AUDITORS’ QUALIFICATIONS FOR 2008-09: INDIAN
COMPANIES COVERED IN THIS INVESTOR ALERT REPORT
3i Infotech Bombay Dyeing Gujarat Mineral Development Corp Jindal Drilling & Industries Punj Lloyd
Aarti Drugs Cable Corp of India GVK Power & Infrastructure K Sera Sera Productions RS Software
Aegis Logistics Classic Diamonds Hatsun Agro Product Lanco Infratech Ranbaxy Labs
Aksh Opticfibre Coromandel International HB Estate Developers Lok Housing & Constructions Raymond
Alembic Cosmo Films Hindustan Motors Mahindra Lifesapce Developers RPG Cables
Alfa Laval Datamatics Global Services Hotel Leelaventure Meghmani Organics Sakthi Sugars
Alstom Projects DCM Shriram Inds Hyderabad Industries Melstar Information Technologies Shrenuj and Company
AP Paper MIlls Dewan Housing Finance Corp IG Petrochemicals Micro Inks Simplex Infrastructures
Aplab Dish TV India IDBI Bank Mukand Spice Communication
Asahi India Glass Dunlop India IFCI Mukand Engineers Suzlon Energy
Ashima Easter Silk Inds India Glycols Navin Fluorine International Tata Motors
Atul Everest Kanto Cylinder Indian Hotels Co Neuland Laboratories Tata Power
Bajaj Auto Excel Industries Indian Oil Corporation Neyveli Lignite Corporation Unitech
Balasore Alloys Finolex Inds Indo Rama Synthetics (India) Oracle Financial Services & Software Wipro
Banswara Syntex GG Dandekar Machine Works IPCA Laboratories Orient Paper & Industries Wockhardt
Batliboi Geometric IRB Infrastructure Developers Oriental Hotels Wyeth
Bell Ceramicx Glenmark Pharma ITD Cementation India Panacea Boitec Zicom Electronic Sec Systems
Binani Industries Godrej Inds IVP Patel Engineering Essar Oil
Birla Power Solutions Gokaldas Exports JK Sugar Polaris Software New Delhi Television
EXCESS REMUNERATION PAID FOR 2008-09
COMPANIES COVERED IN THIS INVESTOR ALERT REPORT
Advanta India Bajaj Hindustan Bharat Gears New Delhi Television
Alembic Balasore Alloys Classic Diamonds NRB Bearings
Asahi India Glass Batliboi Gabriel India Panacea Boitec
Auditors’ reports of many Indian companies for 2008-09
paint a horrific picture of the liquidity crunch
facing the corporate sector
This time of the year is crucial for investors as companies start coming out with their annual reports. In these annual reports, a couple of pages are devoted to auditor’s report. Auditor’s report contains comments or qualifications on the books of accounts prepared by the company. Auditor qualifications are generally given in italics or in bold. Some times auditor’s comments are given in the annexure that accompany the auditor’s report. This is done to highlight them for the shareholders of the company.
Generally, auditor’s comments or qualifications are adverse in nature, pointing discrepancies between the accounting principles followed by the company and the accounting standards set by the Institute of Chartered Accountants of India (ICAI). It is, however, not necessary that comments or qualifications have to be adverse. Certain comments could be favorable to the company as well.
This report has been culled from the auditors’ reports of over 550 companies with turnover above Rs 100 crore and more – including not only large caps but small and mid caps as well. Within this parameter, stocks that are frequently traded were selected to capture their auditors’ views on the books of accounts. Certain comments by the statutory auditors are mere statements that attempt to highlight facts and figures that could be significant and material for the shareholders. In a few cases, qualifications can change if the company turns around. In certain cases, auditor’s qualifications are so serious that they render such companies untouchable for investors.
In a handful of cases, auditors have qualified accounts on multiple issues. This certainly makes the annual accounts look ugly. Certain, companies are not paying enough attention to auditors’ comments on non-conservative accounting policies or rather not taking them seriously. For instance, a company has declined to write off investment in subsidiary and other exposure despite the concerned subsidiary being in a complete financial mess. What is the point of showing investment in the balance sheet when the subsidiary is wiped out?
A few comments could sound immaterial and non-significant. These, however, could have an impact on the financial performance in the medium to long term. For instance, pending legal disputes and liabilities. Another example could be that of inadequate internal controls on inventory and sales of goods and services.
Not only the shareholders, even employees of a company can get crucial information from the balance sheet. In a few cases, auditors have pointed to delays in making payment to employees’ provident fund and other statutory obligations. A company has not recognised its liability towards group gratuity scheme. There have been many instances of statutory auditors mentioning slight-to-considerable delays in payment of undisputed statutory dues such as taxes.
