<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-10852
PROSPECTUS
4,175,000 American Depositary Shares
[LOGO OF SATYAM INFOWAY LIMITED APPEARS HERE]
SATYAM INFOWAY LIMITED
Representing 4,175,000 Equity Shares
----------------
Satyam Infoway Limited is offering up to 4,175,000 American Depositary
Shares, or ADSs, of Satyam Infoway outside India, including in the United
States. This prospectus relates to an offering by the U.S. underwriters of up
to 2,505,000 American Depositary Shares in the United States and Canada.
Additional underwriters are offering up to 1,670,000 American Depositary
Shares outside the United States and Canada. Each American Depositary Share
represents one equity share.
This is Satyam Infoway's initial public offering, and no public market
currently exists for Satyam Infoway's equity shares.
The American Depositary Shares have been approved for listing on The
Nasdaq Stock Market's National Market under the symbol "SIFY."
Investing in the American Depositary Shares involves certain risks which
are described in the Risk Factors beginning on page 7.
----------------
<TABLE>
<CAPTION>
Per ADS Total
------- -----
<S> <C> <C>
Public offering price.................................. $18.00 $75,150,000
Underwriting discount.................................. $1.26 $5,260,500
Proceeds, before expenses, to Satyam Infoway........... $16.74 $69,889,500
</TABLE>
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Satyam Infoway has granted to the underwriters the right to purchase up
to an additional 626,250 American Depositary Shares at the public offering
price, less discount and commissions, within 30 days from the date of this
prospectus to cover overallotments.
----------------
Merrill Lynch & Co. Salomon Smith Barney
----------------
The date of this prospectus is October 18, 1999.
<PAGE>
Three panels of graphical information regarding Satyam Infoway Limited
consisting of:
. a graphical presentation of Satyam Infoway's network covering 25 cities
in India, with international Internet gateways in Mumbai, Bangalore,
Chennai, Hyderabad, Delhi and Calcutta;
. sample web pages from some of Satyam Infoway's content sites, including
satyamonline.com and speciality sites related to cars, movies and
shopping; and
. a list of business-to-business services provided by Satyam Infoway.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 1
Risk Factors............................................................ 7
Conventions Which Apply to This Prospectus.............................. 22
Currency of Presentation................................................ 22
Enforcement of Civil Liabilities........................................ 23
Reports to Our Security Holders......................................... 24
Use of Proceeds......................................................... 25
Dividend Policy......................................................... 26
Capitalization.......................................................... 27
Exchange Rates.......................................................... 28
Dilution................................................................ 29
Selected Financial Data................................................. 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 32
Business................................................................ 43
Management.............................................................. 60
Principal Shareholders.................................................. 65
Certain Transactions.................................................... 66
Description of Equity Shares............................................ 67
Description of American Depositary Shares............................... 72
Restrictions on Foreign Ownership of Indian Securities.................. 80
Government of India Approvals........................................... 84
Taxation................................................................ 86
Shares Eligible for Future Sale......................................... 91
Underwriting............................................................ 92
Legal Matters........................................................... 94
Experts................................................................. 94
Change of Accountants................................................... 94
Additional Information.................................................. 94
Index to Financial Statements........................................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
Through and including November 12, 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our ADSs discussed
under "Risk Factors," before deciding to buy our ADSs.
Satyam Infoway Limited
Our Business
We are the second largest national provider of Internet access and
Internet services to consumers and businesses in India, based on number of
customers as of September 30, 1999. Our customers primarily use our services to
communicate, transmit and share information, access on-line content and conduct
business remotely using our private data network or the Internet. Our Internet
and network services include the following:
. Consumer Internet Access Services. We offer dial-up Internet access,
e-mail and web page hosting to consumers in India through convenient
on-line registration and user-friendly software. In November 1998
after the deregulation of the Internet service provider market in
India, we launched our Internet service provider business and became
the first private Internet service provider in India. The largest
national Internet service provider is VSNL, which is majority
controlled by the Indian government.
. Corporate Network and Technology Services. We offer dial-up and
dedicated Internet access, private network services, business-to-
business electronic commerce solutions and website development and
hosting services to businesses in India. Initiated in April 1998, our
corporate network and technology services division has formed
strategic partnerships with a number of leading technology and
electronic commerce companies, including CompuServe Network Services,
Sterling Commerce and Open Market.
. On-line Portal and Content Offerings. We operate an on-line portal,
satyamonline.com, that functions as a principal entry point and
gateway for accessing the Internet by providing useful web-related
services and links. We also offer related content sites specifically
tailored to Indian interests worldwide for news, personal finance,
movies, music and automobiles. During September 1999, our six websites
generated approximately 12.0 million page views.
As of June 30, 1999, we had an accumulated deficit of approximately
Rs.366.7 million ($8.4 million). For the fiscal year ended March 31, 1999 and
the fiscal quarter ended June 30, 1999, our net loss was approximately Rs.187.4
million ($4.3 million) and Rs.51.7 million ($1.2 million), respectively.
Our Customers
As of September 30, 1999, we had more than 87,000 consumer Internet
access subscribers and more than 300 corporate customers. Our corporate network
and technology services customers are in a variety of industries, including
financial services, publishing, retail, shipping and manufacturing. Our five
largest corporate customers based on revenue for the fiscal quarter ended June
30, 1999 were Carborandum Universal Limited, CDC Advisors Limited, ESPN
Software India Limited, GE Capital Services and Hutchinson Corporate Access.
The customers listed above accounted for approximately 35% of our corporate
network and technology services division revenues in the fiscal quarter ended
June 30, 1999.
Our Network
We currently operate India's largest national private data network
utilizing Internet protocol, which is an Internet industry standard for
tracking Internet addresses, routing outgoing messages and recognizing
1
<PAGE>
incoming messages. We own and operate points of presence in 25 of the largest
metropolitan areas in India. Points of presence are telecommunications
facilities located in a particular market which allow our customers to connect
to the Internet through a local telephone call. We plan to have points of
presence in 40 cities in India by April 2000, which we believe will allow us to
provide Internet access service via a local telephone call to approximately 85%
of the installed personal computer base in India. Our private network
infrastructure provides the platform for national delivery of Internet access
to consumers as well as the backbone for our broad range of corporate network
and technology services. For example, our network provides an alternative to
government telecom providers for corporations that wish to establish virtual
private networks, which provide secure transmission of data using Internet
protocol over our private network infrastructure, and electronic data
interchanges. Our Internet service provider license permits us to establish and
maintain our own direct international Internet connections via satellite links
or transoceanic cable systems as an alternative to government-provided Internet
gateways. We believe that as the size and capacity of our network
infrastructure grows, its large scale and national coverage will create
economies of scale for us and barriers to entry for our competitors.
Our Market Opportunity
The market for Internet access and electronic commerce, both worldwide
and in India, is expanding rapidly. For example, International Data Corporation
estimates:
. the installed personal and network computer base in India will grow at
a rate that averages 44% annually from 1.9 million in 1998 to 8.2
million in 2002;
. Internet users in India will grow at a rate that averages 76% annually
from 0.5 million in 1998 to 4.5 million in 2002; and
. Internet commerce revenues in India will grow at a rate that averages
260% annually from $3.5 million in 1998 to $593.6 million in 2002.
Internet usage is expected to grow rapidly in the Indian market as
deregulation continues, network bandwidth becomes less expensive, the installed
base of personal and network computers increases, alternative Internet-access
devices become available and Internet connectivity becomes increasingly
important for on-line news and content and electronic commerce transactions. We
believe that our company is well positioned to take advantage of this
significant market opportunity in India. The market in India is, however,
presently at a very early stage of development and involves significant
business, competitive and other risks.
The International Data Corporation market data presented above and
elsewhere in this prospectus shows International Data Corporation's estimates
derived from a combination of vendor, user and other market sources and
therefore may differ from numbers claimed by specific vendors using different
market definitions or methods. There can be no assurances that any of these
projected amounts will be achieved.
Our Growth Strategy
Our goal is to become the premier provider of Internet access, network
services and on-line content to consumers and businesses in India. Our
principal business strategies to accomplish this objective are:
. Increase penetration in our existing markets by expanding awareness of
the Satyam Online brand name to capitalize on our first mover
advantage in India;
. Expand our products and services with new technologies to enable our
customers to use the Internet more effectively;
. Strengthen our Internet portal and other Internet content websites
with more content tailored to Indian interests worldwide;
2
<PAGE>
. Expand customer distribution channels through strategic partnerships
to take advantage of the sales and marketing capabilities of our
strategic partners;
. Invest in the continued enhancement and expansion of our network
infrastructure to support customer growth, enter new markets and
accommodate increased customer usage; and
. Pursue selective strategic investments, partnerships and acquisitions
to expand our customer base, increase utilization of our network and
add new technologies to our product mix.
Our Organization
Our principal executive offices are located at Maanasarovar Towers, 271-
A, Anna Salai, Teynampet, Chennai 600 018, India, and our telephone number is
(91) 44-435-3221. Information contained in our websites, including our
principal website, satyamonline.com, is not part of this prospectus. We are,
and after the offering will continue to be, a majority-owned subsidiary of
Satyam Computer Services Limited, a leading Indian information technology
services company which is traded on the principal Indian stock exchanges.
"Satyam" is a trademark owned by Satyam Computer Services, which has licensed
the use of the "Satyam" trademark to us subject to specified conditions. For
additional information regarding this license, please see "Business--
Intellectual Property" on page 56. "Satyam Online," "Satyam:Net" and
"satyamonline.com" are trademarks used by us for which we have registration
applications pending in India. Each trademark, trade name or service mark of
any other company appearing in this prospectus belongs to its holder.
Recent Developments
Based on our preliminary unaudited results of operations for the fiscal
quarter ended September 30, 1999, we recognized approximately Rs.127.4 million
in revenues for the fiscal quarter ended September 30, 1999. Our net loss, on a
preliminary unadited basis, was approximately Rs.76.9 million for the fiscal
quarter ended September 30, 1999.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
American Depositary Shares offered:
U.S. offering............................... 2,505,000 ADSs
International offering...................... 1,670,000 ADSs
--------------
Total................................... 4,175,000 ADSs
==============
The ADSs....................................... Each American Depositary Share represents one
equity share, par value Rs.10 per share. The
ADSs will be evidenced by American Depositary
Receipts.
Equity shares outstanding after this offering.. 21,156,000 equity shares
Use of proceeds................................ To fund network infrastructure expansion and
enhancements, to develop content for our
Internet portal business, to advertise and
promote our brand and for general corporate
purposes, including possible strategic
investments, partnerships and acquisitions. For
additional information regarding the use of
proceeds from this offering, please see "Use of
Proceeds" on page 25.
Proposed Nasdaq National Market symbol......... SIFY
</TABLE>
---------------
The 21,156,000 equity shares outstanding after this offering are based on
the 15,750,000 equity shares outstanding as of June 30, 1999 and include:
. 481,000 equity shares issued to Sterling Commerce at a price of
$10.40 per share in a private- placement pursuant to an agreement
reached in July 1999 which closed in September 1999;
. 750,000 equity shares to be issued to two existing shareholders,
Satyam Computer Services Limited and South Asia Regional Fund, in
connection with the exercise of warrants held by those shareholders
at an exercise price equal to 66% of the price to public indicated
on the cover of this prospectus; and
. the 4,175,000 equity shares represented by ADSs sold by us in this
offering.
The equity shares to be outstanding after this offering exclude, as of
June 30, 1999, the following:
. any equity shares represented by the ADSs to be issued pursuant to
the underwriters' overallotment option;
. 5,000 equity shares issuable upon the exercise of options
outstanding under our stock option plan at a weighted average
exercise price of Rs.70 per share; and
. 820,000 equity shares reserved for future issuance under our stock
option plan (of which options to acquire 147,000 shares were granted
on September 28, 1999 at a weighted average exercise price equal to
Rs.335 per share).
4
<PAGE>
SUMMARY FINANCIAL DATA
You should read the following summary financial data in conjunction with
our financial statements and the related notes, "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. Our financial statements are
prepared in Indian rupees and presented in accordance with U.S. GAAP for the
fiscal years ended March 31, 1997, 1998 and 1999 and the fiscal quarter ended
June 30, 1999. Financial statements for the year ended March 31, 1999 and the
quarter ended June 30, 1999 also have been translated into U.S. dollars. The
pro forma as adjusted data set forth below are adjusted to give effect to the
following:
. the sale by our company to Sterling Commerce of 481,000 equity shares
in a private placement pursuant to an agreement reached in July 1999
which closed in September 1999 and the application of the $5.0 million
of proceeds from this sale primarily towards the repayment of debt;
. the sale by our company of 4,175,000 ADSs representing 4,175,000
equity shares offered hereby and the application of the proceeds from
the offering at an assumed initial public offering price of $18.00 per
ADS and after deducting underwriting discounts and the estimated
offering expenses payable by us; and
. the exercise of warrants to purchase an aggregate of 750,000 of our
equity shares and the application of the $8.9 million aggregate
exercise price primarily towards the repayment of debt.
For additional information regarding the pro forma as adjusted data, please see
"Capitalization" on page 27.
The summary consolidated historical financial and other data includes a
presentation of EBITDA. EBITDA represents earnings (loss) before depreciation
and amortization, interest income and expense, income tax expense (benefit) and
extraordinary items. EBITDA is presented because we believe some investors find
it to be a useful tool for measuring a company's ability to fund capital
expenditures or to service future debts. EBITDA is not determined in accordance
with generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of operating
performance or as an alternative to cash flow as a measure of liquidity.
Because EBITDA excludes interest expense and capital expenditures, negative
EBITDA would limit our ability to fund capital expenditures and service future
debt obligations. Our EBITDA is not comparable to that of other companies which
may determine EBITDA differently.
5
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Fiscal Quarter Ended June 30,
------------------------------------------------------ ------------------------------------
1997 1998 1999 1999 1998 1999 1999
Indian rupees U.S. dollars Indian rupees U.S. dollars
---------------------------------------- ------------ ---------------------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues............... Rs. -- Rs. 6,805 Rs. 103,344 $ 2,378 Rs. 17,558 Rs. 80,803 $ 1,860
Cost of revenues....... -- 19,498 63,651 1,465 7,074 38,897 895
-------------- ----------- ----------- ---------- ---------- ---------- ----------
Gross profit (loss) -- (12,693) 39,693 913 10,484 41,906 965
Operating expenses..... 26,337 80,400 200,282 4,609 30,607 84,338 1,941
Operating loss......... (26,337) (93,093) (160,589) (3,696) (20,123) (42,432) (976)
Net loss............... Rs. (26,337) Rs.(100,590) Rs.(187,376) $ (4,312) Rs.(24,829) Rs.(51,749) $ (1,191)
Loss per equity share.. Rs.(114,508.27) Rs. (121.66) Rs. (17.31) $ (0.40) Rs. (3.28) Rs. (3.29) $ (0.08)
Weighted average equity
shares used in
computing loss per
equity share.......... 230 826,805 10,824,826 10,824,826 7,566,164 15,750,000 15,750,000
Other Financial Data:
EBITDA................. Rs. (25,801) Rs. (73,709) Rs.(111,496) $ (2,566) Rs.(11,337) Rs.(21,131) $ (486)
Capital expenditures... 3,230 77,070 146,135 3,363 15,057 109,578 2,522
Net cash provided by
(used in):
Operating activities.. (30,426) (73,950) (171,388) (3,944) (20,590) (37,258) (857)
Investing activities.. (3,230) (77,070) (146,000) (3,360) (15,057) (109,578) (2,522)
Financing activities.. 35,138 159,449 433,023 9,966 30,504 31,664 729
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
----------------------------------------------------
Pro Forma As
Adjusted Pro Forma
Actual Actual Indian As Adjusted
Indian rupees U.S. dollars rupees U.S. dollars
------------- ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............. Rs.10,375 $ 239 Rs.3,349,517 $77,089
Working capital
(deficit)............... (198,325) (4,564) 3,140,817 72,286
Total assets............. 464,473 10,690 3,803,615 87,540
Long-term debt, including
current installments.... 259,820 5,980 1,320 30
Total stockholders'
equity (deficit)........ 16,075 370 3,613,717 83,170
</TABLE>
6
<PAGE>
RISK FACTORS
Any investment in our ADSs involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this prospectus, before you decide to buy
our ADSs. If any of the following risks actually occur, our business, results
of operations and financial condition would likely suffer. In any such case,
the market price of our ADSs could decline, and you may lose all or part of the
money you paid to buy our ADSs.
Risks Related to Investments in Indian Companies
We are incorporated in India, and virtually all of our assets and our
employees are located in India. Consequently, our financial performance and the
market price of our ADSs will be affected by changes in exchange rates and
controls, interest rates, government of India policies, including taxation
policies, as well as political, social and economic developments affecting
India.
Political instability related to the formation of a new government in India
could halt or delay the liberalization of the Indian economy and adversely
affect business and economic conditions in India generally and our business in
particular.
During the past decade and in particular since 1991, the government of
India has pursued policies of economic liberalization, including significantly
relaxing restrictions on the private sector. Nevertheless, the role of the
Indian central and state governments in the Indian economy as producers,
consumers and regulators has remained significant. The government of India
recently changed for the fifth time since 1996. The prior government of India,
formed in March 1998, announced policies and took initiatives that supported
the continued economic liberalization policies that have been pursued by the
previous governments. We cannot assure you that these liberalization policies
will continue in the future. The rate of economic liberalization could change,
and specific laws and policies affecting technology companies, foreign
investment, currency exchange rates and other matters affecting investment in
our securities could change as well. A significant change in India's economic
liberalization and deregulation policies could adversely affect business and
economic conditions in India generally and our business in particular.
Economic sanctions imposed on India by the United States could restrict our
access to technology and limit our ability to construct our network and operate
our business.
In May 1998, the United States imposed economic sanctions against India
in response to India's testing of nuclear devices. Since then, the United
States has waived some of these sanctions subsequent to its discussions with
the government of India. The economic sanctions imposed on India to date have
not had a material impact on our company. However, these sanctions, or
additional sanctions, could restrict our access to technology that is available
only in the United States and that is required to construct our network and
operate our business. We cannot assure you that any of these sanctions will
continue to be waived, that additional economic sanctions of this nature will
not be imposed, or that these sanctions or any additional sanctions that are
imposed will not have a material adverse effect on our business or on the
market for our ADSs in the United States.
Regional conflicts in South Asia could adversely affect the Indian economy and
cause our business to suffer.
South Asia has from time to time experienced instances of civil unrest
and hostilities among neighboring countries, including between India and
Pakistan. In April 1999, India and Pakistan conducted long-range missile tests.
Since May 1999, military confrontations between India and Pakistan have
occurred in the disputed Himalayan region of Kashmir. Further, in October 1999
the leadership of Pakistan changed as a result of a coup led by the military.
Events of this nature in the future could influence the Indian economy and
could have a material adverse effect on the market for securities of Indian
companies, including our ADSs, and on the market for our services.
7
<PAGE>
Indian law and the terms of our Internet service provider license contain
restrictive provisions that limit our ability to raise capital or to be
acquired which could prevent us from constructing our network and operating our
business or entering into a transaction that is in the best interests of our
shareholders.
Indian law and the terms of our Internet service provider license
constrain our ability to raise capital through the issuance of equity or
convertible debt securities. Guidelines issued by the Department of Policy and
Promotion, Ministry of Industry in January 1997 state that the maximum foreign
equity investment in an Indian company engaged in business in the
telecommunications sector is 49%. Additional guidelines issued in November 1998
provide that the maximum foreign equity investment in an Indian company acting
as an Internet service provider is also 49%. This 49% limit applies to foreign
equity investment in our company. Likewise, our Internet service provider
license provides that the total foreign equity in our company may not, at any
time, exceed 49% of our total equity.
After this offering, we expect that approximately 39%, or 41% if the
overallotment option is exercised in full, of our equity interests will be held
by foreign investors. As a result of the 49% limit on foreign equity ownership,
we will not be permitted to sell more than an additional 10%, or 8% if the
overallotment option is exercised in full, of our equity shares to foreign
investors in the future. We cannot assure you that other forms of financing
will be available on terms favorable to us, or at all. If adequate funds are
not available or are not available on acceptable terms, our ability to fund our
operations, take advantage of unanticipated opportunities, develop or enhance
our infrastructure or services, or otherwise respond to competitive pressures
would be significantly limited. Our business, results of operations and
financial condition could be materially adversely affected by any such
limitation. The 49% limit on foreign equity ownership also restricts our
ability to be acquired by a non-Indian company because a foreign company is
prohibited from acquiring a majority of our equity shares. Likewise, the terms
of our Internet service provider license prevents us from transferring the
license to a third person. This may prevent us from entering into a transaction
which would otherwise be beneficial for our company and the holders of our
equity shares.
For additional information regarding our sources of capital, please see
"Use of Proceeds" on page 25, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Expenditures" on page 38. For additional information regarding foreign
ownership restrictions, please see "Business--Government Regulation" on page 57
and "Restrictions on Foreign Ownership of Indian Securities" on page 80.
We are subject to foreign investment restrictions under Indian law that limit
our ability to attract foreign investors which, together with the lack of a
public market for our equity shares, may adversely impact the value of our
ADSs.
Currently there is no public trading market for our equity shares in
India nor can we assure you that we will take steps to develop one. After this
offering, our equity securities will not trade publicly in India, but will only
be traded on Nasdaq through the ADSs as described in this prospectus. Under
current Indian laws and regulations, our depositary cannot accept deposits of
outstanding equity shares and issue ADRs evidencing ADSs representing such
equity shares without prior approval of the government of India. If you elect
to surrender your ADSs and receive equity shares, you will not be able to trade
those equity shares on any securities market. Under current Indian laws and
regulations, you will be prohibited from re-depositing those outstanding equity
shares with our depositary without prior approval of the government of India.
If in the future a market for our equity shares is established in India or
another market outside of the United States, those shares may trade at a
discount or premium to the ADSs in part because of restrictions on foreign
ownership of the underlying shares.
Under current Indian regulations and practice, the approval of the
Reserve Bank of India is required for the sale of equity shares underlying ADSs
by a non-resident of India to a resident of India as well as for renunciation
of rights to a resident of India. Since exchange controls still exist in India,
the Reserve Bank of India will approve the price at which the equity shares are
transferred based on a specified formula, and a higher price per share may not
be permitted. Holders who seek to convert the rupee proceeds from a sale of
8
<PAGE>
equity shares in India into foreign currency and repatriate that foreign
currency from India will have to obtain Reserve Bank of India approval for each
transaction. We cannot assure you that any required approval from the Reserve
Bank of India or any other government agency can be obtained.
Because we operate our business in India, exchange rate fluctuations may affect
the value of our ADSs independent of our operating results.
The exchange rate between the rupee and the U.S. dollar has changed
substantially in recent years and may fluctuate substantially in the future.
During the three-year period from July 1, 1996 through June 30, 1999, the value
of the rupee against the U.S. dollar declined by approximately 24%.
Devaluations of the rupee will result in higher expenses to our company for the
purchase of capital equipment, such as routers, modems and other
telecommunications and computer equipment, which is generally manufactured in
the U.S. In addition, our market valuation could be materially adversely
affected by the devaluation of the rupee if U.S. investors analyze our value
based on the U.S. dollar equivalent of our financial condition and results of
operations.
The government of India may change its regulation of our business or the terms
of our license to provide Internet access services without our consent, and any
such change could decrease our revenues and/or increase our costs which would
adversely affect our operating results.
Our business is subject to government regulation under Indian law and to
significant restrictions under our Internet service provider license issued by
the government of India. These regulations and restrictions include the
following:
. Our Internet service provider license has a term of 15 years and we
have no assurance that the license will be renewed. If we are unable
to renew our Internet service provider license in 2013 for any
reason, we will be unable to operate as an Internet service provider
in India and will lose one of our primary sources of revenue.
. The government of India maintains the right to regulate the prices we
charge our subscribers. The success of our business model depends on
our ability to price our services at levels we believe are
appropriate. If the government sets a price floor, we may not be able
to attract and retain subscribers. Likewise, if the government sets a
price ceiling, we may not be able to generate sufficient revenues to
fund our operations.
. The government of India maintains the right to take over our entire
operations or revoke, terminate or suspend our license for national
security and similar reasons without compensation to us. If the
government of India were to take any of these actions, we would be
prevented from conducting all or part of our business.
We had outstanding performance guarantees for various statutory purposes
totaling Rs. 22,144,000 ($509,643) as of June 30, 1999. These guarantees are
generally provided to government agencies, primarily the Telegraph Authority,
as security for compliance with and performance of terms and conditions
contained in an Internet service provider license and VSNL towards the supply
and installation of an electronic commerce platform. These guarantees may be
seized by the governmental agencies if they suffer any losses or damage by
reason of our failure to perform our obligations. Any failure on our part to
comply with governmental regulations and the terms of our Internet service
provider license could result in the loss of our license and any amount
outstanding as performance guarantees, which would also prevent us from
carrying on a very significant part of our business. Further, additional laws
regulating telecommunications, electronic records, the enforceability of
electronic documents and the liability of network service providers are under
consideration and if enacted could impose additional restrictions on our
business. For additional information regarding government regulation, please
see "Business--Government Regulation" on page 57.
The global financial crisis could cause our business or the price of our ADSs
to suffer.
Financial turmoil in several Asian countries, Russia and elsewhere in the
world in 1998 and 1999 has adversely affected market prices in the world's
securities markets, including the United States and Indian
9
<PAGE>
markets, for securities of companies which operate in those developing
economies. Continued or increased financial downturns in these countries could
cause further decreases in prices for securities of companies located in
developing economies, such as our company.
Surcharges on Indian income taxes will increase our tax liability by an
additional 10% and decrease any profits we might have in the future.
The statutory corporate income tax rate in India is currently 35.0%. This
tax rate is presently subject to a 10.0% surcharge resulting in an effective
tax rate of 38.5%. The Finance Minister of India has indicated that the 10.0%
surcharge will be effective for a period of only one year, commencing April 1,
1999. However, we cannot assure you that the 10.0% surcharge will be repealed
on April 1, 2000 or that additional surcharges will not be implemented by the
government of India. Dividends declared, distributed or paid by an Indian
corporation are subject to a tax of 11.0%, including the presently applicable
surcharge, of the total amount of the dividend declared, distributed or paid at
the corporate level. This tax is not paid by shareholders nor is it a
withholding requirement, but rather it is a direct tax payable by the
corporation.
Risks Related to the Internet Market in India
Our success will depend in large part on the increased use of the
Internet by consumers and businesses in India. However, our ability to exploit
the Internet service provider and other data service markets in India is
inhibited by a number of factors. If India's limited Internet usage does not
grow substantially, our business may not succeed.
The success of our business depends on the acceptance of the Internet in India
which may be slowed or halted by high bandwidth costs and other technical
obstacles in India.
Bandwidth, the measurement of the volume of data capable of being
transported in a communications system in a given amount of time, remains very
expensive in India, especially when compared to bandwidth costs in the United
States. Bandwidth rates are commonly expressed in terms of Kbps (kilobits per
second, or thousands of bits of data per second) or Mbps (megabits per second,
or millions of bits of data per second). Prices for bandwidth capacity are set
by the Indian government and have remained high due to, among other things,
capacity constraints. Further, limitations in network architecture in India
limit Internet connection speeds to 28 Kbps and below, less than the 33 to 56
Kbps connection speeds on conventional dial-up telephone lines, and
significantly less than the up to 1.5 Mbps connection speed on cable modems, in
the United States. These speed and cost constraints may severely limit the
quality and desirability of using the Internet in India.
The limited installed personal computer base in India limits our pool of
potential customers and restricts the amount of revenues that our consumer
Internet access services division may generate.
The market penetration rates of personal computers and on-line access in
India are far lower than such rates in the United States. For example,
according to International Data Corporation, in 1998 the Indian market
contained approximately 0.5 million Internet users compared to a total
population in India of 984.0 million, while the U.S. market contained
approximately 68.2 million Internet users compared to a total population in the
U.S. of 270.3 million. Alternate methods of obtaining access to the Internet,
such as through cable television modems or set-top boxes for televisions, are
currently unavailable in India. There can be no assurance that the number or
penetration rate of personal computers in India will increase rapidly or at all
or that alternate means of accessing the Internet will develop and become
widely available in India.
The high cost of accessing the Internet in India limits our pool of potential
customers and restricts the amount of revenues that our consumer Internet
access services division may generate.
Our growth is limited by the cost to Indian consumers of obtaining the
hardware, software and communications links necessary to connect to the
Internet in India. If the costs required to access the Internet do not
significantly decrease, most of India's population will not be able to afford
to use our services. The
10
<PAGE>
failure of a significant number of additional Indian consumers to obtain
affordable access to the Internet would make it very difficult to execute our
business plan.
The success of our business depends on the acceptance and growth of electronic
commerce in India which is uncertain and, to a large extent, beyond our
control.
Many of our existing and proposed products and services are designed to
facilitate electronic commerce in India, although there is virtually no
electronic commerce currently being conducted in India. Demand and market
acceptance for these products and services by businesses and consumers,
therefore, are highly uncertain. Critical issues concerning the commercial use
of the Internet, such as legal recognition of electronic records, validity of
contracts entered into on-line and the validity of digital signatures, remain
unresolved. In addition, many Indian businesses have deferred purchasing
Internet access and deploying electronic commerce initiatives for a number of
reasons, including the existence or perception of, among other things:
. inconsistent quality of service;
. need to deal with multiple and frequently incompatible vendors;
. lack of legal infrastructure relating to electronic commerce in
India;
. lack of security of commercial data such as credit card numbers; and
. low number of Indian companies accepting credit card numbers over the
Internet.
If usage of the Internet in India does not substantially increase and the
legal infrastructure and network infrastructure in India are not further
developed, we are not likely to realize any benefits from our investment in the
development of electronic commerce products and services.
Risks Related to Satyam Infoway
Our very limited operating history makes it difficult to evaluate our business.
We commenced operation of our private data network business in April 1998
and launched our Internet service provider operations and Internet portal
website in November 1998. Accordingly, we have a very limited operating history
to evaluate our business. You must consider the risks and difficulties
frequently encountered by companies in the early stages of development,
particularly companies in the new and rapidly evolving Internet service
markets. These risks and difficulties include our ability to:
. continue to develop and upgrade our technology, including our network
infrastructure;
. maintain and develop strategic relationships with business partners;
. offer compelling on-line services and content; and
. promptly address the challenges faced by early stage, rapidly growing
companies which do not have an experience or performance base to draw
on.
Not only is our operating history short, but we have determined to
compete in three businesses that we believe are complementary. These three
businesses are business network and connectivity services, Internet service
provider and consumer portal. Our three businesses were started at different
times and have only been functioning together since late in 1998. We do not yet
know whether these businesses will prove complementary. We cannot assure you
that we will successfully address the risks or difficulties described above.
Failure to do so could lead to an inability to attract and retain subscribers
for our Internet services and corporate customers for our network services as
well as the loss of advertising revenues. For additional information regarding
our limited operating history, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 32 and our financial
statements included elsewhere in this prospectus commencing on page F-1.
11
<PAGE>
We have a history of losses and negative cash flows and anticipate this to
continue because our business plan, which is unproven, calls for additional
subscribers and other customers to attain profitability.
Since our founding, we have incurred significant losses and negative cash
flows. As of June 30, 1999, we had an accumulated deficit of approximately $8.4
million. We have not been profitable and expect to incur operating losses as we
expand our services, invest in expansion of our network infrastructure and
sales and marketing staff, and advertise and promote our brand. Our business
plan assumes that consumers in India will be attracted to and use Internet
access services and content available on the Internet in increasing numbers.
Our business plan also assumes that businesses in India will demand private
network and related electronic commerce services. This business model is not
yet proven in India, and we cannot assure you that we will ever achieve or
sustain profitability or that our operating losses will not increase in the
future. For additional information regarding our history of losses, please see
"Selected Financial Data" on page 30 and "Management's Discussion and Analysis
of Financial Condition and Results of Operation" on page 32.
Our ability to compete in the Internet service provider market is hindered by
the fact that our principal competitor is a government-controlled provider of
international telecommunications services in India which enjoys significant
competitive advantages over our company.
Videsh Sanchar Nigam Limited, or VSNL, is a government-controlled
provider of international telecommunications services in India. VSNL is also
the largest Internet service provider in India with an estimated 300,000
subscribers as of June 30, 1999. VSNL enjoys significant competitive advantages
over our company, including the following:
. Lower rates. VSNL currently offers national Internet service provider
services at rates approximately 10% less than the fees we charge our
subscribers.
. Longer service history. VSNL has offered Internet service provider
services since August 1995 whereas we have offered Internet service
provider services only since November 1998.
. Access to network infrastructure. Because VSNL is controlled by the
government of India, it has direct access to network infrastructure
which is owned by the Indian government.
. Greater financial resources. VSNL has significantly greater total
assets and annual revenues than our company.
If we are unable to distinguish our Internet service provider services
from those of VSNL, these competitive advantages may prevent us from attracting
and retaining subscribers and generating advertising revenue. This could result
in loss of market share, price reductions or reduced margins for our company's
operations.
We may be required to lower the rates we charge for our products and services
in response to new pricing models introduced by new and existing competition in
the Internet services market which would significantly decrease our revenues.
We expect a significant number of new competitors to enter India's
recently liberalized Internet service provider market in the near future. As of
June 30, 1999, 129 companies had obtained Internet service provider licenses in
India, including 22 companies which have obtained licenses to offer Internet
service provider services throughout India. Some of these companies, including
WMI, Dishnet, Shrishti and KMR Online, currently offer regional Internet
service provider services. New entrants into the national Internet service
provider market in India may enjoy significant competitive advantages over our
company, including greater financial resources, which could allow them to
charge Internet access fees that are lower than ours in order to attract
subscribers. In addition, although no Internet service provider in India
currently offers unlimited Internet access for a fixed monthly fee or free
Internet access, the unlimited access pricing and free Internet access models
have been implemented in other markets. If these new entrants offer less costly
or free Internet access, or if one or more of them introduce an unlimited
Internet access pricing model to the Indian market, we may be forced to lower
our prices in order to attract and retain subscribers.
12
<PAGE>
Our on-line portal, satyamonline.com, faces significant competition from
well-established Indian content providers, including IndiaWorld and
RediffontheNet. We also compete with foreign content providers as well as with
traditional print and television media companies.
Our corporate and technology services business faces significant
competition from well-established companies, including Global E-Commerce
Limited, Sprint-RPG Limited and WIPRO-CSD.
Increased competition may result in reduced operating margins, loss of
market share and diminished value in our services, as well as different
pricing, service or marketing decisions. We cannot assure you that we will be
able to successfully compete against current and future competitors. For
additional information regarding competition in our markets, please see
"Business--Competition" on page 55.
Our marketing campaign to establish brand recognition and loyalty for the
Satyam Online brand could be unsuccessful or, if successful, may not benefit
our company if in the future we are no longer permitted to use the "Satyam"
trademark that we license from Satyam Computer Services.
In order to expand our customer base and increase traffic on our
websites, we must establish, maintain and strengthen the Satyam Online brand.
We plan to increase substantially our marketing expenditures to establish brand
recognition and brand loyalty. If our marketing efforts do not produce a
significant increase in consumer traffic to offset our marketing expenditures,
our losses will be increased or, to the extent that we are generating profits,
our profits will be decreased. Furthermore, our Internet portal will be more
attractive to advertisers if we have a large audience of consumers with
demographic characteristics that advertisers perceive as favorable. Therefore,
we intend to introduce additional and enhanced content, interactive tools and
other services and features in the future in an effort to retain our current
subscribers and users and attract new ones. Our reputation and brand name could
be adversely affected if we are unable to do so successfully.
"Satyam" is a trademark owned by Satyam Computer Services Limited, or
Satyam Computer Services, our parent company. We have a license to use the
"Satyam" trademark for so long as Satyam Computer Services continues to own at
least 51% of our company. If there is a change of control in our company,
however, Satyam Computer Services may terminate our license to use the "Satyam"
trademark upon two years' prior written notice. Termination of our license to
use the "Satyam" trademark would require us to invest significant funds in
building a new brand name and could have a material adverse effect on our
business, results of operations and financial condition.
If our efforts to retain our subscribers through investment in network
infrastructure and customer and technical support are unsuccessful, our
revenues will decrease without a corresponding reduction in costs.
Our sales, marketing and other costs of acquiring new subscribers are
substantial relative to the fees actually derived from these subscribers.
Accordingly, our long-term success depends to a great extent on our ability to
retain our existing subscribers, while continuing to attract new subscribers.
We invest significant resources in our network infrastructure and in our
customer and technical support capabilities to provide high levels of customer
service. We cannot be certain, however, that these investments will maintain or
improve subscriber retention. We believe that intense competition from our
competitors, some of whom may offer free hours of service or other enticements
for new subscribers, has caused, and may continue to cause, some of our
subscribers to switch to our competitors' services. In addition, some new
subscribers use the Internet only as a novelty and do not become consistent
users of Internet services, and therefore are more likely to discontinue their
service. Any decline in our subscriber retention rate could decrease the
revenues generated by our consumer Internet access services division.
13
<PAGE>
Our future operating results could fluctuate in part because our expenses are
relatively fixed in the short-term while future revenues are uncertain, and any
adverse fluctuations could negatively impact the price of our ADSs.
Our revenues, expenses and operating results have varied in the past and
may fluctuate significantly in the future due to a number of factors, many of
which are outside our control. Our business involves significant capital
outlays and, thus, a significant portion of our investment and cost base is
relatively fixed in the short term. Our revenues for the foreseeable future
will depend on the following:
. the number of subscribers to our Internet service provider service
and the level of Internet and other on-line service usage by those
subscribers determines the amount of revenues generated by our
consumer Internet access services division;
. advertising and electronic commerce activity on satyamonline.com
determines the amount of revenues generated by our on-line portal and
content offerings division; and
. the products developed by our strategic partners and the usage
thereof by our customers determines the amount of revenues generated
by our corporate network and technology services division.
Our future revenues are difficult to forecast and, in addition to the
foregoing, will depend on the following:
. new Internet sites, services, products or pricing policies introduced
by our competitors may require us to introduce new offerings or
reduce the prices we charge our customers for Internet access;
. our capital expenditures and other costs relating to the expansion of
our operations could affect the completion of our network or could
require us to generate additional revenue in order to be profitable;
. the timing and nature of any agreements we enter into with strategic
partners will determine the amount of revenues generated by our
corporate network and technology services division;
. the timing and nature of our marketing efforts could affect the
number of our subscribers and the level of electronic commerce
activity on our websites;
. our ability to successfully integrate operations and technologies
from any acquisitions, joint ventures or other business combinations
or investments;
. the introduction of alternative technologies may require us to
reevaluate our business strategy and/or to adapt our products and
services to be compatible with such technologies; and
. technical difficulties or system failures affecting the
telecommunication infrastructure in India, the Internet generally or
the operation of our websites.
We plan to increase our expenditures for our sales and marketing
operations, expand and develop content and enhance our technology and
infrastructure development. Many of our expenses are relatively fixed in the
short-term. We cannot assure you that our revenues will increase in proportion
to the increase in our expenses. We may be unable to adjust spending quickly
enough to offset any unexpected revenues shortfall. This could lead to a
shortfall in revenues in relation to our expenses.
You should not rely on quarter-to-quarter comparisons of our results of
operations as indicators of future performance. It is possible that in some
future periods our operating results may be below the expectations of public
market analysts and investors. In this event, the price of our ADSs may
underperform or fall.
14
<PAGE>
Because we lack full redundancy for our computer systems, a systems failure
could prevent us from operating our business.
We rely on the Internet and, accordingly, depend upon the continuous,
reliable and secure operation of Internet servers, related hardware and
software and network infrastructure such as lines leased from service providers
operated by the government of India. We have a back-up data facility but we do
not have full redundancy for all of our computer and telecommunications
facilities. As a result, failure of key primary or back-up systems to operate
properly could lead to a loss of customers, damage to our reputation and
violations of our Internet service provider license and contracts with
corporate customers. These failures could also lead to a decrease in value of
our ADSs, significant negative publicity and litigation. Recently, several
large Internet companies have suffered highly publicized system failures which
resulted in adverse reactions to their stock prices, significant negative
publicity and, in some instances, litigation.
We have suffered service outages from time to time. We guarantee to our
corporate customers that our network will be operational 99% of the time, and
our Internet service provider license requires that we provide an acceptable
level of service quality and that we remedy customer complaints within a
specified time period. Our computer and communications hardware are protected
through physical and software safeguards. However, they are still vulnerable to
fire, storm, flood, power loss, telecommunications failures, physical or
software break-ins and similar events. We do not carry business interruption
insurance to protect us in the event of a catastrophe even though such an event
could lead to a significant negative impact on our business. Any sustained
disruption in Internet access provided by third parties could also have a
material adverse effect on our business.
Security breaches could damage our reputation or result in liability to us.
Our facilities and infrastructure must remain secure and be perceived by
consumers to be secure, because we retain confidential customer information in
our database. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors or similar disruptive problems. If a person circumvents our
security measures, he or she could jeopardize the security of confidential
information stored on our systems, misappropriate proprietary information or
cause interruptions in our operations. We may be required to make significant
additional investments and efforts to protect against or remedy security
breaches. A material security breach could damage our reputation or result in
liability to us, and we do not carry insurance that protects us from this kind
of loss.
