Mtnl and Bsnl

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Question PaperIntegrated Case Studies - I (MSF3S1) : October 2007

Case Study (100 Marks)

This section consists of questions with serial number 1 - 9. Answer all questions. Marks are indicated against each question.

ead the case carefully and answer the following questions:

1. In November 2005, the government set certain reforms in the long distances telephony. Discuss the reforms in the regulatory andcompetitive practices in telecommunications sector.

(14 marks) < Answer >

2. Government has considered the proposal of merger of MTNL and BSNL but there exists certain issues, considered as hurdles for suchmerger. Discuss those issues which give rises to such hurdles in the way of merger.


3. Briefly discuss the various steps taken by MTNL for upgrading their services for the customers.

(12 marks) < Answer >4. The telecom industry in India witnessed major trends that have a greater impact on everything from, modest internet, broadband tomanaging services to local manufacturing and supply chain. Explain the major market trends in the telecom industry.


5. Various key events have created an impressive forward-momentum in Indian telecommunications, resulting in a vigorously competitiveand fast-growing sector. Discuss.


6. MTNL has diversified its business overseas for its further expansion and tied up with World Tel to offer basic telecom services inBangladesh. Discuss how the company entered into the overseas market for its growth?


7. Telecom Regulatory Authority of India (TRAI) was established by an Act of Parliament in March 1997 and vested with powers toissue directions to service providers, frame regulations, and notify tariffs through orders and also adjudicate in disputes Discuss the variousobjectives of TRAI.


8. MTNL has taken various initiatives for the promotion of their services in the domestic market after the private sector came into picture. Discuss.


9. Based on the data given in Annexure IV, comment on profitability, leverage, liquidity and payout ratios of MTNL.


ahanagar Telephone Nigam Limited

MTNL is moving towards realizing its vision of becoming global telecom company with total telecom solutions at affordable prices

[1]

.

R. S. P. Sinha Chairman and Managing Director, MTNL.

epartment of Telecommunications (DOT) move to explore the option of a quasi-merger of Mahanagar Telephone Nigam Ltd. (MTNL)d Bharat Sanchar Nigam Ltd. (BSNL) turned out to be a major news item in the Indian Telecommunications Sector during November 2005

s per the current indications (January 2006), the proposed PSU major is likely to be split into four regional wireline access companies e in each region. This is to be modeled on the famous Baby Bells formula, which was adopted by the US government in the case of

T&T. Effective from January 1, 1984, AT&T was spilt into seven companies under the Baby Bells formula. Baby Bells identifiese regional telephone companies created in the US after the split of AT&T. The US telecom sector felt an immediate impact of thiscision with exponential growth witnessed in both business and employment opportunities. The total revenues of the seven

mpanies increased consistently and international billed revenues exceeded $13 billion in 1993. Telephone traffic accounted for more thanpercent of billed revenue.

urces in the Indian telecommunications ministry confirmed that the Baby Bells model is being considered. If this model wereplemented, besides the four regional wireline companies, a mobile operator and an infrastructure company would also operate. BSNL:st, West, North, and South, would be four regional wireline access companies. MTNL s existing wireline operations in Delhi andumbai would be merged with BSNL North and BSNL West respectively. The sources also suggested that these firms would then be

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ought under the ambit of a new holding company. The mobile operations of both BSNL and MTNL would be transferred to aparate company, BSNL Mobile. Thus, the Public Sector Units (PSUs) would obtain a pan-India mobile footprint. (Refer Exhibit:1)

new company BSNL Infrastructure may also be formed, which would own and operate the BSNL infrastructure for both nationald international long distance. The proposal envisages that an investment arm, BSNL Holdings, would control these companies.

Exhibit 1: The Blueprint

BSNL to get four wireline subsidiaries BSNL North, BSNL East, BSNL South andBSNL West. MTNL s Delhi operations will be brought under BSNL North and Mumbai operationsunder BSNL West. All mobile operations of BSNL and MTNL would be transferred to a separate company,BSNL Mobile.

Source: www.mtnl.net.in

DUSTRY BACKGROUNDhe telecom industry is a key component of the infrastructure sector. This sector is highly capital intensive and has long payback periodr investments. The economic development of a country depends on an efficient telecom network. The various telecom services availableIndia are basic fixed line services, mobile services using both Code Division Multiple Access (CDMA) and Global System forobile (GSM) communications technology, national and international long distance services, pager services and internet services.

DMA (Code Division Multiple Access) technology[2]

, allows multiple users to occupy the same time and frequency allocations in a

ven band. GSM (Global System for Mobile Communications) technology

[3]

is used by many of the world s mobile phone networks. It iswireless technology that has proved to be successful in global communications. The Exhibits 2 and 3 provide information regardinge market-share of subscribers for telecom players under these two types of technologies.

Exhibit 2: Market Share on 31st Oct., 2005 (GSM)

Company Market Share

Bharti 27.82

BSNL 23.61Hutch 19.18

IDEA 11.44

BPL 5.38

Airtel 4.09

Reliance 3.03

Spice 2.87MTNL 2.58

urce: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.

Exhibit 3: Market Share on 31st Oct. 2005 (CDMA)

Company Market Share

Reliance 82.1

TATA 17.28

HFCL 0.43

Shyam 0.19

Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.

r nearly five decades after independence, the government controlled the Indian telecom services industry. The scenario changed after91 and today private sector players operate along with the public sector in India s telecom business. The major companies operating ine telecom sector are Bharat Sanchar Nigam Ltd. (BSNL), Mahanagar Telephone Nigam Ltd. (MTNL), Videsh Sanchar Nigam Ltd.

VSNL), Bharti Tele Ventures, Reliance Infocomm, Tata Teleservices, and entities under the control of the Hutchison group and Dataccess. Exhibit 4 provides information regarding performance of a few major players from both the public and private sectors in thedian telecom industry.

ll the 1990s, until the telecom sector opened up, the Department of Telecom performed the multiple role of policy maker, regulator,rvice provider and the arbitrator in case of disputes. The Telecom Regulatory Authority of India (TRAI) was established by an ActParliament in March 1997. The objective behind this move was to allow fair competition in providing telecom services, provide an

fective regulatory framework and ensure adequate safeguards for and protecting consumer interests. TRAI was vested with powers toue directions to service providers, frame regulations, and notify tariffs through orders and also adjudicate in disputes. Thevernment created the Department of Telecom Services (DTS), in 1999. It had a dual role of service provider and policy formulator.

he DTS was corporatized in October 2000 as Bharat Sanchar Nigam Ltd. (BSNL). The TRAI Act, 1997 was amended in January 2000.ith this amendment the adjudicatory function of TRAI was separated and was assigned a new entity called the Telecom Disputettlement and Appellate Tribunal (TDSAT). Only the Supreme Court can take up for hearing any appeal against TDSAT s judgments.



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wo new telecom policies were announced during the 1990s: the National Telecom Policy (NTP), 1994 and 1999. The NTP 1994troduced the fixed licence fee system. This system was changed to a revenue sharing regime through NTP 1999. The change wasfected against a backdrop of feeling in the industry circles that high amounts were paid during the first round of bidding for basicd cellular services licences in 1994. The industry circles feared that fixed licence fee system could lead to large-scale bankruptcy ine sector if the system was not changed. The telecom tariffs have been slashed over the years, due to the high level of competition andaccount of migration to the revenue sharing regime. This sector also witnessed a spate of mergers and acquisitions.

Exhibit 4: Telephone Services: Performance of Companies: September 2005

(Rs. in million)

Sales PBDIT PAT PBDIT/Sales PAT/Total (Rs. cr.) (G%) (Rs. cr.) (G%) (Rs. cr.) (G%) Sep. 04

(%)Sep. 05

(%)Sep. 04

(%)Sep. 05

(%)

Bharti Tele-Ventures

26,259.4 9,496.5 5,004.3 43415.65 36.16 7.40 18.96

MahanagarTelephone

Nigam

12,689.9 8.49 2,432.4 22.28 1,689.0 15.40 22.81 19.17 13.31 1179

Videsh Sanchar Nigam

9,295.0 19.33 1,910.0 11.11 910.0 3.29 22.07 20.55 10.90 9.37

TataTeleservices(Maharashtra)

2,591.8 266.0 261.4 1,325.0 10.34 10.09 45.59 51.11

HFCL Infotel 745.2 152.7 159.0 20.26 252.6 31.11 21.34 29.10 33.83urce: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.

