Satyam Computer Services Ltd Merged Directors Report

SATYAM COMPUTER SERVICES LIMITED ANNUAL REPORT 2011-2012 DIRECTORS REPORT Your Directors are pleased to present their report for the Financial Year 2011-12. Financial Highlights (Rs. in Million) Particulars 2011-12 2010-11 Income from Operations 59,643 47,761 Other Income 3,900 2,837 Total Income 63,543 50,598 Operating Profit (PBIDT) 13,655 7,263 Interest and Financing Charges 112 92 Depreciation / Amortization 1,494 1,499 Exceptional items (net) (518) 6,411 Profit / (Loss) before Tax 12,567 (739) Tax expense 539 537 Profit (Loss) after Tax 12,028 (1,276) Equity share capital 2,354 2,353 Reserves and Surplus 30,788 19,259 Earnings per share (Rs. Per equity share of Rs. 2 each) - Basic (Rs.) 10.22 (1.08) - Diluted EPS (Rs.) 10.21 (1.08) Business Overview: The Financial Year 2011-12 witnessed the transformation of Mahindra Satyam (MSat) as it embarked on a robust growth phase. During the year under review, your Company recorded Rs. 59,643 Million towards income from operations. North America, Europe, Asia Pacific including India and rest of the world accounted for 50.51%, 24.52%, 22.27% and 2.70% of the revenues respectively. Offshore revenue during the year was 47.38% while onsite stood at 52.62%. Your Companys focus on profitable growth, new logo wins across geographies and regaining acceleration across the legacy strengths in Enterprise Business Solutions have borne fruit. There is a continuing focus on opening low cost offshore centers outside India, strategic acquisitions that reinforce the domain and technology strengths and set aside funds to encourage Entrepreneurship within and outside the Company. Your Company was certified as the Platinum Partner for Oracle and the Microsoft Technology Excellence Center (MTEC) at Mahindra Satyam (in collaboration with our Healthcare practice) came out as winners in the Cloud application development contest held by Microsoft. These are the result of investments your Company has made in building on technology and vertical competencies across all areas and they are definitely giving the returns as planned. Your Company announced the first edition of MSat young engineers awards - reiterating its commitment to recognize and encourage outstanding engineering students across the country. Clearly, your Company is ambitious for growth and ready to invest more to ensure for achieving top percentile growth in the Industry. Scheme of Amalgamation On March 21, 2012, your Board approved the proposal to amalgamate the Company along with C&S System Technologies Private Limited, the wholly owned subsidiary of the Company, Venturbay Consultants Private Limited, CanvasM Technologies Limited and Mahindra Logisoft Business Solutions Limited, the wholly owned subsidiaries of Tech Mahindra (hereinafter referred to as the Transferor Companies) with Tech Mahindra Limited (the Transferee Company). The scheme of amalgamation and arrangement (the Scheme) was proposed with a rationale to consolidate the software related businesses and form a single entity in this sector, to reduce overall cost and attain efficiencies, synergy and benefits, and to enhance value for the shareholders of the Company. The share exchange ratio of 2(two) equity shares of Tech Mahindra Limited of Rs. 10/- each fully paid up for every 17(seventeen) shares of your Company Rs. 2/- each fully paid up was jointly recommended by the valuers, Ernst & Young Pvt. Ltd. and KPMG India Private Limited (the Valuers). M/s. J. P. Morgan India Private Limited, a Category - I merchant banker had given a fairness opinion certifying that the methodologies applied by the Valuers, for determining the share exchange ratio is fair and reasonable. Accordingly, the Board of Directors of your Company, other Transferor Companies and Transferee Company at their respective board meetings held on March 21, 2012 approved the Scheme and the exchange ratio arrived at by the Valuers. The Appointed Date for this scheme, if approved, is with effect from April 01, 2011. The National Stock Exchange of India Limited and BSE Limited respectively vide their letters dated April 10, 2012 granted no-objection under Clause 24(f) of the Listing Agreement to the said Scheme. The Competition Commission of India has vide its order dated April 26, 2012 approved the proposed merger of the Transferor Companies with the Transferee Company, under section 31(1) of The Competition Act 2002. Further the Transferor Companies and the Transferee Company are also in the process of obtaining other approvals from agencies such as the U.S.A. Federal Trade Commission (FTC). Pursuant to the order dated April 18, 2012 passed by the Honble High Court of Judicature of Andhra Pradesh at Hyderabad, the Court convened meeting for shareholders was held on June 8, 2012 and obtained their approval for the Scheme. The Company filed the petition with the Honble High Court of Judicature of Andhra Pradesh at Hyderabad praying for the order sanctioning the proposed Scheme of Arrangement and the petition has been admitted on July 09, 2012. Dividend No dividend was recommended by the Board of Directors. Increase in the Share Capital Consequent to issue of 2,32,083 equity shares of Rs. 2 each to Associates upon exercise of options under the Associate stock option plans of the Company, during the year under review, the paid-up share capital of the Company increased from Rs. 2,353 Million divided into 1,176,565,753 equity shares of Rs. 2 each to Rs. 2,354 Million divided into 1,176,797,836 equity shares of Rs. 2 each. ADS Wind Down Program On August 9, 2011, Company entered into Supplemental Letter Agreement with Citibank for termination of Depository Agreement and necessary filings were made with SEC. The trading of ADSs in Pink OTC markets was stopped on March 12, 2012 and the ADSs were cancelled during March 2012. The Depository sold the underlying shares of outstanding ADSs, in the Indian stock exchanges and distributed the proceeds to the concerned holders. The Securities and Exchange Commission, USA vide its order dated March 29, 2012 revoked the registration of Companys ADS. Human Resources The Financial Year 2011-12 witnessed the transformation of your Company in terms of maintaining steady attrition as per the industry standards, Associate delight and acquiring the best talents in the industry. The attrition of your Company in this year was 15.16% and the total Associate headcount stood at 29,132 as on March 31, 2012. With special focus on nurturing young leadership, programs like Global Leadership Cadre (GLC) and Shadow Board saw deeper emphasis along with more opportunities being provided to the young talent where they were able to showcase their leadership capabilities which in turn empowered them to take strategic decisions. Various Associate delight programs and communication initiatives along with the promise of a brighter tomorrow have acted as an impetus for the reduced attrition rate. A better and improved background verification process ensured that your Company have Associates with appropriate credentials and they bring value to your Company. An inclusive approach and investments in diversity has been another focus area of your Company as a global and diversified workforce continues to remain one of your key strengths. Efforts to improve diversity at leadership levels saw a head start with the induction of Mrs. M. Rajyalakshmi Rao as an additional director on the Board of the Company. Various diversity programs such as Creation of Location Diversity Council, (an initiative led by women leaders), Career Diva (recruitment Initiatives to increase women Associates), Role model series ( workshops with women leaders from the industry) and Leadership development programs such as mentoring tables and diversity cafe have significantly improved the number of women Associates working in your Company. The proposed merger of your Company with Tech Mahindra will result in better and brighter opportunities for the Associates with the convergence of best people practices. The alignment of the best policies and processes will ensure that your Company becomes one of the best employers in the Indian IT landscape. Infrastructure During the year under review, the Company commenced operations in Chennai Mahindra Satyam SEZ Campus. The Company has provided 3853 additional spaces and creation of 8869 additional spaces at various locations is in progress, targeted for completion by end of second quarter of FY 2012-13. Due to addition of new infrastructure facilities, there was substantial increase in the ratio of owned versus leased premises. Green Initiatives The Green Initiative activities include extensive awareness drive on economic utilization of power and water, tips on energy conservation and plantation drives. The Company successfully completed the Surveillance Audit for ISO 14001: OHSAS 18001 at MSDC-Bangalore. Apart from the regular ongoing awareness drives, the Green Initiative activities have been broadly covered and distributed in the fields as indicated below: * Global Listings and Conclaves: - Part of the Carbon Disclosure Project (CDP); that currently covers 200 largest organizations in India. - Listed on the Verdantix 2012 Green Quadrant, an industry leading research report on sustainability. - Released 4th Sustainability Report for the year 2010-11 in accordance with the latest guidelines of the internationally accepted, Global Reporting Initiative (GRI). - Fourth Mahindra & Mahindra Sustainability workshop was hosted at MSTC campus from 16th to 18th of November, 2011 to focus the roadmap on Sustainability. * Power Management: - Achieved savings of 1.37% on Energy Units per Associate per month compared to previous financial year. - Awareness mailers being flashed through Daily buzz to Save Power. * Travel Management: - Launched Car pooling tool to facilitate pooling for associates, to reduce the carbon foot prints, minimizing the usage of fuel used. * Waste Management: - Developed yield of 21.21 tons through Vermi compost by recycling wet waste at MSTC. - Disposed 68.8 Tonnes of e Waste to the Pollution Control Board authorized Vendor. * Paper Management: - Replaced the paper glasses with porcelain mugs to reduce the usage of paper. - Cardboard bins are placed at work areas to encourage Associates to dispose paper in it. * Awareness Initiatives: - Organized Green fair at MSTC and HIC-SEZ as part of awareness on the green products. - Organized awareness campaign on Afforestation and Global warming in association with NGO -Green Peace. - Major events like the