Auditors’ Report

TO THE MEMBERS OF BHARAT SANCHAR NIGAM LIMITED

1. We have audited the attached Balance Sheet of Bharat Sanchar Nigam Limited, as
at 31st March, 2002 and the relative Profit and Loss Account for the year ended on
that date, both of which we have signed under reference to this report. These
financial statements are the responsibility of the management of the Company.
Our responsibility is to express an opinion on these financial statements based on
our audit.

2. The balance sheet and profit and loss account together with the notes thereon
includes 49 units (circles, districts, regions, training institutions and factories etc)
comprising of fixed assets ,net current assets and profit amounting to Rs.697,388
million,Rs.207,629 million and Rs.55,497million respectively which were audited
by the branch auditors whose reports thereon have been furnished to us and have
been considered and relied upon by us for the purpose of our audit and our
opinion on the balance sheet and profit and loss account of the Company. We
have audited Corporate Office of the Company.

3. We have conducted our audit in accordance with auditing standards generally

accepted in India. Those Standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

4. As required by the Manufacturing and Other Companies (Auditor's Report) Order,

1988 issued by the Central Government of India in terms of section 227(4A) of
‘The Companies Act, 1956’ of India (the ‘Act’) and on the basis of such checks as
we considered appropriate and according to the information and explanations
given to us, we set out in the Annexure a statement on the matters specified in
paragraphs 4 and 5 of the said Order.

5. Further to our comments in the Annexure referred to in paragraph 4 above, we

report that:

A. Subject to paragraphs 6 to12, 15 and16 as stated below, we have obtained all the
information and explanations, which to the best of our knowledge and belief were
necessary for the purposes of our audit;

B. In our opinion, subject to paragraphs 7 to 16 as stated below and Note 2.1 on

Schedule T, proper books of account as required by law have been kept by the
company so far as appears from our examination of those books;

C. Subject to paragraphs 7 to 16 as stated below, the Balance Sheet and Profit and
Loss Account dealt with by this report are in agreement with the books of account;
 D. Subject to paragraphs 6 to 16 as stated below, in our opinion, the Balance Sheet
and Profit and Loss Account dealt with by this report have been prepared in
compliance with the applicable accounting standards referred to in section 211
(3C) of the Act;

Assets taken over from Department of Telecommunications (“DoT”) and DoT

balances

6. As referred to in Note 2.1, 5.1 and 8.1 on Schedule U forming part of the
Accounts, net assets (including contingent liabilities) taken over from DoT as on
1st October 2000 have been verified and valued by the management based on
internal calculations, which has not been audited by us and on which we have
placed reliance, and are subject to reconciliation and confirmation from DoT as
regards to ownership and value.

7. Amount recoverable on current account from DoT and amount payable on

current account to DoT are subject to confirmation, reconciliation and
consequent adjustments.

License Fee, Spectrum Charges

8. As stated in Note 13.1 on Schedule U, for the purpose of calculating licence fee
on National Long Distance (“NLD”) revenue, the NLD revenue has been
provisionally assessed at 30% of the total revenue. In the absence of system for
determination of NLD revenue it is not possible to quantify the licence fee on
actual NLD revenue and its impact on the accounts.

9. Royalty/Fee for use of spectrum/possession of wireless telegraphy equipment for

point-to-point radio link and Spectrum Charges has been calculated on adhoc
basis as Rs. 2,890 millions and not as prescribed by DoT as stated in Note 14 on
schedule U.

Retirement Benefits

10. Till the period ended 31st March, 2001, the leave encashment liability relating to
absorbed employees was provided @ 11% of basic pay for contribution to DoT on
the assumption that at the time of retirement such payments will be paid by DoT.
However, DoT in its communication dated 8th May, 2002 stated that the Company
is not required to make any contribution for leave salary to DoT in respect of the
absorbed employees, and also no cash equivalent will be paid to the Company for
any earned leave at the credit of such employees as of 30th September, 2000.
Following the communication, few circles have written back the leave salary
provision made in the last period and accounted for the leave encashment as and
when it is paid to such employees. Also some of the Circles have continued to
provide the liability at 11% of basic pay. The Company is in the process of
estimating the write back on account of past period.