The security services that we offer in connection with our business
customers' networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
could result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could damage our reputation and hinder ability to attract and retain customers
for our service offerings.
If we are unable to manage the rapid growth required by our business strategy,
our results of operations will be adversely affected.
We have experienced and are currently experiencing a period of
significant growth. As of June 30, 1999, we had 411 employees, an increase of
135% from the 175 employees we had as of June 30, 1998. We currently anticipate
hiring an additional 250 employees during the current fiscal year, most of whom
will be hired into our sales, marketing and customer support teams. This growth
has placed, and the future growth we anticipate in our operations will continue
to place, a significant strain on our managerial, operational, financial and
information systems resources. As part of this growth, we will have to
implement new operational and financial systems and procedures and controls,
expand our office facilities, train and manage our employee base, and maintain
close coordination among our technical, accounting, finance, marketing, sales
and editorial staffs. If we are unable to manage our growth effectively, we
will be unable to implement our growth strategy, upon which the success of our
business depends.
15
<PAGE>
We face a competitive labor market in India for skilled personnel and therefore
are highly dependent on our existing key personnel and on our ability to hire
additional skilled employees.
Our success depends upon the continued service of our key personnel,
particularly Mr. R. Ramaraj, our Chief Executive Officer, and each of our vice
presidents. Substantially all of our employees are located in India, and each
of them may voluntarily terminate his or her employment with us. We do not
carry key person life insurance on any of our personnel. Our success also
depends on our ability to attract and retain additional highly qualified
technical, marketing and sales personnel. The labor market for skilled
employees in India is extremely competitive, and the process of hiring
employees with the necessary skills is time-consuming and requires the
diversion of significant resources. While we have not experienced difficulty in
employee retention or integration to date, we may not be able to continue to
retain or integrate existing personnel or identify and hire additional
personnel in the future. The loss of the services of key personnel, especially
the unexpected death or disability of such personnel, or the inability to
attract additional qualified personnel, could disrupt the implementation of our
growth strategy, upon which the success of our business depends. For additional
information regarding our key personnel and other employees, please see
"Management" on page 60 and "Business--Employees" on page 59.
We are highly dependent on our relationships with strategic partners to provide
key products and services to our customers.
We rely on our arrangements with strategic partners to provide key
network and electronic commerce products and services to our business clients.
Our relationships with CompuServe Network Services, Open Market and Sterling
Commerce are exclusive to us within the Indian market with regard to specific
products, so long as we maintain stated minimum sales levels. If we were to
lose exclusivity, we would likely be subject to intense competition for these
products and services. These arrangements can be terminated by our partners in
some circumstances. We also rely on our strategic partners to provide us with
access to their customer base. If our relationships with our strategic partners
do not continue, the ability of our corporate network and technology services
division to generate revenues will be decreased significantly.
We face risks associated with potential acquisitions, investments, strategic
partnerships or other ventures, including whether any such transactions can be
located, completed and the other party integrated with our business on
favorable terms.
We may acquire or make investments in complementary businesses,
technologies, services or products, or enter into strategic partnerships with
parties who can provide access to those assets, if appropriate opportunities
arise. From time to time we have had discussions and negotiations with
companies regarding our acquiring, investing in or partnering with their
businesses, products, services or technologies, and we regularly engage in such
discussions and negotiations in the ordinary course of our business. Some of
those discussions also contemplate the other party making an investment in our
company. We may not identify suitable acquisition, investment or strategic
partnership candidates, or if we do identify suitable candidates, we may not
complete those transactions on commercially acceptable terms or at all. If we
acquire another company, we could have difficulty in assimilating that
company's personnel, operations, technology and software. In addition, the key
personnel of the acquired company may decide not to work for us. If we make
other types of acquisitions, we could have difficulty in integrating the
acquired products, services or technologies into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. Furthermore, we may incur indebtedness or
issue equity securities to pay for any future acquisitions. The issuance of
equity securities would dilute the ownership interests of the holders of our
ADSs. As of the date of this prospectus, we have no agreement to enter into any
material investment or acquisition transaction. The Reserve Bank of India or
government of India must approve under the Foreign Exchange Regulation Act,
1973, any acquisition by our company of any company organized outside of India.
16
<PAGE>
Satyam Computer Services will control our company and may have interests which
conflict with those of our other shareholders or holders of our ADSs.
Satyam Computer Services will beneficially own approximately 59.2% of our
equity shares following this offering, or 57.5% if the overallotment option is
exercised in full. As a result, it will be able to exercise control over many
matters requiring approval by our shareholders, including the election of
directors and approval of significant corporate transactions. Under Indian law,
a simple majority is sufficient to control all shareholder action except for
those items which require approval by a special resolution. If a special
resolution is required, the number of votes cast in favor of the resolution
must be not less than three times the number of votes cast against it. Examples
of actions that require a special resolution include:
. altering our Articles of Association;
. issuing additional shares of capital stock, except for pro rata
issuances to existing shareholders;
. commencing any new line of business; or
. commencing a liquidation.
Circumstances may arise in which the interests of Satyam Computer
Services could conflict with the interests of our other shareholders or holder
of our ADSs. Satyam Computer Services could delay or prevent a change in
control of our company even if a transaction of that sort would be beneficial
to our other shareholders, including the holders of our ADSs. In addition, we
have an agreement with South Asia Regional Fund, an investor in our company,
which assures them a board seat and provides specified additional rights to
them. For additional information regarding our arrangements with Satyam
Computer Services and South Asia Regional Fund, please see "Management--Board
Composition" on page 62 and "Principal Shareholders" on page 65.
The Year 2000 problem may adversely affect our company. We do not anticipate
receiving Year 2000 compliance certification from the Department of
Telecommunications, on which we are dependent for leased lines and
international gateways to the Internet.
Many existing computer systems and hardware and software products use
only two digits to identify a year in the date field and, consequently, cannot
distinguish 21st century dates from 20th century dates. This defect, if
uncorrected, could result in a system failure or miscalculations causing
disruptions of operations, including a temporary inability to process
transactions or engage in other normal business activities. We maintain various
internal computer systems and equipment and we rely directly and indirectly on
systems utilized by our suppliers for telecommunications, utilities and
electronic hardware and software applications. We are in the process of
assessing the Year 2000 readiness of our systems. Satyam Enterprises, an
affiliate of Satyam Computer Services, has completed a Year 2000 assessment of
all of our network hardware and software, including our computers, application
software, generators and uninterruptible power supply systems and relay
switches. We have performed a Year 2000 simulation on our systems to test Year
2000 system readiness which, to date, has indicated no material problems. We
are in the process of contacting selected third-party vendors, licensors and
providers of hardware, software and services, including the government telecom
providers, regarding their Year 2000 readiness. We do not anticipate receiving
Year 2000 compliance certification from the Department of Telecommunications,
on which we are dependent for leased lines and international gateways to the
Internet. Any failure of the Department of Telecommunications to be Year 2000
compliant could cause a substantial disruption to our operations. We are still
engaged in an ongoing Year 2000 assessment and have not yet developed any
contingency plan.
We must make substantial capital expenditures in new network infrastructure
which, if not offset by additional revenue, will adversely affect our operating
results.
We must continue to expand and adapt our network infrastructure as the
number of users and the amount of information they wish to transfer increases
and as the requirements of our customers change. The
17
<PAGE>
expansion of our Internet network infrastructure will require substantial
financial, operational and management resources. The development of private
Internet access and other data networks in India is a new business for private
markets entrants such as our company and we may encounter cost overruns,
technical difficulties or other project delays in connection with any or all of
the new facilities. We can give no assurance that we will be able to expand or
adapt our network infrastructure to meet the additional demand or our
customers' changing requirements on a timely basis, or at a commercially
reasonable cost, or at all. A portion of our capital expenditures for network
development are fixed, and the success of our business depends on our ability
to grow our business to utilize this capacity. In addition, if demand for usage
of our network were to increase faster than projected, our network could
experience capacity constraints, which would adversely affect the performance
of the system.
The laws of India do not protect intellectual property rights to the same
extent as those of the United States, and we may be unsuccessful in protecting
our intellectual property rights.
Our intellectual property rights are important to our business. We rely
on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our
intellectual property.
Our efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of
India do not protect proprietary rights to the same extent as laws in the
United States, and the global nature of the Internet makes it difficult to
control the ultimate destination of our products and services. For example,
Indian statutory law does not protect service marks. The misappropriation or
duplication of our intellectual property could disrupt our ongoing business,
distract our management and employees, reduce our revenues and increase our
expenses. In the future, litigation may be necessary to enforce our
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. Any such litigation could be time-consuming and
costly.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the content and functionality of our
websites or other product or service offerings overlap with competitive
offerings. Defending against these claims, even if not meritorious, could be
expensive and divert our attention from operating our company. If we become
liable to third parties for infringing their intellectual property rights, we
could be required to pay a substantial damage award and forced to develop non-
infringing technology, obtain a license or cease selling the applications that
contain the infringing technology. We may be unable to develop non-infringing
technology or obtain a license on commercially reasonable terms, or at all. For
additional information regarding our intellectual property rights, please see
"Business--Intellectual Property" on page 56.
Our platform infrastructure and its scalability are not proven, and our current
systems may not accommodate increased use while maintaining acceptable overall
performance.
Currently, only a relatively limited number of consumers use our Internet
service provider services and Internet portal. We must continue to expand and
adapt our network infrastructure to accommodate additional users, increasing
transaction volumes and changing customer requirements. We may not be able to
project accurately the rate or timing of increases, if any, in the use of our
websites or expand and upgrade our systems and infrastructure to accommodate
such increases. Our systems may not accommodate increased use while maintaining
acceptable overall performance. Service lapses could cause our users to use the
on-line services of our competitors.
We do not plan to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends to the holders of our ADSs in
the foreseeable future. Accordingly, investors must rely on sales of their ADSs
after price appreciation, which may never occur, as the only way to realize on
their investment. Investors seeking cash dividends should not purchase our
ADSs.
18
<PAGE>
Risks Related to the Internet
We may be liable to third parties for information retrieved from the Internet.
Because users of our Internet service provider service and visitors to
our websites may distribute our content to others, third parties may sue us for
defamation, negligence, copyright or trademark infringement, personal injury or
other matters. We could also become liable if confidential information is
disclosed inappropriately. These types of claims have been brought, sometimes
successfully, against on-line services in the United States and Europe. Others
could also sue us for the content and services that are accessible from our
websites through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards. We do not carry
insurance to protect us against these types of claims, and there is no
precedent on Internet service provider liability under Indian law. Further, our
business is based on establishing the satyamonline.com network as a trustworthy
and dependable provider of information and services. Allegations of
impropriety, even if unfounded, could damage our reputation, disrupt our
ongoing business, distract our management and employees, reduce our revenues
and increase our expenses.
The success of our strategy depends on our ability to keep pace with
technological changes.
Our future success depends, in part, upon our ability to use leading
technologies effectively, to continue to develop our technical expertise, to
enhance our existing services and to develop new services that meet changing
customer requirements. The market for our service is characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new service introductions. We may not successfully identify new
opportunities and develop and bring new services to market in a timely manner.
Our business may not be compatible with delivery methods of Internet access
services developed in the future.
We face the risk that fundamental changes may occur in the delivery of
Internet access services. Currently Internet services are accessed primarily by
computers and are delivered by modems using telephone lines. If the Internet
becomes accessible by screen-based telephones, television or other consumer
electronic devices or becomes deliverable through other means such as coaxial
cable or wireless transmission, we will have to develop new technology or
modify our existing technology to accommodate these developments. Our pursuit
of these technological advances, whether directly through internal development
or by third party license, may require substantial time and expense. We may be
unable to adapt our Internet service business to alternate delivery means and
new technologies may not be available to us at all.
Our product and service offerings may not be compatible with industry standards
developed in the future.
Our ability to compete successfully depends upon the continued
compatibility and interoperability of our services with products and
architectures offered by various vendors. Although we intend to support
emerging standards in the market for Internet access, industry standards may
not be established and, if they become established, we may not be able to
conform to these new standards in a timely fashion or maintain a competitive
position in the market. The announcement or introduction of new products or
services by us or our competitors and any change in industry standards could
cause customers to deter or cancel purchases of existing products or services.
Risk Related to the ADSs and Our Trading Market
Our management will have broad discretion in using the proceeds from this
offering and therefore investors will be relying on the judgment of our
management to invest those funds effectively.
Our management will have broad discretion with respect to the expenditure
of the net proceeds from this offering. We intend to use the net proceeds to
fund network infrastructure expansion and enhancements, to develop content for
our Internet portal business, to advertise and promote our brand, to repay debt
and for other general corporate purposes. We may also use a portion of the
proceeds for possible strategic investments, partnerships and acquisitions. We
have not yet finalized the amount of net proceeds to be used specifically for
each of these purposes, although we are not permitted to use the proceeds to
purchase real estate or to purchase
19
<PAGE>
securities on stock exchanges as specified by the Ministry of Finance.
Investors will be relying on the judgment of our management regarding the
application of these proceeds. For additional information regarding the
expenditure of the net proceeds from this offering, please see "Use of
Proceeds" on page 25 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Expenditures" on
page 38.
Holders of ADSs may be restricted in their ability to exercise preemptive
rights under Indian law and thereby may suffer future dilution of their
ownership position.
Under the Companies Act, 1956 of India, or Companies Act, a company
incorporated in India must offer its holders of equity shares preemptive rights
to subscribe and pay for a proportionate number of shares to maintain their
existing ownership percentages prior to the issuance of any new equity shares,
unless the preemptive rights have been waived by adopting a special resolution
by holders of three-fourths of the company's shares which are voted on the
resolution. U.S. holders of ADSs may be unable to exercise preemptive rights
for equity shares underlying ADSs unless approval of the Ministry of Finance of
the government of India is obtained and a registration statement under the
Securities Act of 1933, as amended, is effective with respect to the rights or
an exemption from the registration requirements of the Securities Act is
available. Our decision to file a registration statement will depend on the
costs and potential liabilities associated with any given registration
statement as well as the perceived benefits of enabling the holders of our ADSs
to exercise their preemptive rights and any other factors that we deem
appropriate to consider at the time the decision must be made. We may elect not
to file a registration statement related to preemptive rights otherwise
available by law to our shareholders. In the case of future issuances, the new
securities may be issued to our depositary, which may sell the securities for
the benefit of the holders of the ADSs. The value, if any, our depositary would
receive upon the sale of such securities cannot be predicted. To the extent
that holders of ADSs are unable to exercise preemptive rights granted in
respect of the equity shares represented by their ADSs, their proportional
interests in our company would be reduced. For additional information regarding
the ability of holders of ADSs to exercise preemptive rights, please see
"Description of American Depositary Shares" on page 72.
Holders of ADSs may be restricted in their ability to exercise voting rights.
As a holder of ADSs, you generally will have the right under the deposit
agreement to instruct the depositary bank to exercise the voting rights for the
equity shares represented by your ADSs. For additional information regarding
the voting rights of holders of equity shares, please see "Description of
Equity Shares--Voting Rights" on page 69.
At our request, the depositary bank will mail to you any notice of
shareholders' meeting received from us together with information explaining how
to instruct the depositary bank to exercise the voting rights of the securities
represented by ADSs. If the depositary bank timely receives voting instructions
from a holder of ADSs, it will endeavor to vote the securities represented by
the holder's ADSs in accordance with such voting instructions. However, the
ability of the depositary bank to carry out voting instructions may be limited
by practical and legal limitations and the terms of the securities on deposit.
We cannot assure you that you will receive voting materials in time to enable
you to return voting instructions to the depositary bank in a timely manner.
Securities for which no voting instructions have been received will not be
voted.
There has been no prior public market for our ADSs or equity shares and the
initial public offering price may not be indicative of future trading prices.
Prior to this offering, there has not been a public market for our ADSs
or equity shares. The initial public offering price for the ADSs will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. Investors may not be able to resell their shares at or above
the initial public offering price.
20
<PAGE>
After the IPO, the market price of our ADSs may be highly volatile, as has been
the case recently with many other newly-public Internet companies.
The financial markets in the United States and other countries have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly Internet-related companies, have been and
continue to be extremely volatile. Volatility in the price of our ADSs may be
caused by factors outside of our control and may be unrelated or
disproportionate to our operating results. In the past, following periods of
volatility in the market price of a public company's securities, securities
class action litigation has often been instituted against that company. Such
litigation could result in substantial costs and a diversion of our
management's attention and resources. For additional information regarding our
arrangements with the underwriters, please see "Underwriting" on page 92.
This offering may not result in an active or liquid market for the ADSs,
particularly in light of Indian legal restrictions on equity share conversion
and foreign ownership of an Internet service provider.
We cannot predict the extent to which this offering will result in the
development of an active, liquid public trading market for our ADSs offered by
this prospectus. Active, liquid trading markets generally result in lower price
volatility and more efficient execution of buy and sell orders for investors.
Liquidity of a securities market is often a function of the volume of the
underlying shares that are publicly held by unrelated parties. Although ADS
holders are entitled to withdraw the equity shares underlying the ADSs from the
depositary at any time, there is no public market for our equity shares in
India or the United States. Under current Indian law, equity shares may not be
re-deposited into our depositary without prior approval of the government of
India. Therefore, the number of outstanding ADSs will decrease to the extent
that equity shares are withdrawn from our depositary, which may adversely
affect the market price and the liquidity of the market for the ADSs.
Furthermore, foreign ownership in our company, which will include all ADSs, is
limited to 49% under present Indian law. This limitation means that, unless
Indian law changes, 51% of our equity shares will never be available to trade
in the United States market being initiated by this offering.
New investors will experience immediate and substantial dilution.
The purchase price of the ADSs offered by this prospectus will be
substantially higher than the tangible book value of our outstanding equity
shares. Any ADSs an investor purchases in this offering will have a post-
closing net tangible book value per share of $14.08 per share less than the
initial public offering price paid, assuming an initial public offering price
of $18.00 per share. Investors who purchase ADSs in this offering will
therefore experience immediate and significant dilution in the tangible net
book value of their investment. For additional information regarding dilution
to investors in our ADSs, please see "Dilution" on page 29.
The future sales of securities by our company or existing shareholders may hurt
the price of our ADSs.
The market price of our ADSs could decline as a result of sales of a
large number of equity shares or ADSs after this offering or the perception
that such sales could occur. Such sales also might make it more difficult for
us to sell equity securities in the future at a time and at a price that we
deem appropriate. After this offering, we will have an aggregate of 21,156,000
equity shares outstanding, including 750,000 equity shares to be issued to two
existing shareholders in connection with the exercise of warrants held by them.
Of the outstanding equity shares, the 4,175,000 ADSs, representing 4,175,000
equity shares, sold in this offering will be freely tradable, other than ADSs
purchased by our affiliates. The remaining equity shares may be sold in the
United States only pursuant to a registration statement under the Securities
Act or an exemption from the registration requirements of the Securities Act,
including Regulation S. Each of our directors, executive officers and current
shareholders, together with the holders of warrants to purchase 750,000 equity
shares, has agreed that he, she or it will not offer, sell or agree to sell,
directly or indirectly, or otherwise dispose of any equity shares without the
prior written consent of the representatives of the U.S. underwriters for a
period of 180 days from the date of this prospectus. For additional information
regarding possible future sales of our securities, please see "Underwriting" on
page 92 and "Shares Eligible for Future Sale" on page 91.
21
<PAGE>
Forward-looking statements contained in this prospectus may not be realized.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risks faced
by us described above and elsewhere in this prospectus. We do not intend to
update any of the forward-looking statements after the date of this prospectus
to conform such statements to actual results.
CONVENTIONS WHICH APPLY TO THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus reflects
the following:
. no exercise by the underwriters of their overallotment option to
purchase up to 626,250 additional ADSs representing 626,250 equity
shares; and
. no exercise of outstanding employee stock options.
CURRENCY OF PRESENTATION
In this prospectus, all references to "Indian rupees," "rupees" and "Rs."
are to the legal currency of India and all references to "U.S. dollars,"
"dollars" and "$" are to the legal currency of the United States. For the
convenience of the reader, this prospectus contains translations of some Indian
rupee amounts into U.S. dollars which should not be construed as a
representation that those Indian rupee or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Indian rupees, as the case may be,
at any particular rate, the rate stated below, or at all. Except as otherwise
stated in this prospectus, all translations from Indian rupees to U.S. dollars
contained in this prospectus have been based on the noon buying rate in the
City of New York on June 30, 1999 for cable transfers in Indian rupees as
certified for customs purposes by the Federal Reserve Bank of New York. The
noon buying rate on June 30, 1999 was Rs.43.45 per $1.00.
Our financial statements are prepared in Indian rupees and presented in
accordance with U.S. GAAP for the fiscal years ended March 31, 1997, 1998 and
1999 and the fiscal quarter ended June 30, 1999. Solely for your convenience,
our financial statements as of and for the year ended March 31, 1999 and the
quarter ended June 30, 1999 have been translated into U.S. dollars. In this
prospectus, any discrepancies in any table between totals and the sums of the
amounts listed are due to rounding.
For historical information regarding rates of exchange between Indian
rupees and U.S. dollars, please see "Exchange Rates" on page 28.
22
<PAGE>
ENFORCEMENT OF CIVIL LIABILITIES
Our company is a limited liability company under the laws of the Republic
of India. All of our directors and executive officers, and several of the
experts named in this prospectus, reside outside the United States, and
virtually all of our assets and the assets of those persons are located outside
the United States. As a result, it may be difficult for investors to effect
service of process upon those persons within the United States or to enforce
against us or those persons in U.S. courts judgments obtained in U.S. courts,
including judgments predicated on the civil liability provisions of the federal
securities laws of the United States.
India is not a party to any international treaty relating to the
recognition or enforcement of foreign judgments. We have been advised by M.G.
Ramachandran, our Indian legal counsel, that in India the statutory basis for
recognition of foreign judgments is found in Section 13 of the Indian Code of
Civil Procedure, 1908, or Indian Civil Code, which provides that a foreign
judgment shall be conclusive as to any matter directly adjudicated upon except:
. where the judgment has not been pronounced by a court of competent
jurisdiction;
. where the judgment has not been given on the merits of the case;
. where the judgment appears on the face of the proceedings to be
founded on an incorrect view of international law or a refusal to
recognize the law of India in cases where such law is applicable;
. where the proceedings in which the judgment was obtained were opposed
to natural justice;
. where the judgment has been obtained by fraud; or
. where the judgment sustains a claim founded on a breach of any law in
force in India.
Section 44A of the Indian Civil Code provides that where a foreign
judgment has been rendered by a court in any country or territory outside India
which the government of India has by notification declared to be a
reciprocating territory, it may be enforced in India by proceedings in
execution as if the judgment had been rendered by the relevant court in India.
The United States has not been declared by the government of India to be a
reciprocating territory for purposes of Section 44A. Accordingly, a judgment of
a court in the United States may be enforced in India only by a suit upon the
judgment, not by proceedings in execution. The suit must be brought in India
within three years from the date of the judgment in the same manner as any
other suit filed to enforce a civil liability in India. It is unlikely that a
court in India would award damages on the same basis as a foreign court if an
action is brought in India. Furthermore, it is unlikely that an Indian court
would enforce foreign judgments if it viewed the amount of damages awarded as
excessive or inconsistent with Indian practice. A party seeking to enforce a
foreign judgment in India is required to obtain approval from the Reserve Bank
of India under the Foreign Exchange Regulation Act, 1973 to execute the
judgment or to repatriate any amount recovered. We have also been advised by M.
G. Ramachandran that a party may file suit in India against us, our directors
or our executive officers as an original action predicated upon the provisions
of the federal securities laws of the United States. To our knowledge, no such
suit has ever been brought in Indian courts. As a result, it may be difficult
for investors to enforce a judgment obtained in a court in the United States,
or to bring an original action in an Indian court, based on the civil liability
provisions of the federal securities laws of the United States against us or
our directors, executive officers or experts who reside outside the United
States.
23
<PAGE>
REPORTS TO OUR SECURITY HOLDERS
Upon consummation of this offering, we will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended, applicable to
foreign private issuers. As a result, we will be required to file reports,
including annual reports on Form 20-F, reports on Form 6-K and other
information with the Securities and Exchange Commission. We have further agreed
in the underwriting agreement relating to this offering to submit to the SEC
quarterly reports on Form 6-K which will include unaudited quarterly financial
information, for the first three quarters of each fiscal year, in addition to
our annual report on Form 20-F which will include audited annual financial
information. We have agreed to file these reports within the same time periods
that apply to the filing by domestic issuers of quarterly reports on Form 10-Q
and annual reports on Form 10-K. The SEC's rules generally require that
domestic issuers file a quarterly report on Form 10-Q within 45 days after the
end of the first three fiscal quarters and file an annual report on Form 10-K
within 90 days after the end of each fiscal year. These reports and other
information filed or to be filed by us can be inspected and copied at the
public reference facilities maintained by the SEC at:
. Judiciary Plaza
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549;
. Seven World Trade Center
13th Floor
New York, New York 10048; and
. Northwestern Atrium Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511.
Copies of these materials can also be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549, at
prescribed rates.
The SEC maintains a website at www.sec.gov that contains reports, proxy
and information statements, and other information regarding registrants that
make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are not required to use the EDGAR system, but currently
intend to do so in order to make our reports available over the Internet.
Upon approval of the ADSs for quotation on the Nasdaq National Market,
our periodic reports and other information may also be inspected at the offices
of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
As a foreign private issuer, we will be exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and
our executive officers, directors and principal shareholders will be exempt
from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act.
We will furnish the depositary referred to under "Description of American
Depositary Shares" with annual reports, which will include annual audited
consolidated financial statements prepared in accordance with U.S. GAAP, and
quarterly reports, which will include unaudited quarterly consolidated
financial information prepared in accordance with U.S. GAAP. The depositary has
agreed with us that, at our request, it will promptly mail these reports to all
registered holders of ADSs. We will also furnish to the depositary all notices
of shareholders' meetings and other reports and communications that are made
generally available to our shareholders. The depositary will arrange for the
mailing of these documents to record holders of ADSs. For further details on
the responsibilities of the depositary and the information to be made available
to persons who purchase our ADSs in this offering, please see "Description of
American Depositary Shares" and "Additional Information."
24
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering, after deducting underwriting
discounts and the estimated offering expenses payable by us, are estimated to
be approximately $68.9 million, or $79.4 million if the underwriters'
overallotment option is exercised in full, assuming an initial public offering
price of $18.00 per ADS. We currently estimate that we will use the proceeds
from this offering as follows:
. approximately $25 million to fund network infrastructure expansion
and enhancements;
. approximately $10 million to develop content for our Internet portal
business;
. approximately $5 million to advertise and promote our brand; and
. the balance of the proceeds from this offering for general corporate
purposes, including possible strategic investments, partnerships and
acquisitions.
While we have from time to time preliminarily discussed potential investments,
strategic partnerships and acquisitions in the ordinary course of our business,
we have no current agreements or understandings relating to any such
transaction.
We have not yet finalized the amount of net proceeds to be used
specifically for the purposes specified above. Accordingly, management will
have significant flexibility in applying the net proceeds of this offering.
Management will not, however, be able to use the proceeds to purchase real
estate or to purchase securities on stock exchanges as specified by the
Ministry of Finance. We will be required to submit to the Reserve Bank of India
and the Ministry of Finance quarterly statements with regard to the periodic
repatriation of the net proceeds of this offering. Pending any use, as
described above, we intend to invest the net proceeds in dollar or rupee
denominated high quality, interest-bearing instruments, provided that the
government of India may require us to repatriate the proceeds of this offering,
which means converting the proceeds into rupees and holding them in India.
25
<PAGE>
DIVIDEND POLICY
We have not declared or paid any cash dividends on our equity shares
since inception and do not expect to pay any cash dividends for the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business. Investors seeking cash dividends should not purchase
our ADSs.
Under Indian law, a corporation may pay dividends upon a recommendation
by its Board of Directors and approval by a majority of its shareholders. Any
future cash dividends on our equity shares represented by ADSs will be paid to
the depositary in rupees and will generally be converted into dollars by the
depositary and distributed to holders of ADSs, net of the depositary's fees and
expenses. For additional information regarding the payment of dividends, please
see "Description of American Depositary Shares--Dividends and Distributions" on
page 72.
26
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1999, the capitalization
of our company on an actual, pro forma and pro forma as adjusted basis. The pro
forma data set forth below are adjusted to give effect to the following:
. the sale by our company to Sterling Commerce in September 1999 of
481,000 equity shares in a private placement and the application of
the $5.0 million of proceeds from this sale primarily towards the
repayment of debt; and
. the exercise of warrants to purchase an aggregate of 750,000 of our
equity shares and the application of the $8.9 million aggregate
exercise price primarily towards the repayment of debt.
The pro forma as adjusted data set forth below are also adjusted to give effect
to the sale by our company of the 4,175,000 ADSs, representing 4,175,000 equity
shares, offered hereby and the application of the proceeds from the offering at
an assumed initial public offering price of $18.00 per ADS and after deducting
underwriting discounts and the estimated offering expenses payable by us.
This information should be read in conjunction with our financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------------------------------------------------------------------
Pro Forma As Pro Forma
Actual Actual Pro Forma Pro Forma Adjusted As Adjusted
Indian rupees U.S. dollars Indian Rupees U.S. Dollars Indian rupees U.S. dollars
------------- ------------ ------------- ------------ ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ Rs. 10,375 $ 239 Rs.356,268 $ 8,199 Rs.3,349,517 $77,089
========== ======= ========== ======= ============ =======
Short-term debt:
Current installments
of long-term debt..... Rs.167,500 $ 3,855 -- -- -- --
Current installments
of capital lease
obligations........... 915 21 Rs. 915 $ 21 Rs. 915 $ 21
---------- ------- ---------- ------- ------------ -------
Total short-term
debt................ 168,415 3,876 915 21 915 21
Long-term debt:
Long-term debt,
excluding current
installments.......... 91,000 2,095 -- -- -- --
Capital lease
obligations,
excluding current
installments.......... 405 9 405 9 405 9
---------- ------- ---------- ------- ------------ -------
Total long-term
debt................ 91,405 2,104 405 9 405 9
Stockholders' equity:
Equity shares, Rs.10
par value; 25,000,000
shares authorized;
15,750,000 shares
issued and
outstanding actual;
16,981,000 shares
issued and
outstanding pro
forma; 21,156,000
shares issued and
outstanding pro forma
as adjusted........... 157,500 3,625 169,810 3,908 211,560 4,869
Additional paid-in
capital................ 226,636 5,216 818,719 18,843 3,770,218 86,772
Deferred Compensation--
Employee Stock Offer
Plan................... (1,375) (32) (1,375) (32) (1,375) (32)
Accumulated deficit..... (366,686) (8,439) (366,686) (8,439) (366,686) (8,439)
---------- ------- ---------- ------- ------------ -------
Total stockholders'
equity................ 16,075 370 620,468 14,280 3,613,717 83,170
---------- ------- ---------- ------- ------------ -------
Total
capitalization...... Rs.107,480 $ 2,474 Rs.620,873 $14,289 Rs.3,614,122 $83,179
========== ======= ========== ======= ============ =======
</TABLE>
27
<PAGE>
EXCHANGE RATES
The following table sets forth, for the fiscal years indicated,
information concerning the number of Indian rupees for which one U.S. dollar
could be exchanged based on the average of the noon buying rate in the City of
New York on the last day of each month during the period for cable transfers in
Indian rupees as certified for customs purposes by the Federal Reserve Bank of
New York:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Period End Average High Low
- --------------------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C>
1996 (from December 12, 1995)............ Rs.34.35 Rs.35.21 Rs.38.05 Rs.34.10
1997..................................... 35.88 35.70 36.85 34.15
1998..................................... 39.53 37.37 40.40 35.71
1999..................................... 42.50 42.27 43.60 39.41
2000 (through September 30, 1999)........ 43.59 43.20 43.59 42.50
</TABLE>
28
<PAGE>
DILUTION
The pro forma net tangible book value of our company as of June 30, 1999
was approximately Rs.612.1 million ($14.1 million), or Rs.36.05 ($0.83) per
share. Pro forma net tangible book value per ADS is equal to the amount of our
total tangible assets (total assets less intangible assets) less total
liabilities, divided by the pro forma number of equity shares outstanding as of
June 30, 1999, after giving effect to the following:
.the sale by our company to Sterling Commerce in September 1999 of
481,000 equity shares in a private placement and the application of
the $5.0 million of proceeds from this sale primarily towards the
repayment of debt; and
.the exercise of warrants to purchase an aggregate of 750,000 of our
equity shares and the application of the $8.9 million aggregate
exercise price primarily towards the repayment of debt.
Assuming the sale by us of ADSs offered by this prospectus at an initial public
offering price of $18.00 per ADS and after deducting underwriting discounts and
the estimated offering expenses payable by us, the pro forma as adjusted net
tangible book value of our company as of June 30, 1999 would have been
Rs.3,605.4 million ($83.0 million), or Rs.170.42 ($3.92) per ADS. This
represents an immediate increase in pro forma as adjusted net tangible book
value of Rs.134.37 ($3.09) per equity share to existing shareholders and an
immediate dilution in pro forma as adjusted net tangible book value of
Rs.611.68 ($14.08) per ADS to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per ADS............... $18.00
------
Pro forma net tangible book value per ADS as of June 30,
1999....................................................... $0.83
Increase in net tangible book value attributable to new
investors.................................................. 3.09
-----
Pro forma as adjusted net tangible book value per ADS after
this offering.............................................. 3.92
------
Dilution per ADS to new investors........................... $14.08
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
June 30, 1999, the difference between existing shareholders and new investors
with respect to the number of equity shares or ADSs, as applicable, purchased,
the total consideration paid and the average price per equity share or ADS, as
applicable, paid.
<TABLE>
<CAPTION>
Total
ADSs Purchased Consideration Average
-------------- --------------- Price
Number Percent Amount Percent Per ADS
------ ------- ------- ------- -------
(In thousands, except per ADS data)
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 16,981 80.3% $22,719 23.2% $ 1.34
New investors...................... 4,175 19.7 75,150 76.8 $18.00
------ ---- ------- ----
Total............................ 21,156 100% $97,869 100%
====== ==== ======= ====
</TABLE>
The foregoing tables and calculations assume no exercise by the
underwriters of their overallotment option and no exercise of outstanding
employee stock options. To the extent that the overallotment option or
outstanding options are exercised, there will be further dilution to new
investors. For additional information regarding our outstanding options and
warrants, please see "Management--Employee Benefit Plans" on page 64 and
"Description of Equity Shares" on page 67. Prior to this offering, we had
issued only equity shares that have not been represented by ADSs. Equity shares
purchased and the average price paid per equity share have been converted into
ADS equivalents for comparison purposes.
29
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data for the fiscal years ended
March 31, 1997, 1998 and 1999, and the balance sheet data as of March 31, 1998
and 1999, are derived from our audited financial statements included elsewhere
in this prospectus which have been audited by KPMG, India, independent
accountants. The statement of operations data for the three months ended June
30, 1999 and the balance sheet data as of June 30, 1999 are derived from our
unaudited financial statements. Our unaudited financial statements have been
prepared on substantially the same basis as our audited financial statements
and, in the opinion of our management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for such periods. Our financial statements are prepared
in Indian rupees and presented in accordance with U.S. GAAP for the fiscal
years ended March 31, 1997, 1998 and 1999 and the fiscal quarter ended June 30,
1999. Financial statements for the year ended March 31, 1999 and the quarter
ended June 30, 1999 also have been translated into U.S. dollars. The pro forma
as adjusted data set forth below are adjusted to give effect to the following:
. the sale by our company to Sterling Commerce of 481,000 equity shares
in a private placement pursuant to an agreement reached in July 1999
which closed in September 1999 and the application of the $5.0
million of proceeds from this sale primarily towards the repayment of
debt;
. the sale by our company of 4,175,000 ADSs, representing 4,175,000
equity shares, offered hereby and the application of the proceeds
from the offering at an assumed initial public offering price of
$18.00 per ADS and after deducting underwriting discounts and the
estimated offering expenses payable by us; and
. the exercise of warrants to purchase an aggregate of 750,000 of our
equity shares and the application of the $8.9 million aggregate
exercise price primarily towards the repayment of debt.
For additional information regarding the pro forma as adjusted data, please see
"Capitalization" on page 27. Historical results are not indicative of the
results to be expected in the future.
The selected financial data for the period from December 12, 1995
(Inception) through March 31, 1996 are not presented because we had just begun
operations. Our revenues and total operating expenses for the period from
December 12, 1995 (Inception) through March 31, 1996 were approximately Rs.0
and Rs.634,000, respectively. As of March 31, 1996, our total assets were
approximately Rs.98,000.
The selected consolidated historical financial and other data includes a
presentation of EBITDA. EBITDA represents earnings (loss) before depreciation
and amortization, interest income and expense, income tax expense (benefit) and
extraordinary items. EBITDA is presented because we believe some investors find
it to be a useful tool for measuring a company's ability to fund capital
expenditures or to service future debts. EBITDA is not determined in accordance
with generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of operating
performance or as an alternative to cash flow as a measure of liquidity.
Because EBITDA excludes interest expense and capital expenditures, negative
EBITDA would limit our ability to fund capital expenditures and service future
debt obligations. Our EBITDA is not comparable to that of other companies which
may determine EBITDA differently.
30
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Fiscal Quarter Ended June 30,
------------------------------------------------------ -------------------------------------
1997 1998 1999 1999 1998 1999 1999
-------------- ----------- ----------- ------------ ---------- ----------- ------------
Indian rupees U.S. dollars Indian rupees U.S. dollars
---------------------------------------- ------------ ----------------------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues............... Rs. -- Rs. 6,805 Rs. 103,344 $ 2,378 Rs. 17,558 Rs. 80,803 $ 1,860
Cost of revenues....... -- 19,498 63,651 1,465 7,074 38,897 895
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Gross profit (loss).... -- (12,693) 39,693 913 10,484 41,906 965
Operating expenses:
Selling, general and
administrative
expenses.............. 25,801 61,017 151,189 3,479 21,821 63,037 1,451
Depreciation and
amortization.......... 536 19,383 49,093 1,130 8,786 21,301 490
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Total operating
expenses............ 26,337 80,400 200,282 4,609 30,607 84,338 1,941
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Operating loss......... (26,337) (93,093) (160,589) (3,696) (20,123) (42,432) (976)
Interest expense....... -- (11,306) (27,755) (639) (4,706) (10,410) (240)
Other income........... -- 3,809 968 23 -- 1,093 25
-------------- ----------- ----------- ---------- ---------- ----------- ----------
Net loss............... Rs. (26,337) Rs.(100,590) Rs.(187,376) $ (4,312) Rs.(24,829) Rs. (51,749) $ (1,191)
============== =========== =========== ========== ========== =========== ==========
Loss per equity share.. Rs.(114,508.27) Rs. (121.66) Rs. (17.31) $ (0.40) Rs. (3.28) Rs. (3.29) $ (0.08)
Weighted equity shares
used in computing loss
per equity share...... 230 826,805 10,824,826 10,824,826 7,566,164 15,750,000 15,750,000
Other Financial Data:
EBITDA................. Rs. (25,801) Rs. (73,709) Rs.(111,496) $ (2,566) Rs.(11,337) Rs. (21,131) $ (486)
Capital expenditures... 3,230 77,070 146,135 3,363 15,057 109,578 2,522
Net cash provided by
(used in):
Operating activities... (30,426) (73,950) (171,388) (3,944) (20,590) (37,258) (857)
Investing activities... (3,230) (77,070) (146,000) (3,360) (15,057) (109,578) (2,522)
Financing activities... 35,138 159,449 433,023 9,966 30,504 31,664 (729)
</TABLE>
<TABLE>
<CAPTION>
As of March 31, As of June 30, 1999
-------------------------------------------- ---------------------------------------------------
Pro Forma
1997 1998 1999 Pro Forma As Adjusted
-------- -------- ---------- 1999 Actual Actual U.S. As Adjusted U.S.
Indian rupees U.S. dollars Indian rupees dollars Indian rupees dollars
------------------------------ ------------ ------------- ----------- ------------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... Rs.1,482 Rs.9,912 Rs.125,547 $ 2,889 Rs.10,375 $ 239 Rs.3,349,517 $77,089
Working capital
(deficit)............. (33,628) (5,355) (21,706) (500) (198,325) (4,564) 3,140,817 72,286
Total assets........... 11,970 107,632 454,888 10,469 464,473 10,690 3,803,615 87,540
Long-term debt,
including current
installments.......... -- 134,455 259,256 5,967 259,820 5,980 1,320 30
Total stockholders'
equity................ (26,969) (52,559) 67,618 1,556 16,075 370 3,613,717 83,170
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Satyam Infoway should be read in conjunction with the financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. For additional information regarding these risks and
uncertainties, please see "Risk Factors" on page 7.
Overview
We were incorporated in December 1995 as an independent business unit of
Satyam Computer Services to develop and offer connectivity-based corporate
services allowing businesses in India to exchange information, communicate and
transact business electronically. Satyam Computer Services, our parent company,
is a leading Indian information technology services company traded on the
principal Indian stock exchanges.
