.61 2,354,542,814 (4,807,052,885) 10,765,011,092 13,217,521,163 - - 92,730,723 - 92,730,723 S.a.r.l USD 44.61 702,431 (96,693,984) 426,753,661 d USD 44.61 17,142,824 19,279,718 209,788,880 173,366,337 - 23,275,366 (8,150,739) - (8,150,739) - Ltd USD 44.61 2,624,118 (3,417,146) (16,488,808) (15,695,780) - - 1,511,092 - 1,511,092 - 28 Ltd VSNL Bermuda 29 SAS VSNL France 30 Ltd VSNL HongKong USD USD 44.61 USD 44.61 535,320 44.61 100,018,890 (468,406,561) 1,276,933,917 (82,853,852) 1,744,805,158 167,784,526 6 150,619,488 - - - (468,402,852) - (82,227,670) - (468,402,852) - (82,227,670) - - 14ULC Canada Teleglobe 15 International S.A.S France Teleglobe 16 Belgium S.P.R.L International Teleglobe 17 International HongKong Lt Teleglobe 18 International Ltd Teleglobe USD USD 44.61 44.61 1,020,187 USD 1,900,686 32,455,641 29,534,769 - - (1,372,205) - (1,372,205) - 11 Pte. Transport Asia Data Teleglobe 12 Ltd Asia Pte. Teleglobe 13 Bermuda Ltd. Teleglobe USD19 Luxembourg International Teleglobe 44.61 1 VSNLLtd. Broadband 2 VSNL America Inc.3Ltd Lanka VSNL 4Pte Ltd. Singapore VSNL 5 Ltd SNOSPV Pte. VSNL 6 BV VSNL Netherlands *8YK Japan Global ITXC USD9 IP Holdings S.a.r.l ITXC 10 USD LKR America Inc Teleglobe 44.61 USD 44.61 0.44 USD 1,784,400,000 44.61 (148,239,916) 82,382,486 10,987,123,169 44.61 16,785,578 9,350,963,085 USD 76,257,244 (27,600,087) USD 251,269,555 44.61 USD 18,055,063 92,629,825 44.61 - 3,575,516 28,869,572 44.61 1,128,725,719 (1,429,490) 39,705,971 - 3,355 - 4,167,911 427,659,432 (6,908,087) 2,021,884 1,065,518,237 73,151,783 - - 1,072,426,324 39,705,971 (28,732,338) 55,499 - 73,096,284 - - - - - (28,732,338)27 VSNL Belgium BVBA - 980,354 (6,829,341) - - - (6,829,341) 980,354 - - 7 Ltd. VSNL Telecommunications(Bermuda) 24 Holdings S.ar.l Luxembourg TLGB 25 B.V Holdings Netherlands TLGB 26 VSNL (Portugal) Unipessoal Limitada USD USD 44.61 44.61 9,206,876,203 (4,024,009) 9,241,025,957 38,173,763 - 22,663,774 (341,969) - (341,969) - 20 Italy S.r.l Teleglobe 23 GmbH Germany International TLGB USD 44.61 21 Netherlands B.V Teleglobe 22S.L SpainCommunications Teleglobe USD USD 44.61 32,394,310 (92,162,837) 458,902,975 518,671,502 - - (3,723,233) - (3,723,233) - Sr.Company of Subsidiary Name Repor No. CurrencyRate Liabilities Details Tu Statement pursuant to Sec 212(8) of the Companies Act, 1956, relating to subsidiary to relating companies 1956, Act, Sec 212(8) of the Companies to pursuant Statement

73 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006 )- 85) - ofit before for Provision after Profit Propsed rnover Taxation Taxation Taxation Dividend in the (except in case of investment subsidiaries) ------Total Investment Total Pr 420,788,054 574,971,277 - 1,439,042,093 (86,540,846) - (86,540,846) - ntities for these acquisition, pending the purchase price allocation price in the group. the purchase amongst entities pending these acquisition, for ntities (1,375,158,936) 5,646,828 43,587,414 - 4,434,957 (28,612,055) - (28,612,055) ------e Capital ReservesAssets Total 147,296,867 (177,166,535) 924,029,621504,336,125 953,899,289 (517,667,908) 863,306,899 876,638,683 - (118,133,994) (45,878,164) - 84,562,267 (8,041) (523,679,273) (45,886,205) - - (523,679,273) - 44.61 1,337,218,350 44.61 78 (154,183,300) 44.61 473,356,710 1,073,823,639 1,567,673,325 20,492,976 - 231,775,910 159,187,934 - 159,187,934 - USD 44.61 126,269,676 16,161,861 143,414,277 982,741 - - 4,340,799 - 4,340,799 - ting Exchange Shar Ltd USD 44.61 15,925,770 (30,133,116) (4,134,469) 10,072,877 - 4,779,203 (3,032,617) 12,291 (3,020,325 Corp. USD 44.61 1,199,783,720 - 1,199,783,720 Manutencao de Redes LDAManutencao USD 44.61 3,139,321,946 (3,043,776,675) 277,864,400 182,319,129 - 4,246,655 96,081,717 - 96,081,717 - 31 AS ( Nordics) VSNL International 32 (Global) VSNL International Corp. 33 (Guam) Llc VSNL International 34 Instalacao e (Portugal) VSNL International 35 USD (US) Inc VSNL International 36 Pty. Australia VSNL International 44.61 USD 668,869 44.61 (22,735,908) USD 24,874,472 46,941,511 - 44.61 (41,950,690) (12,096,976) 1,338 - (1,255,222,785) 29,853,714 10,917,785,769 12,173,007,216 1,657,059 (3,254,881) - - 1,448,660,533 (1,255,222,785) - - (3,254,881) (42,084,085) - - (1,255,222,7 - (42,084,085) - 37 GBRM Ltd VSNL International USD 38 LLC IPCO VSNL International 39 IncRico Puerto VSNL International 40 VSNL International(ITXC) USD USD 44.61 44.61 1,115,250,000 64,906,710 4,46147 1,180,156,710 Services Inc Enhanced (11,996,879) (8,761,462) - 3,230,956 - - USD 44.61 - - 4,436,337 (1,995,531) - - (1,995,531) 4,436,337 - - 48 (UK)Ltd. ITXC 49 Ltd. Global HongKong ITXC 50 UK Ltd. Global ITXC 51 Global d.o.oZagreb ITXC 52 LLC International ITXC 52 are number under liquidation. 47 to serial from Companies USD USD 44.61 USD USD 44.61 44.61 USD 44.61 44.61 41Zo.o Sp. VSNL International(Poland) 42 VSNL Japan K.K USD 44.61 USD - 44.61 159,161 353,413 194,252 - - (471,402) - (471,402) - 43 VSNL Spain Srl44 Inc VSNL Telecommunications(UK) 45 VSNL UK Ltd46 VSNL(Germany) GMBH USD 44.61 USD 44.61 USD USD 111,174,543 (366,862,856) 294,288,806 549,977,119 - (3,589,174) (363,330,677) - (363,330,677) - Sr.Company of Subsidiary Name Repor in respective holding e reported the fair value of assets and liabilities are * In respect of acquisitions made by the Company, No. CurrencyRate Liabilities Details Tu Statement pursuant to Sec 212(8) of the Companies Act, 1956, relating to subsidiary (Contd.) relating companies 1956, Act, Sec 212(8) of the Companies to pursuant Statement of directors of the Board For and on behalf SUBODH BHARGAVAChairmanMUMBAI 2006 26 June, DATED: SRINATH N. Director Executive DHAR RAJIV Chief OfficerFinancial RANADE Officer SATISH Secretary & Chief Legal Company

74 CONSOLIDATED ACCOUNTS 2005-06

75 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

76 AUDITORS’ REPORT ON CONSOLIDATED FINANCIAL STATEMENTS TO THE MEMBERS OF VIDESH SANCHAR NIGAM LIMITED

1. We have audited the attached consolidated balance the consolidated financial statements on the sheet of Videsh Sanchar Nigam Limited (‘the basis of unaudited financial statements as Company’), and its subsidiaries (collectively referred provided by the management of that subsidiary as ‘the VSNL Group’) as at 31 March, 2006 and also and joint venture. the consolidated profit and loss account and the 4. Subject to our remark in paragraph 3 (b) above: consolidated cash flow statement for the year ended on that date annexed thereto. These financial (a) We report that the consolidated financial statements are the responsibility of the Company’s statements have been prepared by the management and have been prepared by the Company’s management in accordance with the management on the basis of separate financial requirements of the Accounting Standard (AS) statements and other financial information regarding 21, Consolidated Financial Statements, components. Our responsibility is to express an Accounting for Investments in Associates in opinion on these financial statements based on our Consolidated Financial Statements and audit. Accounting Standard (AS) 27, Financial Reporting of Interests in Joint Ventures issued by the 2. We conducted our audit in accordance with the Institute of Chartered Accountants of India. auditing standards generally accepted in India. Those Standards require that we plan and perform the audit (b) Based on our audit and on consideration of to obtain reasonable assurance about whether the reports of other auditors on separate financial financial statements are free of material misstatement. statements and on the other financial information An audit includes examining, on a test basis, evidence of the components, and to the best of our supporting the amounts and disclosures in the information and according to the explanations financial statements. An audit also includes assessing given to us, we are of the opinion that the the accounting principles used and significant attached consolidated financial statements give estimates made by the management, as well as a true and fair view in conformity with the evaluating the overall financial statement accounting principles generally accepted in India: presentation. We believe that our audit provides a (i) in the case of the consolidated balance reasonable basis for our opinion. sheet, of the state of affairs of the VSNL 3. (a) We did not audit the financial statements of Group as at 31 March, 2006; certain subsidiaries, whose financial statements (ii) in the case of consolidated profit and loss reflect total assets of Rs.44,275,145 thousands as account, of the profit for the year ended on at 31 March, 2006, total revenues of Rs. 11,234,273 that date; and thousands and net cash flows amounting to Rs. 1,932,626 thousands for the year then ended. (iii) in the case of the consolidated cash flow These financial statements and other financial statement, of the cash flows for the year information have been audited by other auditors ended on that date. whose reports have been furnished to us, and our opinion is based solely on the report of other For S. B. BILLIMORIA & CO. auditors. Chartered Accountants (b) The financial statements of a subsidiary and joint venture which represents total assets of Rs. N. VENKATRAM 332,419 thousands as at 31 March, 2006, total Partner revenues of Rs.71,906 thousands and net cash Membership No. 71387 outflows amounting to Rs.12,751 thousands for the year then ended have been incorporated in Mumbai, 26 June, 2006

