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Question Paper
Integrated Case Studies - I (MSF3S1) : October 2007
Case Study (100 Marks)

This section consists of questions with serial number 1 - 9.

Answer all questions.
Marks are indicated against each question.

Read the case carefully and answer the following questions:

1. In November 2005, the government set certain reforms in the long distances telephony. Discuss the reforms in the regulatory and
competitive practices in telecommunications sector.
(14 marks) < Answer >
2. Government has considered the proposal of merger of MTNL and BSNL but there exists certain issues, considered as hurdles for such
merger. Discuss those issues which give rises to such hurdles in the way of merger.
(12 marks) < Answer >
3.

Briefly discuss the various steps taken by MTNL for upgrading their services for the customers.
(12 marks) < Answer >

4. The telecom industry in India witnessed major trends that have a greater impact on everything from, modest internet, broadband to
managing services to local manufacturing and supply chain. Explain the major market trends in the telecom industry.
(12 marks) < Answer >
5. Various key events have created an impressive forward-momentum in Indian telecommunications, resulting in a vigorously competitive
and fast-growing sector. Discuss.
(10 marks) < Answer >
6.
MTNL has diversified its business overseas for its further expansion and tied up with World Tel to offer basic telecom services in
Bangladesh. Discuss how the company entered into the overseas market for its growth?
(8 marks) < Answer >
7.
Telecom Regulatory Authority of India (TRAI) was established by an Act of Parliament in March 1997 and vested with powers to
issue directions to service providers, frame regulations, and notify tariffs through orders and also adjudicate in disputes Discuss the various
objectives of TRAI.
(8 marks) < Answer >
8.
MTNL has taken various initiatives for the promotion of their services in the domestic market after the private sector came into
picture. Discuss.
(12 marks) < Answer >
9.

Based on the data given in Annexure IV, comment on profitability, leverage, liquidity and payout ratios of MTNL.
(12 marks) < Answer >
ahanagar Telephone Nigam Limited
[1]

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

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

Department of Telecommunications (DOT) move to explore the option of a quasi-merger of Mahanagar Telephone Nigam Ltd. (MTNL)
and Bharat Sanchar Nigam Ltd. (BSNL) turned out to be a major news item in the Indian Telecommunications Sector during November 2005
As per the current indications (January 2006), the proposed PSU major is likely to be split into four regional wireline access companies
one in each region. This is to be modeled on the famous Baby Bells formula, which was adopted by the US government in the case of
AT&T. Effective from January 1, 1984, AT&T was spilt into seven companies under the Baby Bells formula. Baby Bells identifies
the regional telephone companies created in the US after the split of AT&T. The US telecom sector felt an immediate impact of this
decision with exponential growth witnessed in both business and employment opportunities. The total revenues of the seven
companies increased consistently and international billed revenues exceeded $13 billion in 1993. Telephone traffic accounted for more than
90 percent of billed revenue.
Sources in the Indian telecommunications ministry confirmed that the Baby Bells model is being considered. If this model were
implemented, besides the four regional wireline companies, a mobile operator and an infrastructure company would also operate. BSNL:
East, West, North, and South, would be four regional wireline access companies. MTNLs existing wireline operations in Delhi and
Mumbai would be merged with BSNL North and BSNL West respectively. The sources also suggested that these firms would then be
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brought under the ambit of a new holding company. The mobile operations of both BSNL and MTNL would be transferred to a
separate company, BSNL Mobile. Thus, the Public Sector Units (PSUs) would obtain a pan-India mobile footprint. (Refer Exhibit:1)
A new company BSNL Infrastructure may also be formed, which would own and operate the BSNL infrastructure for both national
and international long distance. The proposal envisages that an investment arm, BSNL Holdings, would control these companies.
Exhibit 1: The Blueprint

BSNL to get four wireline subsidiaries BSNL North, BSNL East, BSNL South and
BSNL West.
MTNLs Delhi operations will be brought under BSNL North and Mumbai operations

under BSNL West.

All mobile operations of BSNL and MTNL would be transferred to a separate company,

BSNL Mobile.
Source: www.mtnl.net.in
INDUSTRY BACKGROUND
The telecom industry is a key component of the infrastructure sector. This sector is highly capital intensive and has long payback period
for investments. The economic development of a country depends on an efficient telecom network. The various telecom services available
in India are basic fixed line services, mobile services using both Code Division Multiple Access (CDMA) and Global System for
Mobile (GSM) communications technology, national and international long distance services, pager services and internet services.
[2]
CDMA (Code Division Multiple Access) technology , allows multiple users to occupy the same time and frequency allocations in a
[3]
given band. GSM (Global System for Mobile Communications) technology is used by many of the worlds mobile phone networks. It is
a wireless technology that has proved to be successful in global communications. The Exhibits 2 and 3 provide information regarding
the market-share of subscribers for telecom players under these two types of technologies.
Exhibit 2: Market Share on 31st Oct., 2005 (GSM)
Company
Bharti
BSNL
Hutch
IDEA

Market Share
27.82
23.61
19.18
11.44

BPL
Airtel
Reliance
Spice
MTNL

5.38
4.09
3.03
2.87
2.58

Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.
Exhibit 3: Market Share on 31st Oct. 2005 (CDMA)
Company

Market Share

Reliance

82.1

TATA

17.28

HFCL

0.43

Shyam

0.19

Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.
For nearly five decades after independence, the government controlled the Indian telecom services industry. The scenario changed after
1991 and today private sector players operate along with the public sector in Indias telecom business. The major companies operating in
the telecom sector are Bharat Sanchar Nigam Ltd. (BSNL), Mahanagar Telephone Nigam Ltd. (MTNL), Videsh Sanchar Nigam Ltd.
(VSNL), Bharti Tele Ventures, Reliance Infocomm, Tata Teleservices, and entities under the control of the Hutchison group and Data
Access. Exhibit 4 provides information regarding performance of a few major players from both the public and private sectors in the
Indian telecom industry.
Till the 1990s, until the telecom sector opened up, the Department of Telecom performed the multiple role of policy maker, regulator,
service provider and the arbitrator in case of disputes. The Telecom Regulatory Authority of India (TRAI) was established by an Act
of Parliament in March 1997. The objective behind this move was to allow fair competition in providing telecom services, provide an
effective regulatory framework and ensure adequate safeguards for and protecting consumer interests. TRAI was vested with powers to
issue directions to service providers, frame regulations, and notify tariffs through orders and also adjudicate in disputes. The
government created the Department of Telecom Services (DTS), in 1999. It had a dual role of service provider and policy formulator.
The DTS was corporatized in October 2000 as Bharat Sanchar Nigam Ltd. (BSNL). The TRAI Act, 1997 was amended in January 2000.
With this amendment the adjudicatory function of TRAI was separated and was assigned a new entity called the Telecom Dispute
Settlement and Appellate Tribunal (TDSAT). Only the Supreme Court can take up for hearing any appeal against TDSATs judgments.
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Two new telecom policies were announced during the 1990s: the National Telecom Policy (NTP), 1994 and 1999. The NTP 1994
introduced the fixed licence fee system. This system was changed to a revenue sharing regime through NTP 1999. The change was
effected against a backdrop of feeling in the industry circles that high amounts were paid during the first round of bidding for basic
and cellular services licences in 1994. The industry circles feared that fixed licence fee system could lead to large-scale bankruptcy in
the sector if the system was not changed. The telecom tariffs have been slashed over the years, due to the high level of competition and
on account of migration to the revenue sharing regime. This sector also witnessed a spate of mergers and acquisitions.
Exhibit 4: Telephone Services: Performance of Companies: September 2005
(Rs. in million)
Sales
(Rs. cr.)
Bharti TeleVentures

26,259.4

Mahanagar
Telephone
Nigam

12,689.9

PBDIT
(G%)

(Rs. cr.)

PAT

(G%) (Rs. cr.)

9,496.5

PBDIT/Sales
(G%)

Sep. 04
(%)

15.40

Sep. 05
(%)
18.96

22.81

19.17

13.31

1179

Videsh Sanchar
9,295.0
19.33
1,910.0
11.11
910.0
3.29
22.07
Nigam
Tata
2,591.8
266.0
261.4
1,325.0
10.34
Teleservices
(Maharashtra)
HFCL Infotel
745.2
152.7
159.0 20.26
252.6
31.11
Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.

