Reliance cover

July 18, 2011

RELIANCE INDUSTRIES LTD.

& RELIANCE

COMMUNICATIONS LTD. BSE - RIL

Previous Close: INR 867.10

BSE - RCOM Previous Close: INR 94.00

Brothers In Arms Misappropriating A Fortune—The Full Version

Telecommunications & Technology

Neeraj Monga [email protected]

Varun Raj [email protected]

Veritas Investment Research Corporation owns the copyright in this report. This report may not be reproduced in whole or in part without Veritas’ express prior written consent. Any such breach of this copyright is contrary to ss. 27(1), 34, 35 and 42 of the Copyright Act, R.S.C. 1985, c. C-42 and will be liable for damages.

v

TABLE OF CONTENTS

Misapproriating a Fortune...................................................................................................................................1 Lies Damned Lies & Infocom (M?) ....................................................................................................................3

Reliance Telecom ............................................................................................................................................3

Reliance Communications Infrastructure Limited ............................................................................................3

The Old Giveth Way To The New.....................................................................................................................4

How Did We Arrive At The Number For RCIL? ...................................................................................................5

Now To Reliance Infocomm ............................................................................................................................5

The Dilution Game Gain ................................................................................................................................6

Summing It All Up .............................................................................................................................................7

The See Through Test OF Ownership ................................................................................................................7

Single Timeline......................................................................................................................................................... Understanding Indian Accounting....................................................................................................................8 Convoluted Asset Sale ......................................................................................................................................10

The Tax Angle ................................................................................................................................................11 Recognizing A Capital Grant As Other Operating Income ......................................................................12

Fuel And Bad Debts Bypass EBITDA ...............................................................................................................13

How To Boost EBITDA By 40% In One Quarter? ..............................................................................................13

Heads I Win, Tails You Loose ............................................................................................................................15

Why Dwell On Non-Cash Items? ....................................................................................................................16

What About Income From Investments .........................................................................................................16

Restating Consolidated P&L ............................................................................................................................17 Is The Company Trading In Its Own Shares Under The Guise Of An Employee Stock Option Scheme? .......................................................................18

Our Interpretation ..........................................................................................................................................18

Why The Excess Purchases? ...........................................................................................................................19

Which Rules To Follow? - The SEBI Act Or Accounting Standards Of ICAI? ......................................................................................20 FY11 Results .........................................................................................................................................................20 Valuation ............................................................................................................................................................20 Never Too Late To Jump Ship ..........................................................................................................................22

v

APPENDIX 1(a)

Timeline of Investment in Reliance Telecom Limited (RTL) in INR ….…………………………………………...23 APPENDIX 1(b)

Timeline of Investment in Reliance Telecom Limited (RTL) in USD ...…………………………………………...24 APPENDIX 2(a)

Timeline of Investment in Reliance Communications Infrastructure Limited (RCIL) in INR …………………...25 APPENDIX 2(b)

Timeline of Investment In Reliance Communications Infrastructure Limited (RCIL) in USD ...………………...26 APPENDIX 3(a)

Timeline of Investment In Reliance Infocomm Limited (RIC) in INR .…………………………………………...27 APPENDIX 3(b)

Timeline of Investment In Reliance Infocomm Limited (RIC) in USD …………………………………………...28 APPENDIX 4(a)

Shareholding Pattern of Reliance Communications Ventures Limited (RCVL) …..…………………………...29 APPENDIX 4(b)

Shareholding Pattern of Reliance Communications Ventures Limited (RCVL) …..…………………………...30 APPENDIX 5(a)

Reorganization of Shareholding Pattern: Reliance Communications Ventures Limited (RCVL) …..………...31 APPENDIX 5(b)

Break up of ADAG Investment in Reliance Communications Ventures Limited ………………….…..………...32 APPENDIX 6.1

Consolidated Profit and Loss Account for the year ended 31st March, 2008 …………………….…..…….…...33 APPENDIX 6.2

Consolidated Profit and Loss Account for the year ended 31st March, 2009 …………………….…..…….…...34 APPENDIX 7

The Gazette of India: Extraordinary …………………………………………….…………………….…..…….…...35-36 APPENDIX 8

Change in Compliance Officer, Company Secretary and the Manager ….…………………….…..…….…...37 APPENDIX 9

Mergers / Demergers / Amalgamations …………………………………………………………….…..…….…...38-39 APPENDIX 10

Key Indicators and Developments – Indian Telecom Industry ………………………………….…..…….…...40-42 APPENDIX 11

FY01 Reliance Infocomm ….………………….…………………………………………………………….…..…….…...43 APPENDIX 12

FY03 Reliance Infocomm …………………….…………………………………………………………….…..…….…...44 APPENDIX 13

Associate and Subsidiaries: Reliance Industries Limited, 2001-2005 ….…………………………….…..…….…...45

Reliance Communications Limited 1

July 18, 2011 v

MISAPPROPRIATING A FORTUNE Jim O’Neill of Goldman Sachs created the BRICs (Brazil, Russia, India, and China) moniker in early 2000, igniting the world’s imagination to the potential riches available to brave investors in large emerging markets far way from North American climes. However, the economics of forecasting differs from the nitty-gritty of investing, and therefore, international investors have suffered both politically (BP in Russia, Google Inc. in China) and financially (Yahoo Inc. and Softbank in China), and more recently, investors have taken a bath on Sino-Forest – a forestry company domiciled in Canada with operations in China. Then there is India, the land of the Taj Mahal, the Raj, Yoga, democracy and supposedly “rule of law”. The western media has been recently enamoured with the enormous wealth of Indian billionaires and a rapidly rising middle class with its insatiable needs, giving rise to the next great consumer economy of the world. It is our contention that notwithstanding the many positives of a growing Indian economy, corporate governance, accounting standards and disclosure practices adopted by some of India’s prominent companies are questionable. Reliance Communications Limited. (“Reliance”, the “Company” or “RCom”) is the poster child of everything that is wrong with corporate India, and irrespective of management’s assertions about “values” and “integrity” in various annual reports, we find no credible evidence of either in its financial statements or those of its former parent, Reliance Industries Limited (“RIL”). Doubts about management’s integrity and the short shrift to shareholders arise right at inception, when the demerger from RIL was undertaken on August 31, 2005, and the Company was listed on Indian bourses on March 06, 2006. In the intervening period, ownership of promoters ballooned from 38.27% to 63% in RCom, under the guise of improving shareholder value and transparency1. We firmly believe that the 821,484,568 shares issued to management, as per the “Scheme of amalgamation and arrangement involving reorganization” (“Scheme”) of the group telecom business, as approved by the High Court of Bombay and Gujarat vide orders dated July 21st, 2006 and July 18th, 2006, should be nullified2. We believe that the shareholders of RIL are the true owners of these shares, and that the risks and rewards of funding and creating the telecommunication business have been disproportionally allocated to management. We believe minority RIL shareholders should initiate action to recover monies usurped by RIL’s majority owners. During the formation of RCom, RIL shareholders invested R 13,675C (US$ 3,008.5M, 1C= 10 Million INR) into the business, compared to a paltry R 186C (US$ 40.9M) by management, but after listing on BSE, the shareholding of minority RIL shareholders declined to 37% from 61.73%. We believe that the much discussed Ambani split is a charade to deflect attention from a well thought out plan to split family wealth via formation of similarly named companies, emboldened through strategically timed share allotments within those companies, confusing nomenclature and repeated name changes to enrich insiders at the expense of public shareholders. If the

1 Source: Reliance Communications Investor Presentation, March 2006, and FY07 Annual

Report. Also on Page 35, GDR listing prospectus dated August 02,2006.

2 Source: Annual Report FY07, Page 10

Poor Governance

standards in India

These shares belong to RIL

Minority

Egregious transfer of

wealth

2 Reliance Communications Limited

v July 18, 2011

821.48 million shares issued to management at the formation of RCom are used as a benchmark, we estimate that RIL shareholders suffered an egregious loss of R 25,204C (US$ 5,544.8M) based on the March 06, 2006 RCom closing price of approximately R 307 (US$ 6.75) per share. We believe RIL and RCom have used Indian Accounting Standards and associated disclosures, the Court System, the Companies Act and various other mechanisms to enrich insiders at the expense of institutional money managers, minority shareholders and foreign institutional investors. We believe investors in RIL should be aware of management’s hubris. Subsequently, via various accounting maneuvers, Reliance has inflated its EBITDA, EPS and book equity. Moreover, year-on-year comparability in most instances is compromised on account of whimsical accounting policy changes, use of “cookie jar accounting” to circumvent the P&L impact of cash expenses via creative use of unreliable non-cash general reserves, understatement of cash interest expenses via intermingling non-cash foreign exchange gains and losses in some years and excluding those in others, and changing depreciation policies enabling a one-time boost to earnings, etc. All these measures cloud the very purpose of the P&L statement. We believe that on a cumulative basis from FY07-FY10, the Company has inflated its normalized profit before tax (“PBT”) in the core telecommunication business by R 10,944C (US$ 2,408M). We believe that EBITDA, EPS, and book equity reported by the Company since 2006 are open to interpretation. We give the Company a zero rating on each of corporate governance, balance sheet strength, and accounting and disclosure. We also believe that directors at the helm of RCom and RIL have failed in their fiduciary duties, and that significant and meaningful reform is needed in Indian governance standards for the protection of minority interests and the institutional and retail shareholder base, both domestically and internationally. Since March 17, 2006, RCom has declined by approximately 70% compared to a rise of 70% in the Mumbai Stock Exchange Index (SENSEX). Although Reliance investors have suffered the ignominy of massive under-performance versus the SENSEX, as well as absolute capital losses, it is not too late to jump off this train. SELL. Equity value on a going concern basis is R40 (US$ 0.88) per share. A break-up of the Company may yield more. Moreover, if the malaise identified by us at RIL and RCom runs deep in corporate India, and audited financials - which in the case of RCom are of questionable authenticity - are a hodgepodge of audited and unaudited results, SEBI guidelines and Indian Accounting Standards, the Companies Act and “legal opinions” based on interpreting the Companies Act, then investors have very little reliable information on RCom and many other Indian Companies. Buyers Beware. (Fiscal year in India runs from April 01 to March 31. All bracketed amounts are in US$. Some numbers may not add up due to rounding.)

Abuses galore

We do not believe in the Company’s book equity or EPS

Sell


July 18, 2011 v

LIES DAMNED LIES & INFOCOM (M?) It all began innocuously enough with the passage of the following resolution, “The Company has significant plans for making investments, directly or through associate companies, in various businesses, including oil and gas, petrochemicals, refining and marketing, telecom, infocom, power, etc3.”, on Friday, the 15th day of June, 2001, at 11:00 AM at Birla Matushri Sabhagar, at 19 Marine Lines, Mumbai, at RIL’s 27th Annual General Meeting of Shareholders. Ultimately, that culminated in the de-merger of Reliance Infocomm (“RIC”), Reliance Communications Infrastructure Limited (“RCIL”) and Reliance Telecom Limited (“RTL”) under the aegis of Reliance Communications Venture Limited, which finally emerged on the BSE in its current form. Each has a unique story to tell, and speaks to the mala-fide intent of the majority owners to fleece shareholders and enrich themselves.

RELIANCE TELECOM In FY96, under the stewardship of the now deceased Dhirubhai H. Ambani, the foray into telecommunication began in the form of a joint venture between RIL and the erstwhile Nynex Corporation (“Nynex”), resulting in the formation of RTL (from historical records, it is not clear as to how much equity in the so-called JV was owned by RIL at inception). In FY01, RIL disclosed for the first time that it owned a 26% stake in RTL, subsequently revised to 25.6% in FY034 in its related party note. Then, in April 2004, RIL and its subsidiaries acquired the 10% holding of Nynex International (Asia) Limited, increasing RIL’s stake to 35.6%, at a cost of R 52.59C (US$ 11.6M)5. In August 2005, RTL de-merged from RIL, and it came to light that the remaining 64.4% in RTL was owned by ADAG group/the Ambani Family (“the Family”). After the FY05 Nynex purchase, RIL is shown to own 7.09 million shares of RTL, implying that the total shares outstanding of RTL are 19.91 million, with a paid up capital of R 10 (US$ 0.22) each6. Therefore, the Family paid R 12.8C (US$ 2.8M) to acquire its stake in RTL. However, when it came time to increase its stake in RTL, the Family decided to forego the option of increasing its stake at a big premium, and allowed shareholders of RIL to bear the burden, revaluing the Family’s stake upwards to R 338C (US$ 74.4M) (Refer to Appendix 1(a) and 1 (b) for the timeline, pages 23 & 24).

