2.7 Financial instruments

Financial instruments by category

The carrying value and fair value of financial instruments by categories as of March 31, 2010 were as follows:

	Loans and receivables	Financial assets/liabilities at fair value through profit and loss	Available for sale	Trade and other payables	Total  carrying value/fair value
Assets:
Cash and cash equivalents (Refer Note 2.1)	12,111	–	–	–	12,111
Available-for-sale financial assets (Refer Note 2.2)	–	–	2,556	–	2,556
Investment in certificates of deposit	1,190	–	–	–	1,190
Trade receivables	3,494	–	–	–	3,494
Unbilled revenue	841	–	–	–	841
Derivative financial instruments	–	95	–	–	95
Prepayments and other assets (Refer Note 2.4)	557	–	–	–	557
Total	18,193	95	2,556	-	20,844
Liabilities:
Trade payables	–	–	–	10	10
Client deposits	–	–	–	8	8
Employee benefit obligations (Refer Note 2.8)	–	–	–	302	302
Other liabilities (Refer Note 2.10)	–	–	–	1,492	1,492
Total	–	–	–	1,812	1,812

The carrying value and fair value of financial instruments by categories as of March 31, 2009 were as follows:

	Loans and receivables	Financial assets/liabilities at fair value through profit and loss	Available for sale	Trade and other payables	Total  carrying value/fair value
Assets:
Cash and cash equivalents (Refer Note 2.1)	10,993	–	–	–	10,993
Trade receivables	3,672	–	–	–	3,672
Unbilled revenue	750	–	–	–	750
Prepayments and other assets (Refer Note 2.4)	447	–	–	–	447
Total	15,862	-	-	-	15,862
Liabilities:
Trade payables	–	–	–	27	27
Derivative financial instruments	–	114	–	–	114
Client deposits	–	–	–	5	5
Employee benefit obligations (Refer Note 2.8)	–	–	–	291	291
Other liabilities (Refer Note 2.10)	–	–	–	1,280	1,280
Total	-	114	-	1,603	1,717

Fair value hierarchy

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

The following table presents fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of March 31, 2010:

	As of March 31, 2010	Fair value measurement at end of the reporting year using
		Level 1	Level 2	Level 3
Assets
Available- for- sale financial asset- Investments in liquid mutual fund units	2,518	2,518	–	–
Available- for- sale financial asset- Investments in unlisted equity instruments	38	–	38	–
Derivative financial instruments- gains on outstanding foreign exchange forward and option contracts	95	–	95	–

Income from financial assets or liabilities that are not at fair value through profit or loss is as follows:

	Year ended March 31,
	2010	2009
Interest income on deposits	779	871
Income from available-for-sale financial assets	160	5
	939	876

Derivative financial instruments

The Company uses derivative financial instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in foreign exchange rates on trade receivables and forecasted cash flows denominated in certain foreign currencies. The counterparty for these contracts is generally a bank or a financial institution. These derivative financial instruments are valued based on quoted prices for similar assets and liabilities in active markets or inputs that are directly or indirectly observable in the marketplace. The following table gives details in respect of outstanding foreign exchange forward and option contracts:

	As of  March 31,
	2010	2009
Forward contracts
In U.S. dollars	267	278
In Euro	22	27
In United Kingdom Pound Sterling	11	21
In Australian dollars	3	–
Option contracts
In U.S. dollars	200	173

The Company recognized a net gain on derivative financial instruments of Rs. 299 crore during the year ended March 31, 2010, whereas the Company recorded a net loss of Rs. 760 crore on derivative financial instruments during the year ended March 31, 2009, which are included in other income.

The foreign exchange forward and option contracts mature between 1 to 12 months. The table below analyzes the derivative financial instruments into relevant maturity groupings based on the remaining period as of the balance sheet date:

	As of March 31,
	2010	2009
Not later than one month	280	342
Later than one month and not later than three months	825	1,000
Later than three months and not later than one year	1,205	1,270
	2,310	2,612

Financial risk management

Financial risk factors

The Company's activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Company's primary focus is to foresee the unpredictability of financial markets and seek to minimize potential adverse effects on its financial performance. The primary market risk to the Company is foreign exchange risk. The Company uses derivative financial instruments to mitigate foreign exchange related risk exposures. The Company's exposure to credit risk is influenced mainly by the individual characteristic of each customer and the concentration of risk from the top few customers. The demographics of the customer including the default risk of the industry and country in which the customer operates also has an influence on credit risk assessment.