ORE REFORMS

November 2005, the government effected some reforms in the long distance telephony. A major entry barrier to this segment in the formlicense fee was lowered and players without any prior experience in the industry were also eligible for fresh license. The roll-outligations were done away with.

he licence fee was slashed to 6 percent instead of 15 percent of Adjusted Gross Revenue (AGR). The entry fee for National Longstance (NLD) and International Long Distance (ILD) which was Rs.1,000 million and Rs.250 million respectively was slashed to.25 million. The net-worth requirement which was Rs.25,000 million and Rs.2,500 million respectively was also slashed to aiform amount of Rs.2,500 million.

he reduction in licence fee was expected to bring about a corresponding and equal reduction in long distance tariffs. Industry experts feelat the STD tariffs could slide further if more players start operating in this area. Spice Telecom announced its intentions of entering theena of long distance telephony. Reliance Infocom signed a deal with China Telecom and is routing its calls directly to China using itsLAG telecom network. Earlier calls to China were routed through the US and Europe. The rate charged by Reliance is Rs.8 perinute, which works out 55 percent cheaper as compared to the earlier rates.

few other reform measures were initiated. The subscribers of NLD service providers can now be directly approached for services inased circuits/closed user groups. Further, access providers are permitted to provide internet telephony and broadband. The provisionr Infrastructureoviders-II and VPN licence holders to migrate to NLD/ILD licences has been included.

he Telecom Regulatory Authority of India (TRAI) first published the Performance Indicators of Telecom Services in July 2003. Thesults highlight the trends for the financial year 2002-03, and comprise four quarterly reports pertaining to FY 2003-04. Further,owth trends from 2000 to 2004 have also been compiled and given below.

Exhibit 5: Performance Indicators

Indicators FE 2000 FE 2001 FE 2002 FE 2003 FE 2004

1. Subscriber Base (in million)

i. Fixed 26.65 32.71 38.33 41.48 42.84

ii. Mobile 1.90 3.58 6.54 13 33.69

Gross Total 28.55 36.29 44.87 54.48 76.53



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98.08 29

Source: Telecom Regulatory Authority of India (TRAI).

he monthly growth of mobile subscribers for the 12 months ending March 2005 in comparison to the relevant months for previous yearsshown in the following exhibit:

Exhibit 7: Monthly Growth of Mobile Subscribers (2002-05)

(Rs. in million)

Year/ Month Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Total2002-03 0.28 0.29 0.35 0.36 0.49 0.37 0.53 0.72 0.8 0.73 0.79 0.95 6.582003-04 0.64 2.26 1.42 2.31 1.79 1.61 1.67 1.90 1.90 1.64 1.67 1.91 20.722004-05 1.37 1.33 1.43 1.74 1.67 1.84 1.51 1.56 1.95 1.77 1.67 0.73 18.57

urce: Telecom Regulatory Authority of India (TRAI.).

he number of mobile subscribers exceeded fixed subscribers in the country during October 2004. The tele-density indicates the numbertelephones per 100 people, increased by 1.91, during the year, registering 9.08 at the end of the year as compared to 7.04 at the endprevious year. On the other hand, the increase in tele-density during 50 years from 1948 to 1998 was only 1.92% per annum. The trendthe ratio of the subscriber base of private sector companies as compared to public sector companies underwent a change. This ratio,

hich stood at 46:54 at the end of FY 2004-05, could well mean that the share of private companies would exceed that of public companiesthe year, 2006.

ternet/Broadband

he year 2004-05 also marked an increase in the subscriber base of internet services that increased from 4.55 million to 5.60illion registering a growth of 25%. The pattern of growth of various types of Internet subscribers from March 2003 is shown below:

Exhibit 8: Internet Subscriber Base 2003 to 2005 (in million)

Mar. 03 Mar. 04 Growth Rate 2003-04 Mar. 05 Growth Rate 2004-05

Internet 3.64 4.55 25% 5.60 25%High-speed Always-On connections(=256 Kbps) 0.10

urce: Telecom Regulatory Authority of India (TRAI).

2 Internet Service Providers (ISPs) were operating for the quarter ending March 2005. With a subscriber base of 1.83 million,SNL retained its top position while MTNL with a subscriber base of 1.01 million retained its second position. Sify moved up to thirdsition with a subscriber base of 811,000. VSNL with 702,000 subscribers slipped to the fourth position and Reliance

ommunications Infrastructure Ltd. with a subscriber base of 246,000 occupied the fifth position.

ith effect from 1st April 02, ISPs were permitted to operate internet telephony. Out of the 121 ISPs that received DOT s permissionr offering these services, 51 ISPs were operative in March 2005.

riff Trends

n the tariff front, a significant downward trend was witnessed during the year 2005. The minimum effective per minute charge for locallls, STD and ILD charges were reduced. It became cheaper to make calls to Canada, Europe and the USA. As a result

ternational telephony became more affordable.Exhibit 9

Service Mar. 03 Mar. 04 Mar. 05 % reduction during2004-05

International long distance calls to US, Canada,Europe (Rs./min.)

24 9.60 7.20 25%

STD charges for all the distances beyond 200 Kms(Rs./min.)

4.80 3.60 2.40 33%

Mobile Service [GSM & CDMA] (Effectivecharges in Rs. per minute)

2.40 1.90 1.20 35%

urce: Telecom Regulatory Authority of India (TRAI).

onsumer Oriented Measures

RAI observed that the roaming tariff implemented by some operators for different distance slabs exceeded the prescribed limits and foundbe inconsistent with the regulations. Hence, it directed all Mobile Service Operators to reduce roaming tariffs charged above theescribed ceilings, which was complied with by the operators.



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RAI mandated that the telecom operators should provide minimum essential tariff information to facilitate informed choice fore subscribers. The operators were also directed to provide in their websites all the details of tariff plans for different usage patternsong with the financial implications. TRAI also directed that itemized bills relating to long distance calls should be provided tonsumers free of charge upon request.

New Access Deficit Charge (ADC)[4]

regime was announced by TRAI, which would result in lower tariffs, and high-sustainedbscriber growth. Further, consistent decline in tariffs would also provide a sustained boost to subscriber growth and teledensity, and resultlower prices for consumers.

HE GLOBALIZATION OF THE INDIAN STOCK MARKET

he style of functioning of the Indian stock market changed with the inflow of foreign funds and with the entry of Foreignstitutional Investors (FII) after the financial sector reforms were initiated in 1991. Indian Telecommunications Sector also benefitedom new sources while scouting for funds. This phase has also seen the liberalization of investment norms for Non-Resident IndiansRIs), Persons of Indian Origin (PIO) and Overseas Corporate Bodies (OCBs), with the permission to purchase shares withouttaining prior approval from the RBI. Further, since 1993, the Indian corporate sector was also allowed to tap the global marketth American Depository Receipt (ADR), Foreign Currency Convertible Bond (FCCB) and Global Depository Receipt (GDR).

dian stock market has since joined the integration process. The setting up of the National Stock Exchange (NSE) in 1993 with world-ass facilities provided therein, unleashed competition as other exchanges were forced to go for automation and screen-based trading.he Indian stock market moved into a new era of integration and globalization, which hitherto remained, insulated andgmented. Significantly, the undercurrent of the global markets in general and the Nasdaq in particular was felt in the domestic capitalarket movement. The advent of globalization meant that the Indian stock market should also catch up with the best internationalactices. Badla , has been replaced with index-based and scrip-based futures and options, shares have been dematerialized, rollingttlement is operated in place of the account period settlement, and internet trading has been implemented.

he process of Indian companies tapping the global market began with the maiden issue of Reliance Industries in May 1992. Till 2001-02,Indian companies mobilized Rs.34,173.5 million through 115 issues. Among the emerging economies, India has the distinction ofuing the maximum number of Depository Receipts (DRs).