RELIANCE COMMUNICATIONS INFRASTRUCTURE LIMITED

Nothing about this Company’s history is straight-forward, except that enough prima-facie evidence exists to suggest that RIL management has deceived minority shareholders, under the pretext of demerging telecommunication undertakings and improving shareholder value. 3 Source: Item 12, Notes to the Ordinary Resolution, AR FY01

4 Source: RIL Annual Report FY03, Page 105


6 Source: RIL Annual Report FY05, Schedule ‘F’

Let RIL bear the burden


v July 18, 2011

Simply comparing RIL’s FY01 and FY03 Annual Reports should raise red flags for RIL investors.

“Reliance Infocom has announced plans for addressing the entire telecom market in India with a national footprint, and presence in fixed line, mobile, national long distance, and international long distance telephony, as well as a full bouquet of data, image and value added services.7”.

“In December 2002, Reliance Infocomm ushered a digital revolution in

India….Reliance Infocomm has created an overarching digital infrastructure using state-of-the-art technology on the strength of a 60,000 km terabit capacity optic fibre network linking more than 600 cities and towns in India.8”. We suspect that the beauty and simplicity of confusing shareholders lies in the extra “m” added to the “Infocom” name in the FY03 AR. To a casual observer, two m’s in the name might suggest a typo in the AR, but to the progenitors of the scheme to swindle shareholders, it is a masterstroke that defies conventional wisdom. If nothing else, one has to applaud the ingenuity of its creators. (Appendix 11, Page 43, and Appendix 12 Page 44) Reliance Infocom Ltd. came into existence in FY01 (one year prior to the resolution outlined in footnote 3 was passed by shareholders), when RIL advanced R 1,600C (US$ 352M) in the form of deep discount bonds to undertake the business plan of the telecommunication segment as outlined to shareholders9. At this time, no disclosure regarding equity ownership is made, except in Schedule ‘H’, whereby an insignificant sum of “R 10C (US$ 0.22M) towards Equity Share Application money pending allotment ……, a Company under same management” is outlined. No other disclosure related to this particular entity is made in FY01. In FY02, Reliance Infocom is rechristened Reliance Communication Infrastructure Limited, henceforth RCIL, with RIL holding 810 million shares of R 1 (US$.022) par value, implying an investment of R 81C (US$ 17.8M)10. In the same year, Schedule ‘H’ outlines that R 2,213C (US$ 487M) towards share application money has been advanced pending allotment from RIL to RCIL (formerly Reliance Infocom Limited), a “Company under the same management”. RIL’s related party note of Schedule ‘O’ of FY02 outlines that RCIL is an associate of RIL (i.e. RIL owns less than 50% of RCIL), with no disclosure surrounding the percentage of equity ownership in the Company to which RIL had committed a total of R 3,894C (US$ 856.7M) within a span of two years. The life of Reliance Infocom, which began with much fanfare in F01, with 16 references to its bright future in the annual report, ends abruptly within twelve months in FY02, and the exciting journey of RCIL begins. THE OLD GIVETH WAY TO THE NEW In FY03, RIL discloses that it is the proud owner of 900 million shares of RCIL “a company under the same management”, and that the book value of its investment in RCIL is R 2,331C (US$ 486.7M) compared to R 81C (US$ 17.8M) in


8 Source: RIL Annual Report FY03 Page 26



Buyer…

… beware

Renamed


July 18, 2011 v

the prior fiscal period. Given that RIL acquired 90 million shares in FY03, it paid approximately R 245 (US$ 5.40) per share of RCIL for its purchase11. As per the related party note in Schedule ‘O’ of RIL’s FY03 annual report, RCIL remains an associate of RIL, with an equity ownership of 45% (That’s new disclosure in FY03). At the time of the de-merger, it comes to light that the Family owns 55% of RCIL. Where it gets interesting, is that the 45% shareholding of RIL of 900 million shares cost an average of approximately R 26 (US$ 0.57)/share, but that of the Family holding of 1.1 billion shares, cost only R 1(US$ 0.022)/share. The Family purchased its ownership in FY02 at par value, while RIL became an investor a year later at 26x the price paid by the Family in FY02!

HOW DID WE ARRIVE AT THE NUMBERS FOR RCIL?

In FY02, pending allotment, we know that RIL owns 810 million shares of RCIL, and then in FY03, post-acquisition of 90 million shares, the ownership of RIL increases to 900 million shares of RCIL. With the disclosed 45% stake in FY03, (undisclosed in FY02), it is a simple matter of solving the following mathematical equation to get the Family’s stake and that of RIL in FY02, prior to the purchase of an additional 90 million shares of RCIL. We state the equation as: {(810/x) +90= (900/45%)}, where x is RIL’s ownership prior to the purchase in FY02. On that basis, we estimate that RIL owned 42.4% of RCIL’s outstanding 1.91B shares, amounting to 810 million shares, whereas the Family owned 57.6%, or 1.1 billon shares, acquired at a cost of R 110C (US$ 24.2M) in FY02. The FY03 purchase of 90 million shares was an issuance from treasury by RCIL, thereby diluting the Family’s stake down to 55%, but fair-valuing its R 110C (US$ 24.2M) investment to R 26,950C (US$ 5,929M) within twelve months. We do not believe that the Family had any intentions of matching RIL’s contribution to RCIL. (Detailed timeline in Appendix 2(a) and 2 (b), Pages 25 & 26)

NOW TO RELIANCE INFOCOMM

While Reliance Infocom ceased to exist in F02, Reliance Infocomm (“Infocomm”) took over and RIL management proclaimed in FY03, “In December 2002, our group company, Reliance Infocomm unveiled India's most extensive information and communication technology project that seeks to offer every Indian affordable options to stay connected in a networked world12”. “Reliance Infocomm has built a nationwide optic fibre network of 60,000 km covering 90 per cent of India's population. Reliance Infocomm has created an overarching digital infrastructure using state-of-the-art technology on the strength of a 60,000 km terabit capacity optic fibre network linking more than 600 cities and towns in India13”. (Appendix 12) Clearly, a stupendous achievement in an infrastructure starved country like India, for which the Family won accolades from around the world and in India. What we find interesting though, is that the Company that supposedly



13 Source: ibid

Wow…


v July 18, 2011

enlightened India to the possibilities of the networked world and empowered hundreds of millions of Indians was able to accomplish all this, with common equity capital of only R 31.5C14 (US$ 6.9M). Where did the rest of the capital come from to execute this massive project? Before that, a lesson in history; we suspect that the journey of Infocomm began as Reliance Communications Private Ltd. {25 million shares of R 10 (US$ 0.22) outstanding as of FY01}, which became Infocomm {315 million shares outstanding of R 1 (US$ 0.022) each}. We believe that RIL/the Family split the shares of Reliance Communications Private Limited (10:1), renamed the company, and then subscribed for an additional 65 million shares at R 1 (US$ 0.022) during FY02. Turning back to the question of capital, thanks again to RIL, which subscribed to R 8,100C (US$ 1,782M) of 10% Cumulative Redeemable/Optionally convertible preference shares of Reliance Infocomm of R 1 (US$ 0.022) each15. In spite of the massive infusion of capital into Infocomm, the related party note lists it as an associate, implying that the ownership of RIL is less than 50%. In FY05, RIL discloses that it owns 7.57% of Infocomm Ltd. Based on common share ownership of 315 million shares, which implies total Infocomm shares outstanding at the end of F05 of 4.16B shares. We know from the information memorandum/early presentations of RCom that the Family owned 8.95% in Infocomm, with 45.71% owned by RCIL. However, the 8.95% ownership of the Family is after RIL converted its 10% cumulative convertible preferred shares into Infocomm common shares, diluting existing shareholders, at a price of R 32 (US$ 0.7) each in FY0616. At that price, RIL’s ownership increased to 45.34% from 7.57% in FY05, with the issuance of 2.877B shares, resulting in total RIL ownership of 3.192B, shares in Infocomm. To close the loop, on June 28, 2005, RIL, RCIL and the Family had respective stakes of 45.34% (3.19B shares), 45.71% (3.21B shares) and 8.95% (630 million shares) in Infocomm, but at very different buy in prices. {Appendix 3(a), 3(b) and 4(a), 4(b), pages 27-30} THE DILUTION GAME GAIN Since RIL converted its equity in Infocomm at a premium, the Family and RCIL, which bought their stakes at par value in the previous FY had a windfall. We estimate that the total cost to the Family of acquiring its stake in Infocom is R 63C (U.S. $14M), which based on RIL’s conversion price of R 32 (US$ 0.7)/share, implies another stupendous gain of R 2,016C (US$ 443.5M) within a year. (Detailed timeline in Appendix 3, Pages 27-28) 14 Source: Annual Report FY03, Schedule ‘F’

15 Source: Annual Report FY04, Schedule ‘F’

16 “The Board of Directors at its meeting held on June 28, 2005, decided to exercise the option to convert, 162 Crore 10% Cumulative Convertible / Redeemable Preference Shares of Reliance Infocomm Limited, subscribed at an aggregate value of Rs.8,100 Crore (US$ 1,782M) along with the accrued premium of Rs. 1,108.27 C,(US$ 243.8M) into fully paid up equity shares of the face value of Re.1 each of Reliance Infocomm Limited at a price of Rs.32 (US$ 0.7) per equity share”.

… wow again!


July 18, 2011 v

SUMMING IT ALL UP

Figure 1 illustrates that RIL shareholders funded RCom to the tune of R 13,675C (US$ 3,008.5M) from FY01-to FY05, excluding any financial guarantees that might have been required from RIL to backstop debt facilities at the fledgling business, compared to an equity infusion of R 186C (US$ 40.9M) by the Family. Figure 1 Cumulative Investments – Family and RIL, FY01 to FY05 (In crores of Rupees, bracketed amounts in millions of U.S. $)

Reliance Infocomm (RIC)

Reliance Telecom (RTL)

Reliance Communication

Infrastructure Limited (RCIL, formerly

Infocom)

Total in Reliance Communications Ventures

Limited Subsequently Renamed Reliance Communications

Limited

RIL’s Investment (Including Debt and Preferred Equity)

9,239 (2,032.6) 503 (110.7) 3,931 (864.8) 13,675 (3,008.5)

Family’s Investment 63 (13.9) 13 (2.9) 110 (24.2) 186 (40.9)

Total 9,302 (2,046.4) 516 (13.5) 4,041(889) 13,861 (3,049.4)

Source: Veritas and RIL Annual Reports. Some numbers may not add up due to rounding.

In total, the Family invested 1.3% of the capital required to get the telecommunication business up and running, and ended up gaining a 63% stake when the de-merged entity was listed. Therefore, we firmly believe that the 821,484,568 shares issued to management, as per the Scheme of group telecom business, as approved by the High court of Bombay and Gujarat vide orders dated July 21st, 2006 and 18th July 2006, should be nullified17. We believe that the shareholders of RIL are the true owners of these shares and that the risks and rewards of funding and creating the businesses have been disproportionally allocated to the Family. (Appendix 5.a and 5.b, Pages 31&32)

THE SEE THROUGH TEST OF OWNERSHIP

As outlined in Figure 2, the telecommunication operations of RIL were demerged in FY06, the first year of free cash flow at the consolidated level for RCom. On a cumulative basis, the operations were free cash flow negative by R 9,881C (US$ 2,174M) from FY04-FY06. Figure 2 Consolidated Free Cash Flow of RCom (In crores of Rupees, bracketed amounts in millions of U.S. $)

Consolidated Cash Flow 2003-04 2004-05 2005-06

CFO 1,364 (US$ 300M) 3,954 (US$ 870.0M) 3,124(US$ 687.3M)

Purchase of Fixed Assets 9,983 (US$ 2,196.3M) 6,049 (US$ 1,330.7M) 2,291 (US$ 504M)

Free Cash Flow (8,619) (-US$ 1,896.2M) (2,094) (-US$ 460.8M) 832 (US$ 183.3M)

Source: Veritas and the GDR Prospectus dated August 02, 2006

17 Source: Annual Report FY07,

Need we say more?

