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Auditor Report of Mahanagar Telephone Nigam Ltd.

Mar 31, 2015

We have audited the accompanying standalone financial statements of MAHANAGAR TELEPHONE NIGAM LIMITED, ("the Company''), which comprise the Balance Sheet as at 31st March, 2015, the Statement of Profit and Loss and the Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management''s Responsibility for the Financial Statements

The Company''s Board of Directors is responsible for the matters stated in Section 134(5) of the Companies Act, 2013 ("the Act") with respect to the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash fows of the Company in accordance with the accounting principles generally accepted in India, including the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities, selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that are operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditor''s Responsibility

Our responsibility is to express an opinion on these standalone financial statements based on our audit. We have taken into account the provisions of the Act, the accounting and auditing Standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made there under.

We conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor''s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal financial control relevant to the Company''s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial controls system over financial reporting and the operating effectiveness of such controls. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by the Company''s Directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion on the standalone financial statements.

Basis for Qualified Opinion

(i) The Company has certain balances receivables from and payables to BSNL. The net amount recoverable of Rs. 2762.24 crores is subject to reconciliation and confirmation. In view of non reconciliation and non confirmation and also in view of various pending disputes regarding claims and counter claims, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the financial statements of the Company. (Also refer point no. 15 (a) of note no.35 to the financial statements).

(ii) The Company has certain balances receivables from and payables to Department of Telecommunication (DOT). The net amount recoverable of Rs.8314.32 crores is subject to reconciliation and confirmation. In view of non reconciliation and non confirmation, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the financial statements of the Company. (Also refer point no. 21 (a) of note no.35 to the financial statements).

(iii) Up to financial year 2011-12 License Fee payable to the DOT on IUC charges to BSNL was worked out on accrual basis as against the terms of License agreements requiring deduction for expenditure from the gross revenue to be allowed on actual payment basis. From financial year 2012-13, the license fee payable to the DOT has been worked out strictly in terms of the license agreements. The Company continues to reflect the difference in license fee arising from working out the same on accrual basis as aforesaid for the period up to financial year 2011-12 by way of contingent liability of Rs. 140.36 crores instead of actual liability resulting in understatement of current liabilities and understatement of loss to that extent. (Also refer point no. 5 of note no.35 to the financial statements).

(iv) The Company continues to allocate the establishment overheads towards capital works on estimated / adhoc basis. In view of the basis being not in line with the accepted accounting practices and Accounting Standard -10 "Accounting for Fixed Assets" specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules 2014, the same results into overstatement of capital work in progress/ fixed assets and understatement of loss. The actual impact of the same on the financial statements for year is not ascertained and quantified. (Also refer note no. 25 and 28 to the financial statements).

(v) Except for impairment of CDMA assets of Delhi unit due to closure of CDMA operations, no adjustment has been considered on account of impairment loss during the year, with reference to AS-28 "Impairment of Assets" specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules 2014. In view of uncertainty in achievement of future projections made by the Company, we are unable to ascertain and comment on the provision required in respect of impairment in carrying value of cash generating units and its consequent impact on the loss for the year, accumulated balance of reserve and surplus and also the carrying value of the cash generating units. (Also refer point no. 30 of note no.35 to the financial statements).

(vi) To work out the liability towards wealth tax, vacant land and guest houses/inspection quarters are taken at their book values instead of valuation of the same as per Wealth Tax Act / Rules resulting into understatement of loss resulting from lower wealth tax and also corresponding understatements of liabilities. In the absence of valuation as at the year end, we are not in a position to ascertain and quantify the impact thereof on financial statements. (Also refer point no. 12 of note no.35 to the financial statements).

(vii) Amount receivables from and payables to the various parties are subject to confirmation and reconciliation. Pending such confirmation and reconciliations, the impact thereof on the financial statements is not ascertainable and quantifiable. (Also refer, point no. 18 of note no.35 to the financial statements).

(viii) Dues from the operators are not taken into account for making provision for doubtful debts. Also no provision for doubtful debts is made for disputed cases outstanding for less than one year in Basic and for less than 180 days in GSM/CDMA. In the absence of any working, the impact thereof on the financial statements cannot be ascertained and quantified. (Also refer point no. 3(b) of note no.1 to the financial statements).

(ix) (a) In Delhi Unit, reconciliation of balances of subscriber''s deposits as per subsidiary records with financial books (WFMS) is still in progress and the impact, if any, of the differences arising out of such reconciliation on financial statements cannot be ascertained and quantified at present. (Also refer point no. 17(a) of note no.35 to the financial statements).

(b) Unlinked credit of Rs. 10.43 crores on account of receipts from subscribers against billing by the Company which could not be matched with corresponding receivables are appearing as liabilities in the balance sheet. To that extent, trade receivables and other current liabilities are overstated. (Also refer point no. 17(d) of note no.35 to the financial statements).

(x) In the absence of detailed information i.e. break up of amount received with relation to the individual invoices raised through MACH, invoice wise reconciliation of the roaming debtors is pending. Pending such reconciliation, the impact of the same on the financial statements cannot be ascertained and quantified. (Also refer point no19 of note no.35 to the financial statements).

(xi) Fixed assets are generally capitalised on the basis of completion certificates issued by the engineering department. Due to delays in issuance of the completion certificates, there are cases where capitalization of the fixed assets gets deferred to next year. The resultant impact of the same on the statement of profit and loss by way of depreciation and amount of fixed assets capitalized in the balance sheet cannot be ascertained.

(xii) Pending reconciliation of income from recharge coupons/ITC cards/prepaid calling cards and stock of such coupons/cards, the impact thereof on the financial statements cannot be ascertained and quantified.

(xiii) In respect of sundry creditors, in Mobile Services, Mumbai, liability towards one of the vendors of Rs. 106.73 crores is appearing in the financial books as against the liability of Rs. 42.01 crores to be retained as per the other available records. Pending reconciliation and review of records spread over the years from 2006-07 to 2012-13, no corrective entries have been passed in the financial books during the year. Impact of the same on the financial statements of the Company cannot be ascertained pending the said reconciliation and review. (Refer point no 6 of Note no. 35 to the financial statements).

(xiv) The Company had invested Rs.100 crores in 8.75% Cumulative Preference Shares of M/S. ITI Limited during the year 2001-02. As per the terms of allotment, the said preference shares were to be redeemed in five equal installments. As per letter no. U-59011-10/2002-FAC dated 31.07.2009 issued by DOT, the repayment schedule of the said preference shares was deferred to 2012-13 onwards in five equal installments. M/s. ITI Ltd. has failed to meet its rescheduled obligation in respect of first three installments of Rs. 20 crores each payable in 2012-13, 2013-14 & 2014-15. Since M/s. ITI Ltd. has not complied with even rescheduled commitments, the Company has made a provision for the first three installment of Rs. 60 crores only instead of providing for full investment of Rs. 100 crores. This has resulted into understatement of loss by Rs. 40 crores and overstatement of noncurrent investments by Rs. 20 crores and also overstatement of current investments by Rs. 20 crores. (Also refer point no. 7 of note no.35 to the financial statements).

(xv) Certain Land and Buildings transferred to MTNL from DOT in earlier years have been reflected as leasehold. In the absence of relevant records, we are not in a position to comment on the classification of the same as leasehold and also the consequential impacts, if any, of such classification not backed by relevant records. In the absence of relevant records, impact of such classification on the financial statements cannot be ascertained and quantified.

(xvi) Department of Telecommunication (DOT) had raised a demand of Rs. 3313.15 crores in 2012-13 on account of one time charges for 2G spectrum held by the Company for GSM and CDMA for the period of license already elapsed and also for the remaining valid period of license including spectrum given on trial basis.

As explained the demand for spectrum usage for CDMA has been revised by Rs. 107.44 crores on account of rectification of actual usage.

Also as explained, pending finality of the issue by the Company regarding surrender of a part of the spectrum, crystallization of issue by the DOT in view of the claim being contested by the Company and because of the matter being sub-judice in the Apex Court on account of dispute by other private operators on the similar demands, the amount payable, if any, is indeterminate. Accordingly, no liability has been created for the demand made by DOT on this account and Rs. 3205.71 crores has been disclosed as contingent liability.

In view of the above we are not in a position to comment on the correctness of the stand taken by the Company and the ultimate implications of the same on the financial statements of the Company. (Also refer point no.4 of note no.35 to the financial statements).

(xvii) Other current assets include claim of Income tax refund for F.Y. 1999-2000 of Rs. 101.54 crores arising from pending appeal effect / rectification under Section 154 of Income Tax Act, 1961 by income tax department. This includes tax amount of Rs. 60.30 crores and interest accrued thereon amounting to Rs. 41.24 crores. In the absence of complete records, we are not in a position to comment on the correctness and recoverability of the same and consequential impact on the financial statements of the Company.

(xviii) The balances appearing in the advance tax/income tax receivable / tax deducted at source / interest on income tax and provisions for taxes are subject to reconciliation with the tax records. Pending reconciliations we are not in a position to comment on the correctness of the same and consequential impact of the same on the financial statements of the Company.

(xix) In Mumbai unit, on reconciliation of balance outstanding under refund due to subscribers account with actual amount due for refund, Rs. 37.13 crores was identified as excess liability appearing in the financial books. Pending decision on the final treatment of this excess amount, the same has been retained as liability in the financial books resulting into overstatement of loss and overstatement of current liabilities. (Refer point no. 17(c) of note no.35 to the financial statements).

In the absence of information, the effect of which cannot be quantified, we are unable to comment on the possible impact of the items stated in the point nos.(i), (ii), (iv), (v), (vi), (vii), (viii), (ix)(a), (x), (xi), (xii),(xiii), (xv), (xvi), (xvii) and (xviii) on the standalone financial statements of the Company for the year ended on 31st March 2015.

We further state that without considering the impact of items stated in preceding para, the effect of which could not be determined, had the observations made by us in point nos (iii),(ix)(b), (xiv) and(xix) ) been considered in the standalone financial statements, loss for the year would have been Rs. 3036.62 crores as against the reported figure of Rs. 2893.39 crores in the Statement of Profit and Loss and Trade receivables under the head Current Assets would have been Rs.284.09 crores as against the reported figure of Rs. 294.52 crores, Non Current Investments and Current Investments would have been Rs. 141.98 crores and Rs. NIL as against the reported figures of Rs. 161.98 crores and Rs. 20 crores respectively, Other Current Liabilities would have been Rs. 3163.28 crores as against the reported figure of Rs. 3070.48 crores in the Balance Sheet.

Qualified Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the possible effects of the matters described in the Basis for Qualified Opinion paragraph, the standalone financial statements give the information required by the Act, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at 31st March, 2015 and its losses and its cash fowls for the year ended on that date.

Emphasis of Matters

We draw attention to the following notes on the standalone financial statements being matters pertaining to Mahanagar Telephone Nigam Limited requiring emphasis by us. Our opinion is not qualified in respect of these matters:

(i) Point no. 27 of note no.35 to the financial statements regarding non provision of diminution in the value of investments in joint ventures/subsidiary as these diminutions are considered temporary in nature.

(ii) Point no. 9(a) of note no.35 to the financial statements regarding the adequacy or otherwise of the provision and / or contingency reserve held by the Company with reference to pending dispute with the Income Tax Department before the Hon''ble Courts regarding deduction claimed by the Company u/s 80 IA of the Income Tax Act,1961.

(iii) Point no.14(a) of note no.35 to the financial statements regarding accounting of claims and counter claims of MTNL with M/S M&N Publications Ltd., in a dispute over printing, publishing and supply of telephone directories for MTNL, in the year when the ultimate collection / payment of the same becomes reasonably certain.

(iv) Point no. 15(d)of note no.35 to the financial statements regarding non deduction of tax at source for IUC services rendered by BSNL based on the expert opinion taken by the Company.

(v) Classification of trade receivables as unsecured without considering the security deposit which the Company has received from the subscribeRs. (Also refer note no.19 to the financial statements).

(vi) Amount receivable from BSNL has been reflected as loans and advances instead of bifurcating the same into trade receivables and other receivables. (Also refer note no. 19 to the financial statements).

(vii) Disclosure of consumption of imported and indigenous stores and spares and percentage to the total consumption as required by Schedule III of the Companies Act, 2013 has not been made by the Company in the financial statements.

Report on Other Legal and Regulatory Requirements

1. As required by the Companies (Auditor''s Report) Order, 2015 ("the Order") issued by the Central Government of India in terms of sub-section (11) of section 143 of the Act, we give in the Annexure - ''A'' a statement on the matters specified in paragraphs 3 and 4 of Order, to the extent applicable.

2. As required by Section 143(5) of the Act, we give in Annexure B, a statement on the matters specified by the Comptroller and Auditor-General of India for the Company.

3. As required by section 143 (3) of the Act, we report that:

(a) We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit except for the matters described in point nos. (i), (ii), (iv), (v), (vi), (vii), (viii), (ix)(a), (x), (xi), (xii), (xiii), (xv), (xvi), (xvii) and (xviii)of the paragraph on Basis of Qualified Opinion given above ;

(b) In our opinion proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except for our comments under the head ''Basis for Qualified Opinion'' stated above;

(c) The Balance Sheet, the Statement of Profit and Loss, and the Cash Flow Statement dealt with by this Report are in agreement the books of account;

(d) In our opinion and based on our comments in point nos. (iii), (iv), (v), (xi), (xii), (xiv), (xv) and (xvi) of the paragraph on Basis for Qualified Opinion given above, the aforesaid standalone financial statements comply with the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules 2014 except for AS-2 regarding Valuation of Inventories, AS-6 regarding Depreciation Accounting, AS-9 regarding Revenue recognition, AS-10 regarding Accounting of Fixed Assets, AS-13 regarding Accounting of Investments, AS-28 regarding Impairment of Assets and AS 29 on Provisions, Contingent Liabilities and Contingent Assets.

(e) On the basis of written representations received from the directors as on 31st March, 2015 and taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 2015 from being appointed as a director in terms of Section 164 (2) of the Act; and

(f) The qualification relating to the maintenance of accounts and other matters connected therewith are as stated in the Basis for Qualified Opinion paragraph above.

(g) With respect to the other matters to be included in the Auditors Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us;

i. the Company has disclosed the impact of pending litigations, wherever quantifiable, on its financial position in its financial statements. Refer point no. 1 and 14 of Note no. 35 to the financial statements.

ii. the Company is not required to make any provision for any material foreseeable losses under any law or accounting standards on long terms contracts. Also the Company is not dealing into derivatives contracts. Refer point no. 37 of Note no. 35 to the financial statements.

iii. There has been no delay in transferring any amount to the Investor Education and protection Fund during the year. Refer point no 36 of Note No. 35 to the financial statements.

ANNEXURE TO THE INDEPENDENT AUDITORS'' REPORT

REFERRED TO IN OUR INDEPENDENT AUDITORS'' REPORT OF EVEN DATE TO THE MEMBERS OF MAHANAGAR TELEPHONE NIGAM LIMITED ON THE STANDALONE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31st MARCH 2015.

(i) (a) Delhi unit has maintained records of fixed assets. However in MS unit-Delhi, identification number are not mentioned. It has been noticed that records of the Estates Department in respect of land and building do not match with the records as per financial books. In case of Mumbai unit (both basic and WS), fixed assets registers have been maintained w.e.f. 01.04.2002. However, the fixed assets records maintained by the Mumbai unit are not updated and reconciled with the financial records. Also identification numbers are not mentioned in respect of most of the items. the corporate office has maintained fixed assets records showing full particulars including quantitative details and situation of fixed assets.

(b) As per the accounting policy of the company, fixed assets are required to be physically verified by the management on rotation basis, once in three years, which in our opinion is reasonable and adequate in relation to the size of the Company and the nature of its business. As certified by the management, the office machinery and equipments, leased premises and cables were physically verified in accordance with programme of verification by the management during the year and no material discrepancies were noticed on such verification. However no documentary evidence in respect of physical verification of cables was made available to us for our verification. Therefore, we are unable to comment on material discrepancies, if any, noticed on such verification.

(ii) (a) In our opinion, physical verification of inventory has been conducted by the management at reasonable intervals during the year.

(b) In our opinion, the procedures of physical verification of inventory followed by the management are reasonable and adequate in relation to the size of the Company and the nature of its business.

(c) On the basis of our examination of the records of inventory, we are of the opinion that the Company is maintaining proper records of inventory. Discrepancies noticed on physical verification of inventory as compared to book records were not material and have been properly dealt with in the books of accounts.

(iii) The Company has not granted any secured or unsecured loans to companies, forms or other parties covered in the register maintained under section 189 of the Companies Act, 2013 (''the Act''). Thus , paragraph 3(iii) of the Order is not applicable

(iv) In our opinion and according to the information and explanations given to us, internal control system is reasonably adequate and broadly commensurate with the size of the Company and the nature of its business with regard to purchase of inventory and fixed assets and for the sale of goods and services. The same needs to be strengthened further. We have not observed any continuing failure to correct major weakness in the internal control system during the course of the audit.