One key trend that emerges from auditors’ comments on financial statements for 2008-09 is the liquidity crunch faced by Indian companies. Many companies have directed funds meant for short-term needs for long-term purposes. Even worse, a good number of companies have defaulted in repayment of loan commitments. These not only include small-cap companies but known mid- and large-cap companies as well, painting a horrofic picture of the debacle of the financial markets. In many instances, loans, advances and other financial commitments are suitably rescheduled.
Excess remuneration paid to top managers is another issue that comes up fairly frequently in auditor’s report (see box: Excess remuneration). Other key observations are:
* Inadequate provision towards deferred tax liability in books of accounts.
* Changes in accounting policies and their impact on the bottom line.
* Implementing the enterprise resource planning (ERP) system for better management of inventory.
* Preparation of accounts on going-concern basis despite erosion of net worth.
* Searches by the income-tax department and potential liabilities.
* Non-recognition of mark-to-market losses on derivatives contracts.
* Non-provisioning for possible defaults on loans and advances extended though recovery of such amount is in jeopardy.
* Early adoption of Accounting Standard (AS)-30, Financial Instruments: Recognition and Measurements, thereby inflating profit.
* Change in the method of charging depreciation from writtendown value to straight-line method, thereby inflating profit.
* Pending legal disputes that could severely hammer revenue realisation and profitability.
* Frauds committed by clients and employees, indirectly pointing to failure of internal controls.
* Doubts about recovery of outstanding dues and non-provisioning for them.
* Non-provision of interest on secured/unsecured debt.
*Change in the method of accounting
for compensation payable for voluntary retirement.
* Disqualification of directors & subsequent qualification post-restructuring of debentures.
* Forfeiture of upfront deposit received on convertible warrants, credited to the profit and loss (P&L) account as extraordinary item.
* Change in the method of valuation of inventory.
* Diminution in the value of long-term investments routed through revaluation reserve and not from the P&L account.
* Expenses charged to the general reserve account instead of the P&L account.
* Non-disclosure of information pertaining to joint ventures.
* Non-provision for impairment of assets of discontinued business.
Investors should be vigilant while flipping through the annual reports of companies. They should keep track of auditors’ comments and qualifications made in the past. Where auditors have qualified the accounts and also provided the impact on financials, investors should not take financials provided by companies at face value. Profit and turnover should be appropriately adjusted and performance accordingly evaluated and benchmarked.
Following are companies whose statutory auditors have commented or qualified the books of accounts. The comments are collated from the main auditor’s report and annexure published along with the main report. The notes to accounts were also scrutinised to gather further information wherever necessary.
3i Infotech Consolidated accounts:
The financial statements of a subsidiary in Cyprus and a joint venture in China, whose financial statements reflect total assets of Rs 44.53 crore and total revenue of Rs 0.97crore ended March 2009, not audited.
Aarti Drugs:
Short-term funds amounting to Rs.16.85 crores utilised for long-term purposes.
Aegis Logistics:
Provision of Rs 2.47 crore made in the books for commission, which is percentage of net profit, payable to the managing directors dependent on the grant of approval by the Central government of their appointments.
Aksh Opticfibre:
Not defaulted in repayment of dues to financial institutions, banks or debenture holders, except letters of credits aggregating to Rs 6.85 not paid on due dates. The average delay per letter of credit was 19.3 days.
Alembic: Maintained proper records showing full particulars, including quantitative details and situation of fixed assets. However, item-wise value of assets other than land, buildings and vehicles acquired prior to 1968 not available.
Alfa Laval:
Delay in depositing Rs 6.38 lakh in the Investor Education and Protection Fund, which was paid subsequent to the year end, and withholding tax and service tax.
Alstom Projects:
Undisputed statutory dues (such as provident fund and income tax) generally regularly deposited with the appropriate authorities. Slight delays in a few cases.
Andhra Pradesh Paper Mills:
Not fully provided for deferred tax liability in accordance with AS-22.
Aplab:
Intel Instruments & Systems, wholly owned subsidiary, accumulated losses, threatening the realisation of the company’s investment of Rs 2.25 crore (previous year Rs 1.75 crore), debtors: Rs 2.83 crore (previous year Rs 2.51 crore), and advances: Rs 55.05 lakh (previous year Rs 53.25 lakh). This was referred to in the audit report for the previous year (2007-08).
* The auditors have obtained all the information and explanations necessary for the purpose of the audit, except complete particulars of old outstanding debtors and earnest money deposits. This was referred to in the audit report for the previous year (2007-08).
* Non-compliance with AS-15, which requires accounting for accrued liability towards retirement benefits including gratuity. Gratuity is provided when contribution is made to the group gratuity scheme. The year-end past service contribution of Rs 2.46 crore payable to LIC under this scheme not recognised in the financial statements. (If this is taken into consideration, reported profit after tax of Rs 69.82 lakh would have turned into loss of Rs 1.76 crore and reserves and surplus would have been Rs 23.38 crore as against the reported figure of Rs 25.85 crore.)