Reliance Communications Limited – Betraying Shareholder Trust

In FY 2001, RIL promoted Reliance Infocom buying 6,40,140 deep discount bonds of Reliance Infocom for R 1,600.02C (US$ 352M)

Reliance Communications Pvt. Ltd. was formed

RIL bought 2,50,00,000 unquoted, fully paid up shares of Reliance Communications Private Ltd. of Rs.10 (US$ 0.22) each for R 25C (US$ 5.5M)

2001-02

Reliance Infoco(m) changed to Reliance Communications Infrastructure Ltd. (RCIL)

RIL held 81,00,00,000 shares of RCIL @ R1 each for R 81C (US$ 17.8M)

Reliance Communications Ltd. changed to Reliance Infoco(mm) (RIC) in 2001-02

2003-04

RIL increased its shares of RIC to 31,50,00,000 @ R1 (US$ 0.022) each for R 31.5C (US$ 6.9M)

RIL also held 162,00,00,000 preference shares (10% cumulative redeemable @ R1 each for R 8,100C (US$ 1,782M)

RIL held 90,00,00,000 shares of RCIL @ R1 (US$ 0.022) each for R 2,331C (US$ 513M)

RIL also held 6,40,140 deep discount bonds of RCIL (formerly Reliance Infocom) for R 1,600.02C (US$ 352M)

Total RIL Investment = R 3,931C (US$ 864.8M)

RIL held 31,50,00,000 shares of RIC @ R1 (US$ 0.022) each

RIL also held 162,00,00,000 preference shares (10% cumulative redeemable @ R1 each for R 8,100C (US$ 1,782M)

Total RIL Investment = R 9,239.5 C (US$ 2,032.6M)

Aug 05Jun 05

162,00,00,000 preference shares {subscribed at an aggregate value of R 8,100C (US$ 1,782M), along with the accrued premium of R 1,108.27 (US$ 243.8M)} were converted to fully paid up equity shares of face value R 1 (US$ 0.022) of RIC at a price of R 32/share (US$ 0.7) on June 28, 2005

De-merged RTL, RCIL and RIC under the aegis of RCVL based on the asset value of the company as of August 31, 2005

Feb 06

On February 7, 2006, Reliance ADAG gained control of RCVL

Jan 06

On January 23, 2006, RCVL ‘s annual report for 9 months ended December 2005 was released

Company under RIL control

Mar 06

RCVL listed on BSE and the NSE on March 06, 2006

On March 12, 2006, the board of RCVL approved the merger of RIC, RTL and RCIL

On February 28, 2006, information memorandum for RCVL was filed with the regulator for listing on BSE/NSE

Apr 06

On April 28, 2006, court ordered meeting of shareholders

May 06

On May 02, 2006, RCVL filed pro-forma financial statements for the quarter ended March 31, 2006

Jun 06

On June 03, 2006, court convened meeting of shareholders for merging RIC, RTL and RCIL, and EGM of shareholders

On June 07, 2006, RCVL was renamed to RCOM

Aug 06

On August 02, 2006, RCOM released the listing particulars of GDRs

2007

RCOM issued its annual report for the 15 months ended 31st March 07

2004-05 2000-01

Total Investment by RIL = R 13,675C (USD 3,008.5M) Public/RIL Shareholding = 61.73%

Public/RIL Shareholding = 37%

Total Investment by Reliance ADAG/Family= R 185.8C (USD 40.8M) ADAG/Family Shareholding = 38.27%

ADAG/Family Shareholding = 63%

26%

Belongs to minority RIL Shareholders


v July 18, 2011

A total equity injection of R 173C (US$ 38.1M) from the Family (excluding RTL) would have barley sufficed for a week in FY04, when the operation was burning cash at the rate of approximately R 24C (US$ 5.3M)/day. Therefore, we believe that RIL shareholders would be within their rights to seek compensation from RIL for the opportunity loss, as well as the ownership loss, suffered in the Scheme of de-merger.

UNDERSTANDING INDIAN ACCOUNTING New management wasn’t satisfied with an increased equity stake in the Company, and set about managing the newly demerged operations in a typically imperial fashion, without regard to propriety and generally in contempt of the investment community and disclosure standards.

“In India, the reporting entity generally follows legal form, and under the Companies Act it is considered to be the legal entity rather than the group {i.e. 100% subsidiaries of the parent are considered apart for legal and accounting purposes}. Accordingly, there is no legal requirement to prepare consolidated financial statements. On the other hand, under U.S. GAAP, {Canadian GAAP and IFRS} there is a presumption that consolidated financial statements present more meaningful financial information for a parent and its subsidiaries than separate financial statements of the parent”18. Thus, there is the Institute of Chartered Accounts of India (“ICAI”), which trains the accountants to audit statements, and there is the Companies Act, which ultimately determines how organizations choose to report results. The abuse of this framework has been mastered by the Company by indulging in intra-group asset sales through various subsidiaries, in the process assigning a higher fair value to its assets after every transaction and booking revaluation gains. Some of these revaluation gains are subsequently allotted to general/specific reserves – used as cookie jars to offset current or future period expenses – as well as inflating the value of its assets, thereby boosting book equity (“BE”). All of this is allowed under Indian Accounting Standards. Figure 3 outlines some of the transactions undertaken by the Company to boost its BE via self-dealing and/or revaluing assets on its own.

18 Source: Reliance Communications Limited, GDR Prospectus dated August 02, 2006

That’s very interesting

Shareholders should claw back


July 18, 2011 v

Figure 3 Some of the Mergers/De-mergers/Amalgamations (For more details, refer to Appendix 9) (In Crores of Rupees, bracketed amounts in millions of US$)

FY Amounts booked

to Reserves & Surplus

Transaction

9,030 (1,986.6)

The company fair valued its subsidiaries on the account of amalgamation and arrangement in 2006, when it got demerged from RIL. The Excess of Fair value of

Assets of R 23,207C (US$ 5,105.5M) over the loan liabilities of R 7,953C (US$ 1,749.7M) and consideration paid in the form of allotment of Equity shares of value Rs.410C (US$ 90.2M) was R 14,843C (US$ 3,265.5M) out of which 9,030C (US$

1,986.6M) was transferred to the Securities Account Premium account. 2006-07

2,625 (577.5) Also, a part of the above gain of R 14,843C (US$ 3,265.5M), R 2,625C (US$ 577.5M) was transferred to the general reserve account

2007-08 1,287 (283.1)

When the company transferred passive infrastructure from RCOM and RTL to RITL, the company revalued its Investment in RCIL, the Holding Company of RITL, at its fair value

by R 4,487C (US$ 987.1M) and transferred a sum of R 1,287C (US$ 283.1M) after adjusting the write-off of passive infrastructure assets, transferred to RITL, having book

value of R 3,200C (US$ 704M).

2008-09 12,344 (2,715.6) The company amalgamated its subsidiary, Reliance Gateway Net Limited (“RGNL”), into

itself. In accordance with this amalgamation, the company fair valued its assets and R 12,344C (US$ 2,715.6M) was transferred to General Reserve in Consolidated Accounts

Source: RCom Annual Reports and Veritas

RIL de-merged the assets of Reliance Communications Ventures Limited – the predecessor company subsequently renamed Reliance Communications Limited – on August 31st, 2005 at an asset value of R 15,389C19 (US$ 3,385.6M). The Company’s pro-forma consolidated financial statements for March 31, 2006 list BE of R 11,751C20 (US$ 2,585.2M). Subsequently audited financial statements for the 15-month period ended March 31, 2007 or FY07, exhibit BE of R 22,930C (US$ 5,045M), implying an increase of R 11,179C (US$ 2,459M). In FY07, the Company reported an after-tax profit of R 2,408C (US$ 529.8M) and paid a dividend of R 102C (US$ 22.4M) and a tax on dividend of R 17C (US$ 3.7M). On that basis, BE should have increased by approximately R 2,289C (US$ 503.6M). The difference of R 8,890C (US$ 1,956M) is attributable to management merging RIC, RTL, and RCIL and fair-valuing the assets of the resultant Reliance Communications Limited. As investors are aware, in the normal course of business, BE should grow on an after-tax, after-dividend basis from retained profits or via the issuance of securities at a premium. RCom’s BE is growing by leaps and bounds at the mere stroke of a pen. In FY08 and in FY09 the Company once again undertook various reorganizations of its subsidiaries and related parties, and fair-valued its subsidiaries, booking enormous gains thereby boosting reported BE in every instance. Therefore, we do not find the reported BE of the Company credible. Unless RCom makes each and every one of its fair-valuation reports public, investors should be wary of the Company’s claimed BE. We are.

19 Source: Page 95, RIL Annual Report FY06

20 Source: Proforma report of Reliance Communications Ventures Limited, May 02, 2006

Be wary of the Company’s book

equity


v July 18, 2011

Not only is the BE getting a boost from revaluation gains that lack credibility, the Company is also booking some investment gains twice on its income statement: PBT in one year, and net income in another.

CONVOLUTED ASSET SALE There are various kinds of accounting practices that Veritas has witnessed over the years: conservative, creative and aggressive. To that category we now add clandestine. That the financial statements of RCom are full of potholes is simply established by the fact that to avoid paying capital gains taxes in India, the Company booked income on the sale of shares in a subsidiary, through an offshore trust. How’s that possible you ask? Pursuant to the share sale agreement dated July 30, 200721, Reliance Telecom Infrastructure Holdings Limited (“RTIHL”), a subsidiary of Reliance Infocom BV22 - owned 100% by RCom - sold a 5% equity ownership to certain foreign institutional investors and booked a gain of R 1,283 C (US$ 282.3M) 23. Not only is the Company’s explanation convoluted, it does not pass the smell test either24. As per the Annual Report;

“…..Reliance Telecom Infrastructure (Cyprus) Holdings Limited (RTIHL), which is a subsidiary of Reliance Infocom BV (RIBV) by virtue of control of the Board of Directors and which is owned by a Trust for benefit of the Company and / or its shareholders subscribed balance 78,960,267 Equity Shares, out of which RTIHL subsequently, sold Equity Shares equivalent to 5% RITL’s shares, as stated in Note 1625”. Subsequently, in its FY08 filings, the Company booked the entire amount as an exceptional item below the EBITDA line, boosting its Profit before tax (PBT) to R 7,076C26 (US$ 1,556.7M). So far, so good! In FY09, RCom repatriated the amount to the India and booked it as distribution of income by Reliance Communications Shareholders Trust in the amount of R 1,338C (US$ 294.4M) after some adjustments. That amount made its way to the financial income line of the consolidated P&L statement of FY09, thereby lowering the net interest expense for the year27. The explanation:

“Income by way of distribution received from Reliance Communications Shareholders Trust (the Trust) consists of distribution by the Trust to a Subsidiary of the Company of amounts received by the Trust by way of dividends from Reliance Telecom Infrastructure (Cyprus) Holdings Limited (RTIHL), a Board Controlled Subsidiary of the Company. RTIHL had declared

21 Source: Page 23, Reliance Infratel Draft Red Herring Prospectus

22 Source: Page 100, Annual Report FY-08

23 Source: Galleon Technology Partners II, L.P, Galleon Technology Offshore, Limited, Galleon International Master Fund, SPC Limited and Galleon Special Opportunities Fund, SPC Limited, NSR-PE Mauritius LLC, HSBC Principal Investments, which entity subsequently assigned its rights to HSBC Iris Investments (Mauritius) Limited, IIC Limited, GLG Emerging Markets Special Situations Fund, Drawbridge Towers Limited and Quantum (M) Limited as per the Infratel Red Herring Prospectus.