OMPANY BACKGROUND

he Mahanagar Telephone Nigam Ltd. (MTNL) was incorporated on 28th February 1986, as a Public Limited Company under theompanies Act, 1956. The company s authorized share capital was Rs.8 billion and the paid-up share capital was Rs.6.3 billion. Thempany took over the control, management and operation of Delhi Telephone District (excluding public telegraph service) andumbai Telephone District, which were until then operated by the Department of Telecommunications. The company establishedd maintained all types of telecommunication services such as telephone, telex, wireless and data communication and other formscommunication.

he company needed resources to fulfill the developmental plans of the telecommunications board of the Department oflecommunication. Resources were also required to: (1) improve the quality of telecom services, (2) expand telecom infrastructure, and) establish new telecommunication services, meant particularly for business and public administration purposes.

USTOMER-FRIENDLY STEPS

he company attained Navratna [5]

status in the year 1997. During this year the company took steps to provide a host of serviceske datacom, inet, DIDPABX, Voice Mail, Radio Paging and ISDN. This was done with the aim of providing value-added services toe customers. Other facilities such as call waiting/call transfer, dynamic locking, hot line and phone plus facilities were also provided toe customers. IVRS (Interactive Voice Response System) was also put in place to provide local assistance to the customers regardinganged number information, and fault booking, besides ensuring round the clock service. Improvements were made in telephonerectory and directory enquiry systems with the introduction of a CD-ROM version of the telephone directory and also the introduction of

on-line directory enquiry respectively. In Mumbai and Delhi, wireless in the local loop was provided and GSM Mobile Telephone wasso available in these Metros. For the customers, payment of bills was to become hassle free with the introduction of electronicearing system, on-line payment and adjustment of telephone bills.

r the benefit of customers, the company could clear the waiting list in Mumbai and had only 1047 in Delhi as on 31st March, 1998.he country s first toll-free service was launched in Delhi. MTNL also reduced the security deposit for the customer. For ensuring securityr customers from telephone tapping and reading by external sources, the company proposed to develop software to protect customers.he charges for subscribers in the Wireless Local Loop (WLL) was Rs.25,000 instead of Rs.15,000 for other customers. Toitigate immediate hardship to the customers by way of cash outflow, MTNL agreed to accept a bank guarantee for this security.

he company s low-tariff mobile telephone service was launched in 1999 and was targeted mainly towards the salaried middle-classd students. With the introduction of this scheme, experts felt that MTNL virtually gave the private cellular operators a run for theironey. As regards Internet services, in the year 1999, the company entered into direct competition with another public sector unitdesh Sanchar Nigam Ltd. (VSNL) and offered 15 percent lower tariff. In the same year, MTNL entered into a joint venture withlecom Consultants India Ltd. (TCIL) and became the second basic telecom services provider in Jammu and Kashmir and West Bengal.

he company also proposed a cash-and-stock deal to the Department of Telecommunications (DoT). With the entry of MTNL intollular operations, the Delhi and Mumbai cellular operators proposed to MTNL for an out-of-court-settlement of pendingigation concerning MTNL s entry into cellular services, which was however rejected by MTNL. The company expanded the WLLtwork, both in Delhi and Mumbai to 10,000 and 50,000 subscribers respectively.



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TNL entered into a tie-up with MasterCard International in the year 2000 and is termed by experts as a pioneer in the acceptance andage of credit cards for payment of telephone bills. An alliance with American Express travel related services enabled MTNL tounch India s first co-branded telecom credit card MTNL American Express credit card .

OMPANY S INITIATIVES

was during July 1999, that MTNL decided to facilitate online payment of bills setting August 15, India s Independence Day as theunch date. This decision was taken despite the notable absence of approved legislation for online transactions at that time. Insteadwaiting for the enactment of cyber laws, we decided to go ahead said S Rajagopalan, MTNL s Chairman and Managing Director.arket sources felt that a very bold step was taken by MTNL to take up online billing considering the fact that laws regulating net-sed transactions were not in place. In another development, MTNL s move to cut internet tariffs by 15 percent was challenged by the

ivate operators who lodged a complaint in July 1999 with the Telecom Regulatory Authority of India (TRAI). The privateerators complained should any discounts be given by a network operator, such cuts should be extended to other players as well, to haveevel playing field. A spokesperson expressed the view that since MTNL owned these resources, the overall costs were obviously lower.

r the operation of basic and cellular services, the MTNL board approved the proposal to set-up a joint venture company with thelecom Consultants India Ltd. (TCIL), which was awarded the project to set-up a network in Kuwait. The first steps towards scouting forinternational Joint Venture (JV) partner for operating its cellular phone service were taken with the expectations that MTNL would hold

51 percent equity stake in the new company. In the wake of stiff competition and the need to streamline costs, the company plannedestructuring exercise. The services of Tata Consultancy Services (TCS) were utilized for setting up an integrated commercialcounting system.

significant landmark was achieved when the company launched its cellular service in Mumbai from August 15, 2000. Toprove international communications infrastructure the company took steps to set-up a submarine cable landing station. During thear 2000, the company transferred both its Internet Service Provider Category-A licence and Internet business to Millennium Telecom,subsidiary. Two additional customer service centers were opened in Mumbai. During this year, the company expanded its common

an mobile telephone network with the addition of 50,000 new lines. The company bagged a Rs.320 million contract for providing thexed Wireless Terminals for its CDMA network in Delhi. It also set-up both basic and cellular services in Nepal. Plans for launch ofllular phone service with increased subscriber capacity of 100,000 lines in Mumbai in January 2001 were ready.

he year 2001 saw MTNL developing a dedicated division for expanding its cellular operations in Delhi and Mumbai. Narinder Sharma,e Chairman of the company received the international Millennium Man of the Year award presented by the international awardmmittee of Wisitex Foundation. ICRA was roped in to work out a strategy for leveraging the company s human resources.

TNL and Videsh Sanchar Nigam Ltd. (VSNL) submitted a joint memoranda of understanding with the Department oflecommunications in the year 2001 giving details of their performance agenda for the year. The Company entered into a tie-upth Billjunction.com and provided online bill presentment and payment facility to its customers. An alliance was also forged with IDBI

ank to help the account holders of the bank to effect payment of their telephone bills through Internet and ATMs. MTNL launchedllular service Dolphin, on 6th February, 2001 in Delhi and roaming facility was added before the end of the year. Dolphin increasedsubscriber base to 33,000 in Mumbai. As much as 30 percent of the new connections were defectors from existing cellular operators

either Orange or BPL.

he company also developed a dedicated division to spearhead its cellular business in Delhi and Mumbai. Steps were taken toovide additional net switching capacity of 330,000 lines and to additionally deploy 50,000 lines of CDMA-based WLL technologyring the year 2001-02. In the process of diversifying its overseas operations, MTNL tied-up with WorldTel to offer basic telecom servicesBangladesh.

TNL entered into partnership with RailTel Corporation of India Ltd. in the year 2002 to offer telecom bandwidth through Opticalbre Cable (OFC) laid along the railway track network. Consistent with its strategy to offer value-added communications software incommerce, e-governance and intelligent networking, MTNL developed a new software venture called ComSoft. The launch of WLLrvice in Mumbai and also the launch of pre-paid cellular card Trump in Delhi and Mumbai, at 50 percent lower tariffs as comparedprivate operators players were significant developments. Trump was however withdrawn before the end of the year.

meet competition from the private sector, MTNL cut down cellular tariffs in the year 2003. The subscribers for WLL services werefered new Economy Plan . The tariff rates on CDMA services were reduced by 50%. A new tariff plan was introduced with aonthly rental of Rs.100 and call charges at the rate of Rs.1.90 per minute. Another new scheme was launched that offered a fixede telephone connection for Rs.100 per month, and the customer was provided access to free incoming calls. For outgoing calls,rtual Credit Cards (VCC) were to be used. This new offer combined a hybrid post-paid cum prepaid arrangement. Under basicephony services, it launched a new scheme, Plan 160 , and came out of a negative trap with new fixed-line subscribers outgrowinge surrenders. The company however shelved its global long distance plan. MTNL bagged a contract for providing telephone service andD services in Mauritius. While the company awarded the WLL-M handset contract to Kyocera of Japan, it also joined hands with Nokiad Samsung for providing WLL handsets.

uring the year 2004, MTNL launched new schemes for ISDN subscribers. New leased line services were launched with both full d compressed bandwidth circuits, with speeds ranging from 64 kpbs to two mbps. For landline customers, the company unveiled

MS facilities and for Mumbai landline customers, Value Added Services (VAS) were provided. MTNL announced special tariff plan

January 09, 2004 for low end users of basic services with monthly rental of Rs.160. A strategic alliance was formed with MTNL andSNL coming together to jointly offer their voice and data services. These public sector companies came together to target corporate clients.