Earth Day, Energy Conservation Week, Earth hour etc are being practiced to express solidarity towards this cause. Quality Your Companys core value of Quality Focus strives to meet customer expectations at all times with qualitative deliverables and improvised to exceed expectations at work, in products, services and interactions with all the customers. The Quality Management System (QMS) and delivery framework have been aligned with Mahindra Satyams Vision and Core Values. The QMS establishes company-wide processes to implement Quality and continually improve organizations process capability. It maintains an incessant focus on both continuous process improvements, and Customer Delight. Your Company has successfully completed the external surveillance audit for the year under review, conducted by TUV India, for the standards, (a) ISO 27001: 2005 (Information Security Management System), (b) ISO 20000:2005 (IT Service Management), (c) ISO 9001:2008 (Quality Management Systems) and AS9100 (Standard for Aerospace domain - scope of certification limited to the aerospace business with MSat). In addition to these certifications, one of the customer accounts has also been certified for SA8000 standard, a Social Accountability standard, which was taken up as per customer requirement. All the delivery processes are in compliance with CMMI version 1.2 from SEI and soon your Company will initiate CMMI version 1.3 assessments, the latest version of the model released by SEI. These external certifications are testimony of the robustness of business processes and at large the quality culture imbibed by every Associate. Your Company maintained its commitment to health, safety and environment by continually improving processes related to Health Safety & Environment (HSE) in accordance with ISO 14001 and OHSAS 18001 standards. As part of ongoing efforts to reinforce the quality culture and customer orientation, your Company is focused towards QMS training for all Associates at regular intervals. Your Company has a comprehensive Delivery Framework integrating both Program and Project Management processes. During the year, your Company continued to maintain automation drive to enable delivery view at the level of the program manager, providing near real-time dashboards and reports for effective tracking of delivery. Your Company has a comprehensive Business Continuity and Disaster Recovery framework, as per BS 25999, to prevent and contain potential business disruptions in the event of any disaster. It can quickly resume services to customers acceptable service levels. Your Company was re-certified for BS25999 in Oct 2011 as per the three year re-certification cycle by BSI Management Systems. Your Company implemented 45 projects in Six Sigma methodology for new process definitions and solutions to business problems and they were certified as GB projects. During the year under review, 305 Associates were trained in Green Belt and 16 in Black Belt program and 70 Associates were trained in function point approach for estimation, 50 Associates have been certified as Mahindra Satyam function point champions Awards and Recognitions: Your Company won several accolades during the year. * Best Sourcing Relationship in BPO Category for APAC region, for its relationship with Russell Investments, issued by The Paragon Awards, held on March 29, 2012 at Opera House, Sydney Information Services Group (ISG) * Excellence in Thought Leadership- partner Award from Pegasystems, in global sales conference on January 09, 2012 in Orlanda, Florida * EMC 2012 Partner Innovation Award for the outstanding Industry Solution for Financial Services - ProFinA, at the EMC Partner Conference, held at Momentum Berlin on October 31, 2011. * Ranks 6th out of 20 Best Employers in the survey conducted by Dataquest CMR Best Employers 2011 * First Indian IT services company in Singapore, to achieve SS 507:2008 certification for Business Continuity and Disaster Recovery Services * Systems Integrator of the Year at the 2nd Computer News Middle East (CNME) ICT Achievement Awards 2011. Corporate Governance A report on Corporate Governance, along with a certificate for compliance with the Clause 49 of the Listing Agreement issued by the Practising Company Secretary is provided elsewhere in the Annual Report. Social Programs Mahindra Satyam Foundation is the Corporate Social Responsibility arm of Mahindra Satyam and all CSR programs are implemented through the Foundation. The Foundation operates out of Hyderabad, Bangalore, Pune, Bhubaneswar and Chennai. Mahindra Satyam Foundation supports and strengthens the vulnerable and disadvantaged sections of the society for transforming the quality of life through technology and volunteer support. The power of IT is leveraged to bridge the digital divide that limits opportunities for success and prosperity, and thereby, transform lives of the less privileged. All initiatives of the Foundation are targeted towards the disadvantaged population in locations where Mahindra Satyam has a significant presence. During the year under review, Mahindra Satyam Foundation focused its activities in the core areas of - Education, Health (Blood Donation Drives), providing Livelihoods and Empowering Persons with Disability. The detailed activities of Mahindra Satyam Foundation during the year are given elsewhere in this Annual Report. Acquisitions: During the year under review your Company considered the following acquisitions: i. Your Board approved for 100% acquisition of BPO firm, vCustomers international operations for USD 27 Million. This acquisition will mark the entry of Companys BPO operations into other verticals, such as retail and customer technology in addition to significantly enhancing technical support credentials. ii. Further to the approval of Board and pursuant to the Share Subscription and Investment Agreement entered between the Company, Dion Global Solutions Limited and RHC holding Private Limited, your Company acquired 10,294,117 equity shares of Rs. 10 each issued at premium of Rs. 24/- each, aggregating upto 15.97% of post issued equity share capital of DION Global Solutions Limited. This alliance will help in combining the skills of both the companies to develop new innovative business focused solutions for all tiers of the financial services industry. iii. Your Board approved a proposal to set up joint fund with SBI (Softbank Investment) Group Japan, either in India or outside India, with an investment of USD 25 Million each by the Company and SBI, subject to the necessary applicable statutory and regulatory approvals, The Objective of the fund is to help leapfrog the innovation curve by investing in high growth and promising companies in the evolving ICT space. Legal Matters: Alleged advances The erstwhile Chairman in his letter dated January 7, 2009, among others, stated that the Balance Sheet as of September 30, 2008 carried an understated liability of(Rs.)12,304 Million on account of funds arranged by him. Subsequently, your Company received legal notices from thirty seven companies, claiming repayment of(Rs.)12,304 Million allegedly given as temporary advances and also damages / compensation @18% per annum from date of advance till date of repayment. The Company has not acknowledged any liability to any of the thirty seven companies and has replied to the legal notices stating that the claims are legally untenable. The Directorate of Enforcement (ED) is investigating the matter under the Prevention of Money Laundering Act, 2002 and directed the Company to furnish details with regard to the alleged advances and has further directed the Company not to return the alleged advances until further instructions from the ED. The thirty seven companies had filed petitions / suits for recovery against the Company before the City Civil Court, Secunderabad (Court), with a prayer that these companies be declared as indigent persons for seeking exemption from payment of requisite court fees. More details are provided in Note 25.3 of the standalone financial statements. Aberdeen action (USA) On November 13, 2009, a trustee of two trusts that are assignees of the claims of twenty investors who had invested in the Companys ADS and common stock, filed a complaint against the Company, its former auditors and others (the Action) on grounds substantially similar to those contained in the Class Action Complaint (referred to below). The Action, which has been brought as an individual action, alleges that the losses suffered by the twenty investors (Claimants) are over USD 68 Million. The Action has been transferred to the Court in the Southern District of New York for pre- trial consolidation with the Class Action Complaint. On February 18, 2011, an amended complaint was filed in the Action (Aberdeen Amended Complaint). The Aberdeen Amended Complaint makes substantially the same allegations and asserted the same claims against the Company as the original complaint in the Action. In the light of this amended complaint, the Court denied the then pending motions to dismiss the original complaint in the Action as moot. On May 3, 2011, the Company and other defendants moved to dismiss the Aberdeen Amended Complaint on various grounds. The Company is contesting the above lawsuit, the outcome of which is not determinable at this stage. Aberdeen (UK) complaint On April 2, 2012, the Company was served with a Claim Form and Particulars of Claim dated December 22, 2011, relating to proceedings initiated in the Commercial Court in London (the English Court) by Aberdeen Asset Management PLC on behalf of 23 Claimants representing 30 funds who had invested in the Companys common stock that traded on the exchanges in India (the English Action). The allegations made in the English Action are similar to those in the Class Action Complaint (referred to below). The English Action alleges the Claimants losses to be in excess of $150 million and simple interest at 8% p.a. but provides no details on the basis for that amount, nor any details from which an approximate claimed damages amount may be ascertained. The Company is currently contesting the jurisdiction of the English Court, while all other defenses on the merits of the claims and its legal options remain fully reserved. There will be no substantive activity in the English Action until the English Court has ruled on the threshold jurisdiction issue. Accordingly, in addition to the uncertainty over the claimed losses, it is also uncertain whether the English Court will even continue to exercise jurisdiction over the lawsuit. Given the