24 This appears to be a Rajat Gupta and Raj Rajaratnam link. Bloomberg Markets, July 2011, Page 34.Birds of a feather flocking together?




Circumventing taxes…


July 18, 2011 v

the dividend in the year ended on 31st March, 2008 out of gains realized from sale of shares of Reliance Infratel Limited (RITL), a Subsidiary of the Company, held by it. As the Trust is the sole shareholder of RTIHL, the profits of RTIHL consisting primarily of gains from the sale of the said shares of RITL were in that year excluded from the profits of the Company as representing profits attributable to the Trust28”. Copies of the P&L statement for respective years are attached to the Appendices 6.1 (Page 33) and 6.2 (Page 34).

THE TAX ANGLE While the accounting treatment is egregious in itself, investors should be cognizant of the ongoing tax dispute between the Indian Revenue Service and Vodafone India. Vodafone acquired its Indian wireless unit from Hutchinson Telecommunication International Ltd. for US$10.83B. Hutchinson did not pay capital gains on disposition of its properties in India. However, the Indian authorities want Vodafone to make up for it. The contention of the Indian Revenue Service is that Vodafone should have deducted the capital gains tax at source and repatriated the amount to Indian treasury. We suspect that the US$300M price reduction that Hutchison later agreed to was on account of tax demands faced by Vodafone. Whatever be the merits of the Vodafone case, we suspect that the Company’s position is equally tenuous, since it booked a capital gain on share sale and has circumvented Indian taxes. Investors should be aware that a tax liability not recognized on the books of the Company could exist, and that the Indian authorities could scrutinize this transaction at any time and slap a back tax with punitive damages on the Company.

28 Source: Page 116, Note 20, Annual Report FY-09

… is never a good thing


v July 18, 2011

RECOGNIZING A CAPITAL GRANT AS OTHER OPERATING INCOME Governments and regulators all over the world, provide various incentives to ensure universal service obligations are met by telecommunication operators. In Canada, the Canadian Radio and Telecommunication Commission (“CRTC”) has allowed funds accumulated in the deferral accounts of the ILECs to be used towards deployment of rural broadband and other high priority initiatives. The Universal Services Obligations Fund (“USOF”) of India is another instance where the regulatory authorities collect a levy from telecommunication service providers, and then allocate the corpus of USOF in the form of capital grants for rolling out services to under-served areas of the country. The Company has proudly participated in rural roll-out obligations touting good citizenship, and proclaimed success with much fanfare in FY07 and in subsequent years and we quote;

“The Company won 5,118 towers out of 7,871 towers in the bidding process for active infrastructure, i.e. BTS, backhaul, battery and power plant. This is the highest number of towers won by any operator relating to active infrastructure. Reliance Telecom Limited (RTL), a wholly owned subsidiary of the Company, also won 3,844 towers for subsidy related to active infrastructure. RTL won all the towers where it was present. In addition, Reliance Communications Infrastructure Limited, another wholly owned subsidiary of the Company, won 482 towers for subsidy related to passive infrastructure29”. Clearly there is no ambiguity in either the Company’s understanding or the regulators’ proposition. Therefore, with respect to accounting for the infrastructure subsidy/capital grant, Indian Accounting Standard (AS) 12, Accounting for Government Grants (para 8) says that:

8.3 Under one method the grant is shown as a deduction from the gross value of the asset concerned in arriving at its book value. The grant is thus recognized in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation charge.

8.4 Under the other method, grants related to depreciable assets are treated as deferred income which is recognized over the useful life of the asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged. Accounting standards for capital grants under Canadian GAAP and IFRS (IAS 20) are similar to AS (12). Both 8.3 and 8.4 of AS (12) seem reasonable to us, though we are partial to 8.3, given the intuitive ease of understanding and implementing the standard. However, management and/or auditors of the Company could be recognizing the entire subsidy from the USOF as other operating income. There are some subsidies available from USOF for operations and maintenance 29 Source: Page 15, Annual Report FY07. From Page 105 of the Reliance Infratel draft red

herring prospectus; “A scheme has already been launched by the USO Fund (Phase 1) to provide subsidy support for setting up and managing 7,871 infrastructure sites (i.e., towers) in 500 districts spread over 27 states for the provision of mobile services in the specified rural and remote areas, where there was no existing fixed wireless or mobile coverage”.

We need clarity


July 18, 2011 v

related activities30, - which can be recognized as ‘other income’ or as a reduction to operating expense under Indian Accounting Standards - however, there is no disclosure from RCom regarding the break-up of the subsidies. Giving the Company the benefit of the doubt, we do not adjust reported EBITDA lower for subsidies recognized as other income in its financials, although we outline the amounts in Figure 4 for the benefit of investors.

FUEL AND BAD DEBTS BYPASS EBITDA

The Company is also in the habit of conveniently reporting fuel charges (fuel required to run the telecom infrastructure on captive diesel power generating sets etc.) below the EBITDA line. More importantly, the negative impact of fuel expenditures escapes the net income line via non-cash general reserve account balances established through questionable schemes of de-mergers/amalgamations of subsidiaries as discussed earlier. In other words, “cookie jar accounting” at its best and in plain sight. For instance, the Company established a non-cash account entitled “provision for business restructuring” for a princely sum of R 3,000C (US$ 660M) right at inception in FY07 to “meet the increased depreciation cost, expenses and losses including on account of impairment or write-down of assets which may be suffered by the Company, pursuant to the Scheme or otherwise in course of its business31 ….” And so in FY09, FY10 and most recently, in FY11, Reliance has written off a cumulative R 355C (US$ 78.1M) of cash fuel expenses through fictitious non-cash reserves created via transfer of assets to Reliance Infratel, a subsidiary of RCom32. Since one cannot have too much of a good thing, the Company took the opportunity to write-off R 159C (US$ 35M) of bad debt expense through the same general reserve, thereby ensuring that both reported EBITDA and the reported P&L statement remain untainted by the realities of business, and unworthy of investors’ trust.

HOW TO BOOST EBITDA BY 40% IN ONE QUARTER? Moreover, in the absence of another significant accounting maneuver, for FY11, Reliance would have reported an EBITDA decline of at least 18.3% YoY to R 6,316C (US$ 1,389.5M) from our adjusted R 7,733C (US$ 1,701M) for FY10. Indefeasible rights to use (“IRU”) are a common occurrence in the telecommunication sector, whereby cash is received upfront and capacity is sold on a contracted basis by network providers, with the corresponding revenue being recognized over the term of the contract. Up until FY10, the

30 We called up Mrs. Archana G. Gulati, Joint Administrator (Finance) USOF, Department of

Telecommunications, India on 14 June 2011 to clarify.

31 Source: Page 58, FY07 Annual Report

32 Source: Pursuant to the Scheme for the transfer of passive infrastructure (“the Scheme”) by the Company to Reliance Infratel Limited (RITL), a subsidiary of the Company, RITL, based on a legal opinion, considers the General Reserve created pursuant to the Scheme to be a free reserve and available for any purpose and consequently, has been withdrawn and credited to the Profit and Loss Account, an amount of R 159 C (US$ 35M) in respect of bad debts and R 77 C (US$ 16.9M) in respect of fuel costs, incurred during the year in preference to Indian Generally Accepted Accounting Principles. Had the Company not made such a withdrawal as per the Scheme, the profit before taxes for the year would have been lower by R. 236C (US$ 51.9M)

Why?

Accelerating revenue

recognition…


v July 18, 2011

Company’s policy was to recognize such income over contractual terms, as disclosed in its FY10 annual report.

“Capacity contracts for Indefeasible Right of Use (IRU) relate to specific assets and are accounted for as unearned revenue as legal title does not pass to the customer. Revenue (exclusive of value added taxes) is recognised over the terms of the contract. Billing to customers is based on satisfaction of the relevant criteria for revenue recognition and are included in unearned revenue. Certain customers have committed to purchase capacity from the Company at a future date under signed capacity credit agreements. Amounts received under these agreements and the capacity credits granted to suppliers are recorded at fair value as unearned revenue until the date the credits are utilised, at which time the unearned revenue is recognised as earned. Amounts receivable under these capacity agreements are reflected within sundry debtors in the accompanying Balance Sheets”.

However, for FY11, clearly given declining income, the Company boosted its EBITDA by R 2,530C (US$ 556.6M), “based on a legal opinion”, and changed its policy of revenue recognition from a deferral basis over the term of the contract, to “license income” based on “activation of circuits”33. Shaw Communications Inc. in Canada has also entered into similar IRU agreements and as per Shaw’s disclosure, “Prepayments received under indefeasible right to use (“IRU”) agreements are amortized on a straight-line basis into income over the term of the agreement and are recognized in the Consolidated Statements of Income and Retained Earnings (Deficit) as deferred IRU revenue amortization34”. Thus investors placing relative value bets on international telecommunications should be cognizant of the accounting differences that make EBITDA- based comparisons irrelevant. Figure 4 presents the adjusted numbers.

Figure 4 The Art of Inflating EBITDA (Core Telecommunications Business) (In Crores of Rupees, bracketed amounts in millions of US$)

2006-07 2007-08 2008-09 2009-10 2010-11

EBITDA (Reported) 6,693 (1,472.5) 8,199 (1,803.8) 9,305 (2,047.1) 7,820 (1,720.4) 9,082 (1,998)

Reported Subsidy 271 (59.6) 158 (34.8) 211 (46.4) 158 (34.8) N.A.

Deduct Fuel Expenses - - 191 (42) 87 (19.1) 77 (16.9)

Deduct Bad Debt Expense - - - - 159 (35)

IRU Accounting policy change - - - - 2,530 (556.6)

EBITDA (Adjusted) 6,693 (1,472.5) 8,199 (1,803.8) 9,114 (2,005.2) 7,733 (1,701.4) 6,316 (1,389.5)

Adjusted EBITDA lower by - - -2.1% -1.1% -30.5%

Source: Annual Reports. FY-11 Annual Report unavailable. Subsidy not deducted from adjusted numbers.

33 Source: Q4- FY11 release

34 Source: Shaw Communications Inc., Annual Report FY 2010, Significant Accounting Policy Note

… boosts EBITDA


July 18, 2011 v

HEADS I WIN, TAILS YOU LOSE Boosting consolidated EBITDA using accounting is not the only game played by the Company. In order to make sense of the earnings power of RCom’s consolidated business, reported financial expenses need to be scrubbed clean of unassociated non-cash foreign exchange gains/losses, as well as financial income reported by the Company from its various investments as illustrated in Figure 5. Figure 5 Interest Expense – Muddied Presentation, FY07-FY10

FY 07 FY 08 FY 09 FY 10

Schedule for Financial Charges (net)

In Cr. Rupees

In USD M

In Cr. Rupees

In USD M

In Cr. Rupees

In USD M

In Cr. Rupees

In USD M

Interest and Other Charges on Term Loans 548 120.6 554 121.9 564 124.1 975 214.5

Interest on Other Loans 239 52.6 479 105.4 648 142.6 368 81

Other Financial Cost 78 17.2 35 7.7 47 10.3 210 46.2

Foreign Currency Exchange Fluctuation (Gain)/ Loss (net) (84) (18.5) (422) (92.8) (187) (41.1) (2,645) (581.9)

Income from Investments and Interest Income (716) (157.5) (1,046) (230.1) (1,578*) (347.2) - -

Financial Charges (Gains) reported in the P&L 65 14.3 (400) (88) (507) (111.3) (1,093) (240.24)

Source: Veritas and Annual Reports. *Includes 5% equity sale proceeds from repatriation of overseas funds related to 5% equity sale in RTIHL.