TNL bagged overseas offers to provide telecom services in Mauritius and Kenya. It also bagged the award for excellence in costduction. Significantly, the year 2005 began with a reduction in high-speed Internet tariff. BSNL and MTNL launched theiroadband services across the country from January 14 offering services at lower rates of Rs.500 a month.



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UBLIC OFFER

he company offered for public subscription, 1,500,000-14% and 10% secured redeemable non-convertible bonds of Rs.1,000ring November 1986. This was for meeting the part requirements of the capital expenditure programs of both MTNL and DoT for thear 1986-87. To retain over subscription additionally, another 750,000 bonds were issued. Further, financial institutions and banksceived private placement of 1,588,460-14% secured redeemable bonds. 5,999,984 shares were issued without cash payment. Theotment of 1,12,133-14% and 1,926,327-10% bonds of Rs.1,000 each took place in February/March, 1987. After the date of allotment,e 14% and 10% bonds were to be redeemed at the expiry of 7 years and 10 years respectively. The company also made a privateacement of bonds worth Rs.4,500 million with banks, FIs and mutual funds.

eeping in view the developmental programs of the department of telecommunications, MTNL floated during the year 1996, 11th A part

d 12th Series of bonds on private placement basis amounting to Rs.3,592.6 million.DR ISSUE

uring the year 1997, 350,000 GDRs representing 700,000 equity shares (1 GDR = 2 shares) were issued by the company at a price of US11.958 per GDR. Later in the year 1999, the MTNL Board proposed stock option price of around Rs.85 per share to the DepartmentTelecommunications (DoT). Incidentally, the prevailing market price was around Rs.85 per share after it slumped from a high of

ound Rs.170 before the change of government took place at the center in that year. MTNL also proposed that the disinvestment programthe government should be dovetailed with its $100 million Global Depository Receipt (GDR) issue coinciding with the company s planemerge as the first Indian company to be listed on the New York Stock Exchange (NYSE).

ans were afoot to list MTNL on the New York Stock Exchange (NYSE) before the end of the year 1999. As per the plans the listing wascoincide with the next block of divestment and was aimed at providing an option to the European stakeholders to convert their GDRsto American Depository Receipts (ADRs). MTNL s chairman said we plan to list at NYSE simultaneously with the divestment of

million government shares and a book-building exercise would begin immediately

. As a result, MTNL was also contemplating changesits accounting norms so as to be in tune with the Generally Accepted Accounting Practices (GAAP). The listing at NYSE was alsoanned since the entire Global Depository Receipts (GDRs) were only traded at the London Exchange. However, MTNL did not considere plan to delist from London should the European investors opt out of GDRs. The listing exercise was expected to cost around $1illion. Company sources believed that the NYSE listing along with the ADR conversion would boost MTNL s international presence,d entertained hopes that the share value at the domestic market would shoot up substantially consequent to its listing at the NYSE.

he government finalized the plans to go ahead with the GDR issue of MTNL during early November 1999, which was however called offthe last minute. The global coordinators to the issue and the merchant bankers Goldman Sachs, HSBC Investment Banking anderrill Lynch, advised against this move after considering the market sentiments at that time. The company s earlier GDR issue of 1997as in fact quoted at a discount. S Sundaresan, Director of Finance, MTNL conveyed that even the domestic issue of Employee Stockption (ESOP) that would have offered about 2.25 percent of the paid-up capital was also deferred. Had the GDR, the ESOP and theblic offer been through the government stake in MTNL would have been reduced to 51 percent from a level of around 56.25 percent.

he MTNL shares oscillated between a high of Rs.230 and a low of Rs.154 during the second half of 1999. MTNL s shares were finallyted at the NYSE during November 2001 and in this process became the ninth Indian company to be listed there. Talking to reporters

om NYSE, Narinder Sharma, the company s chairman and managing director informed that more than 31,000 ADRs were traded on theoor within the first 45 minutes of trading at $5.9 a ADR and demand for the scrip only increased . He also revealed that the companyd plans to enter the American market directly and raise funds through issue of fresh ADRs.

EGAL ISSUES

he government approved the proposal to amend MTNL s articles of association after the extraordinary general body meeting of thempany was held on November 19, 1999. The powers to: incur capital expenditure, enter into technological joint ventures orategic alliances, effect organizational restructuring, create and wind-up all posts, structure and implement schemes relating to personneld human resource management, and raise funds from domestic capital markets and to borrow from international markets, were delegatedthe board. This move was taken to give the necessary autonomy to the company to take commercial decisions for improvingareholder value. The step was also seen as a catalyst in creating a positive reaction in the market to push up MTNL share prices.

onsequent to the amendment to the articles of association, MTNL had to make a few choices. The first option was to privately placeeir equity with select investors. Earlier, during 1997, at the time of GDR issue, British Telecom, France Telecom and Italian Telecomfered to take sizable stakes in the company and wanted their representatives on the MTNL board. This proposal was turned down bye company. The second option was to offload sizable chunk of shares in the domestic market, alongside the risk of a singleterested investor mopping up the entire shares. The third option was to buy back MTNL s own shares. The company believedat downsizing the equity base was the need of the hour.

CCOUNTING ISSUES

nalysts believed that the fourth quarter profits for FY2000 were inflated since revised wages and taxation were not provided for.bsequent to the declaration of unaudited results for the last quarter of FY 2000, MTNL revised its profit downwards to accountr retrospective wage revision for its employees. The adjustment in the audited results led to an increase in the staff costs by Rs.3,800illion and in administrative and operating expenses by Rs.830 million. Rs.1,370 million were also applied towards prior periodjustments. Analysts pointed out that the fourth quarter results for 2000 were also inflated since taxation and write-back of taxesovided earlier were not provided for to the extent of Rs.825 million. Consequently, it was believed that the Q4FY2000 profits wereflated to the extent of Rs.1,200 million. (Refer to Annexures I to IV).

gainst this background, during the FY 2001, the government had divested approximately 275.6 million shares (including 70 millionares through Global Depository Receipts (GDRs)). The outstanding shares of MTNL as on March 31, 2001 were 630 million (30illion GDR included) out of which government owned 354.3 million shares (56.25 percent). For the quarter ended June 2001,



9/17


TNL announced a marginal 2.24 percent increase in its net profit at Rs.3,773 million as against Rs.3,690.5 million in therresponding quarter during the earlier year. The net income stood at Rs.14,953 million and the earning per share went up to Rs.23.96ring the quarter as compared to Rs.23.43 per share in the corresponding quarter during the earlier year. For the next quarterded September, MTNL registered a 14.5 percent decline in net profit that stood at Rs.3,823.4 million. S Sundaresan, Director (Finance),id that the decline in net profits was due to the provision of deferred tax liability in compliance with the New Accounting Standard 22.he company s profits registered an increase of 32 percent during the last quarter of 2001, while the company s stock dipped nearly 10rcent with reports suggesting that the profits had actually fallen during that quarter.