(v) The Company has not accepted any deposits from the public within the meaning of Section 73 to Section 76 or any other relevant provisions of the Companies Act, 2013 or rules framed there under.

(vi) As per information and explanation given to us, Company is required to maintain the cost records under Section 148(1) of the Companies Act 2013. As explained the Company has not yet maintained the required cost records for 2014-15.

(vii) (a) According to the information and explanations given to us and on the basis of our examination of the records of the Company, amounts deducted/ accrued in the books of account in respect of undisputed statutory dues including provident fund, employee''s state insurance, income tax, sales tax, wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and other material statutory dues, wherever applicable, have been regularly deposited during the year by the Company with the appropriate authorities.

According to the information and explanations given to us, no undisputed amounts payable in respect of provident fund, employee''s state insurance, income tax, sales tax, wealth tax, service tax duty of customs, duty of excise, value added tax, cess or other material statutory dues were in arrears as at 31 March 2015.

(b) According to the information and explanations given to us, there are no dues of Income tax, Sale tax, service tax, wealth tax, duty of customs, duty of excises, value added tax and cess which have not been deposited with the appropriate authorities on account of any dispute except for the following dues:

Delhi Unit

i. Sales Tax Name of Amount Period Authority where Forum where the Statute (Rs,in Crores) the dispute is pending L.S.T (Net)

Delhi Sales Tax Act 12.21 2007-08 Addl. Comm. Sales Tax

Delhi Sales Tax Act 62.60 2009-10 & 2010-11 Addl. Comm. Sales Tax (CWG 2010)

Delhi Sales Tax Act 0.04 2012-13 Addl. Comm. Sales Tax

TOTAL 74.85

ii. Service Tax

Name of the Statute Amount (Rs,in Period Forum where the dispute is pending Crores) (Net)

Service tax 7.96 2005-06 Addl. Comm. Service Tax Service tax 22.03 2007-08 Addl. Comm. Service Tax

TOTAL 29.99

iii. Labour Cess

Name of the Statute Amount (Rs,in Period Forum where the dispute is Crores) (Net) pending

Building and other 2.68 1996 to 2001 Deputy Labor Commissioner Construction Workers Welfare Cess Act, 1996.

Building and other 5.93 2002 to 2005 Deputy Labor Commissioner Construction Workers Welfare Cess Act, 1996.

Building and other 1.48 2005 to 31.03. 2015 Deputy Labor Commissioner Construction Workers

Welfare Cess Act, 1996.

TOTAL 10.09

Mumbai Basic Unit Sales Tax:

Name of the Nature of Dues Amount under Year to which Statute dispute(Rs,in amount relates Crores) (Net)

BST ACT Assessed Amount 0.36 1993-94

BST ACT Assessed Amount 5.32 1996-97

BST ACT Assessed Amount 1.91 1998-99

BST ACT Assessed Amount 3.52 1999-200

BST ACT Assessed Amount 5.48 2000-01

BST ACT Assessed Amount 10.16 2001-02

BST ACT Assessed Amount 216.11 2003-04

BST ACT Assessed Amount 101.57 2004-05

Total 344.43

Name of the Statute Forum where the dispute is pending

BST ACT mAHARASHTRA SALES tAX Tribunal, Mumbai

BST ACT Maharashtra Sales Tax Tribunal Mumbai

BST ACT Jt. Commissioner of sales Tax (Appeal) II Mumbai

BST ACT Jt. Commissioner of Sales Tax (Appeal) II Mumbai

Bst ACT Maharashtra sales tax Tribunal Mumbai

Bst ACT Maharashtra sales tax Tribunal Mumbai

Bst ACT Maharashtra sales tax Tribunal Mumbai

Bst ACT Maharashtra sales tax Tribunal Mumbai

Mumbai MS Unit Central Excise:

Name of the Statute Nature of dues Amount Under Year to Which dispute not Amount deposited (Rs,in Relates Crores)

Central Excise Act Installation of BTS Site 0.29 2004-05

Central Excise Act Installation of BTS Site 0.26 2005-06

Central Excise Act Installation of BTS Site 0.32 2006-07

Total 0.87



Name of the Statute Form where the dispute is pending

Central Excise Act CESTAT

Central Excise Act CESTAT

Central Excise Act CESTAT



(c) According to the information and explanations given to us the amounts required to be transferred to the investor education and protection fund in accordance with the relevant provisions of the Companies Act, 1956 (1 of 1956) and rules there under have been transferred to such fund within time .

(viii) The company does not have accumulated losses as at 31st March 2015. The Company has incurred cash losses during the current financial year. However, the Company did not have cash losses in the preceding financial year.

(ix) The Company has not defaulted in the repayment of dues to banks or debenture holders. The Company has not taken any loan from any financial institution.

(x) In our opinion and according to the information and the explanations given to us, the Company has not given any guarantee for loans taken by others from banks or financial institutions.

(xi) The Company has not taken any term loan during the year.

(xii) Based on audit procedures applied and according to the information and explanations given to us, we report that no fraud on or by the Company has been noticed or reported during the course of our audit for the year ended on 31st March 2015 except for the following three cases:

Nature of Fraud Amount Remarks (Rs,in Crores)

Major Discrepancy found in reconciliation of 0.02 Investigation in Progress E-recharge through Demo Sim. Short remittances of E-recharge.

Improper record keeping of recharge coupons, non 0.11 Investigation in Progress

reconciliation of stock time to time and probable siphoning of amount collected.

Theft of blank cheques and enacted by forged 0.05 Amount has been credited to signature. MTNL Account by Bank.

TOTAL 0.18

For V. K. DHINGRA & CO. For ARUN K. AGARWAL & ASSOCIATES

CHARTERED ACCOUNTANTS CHARTERED ACCOUNTANTS

Firm Regn. No. 000250N Firm Regn. No. 003917N



(SANJAY JINDAL) (SANJAY GUPTA) PARTNER PARTNER M. NO. 087085 M. NO. 095506

PLACE : NEW DELHI DATED : MAY 30, 2015


Mar 31, 2014

We have audited the accompanying financial statements of Mahanagar Telephone Nigam Limited ("the Company"), which comprise the Balance sheet as at March 31, 2014 and the Statement of Profit and Loss and the Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Managements Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements that give a true and fair view of financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards notified under the Companies Act, 1956 ("the Act") read with the General Circular 15/2013 dated 13th September 2013 of the Ministry of Corporate Affairs in respect of Section 133 of the Companies Act, 2013. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditors Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company''s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company''s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

(i) The Company has certain balances receivables from and payables to BSNL. The net amount recoverable of Rs. 23640.05 million is subject to reconciliation and confirmation. In view of non reconciliation/ confirmation and also in view of various pending disputes regarding each other''s claims, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the financial statements of the Company. (Also refer point no. 11 of note no.35 to the financial statements).

(ii) The Company has certain balances receivables from and payables to Department of Telecommunication (DOT). The net amount recoverable of Rs. 84202.51 million is subject to reconciliation and confirmation. In view of non reconciliation and non confirmation, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the financial statements of the Company.. (Also refer point no. 15 of note no.35 to the financial statements).

(iii) Upto financial year 2011-12 License Fee payable to the DOT on IUC charges to BSNL was worked out on accrual basis as against the terms of License agreements requiring deduction for expenditure from the gross revenue to be allowed on actual payment basis. From financial year 2012-13, the license fee payable to the DOT has been worked out strictly in terms of the license agreements. The Company continues to reflect the difference in license fee arising from working out the same on accrual basis as aforesaid for the period upto financial year 2011-12 byway of contingent liability of Rs. 1403.63 million instead of actual liability resulting in under statement of current liabilities and over statement of profit to that extent. (Also refer point no.17 of note no.35 to the financial statements).

(iv) The Company continues to allocate the establishment overheads towards capital works on estimated basis. In view of the basis being not in line with the accepted accounting practices and Accounting Standard -10 "Accounting for Fixed Assets" issued under the Companies (Accounting Standards) Rules, 2006, the same results into ove Rs. statement of capital work in progress/ fixed assets and overstatement of profits. The actual impact of the same on the financial statements for year is not ascertainable and quantifiable. (Also refer note no.25 and 28 to the financial statements).

(v) No adjustment has been considered on account of impairment loss during the year, with reference to AS-28 "Impairment of Assets" issued under Companies (Accounting Standards) Rules, 2006. In view of uncertainty in achievement of future projections made by the Company, we are unable to ascertain and comment on the provision required in respect of impairment in carrying value of cash generating units and its consequent impact on the profit for the year, accumulated balance of reserve and surplus and also the carrying value of the cash generating units. (Also refer point no. 36 of note no.35 to the financial statements).

(vi) To work out the liability towards wealth tax, vacant land and guest houses/inspection quartetrs are taken at their book values instead of valuation the same as per Wealth Tax Act /Rules resulting into over statement of profit resulting from lower wealth tax and also corresponding understatements of liabilities. In the absence of valuation as at the year end, we are not in a position to ascertain and quantify the impact thereof on financial statements. (Also refer point no. 26 of note no.35 to the financial statements).

(vii) Amount receivables from and payables to the various parties are subject to confirmation and reconciliation. Pending such confirmation and reconciliations, the impact thereof on the financial statements is not ascertainable and quantifiable. (Also refer point no. 23 of note no.35 to the financial statements).

(viii) Dues from the operators are not taken into account for making provision for doubtful debts. Also no provision for doubtful debts is made for disputed cases outstanding for less than one year in Basic and for less than 180 days in GSM/CDMA. In the absence of any working, the impact thereof on the financial statements cannot be ascertained and quantified. (Also refer point no. 3(b) of note no. 1 to the financial statements).

(ix) (a) In Delhi Unit, reconciliation of balances of subscriber''s deposits as per subsidiary records with financial books (WFMS) is still in progress and the impact, if any, of the differences arising out of such reconciliation on financial statements cannot be ascertained and quantified at present. (Also refer point no. 16(a) of note no.35 to the financial statements).

(b) Unlinked credit of Rs. 212.42 million on account of receipts from subscribers against billing by the Company which could not be matched with corresponding receivables are appearing as liabilities in the balance sheet. To that extent, both assets and liabilities are overstated. (Also refer point no. 16(e) of note no.35 to the financial statements).

(c) The aggregate balance of trade receivables as per the ageing summary in subsidiary records is lower by Rs. 66.56 million as compared to the balance in general ledger and is under reconciliation. The same has been provided for Pending reconciliation, the impact of the same on the financial statements cannot be ascertained and quantified. (Also refer point no. 16(f) of note no.35 to the financial statements).

(x) In the absence of detailed information i.e. break up of amount received with relation to the individual invoices raised through MACH, invoice wise reconciliation of the roaming debtors is pending. Pending such reconciliation, the impact of the same on the financial statements can not be ascertained and quantified. (Also refer point no.40 of note no.35 to the financial statements).

(xi) Fixed assets are generally capitalized on the basis of completion certificates issued by the engineering department. Due to delays in issuance of the completion certificates, there are cases where capitalization of the fixed assets gets deferred to next year-. The resultant impact of the same on the statement of profit and loss by way of depreciation and amount of fixed assets capitalized in the balance sheet cannot be ascertained.

(xii) Pending reconciliation of income from recharge coupons/ITC cards/prepaid calling cards and stock of such coupons/cards, the impact thereof on the financial statements cannot be ascertained and quantified.

(xiii) The Company had invested Rs. 1000 million in 8.75% Cumulative Preference Shares of M/S. ITI Limited during the year 2001-02. As per the terms of allotment, the said preference shares were to be redeemed in five equal installments. As per letter no. U-59011-10/2002- FAC dated 31.07.2009 issued by DOT, the repayment schedule of the said preference shares was deferred to 2012-13 onwards in five equal installments. M/s. ITI Ltd. has failed to meet its rescheduled obligation in respect of first two installment of Rs. 200 million each payable in 2012-13 & 2013-14. Since M/s. ITI Ltd. has not complied with even rescheduled commitments, the Company has made a provision for the first two installment of Rs. 400 million only instead of providing for full investment of Rs. 1000 million. This has resulted into over statement of profit by Rs. 600 million and overstatement of non current investments by Rs. 400 million and also overstatement of current investments by Rs. 200 million. (Also refer point no. 14 of note no.35 to the financial statements).

(xiv) Certain Land and Buildings transferred to MTNL from DOT in earlier years have been reflected as leasehold. In the absence of relevant records, we are not in a position to comment on the classification of the same as leasehold and also the consequential impacts, if any, of such classification not backed by relevant records. In the absence of relevant records, impact of such classification on the financial statements cannot be ascertained and quantified.

(xv) Department of Telecommunication (DOT) had raised a demand of Rs. 33131.50 million in 2012-13 on account of one time charges for2G spectrum held by the Company for GSM and CDMA for the period of licence already elapsed and also for the remaining valid period of licence including spectrum given on trial basis.

As explained the demand for spectrum usage for CDMA has been revised by Rs. 1074.40 million on account of rectification of actual usage.

Also as explained, pending finality of the issue by the Company regarding surrender of a part of the spectrum, crystallization of issue by the DOT in view of the claim being contested by the Company and because of the matter being sub-judice in the Apex Court on account of dispute by other private operators on the similar demands, the amount payable, if any, is indeterminate. Accordingly, no liability has been created for the demand made by DOT on this account and Rs. 32057.10 million has been disclosed as contingent liabilityy.

In view of the above we are not in a position to comment on the correctness of the stand taken by the Company and the ultimate implications of the same on the financial statements of the Company. (Also refer point no. 39 of note no.35 to the financial statements).

(xvi)Segment Assets and Segment Liabilities in respect of primary segment have not been ascertained and disclosed by the Company. In the absence of required information, we are not in a position to ascertain and quantify the impact of the same on segment results. (Also refer point no. 33 of note no.35 to the financial statements).

(xvii) Other current assets include claim of Income tax refund for F.Y. 1999-2000 of Rs. 1015.43 million arising from pending appeal effect/rectification under Section 154 of Income Tax Act, 1961 by income tax department . This includes tax amount of Rs. 603.03 million and interest accrued thereon amounting to Rs. 412.40 million. In the absence of complete records, we are not in a position to comment on the correctness and recoverability of the same and consequential impact on the financial statements of the Company.

(xviii) The balances appearing in the advance tax/income tax receivable / tax deducted at source / interest on income tax and provisions for taxes are subject to reconciliation with the tax records. Pending reconciliations we are not in a position to comment on the

correctness of the same and consequential impact of the same on the financial statements of the Company.

(xix)In respect of absorbed combined service pension optee employees of MTNL, part of the pensionary benefits paid in the earlier years were capitalized along with the capital work in progress. However while reversing the same in the current year in view of the same having been taken over by Govt. of India as per notification dated March 03,2014, capitalized portion of earlier years has also been taken to Statement of Profit and Loss and reflected as part of exceptional items without decapitalising the portion capitalized in earlier years. In the absence of details pertaining to previous years, we are not in a position to comment on the impact of the same on the financial statements.

In the absence of information, the effect of which can not be quantified, we are unable to comment on the possible impact of the items stated in the point nos.(i), (ii), (iv), (v), (vi), (vii), (viii), (ix)(a),(ix)(c), (x), (xi), (xii),(xiv), (xv), (xvi), (xvii), (xviii) and (xix) on the financial statements of the Company for the year ended on 31st March 2014.

We further state that without considering the impact of items stated in preceding para, the effect of which could not be determined, had the observations made by us in point nos (iii), (ix)(b) and, (xiii) ) been considered in the financial statements, profit for the year would have been Rs. 76247.68 million as against the reported figure of Rs. 78251.31 million in the Statement of Profit and Loss and Trade receivables under the head Current Assets would have been Rs. 2705.58 million as against the reported figure of Rs. 2918.00 million, Non Current Investments and Current Investments would have been Rs. 1419.79 million and Rs. nil million as against the reported figures of Rs. 1819.79 million and Rs. 200 million respectively, Other Current Liabilities would have been Rs. 30047.60 million as against the reported figure of Rs. 28856.39 million in the Balance Sheet.

Qualified Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with accounting principles generally accepted in India:

a) in the case of Balance Sheet, of the state of affairs of the Company as at March 31,2014;

b) in the case of Statement of Profit and Loss, of the profit for the year ended that date; and

c) in case of the Cash Flow Statement, of the cash flows for the year ended on that date.

Emphasis of Matters

We draw attention to the following notes on the financial statements being matters pertaining to Mahanagar Telephone Nigam Limited requiring emphasis by us. Our opinion is not qualified in respect of these matters:

(i) Point no.4 of note no. 35 to the financial statements regarding non provision of pensionary benefits viz. pension and gratuity in respect of absorbed combined service pension optees to be paid by the Govt. of India vide gazette notification no.GSR 138(E) dated 3rd March 2014.

(ii) Point no.22 of note no.35 to the financial statements regarding non provision of diminution in the value of investments in joint ventures/subsidiary as these diminutions are considered temporary in nature.