lack of sufficient detail in the particulars of claim on the alleged losses, and the possibility that the English Court may not retain jurisdiction over the English Action, its outcome is unpredictable. Income tax matters The Company had filed various petitions before CBDT requesting for stay of demands for the financial years 2002-03 to 2007-08 till the correct quantification of income and taxes payable is done for the respective years. In March 2011 the CBDT rejected the Companys petition and the Company filed a Special Leave Petition before the Honble Supreme Court which directed the Company to file a comprehensive petition / representation before CBDT giving all requisite details / particulars in support of its case for re-quantification / re-assessment of income for the aforesaid years and to submit a Bank Guarantee (BG) forRs.6,170 Million. Pursuant to the direction by the Honble Supreme Court, the Company submitted the aforesaid BG and also filed a comprehensive petition before the CBDT in April 2011. The CBDT vide its order July 11, 2011 disposed the Companys petition directing it to make its submissions before the Assessing Officer in course of the ongoing proceedings for the aforesaid years and directed the Income Tax Department not to encash the BG furnished by the Company till December 31, 2011. Aggrieved by CBDTs order, the Company filed a writ petition before the Honble High Court of Andhra Pradesh on August 16, 2011. The Honble High Court of Andhra Pradesh vide its order dated December 14, 2011 adjourned the hearing to January 31, 2012 and directed the Income Tax Department not to encash the BG until then. In the meanwhile, the Assessing Officer served an order for provisional attachment of properties under Section 281B of the Income Tax Act, 1961 on January 30, 2012 attaching certain immovable assets of the Company on the grounds that there is every likelihood of a large demand to be raised against the Company for the financial years 2002-03 to 2008-09 along with interest liability. Aggrieved by such order, the Company filed a writ petition in the Honble High Court of Andhra Pradesh which granted a stay on the operation of the attachment order until disposal of this writ. The writ petition is pending hearing on June 26, 2012 along with all other pending writ petitions and the Honble High Court has also directed to renew the BG for another six months which has since then been renewed. More details are provided in Note 31.3 of the standalone financial statements. Dispute with Venture Global Engineering LLC The Company and Venture Global Engineering LLC (VGE) entered into a 50:50 Joint Venture Agreement in 1999 to form an Indian Company called Satyam Venture Engineering Services Private Limited (SVES). SVES was formed to provide engineering services to the automotive industry. On or around March 20, 2003 numerous corporate affiliates of VGE filed for bankruptcy (Default Event under the SHA) and consequently the Company, exercised its option under the Shareholders Agreement (hereinafter referred to as the SHA), to purchase VGEs shares in SVES. The Companys action, disputed by VGE, was upheld in arbitration by the London Court of International Arbitration vide its award in April 2006 (the Award). The Courts in Michigan, USA, confirmed and directed enforcement of the Award. In 2008, the District Court of Michigan (since affirmed by the Sixth Court of Appeals in 2009) held VGE in contempt for its failure to honour the Award and inter-alia directed VGE to dismiss its Board members and replace them with individuals nominated by the Company. Following this, VGE has appointed the Companys nominees on the Board of SVES and SVES confirmed the appointment at its Board meeting held in June 2008. The Company is legally advised that SVES became its subsidiary only with effect from that date. In the meantime, while proceedings were pending in the USA, VGE filed a suit in April 2006, before the District Court of Secunderabad in India for setting aside the Award. The suit to set aside the Award was dismissed by the District Court and the Honble High Court of Andhra Pradesh but VGEs appeal to the Honble Supreme Court was upheld in January 2008 that set aside the orders of the Honble High Court and remanded the matter back to the City Civil Court, Hyderabad for hearing the suit on merits. The Honble Supreme Court also directed status quo with regard to transfer of shares till the disposal of the suit. In a separate application, VGE also sought to bring in additional pleadings on record in the matter pending before the City Civil Court that was ultimately allowed by the Honble Supreme Court in August 2010. The City Civil Court, vide its judgment in January 2012, has set aside the Award. The Company is in the process of evaluating its legal options. In December 2010, VGE and the sole shareholder of VGE (the Trust, and together with VGE, the Plaintiffs), filed a complaint against the Company in the United States District Court for the Eastern District of Michigan (District Court) asserting claims under the Racketeer Influenced and Corrupt Organisation Act, 1962 (RICO) and seeking damages with respect to the fraud claim, interest costs and attorney fees (the Complaint). The District Court vide its order in March 2012 has dismissed the Plaintiffs Complaint. The Plaintiffs have filed an application seeking amendment of the Complaint that is pending disposal. Other matters In connection with the financial irregularities (Refer Note 25 of the standalone financial statements) the Company has filed a civil suit in the City Civil Court Hyderabad, against the past Board of Directors (the Board prior to the Government nominated Board), certain former employees and the former statutory auditors, its affiliates and partners, seeking damages for inter-alia perpetrating fraud, breach of fiduciary responsibility and obligations and negligence in performance of duties. Based on media reports, it has come to the knowledge of the Company that the former statutory auditors have filed a suit in the Ranga Reddy District Court (Court) against the Company seeking damages. The said suit has not yet been served on the Company and, therefore, it is unable to comment on the same. However, the Company has been served summons for appearance in the Court. During the year following legal matters were settled: Upaid Systems Limited (Upaid) In connection with the lawsuit filed by Upaid in the United States District Court for the Eastern District of Texas (the Texas Action), the Company had deposited USD 70 Million (equivalent to Rs. 3,274 Million) during financial year ended March 31, 2010 into an escrow account pursuant to the Settlement Agreement. Subsequently, the Company obtained a favourable binding judgement from the Supreme Court of the State of New York, USA declaring that Upaid was solely responsible for any tax liability under Indian law in respect of the settlement amount. Upaid had filed an application before the Authority for Advance Rulings (AAR) seeking a binding advance ruling under the Income Tax Act, 1961 (IT Act) regarding taxability of the above mentioned payment, which ruling was pronounced in October 2011.In January 2012, Upaid and the Company executed a Supplemental Settlement Agreement to clarify certain provisions of the Settlement Agreement and in accordance therewith, the Company discharged in February 2012 all payment obligations to Upaid aggregating USD 59 Million (equivalent to Rs. 3,046 Million) and applicable interest. The remittances were made after deduction of applicable withholding taxes in India. Accordingly, the Texas Action and all other actions related to this matter in the US Courts have been dismissed. Class action complaint Subsequent to the letter by the erstwhile Chairman (Refer Note 25 of the standalone financial statements), a number of persons claiming to have purchased the Companys securities had filed class action lawsuits against the Company, its former auditors and others in various courts in the USA alleging violations of the United States federal securities laws. The lawsuits were consolidated into a single action (the Class Action) in the United States District Court for the Southern District of New York (the USDC). The Class Action Complaint sought monetary damages to compensate the Class Members for their alleged losses arising out of their investment in the Companys common stock and ADS during the Class Period. During the previous year, the class action complaint was settled for USD125 Million (Settlement Amount) and 25% of any net recovery that the Company may in the future obtain against any of the former auditors. The USDC granted final approval to the Settlement Agreement in September 2011. The settlement has become effective pursuant to its terms and in exchange for the Settlement Amount (net of deductions), the Lead Plaintiffs and the members of the Class who do not opt-out of the Class, would release, among other things, their claims against the Company. SEC proceedings During the previous year, the Company entered into a settlement agreement with the Securities Exchange Commission, USA (SEC) in connection with the SEC investigations into misstatements in the Companys financial statements predating January 7, 2009, without admitting or denying the allegations in the SECs complaint and a penalty amount of USD 10 Million (equivalent toRs.446 Million), which was accrued during the previous year, was remitted to the SEC in the current year. Subsidiaries Pursuant to the circular dated February 08, 2011 from the Ministry of Corporate Affairs (MCA), your Company has complied with the required stipulations including disclosure of certain information in the Consolidated Balance Sheet (Refer Note 56 of the consolidated financial statements) and the documents referred to under Section 212(1) of the Companies Act, 1956 are not attached to the Consolidated Balance Sheet. However, the said documents are available for inspection by the members at the registered office of the Company. The members interested in obtaining the said documents may write to Company Secretary at the registered office of the Company. C&S System Technologies Private Limited (C&S) On March 21, 2012, the Board of C&S approved the proposal to amalgamate with Tech Mahindra Limited and the detail of the proposed Scheme was discussed in the Directors Report. Fixed Deposits Your Company did not accept any deposits during the year under review. Directors The Board expresses profoundly its grief at the sudden demise of Mr. C. Achuthan, Government nominated