Asahi India Glass:
Not defaulted in term loan repayment of dues to banks, except delay of three days and 25 days in repayment of two loan instalments of Rs 4.17 crore each and repayment of Rs 20 crore due end March 2009. Planning rescheduling.
Ashima:
Non-provision of interest amounting to Rs 133.57 crore on secured and unsecured debt.
* Accumulated losses more than 50% of net worth. Further, incurred cash losses.
* Defaulted in repayment of dues to banks, financial institutions and debenture holders. Rs 188.74 crore in 2008-09 and Rs 782.05 crore in 2007-08.
* Auditors have drawn attention to preparation of accounts on going-concern basis. (As per the notes to accounts, net worth of the company has eroded. However, it expects to revive the financial position in view of the ongoing debt restructuring and good prospects of improvement in its operational performance in future. Considering these facts, the accounts are prepared on going-concern basis.)
Atul:
Has not recognised mark-to-market losses of Rs 54.84 crore on its derivative contracts to hedge highly probable forecast transactions and firm commitments not covered under AS-11, either by way of creating a hedge reserve as recommended by the ICAI or by prudently charging the same to the P&L account as recommended under AS-1. Consequently, the profit and the reserves and surplus were higher by Rs 54.84 crore at the close of 2008-09.
Bajaj Auto:
Change in the method of accounting for compensation payable for voluntary retirement of workmen by recognising it as an expense over a period of two years as against the past practice of recognising it as an expense in the year of retirement. Hence, Rs 183.3 crore carried forward for recognition as an expense in the subsequent year.
Balasore Alloys:
Certain advances of Rs 7.35 crore as against supply of raw materials pending beyond stipulated delivery schedules. The auditors are unable to opine on the recovery and adjustments of these advances through supply of such materials and, thus, its consequent impact on profit.
* The minimum alternative tax (MAT) credit entitlement of Rs 7.95 crore in 2008-09 (Rs 6.25 crore in 2007-2008) based on future profitability projections. However, auditors are unable to express any opinion on the above projections and their consequent impact on profit. If this MAT is considered, the company would have reported a loss of Rs 7.02 crore compared with profit of Rs 93.59 lakh reported for 2008-09.
Banswara Syntex:
Fraud of Rs 43.25 lakh by an employee noticed. The amount involved since recovered.
Batliboi:
Except for installments of term loans aggregating Rs 124.58 lakh due in March 2009, of which Rs 22.82 lakh paid (written representation made to banks after detailed discussions for reschedulement of remaining amount which is under consideration), the company did not default in repayment of its dues to banks in 2008-09.
Bell Ceramics:
Filed an application with the Central government on 20 May 2009 for seeking approval for removal of disqualification of certain directors for subsequent appointments and reappointments that occurred on 1 April 2008 due to default in repayment of then existing debentures, which were restructured into loan by the debenture holders from 1 April 2008. Subject to a favourable consideration and on the basis of written representations received from the directors and taken on record by the board of directors, none of the directors is disqualified end 31 March 2009.
* Certain instalments aggregating to Rs 4.80 crore of 8% non-convertible redeemable cumulative preference shares had fallen due in 2008-09. Not repaid in view of the extension granted by the preference shareholders but subject to approval from the shareholders at the general meeting. Subsequent to the balancesheet date, the preference shareholders gave their consent for conversion of preference shares into equity shares under the terms of a scheme of arrangement being filed by an application to the High Court of Gujarat.
* Dues of tax deducted at source and fringe benefit tax (including interest on delay of deposit) of Rs 1.96 crore (Rs 23.20 crore has since been paid) outstanding for the period of more than six months from the date they became payable.
* Funds raised on short- term basis including other short-term loans from companies used for long-term purposes including acquisition of fixed assets and repayment of long-term loans of Rs 6.02 crore.
Binani Industries:
Forfeiture of upfront deposit received on warrants credited to the P&L account as extraordinary item. (As per the additional information provided in the notes to accounts, the company has issued 50 lakh convertible warrants to K.B. Vyapar Pvt Ltd, a promoter group company. The company has received 10% upfront deposit amounting to Rs 12.65 crore, which was earlier shown as share capital suspense. However, K.B. Vyapar has not opted for conversion option. Thus, the warrants were cancelled and upfront deposit forfeited. This amount was treated as extraordinary income.)
Birla Power Solutions:
Overdue balances of loans and advances, amounting to Rs 22.62 crore (including Rs 7.83 crore due from a company referred to the Board of Industrial and Financial Reconstruction and pending rehabilitation) considered as good and recoverable and also confirmed by parties.