From December 1995 through 1997, we focused on the development and
testing of our private data network. In 1997, we began forming strategic
partnerships with a number of leading technology and electronic commerce
companies, including CompuServe Network Services, Open Market and Sterling
Commerce, in order to broaden our product and service offerings to our
corporate customers. In March 1998, we obtained network certification for
conformity with Indian and international network operating standards from the
Technical Evaluation Committee of India. In April 1998, we began offering
private network services to businesses in India. Our initial products and
services included electronic data interchange, e-mail and other messaging
services, virtual private networks, and related customer support.
In October 1998, we agreed to sell 3,000,000 equity shares to South Asia
Regional Fund, an investment fund managed by Commonwealth Development
Corporation for Rs.210.0 million ($4.8 million). We used the funds from this
private financing primarily to develop our consumer Internet access business,
expand our network and develop our on-line content business.
In October 1998, we initiated our on-line content offerings with two
websites: carnaticmusic.com and indiaupdate.com. We also started development of
satyamonline.com, our on-line portal, and other related content sites for
personal finance, movies and automobiles with the goal of offering a
comprehensive suite of websites offering content specifically tailored to
Indian interests worldwide.
On November 6, 1998, the Indian government opened the Internet service
provider marketplace to private competition. Capitalizing on our existing
private data network, we launched our Internet service provider business,
Satyam Online, on November 22, 1998 and became the first private national
Internet service provider in India. We began offering Satyam Online Internet
access and related services to India's consumer market as a complement to the
network services offered to our business customers. Our Satyam Online service
was the first in India to offer ready-to-use CD-ROMs enabling on-line
registration and immediate usage.
In July 1999, we agreed to sell 481,000 equity shares to Sterling
Commerce for $5.0 million. We completed this transaction in September 1999 and
used the funds for general corporate purposes, primarily the repayment of debt.
We currently operate India's largest private data network utilizing
Internet protocol with points of presence in 25 of the largest metropolitan
areas in India. As of June 30, 1999, we had more than 300 corporate customers
for our private network services, and as of September 30, 1999, we had more
than 87,000 subscribers for our Satyam Online services. During September 1999,
our six websites generated approximately 12.0 million page views.
We conduct our business in India and most of our revenues and expenses
are denominated in Indian rupees. However, our revenues generated from
CompuServe Network Services and our expenses of purchasing
32
<PAGE>
software from Sterling Commerce and Open Market are denominated in U.S.
dollars. Our foreign exchange loss was Rs.0, Rs.5,613, Rs.615,189 ($14,158) and
Rs.129,344 ($2,977) for fiscal 1997, 1998 and 1999 and the quarter ended June
30, 1999, respectively.
Revenues
For reporting purposes, we classify our revenues into three divisions:
. consumer Internet access services;
. corporate network and technology services; and
. on-line portal and content offerings.
Our consumer Internet access services division derives its revenues
primarily from prepaid dial-up subscriptions. We offer our prepaid
subscriptions in a number of time period and pricing plans through ready-to-use
CD-ROMs sold to our distribution partners. Our distribution partners resell the
CD-ROMs to consumers for on-line registration and immediate Internet access.
Revenues are recognized ratably as the prepaid subscription is used with any
unused portion recognized as revenues at the expiration date of the
subscription. We also generate revenues through international roaming and e-
mail registration fees. Our consumer Internet access services division
accounted for approximately 12.9% of our fiscal 1999 revenues.
Our corporate network and technology services division derives its
revenues from dial-up and dedicated Internet access, electronic commerce,
electronic data interchange, e-mail and other messaging services, virtual
private networks and web-based solutions. Our corporate private network
customers typically enter into one-year arrangements that provide for an
initial installation fee and recurring service fees. Web development is
generally charged on a fixed-price basis. We derive revenues from website
hosting based upon our customer's bandwidth requirements, and we charge co-
location customers for use of our physical facilities. We also generate a small
portion of our revenues through the sale of third-party hardware. Our corporate
network and technology services division accounted for approximately 87.1% of
our fiscal 1999 revenues.
Our on-line portal and content offerings division derives revenues from
third-party advertising and commissions from electronic commerce transactions
on our websites. Advertising fees are recognized over the period in which the
advertisements are hosted on our websites. This division does not currently
constitute a material portion of our total revenues.
Expenses
Cost of revenues for the consumer Internet access services division
consists primarily of recurring telecommunications costs necessary to provide
service to subscribers. Telecommunications costs include the costs of providing
local telephone lines to our points of presence, the costs of using third-party
networks pursuant to service agreements and leased line costs. We anticipate
that our telecommunications costs will increase in the near term as we expand
our network and enter new markets. As utilization of our network increases in
future years, we expect to realize a reduction in per unit data transmission
costs due to our network's scalability and fixed cost structure. Another
recurring cost is the personnel and related operating expenses associated with
customer support and network operations. We expect that customer support and
network operations expenses will decrease as a percentage of revenues as we
more efficiently utilize these capabilities across a larger customer base. Cost
of revenues for consumer Internet access services also includes startup
expenses for new subscribers consisting primarily of the cost of CD-ROMs and
other product media, manuals and associated packaging and delivery costs.
Cost of revenues for the corporate network and technology services
division is divided into three groups: corporate Internet access, corporate
network and electronic commerce products, and web development. Cost of revenues
for the corporate Internet access subdivision consists of telecommunications
costs necessary to provide service, customer support costs and the cost of
providing network operations. Cost of revenues for
33
<PAGE>
corporate network and electronic commerce consists primarily of third-party
software and hardware purchased from our strategic partners for resale, direct
labor costs for initial installation and recurring customer support and network
operation and associated telecommunications costs. Cost of revenues for web
development, website hosting and co-location includes direct labor and
associated telecommunications costs.
The cost of revenues for the on-line portal and content offerings
division includes the labor cost of developing and maintaining our websites,
the cost of third-party software and the cost of obtaining content from third-
party vendors.
Selling, general and administrative expenses consist primarily of
salaries and commissions for sales and marketing personnel; salaries and
related costs for executives, financial and administrative personnel; sales,
marketing, advertising and other brand building costs; travel costs; and
occupancy and overhead costs. As we expand the scope of our operations, we
expect selling, general and administrative expenses to continue to increase for
the foreseeable future. We intend to continue to add more points of presence to
our network and hire new sales and marketing personnel for each of our new
markets. We also have and intend to continue to increase marketing expenses to
build our brand awareness in order to increase our subscriber base. Our
business plan assumes these costs will negatively impact our financial results
in the short term but will be offset by anticipated increases in revenues from
overall subscriber growth.
On September 28, 1999, we granted to employees in India options to
acquire 147,000 equity shares at a weighted average exercise price of Rs.335
per share. We presently estimate that we will record a non-cash compensation
charge related to these grants in the aggregate amount of approximately Rs.18.6
million (approximately $427,000) to be recognized over a three year period in
accordance with vesting provisions. This charge is an initial estimate, and is
subject to revision.
We depreciate our tangible assets on a straight-line basis over the
useful life of assets, ranging from two to five years. We depreciate our
intangible assets on a straight-line basis over five years. Our planned
significant capital expenditures for the expansion and enhancement of our
network infrastructure will substantially increase our depreciation expenses in
the near future.
We may face significant competitive pricing pressure from VSNL, the
government-controlled provider of international telecommunications services in
India, and a number of new competitors that are entering India's recently
opened Internet service provider market. In the face of expected increasing
competition, we do not anticipate being able to maintain our present subscriber
retention rates as our subscriber base grows.
Since our inception, we have experienced negative cash flow from
operations and have incurred net losses. Our ability to generate positive cash
flow from operations and achieve profitability is dependent on our ability to
continue to grow our revenues base and achieve further operating efficiencies.
We presently estimate that our consumer Internet access division requires a
minimum of 100,000 subscribers in order to achieve positive EBITDA based on our
current network of 25 points of presence. As we expand our network to 40 points
of presence, we estimate that this minimum number of subscribers will increase
to 200,000. These estimates are based on the present business environment in
India, including current pricing, marketing and service cost conditions, all of
which are subject to change. For the fiscal years ended March 31, 1997, 1998
and 1999 and the quarter ended June 30, 1999, we incurred negative cash flow
from operations of approximately Rs.30.4 million, Rs.74.0 million, Rs.171.3
million ($3.9 million) and Rs.37.3 million ($0.9 million), respectively. For
the fiscal years ended March 31, 1997, 1998 and 1999 and the quarter ended June
30, 1999, we incurred net losses of approximately Rs.26.3 million, Rs.100.6
million, Rs.187.4 million ($4.3 million) and Rs.51.8 million ($1.2 million),
respectively. We intend to substantially increase our operating expenses and
capital expenditures to expand and enhance our network infrastructure and on-
line content offerings. We expect to experience significant negative cash flow
from operations and to incur net losses as a result of these investments. We
believe that the investment in our network infrastructure will enable us to
achieve further economies of scale as we expand our customer base. Although
consumer Internet access and corporate network and technology services account
for the majority of our revenues today, we expect our on-line portal and
content offerings to generate significant revenue growth through increased
third-party advertising and
34
<PAGE>
transaction and referral fees. However, we may not be able to realize
sufficient future revenues to offset our present investment in network
infrastructure and on-line content offerings or achieve positive cash flow or
profitability in the future. As of June 30, 1999, we had an accumulated deficit
of approximately Rs.366.7 million ($8.4 million).
Three months ended June 30, 1999 compared to three months ended June 30, 1998
Revenues. We recognized Rs.80.8 million ($1.9 million) in revenues for
the quarter ended June 30, 1999, as compared to Rs.17.6 million for the quarter
ended June 30, 1998, representing an increase of Rs.63.2 million, or 359%. This
increase is primarily attributable to the commencement of Internet access
services in November 1998, which accounted for Rs.40.2 million of revenues for
the quarter ended June 30, 1999, a Rs.21.3 million increase in revenues from
corporate network services, resulting from an increase in number of corporate
customers contributing to revenues in the amount of Rs.15.0 million and a
Rs.5.0 million increase in revenues from new service offerings, including web-
based solutions.
Cost of Revenues. Cost of revenues were Rs.38.9 million ($0.9 million) or
48.1% of revenues for the quarter ended June 30, 1999, compared to Rs.7.1
million or 40.3% of revenues for the quarter ended June 30, 1998, representing
an increase of Rs.31.8 million, or 448%. This increase was primarily
attributable to a Rs.6.3 million increase in the cost of hardware and software
purchased for resale for our corporate network and technology services
customers that elect to source the technology through us, a Rs.15.0 million
increase in leased line costs resulting from increasing the capacity of our
network backbone from 64 Kbps to 2 Mbps and a Rs.8.0 million increase in direct
personnel costs for web development and customer technical support.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.63.0 million ($1.5 million) for the quarter
ended June 30, 1999 compared to Rs.21.8 million for the quarter ended June 30,
1998, representing an increase of Rs.41.2 million. This increase was primarily
attributable to a growth in staff from 340 as of March 31, 1999 to 411 as of
June 30, 1999 resulting in a Rs.10.0 million increase in indirect personnel
costs, a Rs.8.6 million increase in selling and marketing expenses resulting
from additional expenditure in connection with marketing our Satyam Online
business, a Rs.4.0 million increase in travelling expenditures and a Rs.3.0
million increase in the cost of software.
Depreciation and amortization. Depreciation and amortization was Rs.21.3
million ($0.5 million) for the quarter ended June 30, 1999, compared to Rs.8.8
million for the quarter ended June 30, 1998, representing an increase of
Rs.12.5 million, or 142%. This increase was primarily attributable to capital
expenditures associated with the installation of six ATM switches along our
network.
Interest expense. Interest expense was Rs.10.4 million ($0.2 million) for
the quarter ended June 30, 1999, compared to Rs.4.7 million for the quarter
ended June 30, 1998, representing an increase of Rs.5.7 million, or 121%. This
increase was primarily attributable to the drawdown of Rs.136.5 million of our
term loan with the Export Import Bank of India.
Other income. Other income was Rs.1.1 million (less than $0.1 million)
for the quarter ended June 30, 1999 which was primarily attributable to
interest earned on short term deposits with banks. We had no other income for
the quarter ended June 30, 1998.
Net loss. Our net loss was Rs.51.7 million ($1.2 million) for the quarter
ended June 30, 1999, compared to a net loss of Rs.24.8 million for the quarter
ended June 30, 1998.
Year ended March 31, 1999 compared to the year ended March 31, 1998
Revenues. We recognized Rs.103.3 million ($2.4 million) in revenues for
the year ended March 31, 1999, as compared to Rs.6.8 million for the year ended
March 31, 1998, representing an increase of Rs.96.5 million. Fiscal 1999
revenues exclude Rs.71.5 million ($1.7 million) of deferred income representing
consumer access subscriptions which had been purchased but not yet used by the
consumer subscribers. This increase was primarily attributable to the
introduction of our business network services in April 1998 and
35
<PAGE>
consumer Internet access services in November 1998. From March 31, 1998 to
March 31, 1999, our number of corporate customers grew from approximately 30 to
more than 300, and our number of subscribers grew to more than 29,000.
Cost of Revenues. Cost of revenues were Rs.63.7 million ($1.5 million) or
62% of revenues for the year ended March 31, 1999, compared to Rs.19.5 million
or 287% of revenues for the year ended March 31, 1998, representing an increase
of Rs.44.2 million, or 227%. This increase was primarily attributable to a
Rs.10.5 million increase in software and hardware purchased for resale, a
Rs.7.9 million increase in leased line charges due to the increased capacity of
our network backbone, Rs.1.8 million towards web development charges and a
Rs.23.9 million increase in direct personnel costs for web development and
customer technical support.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.151.2 million ($3.5 million) for the year ended
March 31, 1999, compared to Rs.61.0 million for the year ended March 31, 1998,
representing an increase of Rs.90.2 million, or 148%. This increase was
primarily attributable to a growth in staff from 140 in March 1998 to 340 in
March 1999 resulting in an increase in employee expenses of Rs.11.5 million, a
Rs.11.5 million increase in marketing expenses relating to the launch of our
consumer Internet access services division, and increases in travel expenses of
Rs.6.9 million, office rental expenses of Rs.1.3 million and professional and
consultant fees of Rs.10.4 million.
Depreciation and amortization. Depreciation and amortization was Rs.49.1
million ($1.1 million) for the year ended March 31, 1999, compared to Rs.19.4
million for the year ended March 31, 1998, an increase of Rs.29.7 million, or
153%. This increase was primarily attributable to capital expenditures of
Rs.146.1 million during the year ended March 31, 1999, including the purchase
of routers, modems, ports, servers and other capital equipment in connection
with the addition of eight points of presence to our network.
Interest expense. Interest expense was Rs.27.8 million ($0.6 million) for
the year ended March 31, 1999, compared to Rs.11.3 million for the year ended
March 31, 1998, representing an increase of Rs.16.5 million, or 146%. This
increase was attributable to increased interest payments from additional
borrowings of Rs.136.5 million during the year under a new term loan.
Other income. Other income was Rs.1.0 million (less than $0.1 million)
for the year ended March 31, 1999, compared to Rs.3.8 million for the year
ended March 31, 1998, representing a decrease of Rs.2.8 million, or 280%. This
decrease was primarily attributable to reduced interest income as excess funds
were deployed in the business.
Net loss. Our net loss was Rs.187.4 million ($4.3 million) for the year
ended March 31, 1999, compared to a net loss of Rs.100.6 million for the year
ended March 31, 1998.
Year ended March 31, 1998 compared to the year ended March 31, 1997
Revenues. We recognized Rs.6.8 million in revenues for the year ended
March 31, 1998 from network service charges related to paid customer trials for
our private network services projects and the sale of hardware and software. We
recognized no revenues for the year ended March 31, 1997.
Cost of Revenues. Cost of revenues was Rs.19.5 million for the year ended
March 31, 1998, consisting primarily of costs of hardware and software
purchased for resale of Rs.3.5 million and leased line costs of Rs.16.0
million. We had no cost of revenues for the year ended March 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were Rs.61.0 million for the year ended March 31, 1998,
compared to Rs.25.8 million for the year ended March 31, 1997, representing an
increase of Rs.35.2 million. This increase was primarily attributable to a
growth in staff from 33 in March 1997 to 140 in March 1998 resulting in an
increase in employee expenses of Rs.14.5 million and increases in travel
expenses of Rs.3.5 million, office rental expenses of Rs.2.6 million, and
general office expenses of Rs.9.1 million related to the development of our
consumer Internet access services division.
36
<PAGE>
Depreciation and amortization. Depreciation and amortization was Rs.19.4
million for the year ended March 31, 1998, compared to Rs.0.5 million for the
year ended March 31, 1997, representing an increase of Rs.18.9 million. This
increase was primarily attributable to capital expenditures of Rs.77.1 million
during the year ended March 31, 1998, including the purchase of routers,
modems, ports, servers and other capital equipment in connection with the
expansion of our network.
Interest expense. Interest expense was Rs.11.3 million for the year ended
March 31, 1998, consisting of interest on privately placed debentures. We had
no interest expense for the year ended March 31, 1997.
Other income. Other income was Rs.3.8 million for the year ended March
31, 1998, consisting of interest income from short-term deposits. We had no
other income for the year ended March 31, 1997.
Net loss. Our net loss was Rs.100.6 million for the year ended March 31,
1998, compared to Rs.26.3 million for the year ended March 31, 1997.
Quarterly Results of Operations Data
The following table sets forth selected unaudited quarterly statements of
operations data for each of the four fiscal quarters ended June 30, 1999 both
in Rupees and as a percentage of revenues. Our management believes this data
has been prepared substantially on the same basis as the audited financial
statement included elsewhere in this prospectus, including all necessary
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. You should read this quarterly data in
conjunction with our financial statements and the related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
September 30, 1998 December 31, 1998 March 31, 1999 June 30, 1999
----------------------------------------- ----------------- ----------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues Rs.17,801 100.0% Rs.22,014 100.0% Rs.45,971 100.0% Rs.80,803 100.0%
Cost of revenues........ 11,962 67.2 18,152 82.5 26,464 57.6 38,897 48.1
---------- ------- ---------- ------- --------- ------ --------- -----
Gross profit (loss)..... 5,839 32.8 3,862 17.5 19,507 42.4 41,906 51.9
Operating expenses:
Selling, general and
administrative
expenses............. 33,165 186.3 38,767 176.1 57,365 124.7 62,831 77.6
Depreciation and
amortization 10,942 61.5 13,707 62.3 15,728 34.2 21,507 26.6
---------- ------- ---------- ------- --------- ------ --------- -----
Total operating
expenses............ 44,107 247.8 52,474 238.4 73,093 158.9 84,338 104.2
Operating loss.......... (38,268) (215.0) (48,612) (220.9) (53,586) (116.5) (42,432) (52.3)
Interest expense........ (5,912) (33.2) (7,877) (35.8) (9,261) (20.1) (10,410) (12.9)
Other income............ -- -- 340 1.5 628 1.4 1,093 1.4
---------- ------- ---------- ------- --------- ------ --------- -----
Net loss................ Rs.44,180 248.2% Rs.56,149 255.2% Rs.62,219 135.2% 51,749 63.8%
========== ======= ========== ======= ========= ====== ========= =====
</TABLE>
A high percentage of our operating expenses, particularly personnel and
facilities, are fixed in advance of any particular quarter. As a result,
unanticipated variations in the number and timing of consumer subscribers and
corporate customers, as well as the introduction of new product and service
offerings may cause significant variations in operating results in any
particular quarter. Due to the rapidly evolving nature of our business and our
limited operating history, we believe that period-to-period comparisons of
revenues and operating results are not necessarily meaningful and you should
not rely upon them as indications of future performance.
As indicated in the quarterly data, revenues increased substantially
during the quarters ended March 31, 1999 and June 30, 1999, primarily as a
result of the rapid growth in the number of subscribers for our Satyam Online
Internet access service. The number of Satyam Online subscribers increased from
approximately 4,700 on December 31, 1998 to approximately 28,500 on March 31,
1999 to approximately 60,000 on June 30, 1999 to more than 77,000 on August 31,
1999 to more than 87,000 on September 30, 1999. The number of corporate
customers also increased from approximately 130 on December 31, 1998 to
37
<PAGE>
approximately 170 on March 31, 1999 to more than 300 on June 30, 1999. Cost of
revenues as a percentage of revenues increased from 67.2% for the quarter ended
September 30, 1998 to 82.5% for the quarter ended December 31, 1998, before
decreasing to 57.6% for the quarter ended March 31, 1999 and 48.1% for the
quarter ended June 30, 1999. The increase in cost of revenues as a percent of
revenues for the quarter ended December 31, 1998 reflects the higher operating
costs associated with our expanded network backbone. During this quarter, we
increased the capacity of our network backbone from 64Kbps to 2Mbps. The
decrease in cost of revenues as a percentage of revenues during the quarters
ended March 31, 1999 and June 30, 1999 reflects operating efficiencies
generated by spreading the fixed costs of our network operations over a larger
customer base. Selling, general and administrative expenses increased over the
four quarters as a result of the aggressive marketing and promotion activities
used to launch our Satyam Online service nationally in India as well as an
increase in our employee base. The number of employees increased from 175 at
June 30, 1998 to 411 employees at June 30, 1999. Selling, general and
administrative expenses as a percentage of revenue decreased from 176.1% for
the quarter ended December 31, 1998, to 124.7% for the quarter ended March 31,
1999, to 77.6% for the quarter ended June 30, 1999, reflecting efficiencies
generated from our larger revenue and customer base. Depreciation and
amortization increased over the four quarters as a result of the purchase of
additional routers, modems, ports, servers and other capital equipment in
connection with the expansion of our network. Interest expense increased over
the four quarters as a result of increased borrowings used to fund the
expansion of our operations.
Seasonality
Given the early stage of the development of the Internet in India, the
rapidly evolving nature of our business and our limited operating history, we
cannot predict to what extent, if at all, our operations will prove to be
seasonal.
Liquidity and Capital Expenditures
Since inception, we have financed our operations primarily through a
combination of private equity sales and borrowings from institutions and banks.
During the fiscal years ended March 31, 1998 and 1999, we received Rs.38.5
million and Rs.307.5 million ($7.1 million), respectively, in net proceeds from
the sale of equity shares.
The following table summarizes our statements of cash flows for the
periods presented:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Fiscal Quarter Ended June 30,
-------------------------------------------------- ------------------------------------
1997 1998 1999 1999 1998 1999 1999
Indian rupees U.S. dollars Indian rupees U.S. dollars
------------------------------------ ------------ ---------------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss................ Rs.(26,337) Rs.(100,590) Rs.(187,376) $(4,312) Rs.(24,829) Rs.(51,749) $(1,191)
Net decrease (increase)
in working capital..... (4,625) 7,257 (33,212) (764) (4,547) (7,016) (161)
Other adjustments for
non-cash items......... 536 19,383 49,200 1,132 8,786 21,507 495
Net cash provided by
(used in) operating
activities............. (30,426) (73,950) (171,388) (3,944) (20,590) (37,258) (857)
Net cash provided by
(used in) investing
activities............. (3,230) (77,070) (145,999) (3,360) (15,057) (109,578) (2,522)
Net cash provided by
(used in) financing
activities............. 35,138 159,449 433,023 9,966 30,504 31,664 729
Net increase (decrease)
in cash and cash
equivalents............ 1,482 8,429 115,636 2,661 (5,143) (115,172) (2,651)
</TABLE>
38
<PAGE>
Our principal capital and liquidity needs historically have related to
developing our network infrastructure and our corporate network and electronic
commerce products, establishing our customer service and support operations,
developing our sales and marketing activities and for general working capital
needs. Prior to 1998, our capital needs were primarily met by funding from our
parent company, Satyam Computer Services, and borrowings from institutions and
banks. As we placed greater emphasis on expanding our network infrastructure
and developing our consumer Internet access and on-line portal and content
services, we sought additional capital from other sources, including vendor
capital leases and other vendor financing arrangements and through private
placements of our securities, as detailed below.
Cash used in operating activities of Rs.171.4 million ($3.9 million)
during fiscal 1999 was primarily attributable to a net loss of Rs.187.4 million
($4.3 million), increases in accounts receivable of Rs.43.1 million ($1.0
million), other current assets of Rs.62.7 million ($1.4 million) and other
assets of Rs.21.2 million ($0.5 million), partially offset by depreciation of
plant and equipment of Rs.46.7 million ($1.1 million) and an increase in
deferred revenues of Rs.71.5 million ($1.7 million). Cash used in investment
activities during fiscal 1999 was Rs.146.0 million ($3.4 million), principally
as a result of the purchase of routers, modems, ports, servers and other
capital equipment in connection with the expansion of our network. Cash
provided from financing activities was Rs.433.0 million ($10.0 million) for
fiscal 1999, which consisted primarily of Rs.307.5 million ($7.1 million) of
net proceeds raised in a private placement of our equity shares to South Asia
Regional Fund and Satyam Computer Services, and Rs.136.5 million ($3.1 million)
of proceeds from a term loan from the Export Import Bank of India.
Our aggregate billings for fiscal 1999 were approximately Rs.174.8
million. This amount represents amounts receivable by us from our customers for
services to be provided over various periods of time. In accordance with our
revenue recognition policy, we recognized Rs. 103.3 million and deferred
Rs.71.5 million of billings in fiscal 1999. Our deferred revenues balance was
Rs.92.5 million as of June 30, 1999.
Cash used in operating activities of Rs.74.0 million during fiscal 1998
was primarily attributable to a net loss of Rs.100.6 million, partially offset
by depreciation of plant and equipment of Rs.18.8 million and an increase in
trade accounts payable of Rs.15.5 million. Cash used in investment activities
during fiscal 1998 was Rs.77.1 million, principally as a result of the purchase
of network equipment and software. Cash provided from financing activities was
Rs.159.4 million in fiscal 1998, which consisted primarily of Rs.122.0 million
of unsecured debentures issued to Citibank, N.A. and Rs.38.5 million of net
proceeds raised in a private placement of our equity shares to Satyam Computer
Services.
As part of our business strategy, we intend to invest significant amounts
of capital over the next 12 to 24 months to fund network infrastructure
expansion and enhancements, to develop content for our Internet portal
business, to advertise and promote our brand and to repay debt. As of June 30,
1999, we had spent approximately Rs.355.7 million ($8.2 million) to develop and
deploy our network infrastructure. We estimate that we will spend approximately
Rs.869 million ($20 million) to extend our network infrastructure to 40 cities
in India by April 2000. As of June 30, 1999, we had aggregate commitments for
capital expenditures in an amount equal to approximately Rs.28.2 million ($0.6
million) of which we had advanced approximately Rs.7.2 million ($0.2 million).
We expect to incur operating losses and negative cash flows from operations for
the foreseeable future. As of June 30, 1999, we had approximately Rs.10.4
million ($0.2 million) of cash and cash equivalents for our working capital
needs, as compared to Rs.4.8 million as of June 30, 1998. As of June 30, 1999,
we had Rs.78.5 million ($1.8 million) of capacity under our Rs.215.0 million
($4.9 million) term loan with the Export Import Bank of India.
We may use a portion of the proceeds from this offering for possible
strategic investments, partnerships and acquisitions. If appropriate
opportunities can be developed, we believe that our growth could be accelerated
by selective investments or acquisitions in India, particularly in Internet
service providers that have developed local or regional points of presence in
markets where we have not yet established a presence. We may also consider
opportunities to acquire sources of content for our Internet portal. We have
engaged in
39
<PAGE>
preliminary discussions involving several transactions of this sort, but have
no agreements as of the date of this prospectus. We expect that once we have
the net proceeds provided by this offering available to us, we will become more
aggressive in our efforts to identify one or more investment or acquisition
opportunities. However, we cannot assure you that we will be able to identify
or complete any such transaction on favorable terms, or at all.
We currently anticipate that our available cash resources combined with
the net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements as discussed above for at
least 12 months after the date of this prospectus. Our ability to raise funds
through the sale of equity is limited by foreign ownership restrictions imposed
on us by Indian law and the terms of our Internet service provider license.
These restrictions provide that the maximum total foreign equity investment in
our company is 49%. For additional information, please see "Restrictions on
Foreign Ownership of Indian Securities" on page 80. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our shareholders and the holders of our ADSs will be
reduced and these securities may have rights, preferences or privileges senior
to those of our shareholders and the holders of our ADSs. We cannot assure you
that additional financing will be available on terms favorable to us, or at
all. If adequate funds are not available or are not available on acceptable
terms, our ability to fund and expand our operations, take advantage of
unanticipated opportunities, develop or enhance Internet content, features or
services, or otherwise respond to competitive pressures will be significantly
limited. Our business, results of operations and financial condition could be
materially adversely affected by any such limitation.
Income Tax Matters
As of June 30, 1999, we had a net operating loss carryforward of
approximately Rs.42.4 million ($1.0 million) for financial reporting purposes.
Under Indian law, loss carryforwards from a particular year may be used to
offset taxable income over the next eight years.
The statutory corporate income tax rate in India is currently 35.0%. This
tax rate is presently subject to a 10.0% surcharge resulting in an effective
tax rate of 38.5%. The Finance Minister of India has indicated that the 10.0%
surcharge would be effective for a period of only one year, commencing April 1,
1999. However, we cannot assure you that the 10.0% surcharge will be in effect
for only one year or that additional surcharges will not be implemented by the
government of India. Dividends declared, distributed or paid by an Indian
corporation are subject to a dividend tax of 11.0%, including the presently
applicable surcharge, of the total amount of the dividend declared, distributed
or paid. This tax is not paid by shareholders nor is it a withholding
requirement, but rather it is a direct tax payable by the corporation.
Effects of Inflation
Inflation has not had a significant effect on our results of operations
and financial condition to date. However, India has experienced relatively high
rates of inflation. According to the Economist Intelligence Unit, the rates of
inflation in India for 1996, 1997 and 1998 were 9.0%, 7.2% and 14.0%,
respectively, and the projected rate of inflation in India for 1999 is 9.3%.
Under our Internet service provider license, we are given the right to
establish the prices we charge to our subscribers, as determined by market
forces. However, under the conditions of our license, the Telecom Regulatory
Authority of India may review and fix the prices we charge our subscribers at
any time. If the Telecom Regulatory Authority were to fix prices for the
Internet service provider services we provide, we might not be able to increase
the prices we charge our subscribers to mitigate the impact of inflation, which
could have a material adverse effect on our business, results of operations and
financial condition.
40
<PAGE>
Debt Financing
In June 1998, we obtained from the Export Import Bank of India a term
loan of Rs.215.0 million. This term loan is secured by a first charge on our
fixed assets and is guaranteed by Satyam Computer Services. The loan bears
interest at a rate of 15.5% per annum and is repayable in six equal half-yearly
installments commencing on December 20, 1999.
In June 1999, we obtained from IDBI Bank Ltd. short term loan commitments
aggregating Rs.100.0 million and a short-term credit facility of Rs.10.0
million. We used the proceeds from the short-term loans and the short-term
credit facility to purchase telecommunication equipment, including Internet
switches, for our network, and in turn repaid substantially all of this
indebtedness with the proceeds from the issuance of equity shares to Sterling
Commerce.
Impact of the Year 2000
Introduction. The term "Year 2000 issue" is a general term used to
describe the various problems that may result from the improper processing of
dates and date-sensitive calculations by computers and other machinery as the
year 2000 is approached and reached. These problems generally arise from the
fact that most of the world's computer hardware and software have historically
used only two digits to identify the year in a date, meaning that the computer
may fail to distinguish dates in the 2000's from dates in the 1900's. If not
corrected, these miscalculations could result in a disruption of our
operations.
State of Readiness. We are currently implementing a comprehensive plan
for us to become Year 2000 ready. Our overall readiness plan consists of the
following phases:
. preparing an inventory of all software and hardware items affected by
the Year 2000 issue;
. testing our internally developed software for quality assurance;
. contacting third-party vendors, licensors and providers of hardware,
software and services regarding their Year 2000 readiness;
. repairing or replacing components that are determined not to be Year
2000 compliant; and
. creating contingency plans to address potential Year 2000 failures
that we cannot control or have not previously been able to detect or
repair.
Specific steps in our Year 2000 assessment which we have completed to
date include:
. retaining Satyam Enterprises, an affiliate of Satyam Computer
Services, to conduct a Year 2000 assessment of all of our network
hardware and software, including our computers, applications
software, power supply systems and relay switches;
. identifying critical suppliers and communicating with them about
their plans and progress in addressing any Year 2000 problems they
may face; and
. performing Year 2000 simulations to verify performance by
artificially moving the date forward from December 31, 1999 to
January 1, 2000.
The Year 2000 readiness plan described above is being carried out across
the three critical areas where we believe the Year 2000 issue might affect our
business:
. software products which are supplied by us to our subscribers and
customers;
. our information and technology systems; and
. our non-information technology systems.
41
<PAGE>
The results of the steps we have completed indicate that substantially all of
our information technology and non-information technology systems are Year 2000
compliant. As a result, we do not anticipate upgrading or modifying any major
internal computers, applications or equipment. In addition, we have contacted,
and obtained verbal or written certification of Year 2000 compliance from, more
than 25 of our third-party vendors, licensors and providers of hardware,
software and services. We expect to receive certification from all of our
private vendors, licensors and providers by September 1999. However, we do not
anticipate receiving Year 2000 compliance certification from the Department of
Telecommunications on which we are dependent for leased lines and international
gateways to the Internet. We cannot assure you that these facilities are Year
2000 compliant.
Costs. We have not incurred any material expenses to date in connection
with the implementation of our Year 2000 program, and we estimate that we will
incur a total of Rs.2.0 million in expenses. These costs will be expensed as
incurred. We currently believe these costs will not have a material effect on
our financial condition, liquidity or results of operations. To date, we have
not deferred any specific information technology projects due to our Year 2000
efforts.
Risks. We are not currently aware of any significant Year 2000 compliance
problems which would materially harm our business, results of operations or
financial condition. During our remaining assessment, we may discover Year 2000
compliance problems in our hardware, software or computer systems that may
require substantial repair or replacement. In addition, material third-party
software, hardware or services incorporated into our systems may contain Year
2000 compliance problems that require substantial repair and/or replacement.
The failure to correct any material Year 2000 problem, including a failure on
the part of the Department of Telecommunications to be Year 2000 compliant,
could materially harm our business, results of operations and financial
condition for the following reasons:
. new subscribers or customers may not be able to sign up for our
Internet services, resulting in reduced growth and lower
effectiveness of our marketing efforts;
. current subscribers or customers may have difficulty using our
services or receiving adequate customer support, which may result in
increased attrition, higher customer support costs and reduced
revenue; and
. we may be subject to claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend and, if defended unsuccessfully, could
result in the imposition of substantial fines or judgments.
We cannot assure you that governmental agencies, utility companies,
third-party service providers and others outside our control will be Year 2000
compliant. The failure by these entities to be Year 2000 compliant could result
in a systemic failure beyond our control, including, for example, a prolonged
failure of Internet, telecommunication and/or electrical systems, which could
also prevent us from providing our services, or prevent users from accessing
our services, either of which would materially harm our business, results of
operations and financial condition.
Contingency Plans. We are still engaged in an ongoing Year 2000
assessment and have not yet developed any contingency plan. Contingency
planning will be conducted as our ongoing assessment and as feedback received
from third parties necessitates. We estimate that the development of our
contingency plan will be substantially completed by November 1999.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. We currently do not engage or plan to engage in derivative instruments or
hedging activities.
42
<PAGE>
BUSINESS
Background
We are the second largest national provider of Internet access and
Internet services to consumers and businesses in India, based on number of
customers as of September 30, 1999. We offer Internet access to both consumers
and corporate customers. We provide private network services, business-to-
business electronic commerce solutions and website development and hosting
services to businesses in India. We also operate an on-line portal and other
on-line services. Our comprehensive range of products and services enables our
consumer and business customers to communicate, transmit and share information,
access on-line content and conduct business remotely using our private data
network or the Internet. We began providing corporate network and electronic
commerce services to businesses in April 1998, and we currently have more than
300 corporate customers. We launched our Internet service provider business in
November 1998, becoming the first private Internet service provider to begin
service after the Indian government, which controls the largest Internet
service provider in India, opened the market to private competition. As of
September 30, 1999, we had more than 87,000 subscribers for our consumer
Internet access service, Satyam Online. We also operate an on-line portal,
satyamonline.com, and related content sites specifically tailored for Indian
interests worldwide. During September 1999, our six websites generated
approximately 12.0 million page views. We currently operate India's largest
national private data network utilizing Internet protocol, which is an Internet
industry standard for tracking Internet addresses, routing outgoing messages
and recognizing incoming messages. We own and operate points of presence in 25
of the largest metropolitan areas in India. Points of presence are
telecommunications facilities located in a particular market which allow our
customers to connect to the Internet through a local telephone call.
We seek to become the premier provider of Internet services in the Indian
market. We believe that demand for our services is significant in India and
growing rapidly as consumers and businesses seek alternatives to the
communications services offered by India's government-controlled telecom
providers. We intend to continue to focus on providing superior network
performance and high levels of customer service and technical support to
increase our subscriber base and maximize customer satisfaction.
Industry Overview
Development of the Internet. According to International Data Corporation,
the total number of Internet users worldwide is expected to grow from
approximately 140 million in 1998 to 400 million in 2002. The International
Data Corporation market data presented above and elsewhere in this prospectus
shows International Data Corporation's estimates derived from a combination of
vendor, user and other market sources and therefore may differ from numbers
claimed by specific vendors using difference market definitions or methods.
There can be no assurances that this projected amount will be achieved. The
large and increasing number of home and office computers linked to the
Internet, advances in network design, increased availability of Internet-based
software and applications, the emergence of useful content and electronic
commerce technologies, and convenient, fast and inexpensive Internet access
will drive Internet growth and usage in the near future.
43
<PAGE>
Special Communications Needs of Businesses. As the Internet becomes more
developed and reliable, businesses are increasingly utilizing the Internet for
functions critical to their core business strategies such as sales and
marketing, customer service and project coordination. The Internet presents a
compelling profit opportunity for businesses by enabling them to reduce
operating costs, access valuable information and reach new markets. To maintain
a significant presence on the Internet, businesses typically purchase Internet
access services and establish a website. Internet access provides a company
with its basic gateway to the Internet, allowing it to transfer e-mail, access
information and connect with employees, customers and suppliers. A website
provides a company with a tangible identity and an interactive presence on the
Internet. Many corporations are also converting their information systems and
databases to web-enabled systems. International Data Corporation estimates that
revenue from Internet web hosting services worldwide will grow at a rate that
averages 96.0% annually from $0.8 billion in 1998 to $11.8 billion in 2002.
International Data Corporation also estimates that revenue from electronic
commerce spending worldwide will grow at a rate that averages 98% annually from
$50.4 million in 1998 to $733.6 million in 2002.
The Opportunity in India. As with many developing nations, the
telecommunications infrastructure in India historically has been controlled by
government-controlled telecom providers. The resulting service has been and
remains inferior to service in developed countries. Consequently, the services
available and the penetration of those services into the base of businesses and
consumers in India has, to date, been limited. At the same time, however, the
Indian economy continues to modernize and expand, particularly in sectors such
as software development that are dependent on a reliable communications
network. The growth of these industries is leading to an increasing base of
personal computers and wired homes and businesses in India with a resulting
increased demand for Internet services. We believe these trends, which mirror
trends in more mature economies, will continue to develop in India. Set forth
below is a table comparing the penetration of computers and on-line access in
India compared to the United States and the Asia-Pacific region in 1998:
<TABLE>
<CAPTION>
Asia-Pacific
India United States Region(1)
----- ------------- ------------
(in millions, except
percentages)
<S> <C> <C> <C>
Population(2).......................... 984.0 270.3 2,769.6
Internet users......................... 0.5 62.8 10.2
Internet users as a percentage of
population............................ 0.0% 23.2% 0.4%
On-line devices........................ 0.3 87.4 9.5
On-line devices as a percentage of
installed base........................ 11.0% 54.5% 24.9%
</TABLE>
--------
(1) Australia, Hong Kong, India, Indonesia, South Korea, Malaysia, New
Zealand, Philippines, China, Singapore, Taiwan, Thailand and
Vietnam.
(2) 1998 population data from U.S. Census Bureau.
Source: International Data Corporation, 1999.
The ability to exploit the Internet service provider and other data
service markets in India is currently inhibited by bandwidth limitations
imposed by cost and technical obstacles. Bandwidth refers to the measurement of
the volume of data capable of being transported in a communications system in a
given amount of time. Bandwidth rates are commonly expressed in terms of Kpbs
(kilobits per second, or thousands of bits of data per second) or Mpbs
(megabits, or millions of bits of data per second). Generally, bandwidth
remains very expensive in India. Prices for bandwidth are set by two
governmental agencies in India, the Department of Telecommunications and the
Telecom Regulatory Authority and have remained high due to, among other things,
capacity constraints. Further, limitations in network architecture limit
consumer telephone dial-up connection speeds to 28 Kbps and below, less than
the 33 to 56 Kbps on conventional dial-up telephone lines, and significantly
less than the up to 1.5 Mbps on cable modems, in the United States.
Improvements in the public telecommunications infrastructure and private
network expansion are expected to diminish these limitations over time. As
network capacity increases worldwide and the cost to transmit data over the
Internet continues to decrease, we also expect the demand for Internet access,
on-line content and similar services to increase.
