Spice Communications Ltd merged Directors Report

SPICE COMMUNICATIONS LIMITED ANNUAL REPORT 2008-2009 DIRECTORS REPORT To The Members of Spice Communications Ltd. Your Directors have pleasure in presenting the Fourteenth Annual Report on the business and operations of the Company, together with the Audited Statement of Accounts for the period ended on 31st March, 2009. FINANCIAL HIGHLIGHTS: (Amount in Rs. mn) Particulars For the period For the year 1st Jan 08 to 1st Jan 07 to 31st Mar09 31st Dec07 Service Revenue 15,805 9,578 Other Income 50 327 Total Income before sale of Passive Infrastructure 15,855 9,905 Operating Expenditure 12,893 7,351 OPERATING PROFIT 2,962 2,554 Profit on sale of Passive 221 4,393 Infrastructure: PROFIT BEFORE INTEREST, 3,183 6,947 DEPRECIATION AND AMORTISATION Interest and financing charges (Net) 3,023 1,170 Depreciation and Amortisation 4,915 1,814 Impairment in license value 4,845 - Amortisation of miscellaneous 596 80 expenditure written off PROFIT/(LOSS) BEFORE TAX (10,196) 3,883 Prior period expenses/(income) 10 - Taxation (Net) (53) 82 PROFIT/(LOSS) AFTER TAX (10,153) 3,801 CHANGE OF FINANCIAL YEAR: Your Directors wish to apprise you that in order to have consistency in the maintenance of books of accounts and tax records, the financial year of your Company has been changed from Jan-Dec cycle to April-March cycle. Thus, the current financial period of the Company had since been extended to fifteen months period that has ended on 31st March, 2009. Hereafter, the Company shall follow a financial year cycle of April to March every year. Accordingly, the figures for the current period represent the operations for the extended period of 15 months ending 31st March, 2009. The Revenues from Services and from Income from other sources, for the current period were Rs 15,855 mn as against Rs 9,905 mn for the previous year ended 31st December, 2007. The Operating Profit for the period ended 31st March, 2009 was Rs 2,962 mn against Rs 2,555 mn for the previous year. During the current period, further 128 telecom towers were sold for a consideration of Rs 588 mn, giving rise to profit on sale of Passive Infrastructure of Rs 221 mn. During the previous financial year, the profit on sale of Passive Infrastructure from 747 telecom towers was Rs 4,393 mn. As a result, the Profit before Interest, Depreciation & Amortisation, for the current period was Rs 3,183 mn against Rs 6,947 mn for the previous year. During the current period, miscellaneous expenditure to the extent not written off, amounting to Rs 596 mn was fully charged to the P&L Account. The loss before tax, after providing for impairment in the values of the overlapping licenses of Rs 4,845 mn was Rs 10,196 mn for the current period. The loss after tax for the current period is Rs 10,152 mn. The subscriber base increased to 4.1 mn as on 31st March, 2009 from 3.8 mn as on 31st December, 2007, registering a growth of 8% during the period. CHANGE OF MANAGEMENT: During the period under review, MCorpGlobal Communications Private Limited (MCPL) (the erstwhile promoter of the Company) had entered into a Share Purchase agreement with Idea Cellular Limited (Idea), one of the present promoter of the Company, inter alia for sale of its entire shareholding consisting of 281,489,350 equity shares of the Company. Pursuant to the said agreement, Idea along with persons acting in concert, viz., Axiata Group Berhad (formerly known as TM International Berhad), TMI Mauritius Ltd., TMI India Ltd. and Green Acre Agro Services Private Limited had made an open offer to acquire upto 20% equity held by members of the Public in terms of relevant provisions of the SEBI Takeover Code. Post the closure of the Public offer, the shareholding of Idea in the Company stands at 41.09%.The shareholding of TMI India Ltd. stands at 49%. Green Acres Agro Services Private Limited acquired 8.81 % shares under the said public offer. AMALGAMATION WITH IDEA: Your directors wish to inform that your Company, as one of the signatories to a Merger Co-operation Agreement, inter alia, between Axiata Group Berhad (formerly known as TM International Berhad) and Idea, has consented for the amalgamation of the Company with Idea, subject to the completion of necessary formalities under the relevant provisions of the Companies Act, 1956 and other regulatory requirements. Your Company has since filed an application with the Honble High Court of Delhi at New Delhi, for its approval to the said amalgamation of the Company with Idea and the same is under process. Your Directors believe that the amalgamation would achieve economies of scale, and other operational synergies which would result in the optimization of operation and capital expenditure and lead to increased competitive strength, cost reduction and efficiencies, productivity gains by pooling the financial, managerial and technical resources, personnel capabilities, skill expertise