20.55

10.90

9.37

10.09

45.59

51.11

21.34

29.10

33.83

22.28

1,689.0

Sep. 04
(%)
7.40

2,432.4

43415.65

Sep. 05
(%)
36.16

8.49

5,004.3

PAT/Total

MORE REFORMS
In November 2005, the government effected some reforms in the long distance telephony. A major entry barrier to this segment in the form
of license fee was lowered and players without any prior experience in the industry were also eligible for fresh license. The roll-out
obligations were done away with.
The licence fee was slashed to 6 percent instead of 15 percent of Adjusted Gross Revenue (AGR). The entry fee for National Long
Distance (NLD) and International Long Distance (ILD) which was Rs.1,000 million and Rs.250 million respectively was slashed to
Rs.25 million. The net-worth requirement which was Rs.25,000 million and Rs.2,500 million respectively was also slashed to a
uniform amount of Rs.2,500 million.
The reduction in licence fee was expected to bring about a corresponding and equal reduction in long distance tariffs. Industry experts feel
that the STD tariffs could slide further if more players start operating in this area. Spice Telecom announced its intentions of entering the
arena of long distance telephony. Reliance Infocom signed a deal with China Telecom and is routing its calls directly to China using its
FLAG telecom network. Earlier calls to China were routed through the US and Europe. The rate charged by Reliance is Rs.8 per
minute, which works out 55 percent cheaper as compared to the earlier rates.
A few other reform measures were initiated. The subscribers of NLD service providers can now be directly approached for services in
leased circuits/closed user groups. Further, access providers are permitted to provide internet telephony and broadband. The provision
for Infrastructure
Providers-II and VPN licence holders to migrate to NLD/ILD licences has been included.
The Telecom Regulatory Authority of India (TRAI) first published the Performance Indicators of Telecom Services in July 2003. The
results highlight the trends for the financial year 2002-03, and comprise four quarterly reports pertaining to FY 2003-04. Further,
growth trends from 2000 to 2004 have also been compiled and given below.
Exhibit 5: Performance Indicators
Indicators

FE 2000

FE 2001

FE 2002

FE 2003

FE 2004

1. Subscriber Base (in million)

i.

Fixed

ii.

Mobile

Gross Total

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26.65

32.71

38.33

41.48

42.84

1.90

3.58

6.54

13

33.69

28.55

36.29

44.87

54.48

76.53

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iii. Internet
iv. Broadband

0.95

3.04

3.42

3.64

4.55

NA

NA

NA

0.08

0.19

1319

1113

884

634

469

NA

NA

794

682

575**

2. ARPU (Average Revenue Per Unit)

(Rs. sub/ month) *
i.

Mobile (Cellular)
ii. All Services (Fixed, Mobile,
NLDO, ILDO)

Indicators

FE 2000

FE 2001

FE 2002

FE 2003

FE 2004

3. RPM (Revenue Per Minute) (in Rs.)

i.

Cellular (Postpaid)

6.55

4.82

3.67

2.55

1.79

ii.

Cellular (Prepaid)

7.32

5.65

5.43

3.49

1.39

6.70

4.98

4.05

2.82

1.55

iii. Cellular (Blended)

4. Teledensity (%)
i.

Fixed

2.62

3.17

3.66

3.88

3.94

ii.

Mobile

0.19

0.35

0.62

1.22

3.10

2.81

3.52

4.28

5.10

7.04

Gross Total
* Data regarding ARPU for fixed lines not available.
** Estimated ARPU for all services combined.
Source: Telecom Regulatory Authority of India (TRAI).

During the financial year 2004-2005, the Telecom services sector witnessed an unprecedented growth. The growth was mainly driven
by intense competition and aggressive pricing. 18.5 million subscribers were added to the number of mobile subscribers, which increased
from 33.58 million to 52.17 million. The mobile tariffs fell by 35% during the year. The International Leased Line Charges (IPLC)
also decreased 35% for lower capacities and 70% for higher capacities. The new Broadband Policy 2004 caused an initial sharp increase
of above 100,000 Broadband connections. The pattern of growth of fixed and mobile subscribers for FY 2004-2005 and earlier years is
shown below (in million):
Exhibit 6
Service

March
2003

March
2004

March 2005

% age growth during the

year

41.48

42.84

45.9

13.00

33.58

52.17

55

54.48

76.16

Fixed including WLL* (F)

Mobile including WLL (M) (CDMA GSM)

Gross Total

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98.08

29

Source: Telecom Regulatory Authority of India (TRAI).

The monthly growth of mobile subscribers for the 12 months ending March 2005 in comparison to the relevant months for previous years
is shown in the following exhibit:
Exhibit 7: Monthly Growth of Mobile Subscribers (2002-05)
(Rs. in million)
Year/ Month
2002-03
2003-04
2004-05

Apr.
0.28
0.64
1.37

May
0.29
2.26
1.33

June
0.35
1.42
1.43

July
0.36
2.31
1.74

Aug.
0.49
1.79
1.67

Sep.
0.37
1.61
1.84

Oct.
0.53
1.67
1.51

Nov.
0.72
1.90
1.56

Dec.
0.8
1.90
1.95

Jan.
0.73
1.64
1.77

Feb.
0.79
1.67
1.67

Mar.
0.95
1.91
0.73

Total
6.58
20.72
18.57

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

The number of mobile subscribers exceeded fixed subscribers in the country during October 2004. The tele-density indicates the number
of telephones per 100 people, increased by 1.91, during the year, registering 9.08 at the end of the year as compared to 7.04 at the end
of previous year. On the other hand, the increase in tele-density during 50 years from 1948 to 1998 was only 1.92% per annum. The trend
in the ratio of the subscriber base of private sector companies as compared to public sector companies underwent a change. This ratio,
which stood at 46:54 at the end of FY 2004-05, could well mean that the share of private companies would exceed that of public companies
in the year, 2006.
Internet/Broadband
The year 2004-05 also marked an increase in the subscriber base of internet services that increased from 4.55 million to 5.60
million registering a growth of 25%. The pattern of growth of various types of Internet subscribers from March 2003 is shown below:
Exhibit 8: Internet Subscriber Base 2003 to 2005
(in million)

Internet
High-speed Always-On connections
(<256 Kbps)
Broadband (>=256 Kbps)

Mar. 03

Mar. 04

Growth Rate 2003-04

Mar. 05

3.64

4.55

25%

5.60

Growth Rate 200405

25%

0.08

0.19

137.5%

0.65

240%

0.10

Source: Telecom Regulatory Authority of India (TRAI).

172 Internet Service Providers (ISPs) were operating for the quarter ending March 2005. With a subscriber base of 1.83 million,
BSNL retained its top position while MTNL with a subscriber base of 1.01 million retained its second position. Sify moved up to third
position with a subscriber base of 811,000. VSNL with 702,000 subscribers slipped to the fourth position and Reliance
Communications Infrastructure Ltd. with a subscriber base of 246,000 occupied the fifth position.
With effect from 1st April02, ISPs were permitted to operate internet telephony. Out of the 121 ISPs that received DOTs permission
for offering these services, 51 ISPs were operative in March 2005.
Tariff Trends
On the tariff front, a significant downward trend was witnessed during the year 2005. The minimum effective per minute charge for local
calls, STD and ILD charges were reduced. It became cheaper to make calls to Canada, Europe and the USA. As a result
international telephony became more affordable.
Exhibit 9
Service
International long distance calls to US, Canada,
Europe (Rs./min.)
STD charges for all the distances beyond 200 Kms
(Rs./min.)
Mobile Service [GSM & CDMA] (Effective
charges in Rs. per minute)
Source: Telecom Regulatory Authority of India (TRAI).