44
<PAGE>
To date, a significant amount of the usage of Indian content sites on the
World Wide Web has been driven by Internet users outside of India. We expect
this growth in personal computers and Internet users to increase the demand for
Internet content directed towards domestic Indian consumers as well as the
amount of electronic commerce in India. Set forth below is a table summarizing
International Data Corporation's projections for Internet use and electronic
commerce revenue in India:
<TABLE>
<CAPTION>
Annualized
1998 2002 growth
---- ------ ----------
(in millions, except
annualized growth)
<S> <C> <C> <C>
Indian Internet users............................. 0.5 4.5 76%
Indian installed personal and network computer
base............................................. 1.9 8.2 44%
Indian Internet commerce revenues................. $3.5 $593.6 260%
</TABLE>
--------
Source: International Data Corporation, 1999
Private market participants have not been able to exploit the market
opportunities in India until recently because the regulatory environment in
India largely prevented any competition with the national government-controlled
telecom providers. Until November 1998, the only Internet service provider
permitted in India was VSNL, a government sponsored and majority owned entity,
which at that time had approximately 150,000 subscribers. VSNL began providing
Internet access on August 15, 1995. We currently estimate that VSNL has
approximately 300,000 subscribers. On November 6, 1998, the government opened
the Indian Internet service provider market to private competition. As of June
30, 1999, the Indian government had granted Internet service provider licenses
to 129 companies, including 22 national licenses, 42 regional licenses and 65
local licenses. The licensees include cable television operators and joint
ventures between local companies and large international telecom providers.
Internet service provider licenses are granted for 15 years, with only nominal
license fees. Internet telephony is not permitted by the current regulations.
Currently, pricing of Internet service provider services is not regulated by
the government of India, although it has the power to elect to do so.
Satyam Solution
We believe that the growth of the Internet and other network services in
India has been inhibited by relatively high costs and poor user experiences
caused by an inadequate telecommunications infrastructure and slow network
connection speeds. We are committed to expanding and enhancing our private
network backbone and to providing high quality technical support to attract
users to our services. We believe that our products and services provide our
customers with the ability to exchange information, communicate and transact
business over the Internet with speed, efficiency, reliability and security
superior to other Internet service providers. Key advantages of the Satyam
solution include:
. National private Internet protocol network backbone. We currently
operate India's only private national Internet protocol data network.
Our network provides the platform for the national delivery of
Internet access to consumers as well as the backbone for our full
range of corporate network and technology services. Our private
network infrastructure allows corporations to establish virtual
private networks and electronic data interchanges without dealing
directly with the government telecom providers. The planned
development of our own Internet gateways will further reduce our
reliance on the government telecom providers.
. Superior end-user performance and customer support. We provide a high
level of customer service, network performance and technical support
to maximize customer satisfaction. Currently, approximately 40% of
our employees are engaged in our customer service or technical
support departments, which operate 24-hours-a-day, seven-days-a-week.
Our network engineers continually monitor network traffic and
congestion points to deliver consistent, high quality network
performance. We plan to maintain a relatively low ratio of
subscribers to modems. As of June 30, 1999, our subscriber to modem
ratio was approximately ten to one. Our strategy of providing
superior network performance and customer service is designed to
result in significant customer growth from referrals and industry
recognition.
45
<PAGE>
. End-to-end network solutions for business customers. We provide our
business customers with a comprehensive range of Internet,
connectivity and private network solutions complemented by a broad
base of web-based business applications. Our corporate services range
from dial-up and dedicated Internet access, international roaming to
virtual private networks, web implementation and electronic commerce
solutions. Our end-to-end solutions enable our corporate customers to
address their networking and data communication needs efficiently
without having to assemble products and services from different
value-added resellers, Internet service providers and information
technology firms.
. Internet content and electronic commerce websites customized for the
Indian market. We view the Indian market as a series of specific
market segments with unique cultural and topical interests, rather
than an extension of a homogeneous, worldwide Internet market. We
have assembled a team of India-based employees familiar with the
local culture, language and business environments in our markets to
develop Internet content and electronic commerce websites tailored
for the Indian market. We regularly incorporate new and original
third-party content suited to our local and regional audiences to
enhance our customers' on-line experience and to attract new users
both within India and abroad. As a result of our local market
knowledge, we have been able to increase traffic flow to our websites
and to create brand awareness for the Satyam Online service.
. Strategic partnerships with industry leaders. We have developed
exclusive strategic relationships with leading Internet and
telecommunications manufacturers. For example, we are the exclusive
network partner for CompuServe Network Services, providing its
customers with roaming services in India. Our exclusive arrangements
with Sterling Commerce and Open Market provide our customers access
to cutting edge business-to-business electronic data and
communication applications and Internet electronic commerce software.
Business Strategy
Our goal is to become the premier provider of Internet and network
services to consumers and businesses in India. Our principal business
strategies to accomplish this objective are:
. Increase penetration in our existing markets by expanding awareness
of the Satyam Online brand name to capitalize on our first mover
advantage in India. We intend to capitalize on our first-to-market
advantage in India to establish national service and a brand name in
advance of other private competitors. We are presently the largest
national independent Internet service provider in India, based on
number of subscribers. We currently operate in 25 cities in India and
expect to provide service in 40 cities by April 2000. We intend to
accelerate penetration within our existing markets and enter
additional targeted markets by creating awareness of the "Satyam
Online" brand name. We intend to make Satyam Online synonymous with
superior Internet connectivity and with on-line content tailored
specifically for the Indian market and Indian interests worldwide.
Our marketing strategy includes print, television and radio
advertising, direct mailing campaigns targeting personal computer
owners, co-branding with "cybercafes" and joint-marketing programs
with leading schools and universities in India.
. Expand our products and services with new technologies to enable our
customers to use the Internet more effectively. We continually seek
to expand the breadth of our product and service offerings with new
technologies. For example, we recently opened the first prototype
Satyam cybercafe to tap the large non-personal computer owner market
in India. Our cybercafes will prominently display the Satyam Online
brand and offer a full range of our Internet connectivity services.
We intend to introduce a number of other new products and services in
the near future, including e-mail designed for regional Indian
dialects, a user customized portal site, tele-voice mail, e-mail to
fax, micro-payments and a supply chain management product.
46
<PAGE>
. Strengthen our Internet portal and other Internet content websites
with more India-specific content tailored to Indian interests
worldwide. Our portal, satyamonline.com, functions as an initial
gateway to the Internet, the user's starting point for web browsing
and other Internet services, for our consumer Internet service
provider subscribers. The Satyam Online portal is a media rich, user
friendly, interactive website offering hyperlinks to a wide variety
of websites and services, including our own websites. To achieve our
goal of developing the premier Internet portal focused on the Indian
market, we intend to continue to expand and improve the quality of
satyamonline.com, and are actively developing additional proprietary
websites oriented towards topical and cultural interests of Indians
worldwide. As the availability of Internet access expands in India,
we believe that increasing numbers of Internet users will be
attracted to our high quality websites and on-line content designed
specifically for the Indian consumer. We will seek to attract
advertisers, electronic commerce merchants and third-party content
providers trying to reach our users in order to generate incremental
revenues for Satyam Online.
. Expand customer distribution channels through strategic partnerships
to take advantage of the sales and marketing capabilities of our
strategic partners. We intend to continue to expand our customer
acquisition channels, for both our consumer Internet access and
corporate network and technology services. We have arrangements with
two leading personal computer manufacturers, Compaq and Hewlett-
Packard, to bundle our Satyam Online Internet access service with the
sale of their personal computers in India. We are working with
Philips Electronics to deploy a television set-top box in India for
accessing the Internet using phone lines. We have also formed
strategic alliances with computer and electronics retailers. We
expect to form additional strategic alliances and referral programs
in the future with selected telecommunication service and equipment
suppliers, network service companies, systems integrators, computer
resellers and retail chains in India.
. Invest in the continued enhancement and expansion of our network
infrastructure to support customer growth, enter new markets and
accommodate increased customer usage. We intend to continue to
increase the capacity and geographic reach of our network in order to
support subscriber growth, enter new markets and accommodate
increased customer usage. We remain committed to using proven
technologies and equipment and to providing superior network
performance. We recently deployed asynchronous transfer mode, or ATM,
switches on six points of presence along our network. These ATM
switches enable us to allocate our network capacity more efficiently.
Our Internet service provider license permits us to establish and
maintain our own direct connections to the international Internet,
either by purchasing satellite earth stations or by leasing or
purchasing capacity on transoceanic fiber optic cables. We believe
that as the size and capacity of our network infrastructure grows,
its large scale and national coverage will create economies of scale
and barriers to entry for our competitors.
. Pursue selective strategic investments, partnerships and acquisitions
to expand our customer base, increase utilization of our network and
add new technologies to our product mix. We believe that our growth
can be supplemented by selective acquisitions of complementary
businesses, particularly Internet service providers that have
developed local or regional points of presence and that have a
significant or growing subscriber base in our current or targeted
markets. We believe that as the Internet service provider market in
India evolves, customers will place greater emphasis on Internet
service provider performance, network coverage, reliability, value-
added services and customer support. As a result, smaller start-up
Internet service providers may be unable to remain competitive on a
national or regional basis, unless they significantly expand the
scope of their operations. These trends could lead to a future
consolidation of Internet service providers in India. In addition, we
may seek to expand our market presence in our corporate network
business through the acquisition of web hosting, data center, web
implementation and/or systems integration companies. We may also
consider opportunities to acquire third-party websites and sources of
additional on-line content and technology for our Internet portal and
proprietary website businesses.
47
<PAGE>
Service Offerings
We offer a wide range of Internet and other network services to meet the
needs of consumers and corporate customers. These services can be divided into
three categories:
. consumer Internet access services;
. corporate network and technology services; and
. on-line portal and content offerings.
Consumer Internet Access Services
We launched our consumer Internet service provider business on November
22, 1998, just 15 days after the government of India opened the market to
private competition. Within 45 days, we had initiated service in 12 cities,
including Ahmedabad, Bangalore, Bombay (Mumbai), Calcutta, Cochin, Coimbatore,
Delhi, Hyderabad, Ludhiana, Madras (Chennai), Pondicherry and Pune. We
currently own and operate points of presence in 25 of the largest metropolitan
areas in India. We plan to extend service to 40 cities by April 2000 which we
believe will allow us to provide Internet access services to approximately 85%
of the installed personal computer base in India. As of September 30, 1999, we
had more than 87,000 subscribers. Our expansion plan targets major metropolitan
areas and state capitals that we believe have a sufficient number of installed
personal computers to support a point of presence.
Our strategy is to offer better and more extensive services to our
subscribers than our competitors, with an emphasis on ease of use. With VSNL
and many of the regional access providers, the user must apply for service and,
frequently, wait one or more weeks for service to begin. Our subscribers
purchase a ready-to-use CD-ROM available at bookstores, computer stores and
universities, or bundled with a personal computer, to access our service
immediately. Our on-line registration process is available to initiate service
and purchase renewals. We also support our subscribers with a 24-hour-a-day,
seven-day-a-week call center staffed with trained technicians.
Our service offerings come in a number of packages, designed to attract
beginning Internet users and service the needs of advanced users. Our Discover
25 offering is a "starter pack" designed for anyone wishing to explore the
Internet or as a second connection for subscribers who primarily use one of our
competitors' services. Each of our other Discover offerings is designed for
regular Internet users. All of our Discover Internet access offerings are
bundled with a package of value-added products, including one megabyte of
either POP3 or Imap e-mail, a one page pre-templated web page and our 24-hour-
a-day, seven-day-a-week customer service. Our Discover offerings are offered
only on a prepaid basis and can be renewed on-line. Each Discover offering is
bundled with approximately Rs.4,000 ($92) retail value of licensed software,
including Viagrafix and E-safe. Viagrafix is an interactive computer-based
tutorial designed to introduce the Internet to new users. E-safe is a virus
removal and parental control tool. We also offer e-mail capability without
Internet access. Our consumer Internet service provider offerings include:
<TABLE>
<CAPTION>
Service Summary Description Initial Price Renewal Price
------------ ---------------------------- --------------- ---------------
<C> <S> <C> <C>
Discover 25 25 hours of Internet access Rs.990 ($23) Not applicable
over a 3-month period
Discover 100 100 hours of Internet access Rs.3,300 ($76) Rs.2,600 ($60)
over a 10-month period
Discover 250 250 hours of Internet access Rs.6,000 ($138) Rs.5,600 ($129)
over a 12-month period
Discover 500 500 hours of Internet access Rs.8,900 ($205) Rs.8,400 ($193)
over a 12-month period
Venture 500 500 hours of Internet access Rs.17,000 ($391) Rs.16,500 ($380)
over a 12-month period by up
to five concurrent users
NetMail Additional e-mail capability Rs.2,000 ($46) Not applicable
without Internet access
</TABLE>
48
<PAGE>
The most common connection technique is for subscribers to dial-up to our
system using a personal computer configured with a modem. A subscriber who is
within local dialing range of one of our points of presence can access the
Internet with a local telephone call. In addition to paying for Internet
access, the customer is responsible for the cost of the call, which currently
is 1.3 rupees (3.0c) per 3 minutes. We estimate that substantially all of our
subscribers access our services with a local telephone call. Subscribers who
access our services with a long-distance telephone call are responsible for the
long-distance charges.
We recently announced a collaboration with Indira Gandhi National Open
University to make trial Internet access available to 70,000 students of the
School of Information and Computer Science. Under the program, participating
students pay approximately 40% of our normal hourly access charges for 20 hours
of Internet access between the hours of 11:00 p.m. and 7:00 a.m. These students
comprised approximately 5,000 of our 60,000 subscribers as of June 30, 1999,
our more than 77,000 subscribers as of August 31, 1999 and our more than 87,000
subscribers as of September 30, 1999.
We believe that a critical element of consumer satisfaction is to have an
adequate number of access lines available to assure prompt and reliable
connection to our service. Telephone lines are in short supply in India, and
there is frequently a waiting period of one or more months to acquire
additional lines. We have ordered in advance a significant number of additional
lines to provide timely capacity additions as we grow our service. We plan to
maintain a relatively low ratio of subscribers to modems. When we commence
service in a city, we initially have approximately one modem-equipped line
available for each ten subscribers. As of June 30, 1999, our subscriber to
modem ratio was approximately ten to one.
Subscribers local to a call center can call our call center facility for
customer service and technical support through a local telephone number.
Subscribers can also e-mail their questions directly to a customer service and
technical support address at our company.
Corporate Network and Technology Services
We offer a comprehensive suite of technology products and network-based
services that provide our corporate customers with end-to-end Internet and
private network access. Our products and services enable our corporate
customers to offer a full range of business-to-business and electronic
commerce-related services.
Our business services consist of the following:
Internet Access. We offer dial-up Internet access as well as a variety of
dedicated Internet access solutions which provide high-speed continuous access
to the Internet. Our dedicated Internet access services are provided to
corporate customers at speeds ranging from 28 Kbps to 128 Kbps. Our Venture 500
Plan provides dial-up access to the Internet tailored to corporate customers
requiring multiple e-mail identifications and includes our 24-hour-a-day,
seven-day-a-week customer service. A corporate customer which is within local
dialing range of one of our points of presence can access our services with a
local telephone call. We also offer an international roaming service which
caters to business executives who travel outside of India. Our principal
Internet access options for corporate customers include:
<TABLE>
<CAPTION>
Service Summary Description Pricing
----------- ----------------------------- ----------------------------- ---
<C> <S> <C> <C>
Leased Line Dedicated high speed Internet Rs.500,000 ($11,507) annually
access at up to 64 Kbps
ISDN Dedicated high speed Internet Rs.350,000 ($8,055) annually
access at up to 128 Kbps
PSTN Dedicated Internet access at Rs.180,000 ($4,143) annually
up to 28.8 Kbps
NetName Domain name registration Rs.5,000 ($115)
NetWorld 25 hours of Internet access Rs.7,000 ($161)
over a 12-month period while
roaming outside India
NetMail Additional e-mail capability Rs.2,000 ($46)
without Internet access
</TABLE>
49
<PAGE>
Private Network Services. We offer a wide variety of private network
services for our small to large corporate customers. Many companies today in
India have established private data communication networks, which are often
referred to as wide area networks, or WANs, and built on expensive leased
lines, to transfer proprietary data between office locations. We were the first
company in India to offer a cost-effective replacement alternative to WANs
using virtual private networks which provide secure transmission of data using
Internet protocol over our private network infrastructure. Virtual private
network products, often in combination with a website, are also the basis for
offering intranet and extranet services. Intranets are corporate networks that
rely on Internet-based technologies to provide secure links between corporate
offices and secure access to company data. Extranets expand the network to
selected business partners through secure links on the Internet. We also allow
a company to outsource all of its WAN requirements to us. Our virtual private
network solutions offer internetworking without the wait periods created when
obtaining these services from the government provider. Our nationwide Lotus
Notes management system provides the software and framework for our customers
to utilize their private network systems to interlink their offices and
exchange information. We also support the Microsoft Exchange messaging system.
We are the exclusive network partner to CompuServe Network Services in
India, and provide the India portion of CompuServe's global network. Through
our partnership, we provide the ability for CompuServe customers traveling in
India to connect to their corporate network and systems resources using the
Internet. We offer Internet access through a local phone call in all locations
in India serviced by our network points of presence. Our service allows
Internet connectivity from India without incurring international telephone
charges. For providing our network services, we receive a portion of the fees
paid by CompuServe's customers to CompuServe when using its service in India.
Business-to-Business Commerce Solutions. We deliver complete electronic
data interchange, or EDI, and business-to-business electronic commerce
solutions to our corporate customers through our relationships with key vendors
of Internet-related hardware, software and services. Our EDI solutions provide
supply chain integration and help coordinate the manufacturing and distribution
process for our corporate customers. Our electronic commerce solutions enable
business-to-business electronic commerce over our network or the Internet. We
have an exclusive agreement with Sterling Commerce to provide their EDI and
electronic commerce software and systems in India. These products include:
. The CONNECT product line that provides the software infrastructure
for moving and managing information inside and outside the
enterprise;
. The COMMERCE product line that provides value-added services to help
customers build, manage, and service global commerce business
communities;
. The GENTRAN product line that provides software for the integration
of business processes and the automation of business transactions;
and
. EC Managed Services which offer businesses a full range of electronic
commerce outsourcing services and consulting solutions.
Web-based Solutions. We provide comprehensive website design,
development, implementation and hosting services. Since April 1998, we have
developed over 600 websites which we believe makes us one of the largest
website developers in India. Our customers' websites range from basic
informational sites to complex interactive sites featuring sophisticated
graphics, animation, sound and other multimedia content. Our interactive
development capabilities utilize tools such as Hypertext Markup Language, or
HTML, Virtual Reality Markup Language, or VRML, computer animation, composting
and motion capture. We have a dedicated team of design and development
personnel who are available for large-scale web development projects. We have a
long-term exclusive agreement with Open Market to provide their electronic
commerce products and services in India. These products include:
. web-based Internet catalogs with database capabilities of various
sizes;
50
<PAGE>
. Internet publishing software;
. a transaction engine that enables an organization to conduct commerce
over the Internet; and
. a payment gateway to facilitate commerce services to other service
providers or merchants.
We also offer web hosting accounts for companies and other organizations
that wish to create their own websites without maintaining their own web
servers and Internet connections. Our web hosting services feature state-of-
the-art web servers for high speed and reliability, high capacity connections
to the Internet and specialized customer support and security features. We also
offer co-location services for customers who prefer to own their servers, but
require the high performance and reliability of our Internet data center. Co-
location customers are typically larger enterprises employing more
sophisticated Internet hardware and software and having the expertise to
maintain their websites and related equipment.
On-line Portal and Content Offerings
We operate an on-line portal, satyamonline.com, and five related on-line
content sites tailored to needs of Indian interests worldwide. Our portal site
is designed to be the initial launch screen for all of our Satyam Online
customers, but can also be accessed by Internet users worldwide. We seek to
establish satyamonline.com as a leading Indian Internet portal. As a portal, we
provide a gateway to the Internet by offering information services, directory
tools, e-mail, contests, Internet chat and electronic commerce activities such
as online shopping and classified ads. We also allow the user to personalize
the satyamonline.com start page to include links to the user's most frequently
used features on the Internet, including particular search engines, free mail
providers and favorite content sites. Our customization features encourage
users to make satyamonline.com their first stop on the Internet and allow us to
provide special privileges and benefits to our Internet service provider
subscribers compared to users who access satyamonline.com through another
service provider. Our objective is to attract as many users as possible to
generate revenues from advertising, sponsorship fees and electronic commerce
transaction commissions.
In addition to satyamonline.com, our India-specific content sites
include:
<TABLE>
<CAPTION>
Feature Website Description
----------------- ----------------- ------------------------------------------
<C> <C> <S>
News and Features indiaupdate.com Real-time news site with domestic and
international news, weather and
entertainment.
Car and Auto carstreet.com Comparison shopping site for automobiles.
Indian Movies indiatalkies.com Indian movie channel featuring movie
reviews, archives, interviews, chats and
local movie listings.
Carnatic Music carnaticmusic.com Indian classical music site where users
may chat with artists, hear CD music clips
and buy concert tickets on-line. This site
also contains a link to an on-line music
store.
Personal Finance walletwatch.com Personal finance site featuring stock
quotes, portfolio manager, links to
brokerage firms and editorial content.
</TABLE>
Today, there are probably more non-resident Indians, than Indians
residing domestically, with access to the Internet. As a result, many content
sites, including satyamonline.com, have more users located outside of India
than within. However, we believe that the market for content and services
within India will develop rapidly. As a result, this market is the primary
focus of our attention, and the market of non-resident Indians is secondary.
Current Indian residents present a market that advertisers and merchants desire
to reach. To expand usage of our services domestically, we believe that we must
provide more services of daily value, such as the ability to buy groceries or
movie tickets on-line or to check an up-to-date movie review before buying a
ticket. New features that we expect to deploy in 1999 include a drugstore,
travel services featuring hotel and transportation reservation and ticketing,
and an auction service.
51
<PAGE>
Strategic Partnerships
We maintain a number of strategic relationships with key vendors of
Internet-related hardware, software and services. Several of these
relationships are exclusive to us in India, subject in some cases to minimum
sales thresholds. These relationships result in two significant benefits.
First, they provide us with the ability to offer valuable products and services
exclusively to our customers in India. In addition, these relationships help us
market our services by providing us with access to our partners' customer
bases. Our network and related services are focused on meeting the needs of
corporate customers, particularly in manufacturing and service organizations,
which have a need to coordinate their activities with satellite operations such
as dealers, distributors, agents and suppliers.
Our key partners are as follows:
CompuServe Network Services. CompuServe Network Services, a unit of MCI
Worldcom, is a world-wide provider of data services. We are the exclusive
network partner to CompuServe Network Services in India, acting as the access
gateway to its global network from India. CompuServe's network business
operates, manages and maintains a global value-added enhanced data network. In
April 1997, we entered into a three-year agreement with CompuServe pursuant to
which each party provides dial-up access services that are sent to the other
party via an international network connection. Each party surcharges its
customers for traffic originated on the other party's network, bills and
collects the amount of such surcharge and remits a portion thereof to the other
party. The cost of the leased line connection between our network and
CompuServe's network is shared between the parties, and each party's
proprietary rights remain the sole and exclusive property of that party. Our
agreement with CompuServe automatically renews at the end of the initial term
and each subsequent term for a period of one year provided there is no default
and the parties have satisfied their respective monetary obligations, subject
to each party's right to elect not to renew the agreement by providing written
notice to the other party at least six months prior to the end of the initial
or any succeeding term.
Sterling Commerce. Sterling Commerce is a leader in the market for
business-to-business electronic commerce software, including communications
software, electronic data interchange, or EDI, software and banking systems
software. In February 1997, we entered into a five-year agreement with Sterling
Commerce pursuant to which Sterling Commerce granted to us the exclusive right
in India, subject to minimum sales thresholds, to market, provide, sublicense,
install, facilitate, maintain and support the electronic commerce network
services, support services and other products developed by Sterling Commerce.
We pay to Sterling Commerce an annual maintenance fee and a percentage of
invoiced charges for Sterling Commerce's products purchased by our customers.
We also paid a license fee to Sterling Commerce in 1997. The license permits us
to use specified proprietary information, as well as trademarks, service marks
and tradenames, of Sterling Commerce in connection with advertising, promoting
and marketing Sterling Commerce's products in India. Our agreement with
Sterling Commerce terminates in 2002 provided that the parties may agree to
renew the term within 30 days of the end of the term, subject to Sterling
Commerce's right to terminate the agreement if we fail to meet any annual sales
threshold. As of June 30, 1999, we had met all sales thresholds under our
agreement with Sterling Commerce.
Open Market. Open Market is a leading platform provider for Internet
commerce worldwide. In June 1997, we entered into a two-year distribution
agreement with Open Market pursuant to which Open Market made us its exclusive
distributor in India of some of its Internet commerce software products,
provided we continue to meet minimum sales thresholds. We purchase copies of
software from Open Market which we resell to our customers. Open Market pays us
a referral fee for software sold to our customers which is not covered by the
agreement. Open Market has granted us a license to use specified proprietary
information and trademarks in connection with our marketing of Open Market
software. Our agreement with Open Market automatically renewed on an exclusive
basis at the end of the initial term through September 2000 and will
automatically renew at the end of each subsequent term provided we continue to
meet minimum sales thresholds, subject to each party's right to elect not to
renew by providing written notice to the other party. Any such additional
extension may be on an exclusive or non-exclusive basis depending on whether we
continue to meet minimum sales thresholds. Open Market may terminate the
agreement if we fail to meet the minimum sales thresholds.
52
<PAGE>
Customer Service and Technical Support
We believe that excellent customer support is critical to our success in
attracting and retaining subscribers. We currently provide customer service and
technical support via a local telephone call in all 25 cities in which we have
points of presence. Subscribers can also e-mail their questions directly to a
customer service and technical support address at our company.
Our customer service and technical support staff handles all questions
regarding a subscriber's account and the provision of our services and is
available 24-hours-a-day, seven-days-a-week. As of June 30, 1999, we had
approximately 174 customer service and technical support employees.
Corporate Customers
We have established a diversified base of corporate customers in a
variety of data intensive industries, including financial services, publishing,
retail, shipping and manufacturing. As of June 30, 1999, our corporate customer
base had grown to over 300 customers. Our largest corporate customers based on
revenue for the fiscal quarter ended June 30, 1999 include American Express
Bank, Carborandum Universal Limited, CDC Advisors Limited, Citibank, Compaq,
Computer Associates, Dupont, ESPN Software India Limited, GE Capital Services,
Henkel, Johnson & Johnson, Hutchison Corporate Access, Levi Strauss, Maruti
Suzuki, Philips India, Standard Chartered Bank, Tata British Petroleum, Tata
McGraw Hill, Toyota Kirloskar and Whirlpool India. The customers listed above
accounted for approximately 47% of our revenues in the fiscal quarter ended
June 30, 1999.
Sales and Marketing
Consumer Offerings. A key element of our business strategy is to increase
our brand awareness and market penetration among consumers through a number of
means including:
. an expanded advertising campaign focused primarily on print
advertising combined with a modest amount of television and radio
advertising;
. direct mail; and
. free software to consumers who become subscribers.
In addition, we intend to establish cybercafes under the Satyam Online brand
name, and to enter into relationships with independent cybercafes to co-brand
our websites with their businesses, in order to expand access to our portal and
websites by consumers who do not own a personal computer or have Internet
access at home. We are also developing programs with Indian schools and
universities to provide Internet access to Satyam Online websites. For example,
we recently announced a collaboration with Indira Gandhi National Open
University to make trial Internet access available to 70,000 students of the
School of Information and Computer Science. Under this program, participating
students pay a reduced rate for 20 hours of Internet access during off-peak
hours. As of June 30, August 31, and September 30, 1999, students under this
program constituted approximately 5,000 of our subscribers. To increase
Internet access and use of our websites by personal computer buyers, we have
entered into arrangements with personal computer manufacturers and vendors,
including Compaq and Hewlett-Packard, to have our Internet access software
bundled with their computers.
Corporate Offerings. The principal focus of our sales and marketing staff
is existing and potential corporate customers. We seek to penetrate this market
through trade publication ads, industry trade shows and seminars for the
benefit of industry associations and potential customers. As of June 30, 1999,
we had 411 employees, 178 of whom were dedicated to sales and marketing.
We intend to hire approximately 250 new employees over the next year,
most of whom will be hired into our sales, marketing and customer support
teams. Each new point of presence which becomes operational will be staffed
with between two and five sales and support personnel to call on potential
corporate customers and service our existing customers.
53
<PAGE>
Technology and Network Infrastructure
We currently operate India's largest national Internet protocol private
data network with points of presence in 25 cities. We own and operate our
network facilities and customer service operations which gives us greater
control over the utilization and quality of our network. We have designed and
built our network using advanced technologies and equipment which allows us to
continue to expand the geographic range of our network, integrate improved data
processing technologies and enhance speed and capacity with little or no
disruption to our customers.
Geographic Coverage. Through our national network of points of presence,
our consumer and business Internet access customers are able to access the
Internet in 25 of the largest markets in India via a local phone call. A point
of presence is commonly defined as the ability to access on-line services in a
market through a local telephone call or local leased lines. As of June 30,
1999, we had backbone points of presence in Ahmedabad, Bangalore, Bombay
(Mumbai), Calcutta, Cochin, Coimbatore, Delhi, Hyderbad, Ludhiana, Madras
(Chennai) and Pune. These backbone points of presence, also called primary
nodes, reside at the core of a larger Internet protocol network with a meshed
topology architecture. We also have additional points of presence, or secondary
nodes, in Baroda, Belgaum, Bhopal, Davengere, Goa, Hubli, Indore, Jaipur,
Jamshedpur, Lucknow, Mangalore, Nagpur and Pondicherry. Each point of presence
contains data communications equipment housed in a secure facility owned or
leased by our company located near a Department of Telecommunications or
Mahanagar Telephone Nigam Limited telephone switching station. Each point of
presence contains a modem bank which receives and aggregates incoming calls
from customers who access our system by modem connection through a local call
on the public telephone system. Our larger corporate customers access the point
of presence directly through leased lines. We plan to have points of presence
in 40 cities by April 2000.
Network Architecture. We ensure network reliability through several
methods and have invested in proven technologies. We use Cisco routers to route
traffic between nodes and an IGX WAN switch to terminate traffic. The routers
and WAN switches are interconnected using a high speed interface. Our
applications and network verification servers are manufactured by Hewlett-
Packard.
The primary nodes on the backbone network are connected by up to 2 Mbps
high speed fiber optic lines that we lease from the Department of
Telecommunications. The secondary nodes are connected by multiple 64 Kbps
leased fiber optic lines. Each node is accessible from at least two other
nodes, allowing us to reroute traffic. We minimize the possibility that system
failures do not interrupt service by automatically activating an ISDN dial-up
on the backbone network in the event any segment goes down. We reduce our
exposure to failures on the local loop by usually locating our points of
presence within one segment of the central telephone exchange. To further
assure our network integrity, we are installing fiber optic connections
directly from each of our primary nodes to the central exchange.
We connect to the international Internet through international gateways
in Bangalore, Calcutta, Delhi, Bombay (Mumbai), Hyderabad and Madras (Chennai).
We currently use international gateways operated by VSNL, the government-
controlled provider of international telecommunications services in India. We
intend to use a portion of the net proceeds from this offering to establish our
own international gateways to the Internet, either by purchasing or leasing
satellite earth stations or by leasing or purchasing capacity on transoceanic
fiber optic cables.
In addition to a fundamental emphasis on reliability, our network design
philosophy has focused on compatibility, interoperability and scalability. At
each level of data transmission, our network is fully compliant with ISO
standards. We use ethernet and Internet protocols to transmit data, thus
ensuring that our network is completely interoperable with other networks and
systems and that we may port any application onto our network. The modular
design of our network is fully scalable, allowing us to expand without changing
the network design or architecture, thus ensuring little or no service
disruption. Finally, we recently deployed Cisco ATM switches on six points of
presence along our network. These ATM switches allow us to allocate our
existing capacity more efficiently by offering frame relay and dedicated
bandwidth.
54
<PAGE>
Network Operations Center. We maintain a network operation center located
in Madras (Chennai) and a back-up data facility in Bombay (Mumbai). This
facility houses our central network servers as well as our network staff which
monitors network traffic, service quality and equipment at all our points of
presence to ensure a reliable Internet service. Our network operations center
is staffed 24-hours-a-day, seven-days-a-week. We have backup power generators
and software and hardware systems designed to prevent network downtime in the
event of system failures. In the future, we may add additional facilities to
supplement or add redundancy to our current network monitoring capability.
Competition
General. We face competition in each of our markets and expect that this
competition will intensify as the market in India for Internet service provider
services, on-line content and corporate network services and technology
products develops and expands. We compete primarily on the basis of service,
reliability and customer support. Price and ease of use are also competitive
factors.
Internet Access Services. Our principal competitor is VSNL, the
government-controlled telecom provider. VSNL currently has significantly more
subscribers than we do because private companies, such as our company, were not
permitted to enter the Internet service provider market until November 1998. As
of June 30, 1999, 128 private parties, other than our company, have been
granted licenses to operate Internet service providers, 21 of which permit
operation on a national basis in the same manner that we are allowed under our
license. While no other parties had launched a private national Internet
service provider service as of June 30, 1999, we expect competitors to emerge.
Further, we believe that it is inevitable that the large, foreign providers of
Internet service provider services will eventually attempt to enter the Indian
market through local joint ventures or other means. Indian law currently limits
foreign ownership of an Internet service provider to 49%.
In addition, we could face competition from companies that develop new
and innovative techniques to access the Internet. Although growing rapidly,
International Data Corporation estimates that India had an installed base of
only approximately 1.9 million personal computers in 1998. Technology which
permits a connection to the Internet through alternative, less capital
intensive means is likely to be attractive to Indian consumers. A number of
companies, including several collaborating with our company, are planning
alternative Internet access devices, such as set-top boxes for televisions, to
create demand for Internet services in excess of that which could be supported
by the installed base of personal computers. The provider who develops this
technology is likely to have a significant advantage in the marketplace.
On-line Portal. There are several other companies in India that have
developed websites, including indiaworld.com, rediff.com and others, designed
to act as Internet portals. These sites currently have greater traffic than our
site and offer some features that we do not. Further, the dominant Internet
portals continue to be the on-line services and search engine companies based
in the United States, such as America Online, Microsoft Network, Yahoo!,
Excite@Home, Infoseek and Lycos. These companies have been developing specially
branded or co-branded products designed for audiences in specific markets.
Although none of these companies has developed a product designed for India
yet, we believe one or more of them is likely to do so, creating a new source
of competition.
Corporate Network and Technology Services. Our competitors for many
private network services include government services, companies that have built
and operate their own private data networks, satellite communications agencies
such as Hughes, Comsat, HCL Comnet and Bharti BT, and terrestrial network
providers such as Sprint RPG (a joint venture between Sprint and RPG Group),
Wipro Communications Services and Global Electronic Commerce Services.
Many of our existing or potential competitors enjoy substantial
competitive advantages compared to our company, including:
. the ability to offer a wider array of services;
55
<PAGE>
. larger production and technical staffs;
. greater name recognition and larger marketing budgets and resources;
. larger subscriber bases; and
. substantially greater financial, technical and other resources.
To be competitive, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance our products and services, as well as our
sales and marketing channels. Increased competition could result in loss of
market share, reduced prices or reduced margins, any of which could adversely
affect our business. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services.
Intellectual Property
Our intellectual property rights are important to our business. We rely
on a combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property. We
require employees, independent contractors and, when possible, suppliers to
enter into confidentiality agreements upon the commencement of their
relationships with our company. These agreements generally provide that
confidential information developed or made known during the course of a
relationship with our company be kept confidential.
Our efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of
India do not protect proprietary rights to the same extent as laws in the
United States, and the global nature of the Internet makes it difficult to
control the ultimate destination of our products and services. For example,
Indian statutory law does not protect service marks. In the future, litigation
may be necessary to enforce our intellectual property rights or to determine
the validity and scope of the proprietary rights of others. Any such litigation
could be time-consuming and costly.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the content and functionality of our
website or other product or service offerings overlap with competitive
offerings. Defending against these claims, even if not meritorious, could be
expensive and divert our attention from operating our company. If we become
liable to third parties for infringing their intellectual property rights, we
could be required to pay a substantial damage award and be forced to develop
non-infringing technology, obtain a license or cease selling the applications
that contain the infringing technology. We may be unable to develop non-
infringing technology or obtain a license on commercially reasonable terms, or
at all.
We also rely on a variety of technologies that are licensed from third
parties, including CompuServe, Sterling Commerce and Open Market. The software
developed by these and other companies is used in the satyamonline.com website
to perform key functions. These third-party licenses may not be available to us
on commercially reasonable terms in the future. The loss of any of these
licenses could delay the introduction of software enhancements, interactive
tools and other features until equivalent technology could be licensed or
developed. Any such delays could materially adversely affect our business,
results of operations and financial condition.
The trademark "Satyam" is owned by Satyam Computer Services, our parent
company, and licensed to our company for so long as Satyam Computer Services
continues to own at least 51% of our company. Upon the occurrence of a change
of control in our company, however, Satyam Computer Services may terminate our
license to use the "Satyam" trademark on two years prior written notice. We
have filed trademark applications for "Satyam Online," "Satyam:Net" and
"satyamonline.com" in India. These applications are currently pending, and we
plan to file applications for these marks in the United States.
56
<PAGE>
Government Regulation
Our business is subject to comprehensive regulation by the Ministry of
Communications through the Telecom Commission and the Department of
Telecommunications pursuant to the provisions of the Indian Telegraph Act of
1885, or Telegraph Act, the India Wireless Telegraphy Act, 1933, or Wireless
Act, and the terms of the Internet service provider license agreement we
entered into with the Department of Telecommunications under which we operate.
Pursuant to the Telegraph Act, the provision of any telecommunications services
in India requires a license from the government of India, obtained through the
Department of Telecommunications. While the Telegraph Act sets the legal
framework for regulation of the telecommunications sector and the Wireless Act
regulates the possession of wireless telegraphy equipment, much of the
supervision and regulation of our company is implemented more informally
through the general administrative powers of the Department of
Telecommunications, including those reserved to the Department of
Telecommunications and other governmental agencies under our license.
In March 1997, the government of India established the Telecom Regulatory
Authority, an independent regulatory authority under the provisions of the
Telecom Regulatory Authority of India Act. The Telecom Regulatory Authority is
an autonomous body consisting of a chairperson and at least two and not more
than four members, and has primary responsibility for the following:
. facilitating competition and promoting efficiency;
. protecting the interests of consumers;
. regulating revenue sharing among service providers;
. ensuring compliance with license conditions;
. setting and ensuring compliance with the time period applicable to
service providers for providing local and long-distance
telecommunications lines;
. ensuring technical compatibility and effective interconnectivity
among different service providers;
. settling differences between service providers;
. advising the government of India on matters relating to the
development of the telecommunications industry; and
. ensuring effective compliance with universal service obligations.
The Telecom Regulatory Authority also has the authority to, from time to
time, set the rates at which domestic and international telecommunications
services are provided in India. The Telecom Regulatory Authority does not have
authority to grant licenses to service providers or renew licenses, functions
which remain with the Department of Telecommunications. The Telecom Regulatory
Authority, however, has the following powers:
. to call on service providers to furnish information relating to their
operations;
. to appoint persons to make official inquiries;
. to inspect the books of service providers; and
. to issue directives to service providers to ensure their proper
functioning.
Failure to follow Telecom Regulatory Authority directives may lead to the
imposition of fines. Decisions of the Telecom Regulatory Authority may be
appealed to High Courts in India.
The authority of the Telecom Regulatory Authority has been the subject of
recent litigation, particularly with respect to its role in introducing new
telecommunications licensees and the scope of its authority to settle disputes
regarding the grant by the Department of Telecommunications of
57
<PAGE>
telecommunications licenses. The Delhi High Court has held that the authority
of the Department of Telecommunications to issue or amend licenses is not
subject to any prior recommendations of the Telecom Regulatory Authority, and
that any such recommendations are not mandatory. In addition, the Delhi High
Court determined that the Telecom Regulatory Authority does not have
jurisdiction to decide disputes regarding the grant or amendment of a
Department of Telecommunications license. The judgment is subject to the
outcome of a pending appeal. The final outcome of this litigation will affect
the sharing of regulatory authority as between the Department of
Telecommunications and the Telecom Regulatory Authority. The government of
India has formulated the New Telecom Policy, 1999, or NTP. The NTP was cleared
by the Union Cabinet in March 1999 and contemplates a new regime for the
telecom operators, a larger role for Telecom Regulatory Authority, a
restructuring of the Department of Telecommunications and opening up of the
market for long-distance calls.