(iii) Point no.5(a) of note no.35 to the financial statements regarding the adequacy or otherwise of the provision and / or contingency reserve held by the Company with reference to pending dispute with the Income Tax Department before the Hon''ble Courts regarding deduction claimed by the Company u/s 80 IA of the Income Tax Act,1961.

(iv) Point no. 8(b) of note no.35 to the financial statements regarding accounting of claims and counter claims of MTNL with M/S M&N Publications Ltd., in a dispute over printing, publishing and supply of telephone directories for MTNL, in the year when the ultimate collection / payment of the same becomes reasonably certain.

(v) Point no. 38 of note no.35 to the financial statements regarding non deduction of tax at source for IUC services rendered by BSNL based on the expert opinion taken by the Company.

(vi) Classification of trade receivables as unsecured without considering the security deposit which the Company has received from the subscribers. (Also refer note no.19 to the financial statements).

(vii) Amount receivable from BSNL has been reflected as loans and advances instead of bifurcating the same into trade receivables and other receivables. (Also refer note no.16 to the financial statements).

(viii) Disclosure of consumption of imported and indigenous stores and spares and percentage to the total consumption as required by Schedule VI of the Companies Act, 1956 has not been made by the Company in the financial statements.

(ix) Point no. 16(b) of note no.35 to the financial statements regarding impact if any, arising out of reconciliation of Balances of customer''s deposits in the CSMS billing system with financial books (WFMS) in Mumbai Unit.

(x) Point no. 16(d) of note no.35 to the financial statements regarding impact if any, arising out of reconciliation of Balance outstanding under refund due to subscribers account with actual amount due for refund in Mumbai Unit.

(xi) Point no. 27 of note no. 35 to the financial statements regarding exceptional items to the tune of Rs. 116209.31 million accounted for during the year.

Report on Other Legal and Regulatory Requirements

1. As required by the Companies (Auditors Report) Order, 2003 ("the Order") issued by the Central Government of India in terms of sub-section (4A) of the Section 227 of the Act, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the Order.

2. As required by Section 227(3) of the Act, we report that :

a. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit except for the matters described in point nos. (i), (ii), (iv), (v), (vi), (vii), (viii), (ix)(a), (ix)(c), (x), (xi), (xii), (xiv), (xv), (xvi), (xvii), (xviii) and (xix) of paragraph on Basis of Qualified Opinion given above;

b. In our opinion proper books of accounts as required by law have been kept by the Company so far as appears from our examination of those books;

c. The Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by this Report are in agreement with books of account;

d. In our opinion and based on our comments in point nos. (iii), (iv), (v), (xi), (xii), (xiii), (xiv), (xv), (xvi) & (xix) of the paragraph on Basis for Qualified opinion given above, the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Act read with the General Circular 15/2013 dated 13th September, 2013 of the Ministry of Corporate Affairs in respect of section 133 of the Companies Act, 2013, except AS-2 regarding Valuation of Inventories, AS-6 regarding Depreciation Accounting, AS-9 regarding Revenue Recognition, AS-10 regarding Accounting of Fixed Assets, AS-13 regarding Accounting for Investments, AS-17 regarding Segment Reporting, AS-28 regarding Impairment of Assets, AS- 29 on Provisions, Contingent Liabilities and Contingent Assets;

e. In view of the Government notification no. GSR 829 (E) dated 21st October 2003, Government companies are exempt from the applicability of provisions of clause(g) sub-section (1) of Section 274 of the Act;

ANNEXURE TO INDEPENDENT AUDITORS'' REPORT

REFERRED TO IN PARAGRAPH 1 UNDER THE HEADING OF "REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS" OF OUR REPORT OF EVEN DATE TO THE MEMBERS OF MAHANAGAR TELEPHONE NIGAM LTD SHALL ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED ON 31ST MARCH 2014.

1. (a) Delhi unit has maintained records of fixed assets. However in MS unit- Delhi, identification number is not mentioned. It is noticed that records of the Estates Department in respect of Land and Building do not match with the records as per financial books. In case of Mumbai Unit (both basic and WS unit), fixed assets registers have been maintained w.e.f. 01.04.2002. However, the fixed assets records maintained by the Mumbai unit are not up dated and reconciled with the financial records. Also identification number is not mentioned in respect of most of the items. The corporate office has maintained fixed assets records showing full particulars including quantitative details and situation of fixed assets.

(b) As per the Accounting Policy of the company, Fixed Assets are required to be physically verified by the Management on rotation basis, once in three years, which in our opinion is reasonable and adequate in relation to the size of the Company and the nature of its business. As certified by the management, the Electric Appliances (excluding lights & fans), Furniture & Fixtures, line & wire and computers were physically verified in accordance with programme of verification by the management during the year and no material discrepancies were noticed on such verification. However no documentary evidence in respect of physical verification of lines & wires was made available to us for our verification. Therefore we are unable to comment on material discrepancies noticed on such verification, if any.

(c) The company has not disposed off any substantial part of its fixed assets during the year except surrender of spectrum of BWA services which is not effecting the going concern.

2. (a) In our opinion, physical verification of inventory has been conducted by the management at reasonable intervals during the year .

(b) In our opinion, the procedures of physical verification of the inventory followed by the management are reasonable and adequate in relation to the size of the company and the nature of its business.

(c) On the basis of our examination of the inventory records, in our opinion, the Company is maintaining proper records of inventory. As per the information provided to us, discrepancies noticed on physical verification of inventory were not material and have been properly dealt with in the books of accounts.

3. As explained to us, the Company has neither taken nor granted any loans, secured or unsecured, from/to companies, firms or other parties covered in the register maintained under Section 301 of the Companies Act, 1956. Accordingly clause 4(iii) of the Companies (Auditors Report) Order, 2003 is not applicable to the Company.

4. In our opinion and according to the information and explanations given to us there are internal control procedures which are generally adequate and commensurate with the size and the nature of its business for the purchase of inventory and fixed assets and for the sale of goods and services. However, the same needs to be further strengthened. During the course of our audit, we have not observed any continuing failure to correct major weaknesses in internal control systems.

5. Based on the audit procedures applied by us and the information and explanations provided by the management, there was no transaction during the year ended 31.03.2014 that need to be entered in the register maintained under Section 301 of the Companies Act 1956.

6. As informed to us, the Company has not accepted any deposits from the public during the year within the meaning of Section 58 A and 58 AA of the Companies Act, 1956 and the rules framed there under.

7. In our opinion, the Internal Audit System of the company is not commensurate with the size of the Company and the nature of its business. Moreover, extent of coverage of the areas of operations, frequency / quality of reporting/ timeliness of the reporting and the follow up of internal audit observations need to be strengthened.

8. The Central Government has prescribed the maintenance of cost records under clause

(d) of sub section (1) of section 209 of Companies Act, 1956 .The company has not maintained the required Cost Records for the year 2013-2014.

9. (a) According to the information and explanations given to us and the records of the company examined by us, in our opinion, the company is generally regular in depositing undisputed Statutory Dues including Contributory Provident Fund, Investor Education and Protection Fund, Income Tax, Sales Tax, Wealth Tax, service tax, Custom Duty, Excise Duty, Cess and any Other material Statutory Dues as applicable with the appropriate authorities. As informed to us, the provisions of Employees State Insurance Act are not applicable to the company. According to the information and explanation given to us no undisputed amounts payable in respect of aforesaid dues were outstanding as at 31.03.2014, for a period of more than six months from the date they become payable.

(b) According to the information and explanation given to us, there are no dues in respect of Custom Duty, Excise Duty and Cess that have not been deposited with the appropriate authorities on account of any dispute. However, the Company has not deposited Sales Tax /VAT Dues, Service Tax and Income Tax Dues on account of disputes as under:

Local Sales Tax and Central Sales Tax / VAT:

Delhi Unit

(i) Sales Tax

Name of Amount (Rs. ) Period Authority where the Statute L.S.T (Net)

Delhi Sales 122100562 2007-08 Addl. Comm. Tax Act Sales Tax

Delhi Sales 625986672 2009-10 & 2010-11 Addl. Comm. Sales Tax Act (CWG 2010) Tax

TOTAL 748087234

Name of Amount (Rs. ) Period Authority where the Statute L.S.T (Net)

Service tax 79553540 2005-06 Addl. Comm. Service Tax Service tax 220288844 2007-08 Addl. Comm. Service Tax TOTAL 299842384

Mumbai Unit

Name of Nature of Dues Amount under Year to the Statute dispute which (Rs.) Net amount relates

BST ACT Assessed Amount 672968 1993-94 BST ACT Assessed Amount 52693370 1996-97 BST ACT Assessed Amount 59424662 1998-99 BST ACT Assessed Amount 30201675 1999-2000 BST ACT Assessed Amount 54029094 2000-01 BST ACT Assessed Amount 101128984 2001-02 BST ACT Assessed Amount 2161090302 2003-04 BST ACT Assessed Amount 1015717015 2004-05 Total 3474958070

Name of Forum where the Statute the dispute is pending

BST ACT Maharashtra Sales Tax Tribunal, Mumbai

BST ACT Maharashtra Sales Tax Tribunal, Mumbai

BST ACT Jt. Commissioner of Sales Tax (Appeal) II Mumbai

BST ACT Jt. Commissioner of Sales Tax (Appeal) II Mumbai

BST ACT Maharashtra Sales Tax Tribunal, Mumbai

BST ACT Maharashtra Sales Tax Tribunal, Mumbai

BST ACT Maharashtra Sales Tax Tribunal, Mumbai

BST ACT Maharashtra Sales Tax Tribunal, Mumbai

Statutory dues which have not been deposited in respect of Mumbai MS unit as on 31st March, 2014.

Name of Nature of Dues Amount under Year to Forum where the Statute dispute which the dispute (Rs.) Net amount is pending relates

Central Installation 2909233 2004-05 CESTAT Excise Act of BTS Site Central Installation 2617816 2005-06 CESTAT Excise Act of BTS Site

Central Installation 3210353 2006-07 CESTAT Excise Act of BTS Site

Total 8737402

10. The company does not have any accumulated losses at the end of the financial year. However, it has incurred cash losses during the current financial year as well as in the immediately preceding financial year.

11. As per the records of the company and according to the explanation provided by the management, we report that there is no default in repayment of dues from the loan taken from banks during the year under audit

12. The Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. Accordingly, clause 4 (xii) of the Order is not applicable.

13. The Company is not a Chit Fund or a Nidhi Mutual Benefit Fund / Society. Accordingly, clause 4(xiii) of the Order is not applicable.

14. The Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, clause 4(xiv) of the Order is not applicable

15. According to the information and explanation given to us, the Company has not given any guarantees for loans taken by others from banks or financial institutions. Accordingly, clause 4(xv) of the Order is not applicable.

16. In our opinion, the term loans have been applied for the purpose for which they were raised.

17. In our opinion and according to the information and explanations given to us and on the basis of overall examination of the Balance Sheet & Cash Flow Statement of the company, we report that the funds raised by the company on short term basis have, prima facie, not been used for long term investments to the extent of Rs. 888.50 million.

18. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under Section 301 of the Act.

19. The Company has issued Non Convertible Debentures (in the form of bonds) under Sovereign Guarantee on private placement basis. As per information and explanation given to us, no charge or security is required to be created for the same.

20. The Company has not raised any money by public issues during the year. Accordingly, clause 4(xx) of the Order is not applicable.

21. According to the information and explanations given to us, no major fraud on or by the company has been noticed or reported during the year.

For Arun K. Agarwal & Associates For V.K. Dhingra & Co. Chartered Accountants Chartered Accountants FRN - 003917N FRN - 000250N

sd/- sd/- (Vimal Kumar Jain) (Lalit Ahuja) (Partner) (Partner) (Mem. No. 086657) (Mem. No. 085842)

Place: New Delhi Date: MAY 30, 2014


Mar 31, 2013

Report on the Financial Statements

We have audited the accompanying financial statements of Mahanagar Telephone Nigam Limited ("the company"), which comprise the Balance sheet as at March 31, 2013, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management''s Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements that give a true and fair view of financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956 ("the Act"). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error.

Auditor''s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards on auditing issued by the Institute of Chartered Accountants of India. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor''s judgment, including the assessment of the risk of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the companies preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

(i) The company has certain balances receivables from and payables to BSNL. The net amount recoverable ofRs. 19752.26 million is subject to reconciliation and confirmation. In view of non reconciliation/ confirmation and also in view of various pending disputes regarding each other''s claims, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the financial statements of the company. (Also refer point no.11 of note no.34 to the financial statements).

(ii) The company has certain balances receivables from and payables to Department of Telecommunication (DOT). The net amount recoverable ofRs. 34427.11 million is subject to reconciliation and confirmation. In view of non reconciliation and non confirmation, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the financial statements of the company. (Also refer point no.15 of note no.34 to the financial statements).

(iii) Upto financial year 2011-12 License Fee payable to the DOT on IUC charges to BSNL was worked out on accrual basis as against the terms of License agreements requiring deduction for expenditure from the gross revenue to be allowed on actual payment basis. From financial year 2012-13, the license fee payable to the DOT has been worked out strictly in terms of the license agreements. The company continues to reflect the difference in license fee arising from working out the same on accrual basis as aforesaid for the period upto financial year 2011-12 by way of contingent liability ofRs. 1403.63 million instead of actual liability resulting in under statement of current liabilities and losses to that extent. (Also refer point no.16 of note no.34 to the financial statements).

(iv) The Company continues to allocate the establishment overheads towards capital works on estimated basis. In view of the basis being not in line with the accepted accounting practices and Accounting Standard -10 "Accounting for Fixed Assets" issued under the Companies (Accounting Standards) Rules, 2006, the same results into overstatement of capital work in progress/ fixed assets and understatement of losses. The actual impact of the same on the capitalization & losses for year is not ascertainable and quantifiable. (Also refer note no.25 and 28 to the financial statements).

(v) No adjustment has been considered on account of impairment loss during the year, with reference to AS-28 "Impairment of Assets" issued under Companies (Accounting Standards) Rules, 2006. In view of continuous losses over the years resulting into full erosion of net worth of the company and uncertainty in achievement of future projections made by the company, we are unable to ascertain and comment on the provision required in respect of impairment in carrying value of cash generating units and its consequent impact on the loss for the year, accumulated balance of loss and also the carrying value of the cash generating units. (Also refer point no. 38 of note no.34 to the financial statements).

(vi) Provision for actuarial liability on account of medical expenses for retired employees and continuing employees has not been worked out and provided for as required under AS-15 "Employee Benefits" issued under Companies (Accounting Standards) Rules, 2006. Instead annual insurance premium for the policy taken by the company for this purpose is charged to statement of profit and loss. In the absence of actuarial valuation as on 31.03.2013, we are not in a position to ascertain and quantify the impact thereof on the financial statement. (Also refer point no. 34 of note no.34 to the financial statements).

(vii) Insurance claim for the fire loss in Data Center in July, 2009 amounting to Rs. 40 Million has been considered good. However, insurance company has disputed the claim and has informed the company to consider only the part of the claim which is not accepted by the Company.

As the dispute is still pending, we are not in a position to comment on the appropriateness of the claim recoverable being considered as good and the ultimate recovery of the same in full. Pending final outcome of the dispute, the impact thereof on the financial statements cannot be ascertained and quantified. (Also refer point no. 30(b) of note no.34 to the financial statements).

(viii)To work out the liability towards wealth tax, vacant land and guest houses/inspection quarters are taken at their book values instead of valuation the same as per Wealth Tax Act / Rules resulting into understatement of losses resulting from lower wealth tax and also corresponding understatements of liabilities. In the absence of valuation as at the year end, we are not in a position to ascertain and quantify the impact thereof on financial statements. (Also refer point no. 27 of note no.34 to the financial statements).

(ix) Amount receivables from and payables to the various parties are subject to confirmation and reconciliation. Pending such confirmation and reconciliations, the impact thereof on the financial statements is not ascertainable and quantifiable. (Also refer point no. 24 of note no.34 to the financial statements).

(x) Dues from the operators are not taken into account for making provision for doubtful debts. Also no provision for doubtful debts is made for disputed cases outstanding for less than 3 years in Basic and for less than 6 months in GSM/CDMA. In the absence of any working, the impact thereof on the financial statements cannot be ascertained and quantified. (Also refer point no. 1 (ii)(b) of note no.1 to the financial statements).

(xi) (a) In Delhi Unit, reconciliation of balances of customer''s deposits as per subsidiary records with financial books (WFMS) is still in progress and the impact, if any, of the differences arising out of such reconciliation on financial statements cannot be ascertained and quantified at present. (Also refer point no. 15(b) of note no.34 to the financial statements).

(b) Unlinked credit ofRs. 420.30 million on account of receipts from subscribers against billing by the company which could not be matched with corresponding receivables are appearing as liabilities in the balance sheet. To that extent, both assets and liabilities are overstated. (Also refer point no. 15(f) of note no.34 to the financial statements).