THER ISSUES

he government held 56.25 percent equity in MTNL, banks held 40.87 percent equity and financial institutions held 70 million shares

rough GDR. Against this background, the central government considered a proposal in August 2002 to bring both the public sectorajors BSNL and MTNL under one umbrella. The then Information Technology Minister Pramod Mahajan however said that theoposal was only in the thinking stage .

e conceded that although both the organizations were public sector units, differences existed with regard to pay scales, promotionsd employee strength. He added BSNL with its vast customer base, possessed vast and strong financial and asset bases too. The value oftelephone infrastructure alone was estimated at about Rs.1,000 billion, having a turnover of Rs.220 billion and fixed assets were

orth more than Rs.900 billion.

nalysts looked at the advantages for BSNL from the merger. Firstly, BSNL could gain control over the lucrative circles of Mumbai andelhi for offering both basic and cellular telephony services. Secondly, the merger with MTNL could boost revenue potential and viabilitythese two metros enjoy the highest Average Revenue Per User (ARPU) in the country. Thirdly, the relatively healthy cash flows ofTNL could help BSNL to narrow the resource gap between its proposed yearly investments and the available internal resources. ForTNL, the loss would be its loss of identity . MTNL was listed both in the domestic as well as overseas markets. BSNL s net worth ate time of merger proposal in the year 2002 was over Rs.600 billion and that of MTNL was about Rs.71 billion. BSNL had a staff strengthabout 350,000 and MTNL had over 50,000 employees.

he BSNL top-brass believed that the proposed merger with MTNL would be detrimental to the interests of both organizations andeir stakeholders. SD Saxena, BSNL s director (finance) told ET we are confident that we can convince Union communicationsinister Pramod Mahajan about this. The recent merger proposal has also not been received well in the international markets he added. Ate same time, MTNL staff was also opposed to this idea of merger.

he merger was possible either through an open offer or a share swap deal. The MTNL shareholders gave a thumbs down to theerger proposal, marking the MTNL stock down. By recording a price of Rs.95 in the year 2002, the MTNL stock price hit a new nine-ar low. At the beginning of the year 2003, the company missed out on the deadline for WLL-M expansion in Delhi. During this year,e new WLL tariffs proposed by MTNL were rejected by the TRAI. The company formulated a Voluntary Retirement Scheme (VRS)heme for its employees. The DoT signed a Memorandum of Understanding (MoUs) for 2003-04 with MTNL.

OVERNMENT S PLANSJanuary 2003, the then Communications Minister Arun Shourie wanted to study the proposal for the merger of MTNL and BSNL andked for details about their market share and their competitiveness. He wanted to assess the handicaps in this regard and the steps neededr removing them. The minister was guarded when he said that he had not fixed any time frame for arriving at a conclusion. His idea wasensure competition in the telecom sector. At the same time, he expressed the view that intense competition must not hurt balanceeets . Things moved ahead, and towards the end of October 2003, MTNL had even finalized the scheme for rationalizing its workforce,d worked out details regarding a VRS.

s news of a possible merger flared up in June 2004, the MTNL stock that was lying low at Rs.95 bounced to Rs.130 levels. Analystsinted out that though nothing really happened in the merger front, it was not until October 2004, that the merger issue becameominent once again. Dayanidhi Maran, the Minister of Communication and Information Technology clearly revealedvernment s intentions to push this idea further. Amidst reports of the possibility of MTNL becoming a subsidiary of BSNL, the moodMTNL was clearly against such a move. R S P Sinha, MTNL CMD said the suggestion does not give either benefit or result, that

as visualized in the case of a possible merger since these two companies would remain as separate entities maintaining an arm sngth distance . This is due to the reason that MTNL is a listed company in the Indian bourses and at New York Stock Exchange (NYSE)well he added. He also revealed that MTNL and BSNL are in fact complementing each other s operations. they are not competingth each other , he said.

wards the end of 2004, the market estimates put BSNL s equity value at $8 billion and enterprise value at $12 billion. The enterpriselue and equity value of MTNL was put at $1.6 and $2.2 billion, respectively. As the merger issue came into limelight again, analystsere busy in analyzing the effects of a possible merger. It was felt that the proposed merger between MTNL and BSNL might notovide relief in terms of high employee cost, political interference and red tape. Accounting experts believed that it would be difficultr BSNL to meet GAAP accounting standards.

r the first quarter ended in June 2005, MTNL reported a 26 percent year-on-year decline in net profit to Rs.1.72 billion. There was alsodecline in the income from services which declined to 9.2 percent amounting to Rs.13.92 billion. MTNL s revenues from mobilervices however increased by 100.19 percent to Rs.1.01 billion. Also the subscriber base in Mumbai and New Delhi doubled to 14rcent with 1.1 million subscribers, up from 7 percent in the first quarter of 2004-05.

EY CONCERNS

onsidering their area of operations, analysts feared that the cost and revenue synergies between MTNL and BSNL would beinimal. Savings on network sharing also would not be possible as the two companies have networks in different areas. BSNL is present



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the entire country except Mumbai and Delhi where MTNL is having its network. The possible benefit from economies of scale inocuring equipment could lead to lower capital expenditure, which however would not exceed more than 5% of the total capitalpenditure for BSNL. With regard to capital expenditure, BSNL s budgeted expenditure was Rs.150 billion for FY 2004. For MTNL,is amount was budgeted to be about Rs.9 billion for the FY 2004. MTNL could have saved about 25% on its capital expenditure due toe merger though it would not have impacted on MTNL s operating expenses. It was against this background that MTNL s merger issueth BSNL and the exercise at restructuring MTNL remained pending.

ANNEXURE IBalance Sheet

(Rs. in million)0503-(12) 0403-(12) 0303-(12) 0203-(12) 0103-(12)

ources of Fundswner s Fundquity Share Capital 6,300.00 6,300.00 6,300.00 6,300.00 6,300.00hare Application Money 0.00 0.00 0.00 0.00 0.00eference Share Capital 0.00 0.00 0.00 0.00 0.00eserves & Surplus 103,138.30 96,976.28 88,669.73 83,096.41 77,181.49oan Fundsecured Loans 0.00 0.00 0.00 0.00 0.00nsecured Loans 0.00 0.00 0.00 26,190.00 28,810.00otal 109,438.30 103,276.28 94,969.73 115,586.41 112,291.49

ses of Fundsxed Assetsross Block 142,522.50 135,629.33 126,652.06 117,322.24 106,809.54ess: Revaluation Reserve 0.00 0.00 0.00 0.00 0.00ess: Accumulated Depreciation 77,836.20 73,526.51 71,480.32 64,204.26 56,530.67et Block 64,686.30 62,102.82 55,171.74 53,117.98 50,278.87apital Work-in-progress 6,270.60 5,082.49 9,187.37 7,978.05 8,155.01vestments 3,974.70 3,806.94 3,710.12 1,026.77 0.02et Current Assetsurrent Assets, Loans & Advances 152,490.00 143,120.51 127,779.59 133,707.72 110,441.50ess: Current Liabilities & Provisions 117,983.30 110,836.48 100,879.09 80,244.11 56,583.91otal Net Current Assets 34,506.70 32,284.03 26,900.50 53,463.61 53,857.59

iscellaneous expenses not written 0.00 0.00 0.00 0.00 0.00otal 109,438.30 103,276.28 94,969.73 115,586.41 112,291.49ote:ook Value of Unquoted Investments 0.00 3,806.94 3,710.12 1,026.77 0.02arket Value of Quoted Investments 0.00 0.00 0.00 0.00 0.00ontingent liabilities 64,028.20 48,531.02 39,659.27 39,222.49 11,865.43umber of Equity shares outstanding 630,000,000.00 630,000,000.00 630,000,000.00 630,000,000.00 630,000,000.00

urce: www.indianinfoline.com

ANNEXURE IIProfit and Loss Account

(Rs. in million)

0503-(12) 0403-(12) 0303-(12) 0203-(12) 0103-(12)IncomeOperating Income 55,923.90 63,704.00 58,072.62 61,450.72 57,875.12ExpensesMaterial Consumed 0.00 0.00 0.00 0.00 0.00Manufacturing Expenses 16,813.00 2,267.17 2,319.62 2,124.47 13,315.07Personnel Expenses 19,319.40 17,011.46 15,482.06 14,803.28 13,233.81Selling Expenses 0.00 3,033.88 2,987.92 312.51 2,310.57Administrative Expenses 9,473.30 21,468.26 17,663.91 19,573.36 3,024.29Expenses Capitalized -963.10 0.00 0.00 0.00 0.00Cost of Sales 44,642.60 43,780.77 38,453.51 36,813.62 31,883.74

Operating Profit 11,281.30 19,923.23 19,619.11 24,637.10 25,991.38Other Recurring Income 7,113.60 1,990.85 1,940.72 1,806.11 2,466.14Adjusted PBDIT 18,394.90 21,914.08 21,559.83 26,443.21 28,457.52Financial Expenses 358.10 470.29 436.08 553.52 3,977.23Depreciation 5,880.10 5,437.95 8,670.42 8,164.56 7,692.46