We began offering Internet access services on November 22, 1998, and we
operate 25 Internet access nodes. In November 1998, the government of India
opened the Internet service provider market to private competition, and the
Department of Telecommunications instituted a mandatory license requirement for
the provision of Internet services. We entered into a license agreement with
the Department of Telecommunications on November 12, 1998 with effect on the
same day, under which we were granted a license to provide national Internet
services on a non-exclusive basis. The terms of our license are generally
consistent with the policy for licensing Internet service providers. The term
of our license is 15 years. Our license can be revoked by the Department of
Telecommunications if we breach the terms and conditions of the license. The
Department of Telecommunications retains the right to take over our network and
to modify, revoke, terminate or suspend the terms and conditions of the license
at any time if, in its opinion, it is necessary or expedient to do so in the
interest of general public, or for the proper operation of the
telecommunications sector or for security considerations. The Department of
Telecommunications also retains the right to review the terms of our license
based on changes in national telecommunications policy. We are not allowed to
assign or transfer our rights under our license without the prior written
consent of the Department of Telecommunications. The license provides that the
total foreign equity in our company may not, at any time, exceed 49% of our
total equity. Telephony on the Internet is not permitted in India, and the
license requires us to take measures to ban carriage of telephone traffic over
the Internet. Our license also requires us to ensure that objectionable,
obscene and unauthorized content, or any other content, messages or
communications infringing copyrights, intellectual property rights and domestic
and international cyberlaws or which is inconsistent with the laws of India, is
not carried on our network. Although under the terms of our license we are free
to fix the prices we charge our subscribers, the Telecom Regulatory Authority
may set prices for the provision of Internet access services generally. We are
permitted to use encryption to safeguard information transmitted over our
network. However, if we use a higher level of encryption than that specified by
the government of India, our license requires us to deposit a set of keys with
the government of India. License fees are waived through October 31, 2003, and
a nominal license fee of Rs.1 per annum is payable from November 1, 2003. Our
obligations under the license are secured by a performance bank guarantee in
the amount of Rs.20.0 million ($0.5 million).
We may be required to import into India computer hardware and Internet
related software purchased from foreign manufacturers for business purposes.
These imports will be subject to the Export and Import Policy as declared by
the Ministry of Commerce. At the time of import, we will be required to pay a
customs duty pursuant to the Customs Tariff Act, 1975. We will also be subject
to the Foreign Exchange Regulation Act, 1973 in connection with payments in
foreign currency to the manufacturers of these products. We will require the
approval of the Reserve Bank of India prior to making these payments.
We may wish to invest in the securities of foreign companies. The Foreign
Exchange Regulation Act, 1973 requires that we obtain permission from the
Reserve Bank of India prior to making any such investment. In addition, foreign
investors may wish to invest in our securities. For information regarding
restrictions on foreign investment in our company, please see "Restrictions on
Foreign Ownership of Indian Securities" on page 80.
58
<PAGE>
Employees
As of June 30, 1999, we had 411 employees. We currently anticipate hiring
an additional 250 employees, most of whom will be hired into our sales and
marketing and technical support and customer care teams, over the next year. Of
our current employees, 59 are administrative, 178 form our sales and marketing
staffs and 174 are dedicated to technical support and customer care. None of
our employees are represented by a union. We believe that our relationship with
our employees is good.
Facilities
Our approximately 15,000 square foot corporate headquarters are located
in Madras (Chennai), India. We also have additional facilities located in
Ahmedabad, Bangalore, Baroda, Belgaum, Bhopal, Bombay (Mumbai), Calcutta,
Cochin, Coimbatore, Davengere, Goa, Hubli, Hyderabad, Indore, Jaipur,
Jamshedpur, Lucknow, Ludhiana, Madras (Chennai), Mangalore, New Delhi, Nagpur,
Pondicherry and Pune aggregating approximately 42,000 square feet. As we expand
our operations, we anticipate leasing additional facilities in each city in
which we develop a point of presence. We lease all of our current facilities
under leases with terms ranging from 33 months to nine years.
Legal Proceeding
As of the date of this prospectus, we are not a party to any material
legal proceedings.
59
<PAGE>
MANAGEMENT
The following table sets forth, as of September 30, 1999, the name, age
and position of each director and executive officer of our company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
R. Ramaraj(1)(2) 49 Chief Executive Officer and Director
A. Srinivasagopalan 44 Senior Vice President
George A. Ajit 40 Vice President, Human Resources
Lalit Bhojwani 43 Vice President, Electronic Commerce
Business
Padma Chandrasekaran 38 Vice President, On-line Business
V.V. Kannan 40 Vice President, Cyber Cafes
Pradeep Lakshmanan 50 Vice President, Internet Sales
N. Shekhar 44 Vice President, Web Services
Rahul Swarup 40 Vice President, Technology
T.R. Santhanakrishnan 42 Chief Financial Officer
T. Suresh Kumar 45 General Manager, Network Control Group
K. Thiagarajan 33 General Manager, Finance
B. Ramalinga Raju(1)(2) 43 Chairman of the Board of Directors
Pranab Barua 46 Director
T.H. Chowdary 67 Director
Donald Peck(2) 47 Director
C. Srinivasa Raju 38 Director
S. Srinivasan(1) 65 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
R. Ramaraj has served as Chief Executive Officer of our company since
April 1998. Mr. Ramaraj has served as a Director since August 1996, prior to
which he served as an advisor to our company since June 1996. From 1992 to
1996, Mr. Ramaraj served as a Director of Sterling Cellular Limited, a mobile
telephone company based in India. Mr. Ramaraj is a Director of Universal Print
Systems Ltd., a publicly held printing company based in India. Mr. Ramaraj
received a B.Tech from Madras University and a P.G.D.M. from IIM Calcutta.
A. Srinivasagopalan has served as Senior Vice President of our company
since February 1996. From 1993 to 1995, Mr. Srinivasagopalan held various
management positions with Abu Dhabi National Oil Co., an oil company based in
the Middle East. Mr. Srinivasagopalan received a B.E. from Madras University
and a P.G.D.M. from IIM Ahmedabad.
George A. Ajit has served as Vice President, Human Resources of our
company since May 1999. From 1998 to 1999, Mr. Ajit was Vice President, Human
Resources of Mobil India, an oil company. From 1996 to 1998, Mr. Ajit was
General Manager, Human Resources, of Mahindra Holidays and Resorts. From 1994
to 1996, Mr. Ajit was Deputy General Manager, BioProducts Division of E.I.D.
Parry, a manufacturing company.
Lalit Bhojwani has served as Vice President, Electronic Commerce Business
of our company since July 1999. From 1997 to 1999, Mr. Bhojwani was Vice
President of Sales of DSS Mobile Communications Limited, a telecommunications
company. Mr. Bhojwani received a B.E. degree from Mumbai University and a
P.G.D.B.M. from IIM, Ahmedabad.
Padma Chandrasekaran has served as Vice President, On-line Business of
our company since March 1996. From June 1995 to February 1996, Ms.
Chandrasekaran was General Manager, Business Development of
60
<PAGE>
ELNET Technologies, a messaging company based in India. From 1993 to February
1994, she was Group Business Manager of ICIM, Mumbai, a computer hardware
company based in India. Ms. Chandrasekaran received a B.Sc. in Statistics from
Calcutta University, a P.G.D.M. from IIM Ahmedabad and an MBA in
Telecommunications Management from the University of San Francisco.
V.V. Kannan has served as Vice President, Cyber Cafes of our company
since July 1999. From 1996 to 1999, Mr. Kannan was Vice President, Marketing of
G.M. Pens International Limited, a manufacturing company. From 1995 to 1996, he
was Vice President, Retail Sales of Real Value Marketing Sales Limited, and
from 1992 to 1995, he was Marketing Manager of ITC Agri Business Division, a
manufacturing company. Mr. Kannan received a B.E. from Madras University and a
P.G.D.M. from IIM Calcutta.
Pradeep Lakshmanan has served as Vice President, Internet Sales of our
company since September 1998. From 1997 to 1998, Mr. Lakshmanan was Associate
Vice President of Amco Batteries Ltd., a battery manufacturing company based in
India. From 1991 to 1997, Mr. Lakshmanan was General Manager of Berger Paints
Limited, an international paint manufacturing company based in India. Mr.
Lakshmanan received B.Sc. in Chemical Engineering from Trichur Engineering
College.
N. Shekhar has served as Vice President, Web Services of our company
since July 1999. From 1995 to 1999, Mr. Shekhar was Chief Executive Officer of
SSA India Private Limited, a global enterprise resource planning company. Mr.
Shekhar received a B.E. from Bangalore University, an M.S. from the University
of Texas and an M.B.A. from San Jose State University.
Rahul Swarup has served as Vice President, Technology of our company
since September 1999. From 1989 to 1999, Mr. Swarup was Vice President of
Citicorp Global Technology Infrastructure. Mr. Swarup received a B.E. in
Electrical Engineering from Indian Institute of Technology, Kanpur.
T.R. Santhanakrishnan has served as Chief Financial Officer of our
company since September 1999. From 1997 to 1999, Mr. Santhanakrishnan was
Executive Vice President, Finance of Sanmar Engineering Corporation. From 1990
to 1997, he served in a senior financial position for Royal Dutch/Shell Oil
Company. Mr. Santhankrishnan received a degree in Commerce from the University
of Madras and is a member of the Institute of Chartered Accountants of India
and the Institute of Cost and Works Accountants of India.
T. Suresh Kumar has served as General Manager, Network Control Group of
our company since March 1999. From 1996 to 1999, Mr. Kumar was Corporate
Manager, Information Services of Compaq Computer Technologies, India Ltd., a
technology company. From 1994 to 1996, he was Senior Manager of W.S.
Telesystems Ltd., a manufacturing company. Mr. Kumar received a B.E. degree
from Madras University.
K. Thiagarajan has served as General Manager, Finance of our company
since October 1997. From 1990 to 1997, Mr. Thiagarajan was Chief Financial
Officer of Coromandel Garments Limited, an export garment manufacturing company
owned by the House of Tata. Mr. Thiagarajan received a B.Com from Loyola
College of Madras and is a member of the Institute of Chartered Accountants of
India and the Institute of Cost and Works Accountants of India.
B. Ramalinga Raju is a co-founder of our company and has served as a
Director since 1995. Mr. B. Ramalinga Raju has served as the Chairman of the
Board of Directors since January 1996. Mr. B. Ramalinga Raju was the Chief
Executive Officer of Samrat Spinners Limited, a spinning mill, until 1995. Mr.
B. Ramalinga Raju is the Chief Executive Officer of Satyam Computer Services
and is a Director of Satyam Computer Services, Satyam Renaissance Consulting
Limited, Satyam Spark Solutions Limited, Gouthami Power Limited, Samrat
Spinners Limited and Maytas Infra Limited. Mr. B. Ramalinga Raju received an
M.B.A. in Business Management from Ohio State University.
61
<PAGE>
Pranab Barua has served as a Director of Satyam Infoway since April 1999.
Mr. Barua has been Chief Executive Officer of Reckitt & Coleman of India Ltd.,
a toiletries manufacturing company, and Regional Director of Reckitt & Coleman,
South Asia since July 1998. Prior to that, Mr. Barua served in various
management positions at Brooke Bond India Ltd.
T.H. Chowdary has served as a Director of our company since February
1996. Mr. Chowdary is a Director of Renaissance Technologies Limited, a
software company based in India. Mr. Chowdary retired as the Chief Executive
Officer of VSNL, the government-controlled provider of international
telecommunications services in India, in 1987.
Donald Peck has served as a Director of Satyam Infoway since March 1999.
Mr. Peck has been with Commonwealth Development Corporation, a UK-based
institution investing in developing markets, since 1991. He has been based in
India since 1995, initially as head of International Venture Capital
Management, or IVCM, and since April 1998 as Chief Executive Officer of CDC
Advisors Private Limited, a Commonwealth Development Corporation subsidiary
providing advisory services to IVCM. Mr. Peck received a PhD in Latin American
Economic History from Oxford University.
C. Srinivasa Raju has served as a Director of our company since February
1996. From 1994 to 1995, Mr. C. Srinivasa Raju was Chief Executive Officer of
Dun & Bradstreet Satyam Software Limited, a software services company based in
India. Mr. C. Srinivasa Raju is a Director of Satyam Computer Services, Satyam
Renaissance Consulting Limited and Satyam Enterprise Solutions Limited. Mr. C.
Srinivasa Raju received an M.S. from Utah State University.
S. Srinivasan has served as a Director of our company since February
1996. From 1989 to 1995, Mr. Srinivasan was Chief Executive Officer of AT&T
India Limited. Mr. Srinivasan received a BE in Engineering and a PG in
Management from Madras University.
Board Composition
Our Articles of Association set the minimum number of directors at two
and the maximum number of directors at 12. We currently have seven directors.
The Companies Act and our Articles of Association require the following:
. at least two-thirds of our directors shall be subject to re-election
by our shareholders; and
. at least one-third of our directors who are subject to re-election
shall be up for re-election at each annual meeting of our
shareholders.
Our Articles of Association provide that B. Ramalinga Raju shall be a
permanent director not subject to re-election. Our Articles of Association also
provide that South Asia Regional Fund, or SARF, is entitled to nominate one
director as long as it continues to own at least 7.5% of the issued ordinary
share capital of our company. B. Ramalinga Raju and C. Srinivasa Raju are
brothers-in-law. There are no other family relationships between any of the
directors or executive officers of our company.
On February 5, 1999, we entered into a Share Subscription and
Shareholders' Agreement, or Shareholders' Agreement, with Satyam Computer
Services, South Asia Regional Fund, or SARF, and Mr. B. Ramalinga Raju, the
Chairman of our Board of Directors, which was subsequently amended effective
September 14, 1999. The Shareholders' Agreement provides, among other things,
that:
. so long as SARF owns at least 5.0% of our issued ordinary share
capital, it is entitled to nominate one director to our Board of
Directors;
. so long as Satyam Computer Services owns at least 50.1% of our issued
ordinary share capital, it is entitled to nominate four directors to
our Board of Directors; and
. a quorum for a meeting of our Board of Directors shall be no less
than three directors.
62
<PAGE>
SARF's current nominee to our Board of Directors is Mr. Peck. Satyam Computer
Services' current nominees to our Board of Directors are Messrs. Ramaraj, B.
Ramalinga Raju, T.H. Chowdary and C. Srinivasa Raju.
Board Committees
The Audit Committee of the Board of Directors reviews, acts on and
reports to the Board of Directors with respect to various auditing and
accounting matters, including the recommendation of our independent auditors,
the scope of the annual audits, fees to be paid to the independent auditors,
the performance of our independent auditors and our accounting practices. The
members of the Audit Committee are Messrs. B. Ramalinga Raju, Ramaraj and Peck.
The Compensation Committee of the Board of Directors determines the
salaries, benefits and stock option grants for our employees, consultants,
directors and other individuals compensated by our company. The Compensation
Committee also administers our compensation plans. The members of the
Compensation Committee are Messrs. B. Ramalinga Raju, Ramaraj and Srinivasan.
Director Compensation
Our Articles of Association provide that each of our directors receives a
sitting fee not exceeding Rs.200 for every Board and Committee meeting. In
fiscal 1999, we did not pay any fees to our non-employee directors. Mr.
Ramaraj, who is employed by Satyam Infoway as our Chief Executive Officer, does
not receive any additional compensation for his service on our Board of
Directors. Directors are reimbursed for travel and out-of-pocket expenses in
connection with their attendance at Board and Committee meetings.
Employment, Severance And Other Agreements
On May 18, 1998, our Board of Directors appointed Mr. Ramaraj as Chief
Executive Officer of Satyam Infoway for a term of five years effective April 1,
1998. Mr. Ramaraj's appointment as Chief Executive Officer was approved by our
shareholders as required under the Companies Act on July 3, 1998. Pursuant to
the terms of his appointment, Mr. Ramaraj receives a monthly salary of
Rs.83,250 ($1,916). Mr. Ramaraj also receives medical, vacation and other
benefits, including membership fees for up to two clubs.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to R. Ramaraj, our Chief Executive Officer, during the fiscal year ended
March 31, 1999 for services rendered in all capacities to us during the fiscal
year ended March 31, 1999. Mr. Ramaraj was appointed Chief Executive Officer of
our company in April 1998. None of our other executive officers earned a
combined salary and bonus in excess of $100,000 during any of the last three
fiscal years. In accordance with the rules of the SEC, other compensation in
the form of perquisites and other personal benefits has been omitted because
the aggregate amount of such perquisites and personal benefits constituted less
than the lesser of $50,000 or 10% of the total of annual salary and bonuses in
fiscal 1999. The amounts in the following table are in dollars based on the
noon buying rate of Rs.43.45 per dollar on June 30, 1999. The total
remuneration received by our officers and directors for their services to us
for the fiscal year ended March 31, 1999 was approximately $105,700.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------- -----------------
Shares Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- ------- ----- -----------------
<S> <C> <C> <C>
R. Ramaraj, Chief Executive Officer $22,992 -- --
</TABLE>
63
<PAGE>
Option Grants In Last Year
There were no option grants to our Chief Executive Officer during the
fiscal year ended March 31, 1999. Of the 147,000 options granted to employees
on September 28, 1999, 7,500 options with an exercise price of Rs.350 per
equity share were granted to Mr. Ramaraj.
Fiscal Year-End Option Values
Our Chief Executive Officer did not exercise or hold any options during
the fiscal year ended March 31, 1999.
Employee Benefit Plans
We have an Associates Stock Option Plan, or ASOP, which provides for the
grant of options to employees of our company. The ASOP was approved by our
Board of Directors and our shareholders in March 1999. A total of 825,000
equity shares were reserved for issuance under the ASOP. As of June 30, 1999,
we had granted an aggregate of 5,000 options under the ASOP at an exercise
price equal to Rs.70 per share. On September 28, 1999, we granted options to
acquire an additional 147,000 equity shares at a weighted exercise price equal
to Rs.335 per share.
The ASOP is administered by the Compensation Committee of our Board of
Directors. Pursuant to the provisions of the ASOP, the Satyam Infoway
Associates Trust, or Trust, is allotted options to purchase our equity shares
pursuant to resolutions passed at our general meetings. The Trust holds these
options for and on behalf of our employees. The Compensation Committee makes
recommendations to the Trust regarding employees who should be considered for
option grants. On the recommendation of the Compensation Committee, the Trust
will advise our company to transfer the options to identified employees, with
the right to convert the issued options into our equity shares at the rates
indicated in the options. The consideration for transfer of the options will be
Rs.1 per option to be paid by the employee before transfer of the options.
An employee holding options may apply for conversion of the options on a
date specified therein which is referred to as the conversion date. The options
are not transferable by an employee on or before the conversion date, except to
the Trust should the employee cease to be an employee by reason of resignation,
dismissal or termination of employment due to reasons of non-performance or
otherwise. On exercise of the option, the employee submits a letter of
conversion to the Trust for allotment of our equity shares in his or her name.
The Trust collects the consideration for conversion arrived at as a product of
number of options converted and the conversion price as reduced by the price of
the options paid by the employee for the number of options converted by the
employee. The equity shares transferred to the employee after conversion from
options is the absolute property of the employee and will be held by the
employee.
64
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our equity shares as of June 30, 1999, and as adjusted to reflect
the sale of the ADSs offered hereby, by (1) each person or group of affiliated
persons who is known by us to beneficially own 5% or more of the equity shares,
(2) each director and our Chief Executive Officer and (3) all directors and
executive officers as a group. The table gives effect to equity shares issuable
within 60 days of June 30, 1999 upon the exercise of all options and other
rights beneficially owned by the indicated shareholders on that date and
thereby gives effect to the exercise by Satyam Computer Services and South Asia
Regional Fund of warrants to acquire 750,000 equity shares in the aggregate.
The table also gives effect to the purchase by Sterling Commerce in September
1999 of 481,000 equity shares in a private placement. Beneficial ownership is
determined in accordance with the rules of the SEC and includes voting and
investment power with respect to equity shares. Unless otherwise indicated, the
persons named in the table have sole voting and sole investment control with
respect to all equity shares beneficially owned. Mr. B. Ramalinga Raju is the
Chief Executive Officer, Chairman of the Board of Directors and a shareholder
of Satyam Computer Services. Messrs. Satyam Ramnauth and Pierre Guy Noel,
directors of International Venture Capital Management, which manages South Asia
Regional Fund, exercise voting control and dispositive power over the equity
shares owned by South Asia Regional Fund. Mr. Peck, a director of our company,
is affiliated with South Asia Regional Fund.
<TABLE>
<CAPTION>
Equity Shares Equity Shares
Beneficially Owned Beneficially Owned
Prior To This After This
Offering Offering
------------------ ------------------
Beneficial Owner Number Percent Number Percent
- ---------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Satyam Computer Services Limited........ 12,529,800 73.8% 12,529,800 59.2%
Mayfair Centre, S P Road
Secunderabad 500 003
India
South Asia Regional Fund................ 3,600,000 21.2 3,600,000 17.0
Les Cascades Building
Edith Cavell Street
Port Louis
Mauritius
R. Ramaraj.............................. 370,000 2.2 370,000 1.7
B. Ramalinga Raju....................... 100 * 100 *
Pranab Barua............................ -- -- -- --
T. H. Chowdary.......................... -- -- -- --
Donald Peck............................. -- -- -- --
C. Srinivasa Raju....................... -- -- -- --
S. Srinivasan........................... -- -- -- --
All directors and executive officers as
a group
(18 persons)........................... 370,100 2.2 370,100 1.7
</TABLE>
- --------
* Less than 1% of total.
65
<PAGE>
CERTAIN TRANSACTIONS
Satyam Computer Services is our parent company. In fiscal 1999 and the
quarter ended June 30, 1999, we sold an aggregate of Rs.0.4 million (less than
$0.1 million) and Rs.9.1 million ($0.2 million), respectively, in services to
Satyam Computer Services and its affiliates. In fiscal 1998 and 1999 and the
quarter ended June 30, 1999, we purchased an aggregate of Rs.1.4 million,
Rs.3.0 million and Rs.1.2 million (less than $0.1 million), respectively, in
software and services from Satyam Computer Services and its affiliates. In
addition, we paid an aggregate of Rs.0.8 million in training and consulting
fees to Satyam Computer Services in fiscal 1998. We believe that the foregoing
transactions with Satyam Computer Services and its affiliates were on terms no
less favorable to our company than could have been obtained from independent
third parties.
Since fiscal 1997, Satyam Computer Services had made advances of working
capital to us. The aggregate of all advances we received from Satyam Computer
Services in fiscal 1997, 1998 and 1999 were Rs.5.3 million, Rs.5.6 million and
Rs.1.3 million (less than $0.1 million), respectively. As of the end of fiscal
1998 and 1999 and the quarter ended June 30, 1999, our balances payable to
Satyam Computer Services were Rs.1.5 million, Rs.4.0 million (less than $0.1
million) and Rs.5.5 million ($0.1 million), respectively. In fiscal 1998, we
repaid an aggregate of Rs.7.6 million through the issuance to Satyam Computer
Services of an aggregate of 756,569 equity shares. In fiscal 1999, we repaid an
aggregate of Rs.1.1 million through the issuance to Satyam Computer Services of
an aggregate of 108,390 equity shares. As of the end of fiscal 1999 and the
quarter ended June 30, 1999, we had a balance of Rs.0.2 million (less than $0.1
million) and Rs.0.2 million (less than $0.1 million), respectively, in
receivables from affiliates of Satyam Computer Services. In fiscal 1998, we
placed short-term deposits with Satyam Computer Services at a rate of 18% per
annum for periods ranging from three to six months.
On February 5, 1999, we entered into a Share Subscription and
Shareholders' Agreement, or Shareholders' Agreement, with Satyam Computer
Services, South Asia Regional Fund, or SARF, and Mr. B. Ramalinga Raju, the
Chairman of our Board of Directors, which was subsequently amended effective
September 14, 1999. Pursuant to the Shareholders' Agreement, Satyam Computer
Services and SARF purchased 750,000 and 3,000,000, respectively, of our equity
shares at a price equal to Rs.70 per equity share. Pursuant to the terms of the
Shareholders' Agreement, we are required to use the proceeds from this sale of
our equity shares to set up a value-added network servicing 25 cities in India
for the purpose of offering information technology connectivity, electronic
commerce and Internet solutions. The Shareholders' Agreement contains
provisions regarding our directors and management. For additional information
regarding how the Shareholders Agreement affects the compensation of our Board
of Directors, please see "Management--Board Composition" on page 62. The
Shareholders' Agreement grants to SARF registration rights and, in the event of
a sale of our equity shares by Satyam Computer Services, "tag-along" rights.
The Shareholders' Agreement also grants to Satyam Computer Services and SARF
warrants to purchase up to an aggregate of 750,000 of our equity shares. The
exercise price of the warrants is equal to eight times our fully diluted
earnings per equity share, as shown on our latest audited financial statements;
provided that the exercise price may not be less than 66% of the fair market
value of an equity share on the exercise date. Since we had a net loss in
fiscal 1999, if the warrants were currently exercisable the exercise price
would be 66% of the fair market value, as determined by three merchant banks,
of the underlying equity shares on the exercise date. The warrants are
exercisable for a period commencing on June 30, 2001 and terminating on June
30, 2003, provided that the warrants become immediately exercisable if Satyam
Computer Services sells any of our equity shares or if we file an application
for listing or a petition to wind up our affairs voluntarily. As a result, the
warrants will be exercisable upon completion of this offering. Both Satyam
Computer Services and SARF have notified the Company of their intent to
exercise the warrants, the exercise price for which will be equal to 66% of the
price to public indicated on the cover of this prospectus. For additional
information regarding these warrants, please see "Description of Equity Shares"
on page 67.
66
<PAGE>
DESCRIPTION OF EQUITY SHARES
The following are summaries of our Articles of Association and Memorandum
of Association and the Companies Act which govern our affairs. Our Articles of
Association provides that the regulations contained in Table 'A' of the
Companies Act apply to Satyam Infoway. We have filed complete copies of our
Memorandum of Association and Articles of Association as well as Table "A' of
the Companies Act as exhibits to our registration statement on Form F-1 of
which this prospectus is a part. In this prospectus, all references to our
Articles of Association include the regulations of Table "A' of the Companies
Act incorporated into our Articles of Association.
General
Our authorized share capital is 25,000,000 shares, par value Rs.10 per
share. As of June 30, 1999, 15,750,000 equity shares, options to purchase an
additional 5,000 equity shares and warrants to purchase an additional 750,000
equity shares were issued and outstanding.
The equity shares are our only class of share capital. However, our
Articles of Association and the Companies Act permit us to issue classes of
securities in addition to the equity shares. For the purposes of this
prospectus, "shareholder" means a shareholder who is registered as a member in
the register of members of our company.
A total of 825,000 equity shares are reserved for issuance under our
ASOP. As of June 30, 1999, we had granted an aggregate of 5,000 options under
our ASOP at an exercise price equal to Rs.70 per share. On September 28, 1999,
we granted options to acquire an additional 147,000 equity shares at a weighted
exercise price equal to Rs. 335 per share.
On February 5, 1999, we entered into a Share Subscription and
Shareholders' Agreement, or Shareholders' Agreement, with Satyam Computer
Services, South Asia Regional Fund, or SARF, and Mr. B. Ramalinga Raju, the
Chairman of our Board of Directors, which was subsequently amended effective
September 14, 1999. The Shareholders' Agreement grants "tag-along" rights to
SARF in the event of a sale of our equity shares by Satyam Computer Services as
well as customary information and inspection rights. Sterling Commerce has
similar rights pursuant to the stockholders agreement in connection with the
sale of our equity shares to Sterling Commerce. The Shareholders' Agreement
with SARF provides that upon the occurrence of specified events, SARF may
require Satyam Computer Services to repurchase our equity shares owned by SARF.
The Shareholders' Agreements also grants to Satyam Computer Services and SARF
warrants to purchase up to an aggregate of 750,000 of our equity shares.
Pursuant to the warrants, Satyam Computer Services and SARF may purchase
150,000 and 600,000, respectively, of our equity shares. The exercise price of
the warrants is equal to eight times our fully diluted earnings per equity
share, as shown on our latest audited financial statements; provided that the
exercise price may not be less than 66% of the fair market value of an equity
share on the exercise date. Since we had a net loss in fiscal 1999, if the
warrants were currently exercisable the exercise price would be 66% of the fair
market value, as determined by three merchant banks, of the underlying equity
shares on the exercise date. The warrants are exercisable for a period
commencing on June 30, 2001 and terminating on June 30, 2003, provided that the
warrants become immediately exercisable if Satyam Computer Services sells any
of our equity shares or if we file an application for listing or a petition to
wind up our affairs voluntarily. As a result, the warrants will be exercisable
upon completion of this offering. Both Satyam Computer Services and SARF have
notified the Company of their intent to exercise the warrants, the exercise
price for which will be equal to 66% of the price to public indicated on the
cover of this prospectus.
Dividends
Under the Companies Act, unless our Board of Directors recommends the
payment of a dividend, we may not declare a dividend. Similarly, under our
Articles, although the shareholders may, at the annual general meeting, approve
a dividend in an amount less than that recommended by the Board, they cannot
increase the amount of the dividend. In India, dividends generally are declared
as a percentage of the par value of a
67
<PAGE>
company's equity shares. The dividend recommended by the Board, if any, and
subject to the limitations described above, is distributed and paid to
shareholders in proportion to the paid up value of their shares within 42 days
of the approval by the shareholders at the annual general meeting. Pursuant to
our Articles, our Board has discretion to declare and pay interim dividends
without shareholder approval. With respect to equity shares issued during a
particular fiscal year (including any equity shares underlying ADSs issued to
the depositary in connection with the offering or in the future), cash
dividends declared and paid for such fiscal year generally will be prorated
from the date of issuance to the end of such fiscal year. Under the Companies
Act, dividends can only be paid in cash to the registered shareholder at a
record date fixed on or prior to the annual general meeting or to his order or
his banker's order.
Under the Companies Act, dividends may be paid out of profits of a
company in the year in which the dividend is declared or out of the
undistributed profits of previous fiscal years. Before declaring a dividend
greater than 10% of the par value of its equity shares, a company is required
under the Companies Act to transfer to its reserves a minimum percentage of its
profits for that year, ranging from 2.5% to 10% depending upon the dividend
percentage to be declared in such year. The Companies Act further provides
that, in the event of an inadequacy or absence of profits in any year, a
dividend may be declared for such year out of the company's accumulated
profits, subject to the following conditions:
. the rate of dividend to be declared may not exceed 10% of its paid up
capital or the average of the rate at which dividends were declared
by the company in the prior five years, whichever is less;
. the total amount to be drawn from the accumulated profits earned in
the previous years and transferred to the reserves may not exceed an
amount equivalent to 10% of its paid up capital and free reserves,
and the amount so drawn is to be used first to set off the losses
incurred in the fiscal year before any dividends in respect of
preference or equity shares are declared; and
. the balance of reserves after withdrawals shall not fall below 15% of
its paid up capital.
For additional information, please see "Dividend Policy" on page 26. A
tax of 11%, including the presently applicable surcharge, of the total dividend
declared, distributed or paid for a relevant period is payable by our company.
For additional information, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 32.
Bonus Shares
In addition to permitting dividends to be paid out of current or retained
earnings as described above, the Companies Act permits us to distribute an
amount transferred from the general reserve or surplus in our profit and loss
account to our shareholders in the form of bonus shares, which are similar to a
stock dividend. The Companies Act also permits the issuance of bonus shares
from a share premium account. Bonus shares are distributed to shareholders in
the proportion recommended by the Board. Shareholders of record on a fixed
record date are entitled to receive such bonus shares.
Preemptive Rights and Issue of Additional Shares
The Companies Act gives shareholders the right to subscribe for new
shares in proportion to their respective existing shareholdings unless
otherwise determined by a special resolution passed by a general meeting of the
shareholders. For approval, this special resolution must be approved by a
number of votes which is not less than three times the number of votes against
the special resolution. If the special resolution is not approved, the new
shares must first be offered to the existing shareholders as of a fixed record
date. The offer must include: (1) the right, exercisable by the shareholders of
record, to renounce the shares offered in favor of any other person; and (2)
the number of shares offered and the period of the offer, which may not be less
than 15 days from the date of offer. If the offer is not accepted it is deemed
to have been declined. Our Board is authorized under the Companies Act to
distribute any new shares not purchased by the preemptive rights holders in the
manner that it deems most beneficial to our company.
68
<PAGE>
Annual General Meetings of Shareholders
We must convene an annual general meeting of shareholders within six
months after the end of each fiscal year and may convene an extraordinary
general meeting of shareholders when necessary or at the request of a
shareholder or shareholders holding at least 10% of our paid up capital
carrying voting rights. The annual general meeting of the shareholders is
generally convened by our Secretary pursuant to a resolution of the Board.
Written notice setting out the agenda of the meeting must be given at least 21
days (excluding the days of mailing and receipt) prior to the date of the
general meeting to the shareholders of record. Shareholders who are registered
as shareholders on the date of the general meeting are entitled to attend or
vote at such meeting.
The annual general meeting of shareholders must be held at our registered
office or at such other place within the city in which the registered office is
located; meetings other than the annual general meeting may be held at any
other place if so determined by the Board. Our registered office is located at
Mayfair Trade Center, IInd Floor, 1-8-303/36, S.P. Road, Secunderabad 500 003,
India.
Our Articles provide that a quorum for a general meeting is the presence
of at least five shareholders in person.
Voting Rights
At any general meeting, voting is by show of hands unless a poll is
demanded by a shareholder or shareholders present in person or by proxy holding
at least 10% of the total shares entitled to vote on the resolution or by those
holding shares with an aggregate paid up capital of at least Rs.50,000. Upon a
show of hands, every shareholder entitled to vote and present in person has one
vote and, on a poll, every shareholder entitled to vote and present in person
or by proxy has voting rights in proportion to the paid up capital held by such
shareholders. Our Chairman of the Board has a deciding vote in the case of any
tie. For a description of voting of ADSs, please see "Description of American
Depositary Shares--Voting Rights" on page 76.
Any shareholder may appoint a proxy. The instrument appointing a proxy
must be delivered to us at least 48 hours prior to the meeting. A proxy may not
vote except on a poll. A corporate shareholder may appoint an authorized
representative who can vote on behalf of the shareholder, both upon a show of
hands and upon a poll.
Ordinary resolutions may be passed by simple majority of those present
and voting at any general meeting for which the required period of notice has
been given. However, specified resolutions such as amendments to our Articles
and the Memorandum of Association, commencement of a new line of business, the
waiver of preemptive rights for the issuance of any new shares and a reduction
of share capital, require that votes cast in favor of the resolution (whether
by show of hands or poll) are not less than three times the number of votes, if
any, cast against the resolution.
Register of Shareholders; Record Dates; Transfer of Shares
We maintain a register of shareholders. For the purpose of determining
the shares entitled to annual dividends, the register is closed for a specified
period prior to the annual general meeting. The date on which this period
begins is the record date.
To determine which shareholders are entitled to specified shareholder
rights, we may close the register of shareholders. The Companies Act requires
us to give at least seven days' prior notice to the public before such closure.
We may not close the register of shareholders for more than thirty consecutive
days, and in no event for more than forty-five days in a year.
Following the introduction of the Depositories Act, 1996, and the repeal
of Section 22A of the Securities Contracts (Regulation) Act, 1956, which
enabled companies to refuse to register transfers of shares in some
circumstances, the equity shares of a public company are freely transferable,
subject only to the
69
<PAGE>
provisions of Section 111A of the Companies Act. Since we are a public company,
the provisions of Section 111A will apply to us. Our Articles currently contain
provisions which give our directors discretion to refuse to register a transfer
of shares in some circumstances. According to our Articles, our directors are
required to exercise this right in the best interests of our company. While our
directors are not required to provide a reason for any such refusal in writing,
they must give notice of the refusal to the transferee within one month after
receipt of the application for registration of transfer by our company. In
accordance with the provisions of Section 111A(2) of the Companies Act, our
directors may exercise this discretion if they have sufficient cause to do so.
If our directors refuse to register a transfer of shares, the shareholder
wishing to transfer his, her or its shares may file a civil suit or an appeal
with the Company Law Board, or CLB. Pursuant to Section 111A(3), if a transfer
of shares contravenes any of the provisions of the Securities and Exchange
Board of India Act, 1992 or the regulations issued thereunder or the Sick
Industrial Companies (Special Provisions) Act, 1985 or any other Indian laws,
the CLB may, on application made by the company, a depositary incorporated in
India, an investor, the Securities and Exchange Board of India or other
parties, direct the rectification of the register of records. The CLB may, in
its discretion, issue an interim order suspending the voting rights attached to
the relevant shares before making or completing its investigation into the
alleged contravention. Notwithstanding such investigation, the rights of a
shareholder to transfer the shares will not be restricted.
Under the Companies Act, unless the shares of a company are held in a
dematerialized form, a transfer of shares is effected by an instrument of
transfer in the form prescribed by the Companies Act and the rules thereunder
together with delivery of the share certificates. Our transfer agent is .
Disclosure of Ownership Interest
Section 187C of the Companies Act requires beneficial owners of shares of
Indian companies who are not holders of record to declare to us details of the
holder of record and the holder of record to declare details of the beneficial
owner. Any person who fails to make the required declaration within 30 days may
be liable for a fine of up to Rs.1,000 for each day the declaration is not
made. Any lien, promissory note or other collateral agreement created, executed
or entered into with respect to any equity share by its registered owner, or
any hypothecation by the registered owner of any equity share, shall not be
enforceable by the beneficial owner or any person claiming through the
beneficial owner if such declaration is not made. Failure to comply with
Section 187C will not affect our obligation to register a transfer of shares or
to pay any dividends to the registered holder of any shares pursuant to which
the declaration has not been made. While it is unclear under Indian law whether
Section 187C applies to holders of ADSs, investors who exchange ADSs for the
underlying equity shares will be subject to the restrictions of Section 187C.
Additionally, holders of ADSs may be required to comply with the notification
and disclosure obligations pursuant to the provisions of the deposit agreement
to be entered into by us, such holders and a depositary. For additional
information regarding the deposit agreement, please see "Description of
American Depositary Shares" on page 72.
Audit and Annual Report
At least 21 days before the annual general meeting of shareholders
excluding the days of mailing and receipt, we must distribute to our
shareholders a detailed version of our audited balance sheet and profit and
loss account and the related reports of the Board and the auditors, together
with a notice convening the annual general meeting. Under the Companies Act, we
must file the balance sheet and annual profit and loss account presented to the
shareholders within 30 days of the conclusion of the annual general meeting
with the Registrar of Companies in Andhra Pradesh, India, which is the state in
which our registered office is located. We must also file an annual return
containing a list of our shareholders and other information, within 60 days of
the conclusion of the meeting.
Company Acquisition of Equity Shares
Under the Companies Act, approval of at least 75% of a company's
shareholders voting on the matter and approval of the High Court of the State
in which the registered office of the company is situated is required to reduce
a company's share capital. A company may, under some circumstances, acquire its
own equity shares
70
<PAGE>
without seeking the approval of the High Court. However, a company would have
to extinguish the shares it has so acquired within the prescribed time period.
A company is not permitted to acquire its own shares for treasury operations.
An acquisition by a company of its own shares (without having to obtain the
approval of the High Court) must comply with prescribed rules, regulations and
conditions as laid down in the Companies Act and the Securities and Exchange
Board of India (Buy-back of Securities) Regulations, 1998, or Buy-back
Regulations. However, the Buy-back Regulations apply only to public companies
listed on a recognized Indian stock exchange and will therefore not apply to
Satyam Infoway. The guidelines for the buy-back of securities by unlisted
companies have not yet been prescribed.
Liquidation Rights
Subject to the rights of creditors, employees and the holders of any
shares entitled by their terms to preferential repayment over the equity
shares, if any, in the event of our winding-up the holders of the equity shares
are entitled to be repaid the amounts of paid up capital or credited as paid up
on those equity shares. All surplus assets after payments due to the holders of
any preference shares at the commencement of the winding-up shall be paid to
holders of equity shares in proportion to their shareholdings.
71
<PAGE>
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
Citibank, N.A. will act as the depositary bank for the American
Depositary Shares. Citibank's depositary offices are located at 111 Wall
Street, New York, New York 10005. American Depositary Shares are frequently
referred to as "ADSs" and represent ownership interests in securities that are
on deposit with the depositary bank. ADSs are normally represented by
certificates that are commonly known as American Depositary Receipts or "ADRs."
The depositary bank typically appoints a custodian to safekeep the securities
on deposit. In this case, the custodian is Citibank, N.A.--Mumbai Branch,
located at 81 Dr. Annie Besant Road, Worli, Mumbai India 400 018.
We have appointed Citibank as depositary bank pursuant to a deposit
agreement. A copy of the deposit agreement is on file with the SEC under cover
of a Registration Statement on Form F-6. You may obtain a copy of the deposit
agreement from the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
We are providing you with a summary description of the ADSs and your
rights as an owner of ADSs. Please remember that summaries by their nature lack
the precision of the information summarized and that a holder's rights and
obligations as an owner of ADSs will be determined by the deposit agreement and
not by this summary. We urge you to review the deposit agreement in its
entirety as well as the form of ADR attached to the deposit agreement.
Each ADS represents one equity share on deposit with the custodian bank.
An ADS will also represent any other property received by the depositary bank
or the custodian on behalf of the owner of the ADS but that has not been
distributed to the owners of ADSs because of legal restrictions or practical
considerations.