(c) The aggregate balance of sundry debtors as per the ageing summary in subsidiary records is lower by Rs. 73.83 million as compared to the balance in general ledger and is under reconciliation. The same has been provided for. Pending reconciliation, the impact of the same on the financial statements cannot be ascertained and quantified. (Also refer point no. 15(g) of note no.34 to the financial statements).

(xii) In the absence of detailed information i.e. break up of amount received with relation to the individual invoices raised through MACH, invoice wise reconciliation of the roaming debtors is pending. Pending such reconciliation, the impact of the same on the financial statements can not be ascertained and quantified. (Also refer point no.42 of note no.34 to the financial statements).

(xiii) Fixed assets are generally capitalized on the basis of completion certificates issued by the engineering department. Due to delays in issuance of the completion certificates, there are cases where capitalization of the fixed assets gets deferred to next year. The resultant impact of the same on the statement of profit and loss by way of depreciation and amount of fixed assets capitalized in the balance sheet cannot be ascertained.

(xiv) Out ofRs. 2850 million on account of wet lease of infrastructure and other services provided in respect of Commonwealth Games and accounted for in 2010-11, a sum ofRs. 430 million remains unrecovered and unconfirmed. Also the said amount ofRs. 430 million is yet to be approved by the concerned authorities. Pending confirmation, approval or any other document from the concerned authorities to substantiate the claim of the company, the recoverability of the amount outstanding is not certain. The company continues to treat the said amount as good for recovery and no provision for doubtful debts has been made for the same. To that extent, loss is understated and current assets are overstated. (Also refer point no. 44 of note no.34 to the financial statements).

(xv) Pending reconciliation of income from recharge coupons/ITC cards/prepaid calling cards and stock of such coupons/cards, the impact thereof on the financial statements cannot be ascertained and quantified.

(xvi)On material exchanged with BSNL on barter basis, VAT liability has not been ascertained and provided for. In the absence of detailed information, we are not in a position to comment on the likely impact of the same on the financial statements of the company.

(xvii) The company had invested Rs.1000 million in 8.75% Cumulative Preference Shares of M/ S. ITI Limited during the year 2001-02. As per the terms of allotment, the said preference shares were to be redeemed in five equal installments. As per letter no. U-59011-10/2002- FAC dated 31.07.2009 issued by DOT, the repayment schedule of the said preference shares was deferred to 2012-13 onwards in five equal installments. M/s. ITI Ltd. has failed to meet its rescheduled obligation in respect of first installment of Rs. 200 million payable in 2012-13. Since M/s. ITI Ltd. has not complied with even rescheduled commitments, the company has made a provision for the first installment of Rs.. 200 million only instead of providing for full investment of Rs.1000 million. This has resulted into understatement of losses by Rs.800 million and overstatement of non current investments by Rs. 600 million and also overstatement of current investments by Rs. 200 million. (Also refer point no. 14 of note no.34 to the financial statements).

(xviii) Certain works were carried out in earlier years by Mumbai Unit for Defence Network of Govt. of India in respect of alternate communication system. In context of the same following explanations has been given to us:-

"In respect of usage of the same Rs.338.3 million has been received at Corporate Office. Out of this Rs.59.82 million has been decapitalised in 2011-12 accounts and ATD sent to Corporate Office. The AT for the balance amount ofRs.278.48 million has been received from Corporate Office in 2012-13. Out of this amountRs.18.98 million has been decapitalised in 2012-13, Rs.32.33 million has been reduced from prior period expenses. Balance amount of Rs.227.17 million is relating to revenue for usage of the ducts. The work was completed in March-2011, the revenue is to be spread over a period of 18 years which is the life considered for depreciation of Cables. During the year Rs.25.24 million has been booked as income and balance of Rs.201.93 million is taken as unearned revenue to be recognised as income in the next 16 years."

In the absence of any agreement / documentary evidence / third party confirmation in respect of aforesaid accounting treatment / adjustments, we are not in a position to comment on the correctness or otherwise of such accounting treatment. (Also refer point no. 21 of note no.34 to the financial statements).

(xix)Certain Land and Buildings transferred to MTNL from DOT in earlier years have been reflected as leasehold. In the absence of relevant records, we are not in a position to comment on the classification of the same as leasehold and also the consequential impacts, if any, of such classification not backed by relevant records. In the absence of relevant records, impact of such classification on the financial statements cannot be ascertained and quantified.

(xx) During the year Department of Telecommunication (DOT) has raised a demand of Rs. 33131.50 million on account of one time charges for 2G spectrum held by the company for GSM and CDMA for the period of licence already elapsed and also for the remaining valid period of licence including spectrum given on trial basis.

As explained the demand for spectrum usage for CDMA will need revision by Rs.1074.40 million on account of rectification of actual usage.

As explained, pending finality of the issue by the company regarding surrender of a part of the spectrum , crystallization of issue by the DOT in view of the claim being contested by the Company and because of the matter being sub judice in the Apex Court on account of dispute by other private operators on the similar demands, the amount payable, if any, is indeterminate. Accordingly, no liability has been created for the demand made by DOT on this account and Rs. 32057.10 million has been disclosed as contingent liability.

In view of the above we are not in a position to comment on the correctness of the stand taken by the company and the ultimate implications of the same on the financial statements of the company. (Also refer point no. 41 of note no.34 to the financial statements).

(xxi)Segment Assets and Segment Liabilities in respect of primary segment have not been ascertained and disclosed by the company. In the absence of required information, we are not in a position to ascertain and quantify the impact of the same on segment results. (Also refer point no. 35 of note no.34 to the financial statements).

In the absence of information, the effect of which can not be quantified, we are unable to comment on the possible impact of the items stated in the point nos.(i), (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi)(a)&(c), (xii), (xiii),(xv), (xvi), (xviii), (xix), (xx) and (xxi) on the financial statements of the company for the year ended on 31st March 2013.

We further state that without considering the impact of items stated in preceding para, the effect of which could not be determined, had the observations made by us in point nos (iii),(xi)(b),(xiv) and (xvii) been considered in the financial statements, loss for the year would have been Rs. 55844.86 million as against the reported figure ofRs. 53211.23 million in the Statement of Profit and Loss and Trade receivables under the head Current Assets would have been Rs. 3389.68 million as against the reported figure of Rs. 3809.98 million, Short Term Loans and Advances under the head Current Assets would have been Rs. 7167.60 million as against the reported figure ofRs. 7597.60 million, Non Current Investments and Current Investments would have been Rs. 1419.79 million and Rs. nil million as against the reported figures ofRs. 2019.79 million and Rs. 200 million respectively, Other Current Liabilities would have been Rs. 29876.50 million as against the reported figure ofRs. 28893.17 million in the Balance Sheet.

Qualified Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with accounting principles generally accepted in India:

a) in the case of Balance Sheet, of the state of affairs of the Company as at march 31, 2013;

b) in the case of Statement of Profit and Loss, of the loss for the year ended that date; and

c) in case of the Cash Flow Statement, of the cash flows for the year ended on that date. Emphasis of Matters

We draw attention to the following notes on the financial statements being matters pertaining to Mahanagar Telephone Nigam Limited requiring emphasis by us. Our opinion is not qualified in respect of these matters:

(i) Point no.28 of note no.34 to the financial statements regarding preparation of financial statements on Going Concern basis in spite of the negative net worth of the company as on 31st March, 2013.

(ii) Point no.20(e) of note no.34 to the financial statements regarding the issue of pension liability on account of absorbed employees yet to be settled with the DOT.

(iii) Point no.22 of note no.34 to the financial statements regarding retaining of outstanding liability ofRs. 736.20 million on account of decommissioned assets pending arbitration case.

(iv) Point no.23 of note no.34 to the financial statements regarding non provision of diminution in the value of investments in joint ventures/subsidiary as these diminution are considered temporary in nature.

(v) Point no.5(a) of note no.34 to the financial statements regarding the adequacy or otherwise of the provision and / or contingency reserve held by the company with reference to pending dispute with the Income Tax Department at High Court level with reference to deduction claimed by the company u/s 80 IA of the Income Tax Act,1961.

(vi) Point no. 5(b) of note no. 34 to the financial statements regarding pending appeal effect by income tax authorities ofRs. 1015.43 million pertaining to financial year 1999-00.

(vii) Point no.5(c) of note no.34 to the financial statements regarding non reconciliation of advance tax, provisions for tax and interest on income tax refunds with the tax records of the company.

(viii) Point no. 8(b) of note no.34 to the financial statements regarding accounting of claims and counter claims of MTNL with M/S M&N Publications Ltd., in a dispute over printing, publishing and supply of telephone directories for MTNL, in the year when the ultimate collection / payment of the same becomes reasonably certain.

(ix) Point no. 40 of note no.34 to the financial statements regarding non deduction of tax at source for IUC services rendered by BSNL based on the expert opinion taken by the company.

(x) Classification of trade receivables as unsecured without considering the security deposit which the company has received from the subscribers. (Also refer note no.19 to the financial statements).

(xi) Amount receivable from BSNL has been reflected as loans and advances instead of bifurcating the same into trade receivables and other receivables. (Also refer note no.16 to the financial statements).

(xii) Disclosure of consumption of imported and indigenous stores and spares and percentage to the total consumption as required by Schedule VI of the Companies Act, 1956 has not been made by the company in the financial statements.

(xiii) Point no. 15(d) of note no.34 to the financial statements regarding impact if any, arising out of reconciliation of Balances of customer''s deposits in the CSMS billing system with financial books (WFMS) in Mumbai Unit.

(xiv) Point no. 15(e) of note no.34 to the financial statements regarding impact if any, arising out of reconciliation of Balance outstanding under refund due to subscribers account with actual amount due for refund in Mumbai Unit.

Report on Other Legal and Regulatory Requirements

1. As required by the Companies (Auditor''s Report) Order, 2003 ("the Order") issued by the Central Government of India in terms of sub-section (4A) of the Section 227 of the Act, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the Order.

2. As required by Section 227(3) of the Act, we report that :

a. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit except for the matters described in point nos. (i), (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi)(a)&(c), (xii), (xiii), (xv), (xvi), (xviii), (xix), (xx) and (xxi) of paragraph on Basis of Qualified Opinion given above;

b. In our opinion proper books of accounts as required by the law have been kept by the company so far as appears from our examination of those books;

c. The Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by this Report are in agreement with books of account;

d. In our opinion and based on our comments in point nos. (iii), (iv), (v), (vi), (xi), (xiii), (xix) & (xxi) of the paragraph on Basis for Qualified opinion given above, the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Act, except AS-2 regarding Valuation of Inventories, AS-6 regarding Depreciation Accounting, AS-9 regarding Revenue Recognition , AS-10 regarding Accounting of Fixed Assets , AS-15 regarding Employee Benefits, AS-17 regarding Segment Reporting, AS-28 regarding Impairment of Assets, AS-29 on Provisions, Contingent Liabilities and Contingent Assets;

e. In view of the Government notification no. GSR 829 (E) dated 21st October 2003, Government companies are exempt from the applicability of provisions of clause (g) sub-section (1) of Section 274 of the Act;

ANNEXURE TO INDEPENDENT AUDITORS'' REPORT

(REFERRED TO IN PARAGRAPH 1 UNDER THE HEADING OF " REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS" OF OUR REPORT OF EVEN DATE)

1. (a) Delhi unit has maintained records of fixed assets. However in MS unit- Delhi, identification number is not mentioned. It is noticed that records of the Estates Department in respect of Land and Building do not match with the records as per financial books. In case of Mumbai Unit (both basic and WS unit), fixed assets registers have been maintained w.e.f. 01.04.2002. However, the fixed assets records maintained by the Mumbai unit are not up dated and reconciled with the financial records. Also identification number is not mentioned in respect of most of the items. The corporate office has maintained fixed assets records showing full particulars including quantitative details and situation of fixed assets.

(b) As per the Accounting Policy of the company, Fixed Assets are required to be physically verified by the Management on rotation basis, once in three years, which in our opinion is reasonable and adequate in relation to the size of the Company and the nature of its business. As certified by the management, the Apparatus & Plants, vehicles and land and buildings were physically verified in accordance with programme of verification by the management during the year. No material discrepancies were noticed on such verification.

(c) The company has not disposed off any substantial part of its fixed assets during the year and as such there is no effect on the going concern.

2. (a) In our opinion, physical verification of inventory has been conducted by the management at reasonable intervals during the year .

(b) In our opinion, the procedures of physical verification of the inventory followed by the management are reasonable and adequate in relation to the size of the company and the nature of its business.

(c) On the basis of our examination of the inventory records, in our opinion, the Company is maintaining proper records of inventory. As per the information provided to us, discrepancies noticed on physical verification of inventory were not material and have been properly dealt with in the books of accounts.

3. As explained to us, the Company has neither taken nor granted any loans, secured or unsecured, to/from companies, firms or other parties covered in the register maintained under Section 301 of the Companies Act, 1956. Accordingly clause 4(iii) of the Companies (Auditor''s Report ) Order, 2003 is not applicable to the Company.

4. In our opinion and according to the information and explanations given to us there are internal control procedures which are generally adequate and commensurate with the size and the nature of its business for the purchase of inventory and fixed assets and for the sale of goods and services. However, the same needs to be further strengthened. During the course of our audit, we have not observed any continuing failure to correct major weaknesses in internal control systems,

5. Based on the audit procedures applied by us and the information and explanations provided by the management, there was no transaction during the year ended 31.03.2013 that need to be entered in the register maintained under Section 301 of the Companies Act 1956.

6. As informed to us, the Company has not accepted any deposits from the public during the year within the meaning of section 58 A and 58 AA of the Companies Act, 1956 and the rules framed there under.

7. In our opinion, the Internal Audit System of the company is not commensurate with the size of the Company and the nature of its business. Moreover, extent of coverage of the areas of operations, frequency / quality of reporting/ timeliness of the reporting and the follow up of internal audit observations need to be strengthened.

8. The Central Government has prescribed the maintenance of cost records under clause (d) of sub section (1) of section 209 of Companies Act, 1956 .The company has not maintained the required Cost Records for the year 2012-2013..

9. (a) According to the information and explanations given to us and the records of the company examined by us , in our opinion, the company is generally regular in depositing undisputed Statutory Dues including Contributory Provident Fund, Investor Education and Protection Fund, Income Tax, Sales Tax, Wealth Tax, service tax, Custom Duty, Excise Duty, Cess and any Other material Statutory Dues as applicable with the appropriate authorities. As informed to us, the provisions of Employees State Insurance Act are not applicable to the company. According to the information and explanation given to us no undisputed amounts payable in respect of aforesaid dues were outstanding as at 31.03.2013, for a period of more than six months from the date they become payable.

(b) According to the information and explanation given to us, there are no dues in respect of Custom Duty, Excise Duty and Cess that have not been deposited with the appropriate authorities on account of any dispute. However, the Company has not deposited Sales Tax /VAT Dues, Service Tax and Income Tax Dues on account of disputes as under:

Local Sales Tax and Central Sales Tax / VAT:

The unit has already deposited Rs. 157233054/- out of the total disputed liability stated above. Mumbai Unit

Name of Nature of Dues Amount under Year to Forum where the Statute dispute which the dispute (Rs.) amount is pending relates

BST ACT Assessed Amount 3552968 1993-94 MSTT

BST ACT Assessed Amount 53193370 1996-97 DC

BST ACT Assessed Amount 59424662 1998-99 MSTT

BST ACT Assessed Amount 35201675 1999-2000 MSTT

BST ACT Assessed Amount 54829094 2000-01 MSTT

BST ACT Assessed Amount 101628984 2001-02 Jt. Commr. of Sales Tax Appeals

BST ACT Assessed Amount 2161090302 2003-04 Jt. Commr. of Sales Tax Appeals

BST ACT Assessed Amount 1015717015 2004-05 Jt. Commr. of Sales Tax Appeals

Finance Act Service Tax 5600000 2003-04 CESTAT 1994

Total 3490238070

The unit has already deposited Rs. 9680000/- with BST Act and Rs. 500000 with CESTAT out of the total disputed liability stated above

Statutory dues which have not been deposited in respect of Mumbai MS unit as on 31st March, 2013.

SL. Nature of Dues Amount under Year to Forum where No. dispute which the dispute (Rs.) amount is pending relates

1 Installation of BTS Site 2909233 2004-05 CESTAT

2 Installation of BTS Site 2617816 2005-06 CESTAT

3 Installation of BTS Site 3210353 2006-07 CESTAT

Total 8737402

10. The accumulated losses of the company exceed fifty percent of its net worth at the end of the financial year. It has incurred cash losses in the financial year and in the immediately preceding financial year.

11. As per the records of the company and according to the explanation provided by the management, we report that there is no default in repayment of dues from the loan taken from banks during the year under audit.

12. The Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. Accordingly, clause 4 (xii) of the Order is not applicable.

13. The Company is not a Chit Fund or a Nidhi Mutual Benefit Fund / Society. Accordingly, clause 4(xiii) of the Order is not applicable.