Director, on September 19, 2011. Your Company places on record its sincere appreciation and gratitude for exemplary efforts and significant role played as a Government Nominee and Independent Director, in steering the Company during the period of turmoil in 2009. Mr. Ashok Kacker was nominated by the Ministry of Corporate Affairs, Government of India as a Director on the Board of the Company, effective from January 24, 2012. The Board co-opted Mrs. M Rajyalakshmi Rao as Additional Director on February 28, 2012. Mr. M. Damodaran submitted his resignation, effective closure of business hours of March 31, 2012 to enable him to focus on his other Boards and Committee responsibilities. The Board places its appreciation on record, for his contribution to Board deliberations and his wise counsel to the Company. In compliance to the Honble Company Law Board order dated July 17, 2009, the Ministry of Corporate Affairs communicated to the Company that the term of Government Nominee Directors, Mr. T.N. Manoharan and Mr. Ashok Kacker has come to an end on July 15, 2012. The Company places its appreciation on record for the significant role played during their tenure. Keeping in view the unstinted support and guidance provided in surpassing the crisis during the year 2009 and continued services as Government nominee director and Audit Committee Chairman, Mr. T.N. Manoharan was co- opted as an additional and independent director on the board with effect from July 18, 2012. The Company also co-opted Mr. Ravindra Kulkarni as Additional Director on the board with effect from July 18, 2012. Mr. Vineet Nayyar shall retire by rotation at this Annual General Meeting and is eligible for re-appointment. Auditors M/s Deloitte Haskins & Sells (DHS) Chartered Accountants, the statutory auditors of your Company, hold office up to the conclusion of the ensuing Annual General Meeting of the Company and have given their consent for re- appointment. The Board recommends the re-appointment of M/s Deloitte Haskins & Sells, Chartered Accountants as the Statutory Auditors of the Company. The information and explanations on the qualifications and adverse remarks contained in the audit report are provided in detail in the Notes forming part of the financial statements. Your Board opines that no further explanation is required in this regard. Conservation of Energy, Technology Absorption and Foreign Exchange Earnings and Outgo The particulars as prescribed under sub-section (1)(e) of Section 217 of the Companies Act, 1956 read with Companies (Disclosure of particulars in the report of Board of Directors) Rules, 1988 are provided in Annexure - A which forms part of this report. Employee Particulars Particulars of employees as required under Section 217(2A) of the Companies Act, 1956 and the Companies (Particulars of Employees) Rules, 1975 as amended, forms part of this report. However, pursuant to Section 219(1) (b) (iv) of the Companies Act, 1956, this report is being sent to all the shareholders of the Company excluding the aforesaid information and the said particulars are made available at the registered office of the Company. The members interested in obtaining information under Section 217 (2A) may write to the Company Secretary at the registered office of the Company. Directors Responsibility Statement As required by the provisions of Section 217 (2AA) of the Companies Act, 1956, the Directors Responsibility Statement is attached as Annexure - B to this report. Associate Stock Option Plan (ASOP) As required by clause 12 of SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, the particulars of the Stock option plans of your Company are provided as Annexure - C to this report. Acknowledgements Your Directors gratefully acknowledge the co-operation and support received from its customers, vendors, investors, bankers, regulatory and Governmental authorities in India and abroad. Your Directors place on record their sincere appreciation for all the Associates for their contribution towards success of your Company. For and on behalf of the Board of Directors Place : Hyderabad Vineet Nayyar Date : July 26, 2012 Chairman ANNEXURE A TO THE DIRECTORS REPORT Particulars pursuant to Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988. A) Details of Conservation of Energy: Your Company uses electrical energy for its equipment such as air- conditioners, computer terminals, lighting and utilities at work places. As an ongoing process, the Company continued to undertake the following measures to conserve energy: * Incorporating new technologies in the air-conditioning system in upcoming facilities to optimize power consumption. * Identification and replacement of low-efficient machinery (AC) in a phased manner. * Identification and replacement of outdated and low-efficient UPS systems in a phased manner. * Conducting continuous energy-conservation awareness and training sessions for operational personnel. B) Technology Absorption: The details are given below: (a) Research and Development (R&D): 1) Specific areas in which R&D work has been done by the Company and benefits expected: The Company believes that domain based innovation and process related innovation lay a solid foundation to meet and exceed customer and investor expectations. Domain based innovations help our customers in enhancing their products / services, and achieving significant time / cost reductions. Innovation led artifacts add to the IP assets of the Company and provide an opportunity to create market-led solutions fairly and regularly. The Company is creating IPs (includes patentable innovations) and solutions and focuses on collaborative innovation by co-working with the customer R&D labs and academia. The research and development activities will help the Company to gear for future opportunities and focus to provide unique benefits to the customers and other stakeholders by working both proactively (self-driven research) and reactively (customer-driven research). The vision is to be recognized as an R&D partner in selected areas of Communication and Computation leading to the design and development of algorithms. The objectives are to (a) carry out applied research in the areas that are closely related to the business objectives of our Company; (b) create tangible IP artifacts; (c) present and publish papers in international conferences; (d) publish papers in refereed journals; (e) file patent applications, mostly in USPTO; and (f) help build market led showcase and market ready solutions based on research results. During the year under review the Company has- * Obtained 7 Patents in the fields of Technology and Media related areas by USPTO * Showcased SEMI Fab automation standards compliance test solution at international consortium ISMIs EDA workshop during SEMICON, West trade show at San Francisco * Implemented in house developed EMS / NMS solution at IMS Academy * Three ideas selected by a leading cards processor as part of one of the pilot projects on Future of Electronic Bill Payment for an internal prototyping session called Innovation Express. * Developed a set of PoCs to demonstrate ideas like Risk Visualization that help to improve dialogue between consumers and financial wealth advisors leveraging the power of mobility, real-time analytics and cloud capabilities. * Created demonstrable solution based on Company owned tester IP for testing Smart Grid Interoperability standards. * Offered an innovative solution in Micro grids trademarked Micro grid as a service. * Developed in collaboration with University of Waterloo Ontarios first Smart Grid Research and Innovation Center (RIC) on the University Campus in Ontario, Canada. 2) Future plan of action: During the year 2012-13, the Company will continue to work on developing solution accelerators in the areas of: I. Technology, Media & Entertainment and semiconductors and create demonstrable prototypes. II. Strategic initiatives: These relate to focus areas driven from the office of the CTO. The investments in this category are for researching next generation capabilities, establishing Centres of Excellence, developing new solution offerings, IP creation, and Innovation labs for experimentation by our customers. Focus areas under this category include Cloud / SaaS, Mobility / Digital Convergence, Sustainability, Open Source, and Enterprise Architecture. III. Enterprise Business Solutions: These cover the ERP platforms (SAP, ORACLE etc), BI / Analytics, Extended Enterprise platforms (PLM, CRM, SCM, MES). The investments in this category enable: * Researching new releases by product vendors * Ideation and innovation * IP based asset creation including development of domain based templates to enable implementation acceleration * Solutions Engineering Centres * Learning and development * Centres of Excellence and Proofs of concepts IV. Platform and Testing Solutions: These cover platforms including Mainframe, Java, and Microsoft. Additionally they also include Testing as an independent capability. Investments in this category enable: * Centre of Excellence * Innovation and solutions stack development * Domain based offerings * Learning and development * Mahindra Satyam has its own z Series IBM Mainframe * Mahindra Satyam (in partnership with Microsoft) has invested in an Azure CoE * Mahindra Satyam (in partnership with HP) has invested in a Testing CoE V. Integrated Engineering Solutions: The investments in this area enable- * Product and process innovation * Development of new capabilities * Prototype development * Digital simulation and prototyping * Learning and development 3) Expenditure on R&D a. Capital : Rs.Nil b. Recurring : Rs.Nil c. Total : Rs.Nil d. Total R&D expenditure : Not applicable as Percentage of total turnover (b) Technology Absorption, Adaptation and Innovation: 1. Efforts made towards technology absorption, adaptation and innovation and benefits derived as a result of the above efforts: The algorithms and systems developed as part of the applied research activities are used to build showcase solutions. The technology and domain knowledge obtained during R&D work, and algorithms, frameworks, and solutions developed as part of R&D work are quite useful in effectively executing customer projects. Further, the algorithms are also to be used as part of demo software and solutions such as (a) ad targeting; (b) context aware mobile solutions; (c) proxy systems, and (d) rich media spam and leak for IPS / IDS systems. These solutions lay a strong foundation for the business units service offerings. 