If you become an owner of ADSs, you will become a party to the deposit
agreement and therefore will be bound to its terms and to the terms of the ADR
that represents your ADSs. The deposit agreement and the ADR specify our rights
and obligations as well as your rights and obligations as owner of ADSs and
those of the depositary bank. As an ADS holder you appoint the depositary bank
to act on your behalf in certain circumstances. The deposit agreement is
governed by New York law. However, our obligations to the holders of equity
shares will continue to be governed by the laws of India, which may be
different from the laws in the United States.
As an owner of ADSs, you may hold your ADSs either by means of an ADR
registered in your name or through a brokerage or safekeeping account. If you
decide to hold your ADSs through your brokerage or safekeeping account, you
must rely on the procedures of your broker or bank to assert your rights as ADS
owner. Please consult with your broker or bank to determine what those
procedures are. This summary description assumes you have opted to own the ADSs
directly by means of an ADR registered in your name and, as such, we will refer
to you as the "holder." When we refer to "you," we assume the reader owns new
ADSs and will own ADSs at the relevant time.
Dividends and Distributions
As a holder, you generally have the right to receive the distributions we
make on the securities deposited with the custodian bank. Your receipt of these
distributions may be limited, however, by practical considerations and legal
limitations. Holders will receive such distributions under the terms of the
deposit agreement in proportion to the number of ADSs held as of a specified
record date.
Distributions of Cash
Whenever we make a cash distribution for the securities on deposit with
the custodian, we will notify the depositary bank. Upon receipt of such notice
the depositary bank will arrange for the funds to be converted into U.S.
dollars and for the distribution of the U.S. dollars to the holders.
72
<PAGE>
The conversion into U.S. dollars will take place only if practicable and
if the U.S. dollars are transferable to the United States. The amounts
distributed to holders will be net of the fees, expenses, taxes and
governmental charges payable by holders under the terms of the deposit
agreement. The depositary will apply the same method for distributing the
proceeds of the sale of any property (such as undistributed rights) held by the
custodian in respect of securities on deposit.
Distributions of Shares
Whenever we make a free distribution of equity shares for the securities
on deposit with the custodian, we will notify the depositary bank. Upon receipt
of such notice, the depositary bank will either distribute to holders new ADSs
representing the equity shares deposited or modify the ADS to equity shares
ratio, in which case each ADS you hold will represent rights and interests in
the additional equity shares so deposited. Only whole new ADSs will be
distributed. Fractional entitlements will be sold and the proceeds of such sale
will be distributed as in the case of a cash distribution.
The distribution of new ADSs or the modification of the ADS-to-Share
ratio upon a distribution of equity shares will be made net of the fees,
expenses, taxes and governmental charges payable by holders under the terms of
the deposit agreement. In order to pay such taxes or governmental charges, the
depositary bank may sell all or a portion of the new equity shares so
distributed.
No such distribution of new ADSs will be made if it would violate a law
(e.g., the U.S. securities laws) or if it is not operationally practicable. If
the depositary bank does not distribute new ADSs as described above, it will
use its best efforts to sell the equity shares received and will distribute the
proceeds of the sale as in the case of a distribution of cash.
Distributions of Rights
Whenever we intend to distribute rights to purchase additional equity
shares, we will give prior notice to the depositary bank and we will assist the
depositary bank in determining whether it is lawful and reasonably practicable
to distribute rights to purchase additional ADSs to holders.
The depositary bank will establish procedures to distribute rights to
purchase additional ADSs to holders and to enable such holders to exercise such
rights if it is lawful and reasonably practicable to make the rights available
to holders of ADSs, and if we provide all of the documentation contemplated in
the deposit agreement (such as opinions to address the lawfulness of the
transaction). You may have to pay fees, expenses, taxes and other governmental
charges to subscribe for the new ADSs upon the exercise of your rights. The
depositary bank is not obligated to establish procedures to facilitate the
distribution and exercise by holders of rights to purchase new equity shares
directly rather than new ADSs.
The depositary bank will not distribute the rights to you if:
. we do not request that the rights be distributed to you or we ask
that the rights not be distributed to you;
. we fail to deliver satisfactory documents to the depositary bank; or
. it is not reasonably practicable to distribute the rights.
The depositary bank will sell the rights that are not exercised or not
distributed if such sale is lawful and reasonably practicable. The proceeds of
such sale will be distributed to holders as in the case of a cash distribution.
If the depositary bank is unable to sell the rights, it will allow the rights
to lapse.
Elective Distributions
Whenever we intend to distribute a dividend payable at the election of
shareholders either in cash or in additional shares, we will give prior notice
thereof to the depositary bank and will indicate whether we wish the
73
<PAGE>
elective distribution to be made available to you. In such case, we will assist
the depositary bank in determining whether such distribution is lawful and
reasonably practical.
The depositary bank will make the election available to you only if it is
reasonably practical and if we have provided all of the documentation
contemplated in the deposit agreement. In such case, the depositary bank will
establish procedures to enable you to elect to receive either cash or
additional ADSs, in each case as described in the deposit agreement.
If the election is not made available to you, you will receive either
cash or additional ADSs, depending on what a shareholder in India would receive
for failing to make an election, as more fully described in the deposit
agreement.
Other Distributions
Whenever we intend to distribute property other than cash, equity shares
or rights to purchase additional equity shares, we will notify the depositary
bank in advance and will indicate whether we wish such distribution to be made
to you. If so, we will assist the depositary bank in determining whether such
distribution to holders is lawful and reasonably practicable.
If it is reasonably practicable to distribute such property to you and if
we provide all of the documentation contemplated in the deposit agreement, the
depositary bank will distribute the property to the holders in a manner it
deems practicable.
The distribution will be made net of fees, expenses, taxes and
governmental charges payable by holders under the terms of the deposit
agreement. In order to pay such taxes and governmental charges, the depositary
bank may sell all or a portion of the property received.
The depositary bank will not distribute the property to you and will sell
the property if:
. we do not request that the property be distributed to you or if we
ask that the property not be distributed to you;
. we do not deliver satisfactory documents to the depositary bank; or
. the depositary bank determines that all or a portion of the
distribution to you is not reasonably practicable.
The proceeds of such a sale will be distributed to holders as in the case
of a cash distribution.
Redemption
Whenever we decide to redeem any of the securities on deposit with the
custodian, we will notify the depositary bank. If it is reasonably practicable
and if we provide all of the documentation contemplated in the deposit
agreement, the depositary bank will mail notice of the redemption to the
holders.
The custodian will be instructed to surrender the shares being redeemed
against payment of the applicable redemption price. The depositary bank will
convert the redemption funds received into U.S. dollars upon the terms of the
deposit agreement and will establish procedures to enable holders to receive
the net proceeds from the redemption upon surrender of their ADSs to the
depositary bank. You may have to pay fees, expenses, taxes and other
governmental charges upon the redemption of your ADSs. If less than all ADSs
are being redeemed, the ADSs to be retired will be selected by lot or on a pro
rata basis, as the depositary bank may determine.
74
<PAGE>
Changes Affecting Equity Shares
The equity shares held on deposit for your ADSs may change from time to
time. For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or classification of such equity shares or a
recapitalization, reorganization, merger, consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent
permitted by law, represent the right to receive the property received or
exchanged in respect of the equity shares held on deposit. The depositary bank
may in such circumstances deliver new ADSs to you or call for the exchange of
your existing ADSs for new ADSs. If the depositary bank may not lawfully
distribute such property to you, the depositary bank may sell such property and
distribute the net proceeds to you as in the case of a cash distribution.
Issuance of ADSs upon Deposit of Equity Shares
Under current Indian laws and regulations, the depositary cannot accept
deposits of outstanding equity shares and issue ADRs evidencing ADSs
representing such equity shares without prior approval of the government of
India. If you elect to surrender your ADSs and receive equity shares, under
current Indian laws and regulations, you will be prohibited from re-depositing
those outstanding equity shares with our depositary without prior approval of
the government of India. For additional information, please see "Risk Factors--
Foreign investment restrictions and the lack of a public market for our equity
shares may impact the value of our ADSs" and "--This offering may not result in
an active or liquid market for the ADSs."
If permitted under applicable law, the depositary bank may create ADSs on
your behalf if you or your broker deposit equity shares with the custodian. The
depositary bank will deliver these ADSs to the person you indicate only after
you obtain all necessary government approvals and pay any applicable issuance
fees and any charges and taxes payable for the transfer of the equity shares to
the custodian.
The issuance of ADSs may be delayed until the depositary bank or the
custodian receives confirmation that all required approvals have been given and
that the equity shares have been duly transferred to the custodian. The
depositary bank will only issue ADSs in whole numbers.
If you are permitted to make a deposit of equity shares, you will be
responsible for transferring good and valid title to the depositary bank. As
such, you will be deemed to represent and warrant that:
. the equity shares are duly authorized, validly issued, fully paid,
non-assessable and legally obtained;
. all preemptive (and similar) rights, if any, with respect to such
equity shares have been validly waived or exercised;
. you are duly authorized to deposit the equity shares;
. the equity shares presented for deposit are free and clear of any
lien, encumbrance, security interest, charge, mortgage or adverse
claim, and are not, and the ADSs issuable upon such deposit will not
be, "restricted securities" (as defined in the deposit agreement);
and
. the equity shares presented for deposit have not been stripped of any
rights or entitlements.
If any of the representations or warranties are incorrect in any way, we
and the depositary bank may, at your cost and expense, take any and all actions
necessary to correct the consequences of the misrepresentations.
Withdrawal of Shares Upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the depositary
bank for cancellation and then receive the underlying equity shares at the
custodian's offices. In order to withdraw the equity shares
75
<PAGE>
represented by your ADSs, you will be required to pay to the depositary the
fees for cancellation of ADSs and any charges and taxes payable upon the
transfer of the equity shares being withdrawn. You assume the risk for delivery
of all funds and securities upon withdrawal. Once canceled, the ADSs will not
have any rights under the deposit agreement.
If you hold an ADR registered in your name, the depositary bank may ask
you to provide proof of identity and genuineness of any signature and certain
other documents as the depositary bank may deem appropriate before it will
cancel your ADSs. The withdrawal of the equity shares represented by your ADSs
may be delayed until the depositary bank receives satisfactory evidence of
compliance with all applicable laws and regulations. Please keep in mind that
the depositary bank will only accept ADSs for cancellation that represent a
whole number of securities on deposit.
You will have the right to withdraw the securities represented by your
ADSs at any time except for:
. Temporary delays that may arise because (i) the transfer books for
the equity shares or ADSs are closed, or (ii) equity shares are
immobilized on account of a shareholders' meeting or a payment of
dividends.
. Obligations to pay fees, taxes and similar charges.
. Restrictions imposed because of laws or regulations applicable to
ADSs or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to
withdraw the securities represented by your ADSs except to comply with
mandatory provisions of law.
Voting Rights
As a holder, you generally have the right under the deposit agreement to
instruct the depositary bank to exercise the voting rights for the equity
shares represented by your ADSs. The voting rights of holders of equity shares
are described in "Description of Equity Shares--Voting Rights."
At our request, the depositary bank will mail to you any notice of
shareholders' meeting received from us together with information explaining how
to instruct the depositary bank to exercise the voting rights of the securities
represented by ADSs.
If the depositary bank timely receives voting instructions from a holder
of ADSs, it will endeavor to vote the securities represented by the holder's
ADSs in accordance with such voting instructions.
Please note that the ability of the depositary bank to carry out voting
instructions may be limited by practical and legal limitations and the terms of
the securities on deposit. We cannot assure you that you will receive voting
materials in time to enable you to return voting instructions to the depositary
bank in a timely manner. Securities for which no voting instructions have been
received will not be voted.
Fees and Charges
As an ADS holder, you will be required to pay the following service fees
to the depositary bank:
<TABLE>
<CAPTION>
Service Fees
------- ----
<S> <C>
Issuance of ADSs Up to 5c per ADS issued
Cancellation of ADSs Up to 5c per ADS canceled
Exercise of rights to purchase Up to 5c per ADS issued
additional ADSs
Distribution of cash upon sale Up to 2c per ADS held
of rights and other entitlements
</TABLE>
76
<PAGE>
As an ADS holder you will also be responsible to pay certain fees and
expenses incurred by the depositary bank and certain taxes and governmental
charges such as:
. fees for the transfer and registration of equity shares (i.e., upon
deposit and withdrawal of equity shares);
. expenses incurred for converting foreign currency into U.S. dollars;
. expenses for cable, telex and fax transmissions and for delivery of
securities; and
. Taxes and duties upon the transfer of securities (i.e., when equity
shares are deposited or withdrawn from deposit).
We have agreed to pay certain other charges and expenses of the
depositary bank. Note that the fees and charges you may be required to pay may
vary over time and may be changed by us and by the depositary bank. You will
receive prior notice of such changes.
Amendments and Termination
We may agree with the depositary bank to modify the deposit agreement at
any time without your consent. We undertake to give holders 30 days' prior
notice of any modifications that would prejudice any of their substantial
rights under the deposit agreement (except in very limited circumstances
enumerated in the deposit agreement).
You will be bound by the modifications to the deposit agreement if you
continue to hold your ADSs after the modifications to the deposit agreement
become effective. The deposit agreement cannot be amended to prevent you from
withdrawing the equity shares represented by your ADSs (except as permitted by
law).
We have the right to direct the depositary bank to terminate the deposit
agreement. Similarly, the depositary bank may in certain circumstances on its
own initiative terminate the deposit agreement. In either case, the depositary
bank must give notice to the holders at least 30 days before termination.
Upon termination, the following will occur under the deposit agreement:
. For a period of six months after termination, you will be able to
request the cancellation of your ADSs and the withdrawal of the
equity shares represented by your ADSs and the delivery of all other
property held by the depositary bank in respect of those equity
shares on the same terms as prior to the termination. During such six
months' period the depositary bank will continue to collect all
distributions received on the equity shares on deposit (i.e.,
dividends) but will not distribute any such property to you until you
request the cancellation of your ADSs.
. After the expiration of such six months' period, the depositary bank
may sell the securities held on deposit. The depositary bank will
hold the proceeds from such sale and any other funds then held for
the holders of ADSs in a non-interest bearing account. At that point,
the depositary bank will have no further obligations to holders other
than to account for the funds then held for the holders of ADSs still
outstanding.
Books of Depositary
The depositary bank will maintain ADS holder records at its depositary
office. You may inspect such records at such office during regular business
hours but solely for the purpose of communicating with other holders in the
interest of business matters relating to the ADSs and the deposit agreement.
The depositary bank will maintain in New York facilities to record and
process the issuance, cancellation, combination, split-up and transfer of ADRs.
These facilities may be closed from time to time, to the extent not prohibited
by law.
77
<PAGE>
Limitations on Obligations and Liabilities
The deposit agreement limits our obligations and the depositary bank's
obligations to you. Please note the following:
. We and the depositary bank are obligated only to take the actions
specifically stated in the depositary agreement without negligence or
bad faith.
. The depositary bank disclaims any liability for any failure to carry
out voting instructions, for any manner in which a vote is cast or
for the effect of any vote, provided it acts in good faith and in
accordance with the terms of the deposit agreement.
. The depositary bank disclaims any liability for any failure to
determine the lawfulness or practicality of any action, for the
content of any document forwarded to you on our behalf or for the
accuracy of any translation of such a document, for the investment
risks associated with investing in equity shares, for the validity or
worth of the equity shares, for any tax consequences that result from
the ownership of ADSs, for the credit worthiness of any third party,
for allowing any rights to lapse under the terms of the deposit
agreement, for the timeliness of any of our notices or for our
failure to give notice.
. We and the depositary bank will not be obligated to perform any act
that is inconsistent with the terms of the deposit agreement.
. We and the depositary bank disclaim any liability if we are prevented
or forbidden from acting on account of any law or regulation, any
provision of our Articles of Association or Memorandum of
Association, any provision of any securities on deposit or by reason
of any act of God or war or other circumstances beyond our control.
. We and the depositary bank disclaim any liability by reason of any
exercise of, or failure to exercise, any discretion provided for the
deposit agreement or in our Articles of Association or Memorandum of
Association or in any provisions of securities on deposit.
. We and the depositary bank further disclaim any liability for any
action or inaction in reliance on the advice or information received
from legal counsel, accountants, any person presenting equity shares
for deposit, any holder of ADSs or authorized representative thereof,
or any other person believed by either of us in good faith to be
competent to give such advice or information.
. We and the depositary bank also disclaim liability for the inability
by a holder to benefit from any distribution, offering, right or
other benefit which is made available to holders equity shares but is
not, under the terms of the deposit agreement, made available to you.
. We and the depositary bank may rely without any liability upon any
written notice, request or other document believed to be genuine and
to have been signed or presented by the proper parties.
Pre-Release Transactions
The depositary bank may, in certain circumstances, issue ADSs before
receiving a deposit of equity shares or release equity shares before receiving
ADSs. These transactions are commonly referred to as "pre-release
transactions." The deposit agreement limits the aggregate size of pre-release
transactions and imposes a number of conditions on such transactions (i.e., the
need to receive collateral, the type of collateral required, the
representations required from brokers, etc.). The depositary bank may retain
the compensation received from the pre-release transactions.
Taxes
You will be responsible for the taxes and other governmental charges
payable on the ADSs and the securities represented by the ADSs. We, the
depositary bank and the custodian may deduct from any
78
<PAGE>
distribution the taxes and governmental charges payable by holders and may sell
any and all property on deposit to pay the taxes and governmental charges
payable by holders. You will be liable for any deficiency if the sale proceeds
do not cover the taxes that are due.
The depositary bank may refuse to issue ADSs, to deliver transfer, split
and combine ADRs or to release securities on deposit until all taxes and
charges are paid by the applicable holder. The depositary bank and the
custodian may take reasonable administrative actions to obtain tax refunds and
reduced tax withholding for any distributions on your behalf. However, you may
be required to provide to the depositary bank and to the custodian proof of
taxpayer status and residence and such other information as the depositary bank
and the custodian may require to fulfill legal obligations. You are required to
indemnify us, the depositary bank and the custodian for any claims with respect
to taxes based on any tax benefit obtained for you.
Foreign Currency Conversion
The depositary bank will arrange for the conversion of all foreign
currency received into U.S. dollars if such conversion is practical, and it
will distribute the U.S. dollars in accordance with the terms of the deposit
agreement. You may have to pay fees and expenses incurred in converting foreign
currency, such as fees and expenses incurred in complying with currency
exchange controls and other governmental requirements.
If the conversion of foreign currency is not practical or lawful, or if
any required approvals are denied or not obtainable at a reasonable cost or
within a reasonable period, the depositary bank may take the following actions
in its discretion:
. convert the foreign currency to the extent practical and lawful and
distribute the U.S. dollars to the holders for whom the conversion
and distribution is lawful and practical;
. distribute the foreign currency to holders for whom the distribution
is lawful and practical; and
. hold the foreign currency (without liability for interest) for the
applicable holders.
79
<PAGE>
RESTRICTIONS ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
Foreign investment in Indian securities is regulated by the Foreign
Exchange Regulation Act, 1973. Under Section 29(1)(b) of the Foreign Exchange
Regulation Act, no person or company resident outside India that is not
incorporated in India (other than a banking company) can purchase the shares of
any company carrying on any trading, commercial or industrial activity in India
without the permission of the Reserve Bank of India. Also, under Section
19(1)(d) of the Foreign Exchange Regulation Act, the transfer and issuance of
any security of any Indian company to a person resident outside India requires
the permission of the Reserve Bank of India. Under Section 19(5) of the Foreign
Exchange Regulation Act, no transfer of shares in a company registered in India
by a non-resident to a resident of India is valid unless the transfer is
confirmed by the Reserve Bank of India upon application filed by the transferor
or the transferee. Furthermore, the issuance of rights and other distributions
of securities to a non-resident also requires the prior consent of the Reserve
Bank of India. The Reserve Bank of India has issued notifications over the past
few years relaxing the restrictions on foreign investment in Indian companies.
These notifications have provided that foreign investment in high priority
industries do not require prior approval of the Reserve Bank of India under
some conditions. Under these circumstances, a post-investment declaration is
required to be filed with the Reserve Bank of India. The Reserve Bank of India
has granted an exemption from application of some of these provisions in
connection with this offering. For additional information, please see
"Government of India Approvals" on page 84.
General
Shares of Indian companies represented by ADSs are required to be
approved for issuance to foreign investors by the Ministry of Finance under the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depositary Receipt Mechanism) Scheme, 1993, as modified from time to time,
notified by the government of India. The Issue of Foreign Currency Convertible
Bonds and Ordinary Shares Scheme is distinct from other policies or facilities,
as described below, relating to investments in Indian companies by foreign
investors. The issuance of ADSs pursuant to the Issue of Foreign Currency
Convertible Bonds and Ordinary Shares Scheme also affords to holders of ADSs
the benefits of Section 115AC of the Indian Income-tax Act, 1961 for purposes
of the application of Indian tax law. For additional information, please see
"Taxation--Indian Taxation" on page 86.
Foreign Direct Investment
In July 1991, the government of India commenced the liberalization
process and raised the limit on foreign equity holdings in Indian companies
from 40% to 51% in high priority industries. The Foreign Investment Promotion
Board currently under the Ministry of Industry of the government of India was
thereafter formed to negotiate with large foreign companies wishing to make
long-term investments in India. Since then, the government of India has relaxed
the restrictions on foreign investment considerably. Our business is not deemed
to be a high priority industry. As a result, the maximum foreign equity
investment in an Indian company operating as an Internet service provider is
49%.
Under current Indian law, no prior approval of the Reserve Bank of India
or the Foreign Investment Promotion Board is required in respect of foreign
equity participation up to 50%, 51%, 74% or 100%, depending on industry
category, in high priority industries in a new issue of shares, including the
purchase of ADSs representing equity securities issued by Indian companies.
However, within a period of 30 days from the date of the investment being made,
a declaration in the prescribed form is required to be filed with the Reserve
Bank of India. For foreign direct investment in the high priority industries in
excess of 50%, 51% or 74% (depending on the category of industry) or in the
industries in which direct foreign investment is permitted up to 100%, or for
any issue of equity securities to foreign investors by a company not in a high-
priority industry, approval of the Foreign Investment Promotion Board is
required if the amount of investment is up to Rs.6 billion ($142.9 million).
Proposals in excess of Rs.6 billion ($142.9 million) require the approval of
the Cabinet Committee on Foreign Investment. Proposals involving the public
sector and other sensitive areas require the approval of Cabinet Committee on
Economic Affairs. These facilities are designed for foreign direct
80
<PAGE>
investments by non-residents of India who are not non-resident Indians,
overseas corporate bodies or foreign institutional investors, all of which we
refer to as foreign direct investors, and do not include transfers of shares
from residents to non-residents. The Department of Industrial Policy and
Promotion, a part of the Ministry of Industry, issued detailed guidelines in
January 1997 for consideration of foreign direct investment proposals by the
Foreign Investment Promotion Board. Under these guidelines, sector specific
guidelines for foreign direct investment and the levels of permitted equity
participation have been established. The issues to be considered by the Foreign
Investment Promotion Board and the Foreign Investment Promotion Board's areas
of priority in granting approvals are also set out in the guidelines. The basic
objective of the guidelines is to improve the transparency and objectivity of
the Foreign Investment Promotion Board's consideration of proposals. However,
because the guidelines are administrative and have not been codified as either
law or regulations, they are not legally binding with respect to any
recommendation made by the Foreign Investment Promotion Board or with respect
to any decision taken by the government of India in cases involving foreign
direct investment.
The high priority industries referred to above are classified into the
following four categories under Annexure III to the New Industrial Policy,
1991:
. Part A lists three industries, comprised mainly of mining-related
industries, in which up to 50% foreign equity participation is
permitted;
. Part B lists 21 industries, including software development,
agricultural production, food product manufacturing, textile
products, paper and basic chemicals, in which up to 51% foreign
equity participation is permitted;
. Part C lists seven industries, including medical equipment
manufacturing, iron ore manufacturing, land transport, water
transport and storage and warehousing services, in which up to 74%
foreign equity participation is permitted; and
. Part D lists two industries, including electricity generation,
transmission and distribution and construction, in which up to 100%
foreign equity participation is permitted.
In May 1994, the government of India announced that purchases by foreign
investors of ADSs and foreign currency convertible bonds of Indian companies
will be treated as foreign direct investment in the equity issued by Indian
companies for such offerings. Therefore, offerings that involve the issuance of
equity that results in foreign direct investors holding more than the
stipulated percentage of foreign direct investments (which depends on the
category of industry) in high priority industries or for any issue of equity to
foreign investors by companies not in high priority industries, would require
approval from the Foreign Investment Promotion Board. In addition, in
connection with offerings of any such securities to foreign investors, approval
of the Foreign Investment Promotion Board is required for Indian companies
whether or not the stipulated percentage limit would be reached, if the
proceeds therefrom are to be used for investment in non-high priority
industries. With respect to the activities of our company, Foreign Investment
Promotion Board approval is required for any foreign direct investment in our
stock. As a result, we will require Foreign Investment Promotion Board approval
before allotting the equity shares underlying the ADSs.
In November 1998, the Reserve Bank of India issued a notification to the
effect that foreign investment in preferred shares will be considered as part
of the share capital of a company and the provisions relating to foreign direct
investment in the equity shares of a company discussed above would apply.
Accordingly, no prior approval of the Reserve Bank of India or the Foreign
Investment Promotion Board would be required in respect of foreign investment
in the preferred stock of an Indian company up to 50%, 51%, 74% or 100% in high
priority industries. All other proposals for foreign investment in the
preferred stock of an Indian company will be processed by the Foreign
Investment Promotion Board. Investments in preferred shares are included as
foreign direct investment for the purposes of sectoral caps on foreign equity,
if such preferred shares carry a conversion option. If the preferred shares are
structured without a conversion option, they would fall outside the foreign
direct investment limit.
81
<PAGE>
Notwithstanding the foregoing, the terms of our Internet service provider
license provide that the maximum total foreign equity investment in our company
is 49%.
Investment by Non-Resident Indians and Overseas Corporate Bodies Owned At Least
60% By Non-Resident Indians
A variety of special facilities for making investments in India in shares
of Indian companies is available to individuals of Indian nationality or origin
residing outside India, or non-resident Indians, and to overseas corporate
bodies, at least 60% owned by such persons, or overseas corporate bodies. These
facilities permit non-resident Indians and overseas corporate bodies to make
portfolio investments in shares and other securities of Indian companies on a
basis not generally available to other foreign investors. These facilities are
different and distinct from investments by foreign direct investors described
above.
Apart from portfolio investments in Indian companies, non-resident
Indians and overseas corporate bodies may also invest in Indian companies
through foreign direct investments. For additional information, please see "--
Foreign Direct Investment" on page 80. Under the foreign direct investment
rules, non-resident Indians and overseas corporate bodies may invest up to 100%
in high-priority industries in which other foreign investors are permitted to
invest only up to 50%, 51%, 74% or 100%, depending on the industry category.
Investment by Foreign Institutional Investors
In September 1992, the government of India issued guidelines which enable
foreign institutional investors, including institutions such as pension funds,
investment trusts, asset management companies, nominee companies and
incorporated/institutional portfolio managers, to make portfolio investments in
all the securities traded on the primary and secondary markets in India. Under
the guidelines, foreign institutional investors must obtain an initial
registration from the Securities and Exchange Board of India and a general
permission from the Reserve Bank of India to engage in transactions regulated
under the Foreign Exchange Regulation Act. Foreign institutional investors must
also comply with the provisions of the Securities and Exchange Board of India
(Foreign Institutional Investors) Regulations, 1995. When it receives the
initial registration, the foreign institutional investor also obtains general
permission from the Reserve Bank of India to engage in transactions regulated
under the Foreign Exchange Regulation Act. Together, the initial registration
and the Reserve Bank of India's general permission enable the registered
foreign institutional investor to buy, subject to the ownership restrictions
discussed below, and sell freely securities issued by Indian companies whether
or not they are listed, to realize capital gains on investments made through
the initial amount invested in India, to subscribe or renounce rights offerings
for shares, to appoint a domestic custodian for custody of investments held and
to repatriate the capital, capital gains, dividends, income received by way of
interest and any compensation received towards sale or renunciation of rights
offerings of shares.
Apart from making portfolio investments in Indian companies as described
above, foreign institutional investors may make direct foreign investments in
Indian companies. For additional information, please see "--Foreign Direct
Investment" on page 80.
Ownership Restrictions
The Securities and Exchange Board of India and Reserve Bank of India
regulations restrict portfolio investments in Indian companies by foreign
institutional investors, non-resident Indians and overseas corporate bodies,
all of which we refer to as foreign portfolio investors. The Reserve Bank of
India issued a circular in August 1998 stating that foreign institutional
investors in aggregate may hold no more than 30% of the equity shares of an
Indian company and non-resident Indians and overseas corporate bodies in
aggregate may hold no more than 10% of the shares of an Indian company through
portfolio investments. The Reserve Bank of India circular also states that no
single foreign institutional investor may hold more than 10% of the shares of
an Indian company and no single non-resident Indian or overseas corporate body
may hold more than 5% of the shares of an Indian company. The Foreign
Investment Promotion Board guidelines issued by the Foreign
82
<PAGE>
Investment Promotion Board in January 1997 state that the total cap on foreign
investment in the telecommunications sector would be 49%. The Guidelines and
General Information for Internet Service Provider announced by the Telecom
Commission of the government of India in November 1998 also state that the
total foreign equity investment in a company acting as an Internet service
provider would be capped at 49%. This cap of 49% applies to foreign equity
investment by foreign portfolio investors and foreign direct investors in our
company.
There is uncertainty under Indian law about the tax regime applicable to
foreign institutional investors that hold and trade ADSs. Foreign institutional
investors are urged to consult with their Indian legal and tax advisers about
the relationship between the foreign institutional investor regulations and the
ADSs and any equity shares withdrawn upon surrender of ADSs.
More detailed provisions relating to foreign institutional investor
investment have been introduced by the Securities and Exchange Board of India
with the introduction of the foreign institutional investor Regulations in
1995. These provisions relate to the registration of foreign institutional
investors, their general obligations and responsibilities and investment
conditions and restrictions. One such restriction is that unless the foreign
institutional investor is registered as a debt fund with the Securities and
Exchange Board of India the total investment in equity and equity-related
instruments should not be less than 70% of the aggregate of all investments of
an foreign institutional investor in India.
Under the Securities and Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 approved by the Securities and
Exchange Board of India in January 1997 and notified by the government of India
in February 1997, which replaced the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1994, upon the
acquisition of more than 5% of the outstanding shares or voting rights of a
listed public Indian company, a purchaser is required to notify the company and
the company and the purchaser are required to notify all the stock exchanges on
which the shares of such company are listed. Upon the acquisition of 15% or
more of such shares or voting rights or a change in control of the company, the
purchaser is required to make an open offer to the other shareholders offering
to purchase at least 20% of all the outstanding shares of the company at a
minimum offer price as determined pursuant to the new regulations. Upon
conversion of ADSs into equity shares, an ADS holder will be subject to the new
regulations. However, since Satyam Infoway is an unlisted company, the
provisions of the new regulations will not apply to us. If our shares are
listed on an Indian stock exchange in the future, the new regulations will
apply to the holders of our ADSs.
Open market purchases of securities of Indian companies in India by
foreign direct investors or investments by non-resident Indians, overseas
corporate bodies and foreign institutional investors above the ownership levels
set forth above require government of India approval on a case-by-case basis.
83
<PAGE>
GOVERNMENT OF INDIA APPROVALS
The Ministry of Finance and the Ministry of Industry of the government of
India and the Reserve Bank of India have approved this offering. In addition,
we have obtained the required approval from the Ministry of Finance to enter
into the underwriting agreements and the depository agreement referred to
elsewhere in this prospectus. Various tax concessions are expected to be
available with respect to this offering in accordance with the provisions of
Section 115AC of the Indian Income-tax Act, 1961. Copies of the approvals from
the Ministry of Industry and the Reserve Bank of India will be made available
for public inspection at our corporate office or provided upon written request
to our Chief Financial Officer. For additional information, please see
"Taxation--Indian Taxation" on page 86.
The Reserve Bank of India has granted our company general approvals which
permit:
. foreign investors to acquire ADSs and equity shares issued by us;
. us to issue the ADSs and transfer and register the equity shares in
the name of the depositary or its nominee;
. us to remit dividends on the equity shares issued by us and
represented by ADSs at market rates, as and when due subject to the
payment of any applicable Indian taxes;
. us to issue any rights or bonus equity shares represented by the ADSs
issued by us;
. us to repatriate in free foreign exchange the proceeds of a sale of
the equity shares received upon surrender of ADSs and any rights or
bonuses that may accrue in respect of the equity shares, subject to
applicable Indian taxes;
. us to export the equity shares from India for transfer thereof
outside of India upon withdrawal from the depositary facility; and
. the free transfer of the ADSs issued by us outside India between non-
residents of India.
Specific approval of the Reserve Bank of India will have to be obtained,
however, for the sale of the underlying equity shares by a person resident
outside India to a person resident in India as well as for any renunciation of
rights to a person resident in India. Pursuant to the Indian Foreign Exchange
Regulation Act, 1973, a person resident in India is: (1) a citizen of India who
has not left India with an intention of staying outside India; and (2) a non-
citizen of India who stays in India for a purpose indicating an intention to
stay in India. Transfers of securities in Indian companies from a person
resident outside India to a person resident in India require approval from the
Reserve Bank of India under Section 19(5) of the Foreign Exchange Regulation
Act. Currently, however, no prior approval of the Reserve Bank of India is
required in respect of such sales if the company whose shares are being sold is
listed in India and if such sales are made in the stock market through a
registered Indian broker and through a recognized stock exchange in India at
prevailing market rates. In such cases, the sale proceeds may be repatriated
after payment of applicable taxes and stamp duties. Since the equity shares of
Satyam Infoway are not presently listed in India, however, the prior approval
of the Reserve Bank of India will be required for a person resident outside
India who is a shareholder in our company to sell his equity shares in our
company to a person resident in India. The Reserve Bank of India will approve
the price at which the shares can be sold based on a formula. Because the sale
would result in an outflow of foreign exchange, the Reserve Bank of India would
generally not approve a price higher than that arrived at by using the formula.
For additional information, please see "Taxation--Indian Taxation--Taxation of
Distributions" on page 86.
Any person resident outside India desiring to sell equity shares received
upon surrender of ADSs or otherwise transfer such equity shares within India
should seek the advice of Indian counsel as to the requirements applicable at
that time. The Reserve Bank of India has approved the free transferability of
our ADSs outside India between two non-residents. However, under current Indian
law, the sale and transfer of our equity shares withdrawn from the depositary
to any person resident in India would require additional approvals to be
obtained from the Reserve Bank of India. Under current regulations and
practice, since we are not listed
84
<PAGE>
on any recognized stock exchange in India, a person resident outside of India
intending to sell our securities within India or to a person resident in India
is required to apply for Reserve Bank of India approval by submitting a Form
TS1, which requires information as to the transferor, transferee, the
shareholding structure of our company, the proposed sale price per share and
other information. The proceeds from such transfers may be transferred outside
India after payment of applicable taxes and stamp duties. The Reserve Bank of
India will approve the price at which shares are to be transferred from a non-
resident holder of shares in our company to a person resident in India based on
a formula. The Reserve Bank of India is not required to respond to a Form TS1
application within any specific time period and may grant or deny the
application in its discretion.
Prior to the effectiveness of the registration statement of which this
prospectus is a part, we will file an application with the Department of
Company Affairs to the effect that we are not required to file this prospectus
under the Companies Act. The Ministry of Finance may request that a copy of
this prospectus be filed with the Securities and Exchange Board of India and
the Registrar of Companies in Andhra Pradesh, which is the state in India where
our registered office is located.
The equity shares issued and outstanding prior to the offering are not
listed on any Indian stock exchanges, and no such listing is presently planned.
However, pursuant to the approval granted by the Ministry of Finance, we have
undertaken to list the equity shares on Indian Stock Exchanges within three
years from the time we first earn profits.
85
<PAGE>
TAXATION
Indian Taxation
General. The following is based on the opinion of M.G. Ramachandran
regarding the principal Indian tax consequences for holders of ADSs and equity
shares received upon withdrawal of such equity shares who are not resident in
India, whether of Indian origin or not. We refer to these persons as non-
resident holders. The following is based on the provisions of the Income-tax
Act, 1961, including the special tax regime contained in Section 115AC and the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993. The Income-tax Act is amended every
year by the Finance Act of the relevant year. Some or all of the tax
consequences of the Section 115AC may be amended or changed by future
amendments of the Income-tax Act.
This opinion is not intended to constitute a complete analysis of the
individual tax consequences to non-resident holders under Indian law for the
acquisition, ownership and sale of ADSs and equity shares by non-resident
holders. Personal tax consequences of an investment may vary for non-resident
holders in various circumstances and potential investors should therefore
consult their own tax advisers on the tax consequences of such acquisition,
ownership and sale, including specifically the tax consequences under the law
of the jurisdiction of their residence and any tax treaty between India and
their country of residence.
Residence. For purposes of the Income-tax Act, an individual is
considered to be a resident of India during any fiscal year if he or she is in
India in that year for:
. a period or periods amounting to 182 days or more; or
. 60 days or more and, in case of a citizen of India or a person of
Indian origin, who, being outside India, comes on a visit to India,
is in India for 182 days or more effective April 1, 1995 and in each
case within the four preceding years has been in India for a period
or periods amounting to 365 days or more.
A company is a resident of India if it is registered in India or the control
and the management of its affairs is situated wholly in India. Individuals and
companies that are not residents of India would be treated as non-residents for
purposes of the Income-tax Act.
Taxation of Distributions. Pursuant to the Finance Act, 1997, withholding
tax on dividends paid to shareholders no longer applies. However, the company
paying the dividend would be subject to a dividend distribution tax of 11%
including the presently applicable surcharge, of the total amount it
distributes, declares or pays as a dividend. This dividend distribution tax is
in addition to the normal corporate tax of 38.5%, including the presently
applicable surcharge. The surcharge was introduced by the Finance Act, 1999.
Any distributions of additional ADSs, equity shares or rights to
subscribe for equity shares made to non-resident holders with respect to ADSs
or equity shares will not be subject to Indian tax.
Taxation of Capital Gains. Any gain realized on the sale of our ADSs or
equity shares by a non-resident holder to any non-resident outside India is not
subject to Indian capital gains tax. However, because subscription rights are
not expressly covered by the Section 115AC, it is unclear, and M.G.
Ramachandran is therefore unable to give an opinion, as to whether capital gain
derived from the sale of subscription rights by a non-resident holder not
entitled to an exemption under a tax treaty to any non-resident outside India
will be subject to Indian capital gains tax. If such subscription rights are
deemed by the Indian tax authorities to be situated within India, the gains
realized on the sale of such subscription rights will be subject to customary
Indian taxation on capital gains as discussed below.
Since the offering has been approved by the government of India under the
Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme, non-
resident holders of the ADSs will have the benefit of tax concessions available
under Section 115AC. The effect of the Scheme in the context of Section 115AC
is
86
<PAGE>
unclear, and M.G. Ramachandran is therefore unable to give an opinion, as to
whether such tax treatment is available to a non-resident who acquires equity
shares outside India from a non-resident holder of equity shares after receipt
of the equity shares upon surrender of the ADSs. If concessional tax treatment
is not available, gains realized on the sale of such equity shares will be
subject to customary Indian taxation on capital gains as discussed below. The
Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme provides
that if the equity shares are sold on a recognized stock exchange in India
against payment in Indian rupees, they will no longer be eligible for such
concessional tax treatment.
Subject to any relief provided pursuant to an applicable tax treaty, any
gain realized on the sale of equity shares to an Indian resident or inside
India generally will be subject to Indian capital gains tax which is to be
withheld at the source by the buyer. Under the Issue of Foreign Currency
Convertible Bonds and Ordinary Shares Scheme, the cost of acquisition of equity
shares received in exchange for ADSs will be the cost of the underlying shares
on the date that the depositary gives notice to the custodian of the delivery
of the equity shares in exchange for the corresponding ADSs. In the case of
companies listed in India, the cost of acquisition of the equity shares would
be the price of the equity shares prevailing on the Stock Exchange, Mumbai or
the National Stock Exchange on the date the depositary gives notice to the
custodian of the delivery of the equity shares in exchange for the
corresponding ADSs. However, the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares Scheme and Section 115AC do not provide for determination
of the cost of acquisition for the purposes of computing capital gains tax
where the shares of the Indian company are not listed on the Stock Exchange,
Mumbai or the National Stock Exchange in India. Therefore, in the case of our
company, which is not listed on either the Stock Exchange, Mumbai or the
National Stock Exchange, M.G. Ramachandran is unable to give an opinion on the
mode of determination of the cost of acquisition of equity shares. Therefore,
the original cost of acquisition of the ADSs may be treated as the cost of
acquisition for the purposes of determining the capital gains tax. According to
the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme, a
non-resident holder's holding period for purposes of determining the applicable
Indian capital gains tax rate in respect of equity shares received in exchange
for ADSs commences on the date of the notice of the redemption by the
depositary to the custodian. The India-U.S. Treaty does not provide an
exemption from the imposition of Indian capital gains tax.