14. The Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, clause 4(xiv) of the Order is not applicable.

15. According to the information and explanation given to us, the Company has not given any guarantees for loans taken by others from banks or financial institutions. Accordingly, clause 4(xv) of the Order is not applicable.

16. In our opinion, the term loans have been applied for the purpose for which they were raised.

17. On the basis of overall examination of the Balance Sheet and Cash Flow Statement of the company, we report that the funds raised by the company on short term basis have been used for long term investments. Out of the short term borrowings, a sum ofRs. 2400 million has been used for long term investments in fixed assets including Capital Work in Progress.

18. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under Section 301 of the Act.

19. The Company has issued Non Convertible Debentures (in the form of bonds) under Sovereign Guarantee on private placement basis. As per information and explanation given to us, no charge or security is required to be created for the same.

20. The Company has not raised any money by public issues during the year. Accordingly, clause 4(xx) of the Order is not applicable.

21. According to the information and explanations given to us, no major fraud on or by the company has been noticed or reported during the year.

For Arun K. Aggarwal & Associates For V.K. Dhingra & Co.

Chartered Accountants Chartered Accountants

FRN - 003917N FRN - 000250N

sd/- sd/-

(Arun Agarwal) (Vipul Girotra)

(Partner) (Partner)

(Mem. No. 082899) (Mem. No. 084312)

Place: New Delhi

Date: MAY 30, 2013


Mar 31, 2012

1. We have audited the attached Balance Sheet of Mahanagar Telephone Nigam Limited as at March 31, 2012, the Statement of Profit and Loss and the Cash Flow Statement of the Company for the year ended on that date, annexed thereto, in which, the accounts of 3 units namely Delhi unit, Mumbai unit and Mobile Service Unit (Delhi & Mumbai both) are incorporated, which have been audited by us. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

3. As required by the Companies (Auditor's Report) Order 2003, as amended by the Companies (Auditor's Report) Order, 2004 (together the 'Order'), issued by the Central Government of India in terms of Section 227 (4A) of the Companies Act, 1956, and on the basis of such checks as we considered appropriate and according to the information and explanation given to us, we give in the Annexure, a statement on the matters specified in paragraphs 4 and 5 of the said Order, to the extent applicable to the company.

4. Further to our comments in the Annexure referred to in paragraph 3 above and subject to:

a) Point No.6 (a) to Note No. 40 regarding deduction under section 80IA of the Income Tax Act claimed by the company of which 75% has already been allowed upto Tribunal level and the company has preferred an appeal for the remaining 25% with the High Court.The company is maintaining a provision for income tax amounting to Rs.4003.31 millions for the years 1997-98 to 1999-2000 on this account whereas the similar claims for subsequent years involving a tax liability of Rs.3948.46 Millions have been shown as Contingent Liability.In view of the pending disputes with the Income Tax Departments at the High Court level, we are unable to comment on the adequacy or requirement of the provision or contingency held in this regard.

b) Point No. 6 (b) to Note No. regarding accounting of appeal effect of Rs.1015.43 millions including accrued Interest of Rs.412.04 millions (Rs.101.86 Millions for the year) as recoverable is subject to adjustment as per the final orders to be passed by the Income Tax Department. Besides, the balances appearing in Advance Tax, Provisions for Income Tax and Interest on income Tax Refund are subject to reconciliation with the figures of the Income Tax Department.

c) Points No.11 & 14 to Note No.40 regarding the amounts recoverable from BSNL/DOT are subject to reconciliation and confirmation and in view of various pending disputes regarding each other's claims we are unable to comment on the impact of the same on the profitability of the company.

d) Point No. 1(k) of Note 40 regarding disclosure of contingent liability of Rs.1403.63 Million instead of actual provision on account of License Fee to the DOT which is being worked out on accrual basis as against the terms of License Agreements according to which the expenditures/ deductions from the Gross revenue are allowed on actual payment basis.

e) The company has allocated the establishment overheads as per Note 25 and Administrative overheads as per Note 28.The company's policy in this regard needs to be made more scientific and the same should avoid capitalizing the loss due to idle time of labour and machines.

f) Point No.32 of Note No. 40 regarding no impairment adjustment required to the carrying value of the fixed assets as at 31 March 2012. In our view, due to recurring losses incurred by the Company and uncertainty in the achievement of projections made by the Company, we are unable to comment on the provisions, if any, required in respect of impairment of carrying value of the fixed assets (including capital work in progress), other than land, and its consequential impact, if any, on the loss for the year, accumulated balance in the Profit and Loss Account and the carrying value of the fixed assets as at 31 March 2012.

g) Point No.27 (ii) of Note No.40 regarding the provision for employees benefits which have been made on the basis of actuarial valuation. the issue being technical, we are unable to comment on the adequacy or otherwise of these provisions.

h) Point No. 28 of Note No. 40 regarding Non provision of actuarial liability on account of medical expenses for retired employees and continuing employees as the Insurance policy has been taken by the company and yearly premium is only charged.

i) Insurance claim for the fire loss in Data Center in July, 2009 amounting to Rs. 40 Millions has been considered as good despite of the same being still pending with the Insurance Company.

j) Accounting Policy No.2 (iv) regarding valuation of scrapped/ decommissioned assets which are not being revalued every year.

k) Accounting Policy No. 1(ii)(b) regarding exclusion of dues from operators for making provision for Doubtful debts and non provision of disputed cases which are outstanding for less than three years in Basic and less than six months in wireless services.

l) Point No. 22 of Note No. 40 regarding non valuation of vacant land and Guest Houses/ Inspection quarters at fair market value as at the year end for the purpose of wealth tax provisions.

m) Point No.18 of Note No.40 regarding non confirmation and reconciliation of amounts receivable and payable from various parties.

n) Point No.14(b) regarding balance in subscriber's deposits account of Rs. 6588.81 Million, unlinked receipts from subscribers Rs..412.60 Million are subject to reconciliation. Balance of sundry debtors as per Ageing Summary is short by Rs. 94.70 Million with comparison to balance is general ledger though the same has been fully provided for ( Refer Note No. 14(c)). The reconciliation of metered and billed calls in various units and leased, operational and billed circuits is in process. The final impact of above on the accounts is presently not ascertainable and the same may have an impact on the Profitability of the company.

o) The matching of Billings for roaming receivables/payable with the actual traffic intimated by the MACH is not being made and the amounts received are allocated on estimated basis. The impact thereof, on profitability ,if any, is unascertainable.

p) The system of issuance of completion certificates by engineering department needs to be strengthened. The impact due to the delay in issuance of completion certificate on Fixed Assets and Depreciation is not ascertainable.

q) Point No.23 of Note No. 40 regarding provision for ADCC recoverable from Project Development Company amounting to Rs. 91.25 Million and non accounting of interest thereon in absence of explicit agreement to that effect.

r) Point No. 34 of Note No. 40 regarding non deduction of tax at source on services received from BSNL and treatment of the expenditure on account of Pension liability on the basis of actuarial valuation as an allowable expense based on experts opinion.

s) The Company had accounted for Rs. 2850.00 millions towards wet lease for infrastructure and other services provided in respect of Commonwealth Games during the year 2010-11 of which Rs..430 millions is subject to acceptance and final settlement.

t) The reconciliation of Income from Recharge Coupons, ITC Cards, Prepaid calling cards and stock of recharge coupons and leased circuits is not available for our verification.

u) No service tax is being charged on the revenue sharing with BSNL for inward circuits for which no bills are being raised.

v) The material sent to BSNL on barter basis, the VAT liability on this account has not been ascertained and provided for.

w) Point No 26 of Note No 40 regarding the requisite information & details for the identification of Micro, Small & Medium enterprises as such we are unable to comment upon the compliance of section 15 & 22 of the Micro Small & Medium Enterprises Development Act-2006.

x) The Company has not made following disclosures required under Schedule VI of the Companies Act, 1956 as per references given after each items:

i) Consumption of imported and indigenous stores and spares and Percentage to the total consumption.

ii) The classification of Trade Receivable as unsecured without considering the security deposit that the company has received from subscribers.

iii) Trade Receivable figures outstanding for more than six months and up to six months are ascertained by the management and relied upon by the auditors.

iv) The Land and Buildings transferred from DOT have been classified as Leasehold as there was no breakup is available.

v) The bifurcation of assets and liabilities into Current and Non Current has been made by the company as per their own assessment of their recoverability and likely payments. In absence of any scientific basis, we are unable to comment on the same.

vi) Classification of amount recoverable from BSNL as loan & advances instead of Trade Receivable.

vii) The reclassification of previous year figures to make it comparable with the revised schedule VI requirements have made by the management as per their assessment and relied upon by us.

The overall impact of matters referred to in the preceding paras on the loss for the year is unascertainable.

We report that:

i) We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;

ii) In our opinion, proper Books of Account, as required by law, have been kept by the Company, so far as appears from our examination of those books except that the following items are consistently accounted on cash basis, instead of on accrual basis as required under section 209 of the Companies Act, 1956 :

a) Interest Income / Liquidated Damages, when realisability is uncertain.

b) Annual recurring charges of amount up to Rs..0.10 Million each for overlapping period.

c) Revenue on account of service connections is being accounted for when the recovery for the same is established.

iii) The Balance Sheet, Statement of Profit and Loss and the Cash Flow Statement dealt with by this report, are in agreement with the books of account;

iv) In our opinion, the Balance Sheet, Statement of Profit and Loss and the Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to

in sub-section (3C) of Section 211 of the Companies Act, 1956 except AS - 2 regarding Valuation of Inventories (Refer Significant Accounting Policy No.3); AS-4 regarding Contingencies and Events Occurring after the date of Balance Sheet; AS -5 regarding Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies [Refer Significant Accounting Policy No.1(i)(b) and ii(a)];AS- 6 regarding Depreciation Accounting [Refer Significant Accounting Policy No. 2(v)];- AS - 9 regarding Revenue Recognition [Refer Accounting Policy No 1(ii); AS- 10 regarding Accounting of Fixed Assets (Refer Significant Accounting Policy No. 2);AS -15regarding Accounting for Retirement Benefits in the Financial Statements of Employers (Refer Note No.27);AS 17 regarding Segmental Reporting; AS- 18 regarding related party transactions: AS - 19 regarding Leases: AS -28 regarding Impairment of Assets ; AS-29 on Provisions for Contingent Liabilities and Contingent Assets.- iv) Since the company is a Government company, clause (g) of sub-section (1) of section 274 of the Companies Act, 1956 regarding obtaining written representations from the directors of the company, is not applicable to the Company in terms of Notification No.GSR-829 (E) dated 21.10.2003);

vi) Attention is further invited to the following without making them a subject matter of qualification: -

a) Point No.13 of Note No.40 regarding over dues of Rs.1000 million on account of Cumulative preference Shares of one of the Govt. company which have considered good on the basis of comfort letter issued by the concerned Ministry.

b) Point No.16 (e) to Note No.40 regarding the issue of pension liability on account of absorbed employees is yet to be settled with the DOT which may have substantial impact on the profitability of the company which could not be ascertained by company.

c) Point No.20 of Note No 40, regarding retaining of outstanding liability of Rs.736.20 Millions on account of decommissioned assets pending arbitration case.

d) Point No 17 of Note No. 40 regarding non provision of diminution in the value of investments in joint ventures as these diminutions are considered temporary in nature.

vii) In our opinion, and to the best of our information and according to the explanations given to us, the said accounts read with the significant Accounting Policies and together with the notes thereon, give the information required by the Companies Act, 1956, in the manner so required and also give, subject to our observations in paragraph 4 foregoing, a true and fair view in conformity with the accounting principles generally accepted in India.

a) in the case of Balance Sheet, of the State of Affairs of the Company as at 31st March, 2012;

b) in the case of the Statement of Profit & Loss , of the Loss of the Company for the year ended on that date; and

c) In the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

ANNEXURE - I TO THE AUDITORS' REPORT (REFERRED TO IN PARAGRAPH - 3 OF OUR REPORT OF EVEN DATE)

As required by the Companies (Auditor's Report) Order, 2003, issued by the Central Government of India in terms of section 227(4A) of the Companies Act, 1956 and as per the information and explanations given to us, the books and records examined by us in the normal course of audit and to the best of our knowledge and belief, we further report that:

1. (a) Delhi unit has maintained records of fixed assets. In case of Mumbai Unit and MS unit Mumbai, fixed assets registers maintained w.e.f. 01.04.2002 are adequate in so far as these give full particulars of quantitative details. In MS unit- Delhi, records of fixed assets have been maintained except that the identification number is not mentioned in respect of office machinery and equipments.The Corporate Office has maintained fixed assets register showing full particulars including quantitative details. It is noticed that records of the Estates Department in respect of Land and Building do not match with the records as per financial books.

(b) As per the Accounting Policy of the company, Fixed Assets are required to be physically verified by the Management on rotation basis, once in three years. As certified by the management, the Apparatus & Plants, vehicles and land and buildings were physically verified in accordance with programmed of verification by the management in this year and relied on by us. In our opinion, the area of physical verification needs to be further strengthened.

(c) The company has not disposed off any substantial part of its fixed assets during the year and as such there is no effect on the going concern.

2. (a) In our opinion, physical verification of inventory has been conducted by the management at reasonable intervals.

(b) In our opinion, the procedure of physical verification of the inventory followed by the management needs to be further strengthened. According to the information and explanations given to us, the physical verification of all the items of stores was carried out during the year by Delhi and Mumbai units. However, at MS unit, Delhi, physical verification was conducted only for SIM cards but detailed physical verification was not made available for the verification.

(c) The Company is maintaining proper records of inventory. As per the information provide to us, discrepancies noticed on physical verification of inventory were not material and have been properly dealt with in the books of accounts. The system of recording the inventories directly to the Capital Works without routing it through Inventory Management System.

3. As explained to us, the Company has not taken nor granted any loans, secured or unsecured to/from Companies, fi rms or other parties covered in the register maintained under Section 301 of the Companies Act, 1956. Accordingly clauses 4(iii) (a), (b), (c) and

(d) of the Companies (Auditor's Report ) Order, 2003 are not applicable to the Company.

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the Company and the nature of its business for the purchase of inventory and fixed assets and for the sale of goods / services. In our opinion the internal control procedures needs to be further strengthened in regard to procedures with respect to the purchases under tenders floated and evaluated by corporate office. The system regarding reconciliation & confirmation of deposit to various departments, reconciliation between the exchange generated calls & billed calls, reconciliation of the balance in subscriber deposit account with subsidiary record, needs to be strengthened. The overall internal control systems on revenue billing needs to be strengthened, as the amount of service tax is not generated from the system and service tax aging is also not available and service tax balances are subject to reconciliation. System of reconciliation of IUC payable needs to be strengthened, as the amount generated as per the system for payable in certain cases has to be reconciled with some operators. Further in our opinion there should be a system of cross checking of IUC billing to operators. In respect of pending insurance claims of theft, fire and damage cases, more conscious perusal and follow up at apt interval is required.

5. The Company has not made purchase of material from companies, firms or other parties listed in the register required to be maintained under section 301 of Companies Act 1956, aggregating during the year to Rs.5,00,000/- or more in value in respect of each party. Based on the audit procedures applied by us and the information and explanations provided by the management, we are of the opinion that there was no transaction during the year ended 31.03.2011 that need to be entered in the register maintained under Section 301 of the Companies Act 1956.

6. As informed to us, the Company has not accepted any deposits from the public during the year within the meaning of section 58 A of the Companies Act, 1956 and the rules framed there under. Therefore, the directives issued by the Reserve Bank of India are not applicable.

7. In our opinion, the Internal Audit System of the company is not commensurate with the size of the Company and the nature of its business. Moreover, the authority and independence, extent of coverage of the areas of operations, frequency / quality of reporting / timeliness of the reporting and the follow up of internal audit observations need to be strengthened.

8. The Central Government has prescribed the maintenance of cost records under clause (d) of sub section (1) of section 209 of Companies Act, 1956 .The company has maintained the required Cost Records for the year 2010-2011 and the same records for the year under audit would be prepared after the audit of the final account. We have not carried out any detailed verification of these cost records.

9. (a) There were no undisputed amounts payable in respect of Statutory Dues including Contributory Provident Fund, Investor Education and Protection Fund, Income Tax, Sales Tax, Wealth Tax, Custom Duty, Excise Duty, Cess and any Other Statutory Dues outstanding as at 31.03.2012, for a period of more than six months from the date they become payable except service tax payable on amount lying in unlinked credits accounts in units and on amount of debtors collected by Delhi wireless services after July 1,2011 ,i.e.,after introduction of Point of Taxation Rules (amount not ascertainable) and Service tax on the revenue sharing with BSNL for inward circuits for which no bills are being raised. As informed to us, the provisions of Employees State Insurance Act are not applicable to the company. There has generally been no delay in depositing CPF contribution to the trust. GPF contribution, in respect of employees on deemed deputation, is generally remitted regularly to DOT cell. GPF contribution, in respect of absorbed DOT employees, has been deposited with the GPF Trust after registration of the trust with Income Tax Department.