77 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CONSOLIDATED BALANCE SHEET AS AT 31 MARCH, 2006 As at Schedule 31 March, 2005 Rupees ‘000 Rupees ‘000 FUNDS EMPLOYED: 1 SHARE CAPITAL 1 2,850,000 2,850,000 2 RESERVES AND SURPLUS 2 51,151,964 51,894,856 3 TOTAL SHAREHOLDERS’ FUNDS 54,001,964 54,744,856 4 SECURED LOANS 3 775,959 169,371 5 UNSECURED LOANS 4 18,905,503 - 6 OBLIGATIONS UNDER FINANCE LEASE 745,318 - 7 DEFERRED TAX LIABILITY (NET) 753,509 996,796 (Refer note B14, Schedule 22) 75,182,253 55,911,023 APPLICATION OF FUNDS: 8 FIXED ASSETS: 5 (a) Gross Block 71,934,540 33,338,956 (b) Less: Depreciation 12,515,766 8,484,629 (c) Net Block 59,418,774 24,854,327 (d) Capital work-in-progress 4,035,962 6,118,741 63,454,736 30,973,068 9 GOODWILL (ON CONSOLIDATION) 1,188,718 - (Refer note B10, Schedule 22) 10 INVESTMENTS 6 17,862,468 9,447,917 11 A. CURRENT ASSETS (a) Inventories 7 96,194 74,043 (b) Sundry Debtors 8 14,994,422 5,103,725 (c) Cash and Bank Balances 9 4,873,854 14,291,087 (d) Other Current Assets 10 1,196,643 767,915 21,161,113 20,236,770 B. LOANS AND ADVANCES 11 11,918,803 12,727,566 33,079,916 32,964,336 12 Less: CURRENT LIABILITIES AND PROVISIONS (A) Current Liabilities 12 37,201,951 14,780,853 (B) Provisions 13 3,201,634 2,693,445 40,403,585 17,474,298 13 NET CURRENT (LIABILITIES) / ASSETS [(11) less (12)] (7,323,669) 15,490,038 TOTAL ASSETS (NET) 75,182,253 55,911,023 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 22

As per our report attached For and on behalf of the Board For S.B. BILLIMORIA & CO. Chartered Accountants

N. VENKATRAM SUBODH BHARGAVA N. SRINATH Partner Chairman Executive Director

RAJIV DHAR SATISH RANADE Chief Financial Officer Company Secretary & Chief Legal Officer MUMBAI MUMBAI DATED: 26 June, 2006 DATED: 26 June, 2006

78 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2006 Schedule Year ended 31 March, 2005 Rupees ‘000 Rupees ‘000 INCOME: 1 REVENUES FROM TELECOMMUNICATION SERVICES 14 45,624,243 33,083,061 2 OTHER INCOME 15 1,467,753 522,241 3 INTEREST INCOME 16 317,522 529,517 4 INTEREST ON INCOME TAX REFUNDS 564,218 - 5 TOTAL INCOME 47,973,736 34,134,819 EXPENDITURE: 6 SALARIES AND RELATED COSTS 17 3,796,450 1,600,647 7 NETWORK COSTS 18 25,806,670 20,082,817 8 OPERATING AND OTHER EXPENSES 19 9,770,955 4,060,140 9 INTEREST EXPENSE 20 398,393 12,280 10 DEPRECIATION 4,858,323 2,533,347 Less: TRANSFER FROM CAPITAL RESERVE (1,846) (1,859) 11 PRIOR PERIOD ADJUSTMENT (NET) 21 (109,004) - 12 TOTAL EXPENDITURE 44,519,941 28,287,372 PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 3,453,795 5,847,447 13 EXCEPTIONAL ITEMS: (a) Profit from sale of long term investment, net of licence fee - 4,687,303 (b) Provision for recoverable pension obligation (Refer note B6, Schedule 22) (64,220) (472,866) (c) Fixed Assets written off (Refer note B7, Schedule 22) (612,127) - PROFIT BEFORE TAXES 2,777,448 10,061,884 14 TAXES (a) CURRENT TAX (2,282,580) (2,050,519) (b) DEFERRED TAX 245,870 (925,630) (c) FRINGE BENEFIT TAX (42,673) - PROFIT AFTER TAXES 698,065 7,085,735 15 BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR 9,330,126 4,953,872 16 AMOUNT AVAILABLE FOR APPROPRIATIONS 10,028,191 12,039,607 17 APPROPRIATIONS : (a) PROPOSED DIVIDEND (Refer note B4, Schedule 22) 1,282,500 1,710,000 (b) TAX ON DIVIDEND 179,871 243,114 (c) GENERAL RESERVE 479,542 756,367 BALANCE CARRIED TO BALANCE SHEET 8,086,278 9,330,126 EARNINGS PER SHARE (EPS) 18 Basic/Diluted earnings per share, excluding exceptional items (Rs.) (Refer note B15, Schedule 22) 4.02 12.66 19 Basic/Diluted earnings per share, including exceptional items (Rs.)(Refer note B15, Schedule 22) 2.45 24.86 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS 22

As per our report attached For and on behalf of the Board For S.B. BILLIMORIA & CO. Chartered Accountants

N. VENKATRAM SUBODH BHARGAVA N. SRINATH Partner Chairman Executive Director

RAJIV DHAR SATISH RANADE Chief Financial Officer Company Secretary & Chief Legal Officer MUMBAI MUMBAI DATED: 26 June, 2006 DATED: 26 June, 2006

79 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH, 2006 Year ended 31 March, 2005 (Rupees in ‘000) (Rupees in ‘000) 1. CASH FLOWS FROM OPERATING ACTIVITIES PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 3,453,795 5,847,447 Adjustments for: Depreciation 4,858,323 2,533,347 Transfer from capital reserve (1,846) (1,859) (Profit)/Loss on sale of fixed assets (35,869) 17,828 Interest income (317,522) (529,517) Interest expense on bank loans 395,741 11,867 Fixed assets written down - 38,618 Interest on income tax refunds (564,218) - Dividend income/profit on sale of current investments (483,999) (287,445) Valuation loss on current investments - 149 Dividend income from long-term investments - (6,331) OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 7,304,405 7,624,104 Inventories (20,321) 1,755 Sundry debtors (1,956,481) (1,597,015) Other current assets, loans and advances (779,308) 201,476 Current liabilities and provisions 4,171,712 698,351 Cash generated from operations 8,720,007 6,928,671 Income tax refunds/ (paid) 245,981 (3,756,979) Interest on income tax refunds 564,218 - NET CASH FROM OPERATING ACTIVITIES 9,530,206 3,171,692 2. CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (10,631,463) (12,716,343) Purchase of long-term investments (1,755,180) (2,354,000) (Purchase)/Sale (net of mutual funds dividend reinvested) of current investments (net) (6,177,522) 8,570,651 Business acquisitions, net of cash (13,326,495) - Proceeds from sale of fixed assets 127,444 714,478 Proceeds from sale of long-term investment (net of licence fees) - 7,789,383 Dividend income on long-term investments - 6,331 Dividend income on current investments 44,423 56,831 Fixed deposits (net) 11,555,755 (1,706,406) Interest received 399,417 580,255 NET CASH (USED IN)/FROM INVESTING ACTIVITIES (19,763,621) 941,180 3. CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from secured loans (net) 6,588 62,202 Proceeds from/ repayment of unsecured loans (net) 14,444,503 (630,000) Finance lease repayment (42,851) - Dividends paid including dividend tax (1,949,694) (1,450,549) Interest paid (215,372) (11,867) CASH FLOW FROM/ (USED IN) FINANCING ACTIVITIES 12,243,174 (2,030,214) NET INCREASE IN CASH AND CASH EQUIVALENTS 2,009,759 2,082,658 CASH AND CASH EQUIVALENTS AS AT 1 APRIL, 2005 2,393,252 305,588 (Refer note B13 Schedule 22) Effect of exchange on cash and cash equivalents (1,412) 5,006 CASH AND CASH EQUIVALENTS AS AT 31 MARCH, 2006 4,401,599 2,393,252 (Refer note B13, Schedule 22) Note : Figures in brackets represent outflows. As per our report attached For and on behalf of the Board For S.B. BILLIMORIA & CO. Chartered Accountants

N. VENKATRAM SUBODH BHARGAVA N. SRINATH Partner Chairman Executive Director

RAJIV DHAR SATISH RANADE Chief Financial Officer Company Secretary & Chief Legal Officer MUMBAI MUMBAI DATED: 26 June, 2006 DATED: 26 June, 2006

80 SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 SCHEDULE - 1 SHARE CAPITAL AUTHORISED : 300,000,000 (2005: 300,000,000) Equity Shares of Rs.10 each 3,000,000 3,000,000 ISSUED, SUBSCRIBED AND PAID UP 285,000,000 (2005: 285,000,000) Equity Shares of Rs.10 each, fully paid up 2,850,000 2,850,000 SCHEDULE - 2 RESERVES AND SURPLUS (a) Capital Reserve 2,058,052 2,059,898 (b) Securities Premium 8,348,834 8,348,834 (c) General Reserve 32,642,195 32,162,653 (d) Profit and Loss Account 8,086,278 9,330,126 51,135,359 51,901,511 (e) Exchange Translation Reserve (net) 16,605 (6,655) 51,151,964 51,894,856 Notes: 1. Depreciation on gifted assets of Rs. 1,846 thousands (2005: 1,859 thousands) has been transferred from capital reserve to the profit and loss account for the year ended 31 March, 2006 2. Capital reserve includes Rs. 2,052,161 thousands (2005: 2,052,161 thousands) in respect of foreign exchange gains on unutilised proceeds from Global Depository Receipts credited to capital reserve in a previous year 3. As at 31 March, 2006 Rs. 479,542 thousands (2005: Rs 756,367 thousands) has been transferred from the profit and loss account to general reserve SCHEDULE - 3 SECURED LOANS From Banks Term-Loan from Hongkong and Shanghai Banking Corporation Limited 600,000 - (Secured by hypothecation of moveable properties both present and future) Term-Loan from Punjab National Bank (Refer note 1) 167,160 160,902 Term-Loan from Everest Bank Limited (Refer note 1) 8,799 8,469 775,959 169,371 Note: 1. Secured against Plant and Machinery of Joint Venture SCHEDULE - 4 UNSECURED LOANS From Banks 18,880,299 - From Others 25,204 - 18,905,503 - Note: 1. Loans repayable within one year Rs. 9,066,099 thousands (2005: Nil)