Mar. 03

Mar. 04

Mar. 05

24

9.60

7.20

% reduction during
2004-05
25%

4.80

3.60

2.40

33%

2.40

1.90

1.20

35%

Consumer Oriented Measures

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

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TRAI mandated that the telecom operators should provide minimum essential tariff information to facilitate informed choice for
the subscribers. The operators were also directed to provide in their websites all the details of tariff plans for different usage patterns
along with the financial implications. TRAI also directed that itemized bills relating to long distance calls should be provided to
consumers free of charge upon request.
[4]
A New Access Deficit Charge (ADC) regime was announced by TRAI, which would result in lower tariffs, and high-sustained
subscriber growth. Further, consistent decline in tariffs would also provide a sustained boost to subscriber growth and teledensity, and result
in lower prices for consumers.
THE GLOBALIZATION OF THE INDIAN STOCK MARKET
The style of functioning of the Indian stock market changed with the inflow of foreign funds and with the entry of Foreign
Institutional Investors (FII) after the financial sector reforms were initiated in 1991. Indian Telecommunications Sector also benefited
from new sources while scouting for funds. This phase has also seen the liberalization of investment norms for Non-Resident Indians
(NRIs), Persons of Indian Origin (PIO) and Overseas Corporate Bodies (OCBs), with the permission to purchase shares without
obtaining prior approval from the RBI. Further, since 1993, the Indian corporate sector was also allowed to tap the global market
with American Depository Receipt (ADR), Foreign Currency Convertible Bond (FCCB) and Global Depository Receipt (GDR).
Indian stock market has since joined the integration process. The setting up of the National Stock Exchange (NSE) in 1993 with worldclass facilities provided therein, unleashed competition as other exchanges were forced to go for automation and screen-based trading.
The Indian stock market moved into a new era of integration and globalization, which hitherto remained, insulated and
segmented. Significantly, the undercurrent of the global markets in general and the Nasdaq in particular was felt in the domestic capital
market movement. The advent of globalization meant that the Indian stock market should also catch up with the best international
practices. Badla, has been replaced with index-based and scrip-based futures and options, shares have been dematerialized, rolling
settlement is operated in place of the account period settlement, and internet trading has been implemented.
The process of Indian companies tapping the global market began with the maiden issue of Reliance Industries in May 1992. Till 2001-02,
81 Indian companies mobilized Rs.34,173.5 million through 115 issues. Among the emerging economies, India has the distinction of
issuing the maximum number of Depository Receipts (DRs).
COMPANY BACKGROUND
The Mahanagar Telephone Nigam Ltd. (MTNL) was incorporated on 28th February 1986, as a Public Limited Company under the
Companies Act, 1956. The companys authorized share capital was Rs.8 billion and the paid-up share capital was Rs.6.3 billion. The
company took over the control, management and operation of Delhi Telephone District (excluding public telegraph service) and
Mumbai Telephone District, which were until then operated by the Department of Telecommunications. The company established
and maintained all types of telecommunication services such as telephone, telex, wireless and data communication and other forms
of communication.
The company needed resources to fulfill the developmental plans of the telecommunications board of the Department of
Telecommunication. Resources were also required to: (1) improve the quality of telecom services, (2) expand telecom infrastructure, and
(3) establish new telecommunication services, meant particularly for business and public administration purposes.
CUSTOMER-FRIENDLY STEPS
[5]
The company attained Navratna status in the year 1997. During this year the company took steps to provide a host of services
like datacom, inet, DIDPABX, Voice Mail, Radio Paging and ISDN. This was done with the aim of providing value-added services to
the customers. Other facilities such as call waiting/call transfer, dynamic locking, hot line and phone plus facilities were also provided to
the customers. IVRS (Interactive Voice Response System) was also put in place to provide local assistance to the customers regarding
changed number information, and fault booking, besides ensuring round the clock service. Improvements were made in telephone
directory and directory enquiry systems with the introduction of a CD-ROM version of the telephone directory and also the introduction of
an on-line directory enquiry respectively. In Mumbai and Delhi, wireless in the local loop was provided and GSM Mobile Telephone was
also available in these Metros. For the customers, payment of bills was to become hassle free with the introduction of electronic
clearing system, on-line payment and adjustment of telephone bills.
For the benefit of customers, the company could clear the waiting list in Mumbai and had only 1047 in Delhi as on 31st March, 1998.
The countrys first toll-free service was launched in Delhi. MTNL also reduced the security deposit for the customer. For ensuring security
for customers from telephone tapping and reading by external sources, the company proposed to develop software to protect customers.
The charges for subscribers in the Wireless Local Loop (WLL) was Rs.25,000 instead of Rs.15,000 for other customers. To
mitigate immediate hardship to the customers by way of cash outflow, MTNL agreed to accept a bank guarantee for this security.
The companys low-tariff mobile telephone service was launched in 1999 and was targeted mainly towards the salaried middle-class
and students. With the introduction of this scheme, experts felt that MTNL virtually gave the private cellular operators a run for their
money. As regards Internet services, in the year 1999, the company entered into direct competition with another public sector unit
Videsh Sanchar Nigam Ltd. (VSNL) and offered 15 percent lower tariff. In the same year, MTNL entered into a joint venture with
Telecom Consultants India Ltd. (TCIL) and became the second basic telecom services provider in Jammu and Kashmir and West Bengal.
The company also proposed a cash-and-stock deal to the Department of Telecommunications (DoT). With the entry of MTNL into
cellular operations, the Delhi and Mumbai cellular operators proposed to MTNL for an out-of-court-settlement of pending
litigation concerning MTNLs entry into cellular services, which was however rejected by MTNL. The company expanded the WLL
network, both in Delhi and Mumbai to 10,000 and 50,000 subscribers respectively.

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MTNL entered into a tie-up with MasterCard International in the year 2000 and is termed by experts as a pioneer in the acceptance and
usage of credit cards for payment of telephone bills. An alliance with American Express travel related services enabled MTNL to
launch Indias first co-branded telecom credit card MTNL American Express credit card.
COMPANYS INITIATIVES
It was during July 1999, that MTNL decided to facilitate online payment of bills setting August 15, Indias Independence Day as the
launch date. This decision was taken despite the notable absence of approved legislation for online transactions at that time. Instead
of waiting for the enactment of cyber laws, we decided to go ahead said S Rajagopalan, MTNLs Chairman and Managing Director.
Market sources felt that a very bold step was taken by MTNL to take up online billing considering the fact that laws regulating netbased transactions were not in place. In another development, MTNLs move to cut internet tariffs by 15 percent was challenged by the
private operators who lodged a complaint in July 1999 with the Telecom Regulatory Authority of India (TRAI). The private
operators complained should any discounts be given by a network operator, such cuts should be extended to other players as well, to have
a level playing field. A spokesperson expressed the view that since MTNL owned these resources, the overall costs were obviously lower.
For the operation of basic and cellular services, the MTNL board approved the proposal to set-up a joint venture company with the
Telecom Consultants India Ltd. (TCIL), which was awarded the project to set-up a network in Kuwait. The first steps towards scouting for
an international Joint Venture (JV) partner for operating its cellular phone service were taken with the expectations that MTNL would hold
a 51 percent equity stake in the new company. In the wake of stiff competition and the need to streamline costs, the company planned
a restructuring exercise. The services of Tata Consultancy Services (TCS) were utilized for setting up an integrated commercial
accounting system.
A significant landmark was achieved when the company launched its cellular service in Mumbai from August 15, 2000. To
improve international communications infrastructure the company took steps to set-up a submarine cable landing station. During the
year 2000, the company transferred both its Internet Service Provider Category-A licence and Internet business to Millennium Telecom,
its subsidiary. Two additional customer service centers were opened in Mumbai. During this year, the company expanded its common
man mobile telephone network with the addition of 50,000 new lines. The company bagged a Rs.320 million contract for providing the
Fixed Wireless Terminals for its CDMA network in Delhi. It also set-up both basic and cellular services in Nepal. Plans for launch of
cellular phone service with increased subscriber capacity of 100,000 lines in Mumbai in January 2001 were ready.
The year 2001 saw MTNL developing a dedicated division for expanding its cellular operations in Delhi and Mumbai. Narinder Sharma,
the Chairman of the company received the international Millennium Man of the Year award presented by the international award
committee of Wisitex Foundation. ICRA was roped in to work out a strategy for leveraging the companys human resources.
MTNL and Videsh Sanchar Nigam Ltd. (VSNL) submitted a joint memoranda of understanding with the Department of
Telecommunications in the year 2001 giving details of their performance agenda for the year. The Company entered into a tie-up
with Billjunction.com and provided online bill presentment and payment facility to its customers. An alliance was also forged with IDBI
Bank to help the account holders of the bank to effect payment of their telephone bills through Internet and ATMs. MTNL launched
cellular service Dolphin, on 6th February, 2001 in Delhi and roaming facility was added before the end of the year. Dolphin increased
its subscriber base to 33,000 in Mumbai. As much as 30 percent of the new connections were defectors from existing cellular operators
either Orange or BPL.
The company also developed a dedicated division to spearhead its cellular business in Delhi and Mumbai. Steps were taken to
provide additional net switching capacity of 330,000 lines and to additionally deploy 50,000 lines of CDMA-based WLL technology
during the year 2001-02. In the process of diversifying its overseas operations, MTNL tied-up with WorldTel to offer basic telecom services
in Bangladesh.
MTNL entered into partnership with RailTel Corporation of India Ltd. in the year 2002 to offer telecom bandwidth through Optical
Fibre Cable (OFC) laid along the railway track network. Consistent with its strategy to offer value-added communications software in
e-commerce, e-governance and intelligent networking, MTNL developed a new software venture called ComSoft. The launch of WLL
service in Mumbai and also the launch of pre-paid cellular card Trump in Delhi and Mumbai, at 50 percent lower tariffs as compared
to private operators players were significant developments. Trump was however withdrawn before the end of the year.
To meet competition from the private sector, MTNL cut down cellular tariffs in the year 2003. The subscribers for WLL services were
offered new Economy Plan. The tariff rates on CDMA services were reduced by 50%. A new tariff plan was introduced with a
monthly rental of Rs.100 and call charges at the rate of Rs.1.90 per minute. Another new scheme was launched that offered a fixed
line telephone connection for Rs.100 per month, and the customer was provided access to free incoming calls. For outgoing calls,
Virtual Credit Cards (VCC) were to be used. This new offer combined a hybrid post-paid cum prepaid arrangement. Under basic
telephony services, it launched a new scheme, Plan 160, and came out of a negative trap with new fixed-line subscribers outgrowing
the surrenders. The company however shelved its global long distance plan. MTNL bagged a contract for providing telephone service and
ILD services in Mauritius. While the company awarded the WLL-M handset contract to Kyocera of Japan, it also joined hands with Nokia
and Samsung for providing WLL handsets.
During the year 2004, MTNL launched new schemes for ISDN subscribers. New leased line services were launched with both full
and compressed bandwidth circuits, with speeds ranging from 64 kpbs to two mbps. For landline customers, the company unveiled
SMS facilities and for Mumbai landline customers, Value Added Services (VAS) were provided. MTNL announced special tariff plan
on January 09, 2004 for low end users of basic services with monthly rental of Rs.160. A strategic alliance was formed with MTNL and
BSNL coming together to jointly offer their voice and data services. These public sector companies came together to target corporate clients.
MTNL bagged overseas offers to provide telecom services in Mauritius and Kenya. It also bagged the award for excellence in cost
reduction. Significantly, the year 2005 began with a reduction in high-speed Internet tariff. BSNL and MTNL launched their
broadband services across the country from January 14 offering services at lower rates of Rs.500 a month.