(b) According to the information and explanation given to us, there are no dues in respect of Custom Duty, Excise Duty and Cess that have not been deposited with the appropriate authorities on account of any dispute. However, the Company has not deposited Sales Tax /VAT Dues, Service Tax and Income Tax Dues on account of disputes as under:

Local Sales Tax and Central Sales Tax / VAT:

(i) Sales Tax

Name of Amount (Rs.) Amount (Rs.) Period Authority where the Statute L.S.T C.S.T pending

Delhi Sales Tax Act 268131 92302769 1988-89 Addl. Comm. Sales Tax

Delhi Sales Tax Act 162120 20517000 1989-90 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1006001 15337192 1990-91 Addl. Comm. Sales Tax

Delhi Sales Tax Act 11660806 63932673 1991-92 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1437418 1443921343434 1992-93 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1699669 176491 1993-94 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1032760 201103762 1994-95 Addl. Comm. Sales Tax

Delhi Sales Tax Act 827253 88446906 1995-96 Addl. Comm. Sales Tax

Delhi Sales Tax Act 71319 0 1996-97 Addl. Comm. Sales Tax

Delhi Sales Tax Act 0 102613 1998-99 High court

Delhi Sales Tax Act 1461 545178 1999-00 High court

Delhi Sales Tax Act 88527 5000 2000-01 High court

Delhi Sales Tax Act 2036407 15200 2001-02 Addl. Comm. Sales Tax

Delhi Sales Tax Act 371932 0 2002-03 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1255424 0 2003-04 Addl. Comm. Sales Tax

Delhi Sales Tax Act 0 180544146 1987-88 to Addl. Comm. Sales Tax 1993-94

Delhi Sales Tax Act 72041344 4234 2004-05 Addl. Comm. Sales Tax

Delhi Sales Tax Act 4459877 0 2005-06 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1914095 0 2006-07 Addl. Comm. Sales Tax

Delhi Sales Tax Act 265248583 0 2007-08 Addl. Comm. Sales Tax

Delhi Sales Tax Act 779575204 0 2008-09 & Addl. Comm. Sales Tax 2009-10

TOTAL 1145158331 807425298

The unit has already deposited Rs.54733054/- out of the total disputed liability stated above..

(ii) Service Tax

Name of the Amount (Rs.) Period Authority where Statute Service Tax pending

Service Tax Act 110300000 2007-08 CEGAT

Mumbai Unit

Name of Nature of Dues Amount under Year to Forum where the Statute dispute which the dispute deposited amount is pending relates

BST ACT Assessed Amount 672968 1993-94 MSTT

BST Act Assessed Amount 52693370 1996-97 DC

BST Act Assessed Amount 59424662 1998-99 MSTT

BST Act Assessed Amount 1013116938 1999-2000 Jt. Commr. of Sales Tax Appeals 35201675 MSTT

BST Act Assessed Amount 54029094 2000-01 MSTT

BST Act Assessed Amount 101128984 2001-02 Jt. Commr. of Sales Tax Appeals BST ACT Assessed Amount 2161090302 2003-04 Jt. Commr. of Sales Tax Appeals

BST ACT Assessed Amount 1015717015 2004-05 Assessment order received on 19.4.2011. appeal to be filed.

Finance Act Service Tax: 4100000 2003-04 CESTAT 1994 S.Clause Notice

Finance Act Demand received 3416176 Oct.2009 to LTU 1994 from LTU March 2010

Finance Act Demand against 10719911 October 2003 CESAT 1994 adjustment of to Feb.2004 excess service tax

Finance Act Demand against 5598941 March 2004 CESAT 1994 adjustment of excess service tax

Finance Act Demand against 10050296 April 2004 to 1994 adjustment of September excess service tax 2004

Total Rs. 4526960332

Statutory dues which have not been deposited in respect of Mumbai MS unit as on 31st March, 2012.

S. No Nature of dues Amount Under Forum where the dispute not dispute is pending deposited (Rs.)

1 Installation of BTS Site 2909233 CESTAT

2 Installation of BTS Site 3210353 CESTAT

3 Installation of BTS Site 2617816 CESTAT

4 Service tax demand 2003-04 2080000 Jt. Comm. ( Appeals)

Total 10817402

c ) There were no dues on account of cess payable under section 441A of the Companies Act, 1956, since the date from which the aforesaid section comes into force has not yet been notified by the Central Government.

10. The accumulated losses of the Company exceed fifty percent of its net worth at the end of the financial year. It has incurred cash losses in the financial year and in the immediately preceding financial year.

11. As per the records of the company and according to the explanation provided by the management, we report that there is no default in repayment of dues from the loan taken from banks during the year under audit.

12. The Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. Accordingly, clause 4 (xii) of the order is not applicable.

13. The Company is not a Chit Fund or a Nidhi Mutual Benefit Fund / Society. Accordingly, clause 4(xiii) of the order is not applicable.

14. The Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, clause 4(xiv) of the Order is not applicable.

15. According to the information and explanation given to us, the Company has not given any guarantees for loans taken by others from banks or financial institutions. Accordingly, clause 4(xv) of the Order is not applicable.

16. In our opinion, the term loans have been applied for the purpose for which they were raised.

17. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under section 301 of the Act.

18. The Company has not issued any debentures. Accordingly, clause 4(xix) of the Order is not applicable.

19. The Company has not raised any money by public issues during the year. Accordingly, clause 4(xx) of the Order is not applicable.

20. According to the information and explanations given to us, no major fraud on or by the company has been noticed or reported during the year. The details with regard to status of frauds till 31.03.2012 have not been provided to us as such provision in this regard, if any, could not be ascertained.

For Bansal Sinha & Co. For Arun K Aggarwal & Associates

Chartered Accountants Chartered Accountants

FRN- 06184N FRN – 003917N

sd/- sd/-

(Ravinder Khullar) (Rajesh Surolia)

(Partner) (Partner)

(Mem. No. 082928) (Mem. No. 088008)

Place: New Delhi Date : June 30, 2012


Mar 31, 2011

1. We have audited the attached Balance Sheet of Mahanagar Telephone Nigam Limited as at March 31, 2011, the Profit and Loss Account and the Cash Flow Statement of the Company for the year ended on that date, annexed thereto, in which, the accounts of 3 units namely Delhi unit, Mumbai unit and Mobile Service Unit (Delhi & Mumbai both) are incorporated. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

3. As required by the Companies (Auditor's Report) Order 2003, as amended by the Companies (Auditor's Report) Order, 2004 (together the 'Order'), issued by the Central Government of India in terms of Section 227 (4A) of the Companies Act, 1956, and on the basis of such checks as we considered appropriate and according to the information and explanation given to us, we give in the Annexure-I, a statement on the matters specified in paragraphs 4 and 5 of the said Order, to the extent applicable to the company.

4. Further to our comments in the Annexure-I referred to in paragraph 3 above and subject to:

a) Note No.4 (a & b) regarding maintenance of a provision for income tax amounting to Rs. 4003.31 million for the years 1997-98 to 1999-2000 oh account of disputed claim of deduction under section 80IA whereas the similar claims for subsequent years involving a tax liability of Rs. 4138.30 Million have been shown as Contingent Liabilities. In view of the pending disputes with the Income Tax Departments at the High Court level, we are unable to comment on the adequacy or otherwise of the provision held in this regard.

b) Note No. 4 (c) regarding accounting of Income tax and interest thereon of Rs. 105.16 million pending appeal effects and Rs. 4873.93 million pending rectifications are subject to adjustment as per the final orders to be passed by the Income Tax Department. The balances appearing in Advance Tax, Provisions for Income Tax and Interest on income Tax Refund are subject to reconciliation with the figures of the Income Tax Department.

c) Note No. 34 (II) regarding the provision for employees benefits which have been made on the basis of actuarial valuation. The issue being technical, we are unable to comment on the adequacy or otherwise of these provisions.

d) (i) Note No/26 regarding booking of income for Rs. 2850.00 million towards wet lease for infrastructure and other services provided in respect of Commonwealth Games out of which Rs. 430.00 million is subject to acceptance and final settlement and non booking of additional claim of Rs. 410.00 million which is also subject to acceptance and final settlement.

(ii) Non availability of relevant records pertaining to contracts with M/s. HCL Infosys Ltd on account of Commonwealth Games Project as the same are informed to be taken by the investigating agencies. In view of the above, we are unable to comment on the lapses, if any, of internal control in awarding the contract.

e) Note no. 17(c) (i) & (ii) regarding reconciliation of Cenvat Credit Receivable as per books with the balance outstanding as per CENVAT records maintained by the company for service tax purposes and accounting of service tax for transactions with BSNL. The resultant impact, if any, on the financial statements for the year can not be ascertained.

f) License Fee to the DOT is being worked out on accrual basis as against the terms of License Agreements according to which the expenditures/ deductions from the Gross revenue are allowed on actual payment basis in respect of the Public Switching Telecom Network (PSTN) related call charges and roaming charges payable to BSNL and other service provider.

g) Note No.15(a)&(b) regarding the amounts recoverable from DOT/ BSNL are subject to reconciliation and confirmation and in view of various pending disputes regarding each other's claims we are unable to comment on the impact of the same on the profitability of the company and Note No. 16 regarding non provision of certain claims of the BSNL on account of signaling charges, Transit tariff, MP Bills, IUC Claims and IUC claims of MTNL rebutted by BSNL, Service Connection billing, Duct charges, TAX usage charges, infrastructure and other charges recoverable and payable, pending identification, reconciliation and settlement of these and other similar claims of the company the impact of the same is not ascertainable. Beside, Note no. 23 regarding non provision for interest payable/ receivable on balances during the year due to abc nee of agreement between the company and DOT/BSNL for interest recoverable/ payable on current account, except charging of interest on GPF claims receivable from DOT.

h) The company has allocated the establishment overheads as per Annexure P and Administrative overheads as per Annexure Q. The company's policy in this regard needs to be made more realistic & scientific and the same should avoid capitalizing the loss due to idle time of labour and machines.

i) Note No.40 regarding non provision of impairment of assets in terms with Accounting Standard 28.

j) Non provision of LTC/ encashment of LTC not availed by the employees^ bonus for last two years(amount unascertained) and Non provision of actuarial liability on account of medical expenses for retired employees in view of the Insurance policy being taken by the company and yearly premium is charged every year.

k) Note No.7 regarding non provision of stamp duty for the properties where the conveyance/lease deed-is yet to be executed, and the amount is unasceirtainable.

I) Accounting Policy No. 2 (iv) regarding valuation of scrapped/decommissioned assets which are not being revalued every year.

m) Accounting Policy No. 1 (ii)(b) regarding exclusion of dues from operators for making provision for Doubtful debts.

n) Note No. 24 regarding non valuation of vacant land and Guest Houses/Inspection quarters at fair market value as at the yearend for the purpose of wealth tax provisions.

o) Note No.20 regarding non confirmation and reconciliation of amounts receivable and payable from various parties.

p) Note No 14(b), regarding balance in subscribers' deposits account of Rs.7206.33 Million and interest accrued thereon of Rs.22.25 Million, unlinked receipts from subscribers Rs.417.41 Million are subject to reconciliation (Refer Note No. 3). Balance of sundry debtors as per Ageing Summary is short by Rs. 89.51 Million with comparison to balance is general ledger though the same has been fully provided for (Refer Note No. 13 and 14(c)). The reconciliation of metered and billed calls in various units is in process. The reconciliation of leased, operational and billed circuits is in progress. The final impact of above on the accounts is presently not ascertainable and the same may have an impact on the Profitability of the company.

q) During the year no reconciliation of roaming receivables has been carried out. The impact of non-reconciliation of roaming debtors on profitability ,if any, is unascertainable

r) The system of issuance of completion certificates by engineering department needs to be strengthened. The impact due to the delay in issuance of completion certificate on Fixed Assets and Depreciation is not ascertainable.

s) Note No.12 regarding the Bank Reconciliation Statements as at 31st March, 2011 include the unmatched/ unlinked credits and debits aggregating Rs.78.03 million and Rs.71.36 million respectively, which have not been properly accounted, in the absence of adequate particulars. The impact of such entries on the Accounts cannot be ascertained.

t) Note No. 25 regarding non provision for ADCC recoverable from Project Development Company and non accounting of interest thereon in absence of explicit agreement to that effect.

u) Note No.4 (d) regarding non deduction of tax at source on services received from BSNL and treatment of the expenditure on account of Pension liability on the basis of actuarial valuation as an allowable expense based on experts opinion.

v) Note No. 27 regarding a technical fraud involving a loss of Rs.258.94 million which was observed during the previous year and another case observed during the year for excess franchise commission paid for which amount is not ascertainable at this stage; however, no provision for the same has been made in the accounts as the cases are still under investigation.

w) The loss on account of unusable subscriber's instruments has not been ascertained and provided for,

x) Note no. 2 regarding non ascertainment of Contingent liabilities and the estimated amount of the contracts of capital nature yet to be executed in respect of some of the units.

y) Note No. 32 regarding no availability of the requisite information & details for the identification of Micro, Small & Medium enterprises, as such we are unable to comment upon the compliance of section 15 & 22 of the Micro Small & Medium [Enterprises Development Act-2006.

z) Non availability of information about the transactions required to be entered in the registers maintained under section 301 of the Companies Act, 1956.

aa) The Cdmpany has not made following disclosures required under Schedule VI of the Companies Act, 1956 as per references given after each items:

i) Consumption of stores and spares (Para no.3 (x) (a) of part II)

ii) Consumption of imported and indigenous stores and spares and Percentage to the total consumption (Para no.4 D (C) of Part II)

iii) The classification of sundry debtors as unsecured without considering the security deposit that the company has received from subscribers. '

iv) Debtor's figures outstanding for more than six months and up to six months are ascertained by the management and relied upon by the auditors.

v) Gross Block of scrapped/ decommissioned fixed assets, Accumulated Depreciation and Net Block separately.

The overall impact of matters referred to in the preceding paras on the loss for the year is unascertainable.

We report that:

i) We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;

ii) In our opinion, proper Books of Account, as required by law, have been kept by the Company, so far as appears from our examination of those books except that the following items referred to in paragraph (i) of Significant Accounting Policies are consistently accounted on cash basis, instead of on accrual basis as required under section 209 of the Companies Act, 1956 :

a) Interest Income / Liquidated Damages, when readability is uncertain.

b) Annual recurring charges of amount up to Rs.0.10 Million each for overlapping period.

c) Revenue on account of service connections is being accounted for when the recovery for the same is established.

iii) The Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by this report, are in agreement with the books of account;

iv) In our opinion, the Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956 except AS - 2 regarding Valuation of Inventories (Refer Significant Accounting Policy No.3); AS-4 regarding Contingencies and Events Occurring after the date of Balance Sheet; AS -5 regarding Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies [Refer Significant Accounting Policy No.1(i) and ii(a)]; AS- 6 regarding Depreciation Accounting [Refer Significant Accounting Policy No. 2(v)];- AS - 9 regarding Revenue Recognition [Refer Accounting Policy No 1 (ii); AS-10 regarding Accounting of Fixed Assets (Refer Significant Accounting Policy No. 2);AS -15 regarding Accounting for Retirement Benefits in the Financial Statements of Employers (Refer Note No.34 ); AS 17 regarding Segmental Reporting: AS- 18 regarding disclosure of related party transactions; AS -19 regarding Leases: AS -28 regarding Impairment of Assets (Refer Note No. 40); AS-29 on Provisions for Contingent Liabilities and Contingent Assets.

v) Since the company is a Government company, clause (g) of sub-section (1) of section 274 of the Companies Act, 1956 regarding obtaining written representations from the directors of the company, is not applicable to the Company in terms of Notification No.GSR-829 (E) dated 21.10.2003);

vi) Attention is further invited to the following without making them a subject matter of qualification: -

a) Note No. 4 (c) regarding non creation of Deferred Tax Assets amounting to Rs. 15932.20 million due to absence of virtual certainty of taxable profits in future against which the said asset could be realized.

b) Note No. 18(e) regarding the issue of pension liability on account of absorbed employees is yet to be settled with the DOT which will have substantial impact on the profitability of the company.

c) Note No. 11 regarding over dues of Rs. 1000 million on account of Cumulative preference Shares of one of the Govt, company which have considered good on the basis of comfort letter issued by the concerned Ministry.

d) Note No. 22 regarding retaining of outstanding liability of Rs.925.98 Million on account of decommissioned assets pending arbitration case.

e) Note No. 17 (b) regarding accounting of Liquidated Damages subject to acceptance by the parties.

f) Note No. 19 regarding non provision of diminution in the value of investments in subsidiaries and joint ventures.

g) The amount of service tax included in debtors and adjusted from deposit is not generated from the system and is done on manual basis. Service Tax ageing is also not available.

h) Revenue from pre paid services has been recognized on the basis of SIM activated and its usage output generated through system and certified by the management being a technical matter.

i) Expenditure on replacement of assets, equipments, instruments and rehabilitation work is capitalized if it results in enhancement of revenue earning capacity as stated in Significant Accounting Policy 2(iii). This being a technical matter, we have placed reliance on the opinion of the management.

j) Non provision for CDMA instruments which are faulty and un returnable for less than three years having WDV of Rs. 126.30 million should also be provided for as provision for loss of assets.

k) TDSAT judgment on the issue of components of "Other Income" for the purpose of calculation of license fee has not been adopted pending the decision of the Hon'ble Supreme Court of India on the appeal of the DOT on this judgment of the TDSAT. In view of the uncertainty involved, we are unable to comment on the amount of license fee being calculated in this regard.

vii) In our opinion, and to the best of our information and according to the explanations given to us, the said accounts read with the significant Accounting Policies and together with the notes thereon, give the information required by the Companies Act, 1956, in the manner so required and also give, subject to our observations in paragraph 4 foregoing, a true and fair view in conformity with the accounting principles generally accepted in India.