81 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006 (Rupees ‘000) 6,118,741 24,854,327 30,973,068 4,035,962 63,454,736 easible Rights of Use (IRUs) for domestic and (IRUs) for easible Rights of Use (15,761) 8,484,629 288,393 (4,136) 793,985 745,040 expense 2,533,347 international telecommunication circuits Rs. 12,218,822 thousands (2005: Rs 3,460,548 thousands). 12,218,822 thousands (2005: Rs. circuits telecommunication international 15,577,519 thousands and Rs. aggregating depreciation reduction in accumulated and corresponding 9,564,093 Rs. net reduction aggregating in carryingThe cost 6,013,426 thousands respectively. Rs. of of the approval with the terms in accordance Account Securities Premium to debited thousands was at Bombay. of Judicature and the High Court the shareholders 3 Nil) 4,461 thousands (2005: of Rs. capitalised assets includes interest of fixed Block Gross 4 and machinery Plant of Indef includes the net block 5 of gross block included reduction in cost Deduction/adjustments ended 31 March 2004, for the year 6 year. for the previous in italics are Figures (18,270) 1,539,025 509,728 Adjustments 2006 2005 Amortisation Adjustments 2006 2006 2005 ------677,618------106,549 325,648 - - 677,618 - 106,549 325,648 - - - 26,061 3,393 123 - 16 26,184 3,409 651,434 - 103,140 - - - 325,648 - 776,053 - 776,053 - 47,709 226 47,935 728,118 - 18,197 - (400) 17,797 9,607 1,972 (319) 11,260 6,537 17,797 2,915 (887) 19,825 11,260 1,286 (516) 12,030 7,795 6,537 782,327 - - 782,327 28,022 8,286 - 36,308 746,019 328,677308,894 116,436 60,086 (9,180) (2,117) 435,933 366,863 100,749 90,462 28,952 17,409 (5,342) (933) 124,359 106,938 311,574 259,925 782,327 634,686 (45,636) 1,371,377 36,308 8,287 - 44,595 1,326,782 746,019 435,933366,863 164,041 129,037 (1,066)969,514 (5,168) 598,908 5,648,777 490,732 124,359 106,938 - 55,361 21,214 6,618,291 581 217,895 (1,459) 180,301 344,274 126,693 418,607 364,039 189 311,574 259,925 562,358 6,055,933 751,619 1,019,514 - (50,000) 969,514 16,992 200,903 - 217,895 751,619 2,576,781 4,059 (4,241) 2,576,599 290,371 40,871 (837) 330,405 2,246,194 1,407,050 150,245 23,813,805 10,343,949 (818,798) 33,338,956 5,967,043 17,372,365 10,013,123 (734,590) 26,650,898 4,921,112 1,946,561 (4,194) 6,863,479 19,787,419 2,576,599 1,203,110 (268) 3,779,441 330,405 84,581 195 415,181 3,364,260 2,246,194 1,539,025 688,960 (32,391) 2,195,594 793,985 307,775 (32,261) 1,069,499 1,126,095 745,040 26,650,898 29,942,809 (1,619,203) 54,974,504 6,863,479 3,958,382 (794,280) 10,027,581 44,946,923 19,787,419 SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET BALANCE THE CONSOLIDATED OF SCHEDULES FORMING PART GRAND TOTAL TOTAL 33,338,956 40,300,203 (1,704,619) 71,934,540 8,484,629 4,858,323 (827,186) 12,515,766 59,418,774 24,854,327 Rs. 37,821 thousands (2005: 687,124 thousands)) 37,821 thousands (2005: Rs. (Including advances for capital expenditure capital for (Including advances (a) SOFTWARE (b) RIGHTS DISTRIBUTION (c) LICENCE FEES (a) LAND (b) LEASEHOLD IMPROVEMENTS (c) BUILDINGS (d) AND MACHINERY PLANT (e) FURNITURE AND FIXTURES (f) OFFICE EQUIPMENTS (g) COMPUTERS (h) VEHICLES MOTOR (i) GOODWILL in respect of which agreements have not been executed. have in respect of which agreements (i) is not done. 2,558 thousands in respect of which conveyance Rs. (ii) Land in Srinagar in respect Leasehold of which lease deed is not available. (iii) 12,079 thousands in respect registered. has not been executed/ of which lease agreement Rs. (iv) 1,640 thousands identified as Surplus Land. Rs. (i) space. 77,888 thousands for leasehold office Rs. (ii) Societies under formation. in Co-operative 4,398 thousands being of flats cost Rs. (iii) Delhi at New office space 10,030 thousands for and Rs. at Mumbai 335,181 thousands for flats Rs. Sr. FIXED ASSETSNo2005 April, 1 GROSS BLOCK Additions Deductions/ March, 31 April, 1 Depreciation/ Deductions/ / AMORTISATION DEPRECIATION ACCUMULATED March, 31 March, 31 March, 31 NET BLOCK 3 IN PROGRESSWORK CAPITAL 2 ASSETS INTANGIBLE 1 FIXED ASSETS TANGIBLE SCHEDULE - 5 NOTES: 1 includes: This 638,340 thousands under lease. Land includes Rs. 2 block of buildings include: Gross

82 SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 SCHEDULE - 6 INVESTMENTS I. TRADE INVESTMENTS - LONG TERM (At Cost) A. Fully Paid Equity Shares (Unquoted) (a) Tata Teleservices Ltd. 8,101,749 6,346,569 (Refer note B5, Schedule 22) (b) New ICO Global Communications (Holdings) Limited 65 65 (c) Wmode inc. 25,276 - 8,127,090 6,346,634 B. Current Investments (Unquoted) Investments In Mutual Funds 9,735,378 3,101,283 17,862,468 9,447,917

SCHEDULE - 7 INVENTORIES Equipments for resale 66,554 80,726 Less: Provision for obsolescence (85) (9,926) 66,469 70,800 Consumable stores and spares (at cost) 29,725 3,243 96,194 74,043

SCHEDULE - 8 SUNDRY DEBTORS (a) Over six months (unsecured) Considered good 3,092,860 411,495 Considered doubtful 2,185,545 1,314,693 5,278,405 1,726,188 Less: Provision for doubtful debts (2,185,545) (1,314,693) 3,092,860 411,495 (b) Other debts (unsecured) Considered good 11,901,562 4,692,230 14,994,422 5,103,725

SCHEDULE - 9 CASH AND BANK BALANCES (a) Cash in hand 1,200 1,120 (b) Cheques in hand 1,639,166 28,620 (c) Remittances in transit 630,265 - (d) Current accounts with banks 2,083,594 321,769 (e) Deposit accounts with banks 519,629 13,939,578 4,873,854 14,291,087

Note: i) Deposit accounts include Rs.NIL (2005: Rs. 5,972,069 thousands) representing unutilised monies from GDR issue.

83 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 SCHEDULE - 10 OTHER CURRENT ASSETS (a) Interest receivable 43,825 125,720 (b) Service tax recoverable 306,076 294,020 (c) Pension contributions recoverable from Government of India (net of provision of Rs. 537,086 thousands; 2005: Rs. 472,866 thousands) (Refer note B6, Schedule 22) 74,424 74,424 (d) Licence fees paid recoverable from Government of India 531,158 245,606 (e) Others 241,160 28,145 1,196,643 767,915 SCHEDULE - 11 LOANS AND ADVANCES (a) Unsecured - Considered good (i) Staff advances 125,895 135,308 (ii) Deposits with public bodies and others 433,794 116,319 (iii) Other loans and advances 448,371 672,765 (iv) Prepaid expenditure 1,968,785 289,982 (v) Advance payment of tax (net of provision for tax) 8,941,958 11,513,192 11,918,803 12,727,566 (b) Unsecured - Considered doubtful Other loans and advances 73,786 73,786 Less: Provision for doubtful advances (73,786) (73,786) 11,918,803 12,727,566 SCHEDULE - 12 CURRENT LIABILITIES (a) Sundry Creditors: (i) Creditors for interconnect charges 14,164,788 3,595,601 (ii) Others (note 2) 8,148,334 5,779,497 (b) Unearned income and deferred revenues 10,627,095 2,996,878 (c) Investor Education and Protection Fund - unpaid dividend 11,906 11,772 (d) Government of India current account 205,747 210,393 (e) Other liabilities (note 1) 3,863,712 2,186,712 (f) Interest accrued but not due on loans taken from banks 180,369 - 37,201,951 14,780,853

Notes: (1) Includes Rs.249,120 thousands overdrawn book bank balance (2005: Rs.74,556 thousands) (2) Sundry creditors includes Rs. 140,250 thousands payable on purchase of ISP business of Seven Star Dot Com Pvt. Ltd. (Refer note B11, Schedule 22)

SCHEDULE - 13 PROVISIONS (a) Provisions for employee benefits 1,408,037 702,880 (b) Provision for proposed dividend 1,282,500 1,710,000 (c) Tax on dividend 179,871 239,828 (d) Provision for contingencies (Refer note B20, Schedule 22) 331,226 40,737 3,201,634 2,693,445

84 SCHEDULES FORMING PART OF THE CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 SCHEDULE - 14 REVENUES FROM TELECOMMUNICATION SERVICES (a) Telephone 26,171,865 18,852,517 (b) Leased channel 9,203,174 7,124,052 (c) Frame relay 1,642,046 1,382,652 (d) Internet 6,941,524 5,005,044 (e) Other traffic revenues 1,665,634 718,796 45,624,243 33,083,061

SCHEDULE-15 OTHER INCOME (a) Dividend income from current investments 406,674 278,419 (b) Dividend income from long-term investments - 6,331 (c) Profit on sale of current investments (net) 77,325 9,026 (d) Profit on sale of fixed assets (net) (Refer note B12, Schedule 22) 35,869 - (e) Rent 103,476 48,786 (f) Exchange gain (net) 89,031 - (g) Provisions no longer required written back 344,039 - (h) Other 411,339 179,679 1,467,753 522,241

SCHEDULE-16 INTEREST INCOME (a) Interest income- i. Bank deposits 308,340 520,800 (Tax deducted at source Rs.58,603 thousands; 2005:Rs.93,487 thousands) ii. Other loans and advances 9,182 8,717 (Tax deducted at source Rs.1,296 thousands; 2005:Rs.1,648 thousands) 317,522 529,517

SCHEDULE - 17 SALARIES AND RELATED COSTS (a) Salaries and bonus 3,326,560 1,339,059 (b) Contribution to provident, gratuity and other funds 167,513 69,473 (c) Staff welfare expenses 302,377 192,115 3,796,450 1,600,647

85 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULES FORMING PART OF THE CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 SCHEDULE-18 NETWORK COSTS (a) Rent of satellite channels 883,014 1,084,971 (b) Rent of landlines 301,968 1,195,195 (c) Administrative lease charges 117,606 95,389 (d) Royalty and licence fee to Department of Telecommunications 2,048,389 2,118,149 (e) Charges for use of transmission facilities (i) Telephone (net of excess provision written back Rs 82,400 thousands; 2005: Rs. 118,489 thousands) 19,066,500 14,070,670 (ii) Leased channel 1,523,237 167,227 (iii) Frame relay 377,990 - (iv) Internet 836,848 856,549 (v) Others 651,118 494,667 25,806,670 20,082,817 SCHEDULE - 19 OPERATING AND OTHER EXPENSES (a) Consumption of stores 19,526 16,507 (b) Light and power 623,440 336,343 (c) Repairs and Maintenance: (i) Buildings 222,563 54,300 (ii) Plant and Machinery 2,543,671 1,082,085 (iii) Others 169,259 91,161 (d) Bad Debts written off 300,335 526,909 (e) Provision for doubtful debts written back (58,935) (577,943) (f) Provision for doubtful advances - 35,677 (g) Rent 942,595 142,106 (h) Rates and taxes 285,498 83,737 (i) Travelling expenses 380,293 172,436 (j) Telephone and telex 170,125 73,153 (k) Printing, postage and stationery 225,861 29,090 (l) Security expenses 22,659 57,569 (m) Computer software and maintenance 79,229 57,798 (n) Legal and professional fees 625,454 350,362 (o) Advertising and publicity 1,160,284 650,504 (p) Commissions 212,352 77,244 (q) Insurance 118,666 41,946 (r) Donations 65,415 1,039 (s) Loss on sale of fixed assets (net) - 17,828 (t) Exchange loss (net) - 152,980 (u) Services rendered by third parties 1,091,659 228,682 (v) Other expenses 571,006 358,627 9,770,955 4,060,140

