Are Port 2006

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)

2

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 & TRANSFER AGENTS

Messrs Sharepro Services (India) Pvt. Ltd. Satam Estate, 3rd Floor, Above Bank of Baroda, Chakala Andheri (East), Mumbai - 400 099.

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

Rs. in Millions

AVG. CAPITAL EMPLOYED AND ROCE 70000

40

60000

35

50000

30 41948

40000

40938

38342

20 30000

19.73

15

20000 10000 0

11.91 9.00 2003-04

2004-05

2005-06 ROCE

Rs. in Millions

EBIDTA 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

8759 7691

5154

2003-04

2004-05

2005-06

WHOLESALE VOLUME 6746

Minutes in Millions

7000 6000 5000

4282

4000 3000

2967

2000 1000 0

2003-04

10 5

Average Capital Employed

4

25

2004-05

2005-06

0

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 & Chief Legal Officer Registered Office : 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 AGM/Board

Balance as on 30 June 2006

Dividend for the year

Remarks

Transfer to Investor Education & Protection Fund 11 Nov 2006 21 April 2007 7 Nov 2007 27 Oct 2008 13 Jan 2009 19 Sept 2009 2 Oct 2010 2Oct 2011 14 Oct 2012

30 Sept 1999 40,478.50 1998-99 Final Dividend 10 March 2000 543,486.00 1999-00 Interim Dividend 26 Sept 2000 339,134.00 1999-00 Final Dividend 27 Sept 2001 2,770,900.00 2000-01 Final Dividend 14 Dec 2001 3,054,084.00 2001-02 Interim Dividend 20 Aug 2002 2,388,446.00 2001-02 Final Dividend 2 Sept 2003 1,422,666.00 2002-03 Final Dividend 2 Sept 2004 854,676.00 2003-04 Final Dividend 14 Sept 2005 1,007,380.00 2004-05 Final Dividend 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 nonexecutive 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.

Dated : 11 August 2006 Registered Office : Videsh Sanchar Bhavan M.G. Road, Mumbai - 400 001.

8

By Order of the Board of Directors Satish Ranade Company Secretary & Chief Legal Officer

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

Mr. N. Srinath

Mr. Ishaat Hussain

Dr. Mukund Rajan

Mr. P.V. Dr. V.R.S. Kalyanasundaram Sampath

Date of Birth

8 July 1962

2 September 1947

5 April 1968

25 February 1958

12 August 1956 17 October 1939

Date of Appointment

13 February 2002

1 July 2002

6 May 2005

9 September 2005

9 September 2005

17 July 2006

Qualifications

Graduated as a Mechanical Engineer from IIT (Madras), Post Graduate Diploma in Management from IIM (Calcutta), Tata Administrative Services Officer

Graduated in Economics from St. Stephens College, Delhi, Fellow of the Institute of Chartered Accountants in England and Wales, attended Advanced Management Program at Harvard Business School

Bachelor of Technology from IIT Delhi, Masters and Doctorate in International Relations from Oxford University, Tata Administrative Service Officer

Bachelor of Arts degree in history, from the New College, Chennai, Bachelor of Law degree from Madras Law College.

Bachelor of Arts degree in History from the Presidency College, Bachelor of Law degree from Madras Law College, Master of Law degree and a PHD from the University of Madras. Master of Arts degree in History from the Madurai Kamaraj University

Fellow of the Institute of Chartered Accountants in England and Wales, Fellow of Institute of Chartered Accountants of India, Fellow of British Institute of Management, member of New Delhi Chapter of Institute of Internal Auditors, Florida, USA, Alumnus of IMI, Geneva

Expertise in Specific Functional General Area Management

Financial Management

General Management

Eminent Lawyer

Eminent Lawyer

Accounting and Audit

Directorships held in other Tata Public Companies (excluding Teleservices foreign and private companies) Limited, VSNL Broadband Limited

Tata Sons Limited,Tata Steel Ltd., Titan Industries Ltd. , Voltas Ltd, Tata Teleservices Ltd.,Tata Industries Ltd., Tata AIG General Insurance Co. Ltd., Tata AIG Life Insurance Co. Ltd., CMC Limited, Tata Sky Ltd,Tata Refractories Limited

Tata Teleservices Limited, Piem Hotels Limited

Arni Vegetable Oil Ltd

Hughes Communications India Ltd., Flextronics Software Systems Ltd., Tube Investments of India Ltd., HCL Technologies Ltd., Samtel Colour Ltd., New Delhi Television Ltd., Century Textiles and Industries Ltd., Avtec Ltd., ICRA Ltd., Maruti Udyog Ltd.

Memberships/Chairmanships of Committees in other Public Companies

Audit Committee Tata Steel Ltd., Titan Industries Ltd. , Tata Industries Limited, Tata Trustee Company Ltd.,Tata AIG General Insurance Co. Ltd., Tata Teleservices Limited Tata AIG Life Insurance Co. Ltd.

Tata Teleservices Limited – Share Transfer Committee

NIL

15

Shareholding In VSNL

NIL

Mr. Amal Ganguli

Audit Committee Felxtronics Software Systems Ltd., HCL Technologies Ltd., Samtel Colour Ltd., New Delhi Television Ltd., Century Textiles and Industries Ltd., Maruti Udyog Ltd.

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 audited accounts for the financial year ended March 31, 2006. FINANCIAL PERFORMANCE During financial year 2005-06, your Company succeeded in growing each one of its business segments. A total of 3.8 billion voice minutes were carried by the India business which translates into a volume increase of 36% over the previous year. The revenue in the Wholesale Voice segment grew by 15.25%, from Rs.18.77 billion to Rs.21.63 billion. The pressure on margins continued during this year as well. The Enterprise and Carrier Data segment reported revenue of Rs.12.62 billion, a growth of 12.95% over the previous year. The revenues in the ‘Other Services’ segment, which includes TV uplinking, transponder leasing services, retail internet, etc., reported a growth of 15.24% over the previous year. Consequent to substantial increases in the complexities of the Company’s businesses, and its focus on growth and globalisation, total expenditure at Rs.32.66 billion in FY 05-06 was higher by 17.57% (Rs.27.78 billion in FY 04-05). VSNL’s profit before tax and exceptional items increased from Rs.6.33 billion in FY 04-05 to Rs.7.54 billion in FY 05-06. In the previous year, your Company had substantial exceptional earnings from the disposal of its investments made in earlier years in international satellite companies. A summary of VSNL’s financial performance for the year is as follows: TABLE 1 Audited financial results for the year 2005-2006

TABLE 2 (Rs. in Million) DESCRIPTION Amount available for appropriation - balance carried forward 11,859.08 - Profit for the year 4,795.42 Less: - Dividend @45% on the paid-up capital of Rs.2,850 million - Tax on total dividend - Transfer to general reserve Surplus carried to balance sheet

Amount

16,654.50

1,282.50 179.87 479.54 14,712.59

CONSOLIDATED FINANCIAL PERFORMANCE For the first time, your Company is reporting the consolidated financial results. The results of the key acquisitions made during the year - Tyco Global Network, Teleglobe, and VSNL Broadband Limited - are included in the Company’s consolidated results from their respective acquisition dates.

2004-05 % Change

For 2005-06, the Company’s total income on a consolidated basis was Rs.47.97 billion, EBIDTA Rs.6.23 billion and profit before tax and exceptional items Rs.3.45 billion.

Income from operations - Wholesale Voice 21,626 18,765 15.25 - Enterprise & Carrier Data 12,618 11,170 12.95 - Other services 3,565 3,095 15.24 Other income 2,288 1,075 113.04 Total Revenue 40,097 34,105 17.57 EBITDA margins before exceptional items (%) 23.16 23.28 (0.52) Depreciation 3,594 2,440 47.30 Prior years adjustment – net expense/(income) (109) Exceptional items – expense/(income) 676 (4,214) (116.04) Profit before tax 6,867 10,540 (34.85) Tax 2,072 2,976 (30.38) Profit after tax 4,795 7,564 (36.61) Earnings per share (Rs.) 16.83 26.54 (36.59) Net worth (Excluding Capital Reserve) 58,554 55,220 6.04 Normal dividend per share (Rs.) 4.50 4.50 Special dividend per share (Rs.) 1.50 Previous year’s figures have been regrouped wherever necessary.

STRATEGIC OVERVIEW Your Company is evolving into India’s first truly global telecommunications company. Today, VSNL is among the world’s top three providers of international wholesale voice services, and the number one wholesale Voice over Internet Protocol provider (according to independent published reports). Your Company provides seamless connectivity across the globe to both carriers and enterprises, supported by a state-of-the-art network infrastructure. VSNL’s submarine cable network of over 2,00,000 route kilometres is one of the world’s largest. Your Company already offers telecommunication services in Sri Lanka and Nepal, and has received the licence to be a strategic partner and investor in South Africa’s Second National Operator (SNO). As of June 30, 2006, VSNL had 52 subsidiaries in 21 countries and about 25% of its employees are located outside India. Meanwhile, in India, your Company continues to be the country’s largest player in international telecommunication services and has a strong pan-India domestic backbone. Your Company is also a leading player in the Indian

Description

10

Dividend The directors are pleased to recommend a dividend of Rs.4.50 per share for the financial year ended March 31, 2006. The directors propose that profits be appropriated in the following manner:

2005-06

(Rs. in Million)

enterprise data market, offering customers a range of telecommunication solutions, such as Private Leased Circuits, Managed Data Networks and Virtual Private Network services. In the retail space, VSNL remains a premier Internet Service Provider, offering a variety of services including connectivity, messaging and Internet telephony. Having pioneered the use of the Internet in India, your Company is now a key player in India’s emerging broadband revolution. VSNL has transformed itself over the last few years by reworking its strategies and repositioning itself. During the year, your Company completed the acquisition of the Tyco Global Network which is a robust network of international submarine cable systems and Teleglobe which was one of the leading global long distance voice and wholesale data players. Domestically, your Company acquired Tata Power Broadband, now known as VSNL Broadband Limited, having about 1000 kilometres of optical fibre infrastructure in Mumbai and Pune; acquired the assets of 7 Star.com Pvt. Limited, a suburban cable operator in Mumbai offering broadband services and acquired Direct Internet Limited which provides internet and related services predominantly to small and medium sector enterprise customers. Your Company’s overall strategy remains to: •

Maintain its leadership in wholesale services with a global footprint, new products and enhanced service levels.

•

Diversify and de-risk its business model and ensure high growth, by expanding into high-potential newer businesses like enterprise and carrier value added data and broadband services.

•

Extend and strengthen its global presence in different ways, such as by delivering network and communication solutions globally, and by expanding into overseas telecom markets through greenfield ventures or through acquisitions.

•

Support all its businesses by selective and strategic expansion and modernisation of its state-of-the-art infrastructure network.

•

Fully leverage synergies with other Tata Group companies in the telecom and software sectors, to give customers a range of end-to-end solutions.

•

Continuously improve efficiency, competitiveness and customer satisfaction through initiatives such as quality, cost rationalisation and profit enhancement.

OPERATIONAL REVIEW Your Company operates under three business segments in India – Wholesale Voice, Enterprise and Carrier Data and Other Services. VSNL’s investments internationally are through its wholly owned subsidiary headquartered in Singapore. Your Company now has major operations spread across Singapore, Canada, the United States of America, the United Kingdom, France and other key commercial and strategically important locations across the globe.

WHOLESALE VOICE Your Company’s largest revenue segment in India is the traditional wholesale voice business consisting of International Long Distance (ILD) and National Long Distance (NLD) voice services. International Long Distance (ILD) Voice ILD voice services have been traditionally the core business of your Company. Over the last four years, the international telephony market in India has been pressured by increased competition, falling rates and lower margins. During 200506, VSNL acquired international wholesale voice service provider Teleglobe International Holdings for an enterprise value of US$239 million. Your Company has transformed itself from a single-country operator to a globally competitive, large-scale player, backed by assets that can support its businesses across the globe. VSNL is now among the top three wholesale voice providers in the world, and owns and operates world’s one of the largest international networks with coverage to more than 240 countries and territories. Your Company also has over 415 direct and bilateral relationships with leading international voice telecommunication providers and carries over 20 billion minutes of international wholesale voice traffic on annualised basis. VSNL retains its position as India’s top ILD services provider, offering telephone services to more than 200 international destinations. During 2005-06, international settlement rates (determining ILD services payments between telecom providers of different countries) remained more or less stable. However, both tariffs and interconnect rates (determining VSNL’s revenues for international calls passed to or from other domestic telecom networks) declined, sustaining the pressure on margins. During 2005-06, the Telecom Regulatory Authority of India ( TRAI) reduced the Access Deficit Charge (ADC) on incoming ILD calls from Rs.3.25 per minute to Rs.1.60 per minute and on outgoing ILD calls from Rs.2.50 per minute to Rs.0.80 per minute. However, from March 1, 2006 onwards, telecom operators must also pay a revenue share of 1.5% of the Adjusted Gross Revenue (AGR) towards ADC. Meanwhile, the Department of Telecommunications (DoT) relaxed the licence conditions for international and national long distance services, and reduced the entry fee for these businesses from Rs. 250 million and Rs. 1 billion respectively to Rs.25 million each, effective January 1, 2006. The licence fee payable by all long distance service providers to the DoT has also been reduced to a uniform 6% of the AGR, effective January 1, 2006. These changes may serve to raise traffic volumes, although they also raise competitive pressures. From February 13, 2004, VSNL ceased to be the preferred carrier for outbound traffic from the public sector access providers Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). Despite this, during 2005-06, outgoing traffic volumes stayed at more or less the same level as in the previous year, while incoming traffic volumes increased by 67%.

11

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

This business is now characterised by increased competition and falling rates and margins, both in India and internationally. Therefore, your Company’s focus is on increasing volumes and thus revenues, while improving margins by cutting costs. VSNL is capitalising on its longstanding relationships with international carriers, offering them flexible solutions. Your Company has signed interconnect agreements/arrangements with all domestic cellular service providers and private basic operators for direct termination and pick up of ILD traffic. Simultaneously, VSNL is restructuring its costs through negotiations with suppliers and carriers, better efficiencies, and reengineering of its networks. Your Company is also in the process of offering higher margin and higher value services to improve profits in this segment. For example, VSNL is now a major player in the mobile signalling business globally, supplying wholesale services to mobile operators for their international roaming and messaging needs. Your Company believes that its strategic advantage in this business comes from its volumes, reach, and robust networks, which are all difficult to replicate. A key concern in the ILD voice business is the illegal market (please see Management Discussion and Analysis for a discussion of regulatory issues). In the past, VSNL had undertaken major initiatives to combat grey traffic, supporting the enforcement authorities who have been tracking and shutting down illegal operators. These efforts, if consistently enforced, will help to curb the grey market. National Long Distance (NLD) Voice In September 2002, your Company entered the NLD services market to offer national long distance services to its customers, as a logical extension of its international telephony expertise. NLD services now account for a significant component of VSNL’s voice services, and volumes in this segment increased from 1.4 billion minutes in 2004-05 to 2.9 billion minutes in 2005-06. From March 1, 2006, TRAI abolished the per-minute ADC of a uniform 30 paise per minute on all NLD calls; however, it introduced a revenue share-based ADC of 1.5% of the AGR. VSNL welcomes the reduction in ADC, which has contributed to a substantial increase in call volumes and benefits the end customer with lower tariffs. Your Company has a robust national network infrastructure and interconnect agreements with all basic and cellular mobile service operators in the country to carry NLD traffic to their networks. The delay in implementing Direct Customer Access mechanisms such as Carrier Access Code (CAC) or Carrier Pre-Selection (CPS) have resulted in VSNL continuing to be absent from the retail voice market. Your Company is dependent on its relationships with access providers (fixed line and cellular) for wholesale long distance traffic. In this regard, your Company’s equity investment in Tata Teleservices Ltd. (TTSL) has enabled VSNL to offer ILD and

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NLD services to all subscribers of TTSL. This attempts to fill an important gap in VSNL’s access to end customers. (Please see Management Discussion and Analysis for details.) Calling Cards Your Company launched Tata Indicom calling cards in 2004. While the ‘Global’ calling card was targeted at Indian outbound travellers and overseas residents, ‘Hello Duniya’ was aimed at Indian customers for cheaper and convenient NLD/ILD calling. VSNL stopped the ‘Hello Duniya’ outbound calling service in March 2005, as directed by TRAI on the grounds that only access providers (basic service license or unified access service license holders) can provide such services. In May 2006, the Telecom Dispute Settlement and Appellate Tribunal ( TDSAT ) rejected your Company’s petition maintaining that VSNL cannot access subscribers directly and provide outbound calling cards under its NLD/ ILD license. Your Company believes that calling cards are a globally recognized mechanism for operators to offer retail long distance services, and in the absence of CAC / CPS, the only mechanism available to provide customers with choice in India. Your Company is examining its option to appeal against this TDSAT ruling in the Supreme Court. ENTERPRISE AND CARRIER DATA The Indian enterprise data market continues to grow at an annualised rate of 60-70% each year. VSNL’s Enterprise Business Unit serves large, mid-sized and small businesses, and its industry-specific solutions encompass banking and financial services, information technology/IT enabled services, industrial and distribution, pharma, petroleum, media and entertainment, travel, and Government verticals. With voice, data and video communications converging, the demand for enterprise data services is growing. In addition to international and national private leased circuits (IPLCs and NPLCs), your Company offers a wide range of Internet Protocol (IP) services encompassing internet telephony, MPLS VPNs (Virtual Private Networks), internet access, managed hosting and other data centre services, internet leased lines, mail and messaging services, video conferencing, website hosting services with security back-up and database management services and network management. VSNL’s telecom service offerings can be seamlessly integrated across products and geographies, and customised to meet the varied requirements of the enterprise sector. The Company continues to extend its reach in the main global markets to provide IP-VPN services. VSNL has progressed up the value chain to deliver consulting and managed solutions to customers. During 2005-06, the Company significantly expanded its VPN and data centre offerings, establishing state-of-the-art Asynchronous Transfer Mode (ATM) and Multi Protocol Label Switching (MPLS) networks.

VSNL also launched several new offerings. In November 2005, it introduced the Tata Indicom Web Conferencing Service powered by the Microsoft Office Live Meeting Platform. Microsoft and VSNL also announced an alliance to create rich solutions and services targeted at the enterprise, small and medium business and consumer segments. In July 2005, VSNL announced its intention to partner with Thomson, the leading technology and service provider in the media and entertainment space. The two companies will offer high quality services and new technologies to the Indian media and entertainment market and also explore opportunities in managing and delivering content for third parties, and developing end-to-end solutions for network operators as well as content management and distribution solutions. To further strengthen its customer value proposition, VSNL partners with TCS and CMC, the software companies of the Tata Group, for integrated joint product and service offerings. VSNL also partners with TCS in the international market to leverage TCS’s existing relationships with numerous Fortune 500 companies globally. Your Company also markets its services through indirect channels catering to the small and medium enterprise market. VSNL is extending its services beyond India to enterprises globally, through its subsidiaries in different geographies. The aim is to make inroads into the large and lucrative global market by developing differentiated services and offering competitive pricing. This is made possible by VSNL’s low-cost global infrastructure, and by capitalising upon its existing international organisation and employees for sales and marketing initiatives. OTHER SERVICES VSNL was the first company to introduce retail internet services in India in 1995. Since then, VSNL has been a premier Internet Service Provider, offering a variety of services including connectivity, messaging and internet telephony. VSNL is now a significant broadband player and is currently extending its broadband services infrastructure, including last mile connectivity and a content and services portal, across all major Indian cities. Dial Up Internet Service VSNL continues to lead the dial up market in India in terms of innovations and services for the customer, and offers services in 300 towns and cities. However, this business is undergoing fundamental changes, as higher-end users migrate to similarly-priced broadband services, while lowend users are being targeted by basic telephony operators who have direct access to customers and offer post-paid or pay-as-you-use services. VSNL’s strategy in this segment is to retain customers with excellent service and value addition, while also capturing those that wish to convert to broadband. Broadband Business VSNL began offering broadband services in April 2004 soon

after it acquired the narrowband and broadband business of Dishnet, and now serves 125,000 broadband and highspeed Internet customers in 43 cities. The Government’s 2004 broadband policy estimates that India will have 20 million broadband subscribers by end-2010. During 200506, VSNL’s broadband business grew by well over 100%, keeping pace with the industry’s high growth. VSNL aims to be the forerunner in this service which offers great growth potential. VSNL has licensed content and services from some of the best content owners in India and abroad, providing access to videos, live news, radio channels, feeds from religious institutions, over 4,200 education modules, more than 300,000 music downloads, online tests, games, e-books, mobile ring-tones and a host of other services. Additionally, for business users, VSNL offers services like domain registration, website hosting, Web2SMS, Mail SMS alerts and Bulk Web2SMS. Last-mile access to the customer is a crucial factor in the success of a broadband business. Therefore, VSNL is building a Metropolitan Area Network (MAN) in key cities and continues to evaluate and test newer access and application technologies. Wi-Fi and Cybercafes VSNL is now one of India’s largest public broadband access providers, using Wi-Fi hotspots and a chain of cybercafés. (Wireless Fidelity or Wi-Fi enables computers, PDAs and other computing devices to use high speed Internet without any wires or cables, at places which are Wi-Fi enabled, called hotspots.) Today VSNL provides access at more than 100 hot spot locations across the country, including railway stations, airports, five star hotels, coffee shops and restaurant chains. VSNL is also tying up domestic and international roaming agreements, through which VSNL will provide public access to travellers into India and offer access to VSNL customers at around 50,000 hotspots internationally. Internet Telephony Effective April 2002, the Government of India permitted Internet Service Providers to offer voice telephony over the Internet using the Voice over Internet Protocol (VoIP). VSNL has deployed its unique, fully owned internet telephony infrastructure. This self-managed network allows VSNL to offer enhanced features, flexibility in billing and plans and superior voice quality. VSNL offers both corporate and retail net telephony services, complementing its voice business. Low tariffs in Internet telephony could encourage usage and increase international call volumes. INTERNATIONAL INITIATIVES VSNL’s international operations (VSNL International) are headquartered out of Singapore, through its wholly owned subsidiary, VSNL Singapore Pte. Limited (VSPL). As on 30 June 2006, your Company has 52 subsidiaries in 21 countries and has a direct operating presence with over 1000 employees in several countries in North America,