(a) in the case of Balance Sheet, of the State of Affairs of the Company as at 31 st March, 2011;

(b) in the case of the Profit & Loss Account, of the Loss of the Company for the year ended on that date; and

(c) in the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

ANNEXURE -1 TO THE AUDITORS' REPORT (REFERREDTO IN PARAGRAPH - 3 OF OUR REPORT OF EVEN DATE)

As required by the Companies (Auditor's Report) Order, 2003, issued by the Central Government of India in terms of section 227(4A) of the Companies Act, 1956 and as per the information and explanations given to us, the books and records examined by us in the normal course of audit and to the best of our knowledge and belief, we further report that:

1. (a) Delhi unit has maintained records of fixed assets'. In case of Mumbai Unit and MS unit Mumbai, fixed assets registers maintained w.e.f. 01.04.2002 are adequate in so far as these give full particulars of quantitative details. In MS unit - Delhi, records of fixed assets have been maintained except that the identification number is not mentioned in respect of office machinery and equipments. The Corporate Office has maintained fixed assets register showing full particulars including quantitative details.

(b) As per the Accounting Policy of the company, Fixed Assets are required to be physically verified by the Management on rotation basis, once in three years. As certified by the management, lines and wires, furniture & fixtures and electrical appliances were physically verified in accordance with programmed of verification by the management in this year and relied on by us. In our opinion, the area of physical verification needs to be further strengthened.

(c) The company has not disposed off any substantial part of its fixed assets during the year and as such there is no effect on the going concern.

2. (a) In our opinion, physical verification of inventory has been conducted by the management at reasonable intervals.

(b) In our opinion, the procedure of physical verification of the inventory followed by the management needs to be further strengthened. According to the information and explanations given to us, the physical verification of all the items of stores was carried out during the year by Delhi and Mumbai units. However, detailed physical verification report was not made available for the verification.

(c) The Company is maintaining proper records of inventory. As per the information provided to us, discrepancies noticed on physical verification of inventory were not material and have been properly dealt with in the books of accounts.

3. Due to Non availability kintormation about the transactions required to be entered in the registers maintained under section 301 of the Companies Act, 1956 we are unable to comment on the same.

4. In our opinion and according to the information and explanations given, to us, there are adequate internal control procedures commensurate with the size of the Company and the nature of its business for the purchase of inventory and fixed assets and for the sale of goods / services. In our opinion the internal control procedures needs to be further strengthened in regard to procedures with respect to the purchases under tenders floated and evaluated, appointment and reviewal/ renewal of service contracts of consultants and lawyers. The system regarding reconciliation & confirmation of deposit to various departments, reconciliation between the exchanges generated calls & billed calls, reconciliation of the balance in subscriber deposit account with subsidiary record, needs to be strengthened. The overall internal control systems on revenue billing needs to be strengthened, as the amount of service tax is not generated from the system and service tax ageing is also not available. System of reconciliation of IUC payable needs to be strengthened, as the amount generated as per the system for payable in certain cases has to be reconciled with some operators. Further in our opinion there should be a system of cross checking of IUC billing to operators. In respect of pending insurance claims of theft, fire and damage cases, related parties transactions, Compliance of TDS provisions of the Income Tax Act 1961, more conscious perusal and follow up at apt interval is required.

5. The Company has not made purchase of material from companies, firms or other parties listed in the register required to be maintained under section 301 of Companies Act 1956, aggregating during the year to Rs. 5,00,000/- or more in value in respect of each party. The company has, however, obtained and provided the services from / to the companies, firms or other parties listed in the register required to be maintained under section 301 of the Companies Act, 1956. The above transactions, though required to be entered in the register required to be maintained under section 301 of the Companies Act, 1956, have not been entered.

6. As informed to us, the Company has not accepted any deposits from the public during the year within the meaning of section 58 A of the Companies Act, 1956 and the rules framed there under. Therefore, the directives issued by the Reserve Bank of India are not applicable.

7. In our opinion, the Internal Audit System of the company is not commensurate with the size of the Company and the nature of its business. Moreover, the authority and independence, extent of coverage of the areas of operations, frequency / quality of reporting / timeliness of the reporting and the follow up of internal audit observations need to be strengthened.

8. The Central Government has prescribed the maintenance of cost records under clause (d) of sub section (1) of section 209 of Companies Act, 1956 i.e. 01.04.2003. The company has maintained the required Cost Records for the year 2009-2010 and the same records for the year under audit would be prepared after the audit of the final account. We have not carried out any detailed verification of these cost records.

9. (a) There were no undisputed amounts payable in respect of Statutory Dues including Contributory Provident Fund, Investor Education and Protection Fund, Income Tax, Sales Tax, Wealth Tax, Custom Duty, Excise Duty, Cess and any Other Statutory Dues outstanding as at 31.03.2011, for a period of more than six months from the date they become payable except service tax payable on amount lying in unlinked credits accounts in units (amount not ascertainable). As informed to us, the provisions of Employees State Insurance Act are not applicable to the company. There has generally been no delay in depositing CPF contribution to the trust. GPF contribution, in respect of employees on deemed deputation, is generally remitted regularly to DOT cell. GPF contribution, in respect of absorbed DOT employees, has been deposited with the GPF Trust after registration of the trust with Income Tax Department. However, as at the year end there has been some delay in remitting funds to the Trust.

(b) According to the information and explanation given to us, there are no dues in respect of Custom Duty, Excise Duty and Cess that have not been deposited with the appropriate authorities on account of any dispute. However, the Company has not deposited Sales Tax /VAT Dues, Service Tax and Income Tax Dues on account of disputes as under:

Local Sales Tax and Central Sales Tax /VAT: (i) Sales Tax Delhi Unit

Name of Amount (Rs) Amount (Rs) Period Authority where pending the Statute L.S.T C.S.T

Delhi Sales Tax Act 268131 92302769 1988-89 Addl.Comm. Sales Tax

Delhi Sales Tax Act 162120 20517000 1989-90 Addl.Comm. Sales Tax

Delhi Sales Tax Act 1006001 15337192 1990-91 Addl. Comm. Sales Tax

Delhi Sales Tax Act 11660806 63932673 1991-92 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1437418 144392134 1992-93 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1699669 176491 1993-94 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1032760 201103762 1994-95 Addl. Comm. Sales Tax

Delhi Sales Tax Act 827253 88446906 1995-96 Addl. Comm. Sales Tax

Delhi Sales Tax Act 71319 0 1996-97 Addl. Comm. Sales Tax

Delhi Sales Tax Act 0 102613 1998-99 High, court

Delhi Sales Tax Act 1461 545178 1999-00 High court

Delhi Sales Tax Act 88527 5000 2000-01 High court

Delhi Sales Tax Act 2036407 15200 2001-02 Addl. Comm. Sales Tax

Delhi Sales Tax Act 371932 0 2002-03 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1255424 0 2003-04 Addl. Comm. Sales Tax

Delhi Sales Tax Act 0 180544146 1987-88 to Addl. Comm. Sales Tax 1993-94

Delhi Sales Tax Act 72041344 4234 2004-05 Addl. Comm. Sales Tax

Delhi Sales Tax Act 4459877 0 2005-06 Addl. Comm. Sales Tax

Delhi Sales Tax Act 1914095 0 2006-07 Addl. Comm. Sales Tax

Delhi Sales Tax Act 26524858 0 2007-08 Addl. Comm. Sales Tax

TOTAL 365583127 807425298

The unit has already deposited Rs. 154733054/- out of the total disputed liability stated above.

Mumbai Unit

Name of Nature of Dues Amount under Year to Forum where the Statute dispute which the dispute deposited amount is pending relates

BST ACT Assessed Amount 672968 1993-94 MSTT

BST Act Assessed Amount 52693370 1996-97 DC

BST Act Assessed Amount 3514698437 1997-98 Jt. Commr. of Sales Tax Appeals

BST Act Assessed Amount 59424662 1998-99 MSTT

BST Act Assessed Amount 1013116938 1999-2000 Jt.Commr.of Sales Tax Appeals 35201675 MSTT

BST Act Assessed Amount 54329094 2000-01 MSTT

BST Act Assessed Amount 101128984 2001-02 Jt.Commr.of Sales Tax Appeals

BST Act Assessed Amount 49102898 2002-03 MSTT

BST ACT Assessed Amount 2161090302 2003-04 Jt.Commr.of Sales Tax Appeals

BST ACT Assessed Amount 1015717015 2004-05 Assessment order received on 19.4.2011. appeal to be filed.

3381368293

(ii) Service Tax

Name of the Statute Amount (Rs) Period Authority where pending

Delhi Unit

Service Tax Act 770447 2007-08 CESTAT

Service Tax Act 59476320 2006-07 & CESTAT 2007-08

Service Tax Act 42472842 2004-05 CESTAT

Service Tax Act 6826503 2005-06 CESTAT

Service Tax Act 633391 2006-07 CESTAT

Service Tax Act 209390 2007-08 CESTAT

Service Tax Act 110670398 Penalty CESTAT

Mumbai Unit

Service Tax Act 4100000 2003-04 CESTAT

Total 225159291

Statutory dues which have not been deposited in respect of Mumbai MS unit as on 31-03-2011.

S. No Nature of dues Amount Under Forum where the dispute not dispute is pending deposited (Rs)

1 Installation of BTS Site 2909233 CESTAT

2 Installation of BTS Site 3210353 CESTAT

3 Installation of BTS Site 2617816 CESTAT

4 Service tax demand 2003-04 2080000 Jt. Comm. (Appeals)

Total 10817402

(c) It may be noted that at present, no Rules relating to the amount of cess for rehabilitation or revival or protection of assets of sick industrial companies, payable by a company under section 441A of the Act have been notified by the Central Government. Thus, we are not able to comment on the regularity or otherwise about on this particular issue.

10. The company has no accumulated losses, however the company has incurred cash losses amounting to Rs. 13917.68 million during the year covered by our Audit and Rs. 8514.78 million in the immediately preceding financial year.

11. As per records of the company and according to the information and explanation provided by the management, we report that there is no default in repayment of dues for the loan taken from financial institution during the period under our audit.

12. The Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. Accordingly, clause 4 (xii) of the order is not applicable.

13. The Company is not a Chit Fund or a Nidhi Mutual Benefit Fund / Society. Accordingly, clause 4(xiii) of the order is not applicable.

14. The Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, clause 4(xiv) of the Order is not applicable.

15. According to the information and explanation given to us, the Company has not given any guarantees for loans taken by others from banks or financial institutions. Accordingly, clause 4(xv) of the Order is not applicable.

16. According to the information and explanation provided by the management, we report that during the year Company has taken term loans from financial institution and utilized the same for the purpose for which it was taken.

17. According to the information and explanations given to us and on an overall examination of Balance sheet of the company, we report that no funds raised on short term basis have been used for long term investment by the company.

18. The Company has not made any preferential allotment of-shares to parties and companies covered in the register maintained under section 301 of the Act.

19. The Company has not issued any debentures. Accordingly, clause 4(xix) of the Order is not applicable.

20. The Company has not raised any money by public issues during the year. Accordingly, clause 4(xx) of the Order is not applicable.

21. According to the information and explanations given to us, no major fraud on or by the company has been noticed or reported during the year except as reported in Note No. 27 (b) of Schedule T. The details with regard to status of frauds till 31.03.2011 have not been provided to us as such provision in this regard, if any, could not be ascertained.

For Bansal Sinha & Co. For Goel Garg & Co.

Chartered Accountants Chartered Accountants

FRN-06184N FRN-00397N

sd/- sd/-

(Ravinder Khullar) (Ajay Rastogi)

(Partner) (Partner)

(Mem. No. 82928) (Mem. No. 84897)

Place: New Delhi

Date: June 30,2011


Mar 31, 2010

1. We have audited the attached Balance Sheet of Mahanagar Telephone Nigam Limited as at March 31, 2010, the Profit and Loss Account and the Cash Flow Statement of the Company for the year ended on that date, annexed thereto, in which, the accounts of 3 units namely Delhi unit, Mumbai unit and Mobile Service Unit (Delhi & Mumbai both) are incorporated, which have been audited by us. These financial statements are the responsibility of the companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

3. As required by the Companies (Auditors Report) Order 2003, as amended by the Companies (Auditors Report) Order, 2004 (together the Order), issued by the Central Government of India in terms of Section 227 (4A) of the Companies Act, 1956, and on the basis of such checks as we considered appropriate and according to the information and explanation given to us, we give in the Annexure, a statement on the matters specified in paragraphs 4 and 5 of the said Order, to the extent applicable to the company.

4. Further to our comments in the Annexure referred to in paragraph 3 above and subject to:

a) Note No.5 (a,b &c) regarding claim of the company for deduction under section 80IA of the Income Tax Act, 1961 pending at various appellate authorities. We are unable to comment on the impact as the outcome of these cases is not ascertainable at this stage.

b) Note No. 6 (b) regarding accounting of Interest Income of Rs.7708.40 millions on Income Tax Refund pending appeal effects which is is subject to adjustment as per the final orders to be passed by the Income Tax Department.

c) Note No.20(e) regarding the issue of pension liability on account of absorbed employees is yet to be settled with the DOT which may have substantial impact on the profitability of the company.

d) Note No.16(a) & (b) regarding the amounts recoverable from DOT/ BSNL are subject to reconciliation and confirmation and in view of various pending disputes regarding each others claims we are unable to comment on the impact of the same on the profitability of the company and Note No. 17 regarding non provision of certain claims of the BSNL on account of signaling charges,Transit tariff, MP Bills,IUC Claims and IUC claims of MTNL rebutted by BSNL,Service Connection billing& TAX charges recoverable and payable, pending identification, reconciliation and settlement of these and other similar claims of the company the impact of the same is not ascertainable.Besides,Note no.25 regarding non provision for interest payable/ receivable on balances during the year due to absence of agreement between the company and DOT/BSNL for interest recoverable/ payable on current account, except charging of interest on GPF claims receivable from DOT.

e) The company has allocated the establishment overheads as per Annexure P and Administrative overheads as per Annexure Q. The companys policy in this regard needs to be made more scientific.

f) Note No.44 regarding non provision of impairment of assets in terms with Accounting Standard 28.

g) Note No. 30 regarding accounting of IUC income and expenditure on estimated basis.

h) Note No. 38 (II) regarding the provision for employees benefits which have been made on the basis of actuarial valuation. There has been some changes in the assumptions taken for the purpose of this valuation, the issue being technical, we are unable to comment on the adequacy or otherwise of these provisions.

i) Note No. 38 (VII) regarding non provision of Bonus to employees in view of heavy losses.

j) Note No. 4 (iii)(b) regarding Non disclosure of the impact of the change in Accounting Policy regarding provision for Spill Over dues of closed leased circuit connections outstanding for less than three years.

k) Note No. 19 (b) regarding non provision of spectrum charges @1% of the revenues from 3G Spectrum pending the receipt of method of calculation from DOT.

l) Note No.8 regarding non provision of stamp duty for the properties where the conveyance/ lease deed is yet to be executed, and the amount is unascertainable.

m) Accounting Policy No. 2 (iv) regarding valuation of scrapped/decommissioned assets which are not being revalued every year.

n) Accounting Policy No. 1(ii)(b) regarding exclusion of dues from operators for making provision for Doubtful debts.

o) Note No. 26 regarding non valuation of vacant land and Guest Houses/Inspection quarters at fair market value as at the year end for the purpose of wealth tax provisions.

p) Non provision of LTC/ encashment of LTC not availed by the employees, amount unascertained.

q) Note No. 21 regarding non provision of diminution in the value of investments in subsidiaries and joint ventures.

r) Note No.22 regarding non confirmation and reconciliation of amounts receivable and payable from various parties.

s) Note No 15(b),3, regarding balance in subscribers deposits account of Rs.7386.71 Million and interest accrued thereon of Rs.25.51 Million, unlinked receipts from subscribers Rs.385.21 Million are subject to reconciliation. Balance of sundry debtors as per Ageing Summary is short by Rs.62.09 Million with comparison to balance is general ledger though the same has been fully provided for ( Refer Note No. 14 and 15(c)). The reconciliation of metered and billed calls in various units is in process. The reconciliation of leased, operational and billed circuits is in progress.The final impact of above on the accounts is presently not ascertainable and the same may have an impact on the Profitability of the company.

t) During the year no reconciliation of roaming receivables has been carried out. The impact of non-reconciliation of roaming debtors on profitability ,if any, is unascertainable

u) The system of issuance of completion certificates by engineering department needs to be strengthened. The impact due to the delay in issuance of completion certificate on Fixed Assets and Depreciation is not ascertainable.

v) The balance of amount payable to GPF Trust is subject to confirmation, reconciliation and subsequent adjustments.

w) Note No.13 regarding the Bank Reconciliation Statements as at 31st March, 2010 include the unmatched/ unlinked credits and debits aggregating Rs.56.09 millions and Rs.69.16 millions respectively, which have not been properly accounted, in the absence of adequate particulars. The impact of such entries on the Accounts cannot be ascertained.

x) Note No. 28 regarding provision for ADCC recoverable from Project Development Company and non accounting of interest thereon in absence of explicit agreement to that effect.

y) Note No.10 (d) regarding Claims receivables include Rs.22.5 Million towards ADC charges receivable from certain operators accounted for on adhoc basis in the financial year 2007-08 and which may have an impact on the results on settlement/acceptance.

z) Note No.5 (e) regarding non deduction of tax at source on services received from BSNL and treatment of the expenditure on account of Pension liability on the basis of actuarial valuation as an allowable expense based on experts opinion.

aa) Note No. 31 regarding a technical fraud involving a loss of Rs.243.55 millions which was observed during the year; however, no provision for the same has been made in the accounts as the matter is still under investigation.

bb) The loss on account of unusable subscribers instruments has not been ascertained and provided for.

cc) Note No.36 regarding the requisite information & details for the identification of Micro, Small & Medium enterprises as such we are unable to comment upon the compliance of section 15 & 22 of the Micro Small & Medium Enterprises Development Act-2006.

dd) The Company has not made following disclosures required under Schedule VI of the Companies Act, 1956 as per references given after each items:

i) Consumption of stores and spares (Para no.3 (x) (a) of part II)

ii) Consumption of imported and indigenous stores and spares and Percentage to the total consumption (Para no.4 D (C) of Part II)

iii) The classification of sundry debtors as unsecured without considering the security deposit that the Company has received from subscribers.

iv) Debtors figures outstanding for more than six months and up to six months are ascertained by the management and relied upon by the auditors. The overall impact of matters referred to in the preceding paras on the loss for the year is unascertainable.