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PUBLIC OFFER
The company offered for public subscription, 1,500,000-14% and 10% secured redeemable non-convertible bonds of Rs.1,000
during November 1986. This was for meeting the part requirements of the capital expenditure programs of both MTNL and DoT for the
year 1986-87. To retain over subscription additionally, another 750,000 bonds were issued. Further, financial institutions and banks
received private placement of 1,588,460-14% secured redeemable bonds. 5,999,984 shares were issued without cash payment. The
allotment of 1,12,133-14% and 1,926,327-10% bonds of Rs.1,000 each took place in February/March, 1987. After the date of allotment,
the 14% and 10% bonds were to be redeemed at the expiry of 7 years and 10 years respectively. The company also made a private
placement of bonds worth Rs.4,500 million with banks, FIs and mutual funds.
Keeping in view the developmental programs of the department of telecommunications, MTNL floated during the year 1996, 11th A part
and 12th Series of bonds on private placement basis amounting to Rs.3,592.6 million.
GDR ISSUE
During the year 1997, 350,000 GDRs representing 700,000 equity shares (1 GDR = 2 shares) were issued by the company at a price of US
$ 11.958 per GDR. Later in the year 1999, the MTNL Board proposed stock option price of around Rs.85 per share to the Department
of Telecommunications (DoT). Incidentally, the prevailing market price was around Rs.85 per share after it slumped from a high of
around Rs.170 before the change of government took place at the center in that year. MTNL also proposed that the disinvestment program
of the government should be dovetailed with its $100 million Global Depository Receipt (GDR) issue coinciding with the companys plan
to emerge as the first Indian company to be listed on the New York Stock Exchange (NYSE).
Plans were afoot to list MTNL on the New York Stock Exchange (NYSE) before the end of the year 1999. As per the plans the listing was
to coincide with the next block of divestment and was aimed at providing an option to the European stakeholders to convert their GDRs
into American Depository Receipts (ADRs). MTNLs chairman said we plan to list at NYSE simultaneously with the divestment of
19 million government shares and a book-building exercise would begin immediately. As a result, MTNL was also contemplating changes
in its accounting norms so as to be in tune with the Generally Accepted Accounting Practices (GAAP). The listing at NYSE was also
planned since the entire Global Depository Receipts (GDRs) were only traded at the London Exchange. However, MTNL did not consider
the plan to delist from London should the European investors opt out of GDRs. The listing exercise was expected to cost around $1
million. Company sources believed that the NYSE listing along with the ADR conversion would boost MTNLs international presence,
and entertained hopes that the share value at the domestic market would shoot up substantially consequent to its listing at the NYSE.
The government finalized the plans to go ahead with the GDR issue of MTNL during early November 1999, which was however called off
in the last minute. The global coordinators to the issue and the merchant bankers Goldman Sachs, HSBC Investment Banking and
Merrill Lynch, advised against this move after considering the market sentiments at that time. The companys earlier GDR issue of 1997
was in fact quoted at a discount. S Sundaresan, Director of Finance, MTNL conveyed that even the domestic issue of Employee Stock
Option (ESOP) that would have offered about 2.25 percent of the paid-up capital was also deferred. Had the GDR, the ESOP and the
public offer been through the government stake in MTNL would have been reduced to 51 percent from a level of around 56.25 percent.
The MTNL shares oscillated between a high of Rs.230 and a low of Rs.154 during the second half of 1999. MTNLs shares were finally
listed at the NYSE during November 2001 and in this process became the ninth Indian company to be listed there. Talking to reporters
from NYSE, Narinder Sharma, the companys chairman and managing director informed that more than 31,000 ADRs were traded on the
floor within the first 45 minutes of trading at $5.9 a ADR and demand for the scrip only increased. He also revealed that the company
had plans to enter the American market directly and raise funds through issue of fresh ADRs.
LEGAL ISSUES
The government approved the proposal to amend MTNLs articles of association after the extraordinary general body meeting of the
company was held on November 19, 1999. The powers to: incur capital expenditure, enter into technological joint ventures or
strategic alliances, effect organizational restructuring, create and wind-up all posts, structure and implement schemes relating to personnel
and human resource management, and raise funds from domestic capital markets and to borrow from international markets, were delegated
to the board. This move was taken to give the necessary autonomy to the company to take commercial decisions for improving
shareholder value. The step was also seen as a catalyst in creating a positive reaction in the market to push up MTNL share prices.
Consequent to the amendment to the articles of association, MTNL had to make a few choices. The first option was to privately place
their equity with select investors. Earlier, during 1997, at the time of GDR issue, British Telecom, France Telecom and Italian Telecom
offered to take sizable stakes in the company and wanted their representatives on the MTNL board. This proposal was turned down by
the company. The second option was to offload sizable chunk of shares in the domestic market, alongside the risk of a single
interested investor mopping up the entire shares. The third option was to buy back MTNLs own shares. The company believed
that downsizing the equity base was the need of the hour.
ACCOUNTING ISSUES
Analysts believed that the fourth quarter profits for FY2000 were inflated since revised wages and taxation were not provided for.
Subsequent to the declaration of unaudited results for the last quarter of FY 2000, MTNL revised its profit downwards to account
for retrospective wage revision for its employees. The adjustment in the audited results led to an increase in the staff costs by Rs.3,800
million and in administrative and operating expenses by Rs.830 million. Rs.1,370 million were also applied towards prior period
adjustments. Analysts pointed out that the fourth quarter results for 2000 were also inflated since taxation and write-back of taxes
provided earlier were not provided for to the extent of Rs.825 million. Consequently, it was believed that the Q4FY2000 profits were
inflated to the extent of Rs.1,200 million. (Refer to Annexures I to IV).
Against this background, during the FY 2001, the government had divested approximately 275.6 million shares (including 70 million
shares through Global Depository Receipts (GDRs)). The outstanding shares of MTNL as on March 31, 2001 were 630 million (30
million GDR included) out of which government owned 354.3 million shares (56.25 percent). For the quarter ended June 2001,
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MTNL announced a marginal 2.24 percent increase in its net profit at Rs.3,773 million as against Rs.3,690.5 million in the
corresponding quarter during the earlier year. The net income stood at Rs.14,953 million and the earning per share went up to Rs.23.96
during the quarter as compared to Rs.23.43 per share in the corresponding quarter during the earlier year. For the next quarter
ended September, MTNL registered a 14.5 percent decline in net profit that stood at Rs.3,823.4 million. S Sundaresan, Director (Finance),
said that the decline in net profits was due to the provision of deferred tax liability in compliance with the New Accounting Standard 22.
The companys profits registered an increase of 32 percent during the last quarter of 2001, while the companys stock dipped nearly 10
percent with reports suggesting that the profits had actually fallen during that quarter.
OTHER ISSUES
The government held 56.25 percent equity in MTNL, banks held 40.87 percent equity and financial institutions held 70 million shares
through GDR. Against this background, the central government considered a proposal in August 2002 to bring both the public sector
majors BSNL and MTNL under one umbrella. The then Information Technology Minister Pramod Mahajan however said that the
proposal was only in the thinking stage.
He conceded that although both the organizations were public sector units, differences existed with regard to pay scales, promotions
and employee strength. He added BSNL with its vast customer base, possessed vast and strong financial and asset bases too. The value of
its telephone infrastructure alone was estimated at about Rs.1,000 billion, having a turnover of Rs.220 billion and fixed assets were
worth more than Rs.900 billion.
Analysts looked at the advantages for BSNL from the merger. Firstly, BSNL could gain control over the lucrative circles of Mumbai and
Delhi for offering both basic and cellular telephony services. Secondly, the merger with MTNL could boost revenue potential and viability
as these two metros enjoy the highest Average Revenue Per User (ARPU) in the country. Thirdly, the relatively healthy cash flows of
MTNL could help BSNL to narrow the resource gap between its proposed yearly investments and the available internal resources. For
MTNL, the loss would be its loss of identity. MTNL was listed both in the domestic as well as overseas markets. BSNLs net worth at
the time of merger proposal in the year 2002 was over Rs.600 billion and that of MTNL was about Rs.71 billion. BSNL had a staff strength
of about 350,000 and MTNL had over 50,000 employees.
The BSNL top-brass believed that the proposed merger with MTNL would be detrimental to the interests of both organizations and
their stakeholders. SD Saxena, BSNLs director (finance) told ET we are confident that we can convince Union communications
minister Pramod Mahajan about this. The recent merger proposal has also not been received well in the international markets he added. At
the same time, MTNL staff was also opposed to this idea of merger.
The merger was possible either through an open offer or a share swap deal. The MTNL shareholders gave a thumbs down to the
merger proposal, marking the MTNL stock down. By recording a price of Rs.95 in the year 2002, the MTNL stock price hit a new nineyear low. At the beginning of the year 2003, the company missed out on the deadline for WLL-M expansion in Delhi. During this year,
the new WLL tariffs proposed by MTNL were rejected by the TRAI. The company formulated a Voluntary Retirement Scheme (VRS)
scheme for its employees. The DoT signed a Memorandum of Understanding (MoUs) for 2003-04 with MTNL.
GOVERNMENTS PLANS
In January 2003, the then Communications Minister Arun Shourie wanted to study the proposal for the merger of MTNL and BSNL and
asked for details about their market share and their competitiveness. He wanted to assess the handicaps in this regard and the steps needed
for removing them. The minister was guarded when he said that he had not fixed any time frame for arriving at a conclusion. His idea was
to ensure competition in the telecom sector. At the same time, he expressed the view that intense competition must not hurt balance
sheets. Things moved ahead, and towards the end of October 2003, MTNL had even finalized the scheme for rationalizing its workforce,
and worked out details regarding a VRS.
As news of a possible merger flared up in June 2004, the MTNL stock that was lying low at Rs.95 bounced to Rs.130 levels. Analysts
pointed out that though nothing really happened in the merger front, it was not until October 2004, that the merger issue became
prominent once again. Dayanidhi Maran, the Minister of Communication and Information Technology clearly revealed
governments intentions to push this idea further. Amidst reports of the possibility of MTNL becoming a subsidiary of BSNL, the mood
of MTNL was clearly against such a move. R S P Sinha, MTNL CMD said the suggestion does not give either benefit or result, that
was visualized in the case of a possible merger since these two companies would remain as separate entities maintaining an arms
length distance. This is due to the reason that MTNL is a listed company in the Indian bourses and at New York Stock Exchange (NYSE)
as well he added. He also revealed that MTNL and BSNL are in fact complementing each others operations. they are not competing
with each other, he said.
Towards the end of 2004, the market estimates put BSNLs equity value at $8 billion and enterprise value at $12 billion. The enterprise
value and equity value of MTNL was put at $1.6 and $2.2 billion, respectively. As the merger issue came into limelight again, analysts
were busy in analyzing the effects of a possible merger. It was felt that the proposed merger between MTNL and BSNL might not
provide relief in terms of high employee cost, political interference and red tape. Accounting experts believed that it would be difficult
for BSNL to meet GAAP accounting standards.
For the first quarter ended in June 2005, MTNL reported a 26 percent year-on-year decline in net profit to Rs.1.72 billion. There was also
a decline in the income from services which declined to 9.2 percent amounting to Rs.13.92 billion. MTNLs revenues from mobile
services however increased by 100.19 percent to Rs.1.01 billion. Also the subscriber base in Mumbai and New Delhi doubled to 14
percent with 1.1 million subscribers, up from 7 percent in the first quarter of 2004-05.
KEY CONCERNS
Considering their area of operations, analysts feared that the cost and revenue synergies between MTNL and BSNL would be
minimal. Savings on network sharing also would not be possible as the two companies have networks in different areas. BSNL is present