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VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Europe and Asia, offering services to both wholesale and enterprise customers. VSNL International is rapidly growing its global footprint, with offices currently in Virginia, New Jersey, London, Paris, Madrid, Amsterdam, Frankfurt, Singapore and Tokyo. In a parallel international initiative, your Company also aims to leverage its expertise to operate telecom services in countries that are liberalising and opening up their telecom markets. VSNL already participates in a Joint Venture that provides telecom services in Nepal and has a subsidiary which holds an External Gateway Operators licence in Sri Lanka. VSNL, as reported last year, will soon offer telecom services in South Africa through its participation in the Second National Operator (SNO) process. VSNL Singapore Pte. Ltd. (VSPL) Your Company set up VSPL in January 2004 as a wholly owned subsidiary. VSPL manages and maintains the Singapore landing for the Tata Indicom Cable (TIC). The company also acquires and sells other cable capacity throughout the Asia Pacific region. VSPL has obtained the required FBO license from the Singapore authorities to own and operate facilities used in the provision of telecom services. VSPL is also the holding company for all of VSNL’s international operations, including TGN and Teleglobe. Acquisition of Tyco Global Network In July 2005, your Company completed the acquisition of TGN, a state-of-the-art undersea cable network that spans 60,000 kilometres (37,280 miles) and the continents of North America, Europe and Asia. With the acquisition of TGN for US$130 million, VSNL is now one of the world’s largest submarine cable system owners, providing submarine cable bandwidth to its customers in multiple continents. Acquisition of Teleglobe International Holdings Limited In February 2006, your Company completed its acquisition of Bermuda-based Teleglobe International Holdings Ltd. VSNL will leverage Teleglobe’s network and capabilities as part of its strategy to deliver key mobile, data and voice offerings to global enterprise customers. Teleglobe serves as the product brand for the voice, mobile and IP transit wholesale services. VSNL International is the product brand for the Company’s wholesale IPL and ethernet offerings, as well as the full enterprise portfolio. South Africa -Second National Operator (SNO) In February 2005, the South African government selected a consortium of VSNL and Tata Africa Holdings Ltd., the investment arm of the Tata Group in South Africa, as the strategic investor in that country’s proposed SNO structure. The equity partners in the SNO are Eskom, Transnet and Nexus and a holding company with 51% stake. VSNL will hold its stake in this holding company with two other private consortia. This new venture is allowed to provide domestic and international voice and data services, except mobile services. The SNO received its license in December 2005 and expects to make a business launch during the

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later part of 2006. The South African market is a large and exciting opportunity in its own right, and also provides a future gateway to the rest of Africa. VSNL SNOSPV Pte. Ltd., a wholly-owned subsidiary of VSNL incorporated in Singapore, is the investment vehicle for all investments made by VSNL in the SNO venture. VSNL Lanka Limited (VLL) In June 2003, VSNL Lanka Ltd., a wholly owned subsidiary set up by VSNL in Sri Lanka, received an External Gateway Operator (EGO) licence. The EGO licence allows VLL to offer ILD voice and data services, which it began providing in February 2004. The Sri Lankan market, growing at an estimated 20%-25% every year, allows VSNL to increase its sub-continental presence and extend offerings in the region to international carriers. VLL has witnessed substantial growth in its very short existence. It was able to earn cash profits within the first six months of its operations and recorded net profits in the first year of its operations. CUSTOMER SERVICE VSNL has transformed itself into a customer-focused organisation. The charter of the Customer Service Organization is to support the entire customer life cycle from service delivery to service assurance, including retention and growth. To support VSNL’s international presence, the Company is defining and implementing stringent service delivery standards that adhere to global best practices. In addition, VSNL has created a dedicated team to bring focus to its relationship with other carrier partners. In order to support the enterprise and international business functions, VSNL has established a centralized 24x7 call centre. Retail and broadband customers are supported by two other outsourced call centres. The organisation is also providing its expertise in setting up the entire customer service function including customer impacting processes and systems, to support the SNO initiative in South Africa. HUMAN RESOURCES VSNL has been constantly reviewing its HR policies in order to keep pace with the market changes and has embarked on a range of initiatives focusing on creating a positive work environment that provides employees with ample opportunities for growth and development as well as ensuring high levels of motivation and engagement. Manpower Planning The manpower requirements are assessed on a regular basis keeping in view the competitive nature of our industry and talent induction has been done in areas like Customer Service, Sales, Networks, Finance, etc. Also efforts have been put in to ensure creation of an internal talent pool by recruiting and training Graduate Engineer Trainees and Management Trainees.

VSNL employed 2,926 employees on March 31, 2006, against 2,479 on March 31, 2005. Of these, 2,258 are executives and 668 are non-executives. Training and Leadership Development The changing business scenario necessitates continuous development of employees in terms of skills and competencies in line with the Company’s requirements. In-house training programs as well as programs with the help of external faculty were conducted covering functional, behavioural and management areas. The Company has implemented a systematic process for orientation and training of new recruits. Compensation and benefit practices Compensation and benefit practices which the Company had evolved during the period under review aim to be competitive, attractive and innovative and is either global or local in orientation depending on what best drives business performance and rewards individual contribution. Performance based pay and performance linked incentive are some of the initiatives that have contributed to attract and retain key talent, foster a superior performance culture and accomplishment of targets. The benefit packages and personnel policies are continuously being reviewed to give our employees comparable industry and market practices. Employee Relations During the year, harmonious relationships were maintained with the employee representative bodies. A significant milestone was the introduction of a Performance Management System for non-executives, as a consequence of a three-year accord reached on productivity-linked incentive and performance linked pay. The Company conducted its second employee satisfaction survey in January 2006. Based on the findings, VSNL has taken up various enterprise and team level issues to enhance satisfaction. INFRASTRUCTURE One of the biggest strengths of your Company is its global, robust, scalable network, with the unique advantage of diversity and multiple connectivity options internationally. Your Company operates a total of 26 switches: 5 international gateway switches and 21 NLD switches. VSNL has over 50 earth stations, ownership in over 100 sub-sea and terrestrial cable systems with 200,000 kilometres of fibre and cable, 275 points of presence in 25 countries and access to five geo-stationary satellites. Your Company also has seven data centres globally. Tata Indicom Cable (TIC) In March 2005, VSNL operationalised its own Tata Indicom Cable (TIC). The state-of-the-art 3,100 km submarine cable system between Chennai and Singapore is VSNL’s first fully owned undersea cable with an initial capacity of 320 gigabits per second that can be ultimately scaled up to

5.12 terabits per second. With an estimated life of 25 years, the new cable enhances significantly India’s connectivity into the Asia-Pacific region and the U.S, via the Pacific. SEA-ME-WE4 VSNL is one of the founding members of SEA-ME-WE4, a consortium of 16 parties that has set up a cable system between France and Singapore with Mumbai as one of the landing points. The cable has a design system capability of 1.28 terabits per second with initial capacity of 160 gigabits per second. This system has an estimated life of 25 years. This new cable enhances significantly India’s connectivity into the Asia-Pacific region, Middle East, Europe and the U.S, both via the Atlantic and the Pacific Ocean. VSNL has been assigned the crucial responsibility of network administration and the operation of the centralised network operating centre located at Mumbai to manage the entire system, thereby giving credibility to your Company’s skills and technical expertise. The system was inaugurated for service in November 2005. VSNL is already utilising SEA-ME-WE2, SEA-ME-WE3, SAFE, FLAG and TIC submarine cable systems as part of its international network out of India. VSNL’s submarine cable landing stations in India are integrated with its domestic NLD network and provide customers with a choice of bandwidth options. VSNL offers redundancy on the intra Asia, Trans Pacific, Trans Atlantic, continental Europe and U.S long distance routes. VSNL also benefits from mutual restoration agreements between cable systems in which it participates. These arrangements help reduce or eliminate the cost of restoration, driving down the cost to customers and increasing reliability and customer service. A cable restoration agreement for VSNL’s TIC cable with i2i, a parallel Chennai-Singapore cable, came into force in June 2005. NLD Backbone VSNL’s domestic long distance network infrastructure includes a 37,000 kilometre fibre optic network and a new MPLS based IP-VPN backbone linking over 120 points of presence, which is integrated with the Company’s international MPLS network thereby enabling multinational companies to seamlessly connect deep into India. Your Company has rolled out its metro ethernet services in eight major cities. Last Mile In view of the fact that the last mile was not readily available, in order to be able to provide IP VPN services to corporate clients as a part of its ISP offering your Company has invested substantially in Wireless last mile on Multipoint Microwave Distribution System(MMDS) technology and fiber as well as through arrangements with cable operators to provide broadband services. In view of the recent amendments in the telecom licenses, the IP VPN services have now become a part of the NLD license and the MMDS as well as the other last mile network can now be utilised for providing services under the NLD license.

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VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Another significant change brought about by the amendment is that the NLD service provider is permitted to make its own arrangements for laying the last mile to serve its customers directly for provision of leased circuits and CUG’s, which was hitherto not permitted. This amendment removes a major hurdle in terms of availability of the last mile to VSNL. INTERNAL INITIATIVES Your Company continues with various internal initiatives such as organisation restructuring, profit enhancement, cost optimisation, quality, customer care and information technology to compete effectively, improve organisational flexibility and respond quickly to customers. Some important initiatives are: Business Excellence Your Company has been re-inventing its business model and transforming itself in tandem with business and regulatory changes. To help drive the transformation, VSNL is implementing the Tata Business Excellence Model (TBEM), a framework that lays down best practices in areas like leadership, strategy, customer and market focus, knowledge management, human resources, process management planning, customer service and social responsibility. During the past year, VSNL has made further progress in implementing TBEM, with many continuous improvement projects underway and extensive employee participation. Amongst the many initiatives undertaken, your Company became the world’s first telecom service provider to obtain the TL 9000 certification (a set of quality system metrics designed for the telecom industry, encompassing ISO 9001 and other best practices). Your Company is also the first telecom service provider in India to obtain the BS7799 certification. In line with a Tata Group priority, your Company has been actively promoting innovations. In the first year of the initiative, VSNL has registered six copyrights for innovation done by its employees. VSNL is also a member of the Tata Knowledge Centre, a key initiative started by Tata Quality Management Services (TQMS) this year. Your Company is successfully running the Six Sigma Green Belt and Black Belt programmes, and has completed more than 100 projects over the last year, with many more in the pipeline. Compliance with section 404 of Sarbanes Oxley Act, 2002 Pursuant to its listing on the New York Stock Exchange, VSNL must comply with section 404 of the Sarbanes Oxley Act by March 2007, which lays down requirements for internal control over financial reporting in the Company. VSNL continues to make rapid progress towards compliance with these stringent requirements. Revenue Assurance and Cost Reduction VSNL continues with its ongoing cost reduction exercise that began in September 2002, and has successfully completed several cost reduction projects as a part of its continuous improvement activities.

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VSNL’s Revenue Assurance function aims to proactively prevent revenue leakages and ensure robust internal controls and processes that keep pace with increasing business complexities, thus moving towards zero tolerance of revenue leakages. A Revenue Assurance charter and manual have been formulated to further structure these activities. Business Process Improvement In its constant endeavour for excellence, your Company has initiated an exercise to streamline internal processes and institutionalise a culture of continuous improvement. The internal audit and revenue assurance teams actively contribute to sustaining process improvement efforts. Senior management regularly tracks implementation of improvement ideas. Enterprise Risk Management VSNL is establishing an enterprise-wide risk management (ERM) framework to take advantage of opportunities and optimally manage risks, as well as to duly comply with clause 49 of the Listing Agreement. In line with VSNL’s commitment to delivering sustainable value, this framework aims to provide an integrated and organised approach for evaluating and managing risks. FIXED DEPOSITS VSNL has not accepted nor does it hold any public deposits. STATUTORY INFORMATION AND DISCLOSURES Information in accordance with the provisions of Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, regarding employees is given in Annexure ‘II’ to the Directors’ Report. There are no particulars to be disclosed pertaining to the year under review, in respect of R&D and technology absorption as required under Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988. For the purpose of Form ‘C’ under the said rules, foreign exchange earnings were equivalent to Rs.17,120 million and foreign exchange outgo was equivalent to Rs. 7,958 million. There are no qualifications contained in the report of the statutory auditors for the year 2005-06. SUBSIDIARIES The Statement pursuant to section 212 of the Companies Act, 1956 containing details of the Company’s subsidiaries is attached. The consolidated financial statements of the Company and its subsidiaries, prepared in accordance with accounting standard 21 (AS 21) prescribed by The Institute of Chartered Accountants of India, form part of the annual report and accounts. The Company has been granted exemption from attaching the accounts etc., of its subsidiary companies with the balance sheet of the parent company. These documents will be provided on request to any shareholder wishing to have a copy, on receipt of such request by the deputy company secretary at the registered office of the Company. These documents will also be available for inspection by any shareholder at the registered office of the Company.

THE BOARD OF DIRECTORS The VSNL Board presently consists of ten Directors. Mr. Subodh Bhargava took over as Chairman of VSNL with effect from April 11, 2005. Dr. Mukund Rajan joined the Board on May 6, 2005. Mr. N. Parameswaran, Government Nominee Director, joined the Board with effect from August 30, 2005 and on September 14, 2005, Mr. P.V. Kalyanasundaram and Dr. V.R.S. Sampath, Independent Directors, joined the Board. On 17 July 2006, Mr. Amal Ganguli, Independent Director, joined the Board of VSNL. On April 11, 2005, Mr. Ratan Tata resigned as a Director of VSNL; on August 10, 2005, Mr. Rakesh Kumar, government nominee Director, resigned as Director of VSNL; on September 9, 2005, Mr. Vivek Singhal and Dr. Ashok Jhunjhunwala, Independent Directors, resigned as Directors of VSNL; on November 25, 2005, Mr. F.A. Vandrevala, Director, resigned as Director of VSNL and on March 21, 2006, Mr. Suresh Krishna, Independent Director, resigned and they accordingly ceased to be Directors on the Board of VSNL from the respective dates. For details about the Directors, please refer to Point 2 of the Report on Corporate Governance below. The Board places on record its appreciation for the services rendered by the outgoing Directors.

VSNL is sensitive towards environmental, ecological and biodiversity concerns arising out of its operations. Towards that end, VSNL has also become the first telecom service provider in India to obtain ISO 14001 Certification. MANAGEMENT OF BUSINESS ETHICS (MBE) Consistent with the Group’s policy, VSNL is systematically implementing the Tata Code of Conduct. VSNL has put in place an organisational structure and a process to implement and improve ethical standards and practices, and began implementing the Tata Code of Conduct in 2003-04. VSNL conducts regular seminars, quiz competitions, ethics awareness campaigns and workshops to sustain the momentum and to strengthen ethical values and practices among various stakeholders. DIRECTORS’ RESPONSIBILITY STATEMENT Pursuant to Section 217(2AA) of the Companies Act, 1956, the Directors, based on the representations received from the operating management, confirm that•

In the preparation of the annual accounts, the applicable accounting standards have been followed and there are no material departures;

•

They have, in the selection of the accounting policies, consulted the statutory auditors and have applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period;

•

They have taken proper and sufficient care, to the best of their knowledge and ability, for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

•

They have prepared the annual accounts on a going concern basis.

In accordance with the provisions of the Companies Act, 1956 and the Company’s Articles of Association, Mr. N. Srinath and Mr. Ishaat Hussain retire by rotation at the ensuing annual general meeting and being eligible, offer themselves for reappointment. In accordance with the provisions of the Companies Act, 1956 and the Company’s Articles of Association, Dr. Mukund Rajan, Mr. P.V. Kalyanasundaram, Dr. V.R.S. Sampath and Mr. Amal Ganguli hold office only up to this Annual General Meeting; notices under the provisions of section 257 of the Companies Act, 1956 have been received by the Company from members signifying their intention to propose them as a candidate for the office of Director. None of the Company’s directors are disqualified from being appointed as Directors as specified in Section 274 of the Companies Act, 1956 as amended by the Companies (Amendment) Act, 2000. CORPORATE GOVERNANCE Pursuant to Clause 49 of the listing agreements with the stock exchanges, a Management Discussion and Analysis, Corporate Governance Report and Auditors’ Certificate regarding compliance of conditions of Corporate Governance are made a part of the annual report. CORPORATE SUSTAINABILITY INITIATIVES As a member of the Tata family, VSNL is committed to the Group’s philosophy of improving the quality of life in the communities we serve. VSNL has a Corporate Social Responsibility (CSR) Policy and is a member of the Tata Council for Community Initiatives (TCCI). The Company fosters an internal culture of volunteerism and contributes to the socio-economic development of the communities it operates in, through financial and other assistance to various causes and organisations.

ACKNOWLEDGMENTS The Directors would like to express their thanks for the hard work and dedication of every employee. The Directors appreciate the support of various Ministries and departments of the Government of India and the DoT. The Directors are also grateful to the Company’s stakeholders and partners including its customers, shareholders, bankers, solicitors, suppliers and foreign telecom administrations for their support. On behalf of the Board of Directors Dated: 11 August 2006 Registered Office : Videsh Sanchar Bhavan M. G. Road, Mumbai - 400 001.

Subodh Bhargava Chairman

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VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

ANNEXURE 1: MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY ANALYSIS The Indian telecom industry has changed significantly over the last decade with all its segments opening to competition. This market is now highly competitive, complex and evolving rapidly, with numerous service offerings of different kinds, including fixed-line, mobile, internet, long distance and various data services. India’s telecom market is growing rapidly and by 2010, telecom is expected to be a Rs.1,380 billion sector, contributing 5.4% to India’s GDP. According to the latest figures from TRAI, during 2005-06, the mobile subscriber base increased approximately 73%, from 52 million to over 90 million, while the fixed subscriber base increased approximately 8% from 46 million to 50 million. During the year, the subscriber base for internet services grew 25%, from 5.5 million to 6.94 million. Broadband subscribers exceeded 1.3 million as on March 31, 2006. STD charges fell substantially after announcement of new Interconnect Usage Charge (IUCs) with effect from March 1, 2006, international private leased circuit charges dropped by between 35-70%, and broadband tariffs fell by 40-50%. The rapid growth in this market, combined with falling tariffs, offers great potential demand for various services of VSNL. International Long Distance Voice (ILD) The combined ILD traffic to and from India has grown from about seven billion minutes in 2004-05 to about 10 billion minutes in 2005-06, an increase of approximately 50%, with a total revenue of nearly Rs.20 billion. The increase in outgoing traffic is an effect of the dramatic increase in mobile subscribers coupled with the decrease in ILD calling rates. At the same time, the increased global expansion of Indian corporates and emergence of India as a global services center has led to an increase in incoming ILD traffic. National Long Distance Voice (NLD) The increased mobile penetration has also resulted in significant growth in the NLD traffic. The NLD traffic has grown by over 70% from 30 billion minutes in 2004-05 to 48 billion minutes in 2005-06. The increased competition along with regulatory initiatives has reduced the gap between NLD and local tariffs. Further reduction in coming years is expected to drive growth further, with NLD traffic expected to almost double to 80 billion minutes (TRAI forecasts) over the next year. Enterprise Data Services Meanwhile, the Indian corporate segment has also been growing at a very healthy rate, with enterprise data volumes growing almost 100%. Even coupled with the 3540% price drop, the industry growth in revenue terms has been a healthy 20-30% in the past financial year. There are two key drivers for this growth. First, the enhanced

18

capability of Indian corporates to deliver goods and services on a global basis is opening up new customers and geographies for this business. Second, there is significant growth in the existing customers’ end businesses. Banking and financial services (BFSI), information technology (IT), and BPOs/ Call Centres are some examples of high growth sectors. A combination of these two factors has created a platform for VSNL’s Enterprise Business Unit to expand the existing business and create a new portfolio of services. Internet and Broadband Services Broadband in India is a developing story with strong growth expected over the next few years. Broadband services to residential homes emerged in early 2005. Although the growth in broadband subscribers has been slow in comparison to mobile, predominantly due to the inability to demonstrate a unique value proposition to the market other than to enterprises and a small group of users. However, due to the recent focus of broadband players on bundled services like the introduction of IPTV, the market may achieve higher growth rates within a couple of years. By the end of March 2006, the pace of broadband deployments had already quickened and the total number of broadband subscribers in the country crossed the one million mark for the first quarter of 2006. India’s entertainment industry is large, with cable revenues alone estimated at Rs.157 billion in 2005. The right mix of content and information could help to proliferate broadband usage among Indian consumers in the future. PREMATURE TERMINATION OF MONOPOLY AND COMPENSATION The Government of India (GoI) allowed private players into the ILD business from April 1, 2002, terminating VSNL’s exclusivity two years ahead of schedule, and compensated VSNL with a package of benefits. GoI had given assurance prior to disinvestment that GoI would consider additional compensation if found necessary on a detailed review, when undertaken. However, prior to the disinvestment of VSNL in February 2002, GoI granted a dispensation as full and final settlement of every sort of claim against preponing of ILD de-monopolisation of VSNL by two years. VSNL had been pursuing GoI for considering additional compensation. Since legalities warranted the filing of a plaint with the High Court within the stipulated time to ensure that the claim is not barred by limitation, VSNL has filed a claim in the Mumbai High Court. DEMERGER OF SURPLUS LAND Under the terms of the share purchase and shareholders’ agreements signed between the parties at the time of privatisation, it was agreed that certain identified lands would be demerged into a separate company. It was further agreed that if for any reason the Company cannot

hive off or demerge the land into a separate entity, alternative courses as stipulated in the share purchase and shareholders’ agreement would be explored. A draft scheme of demerger has been presented to the VSNL Board, and the parties to the shareholders’ agreement are currently examining the legality and feasibility of implementing the scheme. The land identified for demerger at different locations measures 773.13 acres, and carries a book value (as indicated in the accounts) of Rs.1.64 million. IMPORTANT HISTORICAL EVENTS AT VSNL Disinvestment VSNL ceased to be a Public Sector Undertaking (PSU) on February 13, 2002 when the Government of India, which owned 52.97% of VSNL’s equity, divested 25% stake to the Tata Group as a strategic partner along with the right to manage the Company. Following its subsequent open offer for a further 20% of VSNL’s equity, the Tata Group is the Company’s biggest shareholder with a holding of over 45% as of June 30, 2006, while GoI is VSNL’s second-largest shareholder with a 26.12% stake. Investment in TTSL In 2002, VSNL was entirely dependent on the public sector incumbent access providers and other cellular and basic service providers to route their traffic through VSNL. It became imperative for VSNL to acquire an end-customer base of its own. The VSNL Board had accordingly decided to invest in Tata Teleservices Ltd. (TTSL). At the time the investment was approved, TTSL was present in crucial telecom circles across India that yielded over 65% of the country’s telecom revenues. TTSL has subsequently taken additional licences that will give it nation-wide coverage. VSNL’s investment in TTSL now gives the Company substantial access to end customers across the entire country. VSNL’s total investment in TTSL’s equity as on March 31, 2006 stood at Rs.10.11 billion (16.14%). VSNL’s effective holding in TTSL stands at 14.14% as of March 31, 2006. RISKS AND CONCERNS Like all companies, VSNL is exposed to certain risks and concerns in the course of its business: End Customer Ownership An important concern for the Company on its voice business continues to be VSNL’s lack of direct access to end customers. VSNL is dependent on cellular and basic telecommunication service providers to route the national long distance and international calls of their customers through VSNL. Some of these operators are also competitors of VSNL in the long distance and other markets. It would be a serious disadvantage to VSNL not to have access to a large base of customers in order to compete for its business. VSNL has also been pursuing implementation of Direct Customer Access either through the long awaited Carrier Access Code (CAC, which allows subscribers to choose their long distance provider) regime

