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INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF LANCO INFRATECH LIMITED
Report on the Financial Statements
We have audited the accompanying financial statements of Lanco Infratech Limited (‘‘the Company’’), which comprise the Balance Sheet as at March 31, 2015, the Statement of Profit and Loss, the Cash flow Statement for the year then ended and a summary of the significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
The Company’s Board of Directors is responsible for the matters stated in Section 134(5) of the Companies Act, 2013 (“the Act”) with respect to the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the accounting principles generally accepted in India, including the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. We have taken into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made there under.
We conducted our audit in accordance with the Standards on Auditing specified under Section 143 (10) of the Act. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and the disclosures in the financial statements. The procedures selected depend on the auditor’s judgment including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal financial control relevant to the Company’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial controls system over financial reporting and operating effectiveness of such controls. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company’s Directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion on the financial statements.
In our opinion and to the best of our information and according to the explanations given to us, the aforesaid financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at March 31, 2015 and its loss and its cash flows for the year ended on that date.
Emphasis of Matters
Attention is invited to
a) Note No.43 to the financial statements, which explain the transaction entered by the Company along with its step down subsidiaries for sale of their 100% stake in Udupi Power Corporation Limited (UPCL), as per the agreed terms, with effect from August 18, 2014 on closure of the transaction, the result of operations of the UPCL, shall belong to the Buyers. The possible effects of this transaction is not considered in this financial statements.
b) Note No.51 to the financial statements, which explain the structuring undertaken by the management during the year ended March 31, 2012. The Company’s investment as of March 30, 2012 in various subsidiaries and associates was transferred to wholly owned step down subsidiaries and to an associate of wholly owned step down subsidiary aggregating to Rs. 6,815.51 Crores that require lenders and customer approvals. Management has received many such approvals aggregating to 96% in value, of the lenders consenting to the restructuring, the management is confident of receiving balance approvals from lenders and customer in near future and has taken the effect of these transfers while preparing these financial statements. In case any of these residual approvals are not granted, the management will have to revisit the structure and the consequential impact would then be recorded in the financial statements.
c) Note No.53 to the financial statements, regarding the adequacy of disclosure concerning the Company’s ability to meet its financial obligations including loans, overdue loans, unpaid interest and ability to fund obligations pertaining to operations including unpaid creditors, repayment of advances for ensuring normal operations and investments in ongoing projects. During the year, the Company incurred a Net Loss of Rs. 672.23 Crores and has loans aggregating Rs. 267.63 Crores falling due over next twelve months period which also includes unpaid dues of the Company as at March 31, 2015. These matters essentially require the Company to garner such additional cash flows to fund the operations as well as for meeting the investment obligations towards various on–going projects comprising power and other infrastructure projects which are currently going through low level of implementation activities. In this regard the Company approached Corporate Debt Restructuring (CDR) Cell with a scheme seeking certain reliefs in relation to repayment timelines of loans and accumulated unpaid interest and additional funding for its operations. The restructuring envisages certain sacrifices from lenders and commitments from Company towards infusion of additional funds through divestment of existing assets or otherwise.
In the financial year 2013–14, CDR Empowered Group approved the Debt Restructuring Scheme. The Company has completed the required obligations under the scheme to enable the infusion of additional funds from lenders and the lenders have disbursed partially.
Notwithstanding certain variances in contracted terms under CDR scheme in relation to partial disbursements so far made and their utilization thereon, together with delay in implementation of CDR scheme did not still enable the Company to achieve the anticipated performance levels of operations at EPC and Project Companies which has consequential impact on financial statements in the form of incurrence of further losses and cost overruns due to delayed execution at the Project level which is currently not quantifiable and as explained by management steps have been initiated to recommence the EPC operations as well as the implementation of projects under construction. However, the financial statements have been prepared under the assumption, considering the management assessment to recover the balance dues from various State Electricity Boards including those of which under litigations and management plan to get requisite further funding from various other sources including the CDR scheme, cost overrun approvals by the lenders for the under construction projects and the Company’s efforts in disposing few more assets. These submissions and assertions by the management as evaluated by lenders envisage that the Company has the ability to garner the required cash flows, which have not been independently assessed by us. Relying on the above, no adjustments have been made in these financial statements towards any possible impact on account of low key operations and delayed execution of projects under implementation.