86 SCHEDULES FORMING PART OF THE CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 SCHEDULE - 20 INTEREST EXPENSE Interest on: - Bank loans 395,741 11,867 - Others 2,652 413 398,393 12,280 SCHEDULE - 21 PRIOR PERIOD ADJUSTMENTS (NET) INCOME: Revenues from telecommunication services 67,005 - EXPENSES: Charges for use of transmission facilities (186,904) - Repairs and maintenance 8,157 - Other expenses 2,738 - (109,004) - Note: Figures in brackets are credits

87 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

SCHEDULE 22 A. SIGNIFICANT ACCOUNTING POLICIES 1. Basis of preparation The consolidated financial statements of Videsh Sanchar Nigam Limited (the Company), its subsidiary companies and joint ventures (“the Group”) have been prepared under the historical cost convention, in accordance with the accounting standards issued by the Institute of Chartered Accountants of India. Comparative figures do not include the figures of new entities consolidated during the year namely Teleglobe and its subsidiaries, VSNL Broadband Ltd. (“VBL”), VSNL SNOSPV Pte. Ltd. (“SNOSPV”), SEPCO Communications Pty. Ltd. (“SEPCO”) and its subsidiary and companies formed by Tyco International Ltd. (“Tyco”) for takeover of the Tyco Global Network (“TGN”) business by the Company. Consequently, the corresponding figures for the previous year are not comparable with the figures for the year ended and as at 31 March, 2006. 2. Principles of consolidation The financial statements of the subsidiary companies used in the consolidation are drawn up to the same reporting date as of the Company. The consolidated financial statements have been prepared on the following basis: i) The financial statements of the Company and its subsidiary companies have been combined on a line-by-line basis by adding together like items of assets, liabilities, income and expenses. Inter-company balances and transactions, and unrealised profits or losses have been fully eliminated. ii) The consolidated financial statements include the interest in joint ventures which has been accounted as per the ‘proportionate consolidation’ method as per Accounting Standard 27-‘Financial Reporting of Interests in Joint Ventures’. Unrealised profits and losses have been eliminated to the extent of the Company’s share in the joint ventures. iii) The excess of cost to the Company of its investment in a subsidiary company over its share of the equity of the subsidiary company at the date on which the investment in the subsidiary company is made is recognized as ‘Goodwill’ being an asset in the consolidated financial statements. Alternatively, where the share of equity in the subsidiary companies as on date of investment, is in excess of cost of investment of the Company, it is recognised as `Capital Reserve’ and shown under the head `Reserves and Surplus’, in the consolidated financial statements. iv) Minority interest in the net assets of consolidated subsidiaries consists of the amount of equity attributable to the minority shareholders at the dates on which investments are made by the Company in the subsidiary companies and further movements in their share in the equity, subsequent to the dates of investments. 3. Use of estimates The preparation of financial statements requires the management of the Company to make estimates and assumptions that affect the reported balances of assets and liabilities and disclosures relating to the contingent liabilities as at the date of the financial statements and reported amounts of income and expenses during the period. Examples of such estimates include allocation of purchase price on acquisition, provisions for doubtful debts and advances, employee retirement benefit obligations, provision for income taxes, provision for cable restoration, impairment of assets, asset retirement obligation and useful lives of fixed assets. 4. Fixed assets a) Fixed assets are stated at cost less accumulated depreciation. Cost includes freight, duties, taxes, salaries and employee benefits directly related to the construction or development of the asset, interest costs incurred to finance construction and all incidental expenses incurred to bring the assets to their present location and condition.

88 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

b) Fixed assets received as gifts from other Foreign Telecom Administrations are capitalised and credited to capital reserve on the basis of notional cost (cost assessed by customs authorities). Cost includes freight, insurance and customs duty. c) Intangible assets in the nature of Indefeasible Rights of Use (IRUs) for international and domestic telecommunication circuits are recorded as fixed assets. IRU agreements transfer substantially all the risks and rewards of ownership. d) Jointly owned assets are capitalised in proportion to the Company’s ownership interest in such assets. e) Consideration for purchase of business in excess of the value of net assets acquired is recognised as goodwill. f) Internally developed computer software, distribution rights and licence fees have been classified as intangible assets. g) Assets acquired pursuant to an agreement for exchange of similar assets are recorded at the net book value of the asset given up, with an adjustment for any balancing receipt or payment of cash or other consideration. 5. Depreciation Depreciation is charged over the periods set out below so as to write-off the cost of the asset on a straight line basis over the estimated useful lives, at the following rates: a) Leasehold land Lease period b) Leasehold improvements Lease period c) Buildings 1.64% to 4.00% d) Plant and Machinery (i) Indefeasible Rights of Use (IRU’s) life of IRU or period of agreement, whichever is lower (ii) Other plant and machinery 4.75% to 33.33% e) Furniture and fixtures 6.33% to 25.00% f) Office equipment 4.75% to 25.00% g) Computers 15.83% to 33.33% h) Motor vehicles 9.50% to 20.00% i) Goodwill on purchase of business 60 months j ) Intangibles (i) Internally developed computer software 20.00% to 33.33% (ii) Distribution rights 25.00% (iii) License fees 4.00% 6. Leases Lease arrangements where the risk and rewards incident to ownership of an asset substantially vests with the lessor are classified as operating lease. Rental income and rental expense on assets given or obtained under operating lease arrangements are recognised on a straight - line basis over the term of the relevant lease. The initial direct costs relating to operating leases are recorded as expense as they are incurred. Assets given under finance lease are recognised at an amount equal to the net investment in the lease and the finance income is based on a constant rate of return on the outstanding net investment. Assets acquired under lease where the Company has substantially all the risks and rewards of ownership are classified as finance lease. Such leases are capitalised at the inception of the lease at lower of the fair value or the present value of the minimum lease payments and a liability is created for an equivalent amount. Each lease rental paid is allocated between the liability and the interest cost so as to obtain a constant periodic rate of interest on the outstanding liability for each year.

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SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

7. Impairment At each balance sheet date, the Company reviews the carrying amounts of its fixed assets to determine whether there is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Recoverable amount is the higher of an asset’s net selling price and value in use. In assessing the value in use, the estimated future cash flows expected from the continuing use of the asset and from its ultimate disposal are discounted to their present values using a pre-determined discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. 8. Asset Retirement Obligation (“ARO”) The Company’s ARO relate to the removal of cable systems and switches when they will be retired. Provision is recognised based on management’s best estimate of the eventual costs that relate to such obligation and is adjusted to the cost of such assets. 9. Investments Long-term investments are valued at cost less provision for diminution in value. Provision for diminution in the value is made to recognise a decline, which is other than temporary. Current investments comprising investments in mutual funds are stated at the lower of cost or fair value, determined on an individual investment basis. 10. Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined on a weighted average basis. 11. Retirement Benefits a) Provision for unutilised leave due to employees, gratuity and pension contribution are actuarially determined as at the balance sheet date. b) Contributions to Employees’ Provident Fund, other defined contribution plans and overseas pension plans are recognised in the profit and loss account in the period when such contributions are made. 12. Revenue recognition a) Revenues from telephony services are recognised at the end of each month based upon minutes of incoming or outgoing traffic completed in such month. Substantial portion of revenues are on account of recoveries from Foreign Telecommunication Administrations for incoming traffic and recovery from domestic carriers for delivery of calls on foreign networks. b) Revenues from data services are recognised over the lease period based on contracted fee schedules. c) Revenues from right to use of fibre capacity provided based on IRU are recognised over the period of such arrangements. d) Revenues from internet services are recognised based on usage. e) Dividend from investments is recognized when the right to receive payment is established and no significant uncertainty as to measurability or collectibility exists. f) Transactions relating to exchange or swapping of capacities, and which results in little or no consideration, represent the exchange of productive assets not held for sale in the ordinary course of business and, as such, do not result in the culmination of the earnings process and hence the Company does not recognize any revenue for these types of transactions. g) Transactions with providers of telecommunication services such as buying, selling, swapping and / or exchange of traffic are accounted for as non-monetary transactions, depending upon the terms of the agreements entered into with such telecommunication service providers.

90 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

13. Taxation Current income tax expense comprises taxes on income from operations in India and foreign tax jurisdictions. Income tax payable in India is determined in accordance with the provisions of the Income Tax Act, 1961.Tax expense relating to overseas operations is determined in accordance with tax laws applicable in countries where such operations are domiciled. Deferred tax expense or benefit is recognised on timing differences being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets and liabilities are measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets in respect of unabsorbed depreciation and carry forward tax losses are recognised only to the extent that there is virtual certainty that there will be sufficient future taxable income available to realise these assets. All other deferred tax assets in respect of other timing differences are recognised if there is a reasonable certainty that sufficient future taxable income will be available to realise such assets.

14. Foreign currency transactions a) Foreign currency transactions are converted at rates of exchange approximating those prevailing at the transaction date. Foreign currency monetary assets and liabilities are translated at the exchange rate prevailing on the balance sheet date. Exchange differences, other than on foreign currency liabilities to purchase fixed assets from countries outside India are recognised in the profit and loss account. Exchange differences on translation of foreign currency liabilities incurred to purchase fixed assets from countries outside India are adjusted in the cost of such assets. b) Premium or discount on forward contracts is amortised over the life of such contracts and is recognised in the profit and loss account, except in respect of forward contracts taken for liabilities for fixed assets where such amortisation is adjusted in the carrying cost of fixed assets. Forward contracts outstanding as at the balance sheet date are stated at exchange rate prevailing at the reporting date and any gains or losses are recognised in the profit and loss account. Profit or loss arising on cancellation or renewal of forward exchange contract is recognised in the profit and loss account in the period of such cancellation or renewal, except in case of a forward contract relating to liabilities for purchase of fixed assets from countries outside India, in which case such profit or loss is adjusted to the carrying cost of such fixed assets. c) For the purpose of consolidation of foreign subsidiaries and joint ventures, income and expenses are translated at average rates and the assets and liabilities are stated at closing rate. The net impact of such change is disclosed under exchange translation reserve.