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Other Write offs 0.00 0.00 0.00 0.00 0.00Adjusted PBT 12,156.70 16,005.84 12,453.33 17,725.13 16,787.83Tax Charges 2,672.40 4,513.48 3,600.32 4,937.63 1,630.00Adjusted PAT 9,484.30 11,492.36 8,853.01 12,787.50 15,157.83

Non-recurring Items 94.50 -276.41 -111.28 74.34 414.37Other Non-cash adjustments 0.00 288.83 29.82 144.93 -170.37Reported Net Profit 9,484.30 12,346.03 8,771.55 13,006.77 15,572.20Earnings Before Appropriation 9,578.80 11,504.78 8,771.55 13,006.77 15,401.83Equity Dividend 2,835.00 2,835.00 2,835.00 2,835.00 2,835.00

Preference Dividend 0.00 0.00 0.00 0.00 0.00Retained Earnings 6,351.00 8,306.55 5,573.32 10,171.77 12,277.66

urce: www.indianinfoline.com

ANNEXURE III

Cash Flow Statement

(Rs. in million)

0403-(12) 0303-(12) 0203-(12) 0103-(12) 0003-(12)Profit Before Tax 16,859.51 12,597.56 18,023.15 17,202.20 13,999.48Depreciation 5,437.95 8,672.75 8,164.56 7,692.46 7,092.81Lease and Rental Charges 0.00 0.00 0.00 0.00 0.00

Lease Equalization 0.00 0.00 0.00 0.00 0.00P and L in Forex 0.00 0.00 0.00 0.00 0.00Gain on Forex Transaction 0.00 0.00 0.00 0.00 0.00P and L on Sale of Assets 107.51 79.02 9.02 -68.96 -21.61P and L on Sale of Investments 0.00 0.00 0.00 0.00 0.00Profit Adj. on Sale of Undertaking 0.00 0.00 0.00 0.00 0.00Interest Income 1,748.46 1,634.53 1,573.22 1,793.04 1,117.21Interest Paid Net 14.65 4.49 150.43 83.03 -400.49Interest Net 0.00 0.00 0.00 0.00 84.16Dividend Received 0.00 0.00 0.00 0.00 0.00Dividend Net 0.00 0.00 0.00 0.00 0.00Investments 0.00 0.00 0.00 0.00 0.00

Misc. Income 0.00 0.00 0.00 0.00 0.00Amortisation of Expenses 0.00 0.00 0.00 0.00 0.00Assets Written off 0.00 0.00 0.00 0.00 0.00Misc. Expenses 0.00 0.00 0.00 0.00 0.00Payment towards VRS 0.00 0.00 0.00 0.00 0.00Provision and WO Net 0.00 0.00 0.00 0.00 0.00Provision for Gratuity 0.00 0.00 0.00 0.00 0.00Provision for Dimunition in Investments 0.00 0.00 0.00 0.00 0.00Provisions for BadDebts NPA 0.00 0.00 0.00 0.00 0.00Trade and Other Receivables 2,556.44 8,344.92 13,116.45 267.02 1,823.86Trade Bills Purchased 0.00 0.00 0.00 0.00 0.00Inventories 609.74 1,275.11 90.54 212.46 376.87Trade Payables 4,657.52 15,324.67 12,859.57 4,984.88 11,764.40Tax Provision 0.00 0.00 0.00 0.00 0.00Direct Taxes Paid 9,695.26 8,326.70 8,732.32 7,933.02 8,874.97Advance Tax Paid 0.00 0.00 0.00 0.00 0.00Loan and Advances 0.00 0.00 0.00 0.00 0.00Transfer from Reserve 0.00 0.00 0.00 0.00 0.00Other Operating Activity 0.00 0.00 0.00 0.00 0.00Prior Year Adjustments 538.87 198.37 39.46 157.04 1,489.36Provisions Written Back 0.00 0.00 0.00 0.00 0.00Prior Year Taxation 0.00 0.00 0.00 0.00 0.00Balances Written Back 0.00 0.00 0.00 0.00 0.00

Other Assets 0.00 0.00 0.00 0.00 0.00Other Liabilities 0.00 0.00 0.00 0.00 0.00Change in Deposits 0.00 0.00 0.00 0.00 0.00Change in Borrowing 0.00 0.00 0.00 0.00 0.00Discount Exp. on Loans Wrt.off 0.00 0.00 0.00 0.00 0.00Increase/decrease in Advances 0.00 0.00 0.00 0.00 0.00



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Increase/decrease in Investments 0.00 0.00 0.00 0.00 0.00Net Stock on Hire 0.00 0.00 0.00 0.00 0.00Leased Assets Net of Sale 0.00 0.00 0.00 0.00 0.00Excess Depreciation Written back 0.00 0.00 0.00 0.00 0.00Premium on Lease of Land 0.00 0.00 0.00 0.00 0.00Extra Ordinary Items 0.00 0.00 0.00 0.00 0.00Net Cash Flow-Operating Activity 18,260.73 36,138.92 15,613.88 19,531.03 22,484.20Purchase of Fixed Assets 9,336.65 12,061.94 11,592.14 10,156.58 9,586.85Sale of Fixed Assets 57.71 19.77 740.44 47.86 122.92

Capital WIP 0.00 0.00 0.00 0.00 0.00Capital Subsidy Recd 0.00 0.00 0.00 0.00 0.00Purchase of Investments 96.82 2,683.35 1,026.75 0.00 0.00Sale of Investments 0.00 0.00 0.00 0.00 0.00Acquisition of Companies 0.00 0.00 0.00 0.00 0.00Sale of Undertaking Extra Ord. Item 0.00 0.00 0.00 0.00 0.00Interest Received 1,694.75 1,319.35 1,631.89 1,731.21 1,129.76Dividend Received Inves Activity 0.00 0.00 0.00 0.00 0.00Investment Income 0.00 0.00 0.00 0.00 0.00Inter Corporate Deposits 0.00 0.00 0.00 0.00 0.00Investment in Subsidiaries 0.00 0.00 0.00 0.00 -0.02Loan to Subsidiaries 0.00 0.00 0.00 0.00 0.00

Investment in Group Cos 0.00 0.00 0.00 0.00 0.00Issue of Shares on Acq. of Cos 0.00 0.00 0.00 0.00 0.00Cancellation of Invest. in Cos Acq 0.00 0.00 0.00 0.00 0.00Certificate of Deposit in Bank 0.00 0.00 0.00 0.00 0.00Movement in Loans 0.00 0.00 0.00 0.00 0.00Others from Invest. Activity 0.00 0.00 0.00 0.00 0.00Movement in Working Capital 0.00 0.00 0.00 0.00 0.00Amortization of Expenses Invest Activity 0.00 0.00 0.00 0.00 0.00Taxes Paid 0.00 0.00 0.00 0.00 0.00Expenses Capitalized 0.00 0.00 0.00 0.00 0.00Extraordinary Items 0.00 0.00 0.00 0.00 0.00Purchase of Fixed Assets Leased Out 0.00 0.00 0.00 0.00 0.00Net Inc/Dec in Current Asset 0.00 0.00 0.00 0.00 0.00Net Inc/Dec in Advances 0.00 0.00 0.00 0.00 0.00Net Inc/Dec in Current Liab. 0.00 0.00 0.00 0.00 0.00Net Cash Used in Investing Activity 7,681.01 13,406.17 10,246.56 8,377.51 8,334.19Proceeds from Issue of Eq. Capital 0.00 0.00 0.00 0.00 0.00Proceeds from Issue of Pref. Capital 0.00 0.00 0.00 0.00 0.00Proceed from Issue of Cap. Incl. Sh. Prem. 0.00 0.00 0.00 0.00 0.00Redemption of Capital 0.00 0.00 0.00 0.00 0.00Proceed from Issue of Deb 0.00 0.00 0.00 0.00 0.00Proceed from bank Borrowings 0.00 0.00 0.00 0.00 0.00Proceed from oth. LTerm Borr 0.00 0.00 0.00 0.00 26,190.00Proceed from Sh Term Borr 0.00 0.00 0.00 0.00 0.00Proceed from Deposits 0.00 0.00 0.00 0.00 0.00Repayment of Borrowings -5.43 26,190.38 2,624.97 -2,342.46 0.00Share Application 0.00 0.00 0.00 0.00 0.00Loan from Corporate Body 0.00 0.00 0.00 0.00 0.00Dividend Paid 3,198.24 2,835.00 3,124.17 2,167.20 2,097.90Interest Paid 0.00 0.00 0.00 166.33 0.00Financial Charges 0.00 0.00 0.00 0.00 0.00Cash Credit Advances 0.00 0.00 0.00 0.00 0.00Cash Cap Investment Subsidy 0.00 0.00 0.00 0.00 0.00Others from Fin Activity 0.00 0.00 0.00 0.00 0.00Foreign Exchange Gains Losses 0.00 0.00 0.00 0.00 0.00