The foreign exchange saga is especially interesting. In each of its fiscal periods, the Company has booked a translation gain on loans and liabilities related to its fixed assets, and correspondingly lowered its interest expense on the income statement. We quote from its FY10 Annual Report;

“In accordance with an amendment to Schedule VI of the Companies Act, 1956 (“the Act”) and in line with the Accounting Standard (“AS”) 11, “The Effect of Changes in Foreign Exchange Rates”, the Company continues the policy of accounting for the changes in the amounts of loans/ liabilities relating to Fixed Assets, consequent to changes in foreign exchange rates, as profit or loss of the Company for the year in which the changes take place without adjusting the amount of the change in the cost of fixed assets35”. (Refer to Appendix 7, Page 35) Clearly, the distinction between monetary and non-monetary assets/liabilities is lost in translation, making the financial statements a playground of the creative accountant. Accordingly, while on a cash basis – as per the cash flow statement for FY10 – the Company incurred R 1,441C (US$ 317M) in interest expenses associated with its debt, on the P&L it magically turned into income of R 1,093C (US$ 240.5M) for FY1036.

35 The accounting pronouncement was issued on the last day of FY09.

36 Page 91 and 123, FY10 Annual Report

Understating interest expense


v July 18, 2011

Consistency and comparability are required for financial statements to be meaningful and hence our emphasis on “continues” in the quote above. Therefore, one would presume that in FY09, the auditors/management would follow a similar process. But, in FY09, the Company suffered a loss related to FX translation of R 5,771C (US$ 1,269.6M)37. Since losses would inflate financial expenses under a presentation similar to that adopted for FY10, management decided to use the cookie jar of General Reserve, and offset the loss against the said account below the financial expense line. Voila, in one year the favourable effect goes towards improving net income, and in another year, the unfavourable impact bypasses the P&L under the guise of “withdrawal from General reserve38”. WHY DWELL ON NON-CASH ITEMS? Some readers might be wondering that if all of this is foreign exchange translation effect is non-cash, and although it is introducing unnecessary volatility into the income statement, why worry about it? A fair retort, however the convoluted presentation for FY09 was not limited to book entries. Hidden in the R 5,771C (US$ 1,269.6M) translation loss for FY09 was a cash loss of R 1,708C (US$ 375.8M), which bypassed the P&L for the year. The cash flow statement for FY09, in a very nonchalant fashion, outlines a “Realized Forex Loss Transferred to General Reserve” of R 1,708C (US$ 375.8M) for the year39. It is an opportune time to remind investors that the General Reserve is a book entry created via fair-valuing assets of subsidiary companies through self-dealing, while the foreign exchange loss was an actual cash outflow for FY09.

WHAT ABOUT INCOME FROM INVESTMENTS? We estimate, that on a cumulative basis, the Company has realized negative free cash flow of R 20,130C (US$ 4,429M) - from its telecom operations - from FY07-FY10 (including dividends paid to shareholders), and in that intervening period, the Company’s net debt has increased by R 23,033C (US$ 5,067M). As of Q4-F11, the Company’s net debt stood at R 32,048C (US$ 7,050.6M), an increase of R 7,191C (US$ 1,582M) during FY11. Under those circumstances, it is indeed baffling that RCom has booked cumulative investment income of approximately R 2,000C (US$ 440M) {excluding 5% equity sale proceeds of R 1,338C (US$ 294.4M) from repatriation of overseas funds related to 5% equity sale in RTIHL} from FY07-FY10. We surmise that the Company raised approximately US$1.5B via zero coupon convertible bond issues, in FY06 and FY07, and deployed the proceeds in the Indian fixed income market until the funds were utilized for its capital expenditure requirements. Therefore, the Company earned arbitrage profits on account of its ability to capture international funds at a lower cost compared to domestic interest rates in India. Over time, the Company ran out of surplus funds, and with it, the arbitrage opportunity to book financial income, and by FY10, very little investment income was reported.

37 That’s where the lifeline from Ministry of Corporate Affairs vide its Notification dated March

31, 2009 F. No. 17/33/2008/CL-V came in handy, (Appendix 7).

38 Page 91, Annual Report FY 10.

39 Page 123, Annual Report FY 10.

We pick and choose based on net benefits

Better ignored


July 18, 2011 v

More importantly, in FY09, the Company booked a net financial gain of R 506C (US$ 111.3M), on account of repatriation of the proceeds associated with the sale of 5% equity in RTIHL discussed earlier. So, in FY08 the Company boosted its PBT by including the gain in its P&L, and in FY09 RCom boosted its EPS by lowering its reported financial expense40.

RESTATING CONSOLIDATED P&L

Given that we have outlined a series of accounting misdemeanors conducted by the Company, we attempt in Figure 6 to uncover the core earnings power of RCom’s consolidated telecommunication business. As illustrated in Figure 6, accounting choices enabled the Company to report a higher PBT from its core telecommunications operations in every year since FY07. While we have discussed issues related to financial charges and foreign exchange losses at depth, the depreciation expense for FY10 requires explanation. One of the best known tricks involved in boosting EPS is to change the depreciation schedule of fixed assets. In FY10, RCom changed its accounting policy associated with depreciating its electronic equipment {of all things a category that is prone to obsolescence every six months, just ask Nokia and RIMM} to 18 years, from 10 years earlier, ceteris paribus, boosting its consolidated after-tax profits by R 953C (US$ 210M) for the year. We have restated the depreciation for FY10 upwards from the reported R 3,746C (US$ 824M) to R 4,804C (US$ 1,057M), based on a FY 10 effective tax rate of 9.9% reported by Reliance to ensure comparability to prior year results. The annual report for FY11 is unavailable as of the publication of our report. Figure 6 Veritas – Restated Profit before Tax, Consolidated-Normalized to Exclude Accounting Changes, FY07-FY10 (Core telecommunication operations excluding financial income)

FY 07 FY 08 FY 09 FY 10 FY 11

In Cr. INR

In USD M

In Cr. INR

In USD M

In Cr. INR

In USD M

In Cr. INR

In USD M

In Cr. INR

In USD M

Consolidated EBITDA (Adjusted as per Figure 4) 6,693 1,472 8,199 1,804 9,114 2,005 7,733 1,701 6,316 1,389

Consolidated Financial Charges (Adjusted) (864) (190.1) (1,068) (235) (1,259) (277) (1,552) (341) N.A N.A

Exceptional Cash Loss on Foreign Exchange - - - - (1,708) (375.8) - - N.A. N.A.

Consolidated Depreciation and Amortization - Adjusted (2,919) (642.2) (2,805) (617) (3,608) (794) (4,804) (1,057) N.A. N.A.

Veritas PBT 2,910 640 4,326 952 2,539 558 1,377 303 N.A. N.A.

Reliance Communications Limited Reported PBT 3,600 792 7,076 1,557 6,197 1,363 5,223 1,149 N.A. N.A.

YoY Change in Veritas PBT - 49% -41% -46% N.A. N.A.

Veritas Adjusted PBT Lower By -19% -39% -59% -74% N.A N.A

Source: Veritas. FY11Annual Report unavailable as of our report. D&A as per the Companies Act.

40 PAT was not boosted by allocating the gain to minority interest.


v July 18, 2011

The net result of our adjustments is that, cumulatively from FY07-FY10, the Company’s consolidated PBT from its core telecommunications assets, normalized for accounting shenanigans is overstated by R 10,944C (US 2,408M) Therefore, buy our calculations, RCom would have reported an EPS from its core telecommunications operations of R 6 (US$ 0.13) for FY10, compared to the reported R 22.73 (US$ 0.5); or 73.6% lower.

IS THE COMPANY TRADING IN ITS OWN SHARES UNDER THE GUISE OF AN EMPLOYEE STOCK OPTION SCHEME?

“The Company operates two Employee Stock Option Plans; ESOS Plan 2008 and ESOS Plan 2009, which cover eligible employees of the Company, the Holding Company and its Subsidiaries. ESOS Plans are administered through an ESOS Trust. The Vesting of the options is on the expiry of one year from the date of Grant as per Plan under the respective ESOS(s). In respect of Options granted, the accounting value of Options (based on market price of the share on the date of the grant of the option) is accounted as deferred employee compensation, which is amortised on a straight line basis over the Vesting Period. Each Option entitles the holder thereof to apply for and be allotted/ transferred one Equity Share of the Company of Rs. 5 (US$ 0.11) each upon payment of the Exercise Price during the Exercise Period. The maximum Exercise Period is 10 years from the date of Grant of Options”.

“The Company has established a Trust for the implementation and management of ESOS for the benefit of its present and future employees. Advance of R 331C (US$ 73M) (Previous year R 159C (US$35M)) has been granted to the Trust. R 331C (Previous year R 154C (US$ 34M)) has been utilised by the Trust for purchasing 1.67C (16.7M) (Previous year 0.92C (9.2M)) Equity Shares during up to 31st March, 2010”41.

OUR INTERPRETATION Either the nomenclature used by the Company should be different, or the Company needs to explain its intent better. An option is a right to participate in capital appreciation, and not an obligation. Therefore, the holder of the option can decide to exercise that right if the market price at the time of the vesting of the option is higher than the strike price of the option, thereby capturing capital gains. However, if the market price is lower than the exercise price at the time of vesting, the holder can either let the option expire worthless, or if the ability to exercise the option extends far beyond the vesting period, the holder can wait for the option to come in the money, and then exercise it. In the interim, neither the option holder nor the Company need do anything. The Company can choose to prevent dilution by buying stock at the time of vesting from the open market, and for that it does not need to establish an arms length trust that buys the shares at the time of option grant, unless it believes that stock prices only go up. Clearly, something is amiss.

41 Source: Note 20, Page 118, FY10 Annual Report

Stock options or stock grants?


July 18, 2011 v

{Perhaps} it is a restricted stock unit (RSU)/ deferred stock unit (DSU) plan and the Company has established an arms length trust under section 77 of the Companies Act to administer it42. RCom is also allowed to loan funds to the Trust under the Companies Act for the purpose of employee compensation only. Nonetheless, the Trust is buying more shares in the marketplace than available under the ESOS, and on a cumulative basis as of FY10 the Trust owned 25.9 million shares of RCom, compared to 12.8 million available under the two ESOS plans as outlined in Figure 7. Figure 7 Options Outstanding and Shares Held in Trust

ESOS 08 ESOS 09 N.A. Total

Options Outstanding, beginning of Year 1,607,320 11,278,995 N.A. 12,886,315

Shares Bought by the Trust from Advances Given by RCom 9,200,000 (In FY09) 16,700,000 (FY10) 7,389,000 (FY11) 33,289,000

Source: Annual Reports. Options outstanding at respective year ends were lower. FY11 information from Securities and Exchange Board of India disclosure dated February 17, 2011. The accumulation of shares by the Trust continues unabated, and we estimate that as of February 17, 2011, the ESOS Trust has bought 33.29 million shares at an estimated cost of R 613C (US$ 135M), implying an average cost of R184 (US$ 4) per share of the Company, compared to the current market price of R80 (US$ 1.8) and the weighted option exercise price of R225 (US$ 5) for both plans. We are especially intrigued given that the 13.21 million under water options with a weighted exercise price of R369 (US$ 8.1) surrendered as part of the ESOS 08, were immediately allocated to ESOS 09 at a weighted exercise price of R206 (US$ 4.5). Moreover, the re-allocated options were the only options outstanding under ESOS 09, of which, an additional 1.93 million were forfeited during FY09. We also suspect that the 11.27 million options outstanding as of FY10 would expire worthless in FY11 given that all those options are under water as well, and that the Company will roll-over those options into a plan titled ESOS 2010. While we can sympathize with the re-pricing of options under new awards/grants to maintain top management loyalty to/engagement with the Company, we do not understand the Trust’s reasoning behind continued purchases.

WHY THE EXCESS PURCHASES? Unless the Trust has disposed of shares during the prior year, thereby owning fewer shares than the number awarded under grants, there is no reason for the Trust to keep on buying more shares from the market place. Furthermore, there is no reason for the trust to own more shares than granted under the various option plans. Moreover, advances given to the Trust are underwater by approximately R 344C (US$ 76M), given the beating endured by Reliance’s

42 Source: Yellow Media Inc. has a similar mechanism for administering its RSU plan in Canada,

Note 20, AR-10.