B. NOTES TO ACCOUNTS 1. Particulars of subsidiaries and joint ventures : Country of Incorporation Percentage of voting power Subsidiaries (held directly) VSNL Broadband Ltd. India 100.00 VSNL Lanka Ltd. Sri Lanka 100.00 VSNL America Inc. United States of America 100.00 VSNL Singapore Pte Ltd. Singapore 100.00 VSNL SNOSPV Pte. Ltd. Singapore 100.00

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SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

Country of Incorporation Percentage of voting power Subsidiaries (held indirectly) VSNL Telecommunications(Bermuda) Ltd. Bermuda 100.00 VSNL UK Ltd. United Kingdom 100.00 VSNL Bermuda Ltd. Bermuda 100.00 VSNL Netherlands BV Netherlands 100.00 VSNL Hong Kong Ltd. Hong Kong 100.00 Enhanced Services Inc. United States of America 100.00 ITXC (UK)Ltd. United Kingdom 100.00 ITXC Global Hong Kong Ltd. Hong Kong 100.00 ITXC Global Japan YK Japan 100.00 ITXC Global UK Ltd. United Kingdom 100.00 ITXC Global Zagreb d.o.o Croatia 100.00 ITXC IP Holdings S.a.r.l Luxembourg 100.00 Teleglobe America Inc. United States of America 100.00 Teleglobe Asia Data Transport Pte. Ltd. Singapore 100.00 Teleglobe Asia Pte. Ltd. Singapore 100.00 Teleglobe Bermuda Ltd. Bermuda 100.00 Teleglobe Canada ULC Canada 100.00 Teleglobe France International S.A.S France 100.00 Teleglobe International Belgium S.P.R.L Belgium 100.00 Teleglobe International Hong Kong Ltd. Hong Kong 100.00 Teleglobe International Ltd. United Kingdom 100.00 Teleglobe International Luxembourg S.a.r.l. Luxembourg 100.00 Teleglobe Italy S.r.l. Italy 100.00 Teleglobe Netherlands B.V Netherlands 100.00 Teleglobe Spain Communications S.L Spain 100.00 TLGB International Germany GmbH Germany 100.00 TLGB Luxembourg Holdings S.a.r.L Luxembourg 100.00 TLGB Netherlands Holdings B.V Netherlands 100.00 VSNL (Portugal) Unipessoal Limitada Portugal 100.00 VSNL Belgium BVBA Belgium 100.00 VSNL France SAS France 100.00 VSNL International (Nordics) AS Norway 100.00 VSNL International (Global) Corp. United States of America 100.00 VSNL International (Guam) Llc Guam 100.00 VSNL International (Portugal) Instalacao e Manutencao de Redes LDA Portugal 100.00

92 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

VSNL International (US) Inc. United States of America 100.00 VSNL International Australia Pty. Ltd. Australia 100.00 VSNL International GBRM Ltd. Bermuda 100.00 VSNL International IPCO LLC United States of America 100.00 VSNL International Puerto Rico Inc. Puerto Rico 100.00 VSNL International(ITXC) Corp. United States of America 100.00 VSNL International(Poland) Sp. Zo.o Poland 100.00 VSNL Japan K.K Japan 100.00 VSNL Spain Srl Spain 100.00 VSNL Telecommunications(UK) Inc. United Kingdom 100.00 VSNL(Germany) GMBH Germany 100.00 Joint Ventures United Telecom Ltd. Nepal 26.66 SEPCO Communications Pty. Ltd. South Africa 47.00 and its subsidiary 2. The contributions of the significant subsidiaries and joint ventures acquired / formed during the year is as under: Rupees ‘000 Name of Subsidiary Revenue Net Profit/(Loss) Net Assets (post acquisition) (post acquisition) VSNL Singapore Pte. Ltd. and its subsidiaries 10,801,448 (4,079,329) (1,544,491) VSNL Broadband Ltd. 200,269 77,673 909,892 VSNL SNOSPV Pte. Ltd. 61 (28,732) (10,815) SEPCO Communications Pty. Ltd 756 (28,548) (29,366)

3. The Company was incorporated on 19 March, 1986. The Government of India vide its Order No. G 25015/6/86-OC dated 27 March,1986 transferred all the assets and liabilities of the OCS (part of the Department of Telecommunications, Ministry of Communications) as appearing in the Balance Sheet as at 31 March, 1986 to the Company with effect from 1 April,1986. As per the letter no. G-25015/6/86-OC dated 23 October, 2001 of Government of India, Department of Telecommunications, there was no requirement to register a formal transfer deed or deed of sale in the matter of such transfer of assets.

4. The Board of Directors of the Company recommended a dividend of Rs. 4.5 (2005: Rs. 6.0 including Rs. 1.5 special dividend) per share to its shareholders for the year ended 31 March, 2006 based on the financial results of the Company.

5. The Company has an investment of Rs. 8,101,749 thousands in Tata Teleservices Ltd.(“TTSL”) representing an equity interest of 16.14 percent in the issued and paid-up capital of TTSL. TTSL has accumulated losses, which have significantly eroded its net worth. In the opinion of the management, having regard to the long gestation period inevitable to the nature of its business, there is no permanent diminution in value of the investment.

During the current financial year, TTSL issued equity shares to certain other investors at a price that is higher than the carrying value of the equity shares in the books of the Company.

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SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

6. As at 1 April, 2004 proportionate share of pension obligation and payments to erstwhile OCS employees of Rs.547,290 thousands were recoverable from the Government of India (“the Government”). Pursuant to discussions with the Government, the Company had made a provision of Rs. 472,866 thousands in the year ended 31 March, 2005.

In the current year, consequent to an actuarial valuation, the pension obligation towards the erstwhile OCS employees has increased by Rs. 64,220 thousands. Pending resolution of the matter and recovery of this amount from the Government, the Company has provided for the additional amount recoverable in the Profit and Loss account.

7. During the year the Company has charged to the Profit and Loss account a sum of Rs.612,127 thousands towards write off of certain fixed assets having a gross value and accumulated depreciation of Rs. 1,594,407 thousands and Rs. 982,280 thousands respectively. In the opinion of the management, these assets do not have future economic use consequent to technological changes and product related advancements.

8. On 30 June, 2005 the Company, through its wholly owned subsidiary VSNL Singapore Pte. Limited (“VSPL”), completed the acquisition of TGN through the purchase of certain net assets and shares of certain companies formed by Tyco pursuant to the Stock and Asset Purchase Agreement dated 1 November, 2004. The Company acquired net assets of Rs. 6,143,243 thousands ($ 137.7 million), for a total purchase consideration of Rs. 6,143,243 thousands ($137.7 million).

9. On 13 February, 2006, the Company through its wholly owned subsidiary VSPL, completed its acquisition of Teleglobe by acquiring 100% of the common shares of Teleglobe pursuant to the Agreement and Plan of Amalgamation dated 25 July, 2005, amongst Teleglobe, the Company and VSNL Telecommunications (Bermuda) Ltd - a wholly-owned subsidiary of VSPL. The Company acquired net assets of Rs. 2,699,447 thousands($ 60.5 million), for a total purchase consideration of Rs.8,186,336 thousands ($183.5 million). Consequently, an amount of Rs. 5,486,889 thousands ($123.0 million) has been recognised as goodwill and included under fixed assets.

The amalgamation has been accounted for under the Purchase Method as prescribed by Accounting Standard (AS- 14) issued by the The Institute of Chartered Accountants of India. Accordingly, the assets and liabilities have been taken over based on the allocation of consideration to individual identifiable assets and liabilities of Teleglobe on the basis of their fair values at the date of amalgamation.

10. On 31 October, 2005, the Company completed its acquisition of VBL (formerly Tata Power Broadband Ltd.) by purchasing 100% of the common shares of VBL. The Company acquired net assets of Rs. 832,219 thousands for a cash consideration of Rs.2,020,937 thousands. Consequently, Rs. 1,188,718 thousands has been recognised as goodwill on consolidation.

11. On 1 March, 2006, the Company purchased the internet service provider (ISP) business of Seven Star Dot Com Pvt. Ltd. (“Seven Star”) under a slump sale agreement. The Company acquired net assets of Rs. 8,795 thousands for a purchase consideration of Rs. 170,683 thousands. Consequently, an amount of Rs. 161,888 thousands has been recognised as goodwill and included under fixed assets.

The valuation of fixed assets amounting to Rs. 13,543 thousands acquired under the slump sale agreement has been determined by the management based on an independent valuation. Legal formalities relating to transfer of assets and contracts in the name of the Company are pending completion.

12. Profit on sale of fixed asset includes sale of a portion of land by an overseas subsidiary in the Group for Rs. 120,447 thousands resulting in a gain of Rs. 53,532 thousands.

94 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

13. Cash and cash equivalents represent:- As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Cash and Cheques on hand and balances held with banks 3,723,960 351,509 Remittances in transit 630,265 - Deposit accounts held with banks 519,629 13,939,578 4,873,854 14,291,087 Deposits with original maturity over three months (334,957) (11,890,712) Current Account / Deposits held for unpaid dividends (11,808) (6,271) Deposit accounts held as margin money (125,490) (852) Cash and cash equivalents 4,401,599 2,393,252

14. Deferred tax liability: As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Deferred tax liability Difference between accounting and tax depreciation 1,818,776 1,857,787 1,818,776 1,857,787 Deferred tax assets Provision for doubtful debts 420,689 441,125 Expenditure on voluntary retirement schemes 138,634 210,369 Expenditure incurred on NLD license fees ( Refer note below ) 265,737 - Unearned income / deferred revenues 181,781 177,169 Others 58,426 32,328 1,065,267 860,991 Net deferred tax liability 753,509 996,796

Note: In March 2002, the Company paid a one time entry fee of Rs. 1,000,000 thousands to the Department of Telecommunications for providing National Long Distance (“NLD”) service. The Company commenced its NLD operations with effect from September 2002. Owing to uncertainty relating to the allowability of the one time entry fee paid under Sec 35 ABB of the Income Tax Act, 1961, the Company did not consider the deduction in the provision for tax and consequently did not set up a deferred tax asset. During the current year, the Company has set up a deferred tax asset of Rs. 265,737 thousands consequent to the deduction being allowed in its income tax assessment

95 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

for A.Y. 2003-2004. 15. Earnings per Share Rupees ‘000, except Number of Shares and Earnings per share data Year ended Year ended 31 March, 2006 31 March, 2005 Profit before taxes and exceptional items 3,453,795 5,847,447 Income tax expense on profit excluding exceptional items 2,307,041 2,238,229 Profit after tax excluding exceptional items 1,146,754 3,609,218 Exceptional (expense)/ income (net) (676,347) 4,214,437 Income tax benefit/(expense) on exceptional items 227,658 (737,920) Net Profit after tax and exceptional items 698,065 7,085,735 Number of Shares 285,000,000 285,000,000 Earnings per share excluding exceptional items Rs. 4.02 Rs.12.66 Earnings per share including exceptional items Rs. 2.45 Rs.24.86

16. Business Segments In the year ended 31 March, 2006, as a result of changes in the form and content of segment information provided to and used by the Management to allocate resources and assess performance and change in the organisational structure, the Company has reviewed and revised its reportable segments. The reportable segments in the current year are “Wholesale Voice”, “Enterprise and Carrier Data” and “Others”. The composition of the reportable segments is as follows - Wholesale Voice: includes International and National Voice services. - Enterprise and Carrier Data: includes corporate data transmission services like IPLC, Frame Relay, ILL and NPLC. - Others: includes Internet, GPSS, Telex, Telegraph, TV up-linking, Transponder lease, Global Roaming and other services. In the previous year, “Telephony and related services” which included international and national voice and data services and internet was considered as a reportable segment and other services including transponder lease, television uplinking, gateway packet switching services and video conferencing facilities were reported under “Other Services”. Year ended 31 March, 2006 Rupees ‘000 Wholesale Voice Enterprise and Others Total Carrier Data Revenues 26,152,432 14,707,511 4,764,300 45,624,243 Segment Results 6,029,849 11,626,517 2,441,612 20,097,978 Unallocated expenses (net) 16,753,187 Prior Period Income (net) 109,004

96 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

Profit before taxes and exceptional items 3,453,795 Exceptional Items (676,347) Profit before taxes 2,777,448 Income Taxes 2,079,383 Profit after taxes 698,065

Year ended 31 March, 2005 Rupees ‘000 Wholesale Enterprise and Voice Carrier Data Others Total Revenues 18,833,494 11,154,609 3,094,958 33,083,061

Segment Results 3,312,531 8,666,434 1,159,758 13,138,723

Unallocated expenses (net) 7,291,276 Profit before taxes and exceptional items 5,847,447 Exceptional Items 4,214,437 Profit before taxes 10,061,884 Income Taxes 2,976,149 Profit after taxes 7,085,735

i) Revenues and expenses, which are directly identifiable to segments, are attributed to the relevant segment. Expenses on rent of satellite channels and landlines, and royalty and license fee are allocated on the basis of usage. Segment result is segment revenues less segment expenses. Certain costs, including depreciation which are not allocable to segments have been classified as “unallocable expense”. ii) Telecommunication services are provided utilizing the Company’s assets which do not generally make a distinction between the types of services. As a result, fixed assets are used interchangeably between segments. In the absence of a meaningful basis to allocate assets and liabilities between segments, no allocation has been made. iii) Segment information for the year ended 31 March, 2005 has been presented in accordance with the basis of segmentation adopted for the current year.