11. No provision for leave encashment for absorbed employees and directly recruited
employees has been made in the books. The same is accounted for as and when it
is paid. This is not in accordance with AS-15, “Accounting for Retirement
 Benefits”, issued by the Institute of Chartered Accountants of India (ICAI) which
requires retirement benefits to be provided on the basis of actuarial valuation.

12. The management is of the view that incremental pension liability resulting from
revision of pay scale as on 1st October 2000 shall be borne by DoT. The same has
however, not been confirmed by the DoT.

The resultant impact of observations stated in paragraphs 6 to12 above on the

fixed assets, current assets, loans and advances, current liabilities and profits has
not been quantified by the management .

Transponder charges

13. The Satellite Planning Cell of DoT has demanded Rs. 5,100 million for the two
years ended March 31, 2002 as charges for use of INSAT capacity. The Company
has provided Rs. 990 million for such charges from the date of incorporation i.e
September 15, 2000 to March 31, 2002 based on the tariff rate prescribed by DoT
and the INSAT capacity used. However the amount provided is subject to
confirmation/ acceptance by the Satellite Planning Cell.

Fixed Assets and Capital Work-in-Progress

14. As referred to in Note 5.11 on Schedule U, a provision of Rs.3332.5 million had

been made for impaired assets for the period 1 October, 2000 to 31 March, 2001.
However necessary adjustments in fixed assets accounts have not been effected to
this date and consequently depreciation amounting to approximately Rs. 471.72
million (Previous period Rs. 255.4 million) has been provided thereon. Hence the
fixed assets are overstated by Rs. 2605.38million and net profit for the year is
understated by approximately Rs. 471.72 million.

15. The observations stated in paragraphs 15.1to 15.13 and 16 below are based on
the observations made by the branch auditors in their report and which we have
discussed with the management, the resultant impact arising out of these
observations on the assets ,liabilities and profits has not been quantified by the
management .

Fixed Assets and Capital Work-in-Progress

15.1 Capital Work-in-Progress includes balances pending capitalization for long

periods of time, pending analysis of status, value and obtaining of commissioning
certificates.

15.2 The Accounting Policies regarding depreciation of Fixed Assets are not uniformly
applied across all the units.

15.3 The Company has provided depreciation on fixed assets taken over from DoT as
of 1st of October 2000 on written down value method at the rates prescribed in
Schedule XIV of the Companies Act, 1956 as if it were its original assets and has
not recalculated the rates for the remaining useful life of assets. Since the useful
life of the fixed assets taken over from DoT are not re-estimated, the above
treatment is not in accordance with Accounting Standard (“AS”) 6 –
 “Depreciation Accounting” issued by the Institute of Chartered Accountants of
India.

15.4 As referred to in Note 5.5 on Schedule U, in the absence of information for lease-
hold land acquired from DoT no adjustment has been made by writing off the cost
of the land over the lease period as well as for such land acquired during the
period. This is not in accordance with the Note 3.5 (b) on Schedule T.

15.5 As referred to in Note (a) on Schedule E, depreciation for the year includes an
unexplained difference of Rs. 1,463 million.

15.6 In the absence of complete information, the amount of deferred payment liability
of Rs. 2,390 million, repayable within one year has been arrived at on an
estimated basis as referred to in Note 5.2 on Schedule U.

Current assets, loans and advances and Current liabilities

15.7 The Management is in the process of reconciling the various differences between
the subsidiary records and the corresponding accounts at the circles.

15.8 Bank Reconciliation Statements have not been prepared at several units.

15.9 Cash and Bank balances includes Rs. 35.92 million, being net unadjusted balance
between cash and bank entries.

Revenue

15.10 As referred to in Significant Accounting Policies on Schedule T forming part of

the Accounts, reciprocal services between the Circle and DoT are not accounted
for.

15.11 An internal accrual of Rs. 1,423.80 million for the year has been netted off
against administrative expenses since it is not possible to identify the stores which
have been capitalized or expended.

Inter /Intra circle reconciliation

15.12 Inter / Intra unit current account balances amounting to Rs.7,191 million are
subject to reconciliation and adjustments, if any.