2. Information about imported technology: Nil C) Foreign Exchange Earning and Outgo 1. Initiatives like increasing 94% of total exports, development of revenue of the new export markets etc. to Company are increase foreign exchange from exports 2. Foreign exchange earned (on Rs.57,830 accrual basis) Million 3. Foreign exchange outgo (on Rs.33,873 accrual basis) Million Annexure B to the Directors report DIRECTORS RESPONSIBILITY STATEMENT To the Members We the Directors of Satyam Computer Services Limited confirm the following: i. The applicable accounting standards have been followed along with proper explanation relating to material departures in the preparation of the annual accounts; ii. The Directors have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period; iii. The Directors have taken proper and sufficient care for the maintenance of adequate accounting records for the year in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities, taking into account the financial irregularities identified in Note 25 and regulatory non-compliances / breaches identified in Note 32 to Accounts. iv. The Directors have prepared the annual accounts on a going concern basis. For and on behalf of the Board of Directors Place : Hyderabad Vineet Nayyar Date : July 26, 2012 Chairman Annexure C to the Directors report Associate Stock Option Plan (ASOP) The details of Associate Stock Option Plans (ASOP) are given below. Particulars ASOP-A ASOP-B ASOP-ADS (a) No. of options granted during the year Nil 2,313,602 20,000 (b) The pricing formula Refer foot Refer foot Refer foot note 1 note 2 note 2 (c) The maximum vesting period NA 5 years 5 years (d) Options vested during the year Nil 4,732,965 493,121 (e) Options exercised during the year Nil Nil Nil (f) The total number of shares Nil Nil Nil arising as a result of exercise of options during the year (g) Options cancelled/lapsed/on Nil 3,658,097 1,941,751 termination (Refer foot note 4) (h) Variation of terms of options Not Not Not applicable applicable applicable (i) Total number of options in force Nil 20,269,437 Nil (Refer foot note 4) Particulars ASOP-RSUs ASOP-RSUs (ADS) (a) No. of options granted during the year Nil Nil (b) The pricing formula Refer foot Refer foot note 3 note 3 (c) The maximum vesting period 5 years 5 years (d) Options vested during the year 55,125 81,018 (e) Options exercised during the year 219,583 6,250 (f) The total number of shares 219,583 12,500 arising as a result of exercise of options during the year (g) Options cancelled/lapsed/on 32,062 147,846 (Refer termination foot note 5) (h) Variation of terms of options Not Not applicable applicable (i) Total number of options in force 560,185 Nil (Refer foot note 5) (j) Money realised by exercise of options on Rs. 464,166 receipt basis (k) Employee-wise details of options granted to (i) Key management personnel during the year Nil (ii) Other employee who receives a grant in any one year of options amounting to 5% or more of options granted during that year is given below:- Particulars Number of options granted during the year ASOP B: Manish Mehta 200,000 Rohit Gandhi 143,844 Vikram N Nair 143,844 Arvind Malhotra 121,552 ASOP ADS: Srirama Srinivas 20,000 (iii) Identified employees who were granted options, during any one year, equal to or exceeding 1% of Nil the issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant. (l) Diluted Earnings Per Share (EPS) (on par value Rs.10.21 of Rs.2 per share) calculated in accordance with Accounting Standard 20 (m) In accordance with SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, had compensation cost for associate stock option plans been recognized based on the fair value at the date of grant in accordance with Black Scholes model, the pro-forma amounts of your Companys net profit and earnings per share would have been as follows: Particulars Year ended March 31, 2012 2011 1. Net Profit/(Loss) after Taxation and before Non-recurring / Extraordinary Items - As reported (Rs.in Million) 12,028 (1,276) - Proforma (Rs.in Millions) 11,619 (1,649) 2. Earnings per share: Basic - No. of shares 1,176,718,483 1,176,401,598 - EPS as reported (Rs.) 10.22 (1.08) - Proforma EPS (Rs.) 9.87 (1.40) Diluted - - - No. of shares 1,178,288,691 1,176,401,598 - EPS as reported (Rs.) 10.21 (1.08) - Proforma EPS (Rs.) 9.86 (1.40) (n) Weighted-average exercise prices and weighted-average fair values of options, separately for options whose exercise price is either equals or exceeds or is less than the market price of the stock: Options Weighted average Weighted average exercise price (Rs.) fair value (Rs.) ASOP-A No options granted during No options granted during the year the year ASOP-B 78.06 52.58 ASOP ADS 149.42 121.25 ASOP RSU No options granted during No options granted during the year the year ASOP RSU (ADS) No options granted during No options granted during the year the year (o) A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information: The fair value of options has been calculated by using Black Scholes method. The assumptions used in the above are: Sl. Particulars A B C D E No. 1. Risk-free interest rate - 8.50% 8.50% - - 2. Expected life (years) - 3.5-6.5 years 3.5-6.5 years - - 3. Expected Volatility - 83.48%-109.36% 103.08%-136.62% - - 4. Expected dividends - 0.22% - 0.50% 0.22%-0.50% - - A = ASOP-A B = ASOP-B C = ASOP ADS D = ASOP RSU E = ASOP RSU (ADS) 5. The price of the underlying share in market at the time of option grant: Grant Date ASOP-B (Rs.) ASOP ADS ASOP RSU ASOP RSU (ADS) 23.05.2011 74.30 $3.30 (149.42) - - 09.08.2011 78.20 - - - 10.11.2011 75.95 - - - 31.01.2012 73.45 - - - 31.03.2012 78.95 - - - MANAGEMENT DISCUSSION AND ANALYSIS Industry Structure, Development and Outlook Company Overview: Satyam Computer Services Limited (hereinafter referred to as SCSL or Mahindra Satyam or the Company) is a leading global business and information technology services company that leverages deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance. The Companys professionals excel in enterprise solutions, supply chain management, client relationship management, business intelligence, business process quality, engineering and product lifecycle management, and infrastructure services, among other key capabilities. Mahindra Satyam is part of the $14.4 billion Mahindra Group, a global federation of companies and one of the top 10 business houses based in India. The Groups interests span automotive products, aviation components, farm equipment, financial services, hospitality, information technology, logistics, real estate and retail. Mahindra Satyam development and delivery centres in the US, Canada, Brazil, the UK, Hungary, Egypt, UAE, India, China, Malaysia, Singapore and Australia serve numerous clients, including many Fortune 500 organizations. For more information, visit www.mahindrasatyam.com Industry Structure & Development: The Information Technology / Information Technology Enabled Services (IT / ITES) sector one of the important sectors in the Indian economy, has registered huge growth from a small size of US$ 150 million in 1990-1991. It is now expected to cross US$ 100 billion in FY 2011-12 as per NASSCOM. As a proportion of national GDP, the sector revenues contributed from 1.2 per cent in FY1998 to an estimated 7.5 per cent in FY2012. Though the IT- ITES sector is export driven, the domestic market is also significant with a robust revenue growth. The industrys share of total Indian exports (merchandise plus services) increased from less than 4% in FY1998 to about 25% in FY2012. This sector has also led to significant employment generation. The industry expects to add 230,000 jobs in FY2012, thus providing direct employment to about 2.8 million people, and indirectly employing 8.9 million people. FY2012 is a landmark year - while the Indian IT-BPO industry weathered uncertainties in the global business environment, this is also the year when the industry is set to reach a significant milestone. The aggregate revenue for FY2012 is expected to cross US$ 100 billion. Aggregate IT software and services revenue (excluding hardware) is estimated at US$ 88 billion. Within the global sourcing industry, India was able to increase its market share from 51 per cent in 2009, to 58 per cent in 2011, highlighting Indias continued competitiveness and the effectiveness of India-based providers delivering transformational benefits. Current Environment & Outlook Despite year 2011 ending in a difficult economic environment, some geographic regions and services are expected to circumvent the situation in 2012. The global GDP, after growing by 2.7 per cent in 2011, is expected to grow 2.5 per cent in year 2012 according to UN, with developing economies growing thrice as fast as the developed economies. Better economic conditions in the second half of the year signifying return of consumer confidence and renewal of business growth, is expected to drive IT spending going forward. The current trend toward offshore outsourcing is a lot more complex than simply seeking skills and resources at low cost locations. The driving forces in the IT outsourcing market are quality and speed to market, not just cost of services. A new wave of outsourcing is allowing companies to acquire reliable IT quickly, in order to deploy specialized services, and ramp down easily when these services are no longer needed. At the same time, off shoring is pushing the world beyond the information economy and toward a global knowledge-based economy. Technology enables knowledge to be shared quickly throughout the developed and developing world, allowing a variety of regional specializations to arise. These trends are conspiring to bring further changes to the global outsourcing market in the next decade. First of all, consumer demand and spending power in the emerging economies is growing more quickly than expected. As they grow in strength and stability, the risks of outsourcing can be spread further as companies have a wider variety of geographic locations from which it can select the outsourcing partner. No doubt we at Mahindra Satyam consciously keep on investing in setting up global delivery centres across the world to serve our customers better. In the future, many companies will not outsource to a particular country at all. Instead, they will turn to large multinational corporations with access to a variety of resources and expertise across the globe and the ability to spread risk. As these one-stop shops grow in size and skills, they will gain a significant competitive advantage over the strongest individual outsourcing markets. Global IT services overview