We report that:

i) We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;

ii) In our opinion, proper Books of Account, as required by law, have been kept by the Company, so far as appears from our examination of those books except that the following items referred to in paragraph (i) of Significant Accounting Policies are consistently accounted on cash basis, instead of on accrual basis as required under section 209 of the Companies Act, 1956 :

a) Interest Income / Liquidated Damages, when realisability is uncertain.

b) Annual recurring charges of amount up to Rs.0.10 Million each for overlapping period.

c) Revenue on account of service connections is being accounted for when the recovery for the same is established.

iii) The Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by this report, are in agreement with the books of account;

iv) In our opinion, the Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956 except AS - 2 regarding Valuation of Inventories (Refer Significant Accounting Policy No.3); AS-4 regarding Contingencies and Events occurring after the date of Balance Sheet; AS -5 regarding Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies [Refer Significant Accounting Policy No.1(i) and ii(a)];AS- 6 regarding Depreciation Accounting [Refer Significant Accounting Policy No. 2(v)];- AS - 9 regarding Revenue Recognition [Refer Accounting Policy No 1(ii); AS- 10 regarding Accounting of Fixed Assets (Refer Significant Accounting Policy No. 2);AS -15 regarding Accounting for Retirement Benefits in the Financial Statements of Employers (Refer Note No.38 );AS 17 regarding Segmental Reporting: AS -19 regarding Leases: AS- 21 regarding related party transactions: AS -28 regarding Impair ment of Assets (Refer Note No. 44 );AS-29 on Provisions for Contingent Liabilities and Contingent Assets.- v) Since the company is a Government company, clause (g) of sub-section (1) of section 274 of the Companies Act, 1956 regarding obtaining written representations from the directors of the company, is not applicable to the Company in terms of Notification No.GSR-829 (E) dated 21.10.2003);

vi) Attention is further invited to the following without making them a subject matter of qualification: -

a) Note No.12 regarding over dues of Rs.1000 million on account of Cumulative preference Shares of one of the Govt. company which have considered good on the basis of comfort letter issued by the concerned Ministr y.

b) Note No. 19(a) regarding a claim for refund of 3 G and BWA License fee of Rs.110979.70 millions on DOT which has not been accounted for as the same is yet to be acknowledged by DOT.

c) Note No. 27 regarding Provision for wage arrears amounting to Rs. 7369.25 millions which included an amount of Rs. 4566.99 millions pertaining to prior periods. The impact of the wage revision on the Retirement benefits amounting to Rs. 890.83 millions including Rs. 580.21 millions pertaining to Prior periods.

d) Note No24. regarding retaining of outstanding liability of Rs.925.98 Millions on account of decommissioned assets pending arbitration case.

e) Non availability of information about the transactions required to be entered in the registers maintained under section 301 of the Companies Act, 1961.

f) Note No. 18(b) regarding accounting of Liquidated Damages subject to acceptance by the parties.

g) Note No. 21 regarding non provision of diminution in the value of investments in subsidiaries and joint venture considering the diminution as temporary in nature.

h) The amount of service tax included in debtors and adjusted from deposit is not generated from the system and is done on manual basis. Service Tax ageing is also not available.

i) Revenue from pre paid services has been recognized on the basis of SIM activated and its usage output generated through system and certified by the management being a technical matter.

j) Expenditure on replacement of assets, equipments, instruments and rehabilitation work is capitalized if it results in enhancement of revenue earning capacity as stated in Significant Accounting Policy 2(iii). This being a technical matter, we have placed reliance on the opinion of the management.

vii) In our opinion, and to the best of our information and according to the explanations given to us, the said accounts read with the significant Accounting Policies and together with the notes thereon, give the information required by the Companies Act, 1956, in the manner so required and also give, subject to our observations in paragraph 4 foregoing, a true and fair view in conformity with the accounting principles generally accepted in India.

(a) in the case of Balance Sheet, of the State of Affairs of the Company as at 31st March, 2010;

(b) in the case of the Profit & Loss Account, of the Loss of the Company for the year ended on that date; and

(c ) In the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

ANNEXURE -I TO THE AUDITORS REPORT (REFERRED TO IN PARAGRAPH - 3 OF OUR REPORT OF EVEN DATE)

As required by the Companies (Auditors Report) Order, 2003, issued by the Central Government of India in terms of section 227(4A) of the Companies Act, 1956 and as per the information and explanations given to us, the books and records examined by us in the normal course of audit and to the best of our knowledge and belief, we further report that:

1. (a) Delhi unit has maintained records of fixed assets. In case of Mumbai Unit and MS unit Mumbai, fixed

assets registers maintained w.e.f. 01.04.2002 are adequate in so far as these give full particulars of quantitative details. In MS unit - Delhi, records of fixed assets have been maintained except that the identification number is not mentioned in respect of office machinery and equipments. The Corporate Office has maintained fixed assets register showing full particulars including quantitative details.

(b) As per the Accounting Policy of the company, Fixed Assets are required to be physically verified by the Management on rotation basis, once in three years. As certified by the management, the Apparatus & Plants, vehicles and land and buildings were physically verified in accordance with programmed of verification by the management in this year and relied on by us. In our opinion, the area of physical verification needs to be further strengthened.

(c) The company has not disposed off any substantial part of its fixed assets during the year and as such there is no effect on the going concern.

2. (a) In our opinion, physical verification of inventory has been conducted by the management at reasonable intervals.

(b) In our opinion, the procedure of physical verification of the inventory followed by the management needs to be further strengthened. According to the information and explanations given to us, the physical verification of all the items of stores was carried out during the year by Delhi and Mumbai units. However, at MS unit, Delhi, physical verification was conducted only for SIM cards but detailed physical verification was not made available for the verification.

(c) The Company is maintaining proper records of inventory. As per the information provide to us, discrepancies noticed on physical verification of inventory were not material and have been properly dealt with in the books of accounts.

3. Due to Non availability of information about the transactions required to be entered in the registers maintained under section 301 of the Companies Act, 1961 we are unable to comment on the same.

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the Company and the nature of its business for the purchase of inventory and fixed assets and for the sale of goods / services. In our opinion the internal control procedures needs to be further strengthened in regard to procedures with respect to the purchases under tenders floated and evaluated by corporate office. The system regarding reconciliation & confirmation of deposit to various departments, reconciliation between the exchanges generated calls & billed calls, reconciliation of the balance in subscriber deposit account with subsidiary record, needs to be strengthened. The overall internal control systems on revenue billing needs to be strengthened, as the amount of service tax is not generated from the system and service tax aging is also not available. System of reconciliation of IUC payable needs to be strengthened, as the amount generated as per the system for payable in cer tain cases has to be reconciled with some operators. Further in our opinion there should be a system of cross checking of IUC billing to operators. In respect of pending insurance claims of theft, fire and damage cases, more conscious perusal and follow up at apt interval is required.

5. The Company has not made purchase of material from companies, firms or other parties listed in the register required to be maintained under section 301 of Companies Act 1956, aggregating during the year to Rs. 5,00,000/- or more in value in respect of each party. The company has, however, obtained and provided the services from / to the companies, firms or other parties listed in the register required to be maintained under section 301 of the Companies Act, 1956. The above transactions, though required to be entered in the register required to be maintained under section 301 of the Companies Act, 1956, have not been entered.

6. As informed to us, the Company has not accepted any deposits from the public during the year within the meaning of section 58 A of the Companies Act, 1956 and the rules framed there under. Therefore, the directives issued by the Reserve Bank of India are not applicable.

7. In our opinion, the Internal Audit System of the company is not commensurate with the size of the Company and the nature of its business. Moreover, the authority and independence, extent of coverage of the areas of operations, frequency / quality of reporting / timeliness of the reporting and the follow up of internal audit observations need to be strengthened.

8. The Central Government has prescribed the maintenance of cost records under clause (d) of sub section (1) of section 209 of Companies Act, 1956 i.e. 01.04.2003. The company has maintained the required Cost Records for the year 2008-2009 and the same records for the year under audit would be prepared after the audit of the final account. We have not carried out any detailed verification of these cost records.

9. (a) There were no undisputed amounts payable in respect of Statutory Dues including Contributory Provident Fund, Investor Education and Protection Fund, Income Tax, Sales Tax, Wealth Tax, Custom Duty, Excise Duty, Cess and any Other Statutory Dues outstanding as at 31.03.2010, for a period of more than six months from the date they become payable except service tax payable on amount lying in unlinked credits accounts in units (amount not ascertainable). As informed to us, the provisions of Employees State Insurance Act are not applicable to the company. There has generally been no delay in depositing CPF contribution to the trust. GPF contribution, in respect of employees on deemed deputation, is generally remitted regularly to DOT cell. GPF contribution, in respect of absorbed DOT employees, has been deposited with the GPF Trust after registration of the trust with Income Tax Department.

Name of the Amount (Rs) Amount (Rs) Period Statute L.S.T C.S.T

Delhi Sales Tax Act 268131 92302769 1988-89

Delhi Sales Tax Act 162120 20517000 1989-90

Delhi Sales Tax Act 1006001 15337192 1990-91

Delhi Sales Tax Act 11660806 63932673 1991-92

Delhi Sales Tax Act 1437418 144392134 1992-93

Delhi Sales Tax Act 1699669 176491 1993-94

Delhi Sales Tax Act 1032760 201103762 1994-95

Delhi Sales Tax Act 827253 88446906 1995-96

Delhi Sales Tax Act 71319 0 1996-97

Delhi Sales Tax Act 0 102613 1998-99

Delhi Sales Tax Act 1461 545178 1999-00

Delhi Sales Tax Act 88527 5000 2000-01

Delhi Sales Tax Act 2036407 15200 2001-02

Delhi Sales Tax Act 371932 0 2002-03

Delhi Sales Tax Act 1255424 0 2003-04

Delhi Sales Tax Act 0 180544146 1987-88

to 1993-94

Delhi Sales Tax Act 72041344 4234 2004-05

Delhi Sales Tax Act 4459877 0 2005-06

Delhi Sales Tax Act 1914095 0 2006-07

Delhi Sales Tax Act 265248583 0 2007-08

Total 365583127 807425298

Name of the Authority where pending Statute Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act High court Delhi Sales Tax Act High court Delhi Sales Tax Act High court Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax Delhi Sales Tax Act Addl. Comm. Sales Tax

(b) According to the information and explanation given to us, there are no dues in respect of Custom Duty, Excise Duty and Cess that have not been deposited with the appropriate authorities on account of any dispute. However, the Company has not deposited Sales Tax /VAT Dues, Service Tax and Income Tax Dues on account of disputes as under:

Local Sales Tax and Central Sales Tax / VAT: (i) Sales Tax

The unit has already deposited Rs. 154733054/- out of the total disputed liability stated above.

(ii) Service Tax Name of the Statute Amount (Rs) Service Tax Period Authority where pending

Service Tax Act 110300000 2007-08 CEGAT

Mumbai Unit

Name of the Nature of Dues Amount under Year to which Statute dispute not amount deposited relates

BST ACT Assessed Amount 672968 1993-94

BST Act Assessed Amount 52693370 1996-97

BST Act Assessed Amount 3514698437 1997-98 Appeals

BST Act Assessed Amount 59424662 1998-99

BST Act Assessed Amount 1013116938 1999-2000 35201675

BST Act Assessed Amount 54329094 2000-01

BST Act Assessed Amount 101128984 2001-02

BST Act Assessed Amount 49102898 2002-03

BST ACT Assessed Amount 2161090302 2003-04 Appeals

BST ACT Assessed Amount 1015717015 2004-05

Finance Service Tax: 4100000 2003-04 Act 1994 S.Clause Notice

Total Rs. 8,061,276,343

Name of the Forum where Statute the dispute is pending

BST ACT MSTT

BST Act DC

BST ACT Appeals Jt. Commr. of Sales Tax

BST Act MSTT

BST Act Jt. Commr. of Sales Tax Appeals MSTT

BST Act MSTT

BST Act Jt. Commr. of Sales Tax Appeals

BST Act MSTT

BST Act Jt. Commr. of Sales Tax Appeals BST Act Assessment order received on 19.4.2010. appeal to be filed.

Finance Act CESTAT 1994

Statutory dues which have not been deposited in respect of Mumbai MS unit as on 31st March, 2010.

S.No. Nature of Dues Amount under Forum where dispute not the dispute is deposited pending

1. Installation of BTS Site 3963453 CESTAT

2. Installation of BTS Site 35665083 CESTAT

3. Installation of BTS Site 7489891 CESTAT

4. Installation of BTS Site 2248797 CESTAT

5. Installation of BTS Site 2617816 CC

6. Service Tax demand 03-04 2080000 Jt. Comm.(Appeals)

7. Installation of BTS 3210353 CCF

8. Installation of BTS 15167288 CCF

9. Installation of BTS 12190290 CCF

Total 84632971

10. The company has incurred loss of Rs. 26109.71 Millions in the current year. There was no loss in previous years.

11. The Company has neither taken any loans from a financial institution / bank nor issued any debentures. Accordingly, clause 4 (xi) of the order is not applicable.

12. The Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. Accordingly, clause 4 (xii) of the order is not applicable.

13. The Company is not a Chit Fund or a Nidhi Mutual Benefit Fund / Society. Accordingly, clause 4(xiii) of the order is not applicable.

14. The Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, clause 4(xiv) of the Order is not applicable.

15. According to the information and explanation given to us, the Company has not given any guarantees for loans taken by others from banks or financial institutions. Accordingly, clause 4(xv) of the Order is not applicable.

16. The Company has not obtained any Term Loans. Accordingly, clause 4(xvi) of the Order is not applicable. The Company has not raised any Long Term or Short Term Loan. Accordingly, Clause 4(xvii) of the Order is not applicable.

17. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under section 301 of the Act.

18. The Company has not issued any debentures. Accordingly, clause 4(xix) of the Order is not applicable.

19. The Company has not raised any money by public issues during the year. Accordingly, clause 4(xx) of the Order is not applicable.

20. According to the information and explanations given to us, no major fraud on or by the company has been noticed or reported during the year except as reported in Note No. 31 of Schedule T The details with regard to status of frauds till 31.03.2010 have not been provided to us as such provision in this regard, if any, could not be ascertained.

For Bansal Sinha & Co. For Goel Garg & Co.

Chartered Accountants Chartered Accountants

FRN- 06184N FRN - 00397N

(Ravinder Khullar) (Ajay Rastogi)

(Partner) (Partner)

(Mem No. 82928) (Mem No. 84897)

Place: New Delhi

Date: 12th August,2010