Why buy more than allocated

under plans


v July 18, 2011

share price and since the only source of funds for the Trust is through advances from Reliance, the entire scheme appears bogus to us. We suspect that the Company could be in violation of Securities and Exchange Board of India’s (“SEBI”) Prohibition of Insider Trading Regulations, 1992, published in the Official Gazette of India on 19.11.1992, although only an investigation by relevant authorities can prove/disprove our hypothesis.

WHICH RULES TO FOLLOW? - THE SEBI ACT OR ACCOUNTING STANDARDS OF ICAI? The whole ESOS muddle becomes murkier if you consider that under SEBI guidelines, reversal of expense related to the vested options is allowed, whereas under guidelines issued by ICAI, such an expense once accounted for cannot be reversed. So while the financial statements are being prepared under Indian GAAP, the fact that, “amounts earlier charged in respect of surrendered Options under ESOS Plan 2008 amounting to Rs. 6.65 crore (US$ 1.5M)(Previous year charge of Rs. 7.47 crore (US$ 1.6M)) has been reversed during the year and reflected as Exceptional Item in Profit and Loss Account”43, suggests that there are myriad standards, and that a Company can pick and choose the reporting principle44. The “Stock Option Plan” could be a “Stock Ownership Plan”, the expense could be based on one of the option pricing formulas, or it could be a fair value expense based on the date of the stock grant, or it could be something else. Whatever, the case might be, it is not clear.

FY 11 RESULTS FY11 results were released by the Company on May 30, 2011, and it is not a pretty picture. We are unable to comment on any specific accounting issues, other than those already discussed, given that the annual report is not available as of the publication of our report. However, we estimate that the Company’s capital expenditures for the year, including 3G spectrum payment, totaled R 12,885C (US$ 2,835M). We estimate that RCom had a cash deficit of R 8,220C (US$ 1,808M), funded courtesy of the loan extended by China Development Bank for R 8,700C (US$1,914M) on March 09, 2011.

VALUATION We estimate that the normalized capital spending for FY12 should approach R 4,000C (US$ 880M) given the 3G and USOF roll-out obligations45. Normalized

43 AR FY10, Note 20 consolidated financial statements 44 A similar situation could arise on account of a difference in interpretation of rules by FASB and SEC

in the U.S. However, given vigilant shareholders, better disclosures and stronger corporate governance, it is less of a concern.

45 No guidance from the Company.

It’s a circus out there


July 18, 2011 v

EBITDA will at best stagnate at our estimated R 6,316C (US$ 1,390M) for FY12, same as in FY11. With cash interest payments expected at an approximate R 1,997C (US$ 439M) for FY12, we estimate that RCom will have a free cash flow of 319C (US$ 70M) for FY12. Figure 8 Free Cash Flow FY 12 and Prospective Valuation – Optimistic Veritas Estimate

FY12 –Veritas Estimate

In Cr. Of INR

In USD M Notes

Veritas EBITDA FY 12 6,31646 1,390 No growth over FY11. It could decline.

Less Cash Interest – same as FY11 (1,997) (439) FY10 adjusted expense+5% on R8,900C drawn

from CDB Less Estimated Capital Expenditures (4,000) (880) Lower than R 4,500C of FY11, excluding

spectrum. No guidance from the Company.

Estimated Free Cash Flow 319 70

FY12 end Net-Debt (32,048 - 319 =31,729) 6,980 Q4F11 net debt - free cash Flow of FY12

EV/EBITDA x FY 12 6.5 6.5 Benchmarked to Rogers Communications Inc. We believe this multiple is optimistic

Enterprise Value ( 6,316*6.5=41,054) 9,032 N.A.

Less FY12 end Net Debt is Equity Value 9,325 2,052

Excludes any consolidated cash and investments. Given that our starting point is

Q4F11 net debt, it should not matter. Forward Looking Equity Value Per Share R 45/ Share US$

1/Share

PV at 15% R 41/ Share US$ 0.90/Share

Source: Veritas. Management has not provided capital expenditure guidance for FY12.

Given that for FY11, the IRU accounting change and other adjustments boosted EBITDA, we have used our normalized number from Figure 4 as the base to estimate FY12. That the telecommunication market in India is hyper-competitive is not lost on any observer of the global telecommunication landscape. In the Company’s non-consolidated primarily Indian operations, EBITDA declined 23% YoY, to R 2,448C (US$ 539M) in FY11, from R 3,178C (US$ 699M) in FY10. With all players rolling out the 3G platform, and subscriber growth beginning to taper-off, the next down-leg in profitability is around the corner. (Details on competitive activity and operational indicators for India can be found in Appendix 10, Page 40) Excluding the one-time IRU-related accounting change, consolidated EBITDA which includes global operations of the Company, declined 22.4% YoY. This suggests to us that global operations will not be the saviour of this misappropriated fortune.

46 Bloomberg Mean EBITDA Estimate = R 7,419C (US$ 1,632M) Bloomberg Low EBITDA Estimate = R 6,209C (US$ 1,366M)


v June 22, 2011

We believe that our 6.5x FY12 EV/EBITDA multiple is an optimistic valuation, given the issues discussed in our report, and is benchmarked to Rogers Communications Inc. (“Rogers”) in Canada, which is miles ahead of RCom in terms of its governance, disclosure, accounting policies and business practices. In terms of business operations, RCom is aping Rogers by trying to be a distributor of TV programming, a wireless provider, is targeting SMEs in India with its data centers and long distance products, etc. One could argue that given RCom’s complex structure, arcane accounting and poor corporate governance, it deserves to trade at a discount to Rogers.

NEVER TOO LATE TO JUMP SHIP On May 31, 2011, the Company issued a press release (attached to Appendix 8, Page 37) announcing a “Change in Compliance Officer, Company Secretary and the Manager”, with Mr. Hasit Shukla resigning from his position “with effect from 1st June 2011”. Mr. Shukla’s signatures are found on all publicly filed financial documents of the Company since FY07. His departure is an ominous sign. Finally, as per the auditors of the Company:

“We have relied on the unaudited financial statements of the subsidiaries and joint ventures whose financial statements reflect total assets of Rs 2,935.00 crores (US$ 646M) as at 31st March 2010, total revenue of Rs 1,332.55 crores (US$ 293M) and cash outflows amounting to Rs 10.58 crores (US$ 2.3M) for the year ending 31st March 2010. These unaudited financial statements as approved by the respective Board of Directors of these companies have been furnished to us by the management, and our report in so far as it relates to the amounts included in respect of the subsidiaries is based solely on such approved financial statements.” If audited financials (which we have outlined are of questionable authenticity) are a hodgepodge of audited and unaudited results, SEBI guidelines and Indian Accounting Standards, the Companies Act and “legal opinions” based on interpreting the Companies Act, then investors have very little reliable information. Will it change in the future? Only if;

1. Institutional Investors in India and abroad stand up to crooked managements.

2. If the auditors and Company Secretaries stand up to majority owners. 3. Bankers impose stringent governance standards prior to extending

credit. It was announced on Friday, June 17, 2011, that RCom will be ejected from the SENSEX. It is not too late to give it the boot from portfolios either. SELL. EQUITY VALUE is less than R 40/share (US$ 0.90/share) on a going concern basis. A break up may fetch more, but it is unlikely to fetch much more than the current price of R 88 per share (US$ 1.93 per share).

Why are unaudited financials a part of the audited results?

A long journey ahead

Sell

1995-96 2003-04 2004-05

Reliance Telecom (RTL) Formed

Reliance Industries Limited (RIL) entered into a joint venture with NYNEX, USA, to form Reliance Telecom Private Limited

Total Equity Capital = R5.1C

RIL held 51,02,080 unquoted, fully paid up shares of RTL of Rs. 10 eachRIL holding = 25.6% (associate)Outsiders/undisclosed holding = 74.4%Total shares outstanding = 1,99,30,140

RIL held 70,95,130 unquoted, fully paid up shares of RTL of Rs. 10 eachRIL held 450 lakh preferred shares of RTL @ R 10 each for R444.3CRIL holding = 35.6% (associate)Outsiders/undisclosed holding = 64.4%Bought 10% stake from NYNEX, USA for R52.59CTotal shares outstanding = 1,99,30,140Shares held by ADAG = 1,28,35,010Value of ADAG investment = R 12.8C

Total Equity Capital = R59.46CPreference Share Capital = R 444.3C

Timeline of Investment in Reliance Telecom Limited (RTL) in INR

Appendix 1(a)

All numbers as per Indian numeric system

23

1995-96 2003-04 2004-05

Reliance Telecom (RTL) Formed

Reliance Industries Limited (RIL) entered into a joint venture with NYNEX, USA, to form Reliance Telecom Private Limited

Total Equity Capital = USD 1.12M

RIL held 5.1M unquoted, fully paid up shares of RTL of USD 0.22 eachRIL holding = 25.6% (associate)Outsiders/undisclosed holding = 74.4%Total shares outstanding = 19.93M

RIL held 7.1M unquoted, fully paid up shares of RTL of USD 0.22 eachRIL held 450M preferred shares of RTL @ USD 0.22 each for USD 97.8MRIL holding = 35.6% (associate)Outsiders/undisclosed holding = 64.4%Bought 10% stake from NYNEX, USA for USD 11.56MTotal shares outstanding = 19.93MShares held by ADAG = 12.8MValue of ADAG investment = USD 2.8M

Total Equity Capital = USD 13.1MPreference Share Capital = USD 97.8M

Timeline of Investment in Reliance Telecom Limited (RTL) in USD

1 INR = 0.022 USD, Source: Oanda.com as at 10 June, 2011

Appendix 1(b)

24

2000-01 2001-02 2004-05

Reliance Infocom Ltd. FormedDebt Capital = R 1,600.02C

Equity Capital = R 81CDebt Capital = R 1,600.02C

Equity Capital = R 2,331.53CDebt Capital = R 1,600.02C

In fiscal 2001, RIL promoted Reliance Infocom RIL mentioned that it will be a lead investor in Reliance Infocom, with 45% equity stakeRIL bought 6,40,140 deep discount bonds of Reliance Infocom Ltd. for R 1,600.02CReliance Infocom owed R 10C for equity share application money pending allotment

Reliance Infocom changed to Reliance Communications Infrastructure Ltd. (RCIL)RIL held 81,00,00,000 shares of RCIL @ R1 eachRIL holding = 42.4% (associate)Outsiders/undisclosed holding = 57.6%Total shares outstanding = 191CADAG shares = 110CADAG Investment = R110CRCIL owed R 2,213C for equity share application money pending allotment

RIL held 90,00,00,000 shares of RCIL @ R1 eachRIL holding = 45% (associate)Outsiders/undisclosed holding = 55%Total shares outstanding = 200CShares owned by ADAG = 110CValue of ADAG investment = R110CApproximate fair value of additional 9,00,00,000 shares held by RIL = R 250 per share

Timeline of Investment in Reliance Communications Infrastructure Limited (RCIL) in INR

Appendix 2(a)


25

2000-01 2001-02 2004-05

Reliance Infocom Ltd. FormedDebt = USD 352M

Equity Capital = USD 17.82MDebt Capital = USD 352M

Equity = USD 512.8MDebt Capital = USD 352M

In fiscal 2001, RIL promoted Reliance Infocom RIL mentioned that it will be a lead investor in Reliance Infocom, with 45% equity stakeRIL bought 640,140 deep discount bonds of Reliance Infocom Ltd. for USD 352MReliance Infocom owed USD 2.2M for equity share application money pending allotment

Reliance Infocom changed to Reliance Communications Infrastructure Ltd. (RCIL)RIL held 810 million shares of RCIL @ USD 0.022 eachRIL holding = 42.4% (associate)Outsiders/Undisclosed holding = 57.6%Total shares outstanding = 1,910MADAG shares = 1,100MADAG Investment = USD 24.2MRCIL owed USD 486.86M for equity share application money pending allotment

RIL held 900,000,000 shares of RCIL @ USD 0.022 eachRIL holding = 45% (associate)Outsiders/undisclosed holding = 55%Total shares outstanding = 2,000MShares owned by ADAG = 1,100MValue of ADAG investment = USD 24.2Approximate fair value of extra 90,000,000 shares held by RIL = USD 5.5 per share