or through services like calling cards. Delay in Implementation of CAC Regime The Carrier Access Code (CAC) regime was to have been implemented in phases for different segments of the long distance sector, with the final implementation of Carrier Pre Selection (CPS) to be completed by December 2003. Carrier selection gives subscribers the option to either preselect a long distance carrier for all ILD calls, or choose a provider for each call by dialling a carrier access code before making a call. Customers can then freely choose their long distance carrier based on competitiveness and quality, rather than the choice being made by access operators, as is the case at present. However, implementation of the CAC regime has been delayed due to technical and other reasons. In view of the intense competition and the fact that other players are integrated service providers, early implementation of the CAC regime is important to allow a stand-alone long distance operator such as VSNL to develop its own customer base. The delay in implementation of the CAC regime is a cause of concern for VSNL. The Company hopes that this regime, which is essential to the survival of standalone ILD and NLD operators and is a fair entitlement of subscribers seeking competitive service options, will be implemented at the earliest. Regulatory Environment and Tariffs Most of VSNL’s services including ILD, NLD and internet services are operated under licences from the DoT, and the Company is subject to the terms and conditions included therein. As India continues to liberalise its telecom sector and the regulatory regime keeps pace with the changing telecom scenario, it is possible that there may be interpretational differences on the guidelines, licence conditions etc. leading to the need for VSNL to defend its position in case of any notice etc. from the regulator or licensor. TRAI has recommended norms for a Unified Licensing Regime (ULR), which the DoT is considering. If implemented, these norms may increase competitive pressures. The telecom environment in the country has been further liberalized with significant changes in the NLD and ILD Licenses. Pursuant to the Press Note No. 5 dated November 3, 2005 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, the DoT vide its directives dated December 14, 2005 conveyed certain amendments to the ILD and NLD licenses. The foreign Direct Investment ceiling has been enhanced from 49% to 74 % with some stringent guidelines regarding remote access and the same has been made applicable to all telecom service providers irrespective of the level of foreign direct investment. This will affect the efficient monitoring and maintenance of international networks. The entry barriers for the telecom licenses have also been substantially reduced by 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 players entering the field leading to adverse effect on Company’s margins. The tariffs charged by telecommunication service providers in India including VSNL are subject to TRAI regulations. VSNL periodically renegotiates interconnect agreements with various domestic mobile service operators and basic telecom service providers; and settlement rates with international carriers. The consequent revisions could have a material effect on VSNL’s operations and financial condition. The grey market and the IUC regime On January 24, 2003, the Telecom Regulatory Authority of India (TRAI) decided to introduce the interconnection usage charge (IUC) regime to govern inter-operator settlements for calls passed between different networks and implemented the system from May 1, 2003. The IUC includes the cost of the origination/termination of a call and an inbuilt Access Deficit Charge (ADC), which makes up for below-cost monthly rentals and local call charges for fixed telephone connections in rural areas. High ADCs had encouraged grey market ILD services, especially in the larger cities. Illegal international route operators offer cheaper services since they do not pay ADC. According to various market estimates these operators take a share of as much as 30%-40% of the incoming international long distance traffic into India. These illegitimate operators take away the business of licensed providers and deprive the Government of income since licence fees are revenue based; they also pose a threat to the security of the country since such grey calls cannot be monitored. 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 to Rs.0.80 per minute on outgoing ILD calls, and abolished the per minute based ADC on NLD calls of Rs.0.30 per minute, effective March 1, 2006. However, a revenue share based ADC of 1.5% of the AGR has been introduced effective from March 1, 2006. The reductions may have an impact on curbing illegal operations and increasing volumes of legitimate carriers like VSNL. Increased Competition The de-regulation of the Indian telecom market exposes the Company to increased competition: • The Internet Service Provider (ISP) business is intensely competitive and has a large number of players. • ISPs are allowed to provide Internet telephony calls overseas. Though, the quality of such service may not be comparable to traditional ILD calls, it may be affecting VSNL’s ILD business as also the Company’s own Internet telephony services. • VSNL has entered new businesses such as the national long distance and broadband businesses, where there are several potential and existing competitors. Relaxation of licensing conditions for National and

International Long distance services by the Department of Telecommunications effective January 1, 2006 is likely to intensify competition in these sectors. Integration of International Acquisitions VSNL has embarked on an aggressive growth strategy in which acquisitions play an important role. Further, a large part of VSNL’s operations are now in international markets. Integrating the acquisitions and managing operations in diverse international locations would be critical to the success of VSNL’s plans. Economic Conditions Downturns in the Indian, regional and global economies could have a material adverse effect on the Company’s short-term business and prospects. VSNL’s operations could be affected by adverse developments in the operations of some of its key overseas business associates. Exchange Rate Parity A significant portion of Company’s revenues is received in foreign exchange. Similarly, a large portion of its costs is incurred in foreign exchange. Hence, the parity of the rupee to the US dollar and the SDR to the US dollar can have significant impact on the Company’s revenues. Therefore, the Company partially hedges its foreign exchange risk. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY VSNL has a well-developed internal control system and has also implemented the SAP system for accounting. Internal control systems for the newly acquired businesses are being reviewed and will be streamlined. The financial powers of various executives are clearly defined in the delegation of powers. Technical and financial operations are controlled by state-of-the-art technology and systems. The accounts of the Company are subjected to statutory audit. CAUTIONARY STATEMENT Statements in the directors’ report and management discussion and analysis describing the Company’s objectives, projections, estimates and expectations may be ‘forward-looking statements’ within the meaning of applicable securities laws and regulations. Actual results could differ substantially or materially from those expressed or implied. Important factors that could make a difference to the Company’s operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in government regulations, policies, tax laws and other incidental factors. Further, the Company retains the flexibility to respond to fast-changing market conditions and business imperatives. Therefore, the Company may need to change any of the plans and projections that have been outlined in this report, 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 corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance. 1. CORPORATE GOVERNANCE PHILOSOPHY AND PRACTICE

The Company believes that total business risk elimination is never possible but can be minimized by consistently developing and following the best practices of Corporate Governance. To this end, the Company focuses on developing and implementing higher standards of accountability to enable optimum returns to all stakeholders. The company is installing new state-of-the art systems including integrated financial accounting and budgeting systems and through a systematic process of training and development has increased the quality of its personnel. Fairness in words, actions and deeds with all stakeholders are the pillars of corporate governance philosophy of the Company. Corporate Governance in substance rather than form is what the Company believes in and actively

Category

The Company is managed exclusively by and under the directions of the Board. The composition of the Board is governed by the applicable laws and regulations as well as the Articles of Association of the Company. The powers delegated by the Board to the Managing Director and by the Managing Director to the sub-ordinate officers are documented in the Delegation of Powers (DoP). The DoP is revised periodically. Nine out of ten directors are non-executive directors, forming more than half of the total number of directors. VSNL has four independent directors and one executive director. None of the directors hold directorships in more than the permissible number of companies under the applicable provisions. Similarly, none of the directors on the board’s sub-committees hold membership of more than ten committees of boards, nor is any director a chairman of more than five committees of boards. The names and categories of the directors on the board, their attendance at board meetings during the year and at the last annual general meeting, and the number of directorships and committee memberships held by them in other companies as of 31 March 2006 (with Directorships updated as of 30 July 2006) are given below: Attendance at the last AGM (14.09.2005)

Board Meetings during the tenure Held

VSNL’s operations and accounts are audited at three levels: an internal audit; a statutory audit by an Indian accounting firm under Indian accounting requirements and their restatement by an internationally recognised accounting firm according to US GAAP. The Company communicates regularly with its shareholders through bulletins, presentations and meetings with analysts and investors. 2. BOARD OF DIRECTORS

VSNL has evolved from a monopoly ILD player to a multinational corporation having its presence felt across the globe. Its businesses are no longer confined within the boundaries of India but are now spread across the globe offering a wide spectrum of basic and value added services. The challenge for VSNL for governance lies in designing a model addressing the specific and unique needs of geographies and yet strengthening and aligning the overall business objectives and goals.

Name of Director

implements. To ensure this, a high level Corporate Governance Council has been formed to ensure that the best practices of Corporate Governance are adopted.

Attended

No. of Directorships in Public Companies Including VSNL

No. of Committee Positions held in Public Companies Including VSNL

Chairman

Member

Chairman

Member

Directors in Office Mr. Subodh Bhargava [Chairman : w.e.f. 11.04.05]

Independent Non Executive

11

11

Yes

2

10

3

5

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

Name of Director

Category

Attendance at the last AGM (14.09.2005)

Board Meetings during the tenure Held

No. of Directorships in Public Companies Including VSNL

Attended

No. of Committee Positions held in Public Companies Including VSNL

Chairman

Member

Chairman

Member

Directors in Office Mr. Pankaj Agrawala1

Not Independent Non Executive

11

8

No

NIL

2

NIL

3

Dr. Mukund Rajan [w.e.f. 06.05.05].

Not Independent Non Executive

10

9

Yes

NIL

3

NIL

NIL

Mr. N. Parameswaran1 [w.e.f. 30.08.05]

Not Independent Non Executive

8

7

Yes

NIL

2

NIL

NIL

Mr. P.V. Kalyanasundaram [w.e.f. 14.09.05]

Independent Non Executive

7

6

N/A

NIL

NIL

NIL

1

Dr. V.R.S. Sampath [w.e.f. 14.09.05]

Independent Non Executive

7

6

N/A

NIL

2

NIL

1

Mr. Amal Ganguli [w.e.f. 17.07.06]

Independent Non Executive

N/A

N/A

N/A

NIL

11

3

4

Directors served during the year

1

Mr. R.N. Tata [Until 11.04.05]

Not Independent Non Executive

1

1

N/A

12

2

NIL

8

Mr. Rakesh Kumar1 [Until 10.08.05]

Not Independent Non Executive

3

3

N/A

NIL

NIL

NIL

NIL

Mr. Suresh Krishna [Until 21.03.06]

Independent Non Executive

10

3

No

6

3

2

3

Mr. Vivek Singhal [Until 09.09.05]

Independent Non Executive

4

1

N/A

NIL

6

1

1

Dr. Ashok Jhunjhunwala [Until 09.09.05]

Independent Non Executive

4

4

N/A

NIL

8

NIL

8

Mr. F.A. Vandrevala [Until 25.11.05]

Not Independent Non Executive

5

5

Yes

2

13

NIL

2

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 14 September 2005 31 January 2006

22

9 June 2005 7 October 2005 1 March 2006

28 July 2005 25 October 2005 31 March 2006

30 August 2005 7 December 2005

3. AUDIT COMMITTEE The audit committee consists of four members. The Chairman of the committee is Mr. Subodh Bhargava, an independent director, who earlier served as the Chairman and Managing Director of Eicher Motors and has necessary and sufficient financial and accounting background. The other members of the committee are Mr. Pankaj Agrawala, Government Nominee Director, Mr. P.V. Kalyanasundaram, Independent Director and Mr. Amal Ganguli, Independent Director. Mr. Satish Ranade, Company Secretary and Chief Legal Officer is the audit committee’s Secretary. Mr. Ishaat Hussain, Director (Finance), Tata Sons Limited, who was a member of the Audit Committee till 24 October 2005, is a special invitee for Audit Committee meetings. The audit committee has adequate powers and detailed terms of reference to play an effective role as required under the provisions of the Companies Act, 1956 and clause 49 of VSNL’s listing agreement with the stock exchanges. Attendance at the Audit Committee Meetings Name of Member

Audit Committee Meetings during the tenure Held Attended

Mr. Subodh Bhargava

6

6

Mr. Pankaj Agrawala

6

5

Mr. P.V. Kalyanasundaram [W.e.f. 24.10.05]

3

2

Mr. Amal Ganguli [W.e.f. 17.07.06]

N/A

N/A

Mr. Ishaat Hussain (Special Invitee) [Member till 24.10.05]

3

1

Mr. Vivek Singhal [Until 09.09.05]

3

2

Dr. Ashok Jhunjhunwala [Until 09.09.05]

3

2

At the Annual General Meeting held on September 14, 2005, the Chairman of the Audit Committee, Mr. Subodh Bhargava was present. During the last financial year, the Audit Committee held five formal meetings and one informal meeting and not more than four months had elapsed between any two meetings. The dates of meetings of the Audit Committee are as follows:

3 June 2005 (Informal meeting)

8 June 2005

28 July 2005

24 October 2005

31 January 2006

1 February 2006

4. REMUNERATION COMMITTEE a) Constitution and Terms of Reference The Remuneration Committee consists of two members. The Chairman of the Committee is Mr. Kishor Chaukar, Mr. Subodh Bharagava is the other member on the Committee. Mr. Satish Ranade, Company Secretary and Chief Legal Officer is the Remuneration Committee’s Convener. In January 2006, the Remuneration Committee through a circular resolution had recommended certain changes in the terms of appointment of the executive director. One meeting of the Remuneration Committee was held on 26 June 2006. The broad terms of reference of the Remuneration Committee are to review the performance of the Wholetime Directors, after considering the Company’s performance and recommend to the Board remuneration including salary, perquisites and commission to be paid to the Company’s Whole-time Directors within the overall ceilings approved by the shareholders. b) Remuneration Policy The non-executive Directors were not paid any remuneration till 2004-05 except payment by way of sitting fees. For the financial year 2005-06, subject to approval of shareholders at the 20th Annual General Meeting, the Company proposes to pay remuneration to the non-executive directors (NEDs) by way of commission at a rate not exceeding 1% per annum of the profits of the Company (computed in accordance with Section 309(5) of the Companies Act, 1956). The distribution of commission amongst the NEDs is placed before the Board. The commission to NEDs is proposed to be distributed broadly on the basis of their attendance and contribution at the Board and certain Committee meetings as well as the time spent on operational matters other than at the meetings. The Company pays sitting fees of Rs.10,000/- (Rs.5000/till 1 March 2006) per meeting to the non-executive directors for attending the meetings of the Board and Committee meetings.

23

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

The Company pays remuneration by way of salary, perquisites and allowances (fixed component) and commission (variable component) to the whole time director. Salary is paid within the range approved by the shareholders. Annual increments, recommended by the Remuneration Committee are approved by the Board. Within the prescribed ceiling, the perquisites package is approved by the Remuneration Committee. Commission is calculated with reference to net profits of the Company in a particular financial year and is determined by the Board of Directors at the end of the financial year based on the recommendations of the remuneration committee, subject to overall ceilings stipulated in Sections 198 and 309 of the Companies Act, 1956. Specific amount payable to the whole-time director is based on the performance criteria laid down by the Board which broadly takes in to account the profits earned by the Company for the year. c) The details of commission proposed to be paid to the non-executive directors for the year 2005-06, subject to approval of the shareholders at the Annual General Meeting are as follows: (Amount in Rs.) Name of the Director

8,23,500

1,15,000

Mr. Ishaat Hussain

2,37,900

70,000

Mr. Kishor Chaukar

3,01,950

95,000

Mr. Pankaj Agrawala

2,65,350

NIL

Dr. Mukund Rajan

1,64,700

50,000

Mr. N. Parameswaran

1,28,100

NIL

Mr. P.V. Kalyanasundaram

1,46,400

45,000

Dr. V.R..S. Sampath

1,37,250

55,000

Mr. R.N. Tata (Chairman Board) [Till 11 April 2005]

45,750

5,000

Mr. Rakesh Kumar [Till 10 August 2005]

54,900

NIL

Mr. Suresh Krishna [Till 21 March 2006]

54,900

20,000

Mr. Vivek Singhal [Till 9 September 2005]

54,900

15,000

Dr. Ashok Jhunjhunwala [Till 9 September 2005]

2,10,450

70,000

Mr. F.A. Vandrevala [Till 25 November 2005]

1,46,400

40,000

27,72,450

5,80,000

Total

24

Commission Sitting Fees

Mr. Subodh Bhargava (Chairman Board/Audit)

d) The details of remuneration to the whole-time director during the year 2005-06 are as follows: (Amount in Rs.) Name

Salary

Perquisites & Allowances

Commission*

Mr. N. Srinath 44,85,035

375042

25,00,000

Total

375042

25,00,000

44,85,035

* Commission payable will be paid only after the date of the Annual General Meeting. 5. INVESTOR GRIEVANCE COMMITTEE The committee consists of three members. The Chairman of the Committee is Mr. Kishor A. Chaukar who is the Managing Director of Tata Industries Limited. The other members are Mr. Pankaj Agrawala, nominee Director of the Government and Dr. V.R.S. Sampath, Independent Director. Mr. Satish Ranade, Company Secretary and Chief Legal Officer is the Investor Grievance Committee’s secretary. During the last financial year, the Committee held three meetings. The details of grievances received from the shareholders during the year and their status on 31 March 2006 is given below: Sr.

Nature of Complaints

No.

1. 2.

No. of Complaints Received

Pending

SEBI/Stock Exchange Complaint

2

NIL

Direct/Miscellaneous/ Other Complaint

17

NIL

TOTAL

19

NIL

This committee has been delegated the powers to approve the issue of Duplicate Share Certificates and approve transfer/transmission of shares exceeding 500 shares per folio. The Registrar and Transfer Agents have been authorised to issue Duplicate Share Certificates and approve transfer/transmission up to a maximum of 500 shares per folio, limited only to routine day-to-day work. As the shares of the company are under compulsory dematerialized trading for all investors, this delegation is considered adequate. All the shares received for transfer till March 31, 2006 have been duly processed. 6.

ETHICS AND COMPLIANCE COMMITTEE

In accordance with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, as

amended, the Board of Directors of the Company adopted the “VSNL Code Of Conduct For Prevention of Insider Trading and Code of Corporate Disclosure Practices” to be followed by “Directors”, “Designated Employees”, “Designated Persons” and “Insiders”. The code is based on the principle that Directors, Designated Employees, Designated Persons and Insiders should not have undue advantage over other shareholders, in their personal security transactions, due to their possible advance knowledge of Price Sensitive Information. The code, therefore, seeks to ensure timely and adequate disclosure of Price Sensitive Information to the investor community by the Company to enable them to take informed 7.

investment decisions with regard to the Company’s securities. In terms of the said code, an Ethics and Compliance Committee was constituted in 2003. The present committee consists of three members. The Chairman of the committee is Mr. Kishor A. Chaukar, who is the Managing Director of Tata Industries Limited, Mr. Pankaj Agrawala, government nominee director and Dr. V.R.S. Sampath, Independent Director are the members. Mr. Satish Ranade, Company Secretary and Chief Legal Officer is the convener of the Committee. Three meetings of the committee were held during the year 2005-06.

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 held at 1500 hours at Birla Matushri Sabhagar, New Marine Lines, Mumbai - 400020. There were two resolutions, both of which were Special.

Both the resolutions were put to vote by show of hands and were carried unanimously.

14 September 2005 The 19th Annual General Meeting was held at 1100 hours at Birla Matushri Sabhagar, New Marine Lines, Mumbai – 400020. There were Six resolutions (1 special and 5 ordinary).

All the resolutions were put to vote by show of hands and were carried unanimously.

2 September 2004

The 18th Annual General Meeting was held at 1100 hours at Birla Matushri Sabhagar, New Marine Lines, Mumbai - 400020. There were Six resolutions (1 special and 5 ordinary).

All the resolutions were put to vote by show of hands and were carried unanimously.

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 at Birla Matushri Sabhagar, New Marine Lines, Mumbai - 400020.

All the resolutions were put to vote by show of hands and were carried unanimously.

There were ten resolutions (2 special and 8 ordinary). 8.

DISCLOSURES

i)

There were no significant related-party transactions of the company with its promoters, directors or management, their subsidiaries or relatives that may have potential conflict with the interest of the company at large. Note number B.20 of the Notes on Accounts may also be referred to in this respect. No non-compliance notice has been issued and no

penalties or strictures have been imposed on the company by SEBI, any stock exchange or any statutory authority on any matter related to capital markets during the last three years. ii)

The Company has adopted a Whistle Blower Policy and has established necessary mechanisms for

25

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

iii)

employees to report concerns about unethical behaviour. No person has been denied access to the Audit Committee.

a.

The Company has setup a Remuneration Committee. Please see the paragraph on Remuneration Committee.

SECRETARIAL AUDIT

b.

REGULATORY AUDIT

A qualified practicing Company Secretary carried out quarterly secretarial audit to reconcile the total admitted capital with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) and the total issued and listed capital. The audits confirm that the total issued/paid-up capital is in agreement with the total number of shares in physical form and the total number of dematerialized shares held with NSDL and CDSL.

Though not required under any statutory obligations but in the interest of better Corporate Governance and benchmarking, VSNL is undergoing a voluntary Regulatory Audit. The Audit is being carried out by M/s. Ernst and Young Pvt. Ltd., an external agency. c.

The Auditor’s Report on the financial statements 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 as at 31 March, 2006

Maximum amount outstanding during the year Rupees ‘000 Rupees ‘000

Investment in shares of the Company No of shares

Investment in shares of subsidiaries of the Company No of Shares

a) Subsidiaries (i)

VSNL Broadband Ltd.

(ii) VSNL America Inc. (iii) VSNL Lanka Ltd (iv) VSNL Singapore Pte Ltd. (v) VSNL SNOSPV Pte. Ltd

Name of the Subsidiary *

VSNL UK Ltd

** VSNL Netherlands BV ** VSNL Bermuda Ltd ** VSNL Japan K.K ** VSNL Telecommunications (Bermuda) Ltd. ** VSNL HongKong Ltd

26

-

-

-

-

233,226

233,226

-

*

-

-

-

-

2,519,256

6,479,889

-

**

-

-

-

-

No of Shares 1 16,718,000 1,200,000 300 1,200,000 1

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 VSNL(Germany) GMBH

186 1

VSNL International (Portugal) Instalacao e Manutencao de Redes LDA

12,447,000

Subsidiaries of VSNL Telecommunications (Bermuda)Ltd Teleglobe Bermuda Ltd. TLGB Luxembourg Holdings S.ar.l

1,200,000 500

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 ITXC IP Holdings S.a.r.l Teleglobe International Ltd Teleglobe International HongKong Ltd VSNL International Australia Pty. Ltd VSNL International GBRM Ltd VSNL International Puerto Rico Inc

1 500 8,416,801 10,000 555,001 1,200,000 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 Teleglobe Italy S.r.l Teleglobe Netherlands B.V

1 500 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 Teleglobe International Belgium S.P.R.L

278,939 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

28

NA

10. MEANS OF COMMUNICATION

DIVIDEND PAYMENT

VSNL’s quarterly results are published in the Indian Express and Loksatta among others, and are also hosted on VSNL’s website: www.vsnl.in. The company’s press releases, details of significant developments and investor updates are also made available on the website. The company generally holds a press conference/investors’ meet after the half-yearly results are taken on record by the board relating to the period ending September 30th and March 31st every year.