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in the entire country except Mumbai and Delhi where MTNL is having its network. The possible benefit from economies of scale in
procuring equipment could lead to lower capital expenditure, which however would not exceed more than 5% of the total capital
expenditure for BSNL. With regard to capital expenditure, BSNLs budgeted expenditure was Rs.150 billion for FY 2004. For MTNL,
this amount was budgeted to be about Rs.9 billion for the FY 2004. MTNL could have saved about 25% on its capital expenditure due to
the merger though it would not have impacted on MTNLs operating expenses. It was against this background that MTNLs merger issue
with BSNL and the exercise at restructuring MTNL remained pending.
ANNEXURE I
Balance Sheet
0503-(12)
Sources of Funds
Owners Fund
Equity Share Capital
Share Application Money
Preference Share Capital
Reserves & Surplus
Loan Funds
Secured Loans
Unsecured Loans
Total
Uses of Funds
Fixed Assets
Gross Block
Less: Revaluation Reserve
Less: Accumulated Depreciation
Net Block
Capital Work-in-progress
Investments
Net Current Assets
Current Assets, Loans & Advances
Less: Current Liabilities & Provisions
Total Net Current Assets
Miscellaneous expenses not written
Total
Note:
Book Value of Unquoted Investments
Market Value of Quoted Investments
Contingent liabilities
Number of Equity shares outstanding

0403-(12)

0303-(12)

0203-(12)

(Rs. in million)
0103-(12)

6,300.00
0.00
0.00
103,138.30

6,300.00
0.00
0.00
96,976.28

6,300.00
0.00
0.00
88,669.73

6,300.00
0.00
0.00
83,096.41

6,300.00
0.00
0.00
77,181.49

0.00
0.00
109,438.30

0.00
0.00
103,276.28

0.00
0.00
94,969.73

0.00
26,190.00
115,586.41

0.00
28,810.00
112,291.49

142,522.50
0.00
77,836.20
64,686.30
6,270.60
3,974.70

135,629.33
0.00
73,526.51
62,102.82
5,082.49
3,806.94

126,652.06
0.00
71,480.32
55,171.74
9,187.37
3,710.12

117,322.24
0.00
64,204.26
53,117.98
7,978.05
1,026.77

106,809.54
0.00
56,530.67
50,278.87
8,155.01
0.02

152,490.00
117,983.30
34,506.70
0.00
109,438.30

143,120.51
110,836.48
32,284.03
0.00
103,276.28

127,779.59
100,879.09
26,900.50
0.00
94,969.73

133,707.72
80,244.11
53,463.61
0.00
115,586.41

110,441.50
56,583.91
53,857.59
0.00
112,291.49

0.00
0.00
64,028.20
630,000,000.00

3,806.94
0.00
48,531.02
630,000,000.00

3,710.12
0.00
39,659.27
630,000,000.00

1,026.77
0.00
39,222.49
630,000,000.00

0.02
0.00
11,865.43
630,000,000.00

Source: www.indianinfoline.com
ANNEXURE II
Profit and Loss Account
(Rs. in million)
0503-(12)
Income
Operating Income
Expenses
Material Consumed
Manufacturing Expenses
Personnel Expenses
Selling Expenses
Administrative Expenses
Expenses Capitalized
Cost of Sales
Operating Profit
Other Recurring Income
Adjusted PBDIT
Financial Expenses
Depreciation

0403-(12)

0303-(12)

0203-(12)

0103-(12)

55,923.90

63,704.00

58,072.62

61,450.72

57,875.12

0.00
16,813.00
19,319.40
0.00
9,473.30
-963.10
44,642.60
11,281.30
7,113.60
18,394.90
358.10
5,880.10

0.00
2,267.17
17,011.46
3,033.88
21,468.26
0.00
43,780.77
19,923.23
1,990.85
21,914.08
470.29
5,437.95

0.00
2,319.62
15,482.06
2,987.92
17,663.91
0.00
38,453.51
19,619.11
1,940.72
21,559.83
436.08
8,670.42

0.00
2,124.47
14,803.28
312.51
19,573.36
0.00
36,813.62
24,637.10
1,806.11
26,443.21
553.52
8,164.56

0.00
13,315.07
13,233.81
2,310.57
3,024.29
0.00
31,883.74
25,991.38
2,466.14
28,457.52
3,977.23
7,692.46

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Other Write offs

Adjusted PBT
Tax Charges
Adjusted PAT
Non-recurring Items
Other Non-cash adjustments
Reported Net Profit
Earnings Before Appropriation
Equity Dividend
Preference Dividend
Retained Earnings