Timeline of Investment in Reliance Communications Infrastructure Limited (RCIL) in USD


Appendix 2(b)

26

2000-01 2003-04 2004-05

Reliance Communications Pvt Ltd Formed, Equity = R 25C

Equity Capital = R 31.5CPreference Share Capital = R 8,100.0C Equity Capital = R 9,239.5 C

RIL held 2,50,00,000 unquoted, fully paid up shares of Reliance Communications Private Ltd. of Rs. 10 each

Reliance Communications Ltd. changed to Reliance Infocomm (RIC) in 2001-02RIL increased its shares of RIC to 31,50,00,000 @ R1 eachRIL also held 162,00,00,000 preference shares (10% cumulative redeemable @ R1 eachRIL holding = unknown (associate)Outsiders/Undisclosed holding = unknownIt was held as an associate company => RIL shareholding <50%Outsiders/undisclosed shareholding > 50%

RIL held 31,50,00,000 shares of RIC @ R1 each162,00,00,000 preference shares (subscribed at an aggregate value of R 8,100C, along with the accrued premium of R 1,108.27) were converted to fully paid up equity shares of face value R 1 of RIC at a price of R 32/shareRIL holding = 45.34% (associate) as per Investor Presentation, RCOM, March 2006Outsiders/undisclosed holding = 54.66%Total shares outstanding = 704CShares owned by ADAG = 63C (based on the reported ADAG holding of 8.95% in RIC, Investor Presentation, RCom, March 2006)Value of ADAG investment = R 63C at par value of R 1/share

Timeline of Investment in Reliance Infocomm Limited (RIC) in INR

Appendix 3(a)


27

2000-01 2003-04 2004-05

Reliance Communications Pvt Ltd Formed, Equity = USD 5.5M

Equity Capital = USD 6.9MPreference Share Capital = USD 1,782M

Equity Capital = USD 2,032.7M

RIL held 25,000,000 unquoted, fully paid up shares of Reliance Communications Private Ltd. of USD 0.22 each

Reliance Communications Ltd. changed to Reliance Infocomm (RIC) in 2001-02RIL increased its shares of RIC to 315,000,000 @ USD 0.022 eachRIL also held 1,620,000,000 preference shares (10% cumulative redeemable @ USD 0.022 each)RIL holding = unknown (associate)Outsiders/undisclosed holding = unknownIt was held as an associate company = RIL shareholding <50%Outsiders/undisclosed shareholding > 50%

RIL held 315,000,000 shares of RIC @ USD 0.022 each1,620,000,000 preference shares (subscribed at an aggregate value of USD 1,782M, along with the accrued premium of USD 243.8M) were converted to fully paid up equity shares of face value USD 0.022 of RIC at a price of USD 0.7/shareRIL holding = 45.34% (associate) as per Investor Presentation, RCOM, March 2006Outsiders/undisclosed holding = 54.66%Total shares outstanding = 7,040MShares owned by ADAG = 630M (based on the reported ADAG holding of 8.95% in RIC, Investor Presentation, RCom, March 2006)Value of ADAG investment = USD 13.86M at par value of USD 0.022/share

Timeline of Investment in Reliance Infocomm Limited (RIC) in USD


Appendix 3(b)

28

RCVL

Reliance ADAG Public Shareholders

RCIL (m)200C Shares Outstanding

RIC (mm)704C Shares Outstanding

RTL1.99C Shares Outstanding

Reliance ADAG

Flag

45% 45.34% 35.6%

8.95%

100%

64.4%55%

45.71%

61.73%38.27%

110C shares @ R 110C 1.28C shares @ R 12.8C

63C shares@ R63C

90C shares @ R 2,331.53CDeep discount bonds @ R1,600C

0.71C shares @ R 59.46C4.5C Preferred Shares @ R 444.3C

319C shares @ R 9,239.5C

Total RIL Investment in RCVL = R 13,675CTotal RIL Investment in RCVL = R 13,675C

Total Reliance ADAG Investment in RCVL = R 185.8 CTotal Reliance ADAG Investment in RCVL = R 185.8 C

Appendix 4(a)Shareholding Pattern of Reliance Communications Ventures Limited (RCVL)

(m): RCIL was formerly Reliance Infoco(m); (mm): Reliance Infoco(mm)

29

RCVL

Reliance ADAG Public Shareholders

RCIL (m)2,000M Shares Outstanding

RIC (mm)7,040M Shares Outstanding

RTL19.9M Shares Outstanding

Reliance ADAG

Flag

45% 45.34% 35.6%

8.95%

100%

64.4%55%

45.71%

61.73%38.27%

1,100M shares @ USD 24.2M 12.8M shares @ USD 2.8M

630M shares @ USD 13.86M

900M shares @ USD 512.8MDeep discount bonds @ USD 352M

7.1M shares @ USD 13.1M45M Preferred Shares @ USD 97.8M

3,190M shares @ USD 2,032.7M

Total RIL Investment in RCVL = USD 3,008.5MTotal RIL Investment in RCVL = USD 3,008.5M

Total Reliance ADAG Investment in RCVL = USD 40.8MTotal Reliance ADAG Investment in RCVL = USD 40.8M


Appendix 4(b)

Shareholding Pattern of Reliance Communications Ventures Limited (RCVL)

(m): RCIL was formerly Reliance Infoco(m); (mm): Reliance Infoco(mm)

30

RCVL

Reliance ADAG

Public Shareholders/RIL

61.73%

38.27%

RCom

Reliance ADAG

Public Shareholders/RIL

37%

63%

Total Investment by RIL = R 13,675C (USD 3,008.5M)

Total Investment by ADAG = R 185.8C (USD 40.8M)

26%

Should Belong to Public Shareholders/RIL

Prior to De-Merger After De-Merger

Appendix 5(a)

Reorganization of Shareholding Pattern: Reliance Communications Ventures Limited (RCVL)

31

Company % Holding Number of Shares Held

Value/Share (In Rupees)

Total Investment (In

Cr. Rupees

Total Investment (In Million USD)

Panther Consultants Private Limited (PCPL) 3.58% 251,999,996 1 25.2 5.5

Ambani Enterprises Private Limited (AEPL) 5.37% 378,000,004 1 37.8 8.3




Cr. Rupees


Panther Consultants Private Limited (PCPL) 22% 440,000,000 1 44.0 9.7

Ambani Enterprises Private Limited (AEPL) 33% 660,000,000 1 66.0 14.5




Cr. Rupees


Reliance Business Management Private

Limited (RBM)64.4% 12,834,870 10 12.8 2.8

ADAG Investment in RIC

ADAG Investment in RCIL

ADAG Investment in RTL

Break up of ADAG Investment in Reliance Communications Ventures Limited

Total = R 185.8C (USD 40.8M)

Appendix 5(b)

Source: Court convened meeting of the equity shareholders dated June 3, 2006

32

APPENDIX 6.1 33

APPENDIX 6.2 34

APPENDIX 7 35

APPENDIX 7 continued 36

Reliance Communications Limited Dhirubhai Ambani Knowledge City Navi Mumbai 400 710. Tel : +91 022 3038 6286 Fax: +91 022 3037 6622 www.rcom.co.in

Registered Office: H Block, 1st Floor, Dhirubhai Ambani Knowledge City, Navi Mumbai 400 710.

May 31, 2011 The General Manager Corporate Relationship Department The Bombay Stock Exchange Limited Phiroze Jeejeebhoy Towers Dalal Street, Fort, Mumbai 400 001 Fax No.: 2272 2037/39/41/61/3121/3719 BSE Scrip Code: 532712

The Manager National Stock Exchange of India Ltd. Exchange Plaza, C/1, Block G Bandra - Kurla Complex, Bandra (East) Mumbai 400 051 Fax No.: 2659 8237 / 38/8347/48 / 66418124/25/26 NSE Symbol: RCOM

Dear Sir, Sub: Change in Compliance Officer, Company Secretary and the Manager The Board of Directors of the Company has accepted the resignation of Mr. Hasit Shukla as Compliance Officer, Company Secretary and the Manager of the Company and appointed Mr. Prakash Shenoy as the Compliance Officer, Company Secretary and the Manager of the Company with effect from 1st June 2011. Mr. Hasit Shukla will continue to oversee Company Secretarial and other functions of the Company. Kindly inform your members accordingly. Yours faithfully For Reliance Communications Limited Sd/- Hasit Shukla President and Company Secretary

APPENDIX 837

v

APPENDIX 9 Mergers / Demergers /Amalgamations

Year Nature of Transaction Comments from the Company

2006-07 Issue of Shares The Company issued and allotted 82,14,84,568 equity shares of Rs. 5 each to the promoter group being the shareholders of the transferor companies.

2006-07 Amalgamation and Arrangement

Reliance Infocomm Limited, Ambani Enterprises Private Limited, Reliance Business Management Private Limited, Formax Commercial Private Limited, Reliance Communications Technologies Limited, Reliance Software Solutions Private Limited, Reliance Communications

Solutions Private Limited and Panther Consultants Private Limited amalgamated with the Company

2006-07 Demerger

Network division of Reliance Communications Infrastructure Limited was demerged to the Company. As a result of the above, all of the assets and liabilities of the telecom business carried on by Reliance Infocomm Limited became the assets and liabilities of the Company

and Reliance Infocomm Limited stood dissolved without windingup

2006-07 Arrangement for transfer of passive infrastructure

In terms of the Scheme of Arrangement between the Company, Reliance Telecom Limited (RTL) and Reliance Telecom Infrastructure Limited (RTIL), subsidiaries of the Company and

their respective shareholders and creditors, as sanctioned by the Hon’ble High Court of Judicature at Bombay vide order dated 16th March, 2007, the passive infrastructure of the

Company and RTL was demerged and vested into RTIL, with effect from 10th April, 2007

2006-07 Reorganisation of subsidiaries

Synergy Infocomm Solutions Private Limited, Rajasthan Network Private Limited and Assam Network Private Limited amalgamated with Synergy Entrepreneur Solutions Private Limited

(SESPL) and Reliance Next Generation Technology Private Limited amalgamated with Reliance Telecom Infrastructure Limited.

Further, SESPL and Reliance Infoinvestments Limited are proposed to be amalgamated with Reliance Communications Infrastructure Limited, Reliable Internet Services Limited is

proposed to be amalgamated with Reliance Telecom Limited.

2006-07 Subsidiary Companies

Paradox Studios Limited, Reliance Digital World Limited and NIS Sparta Limited ceased to be subsidiaries of the Company and Gateway Net Trading Pte. Limited, Reliance

Communications (Singapore) Pte. Limited, Reliance Communications (Hongkong) Limited, Reliance Communications (New Zealand) Pte. Limited, Reliance Communication (Australia)

Pty. Limited. RCOM Malaysia SDN.BHD, Synergy Enterpreneur Solutions Private Limited and Reliance Next Generation Technology Private Limited became subsidiaries of the

Company.

2006-07 Merger Reliance Communications Infrastructure Limited, Reliance Telecom Limited, FLAG Telecom

Group Limited and Other subsidiaries of RIC became wholly owned subsidiaries of the Company

2007-08 Acquisition Acquired Yipes Holdings - 16 July 2007

2007-08 Merger FLAG Telecom USA Limited was merged with Yipes Holdings Inc. w.e.f. 17th December, 2007

2007-08 Acquisition Acquired Uganda-based company Anupam Globalsoft (U) Limited, holding Public

Infrastructure Provider License and Public Service Provider License to offer Mobile, Fixed Line, Internet, National and International Long Distance services, in Uganda

2007-08 Amalgamation

High Court of Bombay vide Order dated 21st April, 2007, Reliance Infoinvestments Limited (“RIIL” or “the

Transferor Company”), a wholly owned subsidiary of the Company, whose core activity was investment and fund management, was amalgamated, with effect from the Appointed Date of

1st April, 2006, with Reliance Communications Infrastructure Limited (“RCIL” or “the Transferee Company”), also a wholly owned subsidiary of the Company.