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:

The management discussion and analysis forms part of the directors’ report and is included in the annual report for the year 2005-06. Segmental information may be referred to in Note number B.19 of the Notes on Accounts. 11. SHAREHOLDER INFORMATION DATE AND VENUE OF THE AGM 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 Road Marg, Kalghoda, Mumbai - 400023. FINANCIAL CALENDAR Fiscal year ending : March 31, 2006 Annual General Meeting : September 13, 2006 KEY FINANCIAL REPORTING DATES FOR THE FINANCIAL YEAR 2006-07 First quarter ending June 30, 2006

: July 29, 2006

Second quarter ending Sept 30, 2006: On or before October 31, 2006 Third quarter ending Dec 31, 2006

: On or before January 31, 2007

Fourth quarter ending March 31, 2007

: On or before April 30, 2007 or if

(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. BANK DETAILS In order to provide protection against fraudulent encashment of dividend warrants, members are requested to provide, if they have not already provided, their bank account numbers, bank account type and names and addresses of bank branches, quoting folio numbers, to the R&T agents (in case of physical shareholding) to enable them to incorporate the same on the dividend warrants. In case of dematerialised holding the bank account details should be intimated and updated with the shareholder’s Depository Participant. LISTING ON STOCK EXCHANGES IN INDIA AND LISTING FEES The company’s shares are listed on the stock exchanges at Mumbai (BSE) and National Stock Exchange (NSE) in India. Annual listing fees as due to each of the above stock exchanges for 2006-2007 have been paid. LISTING ON STOCK EXCHANGE OUTSIDE INDIA

before

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

June 30, 2007.

DEPOSITORY BANK FOR ADR HOLDERS

audited, on or

BOOK CLOSURE DATES FOR THE PURPOSE OF DIVIDEND VSNL’s register of members and share transfer books will remain closed from 16 August 2006 to 22 August 2006 (both days inclusive), to determine the entitlement of shareholders to receive the final dividend as may be declared for the year ended March 31, 2006.

The Bank of New York, 101, Barclays Street, 22nd Floor West, New York, NY 10286, Telephone: +1 (212) 815 8365, Facsimile: +1 (212) 571 3050 Local Address : The Bank of New York, Express Towers, 12th Floor, Nariman Point, Mumbai 400 021, Telephone: (022) 2204 4941/43, Facsimile: (022) 2204 4942.

29

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CUSTODIAN FOR THE DEPOSITORY IN INDIA ICICI Bank Limited, Securities Markets Services, 1st Floor, Empire Complex, 414 Senapati Bapat Marg, Lower Parel, Mumbai – 400013. Telephone: 91-22-5667 2026, 5667 2030 Facsimile: 91-22-5667 2779/2740.

: : : :

VSL INE151A01013 US92659G6008 92659G600

Reuters Codes VSNL.BO (BSE) VSNL.NS (NSE) VSNLq.L (LSE).

STOCK CODE Bombay Stock Exchange National Stock Exchange

New York Stock Exchange ISIN No. for equity shares ISIN No. for ADRs CUSIP No. for ADRs

: 500483 : 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

30

235332980

611146159

29778100

0

NSE Closing Share Price

31-Mar-06

03-Mar-06

03-Feb-06

06-Jan-06

31-Mar-06

02-Mar-06

10-Feb-06

09-Jan-06

09-Dec-05

10-Nov-05

07-Oct-05

08-Sep-05

08-Aug-05

07-Jul-05

08-Jun-05

02-May-05

Closing Share Price at BSE 400

350

300

250 6000

200

150 4000

100

500

450

300

2500

250

2000

200

50

Sensex Closing

500

Nifty Close

Close (Rs.)

09-Dec-05

11-Nov-05

14-Oct-05

02-Sep-05

05-Aug-05

08-Jul-05

10-Jun-05

13-May-05

1-Apr-05

0

1-Apr-05

Closing Share Price

VSNL Closing Share Price at BSE V/S Sensex Close 12000

450

10000

8000

50 2000

0

Close (Rs.) Sensex Close

VSNL Closing Share Price at NSE V/S Nifty Close 4000

400 3500

350 3000

150

1500

100

1000

500

0

Nifty Close

31

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

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

20

8000

15

7500

10

7000

5

NYSE Composite Index

VSNL Closing Price at NYSE (USD)

25

6500

0

VSNL ADR Closing Price

31-Mar-06

1-Mar-06

1-Feb-06

3-Jan-06

1-Dec-05

1-Nov-05

3-Oct-05

1-Sep-05

1-Aug-05

1-Jul-05

1-Jun-05

2-May-05

1-Apr-05

6000

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 ordinary shares held

Number of Shareholders 31.03.2006

31.03.2005

51536

59450

501 to 1000

1295

1751

1001 to 10000

1624

2154

183

115

54638

63470

1 to 500

Over 10000 Total 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

Shareholders

(Percentage)

Number of Shares Held

2006

2005

2006

2005

2006

2005

- 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

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

2

2

5.99

11.25

17081284

32071857

446

393

0.05

0.06

144635

178508

1730

1420

0.88

0.74

2494521

2101892

52310

61559

2.70

3.61

7691428

10280576

1

1

0.00

0.00

2235

2235

54638

63470

100

100

285000000

285000000

PROMOTERS Tata Group

NON-PROMOTERS

Foreign companies (shares held by The Bank of New York as depository for ADRs) Non-resident individuals / Overseas Corporate Bodies Other Indian Bodies Corporate Indian Public In transit demat shares Total

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

Number of Shares

Total Number of Shares

Nominal Value of Shares (Rs.)

126

126

126,000

+599,874

600,000

600,000,000

NIL

60,000,000

600,000,000

+20,000,000

80,000,000

800,000,000

NIL

80,000,000

800,000,000

NIL

80,000,000

800,000,000

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

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

NIL

95,000,000

950,000,000

NIL

95,000,000

950,000,000

+190,000,000

285,000,000

2,850,000,000

NIL

285,000,000

2,850,000,000

NIL

285,000,000

2,850,000,000

19.3.86 1.4.86

06.02.92

Particulars of Issue Allotted as Purchase consideration for assets & liabilities of OCS Allotted as Purchase consideration for assets & liabilities of OC March’91 Shares of Rs.1000/- each subdivided into shares of Rs.10/- each Bonus of 1:3 issued to Government of India.

Jan-Feb 92 12 million shares disinvested in favour of Indian Financial Institutions by GOI @ Rs.123/- per share 1994-95 27.03.97

04.04.97

Sept’99

2,382,529 Shares transferred to disinvested parties as bonus shares

10 lakh shares Divested by GOI in domestic markets @ Rs.750 per share.

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

34

Dates

Particulars of Issue

Number of Shares

Total Number of Shares

Nominal Value of Shares (Rs.)

NIL

285,000,000

2,850,000,000

NIL

285,000,000

2,850,000,000

NIL

285,000,000

2,850,000,000

NIL

285,000,000

2,850,000,000

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 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. 10.04.02 Open Offer by Panatone Finvest Limited in accordance with SEBI guidelines to acquire upto 57 million shares @ Rs.202/- per share 08.06.02 Open offer complete with Panatone holding total of 128249910 shares including 57 million shares as above. 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) Mahatma Gandhi Road, Mumbai - 400 001. Tel : +91 (22) 6657 8765 Fax : +91 (22) 6639 5162 Email : [email protected] Website : www.vsnl.in

Lokmanya Videsh Sanchar Bhavan (LVSB) Kashinath Dhuru Marg Prabhadevi Mumbai – 400 028. Tel : +91 (22) 6657 8765 Fax : +91 (22) 6639 5162 Email : [email protected] Website : www.vsnl.in

Compliance Officer Mr. Satish Ranade Company Secretary & Chief Legal Officer Lokmanya Videsh Sanchar Bhavan Kashinath Dhuru Marg, Prabhadevi, Mumbai - 400 028. Tel : +91 (22) 6657 8765 Fax : +91 (22) 6659 1962 Email : [email protected] Any queries relating to financial statements of the Company may be addressed to: Investor Relations Cell Videsh Sanchar Nigam Limited 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]

Any shareholder complaints/queries may be addressed to: Registrar and Transfer Agents M/s. Sharepro Services (India) Pvt. Ltd. Unit : Videsh Sanchar Nigam Limited Satam Estate, 3rd Floor, Above Bank of Baroda, Chakala, Andheri (East), Mumbai - 400 099. Tel : +91 (22) 2821 5168 Fax : +91 (22) 2837 5646 E-mail : [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 Date: 27 July 2006

N. Srinath 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) ii)

these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; 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) ii)

significant changes in internal control over financial reporting during the year, if any; 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 (Chief Financial Officer)

36

N. Srinath (Executive Director)

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 compliance 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

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

0.11

0.06

0.01

-

0.02

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

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

42.96

37.89

19.99

24.18

4.12

4.60

4.46

7.31

7.67

8.77

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)

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

3.79

2.67

15.46

7.05

27.38

Profitability ratios

Figures are in % BUSINESS CHARCTERISTICS Debt to Equity Ratio Tax rate (%)

Net Working Capital as part of TCE %

Cash and Equivalents/Total Assets Ratio Depreciation/Gross Block % GROWTH(% OVER PRECEDING YEARS)

PER SHARE DATA Earnings (Rs.)

P/E (as of Year End)

38

AUDITORS’ REPORT TO THE MEMBERS OF VIDESH SANCHAR NIGAM LIMITED 1.

2.

3.

4.

We have audited the attached balance sheet of VIDESH SANCHAR NIGAM LIMITED as at 31 March, 2006, and also the profit and loss account and the cash flow statement for the year ended on that date both annexed thereto. These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As required by the Companies (Auditor’s Report) Order, 2003 issued by the Central Government of India in terms of sub-section (4A) of Section 227 of the Companies Act, 1956, we enclose in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said Order to the extent applicable. Further to our comments in the Annexure referred to in paragraph 3 above, we report that: (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;

(ii) in our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books; (iii) the balance sheet, profit and loss account and cash flow statement dealt with by this report are in agreement with the books of account;

(iv) in our opinion, the balance sheet, profit and loss account and cash flow statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956; (v) on the basis of written representations received from the directors, as on 31 March, 2006, and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31 March, 2006 from being appointed as a director in terms of clause (g) of sub-section (1) of Section 274 of the Companies Act, 1956; and (vi) in our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India: (a) in the case of the balance sheet, of the state of affairs of the Company as at 31 March, 2006; (b) in the case of the profit and loss account, of the profit for the year ended on that date; and (c) in the case of the cash flow statement, of the cash flows for the year ended on that date.

For S. B. BILLIMORIA & Co. Chartered Accountants

N VENKATRAM Partner Membership No: 71387 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 showing full particulars including quantitative details and situation of fixed assets.

(v)

(b) As explained to us, physical verification of a major portion of fixed assets as at 31 March, 2006 was conducted by the Management during the year. In our opinion, the frequency of physical verification is reasonable. Having regard to the size of the operations of the Company and on the basis of explanations received, in our opinion, the net differences found on physical verification were not significant. (ii)

40

(a) To the best of our knowledge and belief and according to the information and explanations given to us, we are of the opinion that the transactions that need to be entered into the register maintained under Section 301 of the Companies Act, 1956 have been so entered. (b) In our opinion and having regard to our comments in paragraph (iv) above, and according to the information and explanations given to us, transactions made in pursuance of contracts or arrangements entered in the register maintained under Section 301 of the Companies Act, 1956 and exceeding the value of Rupees five lakhs in respect of any party during the year have been made at prices which are reasonable having regard to prevailing market prices at the relevant time, where such market prices are available.

(a) As explained to us, the stocks of stores and spares have been verified during the year. In our opinion, the frequency of verification is reasonable. (b) In our opinion and according to the information and explanations given to us, the procedures of physical verification of stocks followed by the Management are reasonable and adequate in relation to the size of the Company and the nature of its business.

(vi)

In our opinion and according to the information and explanations given to us, the Company has not accepted deposits from the public to which the provisions of Section 58A, 58AA or any other relevant provisions of the Companies Act, 1956 are applicable during the period covered by our audit report.

(c) In our opinion and according to the information and explanations given to us, the Company is maintaining proper records of inventory. The discrepancies noticed on verification between the physical stocks and the book records were not material having regard to the size of the operations of the Company.

(vii)

In our opinion, the Company has an internal audit system commensurate with the size and nature of its business.

(iii)

The Company has not taken or granted any loans during the year to parties covered in the register maintained under Section 301 of the Companies Act, 1956.

(iv)

In our opinion and according to the information and explanations given to us, there is adequate internal control system commensurate with the size of the Company and the nature of its business for the purchase of inventory and fixed assets and for rendering of services. During the course of our audit, we have not observed any major weakness in the internal controls in relation to purchase of inventor y, fixed assets and for rendering of services.

(viii) We have broadly reviewed the books of account and records maintained by the Company relating to telecommunication activities pursuant to the Rules made by the Central Government for the maintenance of cost records under Section 209 (1) (d) of the Companies Act, 1956 and, are of the opinion that prima facie, the prescribed accounts and records have been made and maintained. We have not, however, made a detailed examination of the records with a view to determining whether they are accurate or complete. (ix)

(a) According to the information and explanations given to us, the Company is generally regular in depositing with appropriate authorities undisputed statutory dues including provident fund, investor education and protection fund, income tax, sales tax, wealth tax, service tax, customs duty, excise duty, cess and other

in or trading in shares, securities, debentures and other investments. Accordingly, the provisions of clause 4 (xiv) of the Companies (Auditor’s Report) Order, 2003 are not applicable to the Company.

material statutory dues applicable to it. The Company has received exemption from the operation of Employees’ State Insurance Act, 1948. (b) According to the information and explanations given to us, no undisputed amounts payable in respect of income tax, wealth tax, sales tax, service tax, customs duty, excise duty and cess were in arrears, as at 31 March, 2006 for a period of more than six months from the date they became payable. (c) According to the information and explanations given to us, details of dues of sales tax, income tax, excise duty and service tax which have not been deposited on account of any dispute are given below: Particulars

Period to which Forum where the amount relates the dispute is pending

Sales Tax

1989-90, 1996-97, 1997-98, 1998-99, 1999-00, 2000-01, 2001-02, 2003-04

Tribunal

Sales Tax

2001-02, 2002-03

Asst. Commissioner

10,705

Sales Tax

2001-02, 2002-03, 2003-04, 2004-05

High Court

14,689

TDS

2002-03, 2003-04

Commissioner

Entry Tax

2002-03, 2004-05

High Court

Amount in Rs. ‘000 100,385

1,038 59,392

(x)

The Company does not have accumulated losses. The Company has not incurred cash losses during the financial year covered by our audit and the immediately preceding financial year.

(xi)

In our opinion and according to the information and explanations given to us, the Company has not defaulted in repayment of dues to a financial institution, bank or debenture holder.

(xii)

The Company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other securities during the year. Accordingly, the provisions of clause 4 (xii) of the Companies (Auditor’s Report) Order, 2003 are not applicable to the Company.

(xiii) In our opinion, the Company is not a chit fund or a nidhi/mutual benefit fund/society. Accordingly, the provisions of clause 4 (xiii) of the Companies (Auditor’s Report) Order, 2003 are not applicable to the Company. (xiv) In our opinion and according to the information and explanations given to us, the Company is not dealing

(xv)

In our opinion and according to the information and explanations given to us, the terms and conditions on which the Company has given guarantee for loans taken by others from banks or financial institutions are not prejudicial to the interest of the Company.

(xvi) In our opinion and according to the information and explanations given to us, no term loans have been raised during the financial year covered by our audit. (xvii) In our opinion and according to the information and explanations given to us, and on an overall examination of the balance sheet of the Company, we report that no funds raised on short-term basis have been used for long-term investment. (xviii) According to the information and explanations given to us, the Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under Section 301 of the Companies Act, 1956. (xix) In our opinion and according to the information and explanations given to us, the Company has not issued any secured debentures during the period covered by our report. Accordingly, the provisions of clause 4 (xix) of the Companies (Auditor’s Report) Order, 2003 are not applicable to the Company. (xx)

During the period covered by our audit report, the Company has not raised any money by public issues.

(xxi) To the best of our knowledge and belief and according to the information and explanations given to us, no fraud on or by the Company has been noticed or reported during the course of our audit.

For S. B. BILLIMORIA & Co. Chartered Accountants

N VENKATRAM Partner Membership No: 71387 Mumbai, 26 June, 2006

41

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

BALANCE SHEET AS AT 31 MARCH, 2006 Rupees’000

As at 31 March, 2005 Rupees’000

1 2

2,850,000 57,761,671

2,850,000 54,430,468

3

60,611,671 982,501 750,926

57,280,468 — 996,796

62,345,098

58,277,264

40,996,363 10,910,817

31,826,824 8,356,542

30,085,546 1,478,094

23,470,282 5,131,681

31,563,640

28,601,963

Schedule FUNDS EMPLOYED: 1 SHARE CAPITAL 2 RESERVES AND SURPLUS 3 4 5

TOTAL SHAREHOLDERS’ FUNDS UNSECURED LOANS DEFERRED TAX LIABILITY (NET) (Refer Note B15, Schedule 20)

APPLICATION OF FUNDS: 6 FIXED ASSETS (a) Gross Block (b) Less: Accumulated Depreciation/Amortisation

4

(c) Net Block (d) Capital work-in-progress 7 8

9

INVESTMENTS A. CURRENT ASSETS (a) Inventories (b) Sundry Debtors (c) Cash and Bank Balances (d) Other Current Assets

5

24,993,393

12,005,839

6 7 8 9

38,019 7,375,710 2,568,815 983,025

19,651 5,140,573 14,091,243 752,809

B.

10

10,965,569 13,063,532

20,004,276 14,892,865

24,029,101

34,897,141

15,674,824 2,566,212

14,535,221 2,692,458

18,241,036

17,227,679

5,788,065

17,669,462

62,345,098

58,277,264

LOANS AND ADVANCES

Less: CURRENT LIABILITIES AND PROVISIONS (A) Current Liabilities (B) Provisions

11 12

10 NET CURRENT ASSETS [(8) less (9)] 11 TOTAL ASSETS (NET) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

42

20

As per our report attached For S.B. BILLIMORIA & CO. Chartered Accountants

For and on behalf of the Board

N. VENKATRAM Partner

SUBODH BHARGAVA Chairman

N. SRINATH Executive Director SATISH RANADE Company Secretary & Chief Legal Officer

MUMBAI DATED: 26 June, 2006

RAJIV DHAR Chief Financial Officer MUMBAI DATED: 26 June, 2006

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2006 Schedule

1 2 3 4

INCOME: REVENUES FROM TELECOMMUNICATION SERVICES OTHER INCOME INTEREST INCOME INTEREST ON INCOME TAX REFUNDS

TOTAL INCOME EXPENDITURE: 6 SALARIES AND RELATED COSTS 7 NETWORK COSTS 8 OPERATING AND OTHER EXPENSES 9 INTEREST EXPENSE 10 DEPRECIATION AND AMORTISATION Less: TRANSFER FROM CAPITAL RESERVE 11 PRIOR PERIOD ADJUSTMENTS (NET) 12 TOTAL EXPENDITURE PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 13 EXCEPTIONAL ITEMS: (a) Profit from sale of long term investment, net of licence fee (b) Provision for recoverable pension obligation (Refer Note B6, Schedule 20) (c) Fixed Assets written off (Refer Note B8, Schedule 20) PROFIT BEFORE TAXES 14 TAXES (a) CURRENT TAX (b) DEFERRED TAX (c) FRINGE BENEFIT TAX PROFIT AFTER TAXES 15 BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR AMOUNT AVAILABLE FOR APPROPRIATIONS 16 APPROPRIATIONS : (a) PROPOSED DIVIDEND (Refer Note B3, Schedule 20) (b) TAX ON DIVIDEND (c) GENERAL RESERVE BALANCE CARRIED TO BALANCE SHEET EARNINGS PER SHARE (EPS) 17 Basic/Diluted earnings per share, before exceptional items (Rs.) (Refer Note B18, Schedule 20) 18 Basic/Diluted earnings per share, including exceptional items (Rs.) (Refer Note B18, Schedule 20) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

13 14 15

5

16 17 18 4 19

Rupees’000

Year ended 31 March, 2005 Rupees’000

37,809,525 1,334,228 389,302 564,218

33,030,391 519,873 554,938 —

40,097,273

34,105,202

2,090,591 20,958,674 6,001,739 18,027 3,595,572 (1,846) (109,004) 32,553,753 7,543,520

1,412,808 20,030,893 3,895,660 779 2,441,535 (1,859) — 27,779,816 6,325,386

—

4,687,303

(64,220)

(472,866)

(612,127) 6,867,173

— 10,539,823

(2,275,260) 245,870 (42,363) 4,795,420 11,859,083 16,654,503

(2,050,519) (925,630) — 7,563,674 7,004,890 14,568,564

1,282,500 179,871 479,542 14,712,590

1,710,000 243,114 756,367 11,859,083

18.40

14.34

16.83

26.54

20

As per our report attached For S.B. BILLIMORIA & CO. Chartered Accountants

For and on behalf of the Board

N. VENKATRAM Partner

SUBODH BHARGAVA Chairman

N. SRINATH Executive Director SATISH RANADE Company Secretary & Chief Legal Officer

MUMBAI DATED: 26 June, 2006

RAJIV DHAR Chief Financial Officer MUMBAI DATED: 26 June, 2006

43

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH, 2006 1

(Rupees in ‘000)

Year ended 31 March, 2005 (Rupees in ‘000)

7,543,520

6,325,386

3,595,572 (1,846) 21,131 (389,302) 18,027 (564,218) (483,069) 886 -

2,441,535 (1,859) (11,111) (554,938) 366 32,547 (287,445) (4,673) 149 (6,331)

9,740,701 (18,368) (2,231,725) (360,068) (113,156) 2,290,637 9,308,021 265,563 564,218

7,933,626 4,440 (1,634,425) 121,419 (25,059) 589,198 6,989,199 (3,756,751) -

10,137,802

3,232,448

(7,969,579) (1,755,180) (1,083,052) (2,037,776) (6,142,630) (30,483) 7,023 525 (2,175,146) 44,264 11,750,682 449,417

(10,605,756) (2,354,000) (202,880) 8,570,632

(8,941,935)

764,437

982,501 (1,949,693) (5,072)

(630,000) (1,450,549) (366)

CASH FLOW FROM / (USED IN) FINANCING ACTIVITIES

(972,264)

(2,080,915)

NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AS AT 1 APRIL, 2005 (Refer note B14, Schedule 20) Exchange difference on cash and cash equivalents

223,603 2,222,581

1,915,970 301,938

(886)

4,673

CASH AND CASH EQUIVALENTS AS AT 31 MARCH, 2006 (Refer note B14, Schedule 20)

2,445,298

2,222,581

CASH FLOWS FROM OPERATING ACTIVITIES PROFIT BEFORE TAX AND EXCEPTIONAL ITEMS Adjustments for: Depreciation Transfer from capital reserve Loss/(Profit) on sale of fixed assets Interest income Interest expense Fixed assets written down Interest on income tax refunds Dividend income/profit on sale of current investments Exchange difference on cash and cash equivalents Valuation loss on current investments Dividend income from long-term investments OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES Inventories Sundry debtors Other current assets Loans and advances Current liabilities and provisions Cash generated from operations before tax Income taxes refunds / (paid ) Interest on income tax refunds NET CASH FROM OPERATING ACTIVITIES

2

3

CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets Purchase of long-term investments Investments in preference share capital of subsidiaries Investments in equity share capital of subsidiaries (Purchase)/Sale of current investments (net of mutual funds dividend re-invested) (net) Payment made for acquisition of Seven Star Dot Com business (Refer note 3, Schedule 11) Proceeds from sale of fixed assets Proceeds from sale of long-term investment ( net of licence fee ) Proceeds from liquidation of subsidiaries Sale of investments in subsidiary Advances paid for equity investments in subsidiaries Loans to subsidiaries (net) Dividend income on long term investments Dividend income on current investments Fixed deposits (net) Interest received NET CASH FROM / (USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from unsecured loan (net) Repayment of unsecured loans (net) Dividends paid including dividend tax Interest paid

733,930 7,789,383 221 (226,237) (1,881,735) 6,331 56,850 (1,702,391) 580,089

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.