0.00
12,156.70
2,672.40
9,484.30
94.50
0.00
9,484.30
9,578.80
2,835.00
0.00
6,351.00

0.00
16,005.84
4,513.48
11,492.36
-276.41
288.83
12,346.03
11,504.78
2,835.00
0.00
8,306.55

0.00
12,453.33
3,600.32
8,853.01
-111.28
29.82
8,771.55
8,771.55
2,835.00
0.00
5,573.32

0.00
17,725.13
4,937.63
12,787.50
74.34
144.93
13,006.77
13,006.77
2,835.00
0.00
10,171.77

0.00
16,787.83
1,630.00
15,157.83
414.37
-170.37
15,572.20
15,401.83
2,835.00
0.00
12,277.66

Source: www.indianinfoline.com
ANNEXURE III
Cash Flow Statement
(Rs. in million)
Profit Before Tax
Depreciation
Lease and Rental Charges
Lease Equalization
P and L in Forex
Gain on Forex Transaction
P and L on Sale of Assets
P and L on Sale of Investments
Profit Adj. on Sale of Undertaking
Interest Income
Interest Paid Net
Interest Net
Dividend Received
Dividend Net
Investments
Misc. Income
Amortisation of Expenses
Assets Written off
Misc. Expenses
Payment towards VRS
Provision and WO Net
Provision for Gratuity
Provision for Dimunition in Investments
Provisions for BadDebts NPA
Trade and Other Receivables
Trade Bills Purchased
Inventories
Trade Payables
Tax Provision
Direct Taxes Paid
Advance Tax Paid
Loan and Advances
Transfer from Reserve
Other Operating Activity
Prior Year Adjustments
Provisions Written Back
Prior Year Taxation
Balances Written Back
Other Assets
Other Liabilities
Change in Deposits
Change in Borrowing
Discount Exp. on Loans Wrt.off
Increase/decrease in Advances
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0403-(12)
16,859.51
5,437.95
0.00
0.00
0.00
0.00
107.51
0.00
0.00
1,748.46
14.65
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2,556.44
0.00
609.74
4,657.52
0.00
9,695.26
0.00
0.00
0.00
0.00
538.87
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0303-(12)
12,597.56
8,672.75
0.00
0.00
0.00
0.00
79.02
0.00
0.00
1,634.53
4.49
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
8,344.92
0.00
1,275.11
15,324.67
0.00
8,326.70
0.00
0.00
0.00
0.00
198.37
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0203-(12)
18,023.15
8,164.56
0.00
0.00
0.00
0.00
9.02
0.00
0.00
1,573.22
150.43
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
13,116.45
0.00
90.54
12,859.57
0.00
8,732.32
0.00
0.00
0.00
0.00
39.46
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0103-(12)
17,202.20
7,692.46
0.00
0.00
0.00
0.00
-68.96
0.00
0.00
1,793.04
83.03
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
267.02
0.00
212.46
4,984.88
0.00
7,933.02
0.00
0.00
0.00
0.00
157.04
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0003-(12)
13,999.48
7,092.81
0.00
0.00
0.00
0.00
-21.61
0.00
0.00
1,117.21
-400.49
84.16
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1,823.86
0.00
376.87
11,764.40
0.00
8,874.97
0.00
0.00
0.00
0.00
1,489.36
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

Suggested Answers with Examiner's Feedback

Increase/decrease in Investments
Net Stock on Hire
Leased Assets Net of Sale
Excess Depreciation Written back
Premium on Lease of Land
Extra Ordinary Items
Net Cash Flow-Operating Activity
Purchase of Fixed Assets
Sale of Fixed Assets
Capital WIP
Capital Subsidy Recd
Purchase of Investments
Sale of Investments
Acquisition of Companies
Sale of Undertaking Extra Ord. Item
Interest Received
Dividend Received Inves Activity
Investment Income
Inter Corporate Deposits
Investment in Subsidiaries
Loan to Subsidiaries
Investment in Group Cos
Issue of Shares on Acq. of Cos
Cancellation of Invest. in Cos Acq
Certificate of Deposit in Bank
Movement in Loans
Others from Invest. Activity
Movement in Working Capital
Amortization of Expenses Invest Activity
Taxes Paid
Expenses Capitalized
Extraordinary Items
Purchase of Fixed Assets Leased Out
Net Inc/Dec in Current Asset
Net Inc/Dec in Advances
Net Inc/Dec in Current Liab.
Net Cash Used in Investing Activity
Proceeds from Issue of Eq. Capital
Proceeds from Issue of Pref. Capital
Proceed from Issue of Cap. Incl. Sh. Prem.
Redemption of Capital
Proceed from Issue of Deb
Proceed from bank Borrowings
Proceed from oth. LTerm Borr
Proceed from Sh Term Borr
Proceed from Deposits
Repayment of Borrowings
Share Application
Loan from Corporate Body
Dividend Paid
Interest Paid
Financial Charges
Cash Credit Advances
Cash Cap Investment Subsidy
Others from Fin Activity
Foreign Exchange Gains Losses
Share Premium
Misc. Exp. Written-Off
Sale of Investments
Reserves
Current Liabilities
Loans Disbursed
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0.00
0.00
0.00
0.00
0.00
0.00
18,260.73
9,336.65
57.71
0.00
0.00
96.82
0.00
0.00
0.00
1,694.75
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
7,681.01
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
-5.43
0.00
0.00
3,198.24
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0.00
0.00
0.00
0.00
0.00
0.00
36,138.92
12,061.94
19.77
0.00
0.00
2,683.35
0.00
0.00
0.00
1,319.35
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
13,406.17
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
26,190.38
0.00
0.00
2,835.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0.00
0.00
0.00
0.00
0.00
0.00
15,613.88
11,592.14
740.44
0.00
0.00
1,026.75
0.00
0.00
0.00
1,631.89
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
10,246.56
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2,624.97
0.00
0.00
3,124.17
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0.00
0.00
0.00
0.00
0.00
0.00
19,531.03
10,156.58
47.86
0.00
0.00
0.00
0.00
0.00
0.00
1,731.21
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
8,377.51
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
-2,342.46
0.00
0.00
2,167.20
166.33
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0.00
0.00
0.00
0.00
0.00
0.00
22,484.20
9,586.85
122.92
0.00
0.00
0.00
0.00
0.00
0.00
1,129.76
0.00
0.00
0.00
-0.02
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
8,334.19
0.00
0.00
0.00
0.00
0.00
0.00
26,190.00
0.00
0.00
0.00
0.00
0.00
2,097.90
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

Suggested Answers with Examiner's Feedback

Inventories Fin Activity

Extraordinary Items FinActivity
Deferred Exp Against Borrowing
Share Application Refund
On Redemption of Debenture
Of Other Long-Term Borrowing
Of Short-term Borrowing
Of Fin Lease Liability
Shelter Assistance Reserve
Repayment of Short-term Borrow
Repayment of Long-term Borrow
Net Cash Used in Fin. Activity
Foreign Exchange Gains Losses Net Fin. Activity
Net Inc/Dec in Cash and Equivlnt
Cash and Equivalnt Begin of Year
Cash and Equivalnt End of Year
Source: www.indianinfoline.com

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
3,203.67
0.00
7,376.05
18,154.64
25,530.69

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
29,025.38
0.00
-6,292.64
24,446.52
18,153.88

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
5,749.14
0.00
-381.82
24,828.34
24,446.52

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
4,675.99
0.00
6,477.53
18,350.81
24,828.34

0.00
0.00
0.00
0.00
0.00
33,392.20
0.00
0.00
0.00
0.00
0.00
9,300.10
0.00
4,786.60
13,564.21
18,350.81

ANNEXURE IV
Ratio Analysis
0503-(12)
Per Share Ratios
Adjusted EPS (Rs.)
Adjusted Cash EPS (Rs.)
Reported EPS (Rs.)
Reported Cash EPS (Rs.)
Dividend Per Share
Operating Profit Per Share (Rs.)
Book Value (Excl Rev Res) Per Share (Rs.)
Book Value (Incl Rev Res) Per Share (Rs.)
Net Operating Income Per Share (Rs.)
Free Reserves Per Share (Rs.)
Profitability Ratios
Operating Margin (%)
Gross Profit Margin (%)
Net Profit Margin (%)
Adjusted Cash Margin (%)
Adjusted Return on Net Worth (%)
Reported Return on Net Worth (%)
Return on long-term Funds (%)
Leverage Ratios
Long-term Debt/Equity
Total Debt/Equity
Owners fund as % of total Source
Fixed Assets Turnover Ratio
Liquidity Ratios
Current Ratio
Current Ratio (Inc. ST Loans)
Quick Ratio
Inventory Turnover Ratio
Payout Ratios
Dividend payout Ratio (Net Profit)
Dividend payout Ratio (Cash Profit)
Earning Retention Ratio
Cash Earnings Retention Ratio
Coverage Ratios
Adjusted Cash Flow Time Total Debt
Financial Charges Coverage Ratio
Fin. Charges Cov.Ratio (Post Tax)
Component Ratios
Material Cost Component (% earnings)
Selling Cost Component
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0403-(12)