and technologies of both the Companies. It is further advised that as a result of the amalgamation, Idea shall issue and allot new equity shares to each shareholder of the Company, in the ratio of 49 equity shares in Idea of Rs 10/- each credited as fully paid up, for every 100 equity shares of Rs 10/- each fully paid, held of such equity shareholder in the Company on a record date to be fixed in this respect. DEMERGER OF UNIFIED ACCESS SERVICES LICENSES (UASLs) IN RESPECT OF DELHI, HARYANA, MAHARASHTRA AND ANDHRA PRADESH SERVICE AREAS: As you are aware, Idea has acquired a 41.09% stake in your Company, to be followed, subject to approvals, by the amalgamation of your Company with Idea. Your Company holds UASLs dated 29th February, 2008 for the service areas of Andhra Pradesh, Maharashtra, Haryana and dated 3rd March, 2008 for the service area of Delhi. In light of the Idea merger developments, your Company sought to de-merge these overlapping licenses to a third party for a consideration, which, net of costs, would accrue to the shareholders of the Company (other than Idea). The Company entered into an agreement to this effect and filed the application under Sections 391 to 394 of the Companies Act, 1956, with the Delhi High Court. However, the Company has presently, sought deferment from the Court for holding the shareholders and creditors meetings, due to the absence of policy clarity. Further action and completion of the de-merger process is contingent upon obtaining clarity and also upon satisfactory conclusion of other necessary conditions. LISTING ON NATIONAL STOCK EXCHANGE OF INDIA: During the period under review, Equity Shares of the Company were also listed at National Stock Exchange of India Limited (NSE) on 16th June, 2008, with a view to provide more liquidity for shareholders. The Annual Listing Fees for the year 2009-10 have been paid to Bombay Stock Exchange (BSE) and NSE. USE OF IPO PROCEEDS: The Company has placed the statement containing the uses/application of funds raised through the IPO before the Audit Committee. The proceeds of the public issue have been utilized according to the objects stated in the offer document and reported on quarterly basis as a part of financial results published pursuant to Clause 41 of the Listing Agreement. TERM DEPOSITS: During the period under review, the Company has not accepted any Deposits from the public within the meaning of Section 58 A of the Companies Act, 1956. SUBSIDIARY: There has been no operation in Carlos Towers Limited, the subsidiary of the Company, during the period under review. A statement under Section 212 of the Companies Act, 1956, concerning the subsidiary Company is attached to this report. DIRECTORS: During the period under review, Mr. Bhupender Kumar Modi, Mr. Dilip Modi, Mr. Hetal Gandhi, Mr. Krishan Lal Chugh, Mr. D.R. Mehta and Mr. Mahesh Prasad, resigned from the Board of Directors. Mr. Ashish Dwivedi, Mr. M.R. Prasanna, Mr. G.P. Gupta and Mr. Baldev Raj Gupta were appointed as additional directors of the Company, to hold office up to the date of ensuing Annual General Meeting. These additional directors are eligible for appointment as directors of the Company at the ensuing Annual General Meeting. At the ensuing Annual General Meeting, Mr. Yusof Annuar Yaacob, director of the Company, retires by rotation, and being eligible, offers himself for re-appointment. DIRECTORS RESPONSIBILITY STATEMENT: Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, with respect to Directors Responsibility Statement, and subject to the disclosures in the Annual Accounts, the Board of Directors hereby confirm that: (i) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures, if any; (ii) the Directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at the end of financial period ended 31st March, 2009, and of the profit of the Company for the period ended 31st March, 2009; (iii) the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of Companies Act, 1956, for safeguarding the assets of the Company, and for preventing and detecting fraud and other irregularities; and (iv) the Directors had prepared the Annual Accounts on a going concern basis. AUDITORS: M/s BSR & Co., Chartered Accountants, the Statutory Auditors of the Company, retire at the conclusion of the ensuing Annual General Meeting. The Directors of the Company, in their meeting held on 17th June, 2009, have recommended appointment of M/s Delloite Haskins and Sells, Chartered Accountants, as the Statutory Auditors of the Company to hold office from the conclusion of the ensuing Annual General Meeting until the conclusion of the next Annual General Meeting. The Company has received letter from M/s Delloite Haskins and Sells, Chartered Accountants, to the effect that their appointment if made, would be within the prescribed limits under Section 224 (1B) of the Companies Act, 1956 and that they are not disqualified for such appointment. AUDITORS REPORT & NOTES TO ACCOUNTS: The Auditors Report and the Notes to the Accounts are self-explanatory. The Information and Explanations on reservations/qualifications in the Auditors Report pursuant to Section 217(3) of the Companies Act, 1956, are as under: Reference to Management response Audit Report 1. Paragraph 4 (F). Note B 15(a) to Schedule 23 is self explanatory. 