44

As per our report attached For S.B. BILLIMORIA & CO. Chartered Accountants

For and on behalf of the Board

N. VENKATRAM Partner

SUBODH BHARGAVA Chairman

N. SRINATH Executive Director

RAJIV DHAR Chief Financial Officer MUMBAI DATED: 26 June, 2006

SATISH RANADE Company Secretary & Chief Legal Officer

MUMBAI DATED: 26 June, 2006

SCHEDULES FORMING PART OF THE BALANCE SHEET SCHEDULE - 1 SHARE CAPITAL AUTHORISED 300,000,000 (2005:300,000,000) Equity Shares of Rs.10 each

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

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

3,000,000

3,000,000

2,850,000

2,850,000

2,059,898 (1,846)

2,061,757 (1,859)

2,058,052

2,059,898

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 Less : Transferred to profit and loss account

(b) Securities Premium Account Balance at the beginning of the year

(c) General Reserve Balance at the beginning of the year Add: Transferred from profit and loss account

(d) PROFIT AND LOSS ACCOUNT Balance carried forward

SCHEDULE - 3 UNSECURED LOANS Short Term Foreign Currency Loans From Banks

8,348,834

8,348,834

8,348,834

8,348,834

32,162,653 479,542

31,406,286 756,367

32,642,195

32,162,653

14,712,590

11,859,083

57,761,671

54,430,468

982,501

—

982,501

—

45

46

PLANT AND MACHINERY

FURNITURE AND FIXTURES

OFFICE EQUIPMENTS

COMPUTERS

MOTOR VEHICLES

GOODWILL

(c)

(d)

(e)

(f )

(g)

(h)

(i)

BUILDINGS

(b)

2

161,888 -

2,254 -

452,526 146,411

28,370 58,930

47,541 114,950

31,826,824 10,847,325 23,512,048 9,123,981

969,514 1,019,514

16,574 16,974

1,534,327 1,406,186

364,807 307,994

432,298 325,564

25,150,378 10,136,711 17,076,708 8,799,631

18,035 4,059

-

Additions

(1,677,786) (809,205)

(50,000)

(935) (400)

(32,507) (18,270)

(5,230) (2,117)

(1,163) (8,216)

(1,637,683) (725,961)

(268) (4,241)

-

Deductions/ Adjustments

GROSS BLOCK

Leasehold Land in Srinagar in respect of which lease deed is not available.

Rs. 12,079 thousands in respect of which lease agreement has not been executed/ registered.

Rs. 1,640 thousands identified as Surplus Land.

(iii)

(iv)

Rs. 77,888 thousands for leasehold office space, of which Rs. 18,414 thousands (2005: Rs. 8,384 thousands) pertains to assets acquired on or after 31 March 2001.

Rs. 4,398 thousands being cost of flats in Co-operative Societies under formation.

Rs. 335,181 thousands for flats at Mumbai and Rs. 10,030 thousands for office space at New Delhi in respect of which agreements have not been executed.

(i)

(ii)

(iii)

Gross block of buildings include:

Rs. 2,558 thousands in respect of which conveyance is not done.

(ii)

40,996,363 31,826,824

1,131,402 969,514

17,893 16,574

1,954,346 1,534,327

387,947 364,807

478,676 432,298

33,649,406 25,150,378

2,594,366 2,576,599

782,327 782,327

31 March, 2006

(i)

Land includes Rs. 638,340 thousands under lease. This includes:

GRAND TOTAL

CAPITAL WORK-INPROGRESS (including advances for capital expenditure Rs. 37,821 thousands 2005:Rs. 30,874 thousands)

TOTAL

782,327 782,327

LAND

(a)

2,576,599 2,576,781

1 April, 2005

NOTES:

1

FIXED ASSETS

FIXED ASSETS

NO.

SL.

SCHEDULE - 4

(1,041,297) (19,692)

-

(595) (311)

(29,988) (10,194)

(1,584) (927)

(761) (5,306)

(1,008,357) (2,117)

(12) (837)

-

10,910,817 8,356,542

412,496 217,895

11,108 10,320

1,044,502 787,116

123,561 106,439

174,231 122,920

8,728,777 6,745,138

371,547 330,405

44,595 36,309

31 March, 2006

31,563,640

30,085,546 23,470,282 1,478,094 5,131,681

718,906 751,619

6,785 6,254

909,844 747,211

264,386 258,368

304,445 309,378

24,920,629 18,405,240

2,222,819 2,246,194

737,732 746,018

31 March, 2006

28,601,963

23,470,282 17,577,349

751,619 1,002,522

6,254 7,796

747,211 896,670

258,368 217,687

309,378 225,403

18,405,240 12,186,557

2,246,194 2,286,410

746,018 754,304

31 March, 2005

Deduction/adjustments for the year ended 31 March 2004, included reduction in cost of gross block and corresponding reduction in accumulated depreciation aggregating Rs. 15,577,519 thousands and Rs. 6,013,426 thousands respectively. The net reduction in carrying cost aggregating Rs. 9,564,093 thousands was debited to Securities Premium Account in accordance with the terms of the approval of the shareholders and the High Court of Judicature at Bombay. Figures in italics are for the previous year.

6

Plant and machinery includes the net block of Indefeasible Rights of Use (IRUs) for domestic and international telecommunication circuits Rs. 2,056,664 thousands (2005: Rs. 2,638,393 thousands).

Additions to Plant and Machinery/ Capital Work in Progress are net of Rs. 934 thousands (2005: Rs. 11,283 thousands) on account of increase in liabilities consequent to fluctuations in foreign exchange rates.

3,595,572 2,441,535

194,601 200,903

1,383 1,453

287,374 287,794

18,706 17,059

52,072 28,065

2,991,996 1,857,104

41,154 40,871

8,286 8,286

Deductions/ Adjustments

(Rupees ‘000) NET BLOCK

5

4

3

8,356,542 5,934,699

217,895 16,992

10,320 9,178

787,116 509,516

106,439 90,307

122,920 100,161

6,745,138 4,890,151

330,405 290,371

36,309 28,023

1 April, Depreciation/ 2005 Amortisation Expense

ACCUMULATED DEPRECIATION/AMORTISATION

SCHEDULES FORMING PART OF THE BALANCE SHEET

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULES FORMING PART OF THE BALANCE SHEET SCHEDULE - 5

Number of shares

INVESTMENTS I. TRADE INVESTMENTS (At Cost) A. Fully paid Equity Shares (Unquoted) (a) Tata Teleservices Ltd. (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 (Class A common stock of US$ 0.01 each) (c) United Telecom Limited - Joint Venture (Equity shares of NRS 100) (Refer Note B5, Schedule 20) B.

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

952,812,000

10,113,180

8,358,000

180,373

65

65

3,732,400

233,275

233,275

15,179,358

82,382

73,396

40,000,000

1,747,873

226,170

24,205,250

1,083,052

—

3,000

13,125

13,125

—

—

525

401,655

16,786

—

70,000,000

2,020,937

—

15,310,675

8,904,556

Investment in Subsidiary Companies (Unquoted) (a) VSNL Lanka Limited (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

(ii) 24,205,250 10% cumulative convertible redeemable Preference Shares of US$1 each subscribed during the year (Refer Note B23, Subnote (3), Schedule 20) (c) VSNL America Inc. (3,000 equity shares of US$ 0.01 each) (d) VSNL Bermuda Limited (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 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 equity shares of Rs. 10 each acquired during the year) (Refer Note B12, Schedule 20)

47

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULE - 5

No of Units

INVESTMENTS (Contd.) II.

48

OTHERS INVESTMENTS IN MUTUAL FUNDS (Unquoted) (a) Liquid Dividend Plan (including dividend reinvestment) Birla Cash Plus-Daily Dividend 10,119,643 DSP Merrill Lynch Liquid Fund-Daily Dividend 395,563 Principal Cash Management Fund- Liquid Option Institutional Premium Plan- Dividend Reinvestment Plan — Prudential ICICI Sweep Cash Option Daily Dividend 13,557,797 Standard Chartered Liquidity Manager-Plus-Daily Dividend 450,186 TATA Liquidity Management Fund-Daily Dividend 558,906 UTI Liquid Cash Plan Institutional Daily Income Option — UTI Money Market Fund-Daily dividend option 38,094,837 (b) Fixed Maturity Plan ABN AMRO Fixed Term Plan Series 2 Quarterly Plan A Dividend 30,000,000 ABN AMRO Fixed Term Series-Regular Growth 10,000,000 Birla FMP Quarterly Series 3- Plan A Dividend payout — Birla FTP-Quarterly Series 1 Dividend Payout 30,000,000 Birla FTP-Quarterly Series 2 Dividend Payout 30,000,000 Chola FMP- Series 2 (Quarterly Plan-I)-Dividend 20,000,000 Chola FMP-Series 2 (Quarterly Plan II)-Dividend 20,000,000 Chola FMP-Series 3 (Quarterly Plan I)-Dividend 20,000,000 Deutsche Fixed Term Fund Series 8-Dividend Option 20,000,000 DSP Merrill Lynch -Fixed Term Plan-Series 1B Dividend 301,224 DSP Merrill Lynch-Fixed Term Plan -Series 2-Dividend 30,195,924 HDFC Fixed Investment Plan- June2004 — HDFC FMP 3M March06 10,000,000 HSBC Fixed Term Series-3-Dividend 30,124,644 HSBC Fixed Term Series-7-Dividend 30,177,059 JM Fixed Maturity Plan QSA 5- Dividend — Kotak FMP Series 20-Dividend 20,000,000 Kotak FMP Series 23 -Dividend 10,000,000 Kotak FMP Series XV-Dividend 25,275,700 Kotak FMP Series XVIII-Dividend 30,000,000 Principal Deposit Fund (FMP-3) 91 DaysDividend Reinvestment Plan — Principal Deposit Fund (FMP-3-20) 91 Days Plan 40,255,495 Principal Pnb Fixed Maturity Plan 91 Days SeriesII 30,147,799 Prudential ICICI FMP- Quarterly Dividend Series — Prudential ICICI FMP-Yearly Series XXIV Dividend 30,107,619 Prudential ICICI FMP-Yearly Series XXV Dividend 60,808,800 SBI Magnum Debt Fund Series 180 Days (December 04) Dividend Option — SBI Magnum Debt Fund Series 180 Days (November 04) Dividend Option — Standard Chartered Fixed Maturity- 4th Plan Dividend 20,077,000 Standard Chartered Fixed Maturity-3 rd Plan Dividend 30,165,000 Sundaram Fixed Term Plan Series 1 Feb 06 (100 days)-Dividend Plan 20,000,000 TATA Fixed Horizon Fund-Series 2B Option (18 Months) Growth 10,000,000

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

101,394 395,642

— —

— 135,578 450,211 560,138 — 663,813

200,073 — — — 105,144 —

300,000 100,000 — 300,000 300,000 200,000 200,000 200,000 200,000 301,225 301,960 — 100,000 301,246 301,771 — 200,000 100,000 252,758 300,000

— — 239,851 — — — — — — — — 250,031 — — — 252,192 — — — —

— 402,556 301,479 — 301,077 608,088

201,654 — — 150,000 — —

—

201,672

— 200,770 301,650

150,666 — —

200,000

—

100,000

—

SCHEDULE - 5

No of Units

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

10,000,000

100,000

—

10,000,000

100,000

—

10,000,000

100,000

—

10,000,000

100,000

—

30,136,030 — — — — — 30,000,000

301,362 — — — — — 300,000

— 100,000 50,000 500,000 200,000 300,000 —

—

—

200,000

INVESTMENTS (Contd.) TATA Fixed Horizon Fund Series 2 Plan A (13 Months)-Growth TATA Fixed Horizon Fund Series 3 Scheme 2 B (18 Months)-Growth TATA Fixed Horizon Fund Series 3 Scheme D (13 Months)-Growth TATA Fixed Horizon Fund Series 3 Scheme F (18 Months)-Growth TATA Fixed Horizon Fund Series 5 Scheme B (6 Months)-Dividend TATA Fixed Horizon Fund Yearly Growth (August 04) TATA Fixed Horizon Fund Yearly Growth (November 04) TATA Fixed Horizon Fund Yearly Growth (September 04) UTI Fixed Maturity Plan - Qfmp (SeriesIX) Dividend Plan UTI Fixed Maturity Plan - Qfmp (SeriesVIII) Dividend Plan UTI-Fixed Maturity Plan (QFMP/0206/11) Dividend Plan (c) Income Plan JM equity and derivative fund

9,682,718

3,101,283

24,993,393

12,005,839

24,993,393

12,005,839

Notes : (1) Book Value of unquoted investments

(2) All investments other than investments in Mutual Funds are long-term investments (3) Current Investment bought and sold during the year Scheme Name Birla FMP- Series 2- Quarterly- Dividend Payout DSP ML Quarterly Fixed Maturity Plan Dividend Reinvestment Grindlays Fixed Maturity Plan-Quarterly Dividend Reinvestment Grindlays Fixed Maturity Plan Quarterly Series 18- Dividend ING Vysya Quarterly Fixed Maturity Plan Series IV- Dividend JM Fixed Maturity Fund QSE 7- Dividend Option JM Fixed Maturity Fund QSA5- Dividend Option JM Fixed Maturity Plan QSF 6- Dividend Option JM Fixed Maturity Fund- QSG7- Dividend Option Kotak FMP Series XII Dividend Principal Fixed Maturity Plan Quarterly Prudential ICICI FMP Quarterly Series XXV- Dividend SBI Magnum Debt Fund Series II - Monthly Dividend Reinvestment SBI Magnum Debt Fund Series I - Monthly Dividend Reinvestment UTI Fixed Maturity Plan- QFMP 1105/ II UTI Fixed Maturity Plan- QFMP 1205/ II JM Floater Short term plan Fortnightly Dividend Reinvestment

Face Value In Rs.

No. of Units

Purchase Cost Rs. in ‘000

10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

39,968,425 50,641,021 25,000,000 20,000,000 45,000,000 20,238,808 80,282 20,000,000 20,000,000 50,580,686 68,764 165,126 145,440 221,676 40,000,000 50,000,000 94,795,864

400,000 506,411 250,000 200,000 450,000 202,388 803 200,000 200,000 505,810 688 1,651 1,473 2,253 400,000 500,000 954,147

49

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

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

50

Face Value In Rs.

No. of Units

Purchase Cost Rs. in ‘000

Deutsche Floating Rate Fund - Weekly Dividend Reinvestment 10 Grindlays Floating Rate Fund “Plan C” Daily Dividend Reinvestment 10 Kotak Floater Long Term- Weekly Dividend Reinvestment 10 Prudential ICICI Long Term Floating Rate Plan B Dividend 10 TATA Floater Fund Dividend Reinvestment 10 TATA Floating Rate Short Term Institutional Plan- Daily Dividend Reinvestment 10 UTI Floating Rate Fund Short Term Plan Daily Dividend Reinvestment 10 Birla Cash Plus Institutional Premium Plan Daily Dividend Reinvestment 10 Birla Sunlife Cash Manager Institutional Plan- Daily Dividend Reinvestment 10 DSP ML Liquidity Institutional Plan Daily Dividend Reinvestment 1000 Deutsche Insta Cash Plus- IP- Daily Dividend Reinvestment 10 Grindlays Cash Fund SIP “Plan C” Daily Dividend Reinvestment 10 Grindlays Liquidity Manager- Daily Dividend Reinvestment 10 HDFC Cash Management Fund- Savings Daily Dividend Reinvestment 10 HDFC Cash Management Savings Plus- Weekly Dividend Reinvestment 10 ING Vysya Liquid Institutional Premium Plan Daily Dividend Reinvestment 10 JM High Liquidity- Super Institutional Plan Daily Dividend Reinvestment 10 Kotak Liquid Institutional Premium Plan- Daily Dividend Reinvestment 10 Kotak Liquid Institutional Premium Plan Growth 10 Principal Cash Management LO Institutional Premium Plan Daily Dividend Reinvestment 10 Prudential Liquid Super Institutional Plan- Daily Dividend Reinvestment 10 Prudential Liquid Institutional Premium Plan- Daily Dividend Reinvestment 10 Prudential ICICI Liquid Sweep Daily Dividend Reinvestment 10 Sundaram Liquid Super Institutional Plan- Daily Dividend Reinvestment 10 TATA Liquid Super High Investment Plan- Daily Dividend Reinvestment 1000 Templeton India Treasury Management Account Institutional PlanDaily Dividend Reinvestment 1000 UTI Liquid Cash Plan Institutional - Daily Income Option 1000 UTI Liquid Cash Fund Institutional Plan- Growth 1000 UTI Liquid Cash Fund Institutional Plan Daily Dividend Reinvestment 1000 UTI Money Market Fund Daily Dividend Reinvestment 10 Birla Bond Plus- Institutional- Fortnightly Dividend Reinvestment 10 Deutsche Short Maturity Fund- Weekly Dividend Reinvestment 10 Kotak Short Term Bond Fund- Monthly Dividend 10 Principal Short term Income Plan- Weekly Dividend 10 Prudential ICICI Short Term Plan Inst Plan- Fortnightly Dividend 10 TATA Short Term Bond Fund- Dividend 10 Templeton Short Term Income Plan- Weekly Dividend Reinvestment 1000 Templeton Short Term Income Fund Institutional Plan Weekly Dividend 1000 Templeton Short Term Income Fund Institutional Plan Weekly Dividend 1000 Templeton Short Term Income Plan- Weekly Dividend Reinvestment 1000

8,830,561 14,124,962 6,082,993 59,246,179 20,070,451 50,801,425 196,245,982 261,777,929 152,375,909 3,740,658 149,887,680 231,032,836 218,330,652 16,454,791 17,790,074 571,952,243 215,994,355 76,232,633 29,968,832

90,707 141,255 60,863 595,542 200,705 508,552 1,975,266 2,622,884 1,523,987 3,741,406 1,501,800 2,310,333 2,183,515 175,020 178,209 5,720,673 2,163,507 932,180 400,000

295,909,851 21,443,498 278,848,282 15,000,000 139,587,332 5,705,326

2,959,292 254,137 3,097,869 150,000 1,409,176 6,358,591

262,522 9,555,971 459,772 1,056,708 70,577,652 5,823,218 18,938,290 6,126,834 27,962,081 47,131,572 106,162,234 132,078 144,941 121,757 110,952

262,531 9,704,430 500,000 1,073,412 1,229,835 60,960 194,094 61,633 305,704 514,823 1,157,784 144,009 144,942 121,758 120,932

SCHEDULES FORMING PART OF THE BALANCE SHEET SCHEDULE - 6 INVENTORIES Equipment for resale Less: Provision for obsolescence Consumable stores and spares

SCHEDULE - 7 SUNDRY DEBTORS (a) Over six months (Unsecured) Considered good Considered doubtful Less: Provision for doubtful debts (b) Other debts (unsecured) Considered good

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

10,174 (85)

26,334 (9,926)

10,089 27,930

16,408 3,243

38,019

19,651

705,867 1,249,820

411,495 1,310,532

1,955,687 (1,249,820)

1,722,027 (1,310,532)

705,867

411,495

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 (b) Cheques in hand (c) Remittances in transit (d) Current accounts with Scheduled Banks (e) Deposit accounts with Scheduled Banks

440 1,635,070 630,265 190,831 112,209

890 28,620 — 193,071 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 (b) Service tax recoverable (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) (d) NLD licence fees reimbursement recoverable from Government of India (e) Others

91,192 306,076

151,307 279,453

74,424 511,158 175

74,424 245,608 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 SCHEDULE - 10 LOANS AND ADVANCES (a) Unsecured - Considered good (i) Staff advances (note 1) (ii) Deposits with public bodies (iii) Other deposits (iv) Other loans and advances (note 2) (v) Prepaid expenditure (vi) Advance payment of tax (net of provision for tax) (vii) Advance against equity investments in subsidiaries (viii) Loans to subsidiaries

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

113,157 49,417 124,612 829,158 265,481 8,929,226 — 2,752,481

135,171 40,953 71,904 754,228 270,225 11,512,412 226,237 1,881,735

13,063,532

14,892,865

73,786 (73,786)

73,786 (73,786)

13,063,532

14,892,865

(b) Unsecured - Considered doubtful Other loans and advances Less: Provision for doubtful advances

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 (ii) Others (note 3) (b) Unearned income and deferred revenues (c) Liability towards Investors Education and Protection Fund under Section 205C of the Companies Act 1956 (not due): Unpaid dividend (d) Government of India Current Account (e) Other liabilities (note 4) (f ) Interest accrued but not due on short term foreign currency loans from banks

4,431,513 4,905,910 3,212,198

3,504,086 5,721,507 2,972,834

11,906 205,747 2,894,595 12,955

11,772 210,393 2,114,629 —

15,674,824

14,535,221

917,365 1,282,500 179,871 186,476

701,893 1,710,000 239,828 40,737

2,566,212

2,692,458

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 (b) Provision for proposed dividend (c) Tax on dividend (d) Provision for contingencies (Refer Note B22, Schedule 20)

52

SCHEDULES FORMING PART OF THE PROFIT AND LOSS ACCOUNT Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

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

653,606

718,795

37,809,525

33,030,391

406,515

278,419

—

6,331

SCHEDULE - 13 REVENUES FROM TELECOMMUNICATION SERVICES (a) Telephone

(e) Other traffic revenues

SCHEDULE-14 OTHER INCOME (a) Dividend income from current investments (b) Dividend income from long term investments (c) Profit on sale of of current investments (net) (d) Profit on sale of fixed assets (net) (e) Rent (f )

Exchange gain (net)

76,554

9,026

—

11,111

102,226

48,786

70,872

—

(g) Provisions no longer required written back

344,039

13,761

(h) Other

334,022

152,439

1,334,228

519,873

275,235

520,800

114,067

34,138

389,302

554,938

SCHEDULE-15 INTEREST INCOME (a) Interest incomei.

Bank deposits (Tax deducted at source Rs.58,603 thousands, 2005:Rs.93,487 thousands)

ii.