0303-(12)

0203-(12)

0103-(12)

15.05
24.39
15.05
24.39
4.50
17.91
173.71
173.71
88.77
0.00

18.24
26.87
19.60
28.23
4.50
31.62
163.93
163.93
101.12
132.02

14.05
27.81
13.92
27.69
4.50
31.14
150.75
150.75
92.18
120.96

20.30
33.26
20.65
33.61
4.50
39.11
141.90
141.90
97.54
113.74

24.06
36.27
24.72
36.93
4.50
41.26
132.51
132.51
91.87
107.18

20.17
9.65
15.04
24.37
8.66
8.66
11.43

31.27
22.73
18.79
25.77
11.12
11.95
15.95

33.78
18.85
14.61
29.19
9.32
9.23
13.57

40.09
26.80
20.56
33.12
14.30
14.54
15.81

44.90
31.61
25.80
37.86
18.15
18.65
18.49

0.00
0.00
100.00
0.39

0.00
0.00
100.00
0.46

0.00
0.00
100.00
0.45

0.29
0.29
77.34
0.52

0.34
0.34
74.34
0.54

1.29
1.29
1.28
29.97

1.29
1.29
1.25
0.00

1.27
1.27
1.22
0.00

1.67
1.67
1.61
22.16

1.95
1.95
1.90
20.21

34.03
21.00
65.97
79.00

25.90
17.98
72.18
81.11

36.46
18.33
63.88
81.75

21.79
13.39
77.83
86.47

20.06
13.42
79.39
86.33

0.00
51.37
43.91

0.00
46.60
38.81

0.00
49.44
41.00

1.25
47.77
39.25

1.26
7.16
6.85

0.00
0.00

0.00
4.76

0.00
5.14

0.00
0.50

0.00
3.99

Suggested Answers with Examiner's Feedback

Exports as percent of Total Sales

Import Comp. in Raw Mat. Consumed
Long-term assets/Total Assets
Bonus Component in Equity Capital (%)
Source: www.indianinfoline.com

0.00
0.00
0.32
0.00

0.01
0.00
0.33
0.00

0.10
0.00
0.34
0.00

0.50
0.00
0.31
0.00

1.05
0.00
0.34
0.00

END OF QUESTION PAPER

Suggested Answers
Integrated Case Studies - I (MSF3S1) : October 2007
Case Study
1. The Indian telecommunications sector was wholly under government ownership until the mid-1980s, and in 1986 public
sector corporations such as the Mahanagar Telephone Nigam Limited (MTNL) and the Videsh Sanchar Nigam Limited
(VSNL) were created to allow greater autonomy in decision-making, and to facilitate public borrowings that would not have
been possible under a government framework. However, policy formulation and regulation remained with the Department of
Telecommunications (DOT). The MTNL was mainly constituted to look after the operation, maintenance, and development of
telecom services.
The VSNL was set up to plan, operate, develop, and accelerate international telecom services in India. In 1989, the Telecom
Commission was created with executive, administrative, and financial powers to formulate and regulate policy and prepare the
budget for the DOT. In line with other economic reforms, the telecommunications equipment manufacturing industry has been
de-licensed and de-reserved since 1991. Automatic approval of foreign equity up to 51 per cent has been allowed for foreign
investors engaged in the manufacture of all telecommunications equipment. The value added services in the
telecommunications sector were opened up to private investment in July 1992 with the objective of achieving international
facilities. The National Telecom Policy (NTP) announced in 1994 specified the major objectives of the reform in the
telecommunication sector in India. This policy also paved the way for private sector participation in basic telephone services,
particularly local telephones. However, there is criticism that the policy failed to provide the mechanisms to achieve the
objectives such as universal access and service goals.
This revised policy has incorporated an element of revenue sharing with operators rather than license fee arrangements. The
Department of Telecom Services (DTS) was created in 1999 to separate the DOTs service role from policy and licensing. DTS
has been converted in 2001 to an independent company called Bharat Sanchar Nigam (BSNL). This raised huge opposition
from labour unions and the government had to compensate the employees with a free phone installation, free local calls to a
certain number, and no rental charges for a telephone until a specified time. The VSNL has lost its monopoly status as the sole
internet service provider (ISP) in the reform process as the GOI has allowed private participation for ISPs, and thus licensing
was made almost free.
The government has also treated VSNL and other providers indiscriminately, and has provided the same rights to work with
international carriers to have access to undersea bandwidth. Again, in typical fashion, to compensate the losses for VSNL, the
government has granted a nationwide license for internet and a free license for long distance calls, which was cancelled later
due to a belated realisation of the negative impact of this decision on the growth of the sector.
< TOP >
2. The Centre considered a new strategy for the merger of Bharat Sanchar Nigam (BSNL) and Mahanagar Telephone Nigam
(MTNL). In the first phase, the government may form a holding company with BSNL and MTNL as its subsidiaries. After
three years, the two PSUs would be merged into one entity. The consortium of consultants led by ICICI Securities has
informed a high-level steering committee headed by the telecom commission chairman that this is the most practical approach
to synergise operations of the two PSUs. In its report submitted to the DoT, the consortium had suggested four options to
merge the two PSUs. The first option was acquisition of MTNL by BSNL followed by an IPO by BSNL. The other options are
merging MTNL into BSNL, merging BSNL into MTNL, and MTNL acquiring BSNL.
However, the biggest hurdle in the acquisition of MTNL by BSNL is its fair valuation. If the acquisition is through equity
swap, which could be the most preferred option, then the valuation of BSNL would be another problem. MTNL is listed in the
local markets as well as on the NYSE. Hence, compensation of ADR holders will be a issue. Moreover, human resources will
also be an important issue as MTNL staffers currently get a higher salary than their BSNL counterparts.
Once these issues are resolved, the two PSUs can be merged into one entity with least resistance. The merger would not solve
any of the telecom PSUs' existing problems, such as red tapism, political interference, and high employee cost, which is around
30% of the total sales, compared to 6-7% for private operators.
< TOP >
3. The countrys first toll-free service was launched in Delhi. MTNL also reduced the security deposit for the customer. For
ensuring security for customers from telephone tapping and reading by external sources, the company proposed to develop
software to protect customers. To mitigate immediate hardship to the customers by way of cash outflow, MTNL agreed to
accept a bank guarantee for this security.
The companys low-tariff mobile telephone service was launched in 1999 and was targeted mainly towards the salaried
middle-class and students. With the introduction of this scheme, experts felt that MTNL virtually gave the private cellular

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operators a run for their money. As regards Internet services, in the year 1999, the company entered into direct competition
with another public sector unit Videsh Sanchar Nigam Ltd. (VSNL) and offered 15 percent lower tariff. In the same year,
MTNL entered into a joint venture with Telecom Consultants India Ltd. (TCIL) and became the second basic telecom services
provider in Jammu and Kashmir and West Bengal. The company also proposed a cash-and-stock deal to the Department of
Telecommunications (DoT).
MTNL entered into a tie-up with MasterCard International in the year 2000 and is termed by experts as a pioneer in the
acceptance and usage of credit cards for payment of telephone bills. An alliance with American Express travel related services
enabled MTNL to launch Indias first co-branded telecom credit card MTNL American Express credit card.
< TOP >
4. The telecoms trends in India will have a great impact on everything from the humble PC, internet, broadband (both
wireless and fixed), cable, handset features, talking SMS, IPTV, soft switches, and managed services to the local
manufacturing and supply chain.
This report discusses key trends in the Indian telecom industry, their drivers and the major impacts of such trends affecting
mobile operators, infrastructure and handset vendors.
Higher acceptance for wireless services
Indian customers are embracing mobile technology in a big way (an average of four million subscribers added every month for
the past six months itself). They prefer wireless services compared to wire-line services, which is evident from the fact that
while the wireless subscriber base has increased at 75 percent CAGR from 2001 to 2006, the wire-line subscriber base growth
rate is negligible during the same period.
In fact, many customers are returning their wire-line phones to their service providers as mobile provides a more attractive and
competitive solution. The main drivers for this trend are quick service delivery for mobile connections, affordable pricing plans
in the form of pre-paid cards and increased purchasing power among the 18 to 40 years age group as well as sizeable middle
class a prime market for this service.
There are some positive impacts of this trend. According to a study, 18 percent of mobile users are willing to change their
handsets every year to newer models with more features, which is good news for the handset vendors. The other impact is that
while the operators have only limited options to generate additional revenues through value-added services from wire-line
services, the mobile operators have numerous options to generate non-voice revenues from their customers. Some examples of
value-added services are ring tones download, coloured ring back tones, talking SMS, mobisodes (a brief video programme
episode designed for mobile phone viewing) etc. Moreover, there exists great opportunity for content developers to develop
applications suitable for mobile users like mobile gaming, location based services etc. On the negative side, there is an
increased threat of virus spread through mobile data connections and Bluetooth technology in mobile phones, making them
unusable at times. This is good news for anti-virus solution providers, who will gain from this trend.
MERGERS
Demand for new spectrum as the industry grows and the fact the spectrum allocation in done on the basis of number of
subscribers will force companies to merge so as to claim large number of subscribers to gain more spectrum as a precursor to
the launch of larger and expanded services. However it must also be noted that this may very well never happen on account of
low telecom penetration.
< TOP >
5.