d) Note No.54 to the financial statements, in relation to the carrying value of the assets held by Lanco Anpara Power Limited (LAnPL), a step down subsidiary of the Company. Though LAnPL has been incurring losses ever since the commencement of commercial operation and accumulated losses incurred so far eroded the net worth significantly, taking into consideration LAnPL management’s assessment of the situation including efforts towards seeking revision in tariff pending before the regulator, the management of the Company is of the view that the carrying value of the asset of LAnPL is realizable at the value stated therein. Accordingly no adjustments have been made in these financial statements.
e) Note No.55 to the financial statements, dealing with cancellation of coal blocks by the Hon’ble Supreme Court, which included coal mine jointly allotted to Tamil Nadu Electricity Board and Maharashtra State Mining Corporation Limited, the Allottees. Mahatamil
Mining and Thermal Energy Limited (MMTEL), a subsidiary of the Company, entered into Coal Mining Services Agreement with the Allottees of the mine, pursuant to which, the amount invested amounting to Rs. 170.94 Crores, the realizability of which is dependent on the compensation to be awarded under the Ordinance issued by Government of India. The Company obtained a legal opinion in this regard based on which, the investment is considered to be recoverable and, hence no adjustments have been made in these financial statements.
f ) Note No.56 to the financial statements, in relation to the carrying value of investment held by the Company in Lanco Resources International Pte Limited (LRIPL) a subsidiary of the Company, where the accumulated losses exceeded the net worth of LRIPL, taking into account the management’s assessment of the situation including short term initiatives to be implemented to significantly enhance the profitability in the medium to long run, the management of the Company is of the view that the carrying value of the assets are realizable at the value stated therein. Accordingly no adjustments have been made in these financial statements.
g) Note No.57 to the financial statements, in relation to Lanco Kanpur Highways Limited (LKHL), a subsidiary of the Company, has received a notice of termination to the Concession Agreement from National Highways Authority of India (NHAI) and LKHL has also issued a notice of termination to NHAI. Arbitration proceedings have been initiated to settle the claims and the counter claims associated with the termination as per the Concession Agreement. As on March 31, 2015 LKHL and its EPC contractor have incurred certain costs towards the project, the realizability of these amounts is dependent on the outcome of the arbitration proceedings.
h) Note No.58 to the financial statements, which explains the payment of managerial remuneration aggregating to Rs. 1.69 Crores which is in excess of the permissible limits of remuneration payable under the provisions of the Companies Act, 2013 read with rules notified thereon. The Company approached the Central Government seeking its approval for payment of such remuneration in excess of limits and the Central Government in this regard directed the Company to obtain a No Objection from the CDR lenders for granting required approval. The Company is in the process of seeking the required No Objection from lenders and accordingly no adjustments have been made in these financial statements.
Our opinion is not qualified in the respect of the above matters.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor’s Report) Order 2015 (“the Order”), issued by the Central Government of India in terms of Sub Section (11) of Section 143 of the Act, we give in the Annexure a statement on the matters specified in Paragraphs 3 and 4 of the Order.
2. As required by Section 143 (3) of the Act, we report that:
a) We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit.
b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books.
c) The Balance Sheet, the Statement of Profit and Loss and the Cash Flow Statement dealt with by this report are in agreement with the books of account.
d) In our opinion, the aforesaid financial statements comply with the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) rules, 2014.
e) The matters described in the Clause (c) and Clause (f) of the Emphasis of Matter Paragraph above, in our opinion, may have an adverse effect on the functioning of the Company.
f ) On the basis of written representations received from the directors as on March 31, 2015 taken on record by the Board of Directors, none of the directors is disqualified as on March 31, 2015 from being appointed as a director in terms of Section 164 (2) of the Act.
g) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014, in our opinion and to the best of our information and according to the explanations given to us:
i. The Company has disclosed the impact of pending litigations on its financial position in its financial statements. Refer Note No.40 (A) to the financial statements.
ii. The Company has made provisions, as required under applicable laws or accounting standards in respect of the material foreseeable losses on the long term contract. The Company did not have any long term derivative contracts.
iii. There are no amounts which were required to be transferred, to the Investor Education and Protection Fund by the Company.