In the face of the volatile economic environment and currency fluctuations, 2011 recorded steady growth for the technology and related services sector, with worldwide spending exceeding USD 1.7 trillion, a growth of 5.4% over 2010. Software products, IT and BPO services continued to lead; accounting for over USD 1 trillion- 63% of the totals spend. IT hardware spends, at USD 645 billion, accounted for the balance 37% of the worldwide technology spends in 2011. The future of the global technology industry will be shaped by economic forces, adoption of new technologies and currency fluctuations. Lingering debt crises, volatile financial markets and government austerity programs in the US and Europe could have a negative impact on technology spend spilling over to the other regions which could in turn affect business and consumer confidence. However investing in new technologies like smart computing products, cloud computing, mobility and analytics will enable vendors to gain efficiency and agility which when properly leveraged will provide tremendous opportunity for the delivery of real competitive value to clients. Mahindra Satyam believes that the future of spending in the IT services sector is driven by factors such as: * Innovation in IT and customer centricity being a driver for meeting business goals * New Business Models coming into vogue where IT plays a prominent role * Emergence of solutions around new technology platforms and that is where we have come up with a fresh approach N-MACS (Networks, Mobility, Analytics, Cloud Computing and Security Consulting) * Efficiency improvement initiatives and cost focus Indian IT Services Industry Overview According to the NASSCOM Strategic Review 2012, the Indian IT services is the fastest growing segment, increasing by 19% in FY2012, to account for exports of USD 40 billion. There is a considerable traction in traditional segments and an increased acceptance from mature segments such as BFSI, US and large corporations and emerging segments such as retail, healthcare and utilities, SMBs, Asia Pacific and RoW. The industry is re- tooling itself to adjust to rapid change in customer priorities from SLAs to increased time-to-market and emerging technologies such as cloud computing, mobility, social media and big data / analytics are unleashing new opportunities to the industry and solution provider like us. India continues its position as the worlds leader in the global sourcing industry. Its sharing in the global sourcing stands at 58% in 2011. While cost remains as one of the key sourcing drivers, Indias value proposition includes unparalleled human capital, unique customer centricity, supportive ecosystem and a secure environment. India with its unique strengths continues to lead in the global sourcing arena. Indias market share grew from 55% in 2010 to 58% in 2011, largely driven by increased focus on 1. Cost efficiencies 2. Customer centricity 3. Highly supportive ecosystem 4. Unparalleled human capital 5. Secure environment Summary The Indian IT Industry has strong fundamental, is a premier global sourcing destination and is resilient and has demonstrated ability to change. While the outsourcing models are changing, driven by new technologies, new business models, new buyer segments, India has been able to address them in addition to developing customized solutions for emerging market segments. Efficiencies gained during the economic crisis are not lost - the industry continues to re-engineer internally and diversify, with a thrust on non- linearity and transforming customer businesses. As per NASSCOM, better economic conditions expected in second half of the year could see return of consumer confidence and renewal of business growth which could accelerate the global IT spends. NASSCOM has guided 11% to 14% growth in Indian IT exports in FY 12-13 against 16% to 18% it guided for FY11-12 a year back. The year ahead will see uncertainty, but the IT industry will continue to grow and be a net hirer. Operating conditions may improve; differentiated growth for diverse segments of the Industry will propel India to build thrust on high value exports, enabling frameworks and implementation. Opportunities * Higher economic growth in Emerging markets Emerging markets are growing relatively faster than the developed nations. Sustaining such high growth would require increase in competitiveness of local players. IT would play an important role in increasing competitiveness. Markets such as India, Middle East Asia Pacific and Latin America are increasingly becoming important from the point of view of consumption of IT services. * Increased adoption of off-shoring The global economy which was on a recovery mode post the recession continued to face challenges stemming from the European debt crisis, high unemployment in the developed world, and other such events. Simultaneously, the continued thrust of global organizations towards costs and improving efficiencies, reflected in the uptick in discretionary spending, offers sufficient opportunity for growth. The Company views this as a good opportunity to improve and strengthen its customer base. * Environment sustainability issues Increased environmental consciousness coupled with the search for more cost effective IT solutions have brought in a greater emphasis on Green Technologies. * Emergence and acceptance of New Technologies There is an increasing acceptance of cloud-based solutions that offer both flexibility and scalability. There is likely to be increasing interest in technology areas such as Cloud and Software as a Service (SaaS) which will offer new opportunities for growth. The Company views these as a focus area and is taking active interest in developing and providing services in partnership with established product vendors. Threats, Risks and Concerns * Subsequent to the letter by the erstwhile chairman dated January 7, 2009 (the letter) admitting that the Companys Balance Sheet as at September 30, 2008 carried inflated balances in cash and bank balances, non-existent accrued interest, an understated liability and an overstated debtors position, there were investigations by various law enforcement agencies in India and abroad and resultant seizure of documents which is more fully described in Note 25 of the standalone financial statements. Considerable time has elapsed after the letter and the Company has not received any further information as a result of the various ongoing investigations against it that may require adjustments to the financial statements. Notwithstanding the above, the Company may be exposed to liabilities in case of any adverse outcome of these investigations / proceedings, the details of which are disclosed in the aforesaid Note 25 of the standalone financial statements. * There are claims and contingencies and other regulatory non-compliances / breaches faced by the Company that have been set out in more detail in Note 31 and Note 32 of the standalone financial statements for which the Company is taking appropriate action based on legal advice. * As a result of the fragmented nature of the industry, we operate in a highly competitive landscape where we compete for business with several Indian and global companies where differentiation is getting increasingly difficult. Several global companies have also been building their offshore presence thereby intensifying competition in the offshore centric space. We believe that our strength of experience and proven delivery capabilities will stand us in good stead in winning business. * We may find it increasingly tough to keep pace with rapid technological development in newer technologies like cloud computing. However, we have been active in creating newer offerings to replace some of the older offerings that may be cannibalized due to the latest technological developments. * The Companys operations are spread across many countries and the compliance mechanism needs constant updation for regulatory changes, to ensure that there is no risk of non-compliance. * Challenges with regard to attraction and retention of talent / skills which is important for the success of the Company. Employee compensation pressures in India and the hiring of employees outside India may reduce the Companys margins. * The Company may face challenges with respect to its customers, which could have a material impact, including due to customer retention given the competitive market conditions with attendant pressures on price and margins, consolidation of vendors by some of the larger customers, compliance with contract clauses related to bench marking, liquidated damages, non-disclosure of information, infringement of intellectual property rights and breach of confidentiality. * Delays in completion of fixed-price, fixed-time frame contracts within the budgeted time and cost. * The Companys revenues are significantly dependent on customers primarily located in the U.S. and Europe, as well as in certain sectors. An economic slowdown or other factors, including impact of adverse legislations in these countries or sectors would affect the Company. Legislation in certain countries in which we operate, including United States, may restrict companies in those countries from outsourcing work to us. * The exchange rate between the Indian rupee and the US dollar has continued to fluctuate. Thus operating results will be impacted by the fluctuations. Any strengthening of Indian rupee against the US dollar or other foreign currencies could impact profitability. * Force majeure events including terrorist attacks, war, regional conflicts, earthquake, floods, disruptions in telecommunication systems and virus attacks etc., could adversely affect the Companys business, results of operations and financial condition. The political uncertainty in Hyderabad where the Company is currently headquartetared might also adversely impact the operations of our Company. * Proposed merger: The related required approvals and the consequential cultural integration will involve extensive communication and connect events across both companies, in order for the synergies, efficiencies and benefits to be fully realised. * New Business Models: The changing business dynamics are leading to the emergence of new business models e.g. Outcome based models. We may need to adopt the new models alongside the traditional ones to remain competitive. * Strategic acquisitions: During the year Company acquired 100% business of Vcustomers International operations for US$ 27 million (approx. Rs. 135 crores). This is the first 100% acquisition by