Market risk

The Company operates internationally and a major portion of the business is transacted in several currencies and consequently the Company is exposed to foreign exchange risk through its sales and services in the United States and elsewhere, and purchases from overseas suppliers in various foreign currencies. The Company uses derivative financial instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in foreign exchange rates on trade receivables and forecasted cash flows denominated in certain foreign currencies. The exchange rate between the rupee and foreign currencies has changed substantially in recent years and may fluctuate substantially in the future. Consequently, the results of the Company’s operations are adversely affected as the rupee appreciates/ depreciates against these currencies.

The following table gives details in respect of the outstanding foreign exchange forward and option contracts:

	As of March 31,
	2010	2009
Aggregate amount of outstanding forward and option contracts	2,310	2,612
Gains / (losses) on outstanding forward and option contracts	95	(114)

The outstanding foreign exchange forward and option contracts as of March 31, 2010 and 2009, mature between one to twelve months.

The following table analyzes foreign currency risk from financial instruments as of March 31, 2010: 

	U.S. dollars	Euro	United Kingdom Pound Sterling	Australian dollars	Other currencies	Total
Cash and cash equivalents	764	46	31	315	123	1,279
Trade receivables	2,446	254	370	204	177	3,451
Unbilled revenue	567	72	110	32	39	820
Other assets	481	13	11	1	45	551
Trade payables	(1)	(1)	–	–	(7)	(9)
Client deposits	(7)	–	–	–	–	(7)
Accrued expenses	(254)	(16)	–	–	(26)	(296)
Accrued compensation to employees	(149)	(2)	–	–	(48)	(199)
Other liabilities	(1,128)	(137)	(56)	–	(36)	(1,357)
Net assets / (liabilities)	2,719	229	466	552	267	4,233

The following table analyzes foreign currency risk from financial instruments as of March 31, 2009:

	U.S. dollars	Euro	United Kingdom Pound Sterling	Australian dollars	Other currencies	Total
Cash and cash equivalents	633	41	71	298	58	1,101
Trade receivables	2,440	295	587	14	310	3,646
Unbilled revenue	392	72	95	12	99	670
Other assets	14	1	2	2	5	24
Trade payables	(14)	–	–	–	(7)	(21)
Client deposits	(4)	–	(1)	–	–	(5)
Accrued expenses	(208)	(5)	(16)	(6)	(171)	(406)
Accrued compensation to employees	(157)	–	–	(10)	(22)	(189)
Other liabilities	(269)	(162)	(26)	(4)	(40)	(501)
Net assets / (liabilities)	2,827	242	712	306	232	4,319

For the year ended March 31, 2010 and 2009, every percentage point depreciation / appreciation in the exchange rate between the Indian rupee and the U.S. dollar, has affected the Company's operating margins by approximately 0.6% and 0.4% respectively.

Sensitivity analysis is computed based on the changes in the income and expenses in foreign currency upon conversion into functional currency, due to exchange rate fluctuations between the previous reporting period and the current reporting period.

Credit risk

Credit risk refers to the risk of default on its obligation by the counterparty resulting in a financial loss. The maximum exposure to the credit risk at the reporting date is primarily from trade receivables amounting to Rs. 3,494 crore and Rs. 3,672 crore as of March 31, 2010 and 2009, respectively. Trade receivables are typically unsecured and are derived from revenue earned from customers primarily located in the United States. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business.

The following table gives details in respect of percentage of revenues generated from top customer and top five customers:

(In %)

	Year ended March 31,
	2010	2009
Revenue from top customer	4.6	6.9
Revenue from top five customers	16.4	18.0

Financial assets that are neither past due nor impaired

Cash and cash equivalents, available-for-sale financial assets and investment in certificates of deposits are neither past due nor impaired. Cash and cash equivalents include deposits with banks and corporations with high credit-ratings assigned by international and domestic credit-rating agencies. Available-for-sale financial assets include investment in liquid mutual fund units and unlisted equity instruments. Certificates of deposit represent funds deposited at a bank or other eligible financial institution for a specified time period. Of the total trade receivables, Rs. 2,184 crore and Rs. 2,166 crore as of March 31, 2010 and 2009, respectively, were neither past due nor impaired.

Financial assets that are past due but not impaired

There is no other class of financial assets that is past due but not impaired except for trade receivables of Rs. 6 crore and Rs. 16 crore as of March 31, 2010 and 2009, respectively. The Company’s credit period generally ranges from 30-45 days. The age analysis of the trade receivables have been considered from the date of the invoice. The age wise break up of trade receivables, net of allowances that are past due, is given below:

	As of March 31,
Period (in days)	2010	2009
31 – 60	1,161	1,256
61 – 90	116	182
More than 90	27	52

The allowance for impairment of trade receivables for the year ended March 31, 2010 and 2009 was less than Rs. 1 crore and Rs. 75 crore, respectively. The movement in the allowance for impairment of trade receivables is as follows:

	Year ended March 31,
	2010	2009
Balance at the beginning	106	41
Translation differences	2	(1)
Impairment loss recognized	–	75
Trade receivables written off	(6)	(9)
Balance at the end	102	106

Liquidity risk

As of March 31, 2010, the Company had a working capital of Rs. 17,735 crore including cash and cash equivalents of Rs. 12,111 crore, available-for-sale financial assets of Rs. 2,556 crore and investments in certificates of deposit of Rs. 1,190 crore. As of March 31, 2009, the Company had a working capital of Rs. 13,101 crore including cash and cash equivalents of Rs. 10,993 crore.   