2. Clause (i) (a) of Steps are being taken to prepare Annexure to the proper records of assets on a trial Auditors Report. basis. CORPORATE GOVERNANCE & COMPLIANCE CERTIFICATE: A detailed report on Corporate Governance, which forms an integral part of the Directors Report, is given in Annexure A. A certificate confirming compliance to the conditions of Corporate Governance from a practicing Company Secretary, as stipulated under Clause 49 of the Listing Agreement, is annexed to the Corporate Governance Report. MANAGEMENT DISCUSSION AND ANALYSIS REPORT: As required under Clause 49 of the Listing Agreement entered into with the Stock Exchanges, the Management Discussion and Analysis Report is given as Annexure B and forms an integral part of the Directors Report. ADDITIONAL INFORMATION: The additional information required under Section 217(1)(e) of the Companies Act 1956, read with the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988 with respect to Conservation of Energy, Technology Absorption and Foreign Exchange Earnings / Outgo is annexed hereto marked as Annexure C and forms an integral part of this report. PERSONNEL: The Statement of particulars of employees, as per Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975. ACKNOWLEDGEMENT: Your Directors wish to place on record their appreciation of the co- operation received from government authorities, the Department of Telecommunications (DoT), financial institutions, bankers, customers, vendors and shareholders. Your directors also wish to place on record their deep sense of appreciation for the contribution made by the employees of the Company for their unstinted efforts in the progress of the Company at all levels. For and on behalf of the Board of Spice Communications Ltd. Place : Mumbai Ashish Dwivedi B.R. Gupta Date : 17th June, 2009 Director Director Management Discussion and Analysis Report: Industry Growth: The Indian mobility industry continues to grow at a rapid pace. During the period under review, the number of mobility subscribers grew from 233.63 mn as on 31st December, 2007 to 391.76 mn as on 31st March, 2009, being a 67.7% growth over 15 months. This represents a penetration level of 33.7% and hence there is still scope for high growth. One of the trends of this period has been the increased contribution of rural subscribers to total net additions, and the trend is expected to gain strength. Discussion on Financial and Operational Performance Subscriber Base: As on 31st March, 2009, the Company has registered a growth of 8% and has an aggregate of 4.1 mn subscribers, as against 3.8 mn as on 31st December, 2007. Service & Sales Revenues: During the fifteen months ended 31st March, 2009, Revenues from Services & Sale of Trading Goods grew by 32.0% (annualized basis) to Rs 15,805 mn from Rs 9,578 mn for the previous year ended 31st December, 2007. Other Income: Other income for the fifteen months ended 31st March, 2009 amounted to Rs 271 mn as against Rs 4,720 mn during the year ended 31st December, 2007, and includes profit on sale of passive infrastructure amounting to Rs 221 mn and Rs 4,393 mn for each period respectively. Operating Expenses: During the fifteen months ended 31st March, 2009, the Company incurred Operating Expenses of Rs 12,893 mn representing 81.6% of service revenues. The break up includes Network Operating Expenditure 24.7% (including passive infrastructure rentals on the towers taken on lease basis as against the running and maintenance cost incurred on owned sites during most of the previous period), Roaming & Access charges 17.9%, Subscriber Acquisition and Servicing Expenses 13.2%, License and Spectrum charges 10.2%, Administration and Other expenditure 6.3%, Personnel Expenditure 5.3%, and Advertisement & Business Promotion expenditure 4.0%. Profit before Interest, Depreciation and Amortisation: During the fifteen months ended 31s1 March, 2009, the Company made a Profit before Interest, Depreciation and Amortisation of Rs 3,183 mn against Rs.6,947 mn for the year ended 31st December, 2007. Finance Charges: Net Interest & Financing Charges of Rs 3,023 mn include charges amounting to Rs 1,241 mn for assets taken on finance lease. Depreciation and Amortisation: During the fifteen months ended 31st March, 2009, the Company had a depreciation and amortization expense of Rs 4,915 mn. This included effects for revision in the estimates of useful life and obsolescence of Rs 1,132 mn for certain asset categories. Amortisation of miscellaneous expenses not written off of Rs 596 mn includes