Mahindra Satyam since it became part of Mahindra Group and marks the entry of Mahindra Satyams BPO operations into other verticals such as Retail and Consumer Technology in addition to significantly enhancing Technical Support credentials. Post acquisition, the Company faces the challenges associated with cultural, financial and technology integration. This could result in failure to reach the strategic objective for the acquisition and the resultant synergy expected. Internal Control Systems and their adequacy Over the past three financial years i.e. 2009-10, 2010-11 and 2011-12, the Company under the new Management took several steps including inter-alia appointing a new audit committee, revising the code of Ethical Conduct, nominating a Corporate Ombudsman and formulating an entity wide risk management policy duly approved by the Board. The internal audit function has also been strengthened by appointing a reputed and independent external agency as the Internal Auditor. Amongst the initiatives, the Management has carried out a complete analysis of unexplained / un-reconciled balances between various sub-systems / sub- ledgers and the general ledger and the same has been appropriately dealt with in the accounts (Refer Note 33.2 of the standalone financial statements). In addition, physical verification of fixed assets has been conducted in accordance with a defined program by the Management and the deficiencies that were noticed were appropriately dealt with in the books. Further, the new Management, for the purpose of ensuring appropriate controls over the financial reporting process and the preparation of the financial statements, has implemented specific procedures like manual reconciliations between the various sub-systems / sub-ledgers and the general ledger, requests for various balance confirmations as part of the year end closure process, confirmation of the department wise financial details by the business leaders, preparation and review of proper bank reconciliation statements, review of the revenue recognition policies and procedures, preparation and review of schedules for key account balances, implementing proper approval mechanisms, closer monitoring of the financial closure process etc. The software platforms including the ones used for financial reporting are non-integrated contributing to certain deficiencies in IT General and Application controls, and therefore, compensating manual reconciliations are carried out as mentioned above. In addition, the Management is evaluating migration to a new ERP in a phased manner. As at March 31, 2012, the new Managements efforts have resulted in improved controls over the process of revenue recognition, receivables management, approval mechanisms and the preparation and review of material account balances, which have reached a stage so as to provide reasonable level of assurance regarding these account balances in the preparation and presentation of the financial statements. Financial Performance Overview The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956 and Generally Accepted Accounting Principles (GAAP) in India. The Consolidated financial statements have been prepared in compliance with the Accounting Standards AS 21 as prescribed by the Companies (Accounting Standards) Rules, 2006. The discussion on financial performance in the Management Discussion and Analysis relate to the Standalone Financials Statements of SCSL. Share Capital The paid up share capital stands atRs.2,354 Million as on March 31, 2012 compared toRs.2,353 Million as on March 31, 2011. The increase ofRs.1 Million during the year is due to conversion of options into shares by employees under various Associate Stock Option Schemes (ASOPs). Reserves and Surplus Securities premium account Securities premium account has increased fromRs.43,350 Million as on March 31, 2011 toRs.43,460 Million as on March 31, 2012. The addition to the securities premium account ofRs.110 Million during the year is primarily due to the conversion of options into shares by employees under various Associate Stock Option Schemes (ASOPs). Statement of Profit and Loss The deficit in Statement of Profit and Loss ofRs.24,622 Million at the beginning of the year was reduced toRs.12,594 Million as at March 31, 2012 due to the profit ofRs.12,028 Million for the year ending March 31, 2012. Hedging Reserve With effect from April 1, 2011, the Company has applied the hedge accounting principles set out in Accounting Standard 30 Financial Instruments: Recognition and Measurement (AS 30) in respect of such derivative contracts used to hedge its risks associated with foreign currency fluctuations relating to certain firm commitments and highly probable forecast transactions. Accordingly, in respect of all such contracts outstanding as on March 31, 2012, that were designated and effective as hedges of future cash flows, loss aggregatingRs.343 Million (Net) has been recognised directly in the Hedging reserve account (Refer Note 4 of the standalone financial statements). Associate stock option The decrease in the associate stock option account ofRs.265 Million is primarily due to exercise of options during the current year (Refer Note 34 of the standalone financial statements). Borrowings The borrowings comprising of secured loans (including finance lease obligations) as at March 31, 2012 aggregatedRs.292 Million (i.e. Long term borrowings -Rs.233 Million and current maturities of long term debt -Rs.59 Million) as compared to Rs.315 Million (Long term borrowings- Rs.220 Million and current maturities of long term debt - Rs.95 Million) as at March 31, 2011. The decrease of Rs.23 Million over the previous year is primarily due to repayment during the year of the vehicle loans and finance lease obligations for certain assets taken earlier which was offset by the new lease obligations for vehicles acquired during the current year. Long term provisions: Provisions as at March 31, 2012 aggregate Rs.1,545 Million (Rs.1,382 Million as at March 31, 2011). The increase of Rs. 163 Million in provisions is primarily on account of provision for employee benefits Rs.186 Million which is offset by the decrease in Provision for estimated loss on derivative contracts (Refer to Note 55 of the standalone financial statements). Trade payables: Trade payables as at March 31, 2012 aggregated Rs.5,873 Million (Rs.5,693 Million as at March 31, 2011). The increase of Rs.140 Million is primarily on account of increase in salary payables and other operational expenditure. Other current liabilities Other current liabilities as at March 31, 2012 aggregate Rs.7,784 Million (Rs.8,934 Million as at March 31, 2011). The decrease of Rs.1,150 Million is primarily on account of payment of Rs.1,074 Million towards expenses and charges in relation to the Class Action Settlement (Refer Note 29 of the standalone financial statements) and on account of payment of Rs. 447 Million relating to Civil monetary penalty. The decrease is offset by the increase in unearned revenue, statutory remittances, payables on purchase of fixed assets and derivative liability. Short term provisions: Provisions as at March 31, 2012 is Rs. 9,413 Million (Rs. 9,187 Million as at March 31, 2011). The increase of Rs. 226 Million is primarily on account of increase in provision for tax Rs. 1,425 Million due to the provision for income tax for the current year (Refer Note 53.1 of the standalone financial statements) which is offset by decrease on account of provision for contingencies Rs. 913 Million (Refer Note 54.2 of the standalone financial statements), provision for warranties Rs. 13 Million, provision for estimated loss on derivative contracts Rs. 131 Million (Refer Note 55 of the standalone financial statements) and Provision for employee benefits Rs. 142 Million during the current year. Fixed Assets The Gross block of fixed assets is Rs. 21,460 Million as at March 31, 2012 as compared to Rs. 20,204 Million as at March 31, 2011. The additions to gross block aggregate Rs. 2,953 Million and deletions to gross block are Rs. 1,697 Million. The increase of Rs. 2,953 Million is primarily due to additions in plant and equipment (including computers) Rs. 1,296 Million, furniture and fixtures Rs. 342 Million, capitalization of buildings Rs. 1,040 Million, software Rs. 181 Million and Vehicles Rs. 82 Million. The deletions are largely on account of adjustments arising on account of physical verification of fixed assets during the year (for more details refer Note 36.4 of the standalone financial statements). In respect of certain freehold lands and buildings, the Company has received a provisional attachment order from the Income tax authorities which has since been stayed by orders passed by the Honble High Court of Andhra Pradesh (Refer Note 31.3.v of the standalone financial statements). The decrease in capital work-in-progress (net of provisions) to Rs. 2,000 Million (Rs. 2,408 Million as on March 31, 2011) is primarily due to capitalization of buildings during the year. Non-current and Current Investments Non-current investments comprise of investments in Subsidiaries, and in other Trade investments. Investment in Subsidiary companies and other trade investments is Rs. 9,990 Million as on March 31, 2012 (Rs. 9,480 Million as on March 31, 2011). The increase of Rs. 510 Million is primarily on account of additional investment made during the year in Bridge Strategy LLC, Satyam Computer Services Belgium, BVBA, Satyam Computer Services (Shanghai) Co. Limited and Satyam Servicos De Informatica LTDA. The provision for diminution in the value of investment in subsidiaries as on March 31, 2012 is Rs. 8,579 Million (as on March 31, 2011 is Rs. 8,507 Million). The provision for diminution in the investment value in subsidiary companies is made on the basis of valuation reports obtained by the Company. The Company during the year acquired stake in Dion Global Solutions Limited, an entity whose equity shares are listed on the stock exchanges in India, by investing Rs. 350 Million. Current investments comprise of current portion of long-term investments and investments in mutual funds. The Company has made investment in various mutual funds during the current year. These are investments in fixed-term maturity plans of debt funds. Investments in mutual funds aggregated to Rs. 622 Million as at March 31, 2012 (Rs. 4,348 Million as at March 31, 2011). Deferred Tax Assets (net) No deferred tax asset was recognised as at March 31, 2011 on account of accumulated business losses and other items in the absence of virtual certainty