38

v

APPENDIX 9 CONTINUED Mergers / Demergers /Amalgamations

Year Nature of Transaction Comments from the Company

2007-08 Amalgamation

High Court of Bombay vide Order dated 12th June, 2007, Reliable Internet Services Limited (“RISL” or “the Transferor Company”), a subsidiary of the Company, whose core activities

were providing telecom services, was amalgamated with effect from the Appointed Date as 1st April, 2006 with Reliance Telecom Limited (“RTL” or “the Transferee Company”), another

subsidiary of the Company.

2007-08 Transfer transfer of Passive Infrastructure from RCOM and RTL to RITL was approved

2007-08 Sale of Equity Shares sale of 5% of the Equity Shares of Reliance Infratel Limited (formerly known as Reliance

Telecom Infrastructure Limited (RTIL)) by Reliance Telecom Infrastructure (Cyprus) Holdings Limited (RTIHL), a subsidiary of Reliance Infocom BV (RIBV)

2007-08 Subsidiary Companies

Reliance Tech Services Private Limited, Reliance Big TV Limited, Yipes Holdings Inc, Reliance Globalcom Services Inc, Yipes Systems Inc, YTV Inc, Anupam Globalsoft (U) Limited, Lagerwood Investments Limited and Reliance Telecom Infrastructure (Cyprus)

Holdings Limited became the subsidiaries of the Company

2007-08 Demerger

Flag Projects Pte Limited, Alsign Holdings Pte. Limited and Actaram Capital Pte. Limited which became subsidiaries during the year under review, subsequently ceased to be subsidiaries.

Reliance Telephones Limited and Gateway Net Trading Pte. Limited ceased to be subsidiaries of the Company

2008-09 Subsidiary

During the year under review, Reliance Vanco Group Limited and its subsidiaries, Reliance WiMax World Limited and Gateway Net Trading Pte. Limited became the

subsidiaries of the Company. FLAG Telecom France Network SAS, FLAG Telecom France Services EURL, FLAG

Telecom Korea Limited and FLAG Telecom Espana SA ceased to be subsidiaries of the Company, during the year.

2008-09 Merger

the Treasury Activities, as defined in the Scheme, of Reliance Communications Infrastructure Limited (RCIL), a Subsidiary of the Company have been transferred and

vested into Reliance Telecom Limited (RTL), a subsidiary of the Company with effect from the Appointed Date as 1st April, 2008

2008-09 Arrangement the Optic Fibre Undertaking, as defined in the Scheme, of the Company, shall be transferred and vested into Reliance Infratel Limited (“RITL”), a Subsidiary of the Company engaged in providing Telecom Infrastructure Services, with effect from the Appointed Date, 1st April, 2008

2009-10 Amalgamation Reliance Gateway Net Limited (RGNL), a wholly owned subsidiary of the Company amalgamated with the Company w.e.f. 13th July 2009

2009-10 Subsidiaries

During the year under review, Global Innovative Solutions Private Limited, Reliance WiMax D.R.C. B.V, Reliance WiMax Gambia B.V. Reliance WiMax Mauritius B.V.,

Reliance WiMax Mozambique B.V, Reliance WiMax Niger B.V., Reliance WiMax Zambia B.V., Access Bissau LDA became the subsidiaries of the Company

2009-10 Demerger During the year under review, Reliance Mobile Limited and Vanco (India) Private Limited ceased to be subsidiaries of the Company.

39

v

APPENDIX 10 Key Indicators and Developments – Indian Telecom Industry Figure 1 Average Revenue Per Minute, Q1-09 to Q2-011, In Indian Rupees

ARPM Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11

Bharti 0.66 0.63 0.64 0.63 0.58 0.56 0.52 0.47 0.45 0.44

RCOM 0.66 0.64 0.61 0.6 0.58 0.47 0.45 0.44 0.44 0.44

Idea 0.65 0.62 0.65 0.63 0.58 0.56 0.51 0.47 0.44 0.42

Uninor 0.51 0.41 0.39

Average (Bharti, RCom, Idea) 0.66 0.63 0.63 0.62 0.58 0.53 0.49 0.46 0.44 0.43

Source: Company Presentation and Annual Reports Figure 2 Average Revenue Per User, Q1-09 to Q2-011, In Indian Rupees

ARPU Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11

Bharti 350 331 324 305 278 252 230 220 215 202

RCOM 282 271 251 224 210 161 149 139 130 122

Idea (including Spice) 280 263 268 255 232 209 200 185 182 167

Tata Teleservices 234 223 206 166 150 120 125 122 116

BSNL 199 198 199 155 147 131 119 99 99

Aircel 198 183 173 149 134 124 120 113 113

Uninor 51 10 12 12

Average (Bharti, RCom, Idea) 304 288 281 261 240 207 193 181 176 164

Source: Company Presentations and Annual Reports Figure 3 GSM Subscriber Base, Q1-09 to Q4-10, in Millions

Postpaid-Prepaid Mix Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10

Total Subscribers (GSM) 288 328 368 419 479 527 578 642

Prepaid (%) 94.0% 94.3% 94.8% 95.2% 95.8% 96.2% 96.4% 96.7%

Postpaid (%) 6.0% 5.7% 5.2% 4.8% 4.2% 3.8% 3.6% 3.4%

Prepaid Subscribers 271 309 349 399 459 507 557 621

Postpaid Subscribers 17 19 19 20 20 20 21 22

Source: TRAI

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APPENDIX 10 CONTINUED

Figure 4 Mobile Service Providers in India

SI No. Service Provider Area of Operation

1 Bharti All India

2 Aircel Group AP, TN, Karnataka, Assam, Bihar, Chennai, Delhi, HP, J&K, Kerala, Kolkata, MH, Mumbai, NE, Orissa, UP(E), UP(W), WB, Haryana & MP

3 Reliance Communications All India (except Assam & NE)

4 Reliance Telecom Kolkata, MP, WB, HP, Bihar, OR, Assam & NE

5 Vodafone All India

6 Tata Teleservices All India

7 IDEA (Including Spice) All India

8 Sistema Shyam Telelink Kolkata, TN (incl. Chennai), Karnataka, Kerala, Rajasthan, Haryana, Maharashtra, Mumbai, Delhi, Bihar, WB & AP

9 BSNL All India (except Delhi & Mumbai)

10 MTNL Delhi & Mumbai

11 Loop Telecom Private Ltd Mumbai

12 HFCL Punjab

13 Unitech AP, Karnataka, TN (incl. Chennai), Kerala, UP(W), UP(E), Bihar, Orissa, Mumbai, Kolkata, MH, Gujarat & WB

14 S Tel HP, Bihar & Orissa

15 Videocon Haryana, TN (incl Chennai), Mumbai, Gujarat & Kerala

16 Etisalat / Allianz AP, Delhi, Gujarat, Karnataka, Kerala, Maharashtra, Punjab, Rajasthan, UP(E), Mumbai, TN (incl Chennai), Haryana, UP(W), MP & Bihar

Source: TRAI Figure 5 3G Service Providers in India

SI No. 3G Service Provider Area of Operation

1 Bharti Delhi, Mumbai, Andhra Pradesh, Karnataka, Tamil Nadu, Uttar Pradesh (W), Rajasthan, West Bengal, Himachal Pradesh, Bihar, Assam, North East, Jammu & Kashmir

2 Aircel Group Andhra Pradesh, Karnataka, Tamil Nadu, Kolkata, Kerala, Punjab, Uttar Pradesh (E), West Bengal, Bihar, Orissa, Assam, North East, Jammu & Kashmir

3 Reliance Delhi, Mumbai, Kolkata, Punjab, Rajasthan, Madhya Pradesh, West Bengal, Himachal Pradesh, Bihar, Orissa, Assam, North East, Jammu & Kashmir

4 Vodafone Delhi, Mumbai, Maharashtra, Gujarat, Tamil Nadu, Kolkata, Haryana, Uttar Pradesh (E), West Bengal

5 Tata Teleservices Maharashtra, Gujarat, Karnataka, Kerala, Punjab, Haryana, Uttar Pradesh (W), Rajasthan, Madhya Pradesh

6 Idea Maharashtra, Gujarat, Andhra Pradesh, Kerala, Punjab, Haryana, Uttar Pradesh (E), Uttar Pradesh (W), Madhya Pradesh, Himachal Pradesh, Jammu & Kashmir

7 MTNL Mumbai, Delhi

8 BSNL Maharashtra, Gujarat, Andhra Pradesh, Karnataka, Tamil Nadu, Kolkata, Kerela, Punjab,

Harayana, Uttar Pradesh (E), Uttar Pradesh (W), Madhya Pradesh, Himachal Pradesh, Bihar, Orissa, Assam, North East, Jammu & Kashmir

9 S Tel Himachal Pradesh, Bihar, Orissa

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APPENDIX 10 CONTINUED Figure 6 Tower Companies in India

Company Number of Towers Comments Source

Indus 110,000 As at present day Company Website

Reliance Infratel 48,139 As at present day Bloomberg Businessweek

Bharti Infratel 32,000 As at present day "Bharti Infratel chooses IBM for Smarter

Cell Towers", February 2001, Indiainfoline

Quippo Telecom Infrastructure (Including WITIL) 43,000 As at March 2010

"TTML to sell telecom towers to Tata Quippo for Rs 1,318 crore", March

2010, Economic Times

GTL 32,000 As at present day Company Website

American Tower Corp (including Essar Telecom Infrastructure) 8,500 As at August 2010

"We are not seeking to be largest tower co in India", August 2010, Economic

Times

Tower Vision 12,000 by 2012 As at February 2010

"TowerVision to use Rs 1,500-cr PE funding to scale up capacity", February

2010, Economic Times

Ascend Telecom Infrastructure Pvt. Ltd. (including India Telecom Infra Limited) 4,000 As at March 2011

"New Silk Route-controlled Ascend Telecom Infra Pvt. Ltd and IL&FS/TVS-

controlled India Telecom Infra Ltd. announce merger", March 2011, NSR

Press Release

KEC International (formerly RPGT) 400 As at March 2008 "A Guide to India's Telecom Market", March 2008, Light Reading

Independent Mobile Infrastructure (IMIL) 400 As at March 2008 "A Guide to India's Telecom Market", March 2008, Light Reading

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APPENDIX 11FY01

43

APPENDIX 12FY03

44

v

APPENDIX 13 Figure 1 Associate and Subsidiaries: Reliance Industries Limited, 2001-2005

2001-2002

Associate Companies Subsidiaries

Reliance Infocomm Limited (formerly Reliance Communications Limited) Reliance Infocom Inc

Reliance Communications Infrastructure Limited (formerly Reliance Infocom Limited) Reliance Infocom B.V.

Reliance Telecom Limited

2002-2003


Reliance Communications Infrastructure Limited Reliance Infocom Inc. (USA)

Reliance Telecom Limited Reliance Infocom BV (Netherlands)

Reliance Infocomm Limited Reliance Communications Inc. (USA)

Reliance Communications (UK) Ltd.

2003-2004


Reliance Communications Infrastructure Limited Reliance Infocom Inc. (USA)

Reliance Telecom Limited Reliance Infocom BV (Netherlands)

Reliance Infocomm Limited Reliance Communications Inc. (USA)

Reliance Communications (UK) Ltd.

Reliance Communications International Inc.

2004-2005


Reliance Communications Infrastructure Limited Reliance Infocom B.V., Subsidiary till 20th October, 2004

Reliance Telecom Limited Reliance Infocomm Inc., Subsidiary till 20th October, 2004

Reliance Infocomm Limited Reliance Communication Inc., Subsidiary till 20th October, 2004

Reliance Communications (UK) Limited, Subsidiary till 20th October, 2004

Reliance Communications International Inc., Subsidiary till 20th October, 2004

Reliance Communications (Canada) Inc., Subsidiary till 20th October, 2004

Reliance Netway Inc., Subsidiary till 20th October, 2004

Reliance Communications (Hongkong) Limited, Subsidiary till 20th October, 2004

45

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