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SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

Geographical Segment: Segment revenues by Geographical Market Year ended 31 March, 2006 Rupees ‘000 India 21,272,409 United States of America 7,197,088 United Kingdom 3,459,780 United Arab Emirates 26,07,832 Others 11,087,134 45,624,243

Segment revenues by Geographical Market Year ended 31 March, 2005 Rupees ‘000 India 19,078,700 United States of America 3,812,001 United Arab Emirates 2,633,825 Saudi Arabia 1,026,045 Others 6,532,490 33,083,061

For the year ended 31 March, 2006 and 31 March, 2005, revenues from customers comprise mainly revenues from Wholesale Voice and Enterprise and Carrier data segments under the revised segments. 17. Related Party Disclosures (a) List of related parties and relationship: I. Investing party · Panatone Finvest Limited II. Key Managerial Personnel · N.Srinath - Executive Director · Vinod Kumar - Executive Director (VSPL) III. Joint Ventures · United Telecom Ltd. · SEPCO Communications Pty. Ltd. · SNO Telecommunications Pty. Ltd. (“SNO”) – subsidiary of SEPCO IV. Company owned by Executive Director of subsidiary. · Panther Technology Partners Pvt. Ltd.

98 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

(b) Related party transactions

Rupees ‘000 Investing Key Company owned Joint Company Managerial by Executive Ventures Personnel Director of subsidiary Transactions: Revenues from telecommunication services 14,585 8,763 Network Cost 7,330 132 Loans given to SEPCO 9,650 - Managerial remuneration - 23,318 - 24,021 Dividend paid 694,433 - 577,125 - Commissions 56,610

Balances: Loans Given 9,650 - Advances given to SEPCO 17,784 - Receivables 11,816 6,818 Payables - 2,500 56,878 - 2,500 - Note: Figures in italics are in respect of the previous year

18. Operating lease arrangements: (a) As lessee: Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Minimum lease payments under operating leases recognized as expense in the year 2,014,608 1,242,295

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At the balance sheet date, minimum lease payments under non- cancellable operating leases fall due as follows:

Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Due not later than one year 2,673,092 721,221 Due later than one year but not later than five years 6,668,899 923,759 Later than five years 6,498,704 92,885 15,840,695 1,737,865

Operating lease payments represent rentals payable by the Company for certain buildings, satellite channels, office equipments, computer equipments and certain circuit capacities. The minimum future lease payments have not been reduced by minimum operating sublease rentals of Rs. 192,001 thousands due in the future under non-cancellable subleases for certain buildings, which primarily commenced in January 2002 and extend until 31 July, 2011. Rs. 36,000 thousands was recognised in the current year as minimum sublease rental against the same. (b) As lessor: (i) The Company has leased under operating lease arrangements certain IRUs with gross carrying amount and accumulated depreciation of Rs. 874,174 thousands and Rs. 57,787 thousands respectively as at 31 March, 2006. Depreciation expense of Rs. 43,389 thousands (2005: Rs. 14,397 thousands)recognised in respect of these assets has been recognised in the profit and loss account for the year ended 31 March, 2006. In respect of the above rental income of Rs.42,470 thousands (2005: Rs. 18,150 thousands) has been recognised in the profit and loss account for the year ended 31 March, 2006. Future lease rental receipts will be recognised in the profit and loss account of subsequent years as follows: Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Not later than one year 68,303 36,370 Later than one year but not later than five years 273,212 145,480 Later than five years 622,420 345,550 963,935 527,400

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(ii) The Company has leased certain premises under operating lease arrangements. Future lease rental income in respect of these leases will be recognised in the profit and loss account of subsequent years as follows: Year ended Year ended 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 Not later than one year 46,873 50,058 Later than one year but not later than five years 12,357 34,804 Later than five years 325 -

59,555 84,862

Lease rental income of Rs. 64,777 thousands (2005: Rs. 32,419 thousands) in respect of the above leases have been recognised in the profit and loss account for the year ended 31 March, 2006.

19. Finance Lease arrangements: (a) As Lessee As on 31 March, 2006, the following are included in the total fixed assets. Gross carrying Accumulated Net carrying amount Depreciation amount Rupees ‘000 Rupees ‘000 Rupees ‘000 Building 18,414 661 17,753 Plant and Machinery 169,573 5,473 164,100 Furniture and Fixtures 42,177 543 41,634 Computers 53,364 2,419 50,945

283,528 9,096 274,432

Minimum lease payments and the corresponding present value are as follows: Minimum lease Present Value Difference representing payments (“MLP”) of MLP Interest Rupees ‘000 Rupees ‘000 Rupees ‘000 Not later than one year 164,994 148,893 16,101 Later than one year but not later than five years 164,892 153,853 11,039 Later than five years - - - 329,886 302,746 27,140

As there was no finance lease in the previous year, there are no corresponding amounts for the previous year.

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20. Provision for Contingencies: ARO Others Total Rupees ‘000 Rupees ‘000 Rupees ‘000 Balance as on 1 April, 2005 40,737 - 40,737 Provision made during the year 164,684 125,805 290,489 Provision written back during the year - - - Balance as on 31 March, 2006 205,421 125,805 331,226

Notes: 1) Contingent liabilities as at 1 April, 2005, included approximately Rs. 172,000 thousands relating to an escalation claim by a creditor. During the year, consequent to an arbitration award the Management has provided Rs. 90,000 thousands towards such liability. 2) Rs. 35,805 thousands has been provided in respect of a carrier claim, which is under dispute.

21. Contingent Liabilities and Capital Commitments Contingent Liabilities: As at As at 31 March, 2006 March, 2005 Rupees ‘000 31 Rupees ‘000 Letters of Credit 303,410 292,532 Guarantees 2,550,452 3,694,051 i. Claims for taxes on income (Refer note 1) (a) Income tax disputes where the department is in appeal against the Company 1,935,518 1,694,521 (b) Income tax disputes where the Company has a favourable decision in other assessment year for the same issue 78,248 1,860,194 (c ) Income tax disputes other than the above 9,257,720 9,593,879 ii. Claims for other taxes 211,961 237,448 iii. Other claims 3,974,458 401,708 Notes: (1) Significant claims by the revenue authorities in respect of income tax matters are in respect of: (a) expenditure on licence fees for the Assessment Year 1995-96 disallowed by the revenue authorities. The Company’s appeal was allowed at the Tribunal stage, and the matter is now pending before the High Court. The Company has obtained favourable decisions in other assessment years, which have not been contested by the revenue authorities, and the Company is of the view that the claims will eventually be decided in its favour. (b) deductions claimed under Section 80 IA of the Income Tax Act from Assessment years 1996-97 onwards have been disallowed by the revenue authorities. The Company has contested the disallowance and has preferred appeals. (c) reimbursement by the Department of Telecommunications (DoT) of income tax paid by the Company on the DoT levy during 1994-95, that was taxed by the revenue authorities. The Commissioner of Income Tax (Appeals) has upheld the disallowance. The Company is in appeal with the Income Tax Appellate Tribunal.

102 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

(2) A claim of Rs.66,915,000 thousands (US $ 1,500 million) have been made against the Company by a strategic business alliance associate for breach of contract relating to access and sale of bandwidth capacity on the Company’s TGN network acquired during the year. The claim has been made in the US Federal District Court for the Southern District of New York. The Company has filed its answer to the complaint denying all liability and believes that the probability of the claim succeeding is remote. (3) As part of its normal ongoing review of ITXC Corp.’s (“ITXC”) operations in connection with the post-merger integration of Teleglobe, a predecessor in interest to VSNL Telecommunications (Bermuda) Ltd, and ITXC , Teleglobe had identified potential instances of non-compliance with the United States Foreign Corrupt Practices Act (“FCPA”) relating to ITXC’s operations in certain African countries prior to its merger with Teleglobe, consummated on 31 May, 2004. Teleglobe voluntarily notified the SEC and the U.S. Department of Justice (the “DOJ”) of the matter, and the Company has been co-operating fully with the SEC and the DOJ. The Company cannot predict the extent to which the SEC, the DOJ or any other governmental authorities will pursue administrative, civil or criminal proceedings, the imposition of fines or penalties or other remedies or sanctions. The Company has not identified, and does not believe it is likely that, any material adjustment to its financial statements is or will be required in connection with the results of this investigation, although it is possible that a monetary penalty, if any, may be material to its results of operations in the period in which it is imposed. (4) The subsidiaries of the Company in various geographies are routinely party to suits for collection, commercial disputes, claims from customers and/or suppliers over reconciliation of payments for voice minutes, circuits, internet bandwidth and/or access to the public switched telephone network, leased equipment, and claims from estates of bankrupt companies alleging that the Company and / or its subsidiaries received preferential payments from such companies prior to their bankruptcy filings. While management currently believes that resolving such suits and claims, individually or in aggregate, will not have a material adverse impact on the Company’s consolidated financial position, the FCPA investigation noted above is subject to inherent uncertainties and management’s view of this matter may change in the future. If an unfavorable final outcome were to occur, such an outcome could have a material adverse impact on the Company’s consolidated financial position and results of operations for the period in which the effect becomes reasonably estimable. Capital commitments Estimated amount of contracts remaining to be executed on capital account and not provided for Rs. 2,764,862 thousands (2005 : Rs. 5,541,991 thousands). 22. UTL is a Joint Venture between the Company, Mahanagar Telephone Nigam Limited, Telecommunications Consultant India Limited and Nepal Ventures Private Limited. The Company has 26.66 percent equity ownership in UTL. UTL operates basic telephony services in Nepal based on Wireless-in-local loop technology. The Company’s share (unaudited) in income, expenses, assets and liabilities based on the uniform accounting policy adopted by the Company for the year ended 31 March, 2006 and 31 March, 2005 are as follows:

As at As at 31 March, 2006 31 March, 2005 FUNDS EMPLOYED Rupees ‘000 Rupees ‘000 1 Share Capital 233,275 233,275 2 Reserves and Surplus (167,483) (92,755) 3 Secured Loan 175,956 169,371 4 Unsecured Loan 53,787 - 295,535 309,891

103 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) As at As at 31 March, 2006 31 March, 2005 Rupees ‘000 Rupees ‘000 APPLICATION OF FUNDS 5 Fixed Assets (a) Gross Block 294,623 288,620 (b) Less: Accumulated Depreciation 153,050 97,201 (c) Net Block 141,573 191,419 6 A. Current Assets (a) Inventories 50,391 54,393 (b) Sundry Debtors 49,111 27,343 (c) Cash and Bank Balances 35,468 48,218 (d) Other Current Assets 18,952 38,661 153,922 168,615 B. Loans and Advances 18,870 20,463 172,792 189,078 7 Less: Current Liabilities 18,830 70,606 8 Net Current Assets 153,962 118,472 Total Assets (Net) 295,535 309,891

Year ended Year ended 31 March, 2006 31 March, 2005 INCOME Rupees ‘000 Rupees ‘000 1 Traffic Revenue 70,253 39,711 2 Other Income - 14,483 3 Interest Income 1,593 419 Total Income 71,846 54,613

EXPENDITURE 4 Salaries and Related Costs 2,376 2,025 5 Network Costs 28,804 9,401 6 Operating and Other Expenses 50,988 35,381 7 Interest Expense 17,798 11,501 8 Depreciation 52,070 60,350

Total Expenditure 152,036 118,658

CONTINGENT LIABILITIES (i) Claims for other Taxes - 8,313 (ii) Other Claims - 19,970

- 28,283

104 SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

23. During the year, the Company has incorporated a wholly owned subsidiary, SNOSPV, which has invested 47 percent in the issued and paid-up share capital of SEPCO. SEPCO is an investment company which has acquired 51 percent controlling stake in the issued and paid-up share capital of SNO Telecommunications (Pty.) Ltd. (“SNO”), the licensed second network operator in South Africa. The Company’s share (unaudited) in income, expenses, assets and liabilities based on the uniform accounting policy adopted by the Company for the year ended 31 March, 2006 are as follows: As at 31 March, 2006 FUNDS EMPLOYED Rupees ‘000 1 Share Capital 3 Reserves and Surplus (29,370) 3 Unsecured Loan 33,605

4,238

APPLICATION OF FUNDS 4 Fixed Assets (a) Gross Block 325,673 (b) Less: Accumulated Depreciation 1

(c) Net Block 325,672 5 A. Current Assets (a) Cash and Bank Balances 24,607 24,607 B. Loans and Advances 1,913

26,520 6 Less: Current Liabilities 347,954 7 Net Current Liabilities (321,434)

Total Assets (Net) 4,238

105 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

Year ended 31 March, 2006 INCOME Rupees ‘000 1 Interest Income 756

Total Income 756

EXPENDITURE 2 Salaries and Related Costs 1,719 3 Operating and Other Expenses 27,583 4 Depreciation 1 Total Expenditure 29,303

24. Subsequent Events (i) On 8 May, 2006, the Company signed a Share Purchase Agreement (SPA) to acquire Direct Internet Limited (DIL) and its wholly-owned subsidiary, Primus Telecommunications India Limited (PTIL) for a total purchase consideration of Rs. 942,351 thousands. The acquisition was completed on 23 June, 2006. (ii) On 24 May, 2006, an Arbitration Tribunal of the International Chamber of Commerce (ICC), International Court of Arbitration issued a ruling on certain issues in a matter initiated by FLAG Telecom Group Limited (FLAG) in December 2004. FLAG also claimed damages to compensate it for the loss of revenue and/or market. The Tribunal by majority decision has ordered the Company to grant FLAG access to the Mumbai cable landing station of the FEA cable system for various purposes. The Tribunal has retained jurisdiction to determine the financial consequences, if any, of its findings. The Company is not in a position to make a reliable estimate of the obligation. 25. Previous year’s figures have been regrouped and reclassified wherever necessary.

106 BOARD OF DIRECTORS Mr. Subodh Bhargava Born in Agra in 1942, Mr. Subodh Bhargava holds a degree Board of Governors of the University of Roorkee , the Indian in Mechanical Engineering from the University of Roorkee. Institute of Foreign Trade, New Delhi; and the He started his career with Balmer Lawrie & Co., Calcutta Entrepreneurship Development Institute of India, before joining the Eicher Group of Companies in Delhi in Ahmedabad. 1975. On March 31, 2000, he retired as the group chairman He was also a member of the senior panel of the All India and chief executive and is now the Chairman Emaritus, Council for Technical Education (AICTE) set up for a Eicher Group. comprehensive evaluation of research in engineering and He is the past President of the Confederation of Indian technology; and on the committee set up by the Ministry Industry (CII) and the Association of Indian Automobile of Human Resource Department, Government of India for Manufacturers; and the Vice President of the Tractor policy perspectives for management education in India. Manufacturers Association. Over several years, he was He is currently on the Board of the Centre for Policy Research therefore a key spokesperson for Indian industry, and IIM, Indore ; Trustee, Bhartiya Yuva Shakti Trust; Executive contributing to and influencing government policy while Trustee, National Centre for Promoting Employment for simultaneously working with industry to evolve new Disabled Persons; Chairman Trustee Charity Aid Foundation. responses to the changing environment. He is also on the Boards of Governors of other institutions He was a member of the Insurance Tariff Advisory for graduate engineering and bachelors and master’s Committee, the Economic Development Board of the degree programmes in business management. government of Rajasthan He was also the Chairman of the He has been conferred with the first IIT Roorkee National Accreditation Board for Certifying Bodies (NABCB) Distinguished Alumnus Award in 2005 by Indian Institute under the aegis of the Quality Council of India (QCI). of Technology, Roorkee. Mr. Bhargava has been closely associated with technical and Mr Bhargava is the Chairman of Videsh Sanchar Nigam Ltd ( management education in India. He was the chairman of VSNL ) and also Wartsila India Ltd and Director on the the Board of Apprenticeship Training and Member of the respective Boards of several Indian Corporates. Mr. N. Srinath N Srinath, Executive Director, graduated as a Mechanical office sales support functions as well as direct customer sales Engineer from IIT (Madras) and went on to do a Post into various end-user enterprise segments such as Process Graduate Diploma in Management from IIM (Calcutta), Manufacturing, Banking and Financial Services, Petroleum specialising in marketing and systems. Joining the Tata and Distribution. He was, since 1995, also concurrently the Administrative Services (TAS) in 1986, he has held positions Regional Manager for the operations of the company in the in project management, sales and marketing and corporate Western Region. functions in different Tata companies over the past 20 years. He has been responsible for setting up new projects and In March 1998, he returned as General Manager (Projects) managing businesses in high-technology areas like Process to Tata Industries and worked with Tata Teleservices helping Automation and Control, Information Technology, Internet to set up the company and its operations for fixed line and Telecommunications. telecommunications services in Andhra Pradesh. He oversaw the market launch of services by the company in March 1999 On completing his probation with the TAS in 1987, he was and in April he moved to Hyderabad as Chief Operating made Project Executive in Tata Honeywell responsible for Officer of Tata Teleservices responsible for Sales & Marketing, acquiring the necessary project approvals and initial Customer Service, Network and IT. funding. He then moved to Tata Industries as Executive Assistant to the Chairman, an assignment he handled till In late 2000 he took over as Chief Executive Officer of Tata mid-1992. In that period he was also part of the team that Internet Services, a new company set up to meet the set up Tata Information Systems (later Tata IBM and then requirements of both retail and corporate customers for IBM India). Internet services. The company successfully launched and grew its offerings in the market and also managed various In June 1992 he moved to Tata Information Systems Limited customer portals that it had developed. and over the next six years, handled various assignments in sales and marketing. He has been responsible for both back In February 2002, when the Tata group acquired VSNL, he

107 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

was appointed as Director (Operations). With effect from 1 the enterprise and carrier data services market globally, is October, 2004 when the term of the then Managing director one of the largest submarine cable bandwidth providers expired, he was entrusted with the powers of the Managing globally, is a Tier 1 ISP and is expanding its retail presence in director and was redesignated as Executive director with the broadband market in India. The company has also made effect from 1 April, 2005. Since February, 2003, the Company investments in Nepal and Sri Lanka and has recently been has transformed from being predominantly a monopoly, chosen to be the strategic partner to manage the Second International wholesale voice services provider in India to a National Operator license in South Africa. global telecommunications company operating in multiple businesses in over 30 countries. VSNL today, is the leading Recently, Mr. Srinath was chosen as the ‘Telecom CEO of the international wholesale voice provider globally, is building Year’ by the leading publishing group, Telecom Asia in the on its leadership position in India to be a major player in 2006 edition of their awards.

Mr. Ishaat Hussain

Mr Ishaat Hussain joined the Board of Tata Sons as an Thereafter, he moved to Tata Steel in 1983 after Indian Tube Executive Director on 1.7.99, and is Finance Director of Tata was merged with Tata Steel. Sons Ltd. with effect from 28.7.2000. Prior to joining Tata Sons he was the Senior Vice President and Executive Director Besides being on Board of Tata Sons Limited, he is the – Finance in Tata Steel for almost 10 years. Chairman of Voltas Limited. He is also on the Boards of Born on September 2, 1947, Mr Hussain completed his several Tata Companies viz. Tata Steel, Tata Industries, Tata schooling from The Doon School in 1963 to join St. Stephens Teleservices, Titan Industries Limited. College Delhi to do his graduation in Economics. A Chartered Accountant from England and Wales, Mr Hussain attended Mr. Hussain is a member on the Primary Markets Advisory the Advanced Management Programme at the Harvard Committee of the Securities Exchange Board of India. In April Business School. He joined the Board of The Indian Tube 2005, he has been appointed a Member of the Board of Company (a Tata Steel associate company) in 1981. Trade.

Mr. Kishor A. Chaukar Mr. Kishor A. Chaukar (58), currently the Managing Director Teleservices Limited, Idea Cellular Limited, Videsh Sanchar of Tata Industries Limited (TIL), is a post-graduate in Nigam Limited, Tata Autocomp Systems Limited, Tata Management from the Indian Institute of Management at Investment Corporation Limited, among others. He also Ahmedabad. oversees the functions of the Department of Economics & Statistics (DES) and the Tata Credit Card. TIL is one of the two principal holding companies of the Tata Group, India’s largest and best-known conglomerate. TIL acts Mr. Chaukar is the Chairman of Tata Council for Community as the diversification and new projects-promotion arm of Initiatives (TCCI) – the nodal agency of the Group on all the Group, and spearheads the entry of the Group in the matters related to social development, environmental emerging high-tech and sunrise sectors of the economy. management, bio-diversity restoration and conservation of In his capacity as Managing Director of TIL, Mr. Chaukar is wild life. responsible for enhancing the value and the interest of TlL Mr. Chaukar was previously the Managing Director of ICICI in TIL divisions and in companies where TIL has made Securities & Finance Company Limited (July 1993 to October investments. One of the tasks performed in the quest for 1998), and a member of the Board of Directors of ICICI this value enhancement is to provide strategic direction to Limited from February 9, 1995 to October 15, 1998). His other these companies. experiences include stints in Bhartiya Agro Industries Mr. Chaukar is a member of the Group Corporate Centre, Foundation, a Public Trust engaged in rural development which is engaged in strategy formulation at the House of on a no-profit no-loss basis and based in Pune, Maharashtra, Tata. He is on the Board of various companies like Tata and Godrej Soaps Limited.