ANNEXURE TO THE INDEPENDENT AUDITOR’S REPORT
The Annexure referred to in Clause 1 of “Report on Other Legal and Regulatory Requirements” Paragraph of the Independent Auditor’s Report of even date to the members of Lanco Infratech Limited on the financial statements as of and for the year ended March 31, 2015
(i) (a) The Company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets.
(b) The Company has a regular programme of physical verification of its fixed assets by which fixed assets are verified in a phased manner over a period of three years. In accordance with this programme, certain fixed assets were verified during the year and no material discrepancies were noticed on such verification. In our opinion, this periodicity of physical verification is reasonable having regard to the size of the Company and the nature of its assets.
(ii) (a) The management has conducted physical verification of inventory at reasonable intervals during the year. In respect of inventories lying with third parties, thesehave substantially been confirmed by them.
(b) The procedures of physical verification of inventory followed by the management are reasonable and adequate in relation to the size of the Company and the nature of its business.
(c) The Company is maintaining proper records of inventory and no material discrepancies were noticed on physical verification of inventory.
(iii) According to the information and explanations given to us, the Company has not granted any loans secured or unsecured to companies, firms or other parties covered in the register maintainedunder Sec 189 of the Companies Act, 2013. Accordingly,the provisions of clause
(iii),(iii) (a) and (iii) (b) of Paragraph 3 of the Order are not applicable to the Company.
(iv) In our opinion and according to the information and explanations given to us, there is an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Further, on the basis of our examination of the books and records of the Company, and according to the information and explanations given to us, we have neither come across nor have been informed of any continuing failure to correct major weakness in internal control system.
(v) The Company has not accepted any deposits from the public.
(vi) We have broadly reviewed the books of account maintained by the Company pursuant to the rules made by the Central Government for the maintenance of cost records under section 148 (1) of the Companies Act, 2013 and are of the opinion that prima facie, the prescribed accounts and records have been made and maintained.
(vii) (a) The Company is regular in depositing the undisputed statutory dues including provident fund, employee’s state insurance, income tax, sales tax, wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and other statutory dues with the appropriate authorities though there have been delays in some instances.
According to the information and explanations given to us,no undisputed statutory dues payable in respect of provident fund, employee’s state insurance, income tax, sales tax, wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and other statutory dues with the appropriate authorities which were outstanding at the year end for a period of more than six months from the date they became payable except as follows:–
(c) The Company is not required to transfer any amount to the Investor Education and Protection Fund.
(viii) The Company has no accumulated losses as at the end of the financial year and it has incurred cash losses during the current financial year and in the immediately preceding financial year.
(ix) According to the records of the Company examined by us and the information and explanations given to us, the Company has not paid principal and interest of Rs. 0.49 Crores and Rs. 52.22 Crores respectively to banks and financial institutions as at the balance sheet date.
(x) According to the information and explanations given to us, the Company has given guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof in our opinion are not prima facie prejudicial to the interest of the Company.
(xi) Based on the information and explanations given to us by the management, term loans disbursed, including Priority Loan under CDR scheme have been utilized for the purposes of CDR Scheme cash flows envisaged as approved by lenders under the CDR package.
(xii) Based on the audit procedures performed for the purpose of reporting the true and fair view of the financial statements and as per the information and explanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the year, nor have we been informed of such case by the management.
For Brahmayya & Co.
Firm registration Number: 000511S
Membership Number: 222320
Date: May 29, 2015