Other loans and advances (Tax deducted at source Rs.12,742 thousands 2005:Rs.1,648 thousands)

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 (b) Contributions to provident,gratuity and other funds (c) Staff welfare expenses

1,677,249

1,165,971

156,028

56,217

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 SCHEDULE-17 NETWORK COSTS (a) Rent of satellite channels (b) Rent of landlines (c) Administrative lease charges (d) Royalty and licence fee to Department of Telecommunications (e) Charges for use of transmission facilities (i) Telephone [net of excess provision written back Rs. 82,400 thousands (2005: Rs.118,489 thousands)] (ii) Leased channel (iii) Frame relay (iv) Internet (v) Others

SCHEDULE - 18 OPERATING AND OTHER EXPENSES (a) Consumption of stores (b) Light and power (c) Repairs and Maintenance: (i) Buildings (ii) Plant and Machinery (iii) Others (d) Bad debts written off (e) Provision for doubtful debts written back (f ) Provision for doubtful advances (g) Rent (h) Rates and taxes (i) Travelling expenses (j) Telephone and telex (k) Printing, postage and stationery (l) Security expenses (m) Computer software and maintenance (n) Legal and professional fees (o) Advertising and publicity (p) Commissions (q) Water charges (r) Insurance (s) Donations (t) Loss on sale of fixed assets (net) (u) Exchange loss (net) (v) Services rendered by third parties (w) Other expenses

SCHEDULE - 19 PRIOR PERIOD ADJUSTMENTS (NET) INCOME: Revenues from telecommunication services EXPENSES: Charges for use of transmission facilities, written back Repairs and maintenance Other expenses

Note : Figures in brackets are credits

54

Year ended 31 March, 2006 Rupees ‘000 882,408 279,345 117,606 2,037,868

Year ended 31 March, 2005 Rupees ‘000 1,084,800 1,193,634 95,389 2,112,526

15,192,527

14,064,532

664,936 377,990 836,470 569,524

137,286 196,101 856,555 290,070

20,958,674

20,030,893

19,517 369,235

16,507 335,325

121,553 1,594,333 156,444 175,506 (60,712) 176,976 98,294 246,274 118,159 35,924 11,227 40,295 496,428 1,095,010 200,791 10,104 53,070 27,867 21,131 — 683,170 311,143

54,300 1,074,857 90,212 526,909 (582,138) 35,677 123,204 83,673 149,601 67,268 27,511 56,939 56,591 323,046 642,537 77,244 10,774 38,735 1,029 — 151,617 227,533 306,709

6,001,739

3,895,660

67,005

—

(186,904) 8,157 2,738

— — —

(109,004)

—

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 Plant and Machinery a. Land cables b. Earth station and switches c. Other networking equipment d. Overhead fibre cables ii) Goodwill iii) Indefeasible Rights of Use (IRU’s) iv) Leasehold land

Rates of depreciation/ period of amortisation

i)

5.

6.33 % 7.92 % 11.88 % 19.00 % 60 months Life of IRU or period of agreement, whichever is lower Over the lease period

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)

56

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

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:-

Cash and Cheques on hand and balances held with scheduled banks Remittances in transit Deposit accounts held with scheduled banks

Deposits with original maturity over three months Current Account / Deposits held for unpaid dividends Cash and cash equivalents

58

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

1,826,341 630,265 112,209

222,581 13,868,662

2,568,815

14,091,243

(111,709)

(11,862,391)

(11,808)

(6,271)

2,445,298

2,222,581

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) 15. Deferred tax liability:

Deferred tax liability Difference between accounting and tax depreciation Deferred tax assets Provision for doubtful debts Expenditure on Voluntary retirement schemes Expenditure incurred on NLD license fees (Refer Note (a) below) Unearned income and deferred revenues Others

Net deferred tax liability

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

1,816,193

1,857,787

420,689 138,634 265,737 181,781

441,125 210,369 177,169

58,426

32,328

1,065,267

860,991

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:

Auditors’ remuneration and expenses (i) Audit fees (ii) Tax audit fees (iii) Other professional services (iv) Service tax

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

8,250 1,500 2,635 1,263

5,500 1,000 1,648 727

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)

(i) (ii) (iii) (iv) (v)

Managerial Remuneration for whole time director and non-executive directors. The above is inclusive of : Year ended 31 March, 2006 Rupees ‘000 Salaries 4,067 Contribution to provident and other funds 418 Estimated monetary value of perquisites 375 Commission 5,273 Non-executive directors’ sitting fees 580 10,713

Year ended 31 March, 2005 Rupees ‘000 3,305 551 1,392 2,500 615 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

Profit before taxes as per profit and loss account Add: Managerial Remuneration Provision for doubtful advances

Less: Capital profit on sale of investments Provision for doubtful debts written back (net) Net profit as per Section 309(5) of the Companies Act, 1956 c)

Commission (i) Whole-time Director (ii) Non-executive Directors

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

6,867,173

10,539,823

10,713

8,363

-

35,677

6,877,886

10,583,863

-

5,514,486

60,712

582,138

6,817,174

4,487,239

2,500 2,773

2,500 -

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

227,658

(737,920)

4,795,420

7,563,674

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

Income tax benefit/(expense) on exceptional items Net Profit after tax and exceptional items Number of Shares

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 Segment Profits

21,626,466

12,617,977

3,565,082

37,809,525

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

Revenues Segment Profits

4,795,420 Year ended 31 March, 2005 Rupees ‘000 Wholesale Enterprise and Voice Carrier Data 18,764,997 11,170,435 3,095,514

8,738,441

Others 3,094,959

Total 33,030,391

639,468

12,473,423

Unallocated expenses (net)

6,148,037

Profit before taxes and exceptional items Exceptional Items

6,325,386 4,214,437

Profit before taxes Income Taxes Profit after taxes

10,539,823 2,976,149 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:

India

Segment revenues by Geographical Market Year ended 31 March, 2006 Rupees ‘000 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

India

Segment revenues by Geographical Market Year ended 31 March, 2005 Rupees ‘000 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 •

II.

Panatone Finvest Limited

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.)

IV.

•

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.

Joint Venture •

V.

United Telecom Limited

Joint Venture of wholly owned subsidiary •

SEPCO Communications Pty. Ltd.

•

SNO Telecommunications (Pty) Ltd. (Subsidiary of SEPCO)

VI. Key Managerial Personnel •

64

N.Srinath

-

Executive Director

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) (b) Related party transactions (Rupees ‘000) Joint Joint Venture of Venture wholly owned subsidiary

Transactions

Investing Company

Subsidiaries

Key Managerial Personnel

Dividend paid

694,433 577,125

— —

— —

— —

— —

3,127,525 345,254 416,076 60,837

— — — —

19,887 11,949 9,995 180

— — — —

10,036 3,509 106 727,132

—

— — — — — — — — — —

— — — — — — — — — —

— — — — — — — — — —

1,530,689 386,839 1,083,052 — 106,157 25,588

— — — — — —

— — — — — —

— — — — — —

15,767,648 1,885,244

— —

— —

— —

13,592,502 3,509 1,269,814 441,086

— — — —

— —

Revenues from telecommunication services Network cost Purchase of fixed assets (includes purchase from VSNL Broadband Ltd. Rs. 8,454) Sale of fixed assets Sale of Investment in subsidiary to VSPL Services rendered Services received Equity capital contributions (includes contribution in VSPL Rs. 1,521,703) Preference capital contribution in VSPL Interest Income Loans given(includes loans given to VSPL Rs.15,650,743) Loans repaid(includes loans repaid by VSPL Rs.12,904,302) Advances given

525

—

12,780 6,869 5,968

— —

7,360 7,748

— — — — — —

1,627,641 237,956 77,699 525 2,752,481 1,907,323 378,522 459,529 423,935 —

— —

16,111 9,297

Managerial remuneration Balances: Receivables Payables Loans given Advances receivable Deferred Revenue Guarantee on behalf of subsidiaries Letter of Comfort on behalf of VSPL

10,160,045 98,656 8,029,800

—

— — — — — —

— — — — — — — —

— — — —

— — — —

2,500 2,500

33,554

— — — — — — — — —

33,554

— — — — — — —

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 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

VSNL UK Ltd.

1,225,296

86,061

VSNL America Inc.

1,112,191

-

449,472

109,826

313,722

18,235

51,820

41,344

VSNL Singapore Pte. Ltd.

74,176

15,378

VSNL Bermuda Ltd.

20,983

9,084

VSNL America Inc.

10,998

1,126

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

882,408

1,232,160

Revenues from telecommunication services

VSNL Singapore Pte. Ltd. Network cost VSNL Singapore Pte. Ltd. VSNL Lanka Ltd. Interest Income

21. Operating lease arrangements: (a) As lessee :

Minimum lease payments under operating leases recognized as expense in the year

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

Due not later than one year

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

518,117

713,384

714,936

903,041

45,198

92,885

1,278,251

1,709,310

Due later than one year but not later than five years Later than five years

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 31 March, 2006 Rupees ‘000

Not later than one year

Year ended 31 March, 2005 Rupees ‘000

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:

Not later than one year Later than one year but not later than five years Later than five years

Year ended 31 March, 2006 Rupees ‘000 46,873

Year ended 31 March, 2005 Rupees ‘000 50,058

12,357

34,804

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:

Balance as on 1 April, 2005 Provision made during the year Provision written back during the year

1) 2) 3)

Asset Retirement Obligation (“ARO”) Rupees ‘000

Others Rupees ‘000

Total Rupees ‘000

40,737 19,934 -

125,805 -

40,737 145,739 -

Balance as on 31 March, 2006 60,671 125,805 186,476 Notes: Provision for ARO has been made in respect of under-sea cables and switches owned by the Company. 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. 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 31 March, 2006 Rupees ‘000

Letters of Credit Guarantees Guarantees given on behalf of subsidiaries i.

As at 31 March, 2005 Rupees ‘000

207,989

292,532

2,550,452

3,683,246

10,160,045

-

1,935,518

1,694,521

Claims for taxes on income (Refer Note 1 ) (a) Income tax disputes where the department is in appeal against the Company (b) Income tax disputes where the Company has a favourable decision in other assessment year for the same issue (c ) Income tax disputes other than the above

ii.

Claims for other taxes

iii.

Other claims

78,248

1,860,194

9,257,720

9,593,879

211,961

229,135

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

Stores and spares Capital goods 25. Expenditure in foreign currencies

i. ii. iii. iv. v. vi. vii. viii.

Charges for use of transmission facilities Rent of satellite channels Administrative lease charges Repairs and maintenance Advertisement Legal and professional fees Travel expenditure Others

As at 31 March, 2006 Rupees ‘000 111,490 1,639,867

As at 31 March, 2005 Rupees ‘000 52,869 5,966,872

As at 31 March, 2006 Rupees ‘000 5,941,900 882,408 117,080 589,208 1,263 349,476 41,206 35,541

As at 31 March, 2005 Rupees ‘000 5,465,237 1,219,098 88,809 646,429 1,740 66,516 24,744 35,040

7,958,082

7,547,613

26. Earnings in foreign currencies

i. ii. iii. iv.

Revenues from telecommunications services Profit on sale of long-term investments Interest income Other income

As at

As at

31 March, 2006 Rupees ‘000 16,938,734 106,157 75,175

31 March, 2005 Rupees ‘000 13,954,610 5,514,486 26,495 23,286

17,120,066

19,518,877

27. Value of imported and indigenous stores/spares consumed

Imported Indigenous

Year ended 31 March, 2006 Rupees ‘000 Value % 111,805 90.00

Year ended 31 March, 2005 Rupees ‘000 Value % 571 3.00

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 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

71,846

54,613

137,565

118,656

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

Assets

328,837

380,497

Liabilities

248,573

239,977

Income Expenses

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 31 March, 2006 Rupees ‘000 383

As at 31 March, 2005 Rupees ‘000 293

i.

Number of non-resident shareholders

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.

3 9 2 6 6

Balance Sheet Date II.

State Code

3 1

0 3

2 0 0 6

Date

Month

Year

Capital Raised during the year (Amount in Rs. Thousands) Public Issue

1 1

(REFER CODE LIST)

Right Issue

N I L

N I L

Bonus Shares

Private Placement

N I L

N I L

III. Position of Mobilisation and Deployment of Funds (Amount in Rs. Thousands) Total Liabilities Total Assets 8 0 5 8 6 1 3 4

8 0 5 8 6 1 3 4

Source of Funds Paid-up Capital

Reserves & Surplus

2 8 5 0 0 0 0

5 7 7 6 1 6 7 1

Secured Loans

Unsecured Loans

N I L

9 8 2 5 0 1

Deferred Tax Liability 7 5 0 9 2 6 Application of Funds Net Fixed Assets

Investments

3 1 5 6 3 6 4 0

2 4 9 9 3 3 9 3

*Net Current Assets

Misc. Expenditure

5 7 8 8 0 6 5

N I L

Accumulated Losses N I L IV. Performance of Company (Amount in Rs. Thousands) Turnover

Total Expenditure

4 0 0 9 7 2 7 3 + +

Profit/Loss Before Tax 6 8 6 7 1 7 3

(Please tick appropriate box + for Profit, - for Loss) Earning per Share in Rs. 1 6 . 8 3

3 2 5 5 3 7 5 3 + +

Profit/Loss After Tax 4 7 9 5 4 2 0 Dividend% 4 5

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 M U N I C A T I O N S

T E L E C O M

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 01 03 05 07 09 11 13 15 17 20 22 24 53 55 57 59

State Name Andhra Pradesh Bihar Haryana Jammu & Kashmir Kerala Maharashtra Meghalaya Orissa Rajasthan Uttar Pradesh Sikkim Goa Chandigarh Delhi Lakshwadeep Pondicherry

State Code

State Name

02 04 06 08 10 12 14 16 18 21 23 52 54 56 58

Assam Gujarat Himachal Pradesh Karnataka Madhya Pradesh Manipur Nagaland Punjab Tamil Nadu West Bengal Arunachal Pradesh Andaman Islands Dadra Islands Daman & Diu Mizoram

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

SUBODH BHARGAVA Chairman

N. SRINATH Executive Director

RAJIV DHAR Chief Financial Officer

SATISH RANADE Company Secretary & Chief Legal Officer

MUMBAI DATED: 26th JUNE, 2006

72

73

Teleglobe Canada ULC

Teleglobe International Belgium S.P.R.L

Teleglobe International HongKong 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

TLGB International Germany GmbH

TLGB Luxembourg Holdings S.ar.l

TLGB Netherlands Holdings B.V

VSNL (Portugal) Unipessoal Limitada

VSNL Belgium BVBA

VSNL Bermuda Ltd

VSNL France SAS

VSNL HongKong Ltd

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

Teleglobe Bermuda Ltd.

13

Teleglobe France International S.A.S

Teleglobe Asia Pte. Ltd

12

14

Teleglobe Asia Data Transport Pte. Ltd

11

15

ITXC IP Holdings S.a.r.l

ITXC Global Japan YK

8

Teleglobe America Inc

VSNL Telecommunications(Bermuda) Ltd. *

7

10

VSNL Netherlands BV *

6

9

VSNL Singapore Pte Ltd.

VSNL SNOSPV Pte. Ltd

VSNL Lanka Ltd

3

5

VSNL America Inc.

2

4

VSNL Broadband Ltd.

1

Sr. Name of Subsidiary Company No.

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

LKR

USD

INR

Reporting Currency

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

0.44

44.61

1.00

Exchange Rate

6

100,018,890

535,320

103,895,746

57,130,443

9,206,876,203

4,315,007,576

54,531,087

20,746,327

32,394,310

725,637

702,431

429,014,569

17,142,824

1,020,187

1,945,914

380,077,200

3,857,590,642

52

2,624,118

9,112,843,167

-

3,575,516

2,354,542,814

905,314,457

16,785,578

1,784,400,000

82,382,486

13,383,000

700,000,000

Share Capital

(80,069,583)

(82,853,852)

(468,406,561)

(104,372,907)

(466,493)

(4,024,009)

(774,019,108)

(77,113,190)

(129,079,907)

(92,162,837)

4,476,379

(96,693,984)

(198,661,236)

19,279,718

1,900,686

(81,058,057)

(2,942,898,221)

937,858,067

(274,639)

(3,417,146)

(494,739,165)

(6,908,087)

(1,429,490)

(4,807,052,885)

(436,632,097)

(27,600,087)

(148,239,916)

76,257,244

(407,417,513)

209,891,549

Reserves

(45,942,092)

167,784,526

1,276,933,917

3,138,031

41,065,957

9,241,025,957

9,227,889,790

807,006,902

343,487,805

458,902,975

355,917,487

426,753,661

1,609,520,452

209,788,880

32,455,641

223,881,653

8,170,701,858

5,462,065,425

73,325

(16,488,808)

19,579,927,505

1,065,518,237

4,167,911

10,765,011,092

11,096,863,297

18,055,063

10,987,123,169

251,269,555

616,621,678

1,817,853,495

Total Assets

34,127,485

150,619,488

1,744,805,158

3,615,192

(15,597,993)

38,173,763

5,686,901,321

829,589,005

451,821,385

518,671,502

350,715,470

522,745,214

1,379,167,119

173,366,337

29,534,769

302,993,797

10,733,522,880

666,616,715

347,912

(15,695,780)

10,961,823,503

1,072,426,324

2,021,884

13,217,521,163

10,628,180,937

28,869,572

9,350,963,085

92,629,825

1,010,656,191

907,961,946

Total Liabilities

Statement pursuant to Sec 212(8) of the Companies Act, 1956, relating to subsidiary companies

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

25,276,377

-

-

-

-

-

-

-

-

3,355

-

-

-

52,659,652

Investment Details (except in case of investment in the subsidiaries)

52,906,115

-

-

-

-

22,663,774

-

168,611,455

148,976,760

-

100,455,017

-

618,044,212

23,275,366

-

41,094,943

1,616,284,658

20,642,363

-

-

2,273,592,180

-

-

-

-

-

1,128,725,719

427,659,432

1,231,893,753

191,789,674

Total Turnover

(80,069,583)

(82,227,670)

(468,402,852)

(469,284)

(462,136)

(341,969)

(155,707,827)

1,890,593

2,035,919

(3,723,233)

737,748

(5,606,323)

(8,876,867)

(8,150,739)

(1,372,205)

(13,478,240)

(209,899,421)

(6,665,144)

618

1,511,092

(102,667,990)

(6,829,341)

980,354

92,730,723

(15,512,832)

(28,732,338)

39,705,971

73,151,783

(346,106,276)

85,246,591

Profit before Taxation

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

55,499

371,713

7,573,915

Provision for Taxation

(80,069,583)

(82,227,670)

(468,402,852)

(469,284)

(462,136)

(341,969)

(155,707,827)

1,890,593

2,035,919

(3,723,233)

737,748

(5,606,323)

(8,876,867)

(8,150,739)

(1,372,205)

(13,478,240)

(209,899,421)

(6,665,144)

618

1,511,092

(102,667,990)

(6,829,341)

980,354

92,730,723

(15,512,832)

(28,732,338)

39,705,971

73,096,284

(345,734,563)

77,672,676

Profit after Taxation

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Propsed Dividend

74

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 Japan K.K

VSNL Spain Srl

VSNL Telecommunications(UK) Inc

VSNL UK Ltd

VSNL(Germany) GMBH

Enhanced Services Inc

ITXC (UK)Ltd.

ITXC Global HongKong Ltd.

ITXC Global UK Ltd.

ITXC Global Zagreb d.o.o

ITXC International LLC

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

44.61

Exchange Rate

-

-

-

-

-

-

1,337,218,350

78

504,336,125

111,174,543

147,296,867

-

1,199,783,720

4,461

1,115,250,000

473,356,710

15,925,770

1,338

3,139,321,946

-

126,269,676

668,869

Share Capital

-

-

-

-

-

-

(1,375,158,936)

(154,183,300)

(517,667,908)

(366,862,856)

(177,166,535)

159,161

-

(11,996,879)

64,906,710

1,073,823,639

(30,133,116)

(1,255,222,785)

(3,043,776,675)

(41,950,690)

16,161,861

(22,735,908)

Reserves

-

-

-

-

-

-

5,646,828

420,788,054

863,306,899

294,288,806

924,029,621

353,413

1,199,783,720

(8,761,462)

1,180,156,710

1,567,673,325

(4,134,469)

10,917,785,769

277,864,400

(12,096,976)

143,414,277

24,874,472

Total Assets

-

-

-

-

-

-

43,587,414

574,971,277

876,638,683

549,977,119

953,899,289

194,252

-

3,230,956

-

20,492,976

10,072,877

12,173,007,216

182,319,129

29,853,714

982,741

46,941,511

Total Liabilities

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Investment Details (except in case of investment in the subsidiaries)

-

-

-

-

-

-

4,434,957

1,439,042,093

84,562,267

(3,589,174)

(118,133,994)

-

-

-

-

231,775,910

4,779,203

1,448,660,533

4,246,655

-

-

1,657,059

Total Turnover

-

-

-

-

-

-

(28,612,055)

(86,540,846)

(523,679,273)

(363,330,677)

(45,878,164)

(471,402)

-

(1,995,531)

4,436,337

159,187,934

(3,032,617)

(1,255,222,785)

96,081,717

(42,084,085)

4,340,799

(3,254,881)

Profit before Taxation

SUBODH BHARGAVA Chairman MUMBAI DATED: 26 June, 2006

For and on behalf of the Board of directors

N. SRINATH Executive Director

RAJIV DHAR Chief Financial Officer

-

-

-

-

-

-

(28,612,055)

(86,540,846)

(523,679,273)

(363,330,677)

(45,886,205)

(471,402)

-

(1,995,531)

4,436,337

159,187,934

(3,020,325)

(1,255,222,785)

96,081,717

(42,084,085)

4,340,799

(3,254,881)

Profit after Taxation

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Propsed Dividend

SATISH RANADE Company Secretary & Chief Legal Officer

-

-

-

-

-

-

-

-

-

-

(8,041)

-

-

-

-

-

12,291

-

-

-

-

-

Provision for Taxation

* In respect of acquisitions made by the Company, the fair value of assets and liabilities are reported in respective holding entities for these acquisition, pending the purchase price allocation amongst entities in the group.

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD

Reporting Currency

Companies from serial number 47 to 52 are under liquidation.

VSNL International ( Nordics) AS

31

Sr. Name of Subsidiary Company No.

Statement pursuant to Sec 212(8) of the Companies Act, 1956, relating to subsidiary companies (Contd.)

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

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.

2.

3.

We have audited the attached consolidated balance sheet of Videsh Sanchar Nigam Limited (‘the Company’), and its subsidiaries (collectively referred as ‘the VSNL Group’) as at 31 March, 2006 and also the consolidated profit and loss account and the consolidated cash flow statement for the year ended on that date annexed thereto. These financial statements are the responsibility of the Company’s management and have been prepared by the management on the basis of separate financial statements and other financial information regarding components. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. (a) We did not audit the financial statements of certain subsidiaries, whose financial statements reflect total assets of Rs.44,275,145 thousands as at 31 March, 2006, total revenues of Rs. 11,234,273 thousands and net cash flows amounting to Rs. 1,932,626 thousands for the year then ended. These financial statements and other financial information have been audited by other auditors whose reports have been furnished to us, and our opinion is based solely on the report of other auditors. (b) The financial statements of a subsidiary and joint venture which represents total assets of Rs. 332,419 thousands as at 31 March, 2006, total revenues of Rs.71,906 thousands and net cash outflows amounting to Rs.12,751 thousands for the year then ended have been incorporated in

the consolidated financial statements on the basis of unaudited financial statements as provided by the management of that subsidiary and joint venture. 4.