108 Mr. Pankaj Agrawala Mr. Agrawala was born on October 16, 1955. Since May 2002, 12 years of his service. he has been the joint secretary to the GoI, Department of IT, Ministry of Communications and IT. Mr. Agrawala is in-charge He took over as director of the then Ministry of Urban of e-infrastructure in the Department of IT and in that Development, GoI in August 1991, and as director, Housing capacity represents India in the Government Advisory Division, Ministry of Urban Affairs and Employment, GoI in Committee of Internet Corporation for Assigned Names & July 1994. He was a member of the Indian delegation to the Numbers (ICANN). He is a vice chairman of GAC. Mr. Agrawala Habitat II City Summit, Istanbul. He then worked in the also serves on the Board of Telecom Infrastructure Administrative Training Institute, Nainital in the Manufacturing Company, ITI and National internet Exchange Decentralised Training for Urban Development Project, an of India. Indo-Dutch collaboration with the Institute for Housing and Urban Development, Rotterdam. Mr Agrawala belongs to the 1978 batch of the IAS (Uttar Pradesh cadre). He holds a masters degrees in Public From July 1998 to May 2002, he was secretary to the U.P Administration, Development Economics and History and government, in various departments, including the was a Mason Fellow at the Kennedy School of Government, Department of Planning; the Department of Banking and Harvard University, USA. Private Capital Investments; the Department of Externally Mr. Agrawala has held various important U.P government Aided Projects, where he was responsible for five World Bank positions. He has worked on various field organizations projects; the department of IT and Electronics, when India’s in districts and divisions of Uttar Pradesh. He has first private-sector IT university was set up; and the been associated with rural development for nearly department of Small Scale Industries and Export Promotion.

Dr. Mukund Rajan Dr. Rajan was born in Chennai on April 5, 1968. He completed Dr. Rajan joined the Tata Group through the Tata his B.Tech from the Indian Institute of Technology, Delhi in Administrative Service (TAS) in January 1995. He was 1989, and served in his final year as General Secretary of the assigned to the office of Mr. Ratan Tata, Chairman, Tata Sons Student Affairs Council. He received a Rhodes Scholarship Limited, in 1996. Dr. Rajan’s current designation is Vice to study at Oxford University, where he completed a Masters President, Tata Sons Limited, and he continues to support and Doctorate in International Relations. His doctoral Mr. Tata as a member of his office. He also serves on the dissertation was published by Oxford University Press, and boards of several Tata companies, including Tata Teleservices is titled “Global Environmental Politics - India and the North- Limited, Piem Hotels Limited, Videsh Sanchar Nigam Limited South Politics of Global Environmental Issues.” andVSNL Singapore Pte. Limited.

Mr. N. Parameswaran Mr. Parameswaran was born on November 15, 1955. Since year deputation as the Executive Director of the Information July 1998, he has been the Deputy Director General in the & Communication Technologies Authority, Mauritius, Department of Telecom, Government of India. He holds B.Sc. wherein he set up the Authority and facilitated the Engineering degree in Electronics and Telecommunications liberalization of the ICT sector. He has held various positions Engineering from College of Engineering Trivandrum, in DOT and MTNL where he was actively involved in the Master of Technology in Electrical Engineering from IIT implementation of IT solutions and New Services. (Bombay) and Post Graduate Diploma in Business Management from All India Management Association, New He has worked as an International Telecommunications Delhi. Union (ITU) expert in Africa, presented papers and chaired sessions in the ITU / Asia Pacific Telecommunity (APT) Mr. Parameswaran belongs to the Indian seminars/Forums. He was part of a number of Ministerial Telecommunications Service (1978) and has been with the delegations for bilateral meetings. He has made Department of Telecommunications since January 1980. For presentations in Road shows held in a number of countries the last ten years he has beenI involved in Telecom Licensing to attract foreign investment. and Regulations. He has played a key role in the liberalization of the Telecom Sector in India. Recently, he was on a two- He is also Director in the Board of HTL Limited.

109 VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Mr. P.V. Kalyanasundaram Mr. P.V. Kalyanasundaram was born on February 25, 1958. Mr. Kalyanasundaram has played a leading role in various He received a Bachelor of Arts degree in history, from the public activities. As the managing trustee of the Green Peace New College, Chennai in 1977, followed by a Bachelor of World Charitable Trust, Chennai, he took an active part in Law degree from Madras Law College in 1982. the various welfare measures organized by the trust. These include organizing free eye camps to treat poor people. An advocate by profession, Mr. Kalyanasundaram is a legal Between 2000 and 2004, Mr. Kalyanasundaram was the advisor for Pallavan Transport Corporation, Chennai, a chairman and trustee, Pachayappa’s Trust, Chennai. In that government of Tamil Nadu undertaking, as well as a legal position, he managed several educational institutions, advisor to the Chennai Metropolitan Water Supply and including seven colleges and six schools, and looked after Sewerage Board. He is also a trustee of the Jawaharlal Nehru immovable properties worth Rs. 10,000 million belonging Port Trust, Mumbai, and a member of the Censor Board, to the trust. He was also instrumental in conducting several Chennai as well as the Presidency Club, Chennai. educational seminars and courses in various institutions.

Dr. V.R.S Sampath

Dr. V.R.S Sampath received a Bachelor of Arts degree in Dr. Sampath is currently an empanelled advocate to both History from the Presidency College in 1976, followed by a Canara Bank and Indian Overseas Bank, and a legal advisor Bachelor of Law degree from Madras Law College in 1980, a to the Construction Industry Development Board of the Master of Law degree in 1987 and a PH.D in 1997, all from Government of Malaysia. He started his career as a junior the University of Madras. He also holds a Master of Arts advocate for the Aiyer and Dalia law firm in 1981 and has degree in History from the Madurai Kamaraj University since served as a legal advisor to the Tamil Nadu Industrial (1985). Development Corporation.

Dr. Sampath also holds a Diploma in Tourism and has Dr. Sampath has served on various government committees completed a large number of specialised training including the advisory committees of the Central Board of programmes and courses, notably in human rights and Film Certification and the All India Radio, both of the social work. He was awarded an honorary D.Litt for his government of India, Chennai. He is the chairman of various contribution to global peace efforts by the World Peace non-governmental organisations in Chennai including the Academy, Chicago, USA in 1994. He has published numerous Inter-University Cultural Service, the Madras Development research papers and traveled widely internationally, Society, the India International Tourism Centre, the Indian including on study tours. He has also published eight books Institute for Aids Prevention, the International Centre for on subjects such as travel, law and society. Human Rights and the Madras Educational .

Mr. Amal Ganguli Mr. Amal Ganguli, 65, is a fellow member of the Institute of NTPC, Alcatel, GE, Hindustan Lever, STC, Hewlett Packard and Chartered Accountants of India and the Institute of IBM. Chartered Accountants of England and Wales and a member of the New Delhi chapter of the Institute of Internal Auditors, Mr. Ganguli is a member of the Board of Directors of several Florida, U.S.A. He was the Chairman and Senior Partner of Companies such as Hughes Escorts Communications Pricewaterhouse Coopers (PWC), India till his retirement on Limited, Flextronics Software Systems Limited, Tube 31st March, 2003. Besides his qualifications in the area of Investments of India Limited, Gillette India Limited, HCL accounting and auditing, Mr. Ganguli is a fellow of the British Technologies Limited, Samtel Colour Limited, Samcor Glass Institute of Management and alumnus of IMI, Geneva. Ltd., New Delhi Television Limited and Century Textiles and Mr. Ganguli, trained in the UK to become a Chartered Industries Ltd. Mr. Ganguli is a member of Audit Committees Accountant. He was econded as a Partner to PWC, UK/USA of Hughes Escorts Communications Ltd., HCL Technologies for a year in 1972-73. During his career spanning over 40 Ltd., Gillette India Limited, Samtel Colour Limited, Samcor years, Mr. Ganguli’s range of work included International Tax Glass Limited and Century Textiles and Industries Ltd. He is advice and planing, cross border investments, Corporate chairman of the Audit Committee of Flextronics Software mergers and re-organisation, financial evaluation of projects, Systems Limited and a member of Remuneration management, operational and statutory audit and Committees of Tube Investments of India Limited and consulting projects funded by International funding Gillette India Limited. He is also a member of Share Transfer agencies. In the course of his professional career, he has dealt and Shareholders’/Investors’ Grievance Committee of with a variety of clients including US AID, World Bank, ADB, Century Textiles and Industries Ltd.

110 Registered office : Videsh Sanchar Bhavan, M.G. Road, Mumbai - 400 001.

TWENTIETH ANNUAL GENERAL MEETING - 13 SEPTEMBER, 2006 AT 1100 HRS.

ATTENDANCE SLIP

I, Mr/Mrs./Miss...... LF/Client ID. No ...... hereby record my presence at the 20th Annual General Meeting of Videsh Sanchar Nigam Limited at the M. C. Ghia Hall, Kalaghoda, Mumbai - 400 023.

...... Signature of the Shareholder or Proxy

Notes: 1. Please fill this Attendance Slip and hand it over at the entrance of the hall. 2. SHAREHOLDERS ARE REQUESTED TO BRING THEIR COPIES OF THE NOTICE DOCUMENT WITH THEM.

Registered office : Videsh Sanchar Bhavan, M.G. Road, Mumbai - 400 001.

PROXY

I/We ...... (LF/Client ID. No...... ) (Address)...... being a Member/Members of Videsh Sanchar Nigam Limited, do hereby appoint ...... of ...... or/failing him ...... of ...... as my/our proxy in my/our absence to attend and vote for me/us on my/our behalf at the 20th Annual General Meeting of the Company to

be held at 1100 Hrs on Wednesday, the 13 September, 2006, and at any adjournment thereof.

IN WITNESS whereof I/We have set my/our hand/hands this...... day of...... 2006. Please affix 1.00 Re. Revenue Stamp (Signature of the Shareholder across the stamp) Note : 1. A member entitled to attend and vote is entitled to appoint a proxy to attend and vote instead of himself, and a proxy need not be a Member. 2. A One Rupee Revenue Stamp should be fixed to this and it should then be signed by the Member.
3. The instrument appointing the proxy and the power of attorney or other authority, if any, under which it is signed, or a copy of that power of authority duly certified by a notary or other proper authority, shall be deposited at the Registered Office of the Company not later than forty-eight hours before the time for the holding of the Meeting, in default, the instrument of proxy shall not be treated as valid. BeyondSM Ethernet

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