of realisation of such assets in accordance with the accounting policy of the Company. In view of the current year profits and as permitted by the Accounting Standard (AS) 22 on Accounting for Taxes on Income, the Management has recognised deferred tax assets aggregating Rs. 1,621 Million as at March 31, 2012, including the past unrecognised deferred tax assets as of that date, on certain items identified by considering the concept of prudence. Long term loans and advances Long term loans and advances (gross) as at March 31, 2012 aggregate Rs. 4,738 Million (Rs. 5,351 Million as at March 31, 2011) and the cumulative provision towards doubtful advances aggregate Rs. 501 Million (Rs. 3,312 Million as at March 31, 2011). The decrease of Rs. 613 Million is primarily on account of Rs. 564 Million share application money for investment in Satyam BPO being classified as short-term in the current year. The decrease of Rs. 2,811 Million in the provisions is primarily due to write-back of provisions during the year to the Statement of Profit and Loss. Other non-current assets Other non-current assets are Rs. 27 Million as on March 31, 2012 as compared to Rs. 82 Million as on March 31, 2011. The decrease of Rs. 55 Million is primarily on account of decrease in Margin money deposits with banks having maturity of more than 12 months from the Balance sheet date. Trade Receivables (including long-term trade receivables) The Trade Receivables (including long-term trade receivables) (gross) as at March 31, 2012 is Rs. 17,320 Million (Rs. 14,516 Million as at March 31, 2011). Long-term trade receivables (gross) as at March 31, 2012 are Rs. 3,340 Million (Rs. 3,690 Million as at March 31, 2011). Trade receivables (excluding long-term portion) (gross) consist of dues outstanding for a period exceeding six months from the date they were due for payment aggregating Rs. 927 Million (Rs. 625 Million as at March 31, 2011). The cumulative provision against the gross trade receivables (including long- term trade receivables) as at March 31, 2012 is Rs. 4,044 Million (Rs. 4,021 Million as at March 31, 2011). Long-term trade receivables have been fully provided for. Trade receivables are 22.26% of revenues for the year ended March 31, 2012 compared to 21.97% for the previous year representing a Day Sales Outstanding (DSO) of 81 Days and 80 Days for the respective years. (Refer Note 13 and 15 of the standalone financial statements). Cash and cash equivalents Cash and cash equivalents are Rs. 26,898 Million as on March 31, 2012 as compared to Rs. 26,416 Million as on March 31, 2011 out of which Rs. 20,473 Million as at March 31, 2012 (Rs. 16,720 Million) meet the definition of cash and cash equivalents as per AS 3 Cash Flow Statement. Please refer the Cash Flow Statement for detailed analysis of cash flows. Balances in earmarked accounts as on March 31, 2012 is Rs.6,425 Million (Rs.9,696 Million as at March 31, 2011) and the net decrease of Rs.3,271 Million is primarily on account of reduction in balances in escrow / special purpose and segregated accounts due to remittances under such arrangements offset by increase in margin money / security towards bank guarantees, largely on account of Income-tax dispute (also refer Note 31.3.v of the standalone financial statements). Short term loans and advances Short term loans and advances (gross) as at March 31, 2012 Rs.7,567 Million (Rs.2,267 Million as at March 31, 2011) and the cumulative provision towards doubtful advances is Rs.631 Million (Rs.712 Million as at March 31, 2011). The increase of Rs.5,300 Million is primarily on account of Rs.4,515 Million amount deposited and held in initial escrow account towards class action settlement consideration (Refer Note 29 of the standalone financial statements) and on account of classification of share application money of Rs.564 Million for investment in Satyam BPO as short-term during the current year. Decrease in provisions is due to write-back of provisions during the year to the Statement of Profit and Loss. Other Current Assets Other Current Assets are Rs.5,258 Million as on March 31, 2012 as compared to Rs.4,287 Million as on March 31, 2011. The increase of Rs.971 Million is primarily on account of increase in unbilled revenue Rs.811 Million due to increase in revenue, increase in interest accrued on bank deposits Rs.330 Million due to increase in bank deposit balances, derivative asset balances of Rs.69 Million, offset by reduction in contractually reimbursable expenses from customers. Other current assets include contractually reimbursable expenses (gross) Rs.626 Million (Rs.875 Million as at March 31, 2011) against which the provision as at March 31, 2012 is Rs.233 Million (Rs.243 Million as at March 31, 2011). Total income Total income increased to Rs.63,543 Million in the current year from Rs.50,598 Million in the previous year thereby leading to a increase of Rs.12,945 Million. IT services revenues Revenues from IT services of Rs.59,551 Million (Rs.47,414 Million for FY 2010-11) comprises of revenue from Overseas / Exports market Rs.55,832 Million (Rs.45,294 Million for FY 2010-11) and from domestic market of Rs.3,719 Million (Rs.2,120 Million for FY 2010-11). The software revenue mix based on various parameters is as follows: Revenues from IT services based on offshore and onsite / offsite (Rs. in Million) Location Year ended March Year ended March 31, 2012 31, 2011 Offshore 28,216 47.38% 21,761 45.90% Onsite / 31,335 52.62% 25,653 54.10% offsite Total 59,551 100.00% 47,414 100.00% Revenues based on geography: (Rs.in Million) Location Year ended March Year ended March 31, 2012 31, 2011 North 30,077 50.51% 25,228 53.21% America Europe 14,603 24.52% 12,577 26.53% Asia Pacific 8,983 15.09% 6,122 12.91% India 4,277 7.18% 2,120 4.82% Rest of the 1,611 2.70% 1,367 2.53% world Total 59,551 100.00% 47,414 100.00% Sale of Hardware Equipment and Other Items: During the year, the Company has identified and accounted for the sale of certain hardware equipment and other items of Rs.92 Million (Rs.347 Million for FY 2010-11). Other income (net) Other Income has increased to Rs.3,900 Million in FY 2011-12 from Rs.2,837 Million in FY 2010-11. The increase is primarily on account of increase in interest on bank deposits Rs.467 Million, liabilities / provisions no longer required written back Rs.236 Million, dividend from current investments Rs.78 Million, foreign exchange gain Rs.151 Million and increase in other non-operating income is Rs.120 Million. Exceptional items (net) The Statement of Profit and Loss includes the following exceptional items (Refer Note 57 of the standalone financial statements): (Rs.in Million) Particulars * Year ended Year ended March 31, March 31, 2012 2011 Provision for contingencies 2,200 - relating to various disputed matters Expenses related to forensic - 201 investigation and litigation support Class action settlement - 5,690 consideration (Reversals) / provisions (2,718) 520 for impairment losses in subsidiaries (net) Total (518) 6,411 * Exceptional items also include disputed matters settled, net of release from provision for contingencies: (i) for the year ended March 31, 2012 includes Rs.Nil (net) (Rs.3,113 Million less reversal of an equivalent amount from provision for contingencies). (ii) for the year ended March 31, 2011 includes Rs.Nil (net) (Rs.509 Million less reversal of an equivalent amount from provision for contingencies). Employee benefits expense Personnel costs are Rs. 36,354 Million in FY 2011-12 (Rs. 32,760 Million in FY 2010-11). The increase of Rs. 3,594 Million is primarily on account of the following: * Increase of Rs. 1,496 Million on account of variation in foreign exchange rates in respect of employee cost for onsite associates. * Increase of Rs. 769 Million on account of employee movement to onsite. * Increase of Rs. 1,145 Million on account of salary revisions to employees during the year. * Increase of Rs. 590 Million on account of certain costs relating to overseas employees (Refer Note 56 of the standalone financial statements). Operating, administration and other expenses Operating, administration and other expenses increased to Rs. 13,431 Million in FY 2011-12 from Rs. 10,182 Million in FY 2010-11 thereby leading to an increase of Rs. 3,249 Million. This increase was primarily on account of increase in sub-contracting costs Rs. 1,363 Million on account of end customer deployment and an increase in software charges by Rs. 793 Million on account of execution of composite projects, an increase in visa charges by Rs. 400 Million, an increase in provision for doubtful debts by Rs. 369 Million and an increase in legal and professional charges Rs. 171 Million due to project related professional services incurred the current year. This increase is partially offset by a decrease in marketing expenses on account of reduction in Value in Kind expenses related to transactions with the international sports federation during current year amounting to Rs. 207 Million. Provision for diminution in the value of long-term investments During the current year, with the assistance of independent professional agencies, the Company has assessed the operations of the subsidiaries, including the future projections, to identify indications of diminution, other than temporary, in the value of the investments recorded in the books of account and, accordingly, has made a provision of Rs. 103 Million (Rs. 393 Million for FY10-11) and has written-back a net amount of Rs. 31 Million (Rs. Nil for FY10-11) (Refer Note 37.5 of the standalone financial statements). Depreciation Depreciation expense for the year is Rs. 1,494 Million as compared to Rs. 1,499 Million for the year ended March 31, 2011. Provision for tax The provision for tax of Rs. 2,160 Million in the current year (Rs. 537 Million in FY10-11) relates to the liability in respect of the foreign and domestic operations of the Company. Based on professional advice, the Company has determined that the provision made for current tax is adequate and no additional provision for the current year needs to be made (Refer Note 53.1 of Notes forming part of the financial statements). Dividend During the current year, the Company did not declare any dividend. Development in Human Resources For material developments in Human resources, please refer to Directors Report. Disclaimer Certain statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be forward-looking statements within the meaning of applicable securities laws and regulations. Actual results could differ from those expressed or implied.