an additional amount of Rs 496 mn, following the change in accounting policy. Impairment of License values: The Company had made an impairment provision of Rs 4,845 mn for the license / entry fee paid to DOT. Profit and Taxes: During the fifteen months ended 31s1 March, 2009, the Loss was Rs 10,196 mn. The company had a cash profit of Rs 160 mn during fifteen month ended 31st March, 2009. The tax charge for the current period for Fringe Benefit Tax is Rs 13 mn. Excess provision for Tax for earlier year amounting to Rs 66 mn has been written back during the year. Balance Sheet: The Gross Block as at 31st March, 2009 stood at Rs 32,441 mn, representing a net increase of Rs 5,786 mn during the period. The Net Block including Capital Work in Progress (CWIP) stood at Rs 18,254 mn as at 31st March, 2009. The decrease in net current assets amounting to Rs 5,262 mn is largely due to the realization of other debtors amounting to Rs 5,122 mn on account of sale of passive infrastructure, besides the increase in creditors for Capital Expenditure. Total loan funds stood at Rs 20,586 mn and include amounts payable under vendor finance of Rs 5,888 mn. The debit balance of the Profit and Loss Account stood at Rs 13,668 mn as at 31st March, 2009 and exceeds the Share holder funds of Rs 11,842 mn. Human Resources: The Company has strong HR practices and has been able to attract quality talent. The manpower on rolls of the Company as on 31st March, 2009 stands at 823. Regulatory: COAI petition/ writ against DoT on crossover policy: COAI (including Idea Cellular) had approached TDSAT on the issue of the manner in which the cross over spectrum policy was announced by the DoT on 19th October, 2007. After the TDSAT refused to grant any stay in the matter, COAI had approached the Honble High Court of Delhi for an interim stay in the matter. The High Court dismissed the COAI writ petition/ application. The TDSAT also, has now given its verdict on the issue. Key highlights are: GSM operators do not have any vested rights up to 15MHz of spectrum and level playing field has not been disturbed by allocation of spectrum under dual technology. Guidelines on Active Infrastructure Sharing: The DoT has formulated guidelines on active infrastructure sharing among Service Providers and Infrastructure Providers. Sharing will be limited to antenna, feeder cable, Node B, Radio Access Network (RAN) and transmission system only. Sharing of allocated spectrum is not permitted. TRAI Press release on phasing out of ADC: The TRAI, on 27th March, 2008 via IXth amendment to the Interconnection Usage Charges (IUC) regulation, decided to phase out the ADC on domestic calls w.e.f. 1st April 2008. Further, the ADC on the international incoming calls was made payable at a reduced rate of Rs 0.50 for the period from 1st April 2008 to 30th Sep 2008, after which this component of ADC is also phased out. DoT guidelines on Intra Service Area Merger policy: On 22nd April, 2008, the DoT released its new Intra Service Area Merger policy. As per this, post merger, the number of players should not fall below 4, and the market share of the merged entity should not be more then 40%, either in terms of subscriber base or AGR. The total spectrum held post merger should be in line with applicable spectrum policy within three months of merger. DoT amendment on Intra Circle Roaming: On 12th June, 2008, DoT amended the license, allowing a licensee to enter into mutual commercial agreements with other service providers within the same service area for the purpose of intra-circle roaming facility. WPC order on Microwave Spectrum charges: WPC, on 10th November, 2008, specified the microwave spectrum charges for 7th to 11th carrier. The DoT had earlier revised the microwave spectrum charges vide its order dated November 3, 2008, wherein charges for a maximum of 6 carriers were specified. The order was made effective w.e.f November 3, 2006, thus increasing the charges applicable to operators holding more than 6 access spectrum carriers (access & backbone separately) with effect from November 3, 2006. Guidelines for Mobile Number Portability (MNP): The DoT on 01st August 08 issued guidelines for MNP license. As per the guidelines, the country has been divided in two MNP zones for grant of MNP license, with 11 licensed service areas in each zone. On 20th March 2009, DoT signed the MNP operator license issued with M/s Syniverse Technologies (Zone I) and M/s MNP Interconnection Telecom Solutions (Zone II) giving six months time for MNP implementation in metro service areas and category A service areas, and one year time for other service areas. Amendment to Interconnect Usage Charges (IUC) regulation: On 9th March 2009, TRAI released the Interconnection Usage Charges (IUC) Xth Amendment and accordingly, with effect from 1st April 2009, termination charges for incoming calls stood reduced to INR 0.20 per minute from INR 0.30 per