The several key events that have enabled the vigorous competition witnessed include:
The corporatization of the DOT and the creation of a new state-owned telecom company, Bharat Sanchar Nigam

Ltd (BSNL), in 2000;

The opening up of Indias internal long-distance market in 2000, and the subsequent drop in long-distance rates as

part of TRAIs tariff rebalancing exercise;

The termination of VSNLs monopoly over international traffic in 2002, and the partial privatization of the

company that same year, with the Tata group assuming a 25% stake and management control;
The gradual easing of the original duopoly licensing policy, allowing a greater number of operators in each circle;

The legalization, in 2002, of IP telephony (a move that many believe was held up due to lobbying by VSNL, which

feared the consequences on its international monopoly);

The introduction in 2003 of a Calling Party Pays (CPP) system for cell phones, despite considerable opposition

(including litigation) by fixed operators;

The commencement of more stringent interconnection regulation by TRAI, which has moved from an interoperator

negotiations-based approach (often used by the stronger operator to negotiate ad infinitum) to a more rules-based
approach.
< TOP >

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

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7. The TELECOM REGULATORY AUTHORITY OF INDIA (TRAI) was set up in March, 1997, to arbitrate between
Department of Telecommunications (DOT) and private operators with respect to licensing issues, technical compatibility and
tariff setting. The goals and objectives of TRAI are focussed towards providing a regulatory regime that facilitates achievement
of the objectives of New Telecom Policy (NTP) 1999. TRAI has endeavoured to encourage greater competition in telecom
sector together with better quality and affordable prices, in order to meet the objectives of NTP'99. From January, 2004,
broadcasting and cable services have also been included in the definition of 'telecommunication service' under the TRAI Act,
and thus, broadcasting and cable services have also come under the purview of TRAI.
< TOP >
8. It was during July 1999, that MTNL decided to facilitate online payment of bills setting August 15, Indias Independence
Day as the launch date. This decision was taken despite the notable absence of approved legislation for online transactions at
that time. Instead of waiting for the enactment of cyber laws, we decided to go ahead said S Rajagopalan, MTNLs Chairman
and Managing Director. Market sources felt that a very bold step was taken by MTNL to take up online billing considering the
fact that laws regulating net-based transactions were not in place. In another development, MTNLs move to cut internet tariffs
by 15 percent was challenged by the private operators who lodged a complaint in July 1999 with the Telecom Regulatory
Authority of India (TRAI). The private operators complained should any discounts be given by a network operator, such cuts
should be extended to other players as well, to have a level playing field. A spokesperson expressed the view that since
MTNL owned these resources, the overall costs were obviously lower.
For the operation of basic and cellular services, the MTNL board approved the proposal to set-up a joint venture company with
the Telecom Consultants India Ltd. (TCIL), which was awarded the project to set-up a network in Kuwait. The first steps
towards scouting for an international Joint Venture (JV) partner for operating its cellular phone service were taken with the
expectations that MTNL would hold a 51 percent equity stake in the new company. In the wake of stiff competition and the
need to streamline costs, the company planned a restructuring exercise. The services of Tata Consultancy Services (TCS) were
utilized for setting up an integrated commercial accounting system.
A significant landmark was achieved when the company launched its cellular service in Mumbai from August 15, 2000. To
improve international communications infrastructure the company took steps to set-up a submarine cable landing station.
During the year 2000, the company transferred both its Internet Service Provider Category-A licence and Internet business to
Millennium Telecom, its subsidiary. Two additional customer service centers were opened in Mumbai. During this year, the
company expanded its common man mobile telephone network with the addition of 50,000 new lines. The company bagged
a Rs.320 million contract for providing the Fixed Wireless Terminals for its CDMA network in Delhi. It also set-up both basic
and cellular services in Nepal. Plans for launch of cellular phone service with increased subscriber capacity of 100,000 lines in
Mumbai in January 2001 were ready.
The year 2001 saw MTNL developing a dedicated division for expanding its cellular operations in Delhi and Mumbai.
Narinder Sharma, the Chairman of the company received the international Millennium Man of the Year award presented by
the international award committee of Wisitex Foundation. ICRA was roped in to work out a strategy for leveraging the
companys human resources.
< TOP >
9.
Particulars
Profitability ratios
Operating Margin (%)
Gross Profit Margin (%)
Net Profit Margin (%)
Leverage ratios
Long-term Debt/Equity
Total Debt/Equity
Owners fund as % of total Source
Liquidity ratios
Current Ratio
Quick Ratio
Payout ratios
Dividend payout Ratio (Net Profit)
Earning Retention Ratio
Cash Earnings Retention Ratio

0503 (12)

0403 (12)

0303 (12)

0203 (12)

0103 (12)

20.17
9.65
15.04

31.27
22.73
18.79

33.78
18.85
14.61

40.09
26.80
20.56

44.90
31.61
25.80

0.00
0.00
100.00

0.00
0.00
100.00

0.00
0.00
100.00

0.29
0.29
77.34

0.34
0.34
74.34

1.29
1.28

1.29
1.25

1.27
1.22

1.67
1.61

1.95
1.90

34.03
65.97
79.00

25.90
72.18
81.11

36.46
63.88
81.75

21.79
77.83
86.47

20.06
79.39
86.33

Comments:
The operating profit margin has decreased from 2000-01 to 2001-02 and then constantly decreased over the years. Gross profit
margin has also decreased except in 2004 which is an unhealthy sign on the financial performance of the company. The net
profit margin decreased over the periods except in 2004. This decrease in profit margin is probably due to improper-cost
management.
The Long-term debt to equity ratio and total debt-equity ratio had decreased from 2000-01 to 2001-02. This indicates full
repayment of debt obligations and hence avoiding financial risk. The same is evidenced by owners funds to total sources ratio.
The current ratio of the company has gradually decreased from 1.95 to 1.29. Also the quick ratio of the company has decreased
from 1.90 to 1.28 in the current year. By careful observation of current and quick ratios, it can be interpreted that inventories

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maintained by the firm are negligible. As a whole, by looking at the quick ratio, it can be said that liquidity position of the firm
is satisfactory.
Once a dividend payout ratio is decided and accordingly the company makes dividend payments to the stockholders of the
firm, companies will be wary and reluctant to bring about any decline in the dividend payouts in future. This also implies that a
dividend increase by itself will be considered by the management only when it feels reasonably certain that such dividend
increases can be conveniently maintained in the future. Any increase in dividends serves as a signal to the investors with regard
to the confidence of the management about the future earnings potential of the firm. It is by virtue of this signal that a tendency
of the stock prices to rise is observed. Except for a decline in dividend payout ratio in 2004, MTNL has maintained a very high
payout ratio. The earnings retention ratio also declined from 79.39% to 65.37% during the period under consideration. The
cash earnings retention ratio also declined from 86.33% to 79% in the current year. It indicates that the firm is enjoying the
reinvestment in growth opportunities, even if it does not seem to have opportunities as it had earlier.
< TOP >

< TOP OF THE DOCUMENT >

[1]
Chairmans Message 2003-04.
[2]
CDMA technology is spread spectrum technology, which enables a number of users to utilize the same frequency and time allocations in a
given band/space. ww.cdg.org/technology/index.asp
[3]
GSM is also known as Global System for Mobile. Under this system, calls are made based on voice or data. www.canadiancontent.net/tech/
mobile/gsm.html
*
(Wireless Local Loop (WLL) is a system that uses radio signals as a substitute for copper to connect subscribers to the Public Switched
Telephone Network (PSTN). The system includes cordless access systems, fixed cellular systems and proprietary fixed radio access.)
[4]

[5]

ADC is the amount to be paid in domestic long distance telephony to the service provider at the receiving end by the service provider at the
callers end being charges for services rendered by the service provider at the receiving end. www.bsnl.com.
It is a profit making company of the Government of India.

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