Share Premium 0.00 0.00 0.00 0.00 0.00Misc. Exp. Written-Off 0.00 0.00 0.00 0.00 0.00Sale of Investments 0.00 0.00 0.00 0.00 0.00Reserves 0.00 0.00 0.00 0.00 0.00Current Liabilities 0.00 0.00 0.00 0.00 0.00Loans Disbursed 0.00 0.00 0.00 0.00 0.00



13/17


Inventories Fin Activity 0.00 0.00 0.00 0.00 0.00Extraordinary Items FinActivity 0.00 0.00 0.00 0.00 0.00Deferred Exp Against Borrowing 0.00 0.00 0.00 0.00 0.00Share Application Refund 0.00 0.00 0.00 0.00 0.00On Redemption of Debenture 0.00 0.00 0.00 0.00 0.00Of Other Long-Term Borrowing 0.00 0.00 0.00 0.00 33,392.20Of Short-term Borrowing 0.00 0.00 0.00 0.00 0.00Of Fin Lease Liability 0.00 0.00 0.00 0.00 0.00Shelter Assistance Reserve 0.00 0.00 0.00 0.00 0.00

Repayment of Short-term Borrow 0.00 0.00 0.00 0.00 0.00Repayment of Long-term Borrow 0.00 0.00 0.00 0.00 0.00Net Cash Used in Fin. Activity 3,203.67 29,025.38 5,749.14 4,675.99 9,300.10Foreign Exchange Gains Losses Net Fin. Activity 0.00 0.00 0.00 0.00 0.00Net Inc/Dec in Cash and Equivlnt 7,376.05 -6,292.64 -381.82 6,477.53 4,786.60Cash and Equivalnt Begin of Year 18,154.64 24,446.52 24,828.34 18,350.81 13,564.21Cash and Equivalnt End of Year 25,530.69 18,153.88 24,446.52 24,828.34 18,350.81urce: www.indianinfoline.com

ANNEXURE IVRatio Analysis

0503-(12) 0403-(12) 0303-(12) 0203-(12) 0103-(12)

r Share Ratiosdjusted EPS (Rs.) 15.05 18.24 14.05 20.30 24.06djusted Cash EPS (Rs.) 24.39 26.87 27.81 33.26 36.27eported EPS (Rs.) 15.05 19.60 13.92 20.65 24.72eported Cash EPS (Rs.) 24.39 28.23 27.69 33.61 36.93ividend Per Share 4.50 4.50 4.50 4.50 4.50perating Profit Per Share (Rs.) 17.91 31.62 31.14 39.11 41.26ook Value (Excl Rev Res) Per Share (Rs.) 173.71 163.93 150.75 141.90 132.51ook Value (Incl Rev Res) Per Share (Rs.) 173.71 163.93 150.75 141.90 132.51et Operating Income Per Share (Rs.) 88.77 101.12 92.18 97.54 91.87ee Reserves Per Share (Rs.) 0.00 132.02 120.96 113.74 107.18ofitability Ratios

perating Margin (%) 20.17 31.27 33.78 40.09 44.90ross Profit Margin (%) 9.65 22.73 18.85 26.80 31.61et Profit Margin (%) 15.04 18.79 14.61 20.56 25.80djusted Cash Margin (%) 24.37 25.77 29.19 33.12 37.86djusted Return on Net Worth (%) 8.66 11.12 9.32 14.30 18.15eported Return on Net Worth (%) 8.66 11.95 9.23 14.54 18.65eturn on long-term Funds (%) 11.43 15.95 13.57 15.81 18.49everage Ratiosong-term Debt/Equity 0.00 0.00 0.00 0.29 0.34otal Debt/Equity 0.00 0.00 0.00 0.29 0.34wners fund as % of total Source 100.00 100.00 100.00 77.34 74.34xed Assets Turnover Ratio 0.39 0.46 0.45 0.52 0.54quidity Ratiosurrent Ratio 1.29 1.29 1.27 1.67 1.95urrent Ratio (Inc. ST Loans) 1.29 1.29 1.27 1.67 1.95uick Ratio 1.28 1.25 1.22 1.61 1.90ventory Turnover Ratio 29.97 0.00 0.00 22.16 20.21

ayout Ratiosividend payout Ratio (Net Profit) 34.03 25.90 36.46 21.79 20.06ividend payout Ratio (Cash Profit) 21.00 17.98 18.33 13.39 13.42arning Retention Ratio 65.97 72.18 63.88 77.83 79.39ash Earnings Retention Ratio 79.00 81.11 81.75 86.47 86.33overage Ratiosdjusted Cash Flow Time Total Debt 0.00 0.00 0.00 1.25 1.26nancial Charges Coverage Ratio 51.37 46.60 49.44 47.77 7.16n. Charges Cov.Ratio (Post Tax) 43.91 38.81 41.00 39.25 6.85omponent Ratiosaterial Cost Component (% earnings) 0.00 0.00 0.00 0.00 0.00

elling Cost Component 0.00 4.76 5.14 0.50 3.99



14/17


xports as percent of Total Sales 0.00 0.01 0.10 0.50 1.05mport Comp. in Raw Mat. Consumed 0.00 0.00 0.00 0.00 0.00ong-term assets/Total Assets 0.32 0.33 0.34 0.31 0.34onus Component in Equity Capital (%) 0.00 0.00 0.00 0.00 0.00

Source: www.indianinfoline.com

END OF QUESTION PAPER

Suggested AnswersIntegrated Case Studies - I (MSF3S1) : October 2007

Case Study

1. The Indian telecommunications sector was wholly under government ownership until the mid-1980s, and in 1986 publicsector corporations such as the Mahanagar Telephone Nigam Limited (MTNL) and the Videsh Sanchar Nigam Limited(VSNL) were created to allow greater autonomy in decision-making, and to facilitate public borrowings that would not have

been possible under a government framework. However, policy formulation and regulation remained with the Department ofTelecommunications (DOT). The MTNL was mainly constituted to look after the operation, maintenance, and development oftelecom services.

The VSNL was set up to plan, operate, develop, and accelerate international telecom services in India. In 1989, the TelecomCommission was created with executive, administrative, and financial powers to formulate and regulate policy and prepare the

budget for the DOT. In line with other economic reforms, the telecommunications equipment manufacturing industry has beende-licensed and de-reserved since 1991. Automatic approval of foreign equity up to 51 per cent has been allowed for foreigninvestors engaged in the manufacture of all telecommunications equipment. The value added services in thetelecommunications sector were opened up to private investment in July 1992 with the objective of achieving internationalfacilities. The National Telecom Policy (NTP) announced in 1994 specified the major objectives of the reform in thetelecommunication sector in India. This policy also paved the way for private sector participation in basic telephone services,

particularly local telephones. However, there is criticism that the policy failed to provide the mechanisms to achieve theobjectives such as universal access and service goals.

This revised policy has incorporated an element of revenue sharing with operators rather than license fee arrangements. TheDepartment of Telecom Services (DTS) was created in 1999 to separate the DOT s service role from policy and licensing. DTShas been converted in 2001 to an independent company called Bharat Sanchar Nigam (BSNL). This raised huge oppositionfrom labour unions and the government had to compensate the employees with a free phone installation, free local calls to acertain number, and no rental charges for a telephone until a specified time. The VSNL has lost its monopoly status as the sole

internet service provider (ISP) in the reform process as the GOI has allowed private participation for ISPs, and thus licensingwas made almost free.

The government has also treated VSNL and other providers indiscriminately, and has provided the same rights to work withinternational carriers to have access to undersea bandwidth. Again, in typical fashion, to compensate the losses for VSNL, thegovernment has granted a nationwide license for internet and a free license for long distance calls, which was cancelled laterdue to a belated realisation of the negative impact of this decision on the growth of the sector.