Others

15.13 In the absence of adequate information, no provision for Wealth Tax has been
provided in the financial statements.

16. The practices and procedures followed by the Company which in our opinion,
are not in compliance with various Accounting Standards (“AS”) issued by
Institute of Chartered Accountants of India are stated below.
16.1 The practices and procedures followed by the Company in respect of Inventories
which are, in our opinion, not in compliance with AS –2 Valuation of Inventories
are as follows :

16.1.1 The purchase cost of inventory in certain locations, do not include all costs
incurred in bringing the inventories to their present location and condition.

16.1.2 Inventories have been valued using methods other than “weighted average
cost”(or “FIFO” as per AS – 2) which is not in accordance with the Significant
Accounting Policy on the subject.

16.2 In the absence of relevant information, no provision for contingent loss if any, has
been made. This is not in accordance with AS – 4 “Contingencies and Events
Occurring after the Balance Sheet Date” issued by ICAI. The resultant impact of
the same on the accounts is not presently ascertainable.

16.3 The following practices and procedures followed by the Company in respect of
Fixed Assets are, in our opinion, not in compliance with AS - 10“Accounting for
fixed assets”, issued by ICAI:

16.3.1 The cost of stores and materials issued is charged to the project for which it was
initially intended, without adjustment for actual issue to a different project or
purpose.

16.3.2 The Overheads (Establishment Expenses) are allocated as a percentage of capital

expenditure at percentages prescribed by DoT and not on the basis of directly
allocable costs.

16.4 In the absence of system for identifying qualifying asset and the period in which
the activities necessary to prepare such assets for its intended use are complete,
the borrowing costs that are directly attributable are not capitalized as part of the
cost of the asset which is not in accordance with AS – 16 on “Borrowing Costs”
issued by ICAI.

16.5 In the absence of information, the Company is not in a position to identify

operating and finance leases as required by AS-19 “Accounting for Leases”
issued by the ICAI.

17. The Company has not made following disclosures required under Schedule VI to
the Companies Act, 1956 as per references given after each item:

17.1 Bifurcation of Land as Freehold and Leasehold [Part I]

17.2 Classification of Sundry Debtors as “Secured”(to the extent of Security Deposits

held by the Company)[Part I] Bifurcation of Sundry Debtors into debts
outstanding for a period exceeding six months and other debts [Part I]

17.3 Classification of Cash and Bank balances into cash balances in hand and bank
balances and not as cash and bank contra entries [Part I]
 17.4 Estimated amount of Contracts remaining to be executed on capital account and
not provided for [Part I]

17.5 Other amounts for which the Company is contingently liable [Part I]

17.6 Quantity and Value wise break up of closing stock of finished goods and
consumption of raw materials. [Para 3(ii)(2)(d) of Part II]

17.7 Consumption of stores and spares [Para 3(x)(a) of Part II]

17.8 Value of imports calculated on CIF basis in respect of (a) Raw materials (b)
Components and Spare parts (c) Capital goods. [Para 4D(a) of Part II]

17.9 Consumption of imported and indigenous stores and spares and percentage to the
total consumption [Para 4D (c) of Part II].

18 On the basis of written representations received from the directors and taken on
record by the Board of Directors of the Company, none of the directors is
disqualified as on 31st March, 2002 from being appointed as a director in terms of
clause (g) of sub-section (1) of section 274 of the Act.

19 In our opinion and to the best of our information and according to the explanations
given to us, the Balance Sheet and Profit and Loss account together with the notes
thereon and attached thereto give in the prescribed manner except for those stated
in paragraph 17 of this report, the information required by the Act, and subject to
paragraphs 13 and 14 as stated above with effect on the profit for the year being
overstated by Rs 3638.28 million and the consequential effect on the net assets
and subject to paragraphs 6 to12 and 15 to 16 as stated above with the
corresponding effects on the profit for the year ended and net assets which is not
currently ascertainable also give a true and fair view in conformity with the
accounting principles generally accepted in India:

(i). in the case of the Balance Sheet, of the state of affairs of the Company as at
31st March, 2002; and

(ii). in the case of the Profit and Loss Account, of the profit for the year ended on
that date.

H. Singh
Partner
For and on behalf of
Price Waterhouse
Chartered Accountants

Place : New Delhi

Date :
 ANNEXURE TO THE AUDITORS’ REPORT

Referred to in paragraph (4) of our report dated 25th September, 2002.