minute, while the termination charges for international incoming calls stood increased from INR 0.30 per minute to INR 0.40 per minute. Opportunities, Risks, Concerns and Threats: Indian telecom industry has continued to demonstrate strong growth even in a period of global economic recession. This establishes that mobile communication, which not too long ago was seen as a luxury affordable to a limited few, has become a necessity even with consumers from the lower income groups. This creates an opportunity for further growth with increasing penetration. It also shows that the industry is not as susceptible to economic cycles as some other consumer segments. The increasing level of competition is resulting in higher churn which continues to be a threat as well as an opportunity. The churn rates may increase in the short term following the implementation of Mobile Number Portability (MNP), but in the long term it is not expected to have any significant impact on market shares. The increasing competition is also likely to have an adverse impact on margins. However, as your Company is expected to merge with Idea, the overall strengths of the merged entity will strengthen it to withstand competitive pressures. The telecom industry has seen rapid progresses in technology and hence competition from alternative technologies is an inherent threat in such a business. The government proposes to auction 2100 Mhz spectrum to be used for rolling out 3G technology. The final structure of the auction and the number of spectrum slots will also have a bearing on the competitive landscape. The Company requires certain approvals, licenses, registrations and permissions for operating its business. In addition, regulators may impose conditions in relation to the grant of licenses and approvals and any such requirements could have a material adverse effect on the Companys business. The Company, however, is confident that the regulatory changes will ensure a level playing field for all service providers. The Companys business is dependent on a limited number of vendors to supply critical network equipment and services. Besides this, its ability to provide quality mobile network and expanding its area of operations and the subscriber base is also dependent on the spectrum allocation by government. The Company believes in partnering with vendors who are of international repute, and with whom it builds long term relationships. Outlook: We believe that the telecom sector will continue to demonstrate continued growth. In the short term the competition is likely to intensify which may place pressure on margins. However, in the medium to long term we believe that some consolidation in the industry is inevitable. Your Company, subject to necessary approvals, will be merging with Idea Cellular. This merged entity is expected to be a strong industry player with advantages of spectrum and scale. Annexure to the Director Report: Particulars required under the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988: A. Conservation of Energy: The Company takes all steps and ensures optimum utilization of the sources of energy and avoids wastage. B. Technology Absorption: The information required to be disclosed under Rule 2 of the aforesaid Rules is given hereunder in Form-B: Form-B: Form for disclosure of particulars with respect to Technology Absorption, Research and Development (R&D): 1. Specific areas in which R&D is : Not applicable carried out by the Company 2. Benefits derived as a result of : Not applicable the above R&D work 3. Future plan of action : The Company is into cellular services operations and does not manufacture/assemble any machinery/equipment related to its field of operation and hence expenditure for R&D for manufacture/assembly of the machinery/equipment is not planned at present. However, the Company plans to import machinery/ equipment of latest technology required for its operations. 4. Expenditure on R&D : Not applicable a) Capital - b) Revenue - c) Total - d) Total R&D expenditure as a percentage of total turnover - Technology absorption, adaptation and innovation: 1. Efforts, in brief, made towards technology Not applicable absorption, adaptation and innovation. 2. Benefits derived as a result of the above Not applicable efforts, e.g. product improvement, cost reduction, product development, import substitution, etc. 3. In case of imported technology (imported during Not applicable the last 5 years reckoned from the beginning of the financial year) following information may be furnished: a) Technology imported - b) Year of import - c) Has technology been fully absorbed? - d) If not fully absorbed, areas where this has not taken place, reasons therefore and future plan of action - C. Foreign Exchange Earnings and Outgo: (Amount in Rs. Million) For the period ended For the year ended 31st March 2009 31st December 2007 i) Earnings 250.58 184.48 ii) Outgo 298.72 308.92