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2. The Centre considered a new strategy for the merger of Bharat Sanchar Nigam (BSNL) and Mahanagar Telephone Nigam(MTNL). In the first phase, the government may form a holding company with BSNL and MTNL as its subsidiaries. Afterthree years, the two PSUs would be merged into one entity. The consortium of consultants led by ICICI Securities hasinformed a high-level steering committee headed by the telecom commission chairman that this is the most practical approachto synergise operations of the two PSUs. In its report submitted to the DoT, the consortium had suggested four options to

merge the two PSUs. The first option was acquisition of MTNL by BSNL followed by an IPO by BSNL. The other options aremerging MTNL into BSNL, merging BSNL into MTNL, and MTNL acquiring BSNL.

However, the biggest hurdle in the acquisition of MTNL by BSNL is its fair valuation. If the acquisition is through equityswap, which could be the most preferred option, then the valuation of BSNL would be another problem. MTNL is listed in thelocal markets as well as on the NYSE. Hence, compensation of ADR holders will be a issue. Moreover, human resources willalso be an important issue as MTNL staffers currently get a higher salary than their BSNL counterparts.

Once these issues are resolved, the two PSUs can be merged into one entity with least resistance. The merger would not solveany of the telecom PSUs' existing problems, such as red tapism, political interference, and high employee cost, which is around30% of the total sales, compared to 6-7% for private operators .

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3. The country

s first toll-free service was launched in Delhi. MTNL also reduced the security deposit for the customer. Forensuring security for customers from telephone tapping and reading by external sources, the company proposed to developsoftware to protect customers. To mitigate immediate hardship to the customers by way of cash outflow, MTNL agreed toaccept a bank guarantee for this security.The company s low-tariff mobile telephone service was launched in 1999 and was targeted mainly towards the salariedmiddle-class and students. With the introduction of this scheme, experts felt that MTNL virtually gave the private cellular



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operators a run for their money. As regards Internet services, in the year 1999, the company entered into direct competitionwith another public sector unit Videsh Sanchar Nigam Ltd. (VSNL) and offered 15 percent lower tariff. In the same year,MTNL entered into a joint venture with Telecom Consultants India Ltd. (TCIL) and became the second basic telecom services

provider in Jammu and Kashmir and West Bengal. The company also proposed a cash-and-stock deal to the Department ofTelecommunications (DoT).MTNL entered into a tie-up with MasterCard International in the year 2000 and is termed by experts as a pioneer in theacceptance and usage of credit cards for payment of telephone bills. An alliance with American Express travel related servicesenabled MTNL to launch India s first co-branded telecom credit card MTNL American Express credit card .

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4. The telecoms trends in India will have a great impact on everything from the humble PC, internet, broadband (bothwireless and fixed), cable, handset features, talking SMS, IPTV, soft switches, and managed services to the localmanufacturing and supply chain.This report discusses key trends in the Indian telecom industry, their drivers and the major impacts of such trends affectingmobile operators, infrastructure and handset vendors.Higher acceptance for wireless servicesIndian customers are embracing mobile technology in a big way (an average of four million subscribers added every month forthe past six months itself). They prefer wireless services compared to wire-line services, which is evident from the fact thatwhile the wireless subscriber base has increased at 75 percent CAGR from 2001 to 2006, the wire-line subscriber base growthrate is negligible during the same period.In fact, many customers are returning their wire-line phones to their service providers as mobile provides a more attractive andcompetitive solution. The main drivers for this trend are quick service delivery for mobile connections, affordable pricing plansin the form of pre-paid cards and increased purchasing power among the 18 to 40 years age group as well as sizeable middleclass a prime market for this service.There are some positive impacts of this trend. According to a study, 18 percent of mobile users are willing to change theirhandsets every year to newer models with more features, which is good news for the handset vendors. The other impact is thatwhile the operators have only limited options to generate additional revenues through value-added services from wire-lineservices, the mobile operators have numerous options to generate non-voice revenues from their customers. Some examples ofvalue-added services are ring tones download, coloured ring back tones, talking SMS, mobisodes (a brief video programmeepisode designed for mobile phone viewing) etc. Moreover, there exists great opportunity for content developers to developapplications suitable for mobile users like mobile gaming, location based services etc. On the negative side, there is anincreased threat of virus spread through mobile data connections and Bluetooth technology in mobile phones, making themunusable at times. This is good news for anti-virus solution providers, who will gain from this trend.MERGERSDemand for new spectrum as the industry grows and the fact the spectrum allocation in done on the basis of number of

subscribers will force companies to merge so as to claim large number of subscribers to gain more spectrum as a precursor tothe launch of larger and expanded services. However it must also be noted that this may very well never happen on account oflow telecom penetration.

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5. The several key events that have enabled the vigorous competition witnessed include: The corporatization of the DOT and the creation of a new state-owned telecom company, Bharat Sanchar NigamLtd (BSNL), in 2000; The opening up of India s internal long-distance market in 2000, and the subsequent drop in long-distance rates as

part of TRAI s tariff rebalancing exercise; The termination of VSNL s monopoly over international traffic in 2002, and the partial privatization of thecompany that same year, with the Tata group assuming a 25% stake and management control; The gradual easing of the original duopoly licensing policy, allowing a greater number of operators in each circle; The legalization, in 2002, of IP telephony (a move that many believe was held up due to lobbying by VSNL, whichfeared the consequences on its international monopoly); The introduction in 2003 of a Calling Party Pays (CPP) system for cell phones, despite considerable opposition(including litigation) by fixed operators; The commencement of more stringent interconnection regulation by TRAI, which has moved from an interoperator negotiations-based approach (often used by the stronger operator to negotiate ad infinitum) to a more rules-basedapproach.

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6. The state-owned Mahanagar Telephone Nigam Ltd has readied a war chest of Rs 500 crore for international operations,including acquisitions and bidding for new licences in developing countries in the current financial year. It has already enteredMauritius and Nepal and is now looking at other developing countries in Africa and Asia. MTNL had recently bid for licencesin Kenya and Saudi Arabia. Other Indian operators have also been on the look out for acquiring new licences in foreigncountries. Reliance Communication and Bharti Airtel have also been bidding for licences in countries such as Saudi Arabia andAfrican countries. BSNL is also keen to invest in international markets especially in the managed services segment.

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maintained by the firm are negligible. As a whole, by looking at the quick ratio, it can be said that liquidity position of the firmis satisfactory.

Once a dividend payout ratio is decided and accordingly the company makes dividend payments to the stockholders of thefirm, companies will be wary and reluctant to bring about any decline in the dividend payouts in future. This also implies that adividend increase by itself will be considered by the management only when it feels reasonably certain that such dividendincreases can be conveniently maintained in the future. Any increase in dividends serves as a signal to the investors with regardto the confidence of the management about the future earnings potential of the firm. It is by virtue of this signal that a tendencyof the stock prices to rise is observed. Except for a decline in dividend payout ratio in 2004, MTNL has maintained a very high

payout ratio. The earnings retention ratio also declined from 79.39% to 65.37% during the period under consideration. Thecash earnings retention ratio also declined from 86.33% to 79% in the current year. It indicates that the firm is enjoying the

reinvestment in growth opportunities, even if it does not seem to have opportunities as it had earlier.< TOP >

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Chairman s Message 2003-04.[2]

CDMA technology is spread spectrum technology, which enables a number of users to utilize the same frequency and time allocations in a

given band/space. ww.cdg.org/technology/index.asp[3]

GSM is also known as Global System for Mobile. Under this system, calls are made based on voice or data. www.canadiancontent.net/tech/mobile/gsm.html* (Wireless Local Loop (WLL) is a system that uses radio signals as a substitute for copper to connect subscribers to the Public Switched

Telephone Network (PSTN). The system includes cordless access systems, fixed cellular systems and proprietary fixed radio access.)[4]

ADC is the amount to be paid in domestic long distance telephony to the service provider at the receiving end by the service provider at thecaller s end being charges for services rendered by the service provider at the receiving end. www.bsnl.com.

It is a profit making company of the Government of India.

Documents

Mtnl and Bsnl