Under Section 115AC, taxable gain realized in respect of equity shares
held for more than 12 months, or long-term gain, is subject to tax at the rate
of 10%. Taxable gain realized in respect of equity shares held for 12 months or
less, or short-term gain, is subject to tax at variable rates with a maximum
rate of 48%. If Section 115AC is not applicable, then a tax rate of 20% applies
to long-term capital gains. The actual rate of tax on short-term gain depends
on a number of factors, including the residential status of the non-resident
holder and the type of income chargeable in India.
Buy-back of Securities. Currently, Indian companies are not subject to
any tax in respect of the buy-back of their shares. However, the shareholders
will be taxed on any gain at the long-term or short-term, as applicable,
capital gains rates. For additional information, please see "--Taxation of
Capital Gains" on page 87.
Stamp Duty and Transfer Tax. Upon issuance of the equity shares
underlying our ADSs, we will be required to pay a stamp duty of Rs.0.30 per
share certificate issued by us. However, for purposes of convenience, instead
of paying a stamp duty of Rs.0.30 per share certificate, we will pay a stamp
duty of Rs.1 per share certificate issued by us in respect of the underlying
equity shares. A transfer of ADSs is not subject to Indian stamp duty. However,
upon the acquisition of equity shares from the depositary in exchange for ADSs,
the non-resident holder will be liable for Indian stamp duty at the rate of
0.5% of the market value of the ADSs or equity shares exchanged. A sale of
equity shares by a non-resident holder will also be subject to Indian stamp
duty at the rate of 0.5% of the market value of the equity shares on the trade
date, although customarily such tax is borne by the transferee.
Wealth Tax. The holding of the ADSs in the hands of non-resident holders
and the holding of the underlying equity shares by the depositary as a
fiduciary will be exempt from Indian wealth tax. Non-resident holders are
advised to consult their own tax advisers in this context.
87
<PAGE>
Gift Tax and Estate Duty. Indian gift tax was abolished in October 1998,
although it may be restored in the future. In India, there is no estate duty
law. As a result, no estate duty would be applicable to non-resident holders.
Non-resident holders are advised to consult their own tax advisors in this
context.
United States Federal Taxation
The following is a summary of the material U.S. federal income and estate
tax consequences that may be relevant with respect to the acquisition,
ownership and disposition of equity shares or ADSs. This summary addresses the
U.S. federal income and estate tax considerations of holders that are U.S.
persons, i.e., citizens or residents of the United States, partnerships or
corporations created in or under the laws of the United States or any political
subdivision thereof or therein, estates, the income of which is subject to U.S.
federal income taxation regardless of its source and trusts for which a U.S.
court exercises primary supervision and a U.S. person has the authority to
control all substantial decisions and that will hold equity shares or ADSs as
capital assets and holders that are not U.S. persons. We refer to these persons
as U.S. holders and non-U.S. holders, respectively. This summary does not
address tax considerations applicable to holders that may be subject to special
tax rules, such as banks, insurance companies, dealers in securities or
currencies, tax-exempt entities, persons that will hold equity shares or ADSs
as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes, persons that have a "functional currency" other
than the U.S. dollar or holders of 10% or more, by voting power or value, of
the stock of our company. This summary is based on the tax laws of the United
States as in effect on the date of this prospectus and on United States
Treasury Regulations in effect or, in some cases, proposed, as of the date of
this prospectus, as well as judicial and administrative interpretations thereof
available on or before such date and is based in part on representations of the
depositary and the assumption that each obligation in the deposit agreement and
any related agreement will be performed in accordance with its terms. All of
the foregoing are subject to change, which change could apply retroactively and
could affect the tax consequences described below.
Each prospective investor should consult his, her or its own tax advisor
with respect to the U.S. Federal, state, local and foreign tax consequences of
acquiring, owning or disposing of equity shares or ADSs.
Ownership of ADSs. For U.S. federal income tax purposes, holders of ADSs
will be treated as the owners of equity shares represented by such ADSs.
Dividends. Distributions of cash or property (other than equity shares,
if any, distributed pro rata to all shareholders of our company, including
holders of ADSs) with respect to equity shares will be includible in income by
a U.S. holder as foreign source dividend income at the time of receipt, which
in the case of a U.S. holder of ADSs generally will be the date of receipt by
the depositary, to the extent such distributions are made from the current or
accumulated earnings and profits of our company. Such dividends will not be
eligible for the dividends received deduction generally allowed to corporate
U.S. holders. To the extent, if any, that the amount of any distribution by our
company exceeds our company's current and accumulated earnings and profits as
determined under U.S. federal income tax principles, it will be treated first
as a tax-free return of the U.S. holder's tax basis in the equity shares or
ADSs and thereafter as capital gain.
A U.S. holder will not be eligible for a foreign tax credit against its
U.S. federal income tax liability for Indian dividend distribution taxes paid
by our company, unless it is a U.S. company holding at least 10% of the Indian
company paying the dividends. U.S. holders should be aware that dividends paid
by our company generally will constitute "passive income" for purposes of the
foreign tax credit.
If dividends are paid in Indian rupees, the amount of the dividend
distribution includible in the income of a U.S. holder will be in the U.S.
dollar value of the payments made in Indian rupees, determined at a spot
exchange rate between Indian rupees and U.S. dollars applicable to the date
such dividend is includible in the income of the U.S. holder, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, gain or
loss, if any, resulting from currency exchange fluctuations during the period
from the date the dividend is paid to the date such payment is converted into
U.S. dollars will be treated as ordinary income or loss.
88
<PAGE>
A non-U.S. holder of equity shares or ADSs generally will not be subject
to U.S. federal income tax or withholding tax on dividends received on equity
shares or ADSs unless such income is effectively connected with the conduct by
such non-U.S. holder of a trade or business in the United States.
Sale or Exchange of equity shares or ADSs. A U.S. holder generally will
recognize gain or loss on the sale or exchange of equity shares or ADSs equal
to the difference between the amount realized on such sale or exchange and the
U.S. holder's tax basis in the equity shares or ADSs, as the case may be. Such
gain or loss will be capital gain or loss, and will be long-term capital gain
or loss if the equity shares or ADSs, as the case may be, were held for more
than one year. Gain or loss, if any, recognized by a U.S. holder generally will
be treated as U.S. source passive income or loss for U.S. foreign tax credit
purposes.
A non-U.S. holder of equity shares or ADSs generally will not be subject
to U.S. federal income or withholding tax on any gain realized on the sale or
exchange of such equity shares or ADSs unless:
. such gain is effectively connected with the conduct by such non-U.S.
holder of a trade or business in the U.S.; or
. in the case of any gain realized by an individual non-U.S. holder,
such holder is present in the United States for 183 days or more in
the taxable year of such sale and other conditions are met.
Estate Taxes. An individual shareholder who is a citizen or resident of
the United States for U.S. federal estate tax purposes will have the value of
the equity shares or ADSs owned by such holder included in his or her gross
estate for U.S. federal estate tax purposes. An individual holder who actually
pays Indian estate tax with respect to the equity shares will, however, be
entitled to credit the amount of such tax against his or her U.S. federal
estate tax liability, subject to a number of conditions and limitations.
Backup Withholding Tax and Information Reporting Requirements. Under
current U.S. Treasury Regulations, dividends paid on equity shares, if any,
generally will not be subject to information reporting and generally will not
be subject to U.S. backup withholding tax. Information reporting will apply to
payments of dividends on, and to proceeds from the sale or redemption of,
equity shares or ADSs by a paying agent, including a broker, within the United
States to a U.S. holder, other than an "exempt recipient," including a
corporation, a payee that is a non-U.S. holder that provides an appropriate
certification and other persons. In addition, a paying agent within the United
States will be required to withhold 31% of any payments of the proceeds from
the sale or redemption of equity shares or ADSs within the United States to a
holder, other than an "exempt recipient," if such holder fails to furnish its
correct taxpayer identification number or otherwise fails to comply with such
backup withholding requirements.
Passive Foreign Investment Company. A non-U.S. corporation will be
classified as a passive foreign investment company for U.S. Federal income tax
purposes if either:
. 75% or more of its gross income for the taxable year is passive
income; or
. on average for the taxable year by value (or, if it is not a publicly
traded corporation and so elects, by adjusted basis) 50% or more of
its assets produce or are held for the production of passive income.
We do not believe that we satisfy either of the tests for passive foreign
investment company status. If we were to be a passive foreign investment
company for any taxable year, U.S. holders would be required to either:
. pay an interest charge together with tax calculated at maximum
ordinary income rates on "excess distributions," which is defined to
include gain on a sale or other disposition of equity shares;
89
<PAGE>
. if a qualified electing fund election is made, to include in their
taxable income their pro rata share of undistributed amounts of our
income; or
. if the equity shares are "marketable" and a mark-to-market election
is made, to mark-to-market the equity shares each taxable year and
recognize ordinary gain and, to the extent of prior ordinary gain,
ordinary loss for the increase or decrease in market value for such
taxable year.
The above summary is not intended to constitute a complete analysis of
all tax consequences relating to ownership of equity shares or ADSs. You should
consult your own tax advisor concerning the tax consequences of your particular
situation.
90
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our ADSs
or equity shares, and no prediction can be made as to the effect, if any, that
market sales of ADSs or equity shares or the availability of ADSs for sale will
have on the market price of the ADSs prevailing from time to time.
Nevertheless, sales of substantial amounts of ADSs in the public market, or the
perception that such sales could occur, could adversely affect the market price
of ADSs and could impair our future ability to raise capital through the sale
of our equity securities. For additional information, please see "Risk
Factors--The future sales of securities by our company or existing shareholders
may hurt the price of our ADSs" on page 21.
Upon the closing of this offering, we will have an aggregate of
21,156,000 equity shares outstanding, assuming no exercise of the underwriters'
overallotment option or outstanding employee stock options, but assuming the
exercise of the 750,000 warrants presently held by SARF and Satyam Computer
Services. Of the outstanding equity shares, the ADSs sold in this offering will
be freely tradable, except that any shares held by "affiliates" as defined
under Rule 144 under the Securities Act may only be sold in compliance with the
limitations described below. The remaining equity shares were all issued in
accordance with Regulation S, other than the 481,000 shares issued to Sterling
Commerce which were issued pursuant to Regulation D. None of these shares may,
under present law, be converted into ADSs without government of India approval.
If converted into ADSs, all equity shares issued in accordance with Regulation
S and held by non-affiliates may immediately be resold, subject to any
applicable lock-up periods. All equity shares issued in accordance with
Regulation D may be resold in accordance with Rule 144 after complying with a
holding period of at least one year and the other requirements of that rule.
In September 1999, we entered into a registration rights agreement with
SARF and Sterling Commerce relating to our company. Commencing 180 days after
the completion of this offering, each of SARF and Sterling Commerce may up to
make three requests of our company to register their equity shares. In
addition, SARF and Sterling Commerce have specified rights to sell equity
shares in connection with any public offering of our equity shares in India or
any other country, excluding the United States. The registration rights
agreement also grants to SARF and Sterling Commerce "piggy-back" registration
rights and contains other customary provisions. SARF also has similar rights to
require the listing of its shares in markets other than the United States under
specified circumstances.
Our company, each of our executive officers and directors, the holders of
warrants to purchase 750,000 equity shares and substantially all of our
shareholders have agreed not to offer, sell, contract to sell or otherwise
dispose of any equity shares or securities convertible into, exchangeable for
or representing the right to receive equity shares, for a period of 180 days
after the date of this prospectus without the prior written consent of Merrill
Lynch, Pierce, Fenner and Smith Incorporated. These agreements do not cover (1)
the grant of stock options under our existing stock option plan or (2) equity
shares issued upon the conversion of convertible or exchangeable securities or
the exercise of an option or warrant outstanding as of the date of this
prospectus. These lock-up agreements cover substantially all equity shares
outstanding prior to this offering.
We have agreed not to sell or otherwise dispose of any equity shares
during the 180-day period following the date of the prospectus, except we may
issue, and grant options to purchase, equity shares under our Associate Stock
Option Plan and other pre-existing agreements. In addition, we may issue equity
shares in connection with any acquisition of another company if the terms of
such issuance provide that such equity shares shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence. For
additional information, please see "Risk Factors--The future sales of
securities by our company or existing shareholders may hurt the price of our
ADSs" on page 21.
91
<PAGE>
UNDERWRITING
The offering consists of:
. the U.S. offering of 2,505,000 ADSs in the United States and
Canada; and
. the international offering of 1,670,000 ADSs outside the United
States and Canada.
We and the underwriters for the U.S. offering named below have entered
into an underwriting agreement with respect to the ADSs being offered in the
U.S. offering. Each U.S. underwriter has severally agreed to purchase the
number of ADSs indicated in the table below. Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Salomon Smith Barney Inc. are the representatives of the
U.S. underwriters.
<TABLE>
<CAPTION>
Number of
U.S. Underwriters ADSs
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................ 1,473,500
Salomon Smith Barney Inc. ....................................... 631,500
BancBoston Robertson Stephens Inc. .............................. 50,000
Bear, Stearns & Co. Inc. ........................................ 50,000
Credit Suisse First Boston Corporation........................... 50,000
Lehman Brothers Inc. ............................................ 50,000
Morgan Stanley & Co. Incorporated................................ 50,000
Raymond James & Associates, Inc. ................................ 50,000
E*OFFERING Corp. ................................................ 25,000
H. Rivkin & Co., Inc. ........................................... 25,000
Janney Montgomery Scott LLC...................................... 25,000
Paribas Corporation.............................................. 25,000
---------
Total....................................................... 2,505,000
=========
</TABLE>
The U.S. underwriters have agreed to purchase all the ADSs being offered
in the U.S. offering, other than those covered by the overallotment option
described below, if they purchase any of these ADSs.
We have granted to the underwriters in the U.S. and international
offerings an option, exercisable within 30 days after the date of this
prospectus, to purchase up to 626,250 additional ADSs at the public offering
price less the underwriting commission. The underwriters may exercise this
option solely for the purpose of covering overallotments, if any, in connection
with the offerings. The representatives of the U.S. underwriters will decide on
behalf of the underwriters whether to exercise the option and whether to
allocate any ADSs covered by the option to the U.S. offering or the
international offering. If the underwriters exercise the overallotment option,
each U.S. underwriter will purchase a number of additional ADSs approximately
proportionate to the underwriter's initial purchase commitment.
The U.S. underwriters will initially offer the ADSs at the public
offering price set out on the cover of this prospectus. The U.S. underwriters
may sell ADSs to securities dealers at a discount of not in excess of $.75 per
ADS from the initial public offering price. Any of these securities dealers may
resell any securities purchased from the U.S. underwriters to other brokers or
dealers at a discount of not in excess of $.10 per ADS from the initial public
offering price. If all the ADSs are not sold at the initial offering price, the
representatives of the U.S. underwriters may change the offering price and the
other selling terms.
We have also entered into an underwriting agreement for the sale of
1,670,000 ADSs outside the United States and Canada. Merrill Lynch (Singapore)
Pte. Ltd. and Salomon Brothers International Limited are the representatives of
the underwriters for the international offering. The U.S. and international
offerings are conditioned on each other. The initial offering price and
aggregate underwriting commissions per ADS for the U.S. offering and the
international offering are identical.
92
<PAGE>
The underwriters have entered into an agreement in which they agree to
restrictions on where and to whom they and any dealer purchasing from them may
offer ADSs in connection with the offering. The U.S. and international
underwriters also have agreed that they may sell shares between their
respective underwriting groups.
Our company, each of our executive officers and directors, the holders of
warrants to purchase 750,000 equity shares and substantially all of our
shareholders have agreed not to offer, sell, contract to sell or otherwise
dispose of any equity shares or securities convertible into, exchangeable for
or representing the right to receive equity shares, for a period of 180 days
after the date of this prospectus without the prior written consent of Merrill
Lynch, Pierce, Fenner and Smith Incorporated. These agreements do not cover
(1) the grant of stock options under our existing stock option plan or (2)
equity shares issued upon the conversion of convertible or exchangeable
securities or the exercise of an option or warrant outstanding as of the date
of this prospectus. These lock-up agreements cover substantially all equity
shares outstanding prior to this offering.
The ADSs offered under this prospectus have been approved for listing on
the Nasdaq National Market.
In connection with the offering, the U.S. and international underwriters
may purchase and sell ADSs in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of securities than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the ADSs while the
offering is in progress.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the ADSs. As a result, the price of the ADSs may be
higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, the underwriters may discontinue these
transactions at any time. The underwriters may effect transactions through the
Nasdaq National Market, in the over-the-counter market or otherwise.
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1.0 million and are payable by us.
We have agreed to indemnify the several underwriters against some
liabilities, including liabilities under the Securities Act of 1933.
The underwriters and their affiliates engage and may in the future engage
in investment banking and commercial banking transactions with us.
The underwriters have reserved up to 200,000 ADSs for sale at our request
to persons associated with our company at the same price and on the same terms
as the shares sold by the underwriters to the general public. The number of
ADSs available for sale to the general public will be reduced to the extent
any reserved ADSs are purchased. Any reserved ADSs not so purchased will be
offered by the underwriters on the same basis as the other ADSs offered
hereby.
The underwriters expect to deliver ADSs against payment for the ADSs in
U.S. dollars in New York, New York on or about October 22, 1999.
Selling Restrictions
This prospectus does not constitute an offer or an invitation by, or on
behalf of, us or by or on behalf of the underwriters, to subscribe for or
purchase any of our equity shares or ADSs in any jurisdiction to any person to
whom it is unlawful to make such an offer or solicitation in that
jurisdiction. The distribution of this prospectus and the offering of our
equity shares or ADSs in certain jurisdictions may be restricted by law.
Persons into whose possession this prospectus comes are required by us and the
underwriters to inform themselves about and to observe any such restrictions.
93
<PAGE>
LEGAL MATTERS
The validity of the ADSs offered hereby will be passed upon for Satyam
Infoway Limited by Latham & Watkins, Menlo Park, California. The validity of
the equity shares represented by the ADSs offered hereby and the principal
Indian tax consequences for holders of ADSs and equity shares received upon
withdrawal of such equity shares who are not resident in India will be passed
upon by M.G. Ramachandran, New Delhi, India, Indian counsel for Satyam Infoway
Limited. Matters in connection with the offering will be passed upon on behalf
of the underwriters by Brobeck, Phleger & Harrison, LLP, New York, New York,
and Nishith Desai Associates, Mumbai, India, counsel for the Underwriters.
Latham & Watkins may rely upon M.G. Ramachandran with respect to matters
governed by Indian law.
EXPERTS
The U.S. GAAP financial statements of Satyam Infoway Limited as of March
31, 1998 and 1999, and for each of the years in the three-year period ended
March 31, 1999, have been included herein in reliance upon the report of KPMG,
India, independent accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in auditing and accounting.
CHANGE OF ACCOUNTANTS
Effective May 1998, Bharat S. Raut and Company was engaged as the
principal independent accountants for Satyam Infoway for Indian GAAP reporting,
replacing Fraser & Ross, who resigned at that time. The change was approved by
our Directors and at the annual general meeting held on May 23, 1998.
In connection with the audits of the fiscal years ended March 31, 1996,
1997 and 1998, and for the interim period from April 1, 1998 through May 23,
1998, there were no disagreements with Fraser & Ross on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction
of Fraser & Ross, would have caused them to make reference to the matter in
their report, except that during the fiscal year ended March 31, 1998 Fraser &
Ross qualified its opinion regarding whether or not Section 58A of the
Companies Act applied to Satyam Infoway's issuance of debentures to Citibank.
Section 58A prohibits Indian companies, other than banks, from accepting
"deposits" in an amount in excess of 25% of their share capital. Fraser & Ross
concluded that the debentures should be classified as "deposits" while Satyam
Infoway concluded that they should be classified as a bank loan. The audit
reports of Fraser & Ross for the financial statements of Satyam Infoway as of
and for the fiscal years ended March 31, 1996, 1997 and 1998 did not contain
any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty or audit scope, except for a qualification of the
financial statements at March 31, 1998 prepared under Indian GAAP related to
the treatment of the Citibank debentures as described above.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form F-1, which
includes amendments, exhibits, schedules and supplements, under the Securities
Act of 1933, as amended, and the rules and regulations of the SEC, for the
registration of the ADSs and underlying equity shares offered by this
prospectus. Although this prospectus, which forms a part of the registration
statement, contains all material information included in the registration
statement, part of the registration statement have been omitted from this
prospectus as permitted by the rules and regulations of the SEC. A related
registration statement on Form F-6 has also been filed to register our ADSs as
represented by the ADRs. For further information with respect to
94
<PAGE>
our company and the ADSs offered by this prospectus, please refer to the
registration statement. Although this prospectus contains all material terms of
the contracts or other documents referred to in this prospectus, the
descriptions of these contracts or other documents contained in this prospectus
are not necessarily complete.
You may read and copy all or any portion of the registration statement or
any other information that we file, or obtain a copy of those materials,
through facilities maintained by the SEC as described in the front of this
prospectus under the caption "Reports to our Security Holders."
95
<PAGE>
SATYAM INFOWAY LIMITED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG, Independent Auditors....................................... F-2
Balance Sheets............................................................. F-3
Statements of Income....................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Satyam Infoway Limited:
We have audited the accompanying balance sheets of Satyam Infoway
Limited as of March 31, 1998 and 1999, and the related statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Satyam Infoway
Limited as of March 31, 1998 and 1999, and the results of its operations and
its cash flows for each of the years in the three-year period ended March 31,
1999, in conformity with accounting principles generally accepted in the
United States.
The United States dollar amounts are presented in the accompanying
financial statements solely for the convenience of the readers and are
arithmetically correct on the basis disclosed in footnote 1(b).
KPMG
Chennai, India
April 19, 1999, except as to Note 21
which is as of October 12, 1999
F-2
<PAGE>
SATYAM INFOWAY LIMITED
BALANCE SHEETS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
As of
------------------------------------------------------------------------------
March 31, March 31, March 31, June 30, June 30, June 30,
1998 1999 1999 1998 1999 1999
Rs. Rs. US$ Rs. Rs. US$
------------ ------------ ---------- ------------ ------------ ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ 9,911,667 125,547,453 2,889,470 4,768,486 10,375,381 238,789
Accounts receivable, net
of allowances of Rs
Nil, Rs. 501,839 and
Rs. 726,060 as of March
31, 1998, 1999 and
June 30, 1999,
respectively........... 1,945,483 45,087,639 1,037,692 10,515,365 53,157,565 1,223,419
Due from officers and
employees.............. 87,302 573,143 13,191 123,676 570,806 13,137
Inventories............. -- 6,758,190 155,539 102,755 5,925,745 136,381
Other current assets.... 10,978,160 73,688,213 1,695,931 12,358,743 87,638,648 2,017,000
------------ ------------ ---------- ------------ ------------ ----------
Total current assets... 22,922,612 251,654,638 5,791,823 27,869,025 157,668,145 3,628,726
Plant and equipment--
net.................... 63,240,894 162,833,876 3,747,615 70,106,064 252,429,715 5,809,660
Intangible asset........ 11,295,502 8,916,052 205,203 10,700,639 8,321,190 191,512
Other assets............ 10,173,248 31,483,855 724,599 10,825,159 46,053,778 1,059,925
------------ ------------ ---------- ------------ ------------ ----------
Total assets........... 107,632,256 454,888,421 10,469,240 119,500,887 464,472,828 10,689,823
============ ============ ========== ============ ============ ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of
long-term debt......... -- 144,750,000 3,331,415 -- 167,500,000 3,855,006
Current installments of
capital lease
obligations............ 2,541,263 596,740 13,734 2,689,165 914,901 21,056
Short term borrowings... -- -- -- -- 31,823,824 732,424
Trade accounts payable.. 15,471,302 17,275,480 397,595 21,748,862 23,118,809 532,079
Due to parent company... 1,508,887 3,980,370 91,608 1,890,222 5,481,776 126,163
Accrued expenses........ 3,685,525 19,028,671 437,944 4,294,524 15,152,329 348,730
Deferred revenue........ -- 71,506,440 1,645,719 1,491,293 92,480,652 2,128,439
Advances from
customers.............. 1,641,292 11,747,346 270,365 919,373 8,596,943 197,858
Other current
liabilities............ 3,429,204 4,476,322 103,022 2,585,996 10,923,424 251,402
------------ ------------ ---------- ------------ ------------ ----------
Total current
liabilities........... 28,277,473 273,361,369 6,291,402 35,619,435 355,992,658 8,193,157
Non-current liabilities:
Long-term debt,
excluding current
installments........... 122,000,000 113,750,000 2,617,952 122,000,000 91,000,000 2,094,361
Capital lease
obligations, excluding
current installments... 9,913,961 159,244 3,665 9,269,877 404,806 9,317
Other liabilities....... -- -- -- -- 1,000,000 23,015
------------ ------------ ---------- ------------ ------------ ----------
Total liabilities...... 160,191,434 387,270,613 8,913,019 166,889,312 448,397,464 10,319,850
============ ============ ========== ============ ============ ==========
Stockholders' equity:
Common stock, Rs. 10 par
value; 15,000,000,
25,000,000 and
25,000,000 Equity
Shares authorized as of
March 31, 1998, 1999
and June 30, 1999;
Issued and outstanding
Equity Shares--
7,500,230, 15,750,000
and 15,750,000 as of
March 31, 1998, 1999
and June 30, 1999...... 75,002,300 157,500,000 3,624,856 105,002,300 157,500,000 3,624,856
Additional paid-in
capital................ -- 226,636,200 5,216,023 -- 226,636,200 5,216,023
Accumulated deficit
during development
stage.................. (127,561,478) -- -- -- -- --
Deferred Compensation--
Employee Stock Offer
Plan................... -- (1,581,249) (36,392) -- (1,374,999) (31,646)
Accumulated deficit..... -- (314,937,143) (7,248,266) (152,390,725) (366,685,837) (8,439,260)
------------ ------------ ---------- ------------ ------------ ----------
Total stockholders'
equity................ (52,559,178) 67,617,808 1,556,221 (47,388,425) 16,075,364 369,973
------------ ------------ ---------- ------------ ------------ ----------
Total liabilities and
stockholders' equity.. 107,632,256 454,888,421 10,469,240 119,500,887 464,472,828 10,689,823
============ ============ ========== ============ ============ ==========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
SATYAM INFOWAY LIMITED
STATEMENTS OF INCOME
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Years ended March 31 Quarter ended June 30,
--------------------------------------------------- ------------------------------------
1997 1998 1999 1999 1998 1999 1999
Rs. Rs. Rs. US$ Rs. Rs. US$
----------- ------------ ------------ ---------- ----------- ----------- ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... -- 6,805,020 103,343,832 2,378,454 17,557,719 80,803,252 1,859,684
Cost of revenues....... -- (19,497,654) (63,651,265) (1,464,931) (7,074,081) (38,896,630) (895,204)
----------- ------------ ------------ ---------- ----------- ----------- ----------
Gross profit/(loss).... -- (12,692,634) 39,692,567 913,523 10,483,638 41,906,622 964,480
----------- ------------ ------------ ---------- ----------- ----------- ----------
Operating expenses:
Selling, general and
administrative
expenses............. 26,336,901 80,399,677 200,212,761 4,607,888 30,607,474 84,131,759 1,936,289
Amortization of
deferred stock
compensation
expense.............. -- -- 68,751 1,582 -- 206,250 4,747
----------- ------------ ------------ ---------- ----------- ----------- ----------
Total operating
expenses.............. 26,336,901 80,399,677 200,281,512 4,609,470 30,607,474 84,338,009 1,941,036
----------- ------------ ------------ ---------- ----------- ----------- ----------
Operating loss......... (26,336,901) (93,092,311) (160,588,945) (3,695,947) (20,123,836) (42,431,387) (976,556)
Other expense, net..... -- (7,498,053) (26,786,720) (616,495) (4,705,411) (9,317,307) (214,437)
----------- ------------ ------------ ---------- ----------- ----------- ----------
Net loss............... (26,336,901) (100,590,364) (187,375,665) (4,312,442) (24,829,247) (51,748,694) (1,190,993)
=========== ============ ============ ========== =========== =========== ==========
Loss per Equity Share.. (114,508.27) (121.66) (17.31) (0.40) (3.28) (3.29) (0.08)
=========== ============ ============ ========== =========== =========== ==========
Weighted Equity Shares
used in computing loss
per equity share...... 230 826,805 10,824,826 10,824,826 7,566,164 15,750,000 15,750,000
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
SATYAM INFOWAY LIMITED
STATEMENTS OF STOCK HOLDERS EQUITY
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Deferred
Common Stock Accumulated Compensation- Total
---------------------- Additional Paid Deficit During Employee Accumulated Stockholders'
Shares Par Value In Capital Development Stage Stock Offer Plan Deficit Equity
---------- ----------- --------------- ----------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of March
31, 1996.......... 230 2,300 -- (634,213) -- -- (631,913)
Net loss........... -- -- -- (26,336,901) -- -- (26,336,901)
---------- ----------- ----------- ------------ ---------- ------------ ------------
Balance as of March
31, 1997.......... 230 2,300 -- (26,971,114) -- -- (26,968,814)
Common stock issued
to the parent
Company........... 7,500,000 75,000,000 -- -- -- -- 75,000,000
Net loss........... -- -- -- (100,590,364) -- -- (100,590,364)
---------- ----------- ----------- ------------ ---------- ------------ ------------
Balance as of March
31, 1998.......... 7,500,230 75,002,300 -- (127,561,478) -- -- (52,559,178)
Deficit transfer... -- -- -- 127,561,478 -- (127,561,478) --
Common stock issued
to the parent
Company........... 4,879,770 48,797,700 44,986,200 -- -- -- 93,783,900
Other issuances of
common stock...... 3,370,000 33,700,000 180,000,000 -- -- -- 213,700,000
Net loss........... -- -- -- -- -- (187,375,665) (187,375,665)
Compensation
related to stock
option grants..... -- -- 1,650,000 -- (1,650,000) -- --
Amortization of
compensation
related to stock
option grants..... -- -- -- -- 68,751 -- 68,751
---------- ----------- ----------- ------------ ---------- ------------ ------------
Balance as of March
31, 1999.......... 15,750,000 157,500,000 226,636,200 -- (1,581,249) (314,937,143) 67,617,808
Net loss
(unaudited)....... -- -- -- -- -- (51,748,694) (51,748,694)
Amortization of
compensation
related to stock
option grants
(unaudited)....... -- -- -- -- 206,250 -- 206,250
---------- ----------- ----------- ------------ ---------- ------------ ------------
Balance as of June
30, 1999
(unaudited)....... 15,750,000 157,500,000 226,636,200 -- (1,374,999) (366,685,837) 16,075,364
========== =========== =========== ============ ========== ============ ============
Balance as of March
31, 1999 (in
US$).............. 15,750,000 3,624,856 5,216,023 -- (36,392) (7,248,266) 1,556,221
========== =========== =========== ============ ========== ============ ============
Balance as of June
30, 1999 (in US$)
(unaudited)....... 15,750,000 3,624,856 5,216,023 -- (31,646) (8,439,260) 369,973
========== =========== =========== ============ ========== ============ ============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
SATYAM INFOWAY LIMITED
STATEMENTS OF CASH FLOWS
(Expressed in Indian Rupees, except share data and as otherwise stated)
<TABLE>
<CAPTION>
Years ended March 31, Quarter ended June 30,
--------------------------------------------------- --------------------------------------
1997 1998 1999 1999 1998 1999 1999
Rs. Rs. Rs. US$ Rs. Rs. US$
----------- ------------ ------------ ---------- ----------- ------------ -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ (26,336,901) (100,590,364) (187,375,665) (4,312,442) (24,829,247) (51,748,694) (1,190,993)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation of plant
and equipment......... 535,975 18,781,598 46,714,402 1,075,130 8,191,497 20,705,897 476,545
Amortization of
technical know how
fees.................. -- 601,748 2,379,450 54,763 594,863 594,862 13,691
Amortization of
deferred stock
compensation
expense............... -- -- 68,751 1,582 -- 206,250 4,747
Loss on sale of plant
and equipment......... -- -- 37,627 866 -- -- --
Changes in assets and
liabilities:
Accounts receivable
(net)............... -- (1,945,483) (43,142,156) (992,916) (8,569,882) (8,069,926) (185,727)
Inventories.......... -- -- (6,758,190) (155,539) (102,755) 832,445 19,159
Other current
assets.............. (4,710,247) (6,204,993) (62,710,053) (1,443,269) (1,380,583) (13,950,435) (321,070)
Other assets......... (2,780,684) (7,212,564) (21,218,607) (488,345) (651,911) (14,538,260) (334,598)
Due to parent
company............. -- 1,508,887 1,387,583 31,935 (618,665) 1,501,406 34,555
Accrued expenses..... 2,743,173 942,352 15,343,146 353,122 608,999 (3,876,342) (89,215)
Deferred revenue..... -- -- 71,506,440 1,645,718 1,491,293 20,974,212 482,721
Trade accounts
payable............. -- 15,471,302 1,804,178 41,523 6,277,560 5,843,329 134,484
Advances from
customers........... -- 1,641,292 10,106,054 232,590 (721,919) (3,150,403) (72,506)
Other current
liabilities......... 327,643 3,082,704 1,047,118 24,098 (843,208) 6,447,102 148,379
Advances given to
officers and
employees........... (205,341) (26,961) (577,841) (13,299) (36,374) (29,326) (675)
Other liabilities.... -- -- -- -- -- 1,000,000 23,015
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net cash used in
operating activities... (30,426,382) (73,950,482) (171,387,763) (3,944,483) (20,590,332) (37,257,883) (857,488)
----------- ------------ ------------ ---------- ----------- ------------ ----------
Cash flows from
investing activities:
Expenditure on plant and
equipment.............. (3,229,593) (65,172,385) (146,134,547) (3,363,281) (15,056,667) (109,577,914) (2,521,931)
Expenditure on technical
know how............... -- (11,897,250) -- -- -- -- --
Proceeds from sale of
plant and equipment.... -- -- 135,000 3,107 -- -- --
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net cash used in
investing activities... (3,229,593) (77,069,635) (145,999,547) (3,360,174) (15,056,667) (109,577,914) (2,521,931)
----------- ------------ ------------ ---------- ----------- ------------ ----------
Cash flows from
financing activities:
Principal payments of
long-term debt......... -- (860,000) -- -- -- -- --
Proceeds from issuance
of long-term debt...... 860,000 122,000,000 136,500,000 3,141,542 -- -- --
Proceeds from short term
loans.................. -- -- -- -- -- 31,823,824 732,423
Principal payments under
capital lease
obligations............ -- (1,701,265) (12,044,704) (277,208) (496,182) (160,099) (3,685)
Net proceeds from
issuance of common
stock.................. -- 38,453,000 307,483,900 7,076,730 30,000,000 -- --
Due to parent company... 34,278,465 1,557,559 1,083,900 24,946 1,000,000 -- --
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net cash provided by
financing activities... 35,138,465 159,449,294 433,023,096 9,966,010 30,503,818 31,663,725 728,738
----------- ------------ ------------ ---------- ----------- ------------ ----------
Net increase/(decrease)
in cash and cash
equivalents............ 1,482,490 8,429,177 115,635,786 2,661,353 (5,143,181) (115,172,072) (2,650,681)
Cash and cash
equivalents at the
beginning of the
year/quarter........... -- 1,482,490 9,911,667 228,117 9,911,667 125,547,453 2,889,470
----------- ------------ ------------ ---------- ----------- ------------ ----------
Cash and cash
equivalents at the end
of the year/quarter.... 1,482,490 9,911,667 125,547,453 2,889,470 4,768,486 10,375,381 238,789
=========== ============ ============ ========== =========== ============ ==========
Supplementary
Information
Cash paid towards
interest............... -- 11,307,320 27,754,615 638,770 4,422,500 10,060,759 231,547
Supplemental schedule of
non cash financing
activity
Additional common stock
issued upon conversion
of amounts payable to
parent company......... -- 7,565,690 1,083,900 24,946 1,000,000 -- --
Capital leases.......... -- 14,156,489 161,443 3,716 -- 723,822 16,659
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
1. Summary of Significant Accounting Policies
(a) Description of Business
Satyam Infoway Limited ("Satyam" or "the Company") was incorporated on
December 12, 1995 in Chennai, India with the objective of offering electronic
commerce and Internet/intranet based solutions. Headquartered at Chennai, the
Company has 25 points of presence throughout the country. Prior to April 1,
1998, the Company was in the development stage and its primary activities
included raising capital, developing strategic alliances, developing, deploying
and certifying its network, acquiring plant and equipment and other operating
assets and identifying markets. As of April 1, 1998, the Company is no longer
in the development stage.
The Company commenced its Internet service operations on November 22,
1998, consequent to the privatization of Internet services by the Government of
India.
The Company is a majority owned subsidiary of Satyam Computer Services
Limited ("Satyam Computer Services"). As of June 30, 1999, Satyam Computer
Services held approximately 78.6% of the voting control of the Company
represented by 12,379,800 Equity Shares of Rs. 10 each.
(b) Basis of Preparation of Financial Statements
The accompanying financial statements have been prepared in Indian Rupees
(Rs.), the national currency of India. Solely for the convenience of the
reader, the financial statements as of and for the year ended March 31, 1999
and quarter ended June 30, 1999 have been translated into United States dollars
at the noon buying rate in New York City on June 30, 1999 for cable transfers
in Indian rupees, as certified for customs purposes by the Federal Reserve Bank
of New York of US$ 1 = Rs. 43.45. No representation is made that the Indian
rupee amounts have been, could have been or could be converted into United
States dollars at such a rate or at any other certain rate on June 30, 1999 or
at any other date.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original
maturities, at the date of purchase/investment, of three months or less to be
cash equivalents. Cash and cash equivalents currently consist of cash and cash
on deposit with banks.
(e) Revenue Recognition
Revenues from corporate network services which include providing e-
commerce solutions, electronic data interchange and other network based
services are recognized upon actual usage of such services by customers and is
based on either the time for which the network is used or the volume of data
transferred or
F-7
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
both. The Company enters into contracts with its corporate customers for the
use of its networks on both a time and usage basis. In accordance with the
terms of these contracts, customers are allowed to transmit certain volumes of
data free of cost through the Company's networks. No revenues are recognized
for such data transfers. Data transfers above the minimum exempt volumes are
charged to customers at specified rates. Customers also receive the right to
use the Company's networks free of cost for specified periods of time. No
revenues are recognized for such exempt periods of time. Network usage over and
above the exempt periods of time are billed to customers at agreed rates. The
Company recognizes such revenues based on actual usage of the networks by
customers both in terms of time and data transferred.
Revenues from web-site design and development are recognized upon
completion of the project once the customer's web links are commissioned and
available on the world-wide-web. Revenues from web-site hosting are recognized
ratably over the period for which the site is hosted.
Internet access is sold to customers for a specified number of hours,
which is to be utilized within a specified period of time. Customers purchase a
CD ROM that allows them to access the Internet. The amounts received from
customers on the sale of these CD ROMs are not refundable. The Company
recognizes revenue based on usage by the customer over the specified period. At
the end of the specified time frame, the remaining unutilized hours, if any,
are recognized as revenue. Electronic mail access is sold to customers for a
specified period of time over which the related revenue is recognized.
Revenues from banner advertisements are recognized ratably over the
period in which the advertisement is displayed, provided that no significant
Company obligations remain at the end of the period and the collection of the
related receivable is probable. Revenues from sponsorship contracts are
recognized ratably over the period in which the sponsors' advertisements are
displayed provided no significant Company obligations remain at the end of the
period and collection of the resulting receivable is probable. Revenues from
electronic commerce transactions are recognized when the transaction is
completed provided there are no significant remaining Company obligations and
collection of the resulting receivable is probable.
The Company has entered into a three-year agreement with CompuServe
Network Services ("CompuServe") to provide dial up access services. The Company
recognizes revenues from this agreement on the basis of usage of its networks
by CompuServe's customers. Revenues from the sale of communication hardware and
software required to provide the Company's network based services is recognized
when the sale is complete with the passing of title.
(f) Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method for all classes of inventories
other than CD ROMs used for Internet service activities for which the weighted
average method is used to determine cost.
F-8
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
(g) Plant and Equipment
Plant and equipment are stated at cost. Plant and equipment under capital
leases are stated at the present value of minimum lease payments. The Company
computes depreciation for all plant and equipment using the straight-line
method. Leasehold improvements are amortized on a straight-line basis over the
shorter of the primary lease period or estimated useful life of the asset. The
estimated useful lives of assets are as follows:
<TABLE>
<S> <C>
Plant and machinery............................................... 5 years
Computer equipment................................................ 2 years
Office equipment.................................................. 5 years
Furniture and fixtures............................................ 5 years
Vehicles.......................................................... 5 years
System software................................................... 3 years
</TABLE>
The Company purchases certain application software for internal use. It
is estimated that such software has a relatively short useful life, usually
less than one year. The Company, therefore, charges to income the cost of
acquiring such software, entirely at the time of acquisition. Deposits paid
towards the acquisition of plant and equipment outstanding at each balance
sheet date and the cost of plant and equipment not put to use before such date
are disclosed under Construction-in-progress.