As of March 31, 2010 and 2009, the outstanding employee benefit obligations were Rs. 302 crore and Rs. 291 crore, respectively, which have been fully funded. Further, as of March 31, 2010 and 2009, the Company had no outstanding bank borrowings. Accordingly, no liquidity risk is perceived.

The table below provides details regarding the contractual maturities of significant financial liabilities as of March 31, 2010:

Particulars	Less than 1 year	1-2 years	2-4 years	4-7 years	Total
Trade payables	10	–	–	–	10
Client deposits	8	–	–	–	8
Other liabilities (Refer Note 2.10)	1,431	–	21	–	1,452
Liability towards acquisition of business on an undiscounted basis (Refer Note 2.10)	–	9	27	31	67

The table below provides details regarding the contractual maturities of significant financial liabilities as of March 31, 2009:

Particulars	Less than 1 year	1-2 years	2-4 years	4-7 years	Total
Trade payables	27	–	–	–	27
Client deposits	5	–	–	–	5
Other liabilities (Refer Note 2.10)	1,224	26	30	–	1,280

As of March 31, 2010 and 2009, the Company had outstanding financial guarantees of Rs. 18 crore and Rs. 17 crore, respectively, towards leased premises. These financial guarantees can be invoked upon breach of any term of the lease agreement. To the Company’s knowledge there has been no breach of any term of the lease agreement as of March 31, 2010 and 2009.

2.8 Employee benefit obligations

Employee benefit obligations comprise the following:

	As of March 31,
	2010	2009
Current
Compensated absence	131	104
	131	104
Non-current
Compensated absence	171	187
	171	187
	302	291

2.9 Provisions

Provisions comprise the following:

	As of March 31,
	2010	2009
Provision for post sales client support	82	92

Provision for post sales client support represents cost associated with providing sales support services which are accrued at the time of recognition of revenues and are expected to be utilized over a period of 6 months to 1 year. The movement in the provision for post sales client support is as follows:

 

	Year ended March 31,
	2010	2009
Balance at the beginning	92	53
Provision recognized/ (reversed)	(2)	39
Provision utilized	(8)	–
Balance at the end	82	92

Provision for post sales client support for the year ended March 31, 2010 and 2009 is included in cost of sales in the statement of comprehensive income.

2.10 Other liabilities

Other liabilities comprise the following: 

	As of March 31,
	2010	2009
Current
Accrued compensation to employees	667	543
Accrued expenses	606	609
Withholding taxes payable	250	218
Retainage	72	55
Unamortized negative past service cost (Refer Note 2.12.1)	26	29
Liabilities arising on consolidation of trusts	74	–
Others	12	17
	1,707	1,471
Non-current
Liability towards acquisition of business (Refer Note 2.3)	40	-
Incentive accruals	21	56
	61	56
	1,768	1527
Financial liabilities included in other liabilities	1,452	1,280
Financial liability towards acquisition of business on an undiscounted basis (Refer Note 2.3)	67	-

Accrued expenses primarily relates to cost of technical sub-contractors, telecommunication charges, legal and professional charges, brand building expenses, overseas travel expenses and office maintenance. Others consist of unclaimed dividends and amount payable towards acquisition of business.

2.11 Expenses by nature

	Year ended March 31
	2010	2009
Employee benefit costs (Refer Note 2.12.4)	12,093	11,412
Depreciation and amortization charges (Refer Note 2.5 and 2.6)	942	767
Travelling costs	692	845
Consultancy and professional charges	278	259
Cost of software packages	353	361
Communication costs	225	272
Cost of technical sub-contractors	372	396
Power and fuel	145	147
Office maintenance	165	168
Repairs and maintenance	95	80
Rates and taxes	31	34
Insurance charges	31	26
Commission	16	11
Branding and marketing expenses	73	89
Consumables	25	22
Provision for post-sales client support (Refer Note 2.9)	(2)	39
Allowance for impairment of trade receivables (Refer Note 2.7)	–	75
Postage and courier	12	11
Printing and stationery	12	13
Operating lease payments (Refer Note 2.15)	125	114
Others	149	131
Total cost of sales, selling and marketing expenses and administrative expenses	15,832	15,272