I. a). The records maintained by the Company in respect of its fixed assets are not
considered to be proper in so far as these do not show full particulars including
quantitative details and situation of fixed assets. The fixed asset register is to be updated
in case of several units.

b). We are informed by the management that the fixed assets at most of the units have
been physically verified by them at the beginning of the period under review. No
documentary evidence was made available substantiating the aforesaid physical
verification. Consequently, we are unable to comment on the discrepancies noticed on
such verification and the reasonableness of the period of verification.

II. The fixed assets of the Company have not been revalued during the year.

III. As informed to us, physical verification of stores, spare parts, raw materials and finished
goods has been carried out by the management during the period at most of the units.
However documents substantiating such physical verification were not made available.
In the absence of proper documents we are unable to comment on reasonableness of
frequency of physical verification carried out.

IV. In the absence of proper documents we are unable to comment on reasonableness and
adequacy of procedures of physical verification of stock followed by the management in
relation to the size of the Company.

V. We are informed by the management that the discrepancies noticed on verification of

stocks as compared to book records are under reconciliation and will be dealt with in the
accounts on due completion of the same.

VI. Pending completion of reconciliation between physical stocks and book stocks and
subject to paragraph 16.1 as stated above, we are unable to comment as to whether the
valuation of stocks has been fair and proper and arrived at in accordance with normally
accepted accounting principles in India. The valuation of stocks is on the same basis as
in the previous year.

VII. The Company has not taken any loans, secured or unsecured from companies, firms or
other parties listed in the register maintained under Section 301 of the Act.

VIII. The Company has not granted any loans, secured or unsecured to companies, firms or
other parties listed in the register maintained under Section 301 of the Act.

IX. The parties to whom loans or advances in the nature of loans have been given by the
company are generally repaying the principal amounts as stipulated and are also regular
in payment of interest, wherever applicable.

X. In our opinion, there is an adequate internal control procedure commensurate with the
size of company and nature of its business for purchase of raw material. However for
 purchase of stores, components, plant and machinery, equipment and other assets the
same needs to be strengthened to make it commensurate with the size of the Company
and the nature of its business. There is no sale of goods.

XI. The Company has not purchased goods and materials and sold goods, materials and
services aggregating Rs.50,000/- or more in value from/to any of the parties listed in the
register maintained under Section 301 of the Act.

XII. The Company does not have a proper system of determining unserviceable or damaged
stores or finished goods or raw materials at several units. In the absence of the same, we
are unable to comment on the adequacy of the provision made in the accounts.

XIII. The Company has not accepted any deposits from the public.

XIV. Reasonable records have been maintained by the Company for the sale and disposal of
realizable scrap. The company does not generate any by-products.

XV. In our opinion the Company’s present internal audit system is not commensurate with its
size and nature of business.

XVI. The Central Government of India has not prescribed the maintenance of cost records by
the Company under Section 209(1)(d) of the Act for any of its products.

XVII. The provisions of Provident Fund Act and Employees’ State Insurance Act are not
applicable to the Company during the period.

XVIII. At the last day of the financial year there were no amounts outstanding in respect of
undisputed income tax, wealth tax, sales tax, customs duty and excise duty which were
due for more than six months from the date they became payable. In the absence of
adequate information, the amount of undisputed wealth tax which was due for more than
six months from the date it became payable has not been determined.

XIX. During the course of our examination of the books of account carried out in accordance
with the generally accepted auditing practices in India, we have not come across any
personal expenses which have been charged to Profit and Loss Account, nor have we
been informed of such case by the management other than those payable under
contractual obligations and / or accepted business practices.

XX. The Company is not a sick industrial company within the meaning of clause (o) of
Section 3(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 of India.

XXI. In respect of services rendered:

a) The system of recording receipts, issue and consumption of materials and stores and
allocating materials consumed to the relative jobs needs to be strengthened to make it
commensurate with its size and the nature of its business.

b) The Company does not have a system of allocating man hours utilised in the relative
jobs commensurate with its size and nature of business.
c) In our opinion there is a reasonable system of authorisation at proper levels, however,
the system of internal control of the Company needs to be strengthened to make it
commensurate with the size of the Company and nature of its business, on issue of
stores and allocation of stores and labour to jobs.