Subject to our remark in paragraph 3 (b) above: (a) We report that the consolidated financial statements have been prepared by the Company’s management in accordance with the requirements of the Accounting Standard (AS) 21, Consolidated Financial Statements, Accounting for Investments in Associates in Consolidated Financial Statements and Accounting Standard (AS) 27, Financial Reporting of Interests in Joint Ventures issued by the Institute of Chartered Accountants of India. (b) Based on our audit and on consideration of reports of other auditors on separate financial statements and on the other financial information of the components, and to the best of our information and according to the explanations given to us, we are of the opinion that the attached consolidated financial statements give a true and fair view in conformity with the accounting principles generally accepted in India: (i)

in the case of the consolidated balance sheet, of the state of affairs of the VSNL Group as at 31 March, 2006;

(ii) in the case of consolidated profit and loss account, of the profit for the year ended on that date; and (iii) in the case of the consolidated cash flow statement, of the cash flows for the year ended on that date. For S. B. BILLIMORIA & CO. Chartered Accountants

N. VENKATRAM Partner Membership No. 71387 Mumbai, 26 June, 2006

77

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

CONSOLIDATED BALANCE SHEET AS AT 31 MARCH, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

1 2

2,850,000 51,151,964

2,850,000 51,894,856

3 4

54,001,964 775,959 18,905,503 745,318 753,509

54,744,856 169,371 996,796

75,182,253

55,911,023

71,934,540 12,515,766

33,338,956 8,484,629

59,418,774 4,035,962

24,854,327 6,118,741

63,454,736

30,973,068

1,188,718

-

6

17,862,468

9,447,917

7 8 9 10

96,194 14,994,422 4,873,854 1,196,643

74,043 5,103,725 14,291,087 767,915

11

21,161,113 11,918,803

20,236,770 12,727,566

33,079,916

32,964,336

37,201,951 3,201,634

14,780,853 2,693,445

Schedule FUNDS EMPLOYED: 1 SHARE CAPITAL 2 RESERVES AND SURPLUS 3 4 5 6 7

TOTAL SHAREHOLDERS’ FUNDS SECURED LOANS UNSECURED LOANS OBLIGATIONS UNDER FINANCE LEASE DEFERRED TAX LIABILITY (NET) (Refer note B14, Schedule 22)

APPLICATION OF FUNDS: 8 FIXED ASSETS: (a) Gross Block (b) Less: Depreciation

5

(c) Net Block (d) Capital work-in-progress 9

GOODWILL (ON CONSOLIDATION) (Refer note B10, Schedule 22) 10 INVESTMENTS 11 A. CURRENT ASSETS (a) Inventories (b) Sundry Debtors (c) Cash and Bank Balances (d) Other Current Assets B.

LOANS AND ADVANCES

12 Less: CURRENT LIABILITIES AND PROVISIONS (A) Current Liabilities (B) Provisions

12 13

13 NET CURRENT (LIABILITIES) / ASSETS [(11) less (12)] TOTAL ASSETS (NET) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

78

40,403,585

17,474,298

(7,323,669)

15,490,038

75,182,253

55,911,023

22

As per our report attached For S.B. BILLIMORIA & CO. Chartered Accountants

For and on behalf of the Board

N. VENKATRAM Partner

SUBODH BHARGAVA Chairman

N. SRINATH Executive Director SATISH RANADE Company Secretary & Chief Legal Officer

MUMBAI DATED: 26 June, 2006

RAJIV DHAR Chief Financial Officer MUMBAI DATED: 26 June, 2006

CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH, 2006 Schedule INCOME: REVENUES FROM TELECOMMUNICATION SERVICES OTHER INCOME INTEREST INCOME INTEREST ON INCOME TAX REFUNDS TOTAL INCOME EXPENDITURE: 6 SALARIES AND RELATED COSTS 7 NETWORK COSTS 8 OPERATING AND OTHER EXPENSES 9 INTEREST EXPENSE 10 DEPRECIATION Less: TRANSFER FROM CAPITAL RESERVE 11 PRIOR PERIOD ADJUSTMENT (NET)

1 2 3 4 5

Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

14 15 16

45,624,243 1,467,753 317,522 564,218 47,973,736

33,083,061 522,241 529,517 34,134,819

17 18 19 20

3,796,450 25,806,670 9,770,955 398,393 4,858,323 (1,846) (109,004)

1,600,647 20,082,817 4,060,140 12,280 2,533,347 (1,859) -

44,519,941

28,287,372

3,453,795

5,847,447

-

4,687,303

(64,220) (612,127) 2,777,448

(472,866) 10,061,884

(2,282,580) 245,870 (42,673)

(2,050,519) (925,630) -

698,065 9,330,126 10,028,191

7,085,735 4,953,872 12,039,607

1,282,500 179,871 479,542

1,710,000 243,114 756,367

8,086,278

9,330,126

4.02

12.66

2.45

24.86

21

12 TOTAL EXPENDITURE PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS 13 EXCEPTIONAL ITEMS: (a) Profit from sale of long term investment, net of licence fee (b) Provision for recoverable pension obligation (Refer note B6, Schedule 22) (c) Fixed Assets written off (Refer note B7, Schedule 22) PROFIT BEFORE TAXES 14 TAXES (a) CURRENT TAX (b) DEFERRED TAX (c) FRINGE BENEFIT TAX PROFIT AFTER TAXES 15 BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR 16 AMOUNT AVAILABLE FOR APPROPRIATIONS 17 APPROPRIATIONS : (a) PROPOSED DIVIDEND (Refer note B4, Schedule 22) (b) TAX ON DIVIDEND (c) GENERAL RESERVE BALANCE CARRIED TO BALANCE SHEET EARNINGS PER SHARE (EPS) 18 Basic/Diluted earnings per share, excluding exceptional items (Rs.) (Refer note B15, Schedule 22) 19 Basic/Diluted earnings per share, including exceptional items (Rs.)(Refer note B15, Schedule 22) SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS

22

As per our report attached For S.B. BILLIMORIA & CO. Chartered Accountants

For and on behalf of the Board

N. VENKATRAM Partner

SUBODH BHARGAVA Chairman

N. SRINATH Executive Director SATISH RANADE Company Secretary & Chief Legal Officer

MUMBAI DATED: 26 June, 2006

RAJIV DHAR Chief Financial Officer MUMBAI 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 1.

2.

3.

(Rupees in ‘000)

Year ended 31 March, 2005 (Rupees in ‘000)

3,453,795

5,847,447

4,858,323 (1,846) (35,869) (317,522) 395,741 (564,218) (483,999) -

2,533,347 (1,859) 17,828 (529,517) 11,867 38,618 (287,445) 149 (6,331)

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES Inventories Sundry debtors Other current assets, loans and advances Current liabilities and provisions

7,304,405 (20,321) (1,956,481) (779,308) 4,171,712

7,624,104 1,755 (1,597,015) 201,476 698,351

Cash generated from operations Income tax refunds/ (paid) Interest on income tax refunds

8,720,007 245,981 564,218

6,928,671 (3,756,979) -

NET CASH FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets Purchase of long-term investments (Purchase)/Sale (net of mutual funds dividend reinvested) of current investments (net) Business acquisitions, net of cash Proceeds from sale of fixed assets Proceeds from sale of long-term investment (net of licence fees) Dividend income on long-term investments Dividend income on current investments Fixed deposits (net) Interest received

9,530,206

3,171,692

(10,631,463) (1,755,180) (6,177,522) (13,326,495) 127,444 44,423 11,555,755 399,417

(12,716,343) (2,354,000) 8,570,651 714,478 7,789,383 6,331 56,831 (1,706,406) 580,255

(19,763,621)

941,180

6,588 14,444,503 (42,851) (1,949,694) (215,372)

62,202 (630,000) (1,450,549) (11,867)

CASH FLOW FROM/ (USED IN) FINANCING ACTIVITIES

12,243,174

(2,030,214)

NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AS AT 1 APRIL, 2005 (Refer note B13 Schedule 22) Effect of exchange on cash and cash equivalents

2,009,759 2,393,252

2,082,658 305,588

(1,412)

5,006

CASH AND CASH EQUIVALENTS AS AT 31 MARCH, 2006 (Refer note B13, Schedule 22)

4,401,599

2,393,252

CASH FLOWS FROM OPERATING ACTIVITIES PROFIT BEFORE TAXES AND EXCEPTIONAL ITEMS Adjustments for: Depreciation Transfer from capital reserve (Profit)/Loss on sale of fixed assets Interest income Interest expense on bank loans Fixed assets written down Interest on income tax refunds Dividend income/profit on sale of current investments Valuation loss on current investments Dividend income from long-term investments

NET CASH (USED IN)/FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from secured loans (net) Proceeds from/ repayment of unsecured loans (net) Finance lease repayment Dividends paid including dividend tax Interest paid

Note : Figures in brackets represent outflows.

80

As per our report attached For S.B. BILLIMORIA & CO. Chartered Accountants

For and on behalf of the Board

N. VENKATRAM Partner

SUBODH BHARGAVA Chairman

N. SRINATH Executive Director SATISH RANADE Company Secretary & Chief Legal Officer

MUMBAI DATED: 26 June, 2006

RAJIV DHAR Chief Financial Officer MUMBAI DATED: 26 June, 2006

SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 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 (b) Securities Premium (c) General Reserve (d) Profit and Loss Account

2,058,052 8,348,834 32,642,195 8,086,278

2,059,898 8,348,834 32,162,653 9,330,126

(e) Exchange Translation Reserve (net)

51,135,359 16,605

51,901,511 (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

18,880,299 25,204

-

18,905,503

-

Note: 1. Secured against Plant and Machinery of Joint Venture SCHEDULE - 4 UNSECURED LOANS From Banks From Others

Note: 1. Loans repayable within one year Rs. 9,066,099 thousands (2005: Nil)

81

82

2

1

OFFICE EQUIPMENTS

COMPUTERS

MOTOR VEHICLES

GOODWILL

(f)

(g)

(h)

(i)

LICENCE FEES

(c) 8,484,629 5,967,043

-

36,308 28,022 330,405 290,371 6,863,479 4,921,112 124,359 100,749 106,938 90,462 793,985 509,728 11,260 9,607 217,895 16,992

1 April, 2005

4,858,323 2,533,347

26,061 3,393 -

8,287 8,286 47,709 84,581 40,871 3,958,382 1,946,561 55,361 28,952 21,214 17,409 307,775 288,393 1,286 1,972 344,274 200,903

Depreciation/ Amortisation expense

(827,186) (15,761)

123 16 -

226 195 (837) (794,280) (4,194) 581 (5,342) (1,459) (933) (32,261) (4,136) (516) (319) 189 -

Deductions/ Adjustments

12,515,766 8,484,629

26,184 3,409 -

44,595 36,308 47,935 415,181 330,405 10,027,581 6,863,479 180,301 124,359 126,693 106,938 1,069,499 793,985 12,030 11,260 562,358 217,895

31 March, 2006

63,454,736 30,973,068

4,035,962 6,118,741

59,418,774 24,854,327

325,648

103,140

651,434

1,326,782 746,019 728,118 3,364,260 2,246,194 44,946,923 19,787,419 418,607 311,574 364,039 259,925 1,126,095 745,040 7,795 6,537 6,055,933 751,619

31 March, 2006

Figures in italics are for the previous year.

6

Rs. 77,888 thousands for leasehold office space.

(iii) Rs. 335,181 thousands for flats at Mumbai and Rs. 10,030 thousands for office space at New Delhi in respect of which agreements have not been executed.

(ii) Rs. 4,398 thousands being cost of flats in Co-operative Societies under formation.

(i)

Gross block of buildings include:

(iv) Rs. 1,640 thousands identified as Surplus Land.

(iii) Rs. 12,079 thousands in respect of which lease agreement has not been executed/ registered.

(ii) Leasehold Land in Srinagar in respect of which lease deed is not available.

Rs. 2,558 thousands in respect of which conveyance is not done.

Deduction/adjustments for the year ended 31 March 2004, included reduction in cost of gross block and corresponding reduction in accumulated depreciation aggregating Rs. 15,577,519 thousands and Rs. 6,013,426 thousands respectively. The net reduction in carrying cost aggregating Rs. 9,564,093 thousands was debited to Securities Premium Account in accordance with the terms of the approval of the shareholders and the High Court of Judicature at Bombay.

24,854,327

-

-

751,619

6,537

745,040

259,925

311,574

19,787,419

2,246,194

-

746,019

31 March, 2005

5

Gross Block of fixed assets includes interest capitalised of Rs. 4,461 thousands (2005: Nil)

71,934,540 33,338,956

677,618 106,549 325,648 -

1,371,377 782,327 776,053 3,779,441 2,576,599 54,974,504 26,650,898 598,908 435,933 490,732 366,863 2,195,594 1,539,025 19,825 17,797 6,618,291 969,514

31 March, 2006

Plant and machinery includes the net block of Indefeasible Rights of Use (IRUs) for domestic and international telecommunication circuits Rs. 12,218,822 thousands (2005: Rs 3,460,548 thousands).

(1,704,619) (818,798)

-

(45,636) (268) (4,241) (1,619,203) (734,590) (1,066) (9,180) (5,168) (2,117) (32,391) (18,270) (887) (400) (50,000)

Deductions/ Adjustments

(Rupees ‘000) NET BLOCK

4

40,300,203 10,343,949

677,618 106,549 325,648 -

634,686 776,053 1,203,110 4,059 29,942,809 10,013,123 164,041 116,436 129,037 60,086 688,960 150,245 2,915 5,648,777 -

Additions

ACCUMULATED DEPRECIATION / AMORTISATION

3

33,338,956 23,813,805

-

782,327 782,327 2,576,599 2,576,781 26,650,898 17,372,365 435,933 328,677 366,863 308,894 1,539,025 1,407,050 17,797 18,197 969,514 1,019,514

1 April, 2005

GROSS BLOCK

(i)

GRAND TOTAL

CAPITAL WORK IN PROGRESS (Including advances for capital expenditure Rs. 37,821 thousands (2005: 687,124 thousands))

TOTAL

DISTRIBUTION RIGHTS

(b)

INTANGIBLE ASSETS (a) SOFTWARE

PLANT AND MACHINERY

FURNITURE AND FIXTURES

(d)

BUILDINGS

(c)

(e)

LEASEHOLD IMPROVEMENTS

(b)

TANGIBLE FIXED ASSETS (a) LAND

FIXED ASSETS

Land includes Rs. 638,340 thousands under lease. This includes:

NOTES:

3

2

1

No

Sr.

SCHEDULE - 5

SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SCHEDULES FORMING PART OF THE CONSOLIDATED BALANCE SHEET As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

8,101,749

6,346,569

65 25,276

65 -

8,127,090

6,346,634

9,735,378

3,101,283

17,862,468

9,447,917

SCHEDULE - 7 INVENTORIES Equipments for resale Less: Provision for obsolescence

66,554 (85)

80,726 (9,926)

Consumable stores and spares (at cost)

66,469 29,725

70,800 3,243

96,194

74,043

SCHEDULE - 8 SUNDRY DEBTORS (a) Over six months (unsecured) Considered good Considered doubtful

3,092,860 2,185,545

411,495 1,314,693

Less: Provision for doubtful debts

5,278,405 (2,185,545)

1,726,188 (1,314,693)

3,092,860

411,495

11,901,562

4,692,230

14,994,422

5,103,725

1,200 1,639,166 630,265 2,083,594 519,629

1,120 28,620 321,769 13,939,578

4,873,854

14,291,087

SCHEDULE - 6 INVESTMENTS I. TRADE INVESTMENTS - LONG TERM (At Cost) A. Fully Paid Equity Shares (Unquoted) (a) Tata Teleservices Ltd. (Refer note B5, Schedule 22) (b) New ICO Global Communications (Holdings) Limited (c) Wmode inc. B.

Current Investments (Unquoted) Investments In Mutual Funds

(b) Other debts (unsecured) Considered good

SCHEDULE - 9 CASH AND BANK BALANCES (a) Cash in hand (b) Cheques in hand (c) Remittances in transit (d) Current accounts with banks (e) Deposit accounts with banks

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 31 March, 2006 Rupees ‘000 SCHEDULE - 10 OTHER CURRENT ASSETS (a) Interest receivable (b) Service tax recoverable (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) (d) Licence fees paid recoverable from Government of India (e) Others

SCHEDULE - 11 LOANS AND ADVANCES (a) Unsecured - Considered good (i) Staff advances (ii) Deposits with public bodies and others (iii) Other loans and advances (iv) Prepaid expenditure (v) Advance payment of tax (net of provision for tax) (b) Unsecured - Considered doubtful Other loans and advances Less: Provision for doubtful advances

SCHEDULE - 12 CURRENT LIABILITIES (a) Sundry Creditors: (i) Creditors for interconnect charges (ii) Others (note 2) (b) Unearned income and deferred revenues (c) Investor Education and Protection Fund - unpaid dividend (d) Government of India current account (e) Other liabilities (note 1) (f ) Interest accrued but not due on loans taken from banks

As at 31 March, 2005 Rupees ‘000

43,825 306,076

125,720 294,020

74,424 531,158 241,160

74,424 245,606 28,145

1,196,643

767,915

125,895 433,794 448,371 1,968,785 8,941,958 11,918,803

135,308 116,319 672,765 289,982 11,513,192 12,727,566

73,786 (73,786)

73,786 (73,786)

11,918,803

12,727,566

14,164,788 8,148,334 10,627,095 11,906 205,747 3,863,712 180,369

3,595,601 5,779,497 2,996,878 11,772 210,393 2,186,712 -

37,201,951

14,780,853

1,408,037 1,282,500 179,871 331,226

702,880 1,710,000 239,828 40,737

3,201,634

2,693,445

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 (b) Provision for proposed dividend (c) Tax on dividend (d) Provision for contingencies (Refer note B20, Schedule 22)

84

SCHEDULES FORMING PART OF THE CONSOLIDATED PROFIT AND LOSS ACCOUNT

SCHEDULE - 14 REVENUES FROM TELECOMMUNICATION SERVICES (a) Telephone (b) Leased channel (c) Frame relay (d) Internet (e) Other traffic revenues

SCHEDULE-15 OTHER INCOME (a) Dividend income from current investments (b) Dividend income from long-term investments (c) Profit on sale of current investments (net) (d) Profit on sale of fixed assets (net) (Refer note B12, Schedule 22) (e) Rent (f ) Exchange gain (net) (g) Provisions no longer required written back (h) Other

SCHEDULE-16 INTEREST INCOME (a) Interest incomei. Bank deposits (Tax deducted at source Rs.58,603 thousands; 2005:Rs.93,487 thousands) ii. Other loans and advances (Tax deducted at source Rs.1,296 thousands; 2005:Rs.1,648 thousands)

SCHEDULE - 17 SALARIES AND RELATED COSTS (a) Salaries and bonus (b) Contribution to provident, gratuity and other funds (c) Staff welfare expenses

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

26,171,865 9,203,174 1,642,046 6,941,524 1,665,634

18,852,517 7,124,052 1,382,652 5,005,044 718,796

45,624,243

33,083,061

406,674 77,325 35,869 103,476 89,031 344,039 411,339

278,419 6,331 9,026 48,786 179,679

1,467,753

522,241

308,340

520,800

9,182

8,717

317,522

529,517

3,326,560 167,513 302,377

1,339,059 69,473 192,115

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

SCHEDULE-18 NETWORK COSTS (a) Rent of satellite channels (b) Rent of landlines (c) Administrative lease charges (d) Royalty and licence fee to Department of Telecommunications (e) Charges for use of transmission facilities (i) Telephone (net of excess provision written back Rs 82,400 thousands; 2005: Rs. 118,489 thousands) (ii) Leased channel (iii) Frame relay (iv) Internet (v) Others

SCHEDULE - 19 OPERATING AND OTHER EXPENSES (a) Consumption of stores (b) Light and power (c) Repairs and Maintenance: (i) Buildings (ii) Plant and Machinery (iii) Others (d) Bad Debts written off (e) Provision for doubtful debts written back (f ) Provision for doubtful advances (g) Rent (h) Rates and taxes (i) Travelling expenses (j) Telephone and telex (k) Printing, postage and stationery (l) Security expenses (m) Computer software and maintenance (n) Legal and professional fees (o) Advertising and publicity (p) Commissions (q) Insurance (r) Donations (s) Loss on sale of fixed assets (net) (t) Exchange loss (net) (u) Services rendered by third parties (v) Other expenses

86

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

883,014 301,968 117,606 2,048,389

1,084,971 1,195,195 95,389 2,118,149

19,066,500 1,523,237 377,990 836,848 651,118

14,070,670 167,227 856,549 494,667

25,806,670

20,082,817

19,526 623,440

16,507 336,343

222,563 2,543,671 169,259 300,335 (58,935) 942,595 285,498 380,293 170,125 225,861 22,659 79,229 625,454 1,160,284 212,352 118,666 65,415 1,091,659 571,006

54,300 1,082,085 91,161 526,909 (577,943) 35,677 142,106 83,737 172,436 73,153 29,090 57,569 57,798 350,362 650,504 77,244 41,946 1,039 17,828 152,980 228,682 358,627

9,770,955

4,060,140

SCHEDULES FORMING PART OF THE CONSOLIDATED PROFIT AND LOSS ACCOUNT

SCHEDULE - 20 INTEREST EXPENSE Interest on: - Bank loans - Others

SCHEDULE - 21 PRIOR PERIOD ADJUSTMENTS (NET) INCOME: Revenues from telecommunication services EXPENSES: Charges for use of transmission facilities Repairs and maintenance Other expenses

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

395,741 2,652

11,867 413

398,393

12,280

67,005

-

(186,904) 8,157 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)

88

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.

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

5.

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.

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) b) c) d)

e) f) g) h) i) j)

6.

Leasehold land Leasehold improvements Buildings Plant and Machinery (i) Indefeasible Rights of Use (IRU’s) (ii) Other plant and machinery Furniture and fixtures Office equipment Computers Motor vehicles Goodwill on purchase of business Intangibles (i) Internally developed computer software (ii) Distribution rights (iii) License fees

Lease period Lease period 1.64% to 4.00% life of IRU or period of agreement, whichever is lower 4.75% to 33.33% 6.33% to 25.00% 4.75% to 25.00% 15.83% to 33.33% 9.50% to 20.00% 60 months 20.00% to 33.33% 25.00% 4.00%

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.

89

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

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

90

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.

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

91

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) Country of Incorporation

Percentage of voting power

Subsidiaries (held indirectly)

92

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

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) VSNL International (US) Inc.