(h) Intangible Asset
The Company entered into a five year agreement effective September 1997
with Sterling Commerce International Inc ("Sterling") whereby Sterling agreed
to grant the Company certain rights to market, provide, install, facilitate,
maintain and support Sterling's proprietary electronic commerce technology. In
consideration for granting this proprietary technology, the Company paid
Sterling a licencing fee of $ 300,000, which was capitalized. The Company
currently amortizes this fee over five years, this being the initial period
over which it is entitled to use the electronic commerce technology. The
amortization related to the licence is included under "Depreciation and
amortization" and is classified in the Income Statement under the caption
"Selling, general and administrative expenses."
(i) Earnings Per Share
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share. In accordance with SFAS No.
128, basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using the treasury stock
method for options and warrants, except where the results would be anti-
dilutive.
(j) Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carry-forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on
F-9
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits of which future realization is uncertain.
(k) Retirement Benefits to Employees
Provident fund: In accordance with Indian law, all employees receive
benefits from a provident fund, which is a defined contribution plan. Both the
employee and employer each make monthly contributions to the plan equal to 12%
of the covered employee's basic salary. The Company has no further obligations
under the plan beyond its monthly contributions.
Gratuity: In addition to the above benefits, the Company provides for
gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering all
employees. The Gratuity Plan commenced on April 1, 1997. The plan provides a
lump sum payment to vested employees at retirement or termination of employment
in an amount based on the respective employee's salary and the years of
employment with the Company. The Company contributes each year to a gratuity
fund maintained by the Life Insurance Corporation of India ("LIC") based upon
actuarial valuations. No additional contributions were required to be made by
the Company in excess of the unpaid contributions to the plan. The LIC has no
recourse to the Company in the event of any shortfall in its obligations to
vested employees and is entirely responsible for meeting all unfunded
liabilities. Consequently, all additional liabilities that may arise will be
borne by the LIC. Further, vested employees do not have any recourse to the
Company in the event the LIC does not fulfil its obligations to them. The
Company does not carry any pension liability in its financial statements and
has no further obligations under the plan beyond its monthly contributions.
(l) Stock-based Compensation
The Company uses the intrinsic value-based method of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, to account for its employee stock-based compensation plan. The
Company has therefore adopted the pro forma disclosure provisions of SFAS No.
123, Accounting for Stock-Based Compensation.
(2) Cash and Cash Equivalents
The cost and fair values for cash and cash equivalents as of March 31,
1998 and 1999 and June 30, 1999, are set out below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
--------- ----------- --------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cost and fair values
Cash and cash
equivalents.......... 9,911,667 125,547,453 2,889,470 10,375,381 238,789
</TABLE>
Cash and cash equivalents include deposits of Rs. 69,200, Rs. 7,261,200
(US$ 167,116) and Rs. 7,634,477 (US$ 175,707) as of March 31, 1998 and 1999 and
June 30, 1999, respectively placed in "No-charge-no-lien" accounts as security
towards performance guarantees issued by the Company's bankers on the Company's
behalf. The Company cannot utilize these amounts until the guarantees are
discharged or revoked.
F-10
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
Cash and cash equivalents as of March 31, 1999 also include deposits of Rs.
115,000,000 (US$ 2,646,720) placed with banks as short-term deposits.
(3) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30, June 30,
1998 1999 1999 1998 1999 1999
Rs. Rs. US$ Rs. Rs. US$
--------- --------- --------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Compact discs........... -- 120,192 2,765 -- 178,378 4,105
Communication hardware.. -- 3,288,496 75,685 -- 2,345,114 53,973
Application software.... -- 3,349,502 77,089 102,755 3,402,253 78,303
--- --------- ------- ------- --------- -------
-- 6,758,190 155,539 102,755 5,925,745 136,381
=== ========= ======= ======= ========= =======
</TABLE>
(4) Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
---------- ---------- --------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Advance for expenses.... 818,285 1,617,959 37,238 5,976,618 137,552
Prepaid expenses........ 9,398,921 70,329,478 1,618,630 79,850,894 1,837,765
Prepaid telephone
rentals................ 51,750 296,250 6,818 296,250 6,818
Advance tax payments.... 709,204 959,516 22,083 1,225,783 28,211
Due from associate
company................ -- 190,104 4,375 224,993 5,178
Other advances.......... -- 294,906 6,787 64,110 1,476
---------- ---------- --------- ---------- ---------
10,978,160 73,688,213 1,695,931 87,638,648 2,017,000
========== ========== ========= ========== =========
</TABLE>
Prepaid expenses consist mainly of the unexpired portion of annual
rentals paid to the Department of Telecommunications, Ministry of
Communications, Government of India for use of leased telecommunication lines.
F-11
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
(5) Plant and Equipment
Plant and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
----------- ----------- ---------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Leasehold improvements.. 1,455,293 6,164,699 141,880 8,799,064 202,510
Plant and machinery..... 20,979,507 101,558,254 2,337,359 193,243,376 4,447,489
Computer equipment...... 41,055,959 72,577,533 1,670,369 82,403,663 1,896,517
Office equipment........ 1,299,341 1,727,654 39,762 2,104,818 48,442
Furniture and fixtures.. 4,636,715 7,665,644 176,424 8,211,437 188,986
Vehicles................ -- 161,443 3,716 885,265 20,374
System software......... 11,039,530 20,022,142 460,809 20,925,905 481,609
Construction-in-
progress............... 2,092,122 18,977,088 436,757 22,582,665 519,739
----------- ----------- ---------- ----------- ----------
82,558,467 228,854,457 5,267,076 339,156,193 7,805,666
Accumulated
depreciation........... (19,317,573) (66,020,581) (1,519,461) (86,726,478) (1,996,006)
----------- ----------- ---------- ----------- ----------
63,240,894 162,833,876 3,747,615 252,429,715 5,809,660
=========== =========== ========== =========== ==========
</TABLE>
Depreciation expense amounted to Rs. 535,975, Rs. 18,781,598, Rs.
46,714,402 (US$ 1,075,130) and Rs. 20,705,897 (US$ 476,545) for fiscal years
1997, 1998, 1999 and for the quarter ended June 30, 1999, respectively.
(6) Technical know-how fees as of March 31, 1998 and 1999 and June 30, 1999,
net of accumulated amortization of Rs. 601,748, Rs. 2,981,198 (US$ 68,612) and
Rs. 3,576,060 (US$ 82,303) respectively amounted to Rs. 11,295,502, Rs.
8,916,052 (US$ 205,203) and Rs. 8,321,190 (US$ 191,512) respectively.
(7) Leases
The Company is obligated under capital leases that expire in fiscal 1999
through 2002 for certain items of computers and vehicles. The gross amount and
related accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
March 31, March 31, March June 30, June 30,
1998 1999 31, 1999 1999 1999
Rs. Rs. US$ Rs. US$
---------- ----------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Computer equipment...... 14,156,489 14,156,489 325,811 1,649,789 37,970
Vehicles................ -- 161,443 3,716 885,265 20,374
---------- ----------- -------- ---------- -------
Total................... 14,156,489 14,317,932 329,527 2,535,054 58,344
========== =========== ======== ========== =======
Accumulated
depreciation........... (3,526,065) (10,628,548) (244,616) (1,706,580) (39,277)
</TABLE>
F-12
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
Depreciation on assets held under capital leases is included in total
depreciation expense.
Future minimum capital lease payments as of June 30, 1999 (unaudited)
are:
<TABLE>
<CAPTION>
Year ending March 31, June 30,
----------- ----------------- ----------------------
Rs. US$ Rs. US$
-------- ------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
2000.......................... 701,804 16,152 1,094,487 25,190
2001.......................... 166,461 3,831 253,140 5,826
2002.......................... -- -- 210,950 4,855
-------- ------- --------- -------
Total minimum lease payments.. 868,265 19,983 1,558,577 35,871
Less: Amount representing
interest..................... (112,281) (2,584) (238,870) (5,498)
-------- ------- --------- -------
Present value of net minimum
capital lease payments....... 755,984 17,399 1,319,707 30,373
Less: Current installments of
obligations under capital
leases....................... (596,740) (13,734) (914,901) (21,056)
-------- ------- --------- -------
Obligations under capital
leases, excluding current
installments................. 159,244 3,665 404,806 9,317
======== ======= ========= =======
</TABLE>
During fiscal 1999 the Company prepaid certain of its capital lease
obligations acquiring ownership of the related assets. The principal repaid
amounted to Rs. 1,121,696 and Rs. 11,385,004 (US$ 262,025) in fiscal 1998 and
1999, respectively.
(8) Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
---------- ---------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Rent and maintenance
deposits............... 5,948,129 8,239,345 189,627 9,803,140 225,619
Telephone deposits...... 2,334,000 17,308,000 398,343 30,330,076 698,045
Other deposits.......... 139,822 392,197 9,026 418,647 9,635
Prepaid telephone
rentals................ 1,606,297 5,307,313 122,148 5,233,252 120,443
Staff advances
recoverable after one
year................... 145,000 237,000 5,455 268,663 6,183
---------- ---------- ------- ---------- ---------
10,173,248 31,483,855 724,599 46,053,778 1,059,925
========== ========== ======= ========== =========
</TABLE>
F-13
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
(9) Short term borrowings
Short term borrowings comprise the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Short term loan......... -- -- -- 20,000,000 460,299
Cash credit facilities
from banks............. -- -- -- 11,823,824 272,125
--- --- --- ---------- -------
-- -- -- 31,823,824 732,424
=== === === ========== =======
</TABLE>
In June 1999, the Company obtained a short term loan facility from the
IDBI Bank Limited ("IDBI") in an amount of Rs. 100,000,000. This loan is
secured by a subordinated charge on the fixed assets (both present and future)
of the Company and also by a corporate guarantee provided by Satyam Computer
Services. The loan carries an interest rate of 12.75% per annum and is
repayable within 90 days. As of June 30, 1999, the Company has availed an
amount of Rs. 20,000,000 (US$ 460,299) under this facility, which is repayable
in the month of September 1999. The Company has also availed of a cash credit
facility from IDBI to meet its working capital requirements. The facility
carries an interest rate of 15.81% per annum. This loan is secured by a senior
charge on all present and future goods, book debts and other movable current
assets of the Company.
(10) Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
----------- ------------ ---------- ------------ ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Unsecured debentures.... 122,000,000 122,000,000 2,807,825 122,000,000 2,807,825
Term loan from Export
Import Bank of India... -- 136,500,000 3,141,542 136,500,000 3,141,542
----------- ------------ ---------- ------------ ----------
Total long-term debt.... 122,000,000 258,500,000 5,949,367 258,500,000 5,949,367
Less: Current
installments........... -- (144,750,000) (3,331,415) (167,500,000) (3,855,006)
----------- ------------ ---------- ------------ ----------
Long-term debt,
excluding current
installments........... 122,000,000 113,750,000 2,617,952 91,000,000 2,094,361
=========== ============ ========== ============ ==========
</TABLE>
Long term debt includes 1,220,000 unsecured debentures of Rs. 100 each
issued to Citibank NA, redeemable on August 31, 1999 and guaranteed by Satyam
Computer Services, the Company's holding company. These debentures carry a
floating rate of interest subject to a minimum rate of 14.5% per annum and an
additional mark-up rate. This additional mark-up rate is based on the
difference between the "base reference rate" and the "reference rate". The
"base reference rate" and the "reference rate" are calculated based on the
performance of the Indian National Stock Exchange indices through certain
designated periods. Such additional interest will be payable if the reference
rate as of August 31, 1999 exceeds the base reference rate and consequently
will be accounted for at the time of redemption, i.e. on August 31, 1999.
F-14
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
In June 1998, the Company obtained a facility from the Export Import Bank
of India for a term loan of Rs. 215,000,000. This term loan is secured by a
first charge on the fixed assets (both present and future) of the Company and
is also guaranteed by Satyam Computer Services. The loan carries an interest
rate of 15.5% per annum and will be repaid in six equal half-yearly
installments commencing on December 20, 1999. As of June 30, 1999, the Company
has availed an amount of Rs. 136,500,000 (US$ 3,141,542) under this facility.
Aggregate maturities of long-term debt for each of the years subsequent
to June 30, 1999 are as follows: June 30, 2000 - Rs. 167,500,000; June 30,
2001 - Rs. 45,500,000 and June 30, 2002 - Rs. 45,500,000.
(11) Income Taxes
The Company has incurred book and tax operating losses since inception
and has not provided for any deferred income tax because of the uncertainty
associated with the realization of such deferred tax assets.
The composition of the deferred tax asset is as follows:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
----------- ------------ ---------- ------------ ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Deferred tax assets
Operating loss carry
forwards............. 35,433,113 95,590,394 2,200,009 123,081,836 2,832,723
Plant and equipment
and intangibles...... 1,091,277 5,807,119 133,651 8,160,313 187,809
----------- ------------ ---------- ------------ ----------
Total deferred tax
assets................. 36,524,390 101,397,513 2,333,660 131,242,149 3,020,532
Less: Valuation
allowance.............. (36,524,390) (101,397,513) (2,333,660) (131,242,149) (3,020,532)
----------- ------------ ---------- ------------ ----------
Net deferred tax
assets................. -- -- -- -- --
=========== ============ ========== ============ ==========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes that it is more likely than not the Company will not
realize the benefit of these deductible differences. Under Indian law, loss
carry-forwards from a particular year may be used to offset taxable income over
the next eight years.
(12) Common Stock
Dividends: Should the Company declare and pay dividends, such dividends
will be paid in Indian rupees.
Indian law mandates that any dividend can be declared out of
distributable profits only after the transfer of up to 10% of net income
computed in accordance with current regulations to a general reserve. Also, the
remittance of dividends outside India is governed by Indian law on foreign
exchange. Such dividend payments are also subject to applicable withholding
taxes.
F-15
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
(13) Stock Purchase Plan
In fiscal 1999, the Company entered into an agreement with Satyam
Computer Services and the South Asia Regional Fund ("SARF"). Under the terms of
this agreement, the Company agreed to issue warrants to Satyam Computer
Services and SARF. Each warrant entitles the registered holder thereof to
subscribe for and be allotted one Equity Share in the Company. The warrants are
exercisable at a price calculated at a multiple of eight times the fully
diluted earnings per share, subject to a minimum price of the higher of: (a)
66% of the fair market value of a share as determined by three merchant bankers
acceptable to shareholders, and (b) par value of the shares subscribed. These
warrants are exercisable anytime: (a) between June 30, 2001 through June 30,
2003; or (b) if the Company decides to sell any of its shares prior to June 30,
2001; or (c) on a date not later than the date on which the Company files an
application for listing or petitions for voluntary liquidation. As of June 30,
1999, the Company had issued 150,000 and 600,000 warrants to Satyam Computer
Services and SARF respectively. The Company has been notified by Satyam
Computer Services and SARF of their intent to exercise the warrants issued to
them in the event of an Initial Public Offering made by the Company.
(14) Employee Post Retirement Benefits
Contributions to the gratuity plan managed by the Life Insurance
Corporation of India in fiscal 1998 and 1999 was Rs. 313,733 and Rs. 319,606
(US$ 7,356) respectively. No contribution has been made for the quarter ended
June 30, 1999 as the amount had not fallen due on the Balance Sheet date.
In addition the Company contributed Rs. 266,328, Rs. 679,830, Rs.
2,122,963 (US$ 48,860), and Rs. 986,842 (US$ 22,712) to the provident fund
managed by Government of India in fiscal 1997, 1998, 1999 and quarter ended
June 30, 1999 respectively.
(15) Other Expense
Other expense, net, consists of the following:
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, June 30, June 30,
1997 1998 1999 1999 1999 1999
Rs. Rs. Rs. US$ Rs. US$
--------- ---------- ---------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest expense........ -- 11,307,320 27,754,615 638,771 10,060,759 231,547
Other finance charges... -- -- -- -- 349,650 8,047
Interest income......... -- (3,809,267) (609,020) (14,017) (785,361) (18,075)
Internet management
fees................... -- -- -- -- (300,000) (6,904)
Other income............ -- -- (358,875) (8,259) (7,741) (178)
----- ---------- ---------- ------- ---------- -------
-- 7,498,053 26,786,720 616,495 9,317,307 214,437
===== ========== ========== ======= ========== =======
</TABLE>
(16) Commitments and Contingencies
The Company had outstanding performance guarantees for various statutory
purposes totaling Rs. 144,000, Rs. 22,144,000 (US$ 509,643) and Rs. 22,144,000
(US$ 509,643) as of March 31, 1998 and 1999 and June 30, 1999, respectively.
These guarantees are generally provided to government agencies, primarily the
Telegraph Authority, as security for compliance with and performance of terms
and conditions contained in the Internet Service Provider licence granted to
the Company, and Videsh Sanchar Nigam Limited, towards the
F-16
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
supply and installation of an electronic commerce platform, respectively. These
guarantees may be invoked by the governmental agencies if they suffer any
losses or damage by reason of breach of any of the covenants contained in the
licence.
As of June 30, 1999, the Company had contractual commitments of
Rs.21,066,110 ($484,836) for capital expenditures relating to new network
infrastructure.
(17) Related Party Transactions
An analysis of transactions with Satyam Computer Services is set out
below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, June 30, June 30,
1997 1998 1999 1999 1999 1999
Rs. Rs. Rs. US$ Rs. US$
---------- ----------- ----------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
the year............... 710,976 34,989,440 1,508,887 34,727 3,980,370 91,608
Advances received
towards working
capital................ 5,297,155 5,590,982 1,308,714 30,121 341,936 7,869
Advance received against
equity................. 28,981,309 38,453,000 92,700,000 2,133,487 -- --
Allocation of facilities
costs.................. -- -- 636,747 14,655 1,107,394 25,487
Expenses incurred on
behalf
of the Company......... -- -- 809,922 18,640 52,076 1,199
Purchases from Satyam
Computer Services...... -- -- 800,000 18,411 -- --
Allotment of equity..... -- (75,000,000) (93,783,900) (2,158,433) -- --
Interest income
received............... -- (2,524,535) -- -- -- --
---------- ----------- ----------- ---------- --------- -------
Balance at the end of
the year............... 34,989,440 1,508,887 3,980,370 91,608 5,481,776 126,163
========== =========== =========== ========== ========= =======
</TABLE>
Advance against equity represents interest free advances received from
the Company's parent company, Satyam Computer Services to be adjusted against
subsequent issues of common stock. There are no other terms against which such
advances have been made. The Company received temporary advances from Satyam
Computer Services to meet its working capital requirements in fiscal 1997
through 1999. Of these, advances amounting to Rs. 7,565,690 and Rs. 1,083,900
were settled by the issue of 756,569 and 108,390 equity shares of Rs. 10 each
in fiscal 1998 and 1999 respectively and is disclosed in the statement of cash
flows as a non-cash financing activity. The fair value of each equity share on
the dates of issuance of these shares equaled their face value.
The Company made sales to Satyam Computer Services for cash amounting to
Rs. 390,000 (US$ 8,976) and Rs. 9,039,000 (US$ 208,032) during the year March
31, 1999 and quarter ended June 30, 1999 respectively. The Company also paid
Satyam Computer Services Rs. 757,141 towards training and consultancy fees in
fiscal 1998.
During fiscal 1998, the Company placed short term deposits with Satyam
Computer Services at a rate of 18% per annum for periods ranging between three
to six months.
F-17
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
Particulars of significant related transactions with other affiliated
companies are set out below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, June 30, June 30,
1997 1998 1999 1999 1999 1999
Rs. Rs. Rs. US$ Rs. US$
--------- --------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Sales to affiliates..... -- -- 45,000 1,036 -- --
Purchases of
software/cables from
affiliates............. -- 1,370,938 800,000 18,411 -- --
</TABLE>
No interest is charged by Satyam Computer Services on the balances
payable to them. The balances payable to Satyam Computer Services as of March
31, 1998, 1999 and June 30, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, March 31, March 31, June 30, June 30,
1998 1999 1999 1999 1999
Rs. Rs. US$ Rs. US$
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Due to Satyam Computer
Services............... 1,508,887 3,980,370 91,608 5,481,776 126,163
</TABLE>
No amounts were receivable from Satyam Computer Services as of March 31,
1998, March 31, 1999 and June 30, 1999. Included in other current assets is an
amount of Rs. 190,104 (US$ 4,375) and Rs. 224,993 (US$ 5,178) receivable from
affiliates as of March 31, 1999 and June 30, 1999 respectively. No other
amounts were receivable from or payable to affiliates as of March 31, 1998,
1999 and June 30, 1999.
The Company grants interest free advances to officers and employees. Such
loans are repayable over fixed periods ranging from one to sixty months. As of
March 31, 1998, 1999 and June 30, 1999, the amounts recoverable from officers
and employees were Rs. 232,302, Rs. 810,143 (US$ 18,645) and Rs. 839,469
(US$ 19,320) respectively, of which Rs. 87,302, Rs. 573,143 (US$ 13,191) and
Rs. 570,806 (US$ 13,137) respectively were recoverable within one year from
those dates.
(18) Segment Reporting
In accordance with the provisions of SFAS 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has determined that it
has three operating segments:
. Internet Access Services, providing Internet access services to
subscribers;
. Corporate Services, providing dial up and dedicated Internet
access, e-commerce, electronic data interchange, e-mail and other
messaging services, virtual private networks, and web based
solutions to businesses, web page hosting to individuals; and
. Online Portal Services, operating an Internet portal and offering
related content sites.
F-18
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
These operating segments were identified from the structure of the
Company's internal organization. Currently, the chief operating decision-maker
of the Company receives and reviews information relating to segment revenues
only. Products and services revenues are presented below.
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, June 30, June 30,
1997 1998 1999 1999 1999 1999
Rs. Rs. Rs. US$ Rs. US$
--------- --------- ----------- --------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Internet access
services............... -- -- 13,310,800 306,348 40,148,279 924,011
Corporate services...... -- 6,805,020 89,973,032 2,070,725 40,076,347 922,356
Online portal services.. -- -- 60,000 1,381 578,626 13,317
--- --------- ----------- --------- ---------- ---------
Revenues................ -- 6,805,020 103,343,832 2,378,454 80,803,252 1,859,684
=== ========= =========== ========= ========== =========
</TABLE>
SFAS 131 also requires that an enterprise report a measure of profit or
loss and total assets for each reportable segment. Certain expenses such as
bandwidth costs (telecommunication), depreciation on plant and machinery, etc.,
which form a significant component of total expenses, are not specifically
allocable to these business segments as the services are used interchangeably
between reportable segments. Management believes that it is not practical to
provide segment disclosures relating to segment costs and expenses, and
consequently segment profits or losses, since a realistic allocation cannot be
made. The fixed assets used in the Company's business are not identifiable to
any particular reportable segment and can be used interchangeably among
segments. Consequently, management believes that it is not practical to provide
segment disclosures relating to total assets since a realistic analysis among
the various operating segments is not possible.
(19) Employee Stock Offer Plan
In fiscal 1999, the Company established the Employee Stock Offer Plan
("ESOP") which provides for the issuance of 825,000 warrants to eligible
employees. The warrants were issued to an employee welfare trust (the "Trust")
at Rs. 1 each. The Trust holds the warrants and transfers them to eligible
employees over a period of three years. The warrants are transferred to
employees at Rs. 1 each and each warrant entitles the holder to purchase one of
the Company's equity shares at an exercise price of Rs. 70 per share. The
warrants and the equity shares received upon the exercise of warrants are
subject to progressive vesting over a three-year period from the date of issue
of warrants to employees. The fair market value of each of the issued warrants
was determined by the Board of Directors to be Rs. 400. The warrants allotted
and the underlying equity shares are not subject to any repurchase obligations
by the Company.
During fiscal 1999, 5,000 warrants were granted to a single employee
resulting in a deferred compensation of Rs. 1,650,000, for the difference
between the exercise price and the fair market value of the common stock
underlying the warrants, as of the date the warrants were unconditionally made
available to the employee. Deferred compensation is amortized over the vesting
period of the warrants. The weighted average remaining useful life of the
outstanding warrants as of June 30, 1999 was 2.11 years.
F-19
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
The Company has adopted the pro forma disclosure provisions of SFAS No.
123. Had compensation cost for the Company's stock-based compensation plan been
determined in a manner consistent with the fair value approach described in
SFAS No. 123, the Company's net loss would have increased to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
March 31, March 31, June 30, June 30,
1999 1999 1999 1999
Rs. US$ Rs. US$
------------ ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss
As reported.......... (187,375,665) (4,312,442) (51,748,694) (1,190,993)
Adjusted pro forma... (187,378,430) (4,312,507) (51,756,994) (1,191,185)
Basic loss per share
As reported.......... (17.31) (0.40) (3.29) (0.08)
Adjusted pro forma... (17.31) (0.40) (3.29) (0.08)
</TABLE>
The fair value of each warrant is estimated on the date of grant using
the Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1999
--------- -----------
(unaudited)
<S> <C> <C>
Dividend yield %..................................... 0.00% 0.00%
Expected life........................................ 3 years 3 years
Risk free interest rates............................. 11.00% 11.00%
Volatility........................................... 0.01% 0.01%
</TABLE>
(20) Year 2000
Certain organizations anticipate that they will experience operational
difficulties at the beginning of the Year 2000 as a result of computer programs
being written using two digits rather than four to define the applicable year.
The Company's plan for the Year 2000 calls for compliance verification with
external vendors supplying the Company software, testing in-house engineering
and manufacturing software tools, testing software in the Company's products
for the Year 2000, and communication with significant suppliers to determine
the readiness of third parties remediation of their own Year 2000 issues.
To date, the Company has not encountered any material Year 2000 issues
concerning its respective computer programs. The Company plans to complete its
Year 2000 research and testing by July 1999. All costs associated with the
Company's plan for the Year 2000 are being expensed as incurred. The costs
associated with the Year 2000 are not expected to have a material adverse
effect on the Company's business, financial condition and results of
operations. Nevertheless there is uncertainty concerning the potential costs
and effects associated with any Year 2000 compliance.
F-20
<PAGE>
SATYAM INFOWAY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Expressed in Indian Rupees, except share data and as otherwise stated)
(Information as of June 30, 1999 and for the quarter ended June 30, 1998 and
1999 is unaudited)
(21) Subsequent Events
The Company entered into an agreement with Sterling Commerce, Inc on July
19, 1999 for the sale of 481,000 equity shares of Rs.10 each for an aggregate
cash purchase price of $5,000,000. This agreement was concluded and the
proceeds were received on September 19, 1999 after obtaining the necessary
approvals from the Government of India. The proceeds of $5,000,000
(approximately equivalent to Rs.216.8 million) were principally applied to
entirely redeem 1,220,000 unsecured debentures of Rs.100 each aggregating to
Rs.122 million issued to Citibank N.A., partially repay short term loans
obtained from IDBI amounting to Rs.50,000,000, and fund working capital
requirement.
F-21
<PAGE>
Three panels of graphical information regarding Satyam Infoway Limited
consisting of:
. a graphical presentation of Satyam Infoway's network covering 25 cities
in India, with international Internet gateways in Mumbai, Bangalore,
Chennai, Hyderabad, Delhi and Calcutta;
. sample web pages from some of Satyam Infoway's content sites, including
specialty sites related to personal finance and classified ads;
. a picture of the Satyam Online CD-ROM;
. a list of products and services provided by Satyam Infoway;
. a picture of equipment in Satyam's data center; and
. a description of some of the features of Satyam Online.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,175,000 American Depositary Shares
[LOGO OF SATYAM INFOWAY LIMITED APPEARS HERE]
SATYAM INFOWAY LIMITED
Representing 4,175,000 Equity Shares
----------------
P R O S P E C T U S
----------------
Merrill Lynch & Co.
Salomon Smith Barney
October 18, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
OFFERING CIRCULAR
4,175,000 American Depositary Shares
[LOGO OF SATYAM INFOWAY LIMITED APPEARS HERE]
SATYAM INFOWAY LIMITED
Representing 4,175,000 Equity Shares
----------------
Satyam Infoway Limited is offering up to 4,175,000 American Depositary
Shares, or ADSs, of Satyam Infoway outside India, including in the United
States. This offering circular relates to an offering by the international
underwriters of up to 1,670,000 American Depositary Shares outside the United
States and Canada. Additional underwriters are offering up to 2,505,000
American Depositary Shares in the United States and Canada. Each American
Depositary Share represents one equity share.
This is Satyam Infoway's initial public offering, and no public market
currently exists for Satyam Infoway's equity shares.
The American Depositary Shares have been approved for listing on The
Nasdaq Stock Market's National Market under the symbol "SIFY."
Investing in the American Depositary Shares involves certain risks which
are described in the Risk Factors beginning on page 7.
----------------
<TABLE>
<CAPTION>
Per ADS Total
------- -----
<S> <C> <C>
Public offering price.................................. $18.00 $75,150,000
Underwriting discount.................................. $1.26 $5,260,500
Proceeds, before expenses, to Satyam Infoway........... $16.74 $69,889,500
</TABLE>
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Satyam Infoway has granted to the underwriters the right to purchase up
to an additional 626,250 American Depositary Shares at the public offering
price, less discount and commissions, within 30 days from the date of this
offering circular to cover overallotments.
----------------
Merrill Lynch International Salomon Smith Barney International
----------------
The date of this offering circular is October 18, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 1
Risk Factors............................................................ 7
Conventions Which Apply to This Prospectus.............................. 22
Currency of Presentation................................................ 22
Enforcement of Civil Liabilities........................................ 23
Reports to Our Security Holders......................................... 24
Use of Proceeds......................................................... 25
Dividend Policy......................................................... 26
Capitalization.......................................................... 27
Exchange Rates.......................................................... 28
Dilution................................................................ 29
Selected Financial Data................................................. 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 32
Business................................................................ 43
Management.............................................................. 60
Principal Shareholders.................................................. 65
Certain Transactions.................................................... 66
Description of Equity Shares............................................ 67
Description of American Depositary Shares............................... 72
Restrictions on Foreign Ownership of Indian Securities.................. 80
Government of India Approvals........................................... 84
Taxation................................................................ 86
Shares Eligible for Future Sale......................................... 91
Underwriting............................................................ 92
Legal Matters........................................................... 95
Experts................................................................. 95
Change of Accountants................................................... 95
Additional Information.................................................. 95
Index to Financial Statements........................................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
Through and including November 12, 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
UNDERWRITING
The global offering consists of:
. the international offering of 1,670,000 ADSs outside the United
States and Canada; and
. the U.S. offering of 2,505,000 ADSs in the United States and
Canada.
We and the underwriters for the international offering named below have
entered into an underwriting agreement with respect to the ADSs being offered
in the international offering. Each international underwriter has severally
agreed to purchase the number of ADSs indicated in the table below. Merrill
Lynch (Singapore) Pte. Ltd. and Salomon Brothers International Limited are the
representatives for the international underwriters. Merrill Lynch International
will be selling in Europe.
<TABLE>
<CAPTION>
Number of
International Underwriters ADSs
-------------------------- ---------
<S> <C>
Merrill Lynch (Singapore) Pte. Ltd................................ 1,169,000
Salomon Brothers International Limited............................ 501,000
---------
Total........................................................ 1,670,000
=========
</TABLE>
The international underwriters have agreed to purchase all the ADSs being
offered in the international offering, other than those covered by the
overallotment option described below, if they purchase any of these ADSs.
We have granted to the underwriters in the international and U.S.
offerings an option, exercisable within 30 days after the date of this
prospectus, to purchase up to 626,250 additional ADSs at the public offering
price less the underwriting commission. The underwriters may exercise this
option solely for the purpose of covering overallotments, if any, in connection
with the offerings. The representatives of the U.S. underwriters will decide on
behalf of the underwriters whether to exercise the option and whether to
allocate any ADSs covered by the option to the U.S. offering or the
international offering. If the international underwriters purchase
overallotment ADSs, each international underwriter will purchase a number of
additional ADSs approximately proportionate to the underwriter's initial
purchase commitment.
The international underwriters will initially offer the ADSs at the
public offering price set out on the cover of this prospectus. The
international underwriters may sell ADSs to securities dealers at a discount of
not in excess of $.75 per ADS from the initial public offering price. Any of
these securities dealers may resell any securities purchased from the
international underwriters to other brokers or dealers at a discount of not in
excess of $.10 per ADS from the initial public offering price. If all the ADSs
are not sold at the initial offering price, the representatives of the
international underwriters may change the offering price and the other selling
terms.
We have also entered into an underwriting agreement for the sale of
2,505,000 ADSs in the United States and Canada. Merrill Lynch and Co. and
Salomon Smith Barney Inc. are the representatives of the underwriters for the
U.S. offering. The international and U.S. offerings are conditioned on each
other. The initial offering price and aggregate underwriting commissions per
ADS for the international offering and the U.S. offering are identical.
The underwriters have entered into an agreement in which they agree to
restrictions on where and to whom they and any dealer purchasing from them may
offer ADSs in connection with the offering. The international and U.S.
underwriters also have agreed that they may sell shares between their
respective underwriting groups.
Our company, each of our executive officers and directors, the holders of
warrants to purchase 750,000 equity shares and substantially all of our
shareholders have agreed not to offer, sell, contract to sell or otherwise
dispose of any equity shares or securities convertible into, exchangeable for
or representing the right to receive equity shares, for a period of 180 days
after the date of this prospectus without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated. These agreements do not cover (1)
the grant of stock options under our existing stock option plan or (2) equity
shares issued upon the conversion of convertible or exchangeable securities or
the exercise of an option or warrant outstanding as of the date of this
prospectus. These lock-up agreements cover substantially all equity shares
outstanding prior to this offering.
92
<PAGE>
The ADSs offered under this prospectus have been approved for listing on
the Nasdaq National Market.
In connection with the global offering, the international and U.S.
underwriters may purchase and sell ADSs in the open market. These transactions
may include short sales, stabilizing transactions and purchases to cover
positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of securities than they are required to
purchase in the offering. Stabilizing transactions consist of bids or
purchases made for the purpose of preventing or retarding a decline in the
market price of the ADSs while the offering is in progress.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the ADSs. As a result, the price of the ADSs may be
higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, the underwriters may discontinue these
transactions at any time. The underwriters may effect transactions through the
Nasdaq National Market, in the over-the-counter market or otherwise.
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1.0 million and are payable by us.
We have agreed to indemnify the several underwriters against some
liabilities, including liabilities under the Securities Act of 1933.
The underwriters and their affiliates engage and may in the future engage
in investment banking and commercial banking transactions with us.
The underwriters have reserved up to 200,000 ADSs for sale at our request
to persons associated with our company at the same price and on the same terms
as the shares sold by the underwriters to the general public. The number of
ADSs available for sale to the general public will be reduced to the extent
any reserved ADSs are purchased. Any reserved ADSs not so purchased will be
offered by the underwriters on the same basis as the other ADSs offered
hereby.
The underwriters expect to deliver ADSs against payment for the ADSs in
U.S. dollars in New York, New York on or about October 22, 1999.
Selling Restrictions
The prospectus does not constitute an offer or an invitation by, or on
behalf of, us or by or on behalf of the underwriters, to subscribe for or
purchase any of the equity shares or the offered ADSs in any jurisdiction to
any person to whom it is unlawful to make such an offer or solicitation in
that jurisdiction. The distribution of this prospectus and the offering of the
equity shares or the ADSs in certain jurisdictions may be restricted by law.
Persons into whose possession this prospectus comes are required by us and the
underwriters to inform themselves about and to observe any such restrictions.
Each international underwriter has represented and agreed that it has not
distributed and will not distribute, directly or indirectly, any prospectus
relating to the ADSs in India or to residents of India and that it has not
offered or sold and will not offer or sell, directly or indirectly, any ADSs
in India or to, or for the account or benefit of, any resident of India.
Each international underwriter has represented and agreed that (1) it has
not offered or sold and prior to the expiry of the period of six months from
the initial issue date of the ADSs will not offer or sell any ADSs to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purpose of their business or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
93
<PAGE>
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(2) it has completed and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the ADSs in, from or otherwise involving the United Kingdom; and (3) it has
only issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the ADSs to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended, or is
a person to whom such document may otherwise lawfully be issued or passed on.
Each international underwriter has represented and agreed that (1) it has
not offered or sold and will not offer or sell in the Hong Kong Special
Administrative Region of the People's Republic of China, or Hong Kong, by means
of any document, the ADSs other than to persons whose ordinary business is to
buy or sell shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Ordinance (Cap. 32 of the laws of Hong Kong) and (2) unless
permitted to do so under the securities laws of Hong Kong, it has not issued or
had in its possession for the purpose of issue and will not issue or have in
its possession for the purpose of issue any invitation, advertisement or
document relating to the ADSs in Hong Kong other than with respect to such ADSs
intended to be disposed of to persons outside Hong Kong or to persons whose
business involves the acquisition, disposal or holding of securities (whether
as principal or agent).
This prospectus has not been registered with the Registrar of Companies
and Business in Singapore. Accordingly, each international underwriter has
represented and agreed that is has not and will not offer or sell any ADSs or
distribute this prospectus or any other document or material in connection with
the ADSs, either directly or indirectly, (1) to constitute an offer or sale of
the ADSs to the public of Singapore or (2) to the public or any member of the
public in Singapore other than pursuant to, and in accordance with the
conditions of, an exemption invoked under Division 5A of Part IV of the
Companies Act, Chapter 50 of Singapore and to persons to whom the ADSs may be
offered or sold under such exemption. The Registrar of Companies and Businesses
in Singapore takes no responsibility as to the contents of this document.
Each international underwriter has represented and agreed that the ADSs
have not been registered under the Securities and Exchange Law of Japan and are
not being offered or sold and may not be offered or sold, directly or
indirectly, in Japan or to or for the account of any resident of Japan or to
any persons for reoffering or resale, directly or indirectly, in Japan or to
any residents of Japan, except (1) pursuant to an exemption from the
registration requirements of the Securities and Exchange law of Japan and (2)
in compliance with any other applicable requirements of Japanese law.
94
<PAGE>
LEGAL MATTERS
The validity of the ADSs offered hereby will be passed upon for Satyam
Infoway Limited by Latham & Watkins, Menlo Park, California. The validity of
the equity shares represented by the ADSs offered hereby and the principal
Indian tax consequences for holders of ADSs and equity shares received upon
withdrawal of such equity shares who are not resident in India will be passed
upon by M.G. Ramachandran, New Delhi, India, Indian counsel for Satyam Infoway
Limited. Matters in connection with the offering will be passed upon on behalf
of the underwriters by Brobeck, Phleger & Harrison, LLP, New York, New York,
and Nishith Desai Associates, Mumbai, India, counsel for the Underwriters.
Latham & Watkins may rely upon M.G. Ramachandran with respect to matters
governed by Indian law.
EXPERTS
The U.S. GAAP financial statements of Satyam Infoway Limited as of March
31, 1998 and 1999, and for each of the years in the three-year period ended
March 31, 1999, have been included herein in reliance upon the report of KPMG,
India, independent accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in auditing and accounting.
CHANGE OF ACCOUNTANTS
Effective May 1998, Bharat S. Raut and Company was engaged as the
principal independent accountants for Satyam Infoway for Indian GAAP reporting,
replacing Fraser & Ross, who resigned at that time. The change was approved by
our Directors and at the annual general meeting held on May 23, 1998.
In connection with the audits of the fiscal years ended March 31, 1996,
1997 and 1998, and for the interim period from April 1, 1998 through May 23,
1998, there were no disagreements with Fraser & Ross on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction
of Fraser & Ross, would have caused them to make reference to the matter in
their report, except that during the fiscal year ended March 31, 1998 Fraser &
Ross qualified its opinion regarding whether or not Section 58A of the
Companies Act applied to Satyam Infoway's issuance of debentures to Citibank.
Section 58A prohibits Indian companies, other than banks, from accepting
"deposits" in an amount in excess of 25% of their share capital. Fraser & Ross
concluded that the debentures should be classified as "deposits" while Satyam
Infoway concluded that they should be classified as a bank loan. The audit
reports of Fraser & Ross for the financial statements of Satyam Infoway as of
and for the fiscal years ended March 31, 1996, 1997 and 1998 did not contain
any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty or audit scope, except for a qualification of the
financial statements at March 31, 1998 prepared under Indian GAAP related to
the treatment of the Citibank debentures as described above.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form F-1, which
includes amendments, exhibits, schedules and supplements, under the Securities
Act of 1933, as amended, and the rules and regulations of the SEC, for the
registration of the ADSs and underlying equity shares offered by this
prospectus. Although this prospectus, which forms a part of the registration
statement, contains all material information included in the registration
statement, part of the registration statement have been omitted from this
prospectus as permitted by the rules and regulations of the SEC. A related
registration statement on Form F-6 has also been filed to register our ADSs as
represented by the ADRs. For further information with respect to
95
<PAGE>
our company and the ADSs offered by this prospectus, please refer to the
registration statement. Although this prospectus contains all material terms of
the contracts or other documents referred to in this prospectus, the
descriptions of these contracts or other documents contained in this prospectus
are not necessarily complete.
You may read and copy all or any portion of the registration statement or
any other information that we file, or obtain a copy of those materials,
through facilities maintained by the SEC as described in the front of this
prospectus under the caption "Reports to our Security Holders."
96
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,175,000 American Depositary Shares
[LOGO OF SATYAM INFOWAY LIMITED APPEARS HERE]
SATYAM INFOWAY LIMITED
Representing 4,175,000 Equity Shares
----------------
OFFERING CIRCULAR
----------------
Merrill Lynch International
Salomon Smith Barney International
October 18, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