United States of America

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. SEPCO Communications Pty. Ltd. and its subsidiary

Nepal South Africa

2.

100.00

26.66 47.00

The contributions of the significant subsidiaries and joint ventures acquired / formed during the year is as under: Name of Subsidiary VSNL Singapore Pte. Ltd. and its subsidiaries VSNL Broadband Ltd. VSNL SNOSPV Pte. Ltd. SEPCO Communications Pty. Ltd

Rupees ‘000 Net Assets

Revenue (post acquisition)

Net Profit/(Loss) (post acquisition)

10,801,448

(4,079,329)

(1,544,491)

200,269

77,673

909,892

61

(28,732)

(10,815)

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.

93

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

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 (AS14) 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 Remittances in transit Deposit accounts held with banks

Deposits with original maturity over three months Current Account / Deposits held for unpaid dividends Deposit accounts held as margin money Cash and cash equivalents

3,723,960 630,265 519,629

351,509 13,939,578

4,873,854

14,291,087

(334,957)

(11,890,712)

(11,808)

(6,271)

(125,490)

(852)

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

Provision for doubtful debts

420,689

441,125

Expenditure on voluntary retirement schemes

138,634

210,369

Deferred tax assets

Expenditure incurred on NLD license fees ( Refer note below )

265,737

-

Unearned income / deferred revenues

181,781

177,169

58,426

32,328

1,065,267

860,991

753,509

996,796

Others

Net deferred tax liability 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

Revenues Segment Results Unallocated expenses (net) Prior Period Income (net)

96

Wholesale Voice

Enterprise and Carrier Data

Others

Total

26,152,432

14,707,511

4,764,300

45,624,243

6,029,849

11,626,517

2,441,612

20,097,978 16,753,187 109,004

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

Revenues

Wholesale Voice

Enterprise and Carrier Data

Others

Total

18,833,494

11,154,609

3,094,958

33,083,061

3,312,531

8,666,434

1,159,758

13,138,723

Segment Results 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 Profit after taxes

2,976,149 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.

97

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) Geographical Segment: Segment revenues by Geographical Market Year ended 31 March, 2006 Rupees ‘000 India United States of America United Kingdom United Arab Emirates Others

21,272,409 7,197,088 3,459,780 26,07,832 11,087,134 45,624,243 Segment revenues by Geographical Market Year ended 31 March, 2005 Rupees ‘000

India United States of America United Arab Emirates Saudi Arabia Others

19,078,700 3,812,001 2,633,825 1,026,045 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 ·

II.

III.

IV.

Key Managerial Personnel ·

N.Srinath

·

Vinod Kumar - Executive Director (VSPL)

- Executive Director

Joint Ventures ·

United Telecom Ltd.

·

SEPCO Communications Pty. Ltd.

·

SNO Telecommunications Pty. Ltd. (“SNO”) – subsidiary of SEPCO

Company owned by Executive Director of subsidiary. ·

98

Panatone Finvest Limited

Panther Technology Partners Pvt. Ltd.

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

(b) Related party transactions Rupees ‘000 Investing Company

Key Managerial Personnel

Company owned by Executive Director of subsidiary

Joint Ventures

Transactions: Revenues from telecommunication services

14,585 8,763

Network Cost

7,330 132

Loans given to SEPCO

9,650 -

Managerial remuneration Dividend paid

-

23,318 24,021

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 2,500

56,878 -

Note: Figures in italics are in respect of the previous year 18. Operating lease arrangements: (a) As lessee:

Minimum lease payments under operating leases recognized as expense in the year

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

2,014,608

1,242,295

99

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

At the balance sheet date, minimum lease payments under non- cancellable operating leases fall due as follows: Year ended 31 March, 2006

Year ended 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 31 March, 2006

Year ended 31 March, 2005

Rupees ‘000

Rupees ‘000

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

Not later than one year

100

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.)

(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 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 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

325

-

59,555

84,862

Later than five years

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 amount

Accumulated Depreciation

Net carrying amount

Rupees ‘000

Rupees ‘000

Rupees ‘000

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

Building

Minimum lease payments and the corresponding present value are as follows: Minimum lease payments (“MLP”) Rupees ‘000

Present Value of MLP Rupees ‘000

Difference representing Interest 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.

101

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) 20. Provision for Contingencies: ARO Rupees ‘000 Balance as on 1 April, 2005 Provision made during the year Provision written back during the year Balance as on 31 March, 2006

Others Rupees ‘000

Total Rupees ‘000

40,737

-

40,737

164,684

125,805

290,489

-

-

-

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:

Letters of Credit Guarantees i.

As at 31 March, 2006 Rupees ‘000

As at March, 2005 31 Rupees ‘000

303,410 2,550,452

292,532 3,694,051

1,935,518

1,694,521

Claims for taxes on income (Refer note 1)

(a) Income tax disputes where the department is in appeal against the Company (b) Income tax disputes where the Company has a favourable decision in other assessment year for the same issue (c ) Income tax disputes other than the above ii.

Claims for other taxes

iii.

Other claims

78,248

1,860,194

9,257,720

9,593,879

211,961

237,448

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:

FUNDS EMPLOYED 1 2 3 4

Share Capital Reserves and Surplus Secured Loan Unsecured Loan

As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

233,275 (167,483) 175,956 53,787

233,275 (92,755) 169,371 -

295,535

309,891

103

VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS (Contd.) As at 31 March, 2006 Rupees ‘000

As at 31 March, 2005 Rupees ‘000

(a) Gross Block

294,623

288,620

(b) Less: Accumulated Depreciation

153,050

97,201

(c) Net Block

141,573

191,419

(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

18,870

20,463

172,792

189,078

18,830

70,606

APPLICATION OF FUNDS 5

6

Fixed Assets

A.

B.

Current Assets

Loans and Advances

7

Less: Current Liabilities

8

Net Current Assets

153,962

118,472

Total Assets (Net)

295,535

309,891

Year ended 31 March, 2006 Rupees ‘000

Year ended 31 March, 2005 Rupees ‘000

70,253

39,711

-

14,483

1,593

419

71,846

54,613

2,376 28,804 50,988 17,798 52,070

2,025 9,401 35,381 11,501 60,350

152,036

118,658

-

8,313

-

19,970

-

28,283

INCOME 1

Traffic Revenue

2

Other Income

3

Interest Income Total Income

EXPENDITURE 4 Salaries and Related Costs 5 Network Costs 6 Operating and Other Expenses 7 Interest Expense 8 Depreciation Total Expenditure CONTINGENT LIABILITIES (i)

Claims for other Taxes

(ii) Other Claims

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:

FUNDS EMPLOYED 1

Share Capital Reserves and Surplus

3

Unsecured Loan

As at 31 March, 2006 Rupees ‘000 3 (29,370) 33,605 4,238

APPLICATION OF FUNDS 4

Fixed Assets (a) Gross Block (b) Less: Accumulated Depreciation (c) Net Block

5

A.

325,673 1 325,672

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.)

INCOME 1

Year ended 31 March, 2006 Rupees ‘000

Interest Income

756

Total Income

756

EXPENDITURE 2

Salaries and Related Costs

3

Operating and Other Expenses

4

Depreciation Total Expenditure

1,719 27,583 1 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.

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BOARD OF DIRECTORS Mr. Subodh Bhargava Born in Agra in 1942, Mr. Subodh Bhargava holds a degree in Mechanical Engineering from the University of Roorkee. He started his career with Balmer Lawrie & Co., Calcutta before joining the Eicher Group of Companies in Delhi in 1975. On March 31, 2000, he retired as the group chairman and chief executive and is now the Chairman Emaritus, Eicher Group. He is the past President of the Confederation of Indian Industry (CII) and the Association of Indian Automobile Manufacturers; and the Vice President of the Tractor Manufacturers Association. Over several years, he was therefore a key spokesperson for Indian industry, contributing to and influencing government policy while simultaneously working with industry to evolve new responses to the changing environment. He was a member of the Insurance Tariff Advisory Committee, the Economic Development Board of the government of Rajasthan He was also the Chairman of the National Accreditation Board for Certifying Bodies (NABCB) under the aegis of the Quality Council of India (QCI). Mr. Bhargava has been closely associated with technical and management education in India. He was the chairman of the Board of Apprenticeship Training and Member of the

Board of Governors of the University of Roorkee , the Indian Institute of Foreign Trade, New Delhi; and the Entrepreneurship Development Institute of India, Ahmedabad. He was also a member of the senior panel of the All India Council for Technical Education (AICTE) set up for a comprehensive evaluation of research in engineering and technology; and on the committee set up by the Ministry of Human Resource Department, Government of India for policy perspectives for management education in India. He is currently on the Board of the Centre for Policy Research and IIM, Indore ; Trustee, Bhartiya Yuva Shakti Trust; Executive Trustee, National Centre for Promoting Employment for Disabled Persons; Chairman Trustee Charity Aid Foundation. He is also on the Boards of Governors of other institutions for graduate engineering and bachelors and master’s degree programmes in business management. He has been conferred with the first IIT Roorkee Distinguished Alumnus Award in 2005 by Indian Institute of Technology, Roorkee. Mr Bhargava is the Chairman of Videsh Sanchar Nigam Ltd ( VSNL ) and also Wartsila India Ltd and Director on the respective Boards of several Indian Corporates.

Mr. N. Srinath N Srinath, Executive Director, graduated as a Mechanical Engineer from IIT (Madras) and went on to do a Post Graduate Diploma in Management from IIM (Calcutta), specialising in marketing and systems. Joining the Tata Administrative Services (TAS) in 1986, he has held positions in project management, sales and marketing and corporate functions in different Tata companies over the past 20 years. He has been responsible for setting up new projects and managing businesses in high-technology areas like Process Automation and Control, Information Technology, Internet and Telecommunications. On completing his probation with the TAS in 1987, he was made Project Executive in Tata Honeywell responsible for acquiring the necessary project approvals and initial funding. He then moved to Tata Industries as Executive Assistant to the Chairman, an assignment he handled till mid-1992. In that period he was also part of the team that set up Tata Information Systems (later Tata IBM and then IBM India). In June 1992 he moved to Tata Information Systems Limited and over the next six years, handled various assignments in sales and marketing. He has been responsible for both back

office sales support functions as well as direct customer sales into various end-user enterprise segments such as Process Manufacturing, Banking and Financial Services, Petroleum and Distribution. He was, since 1995, also concurrently the Regional Manager for the operations of the company in the Western Region. In March 1998, he returned as General Manager (Projects) to Tata Industries and worked with Tata Teleservices helping to set up the company and its operations for fixed line telecommunications services in Andhra Pradesh. He oversaw the market launch of services by the company in March 1999 and in April he moved to Hyderabad as Chief Operating Officer of Tata Teleservices responsible for Sales & Marketing, Customer Service, Network and IT. In late 2000 he took over as Chief Executive Officer of Tata Internet Services, a new company set up to meet the requirements of both retail and corporate customers for Internet services. The company successfully launched and grew its offerings in the market and also managed various customer portals that it had developed. In February 2002, when the Tata group acquired VSNL, he

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VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

was appointed as Director (Operations). With effect from 1 October, 2004 when the term of the then Managing director expired, he was entrusted with the powers of the Managing director and was redesignated as Executive director with effect from 1 April, 2005. Since February, 2003, the Company has transformed from being predominantly a monopoly, International wholesale voice services provider in India to a global telecommunications company operating in multiple businesses in over 30 countries. VSNL today, is the leading international wholesale voice provider globally, is building on its leadership position in India to be a major player in

the enterprise and carrier data services market globally, is one of the largest submarine cable bandwidth providers globally, is a Tier 1 ISP and is expanding its retail presence in the broadband market in India. The company has also made investments in Nepal and Sri Lanka and has recently been chosen to be the strategic partner to manage the Second National Operator license in South Africa. Recently, Mr. Srinath was chosen as the ‘Telecom CEO of the Year’ by the leading publishing group, Telecom Asia in the 2006 edition of their awards.

Mr. Ishaat Hussain Mr Ishaat Hussain joined the Board of Tata Sons as an Executive Director on 1.7.99, and is Finance Director of Tata Sons Ltd. with effect from 28.7.2000. Prior to joining Tata Sons he was the Senior Vice President and Executive Director – Finance in Tata Steel for almost 10 years. Born on September 2, 1947, Mr Hussain completed his schooling from The Doon School in 1963 to join St. Stephens College Delhi to do his graduation in Economics. A Chartered Accountant from England and Wales, Mr Hussain attended the Advanced Management Programme at the Harvard Business School. He joined the Board of The Indian Tube Company (a Tata Steel associate company) in 1981.

Thereafter, he moved to Tata Steel in 1983 after Indian Tube was merged with Tata Steel. Besides being on Board of Tata Sons Limited, he is the Chairman of Voltas Limited. He is also on the Boards of several Tata Companies viz. Tata Steel, Tata Industries, Tata Teleservices, Titan Industries Limited. Mr. Hussain is a member on the Primary Markets Advisory Committee of the Securities Exchange Board of India. In April 2005, he has been appointed a Member of the Board of Trade.

Mr. Kishor A. Chaukar Mr. Kishor A. Chaukar (58), currently the Managing Director of Tata Industries Limited ( TIL), is a post-graduate in Management from the Indian Institute of Management at Ahmedabad. TIL is one of the two principal holding companies of the Tata Group, India’s largest and best-known conglomerate. TIL acts as the diversification and new projects-promotion arm of the Group, and spearheads the entry of the Group in the emerging high-tech and sunrise sectors of the economy. In his capacity as Managing Director of TIL, Mr. Chaukar is responsible for enhancing the value and the interest of TlL in TIL divisions and in companies where TIL has made investments. One of the tasks performed in the quest for this value enhancement is to provide strategic direction to these companies. Mr. Chaukar is a member of the Group Corporate Centre, which is engaged in strategy formulation at the House of Tata. He is on the Board of various companies like Tata

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Teleservices Limited, Idea Cellular Limited, Videsh Sanchar Nigam Limited, Tata Autocomp Systems Limited, Tata Investment Corporation Limited, among others. He also oversees the functions of the Department of Economics & Statistics (DES) and the Tata Credit Card. Mr. Chaukar is the Chairman of Tata Council for Community Initiatives (TCCI) – the nodal agency of the Group on all matters related to social development, environmental management, bio-diversity restoration and conservation of wild life. Mr. Chaukar was previously the Managing Director of ICICI Securities & Finance Company Limited (July 1993 to October 1998), and a member of the Board of Directors of ICICI Limited from February 9, 1995 to October 15, 1998). His other experiences include stints in Bhartiya Agro Industries Foundation, a Public Trust engaged in rural development on a no-profit no-loss basis and based in Pune, Maharashtra, and Godrej Soaps Limited.

Mr. Pankaj Agrawala Mr. Agrawala was born on October 16, 1955. Since May 2002, he has been the joint secretary to the GoI, Department of IT, Ministry of Communications and IT. Mr. Agrawala is in-charge of e-infrastructure in the Department of IT and in that capacity represents India in the Government Advisory Committee of Internet Corporation for Assigned Names & Numbers (ICANN). He is a vice chairman of GAC. Mr. Agrawala also serves on the Board of Telecom Infrastructure Manufacturing Company, ITI and National internet Exchange of India. Mr Agrawala belongs to the 1978 batch of the IAS (Uttar Pradesh cadre). He holds a masters degrees in Public Administration, Development Economics and History and was a Mason Fellow at the Kennedy School of Government, Harvard University, USA. Mr. Agrawala has held various important U.P government positions. He has worked on various field organizations in districts and divisions of Uttar Pradesh. He has been associated with rural development for nearly

12 years of his service. He took over as director of the then Ministry of Urban Development, GoI in August 1991, and as director, Housing Division, Ministry of Urban Affairs and Employment, GoI in July 1994. He was a member of the Indian delegation to the Habitat II City Summit, Istanbul. He then worked in the Administrative Training Institute, Nainital in the Decentralised Training for Urban Development Project, an Indo-Dutch collaboration with the Institute for Housing and Urban Development, Rotterdam. From July 1998 to May 2002, he was secretary to the U.P government, in various departments, including the Department of Planning; the Department of Banking and Private Capital Investments; the Department of Externally Aided Projects, where he was responsible for five World Bank projects; the department of IT and Electronics, when India’s first private-sector IT university was set up; and the department of Small Scale Industries and Export Promotion.

Dr. Mukund Rajan Dr. Rajan was born in Chennai on April 5, 1968. He completed his B.Tech from the Indian Institute of Technology, Delhi in 1989, and served in his final year as General Secretary of the Student Affairs Council. He received a Rhodes Scholarship to study at Oxford University, where he completed a Masters and Doctorate in International Relations. His doctoral dissertation was published by Oxford University Press, and is titled “Global Environmental Politics - India and the NorthSouth Politics of Global Environmental Issues.”

Dr. Rajan joined the Tata Group through the Tata Administrative Service ( TAS) in January 1995. He was assigned to the office of Mr. Ratan Tata, Chairman, Tata Sons Limited, in 1996. Dr. Rajan’s current designation is Vice President, Tata Sons Limited, and he continues to support Mr. Tata as a member of his office. He also serves on the boards of several Tata companies, including Tata Teleservices Limited, Piem Hotels Limited, Videsh Sanchar Nigam Limited andVSNL Singapore Pte. Limited.

Mr. N. Parameswaran Mr. Parameswaran was born on November 15, 1955. Since July 1998, he has been the Deputy Director General in the Department of Telecom, Government of India. He holds B.Sc. Engineering degree in Electronics and Telecommunications Engineering from College of Engineering Trivandrum, Master of Technology in Electrical Engineering from IIT (Bombay) and Post Graduate Diploma in Business Management from All India Management Association, New Delhi. Mr. Parameswaran belongs to the Indian Telecommunications Service (1978) and has been with the Department of Telecommunications since January 1980. For the last ten years he has beenI involved in Telecom Licensing and Regulations. He has played a key role in the liberalization of the Telecom Sector in India. Recently, he was on a two-

year deputation as the Executive Director of the Information & Communication Technologies Authority, Mauritius, wherein he set up the Authority and facilitated the liberalization of the ICT sector. He has held various positions in DOT and MTNL where he was actively involved in the implementation of IT solutions and New Services. He has worked as an International Telecommunications Union (ITU) expert in Africa, presented papers and chaired sessions in the ITU / Asia Pacific Telecommunity (APT) seminars/Forums. He was part of a number of Ministerial delegations for bilateral meetings. He has made presentations in Road shows held in a number of countries to attract foreign investment. He is also Director in the Board of HTL Limited.

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VIDESH SANCHAR NIGAM LIMITED Twentieth Annual Report 2005-2006

Mr. P.V. Kalyanasundaram Mr. P.V. Kalyanasundaram was born on February 25, 1958. He received a Bachelor of Arts degree in history, from the New College, Chennai in 1977, followed by a Bachelor of Law degree from Madras Law College in 1982. An advocate by profession, Mr. Kalyanasundaram is a legal advisor for Pallavan Transport Corporation, Chennai, a government of Tamil Nadu undertaking, as well as a legal advisor to the Chennai Metropolitan Water Supply and Sewerage Board. He is also a trustee of the Jawaharlal Nehru Port Trust, Mumbai, and a member of the Censor Board, Chennai as well as the Presidency Club, Chennai.

Mr. Kalyanasundaram has played a leading role in various public activities. As the managing trustee of the Green Peace World Charitable Trust, Chennai, he took an active part in the various welfare measures organized by the trust. These include organizing free eye camps to treat poor people. Between 2000 and 2004, Mr. Kalyanasundaram was the chairman and trustee, Pachayappa’s Trust, Chennai. In that position, he managed several educational institutions, including seven colleges and six schools, and looked after immovable properties worth Rs. 10,000 million belonging to the trust. He was also instrumental in conducting several educational seminars and courses in various institutions.

Dr. V.R.S Sampath Dr. V.R.S Sampath received a Bachelor of Arts degree in History from the Presidency College in 1976, followed by a Bachelor of Law degree from Madras Law College in 1980, a Master of Law degree in 1987 and a PH.D in 1997, all from the University of Madras. He also holds a Master of Arts degree in History from the Madurai Kamaraj University (1985).

Dr. Sampath is currently an empanelled advocate to both Canara Bank and Indian Overseas Bank, and a legal advisor to the Construction Industry Development Board of the Government of Malaysia. He started his career as a junior advocate for the Aiyer and Dalia law firm in 1981 and has since served as a legal advisor to the Tamil Nadu Industrial Development Corporation.

Dr. Sampath also holds a Diploma in Tourism and has completed a large number of specialised training programmes and courses, notably in human rights and social work. He was awarded an honorary D.Litt for his contribution to global peace efforts by the World Peace Academy, Chicago, USA in 1994. He has published numerous research papers and traveled widely internationally, including on study tours. He has also published eight books on subjects such as travel, law and society.

Dr. Sampath has served on various government committees including the advisory committees of the Central Board of Film Certification and the All India Radio, both of the government of India, Chennai. He is the chairman of various non-governmental organisations in Chennai including the Inter-University Cultural Service, the Madras Development Society, the India International Tourism Centre, the Indian Institute for Aids Prevention, the International Centre for Human Rights and the Madras Educational .

Mr. Amal Ganguli Mr. Amal Ganguli, 65, is a fellow member of the Institute of Chartered Accountants of India and the Institute of Chartered Accountants of England and Wales and a member of the New Delhi chapter of the Institute of Internal Auditors, Florida, U.S.A. He was the Chairman and Senior Partner of Pricewaterhouse Coopers (PWC), India till his retirement on 31st March, 2003. Besides his qualifications in the area of accounting and auditing, Mr. Ganguli is a fellow of the British Institute of Management and alumnus of IMI, Geneva. Mr. Ganguli, trained in the UK to become a Chartered Accountant. He was econded as a Partner to PWC, UK/USA for a year in 1972-73. During his career spanning over 40 years, Mr. Ganguli’s range of work included International Tax advice and planing, cross border investments, Corporate mergers and re-organisation, financial evaluation of projects, management, operational and statutory audit and consulting projects funded by International funding agencies. In the course of his professional career, he has dealt with a variety of clients including US AID, World Bank, ADB,

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NTPC, Alcatel, GE, Hindustan Lever, STC, Hewlett Packard and IBM. Mr. Ganguli is a member of the Board of Directors of several Companies such as Hughes Escorts Communications Limited, Flextronics Software Systems Limited, Tube Investments of India Limited, Gillette India Limited, HCL Technologies Limited, Samtel Colour Limited, Samcor Glass Ltd., New Delhi Television Limited and Century Textiles and Industries Ltd. Mr. Ganguli is a member of Audit Committees of Hughes Escorts Communications Ltd., HCL Technologies Ltd., Gillette India Limited, Samtel Colour Limited, Samcor Glass Limited and Century Textiles and Industries Ltd. He is chairman of the Audit Committee of Flextronics Software Systems Limited and a member of Remuneration Committees of Tube Investments of India Limited and Gillette India Limited. He is also a member of Share Transfer and Shareholders’/Investors’ Grievance Committee of Century Textiles and Industries Ltd.

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.

SM

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