* On the basis of examination of the inventory records, ERP package needed to be updated and customised for maintaining proper records of inventory.
* Adequate internal control procedures for fixed assets commensurate with the size and the nature of business. However, for purchase of inventory, sale of goods and services and related areas, control needed to be further strengthened to make it commensurate with the size.
Bombay Dyeing and Manufacturing Company:
Sold a portion of the commercial building under construction to its wholly owned subsidiary and recognised revenue of Rs 235.02 crore in the P&L account. The subsidiary is excluded from consolidation, based on representation that control over it is temporary, i.e., it is being held exclusively with a view to its subsequent divestment in the near future.
* Adopted the principles of hedge accounting as per AS-30, Financial Instruments Recognition and Measurement, from 1 April 2008, for derivatives transactions entered to hedge currency risk. Accordingly, the unrealised losses amounting to Rs 37.69 crore on such derivative transactions, which qualify as effective hedges, recorded in the hedging reserve account. The loss for the year lowers to that extent.
Cable Corporation of India: Strengthening of internal control procedures for purchases of inventory, fixed assets and sale of goods and services required to make it commensurate with its size and the nature of business.
Classic Diamonds: Provision of gratuity/leave encashment not provided on actuarial basis. Therefore, the auditors were unable to quantify the effect, if any, on the profit in 2008-09. (As per the notes to accounts, the company made provision amounting to Rs 54.31 lakh for gratuity and Rs 13.08 lakh for leave encashment payable end March 2009. However, this sum not actuarially valued as required by AS-15.)
Coromandel Fertilisers:
Subsidy income recognised based on the understanding of the current subsidy scheme in the period for which the notification issued. For subsidy income for the remaining period and for the purpose of valuation of related inventories at their net realisable values end March 2009, subsidy rates computed based on the management’s best estimates. Necessary adjustments to such accrual and valuation, and consequential impact, if any, on net profit and net assets will be accounted for by the management on final announcement and determination of the subsidy receivable.
Cosmo Films:
Change in the method of providing depreciation from writtendown value method to straightline method for certain plant and machinery, resulting in profit after tax including extraordinary item to be higher by Rs 45.64 crore, deferred tax liability higher by Rs 23.03 crore, and fixed assets higher by Rs 68.68 crore.
* Change in the method of valuation of inventory resulting in profit after tax including extraordinary item and inventory lower by Rs 2.28 crore.
Datamatics Global Services:
Investment of Rs 71.39 crore in four of its wholly owned subsidiaries and extended loans and advances of Rs 12.35 crore to these subsidiaries. The net worth of these subsidiaries has declined. These investments are for long term and of strategic nature. In view of this, auditors are unable to comment on whether provision, if any, for the diminution in value of investments required to be made.
DCM Shriram Industries:
Consolidated accounts: Accounting for cane purchase liability at Rs 110 per quintal for the sugar season 2007-08 instead of state advised price of Rs 125 per quintal fixed by the Uttar Pradesh state government. Pending completion of legal proceedings, the effect on the accounts cannot be determined at this stage.
* Various issues arisen/arising out of the reorganisation arrangement to be settled and accounted for on determination of liabilities and benefits. The effect of these cannot be determined at this stage. (As per the notes to accounts, there are various issues relating to sales tax and income tax arising from the reorganisation arrangement, which will be settled and accounted for when the liabilities and benefits are finally determined.)
Dewan Housing Finance Corporation:
No material fraud on or by the company noticed, except some instances of fraud by way of misrepresentation by borrowers to avail housing loans or its repayment of about Rs 29.40 lakh. Has initiated legal proceedings against such parties and hopeful of recoveries. Provision made for appropriate contingencies that may arise in future.
Dish TV India:
Term loan availed applied for the purpose for which loan was raised, except Rs 173.27 crore, which has been temporarily deployed in the business.
Dunlop India:
Diminution in the value of long-term investments amounting to Rs 105 crore as per revaluation report of the valuer adjusted from the revaluation reserve in confirmation with legal opinion.
* Stamp duty and registration charges amounting to Rs 8.80 crore on sale of property in 2006-2007 adjusted against the general reserve account in 2007-08 as this was not considered earlier.
Eastern Silk Industries:
Delay of three months in the repayment of term-loan instalment amounting to Rs 18.85 lakh and interest of Rs 1.95 lakh due to UCO Bank. Payment made in May 2009.
Essar Oil:
Default in repayment of loans of Rs 365.53 crore (including interest of Rs 108.52 crore) to the banks not covered by the Master Restructuring Agreement for the period May 2002 to March 2009. Restructuring of this loan progressing.
* Applied funds raised through supplier’s credit and other short-term sources amounting to Rs 2058.24 crore, including Rs 1856.73 crore up to the date the plant was under trial runs, for long-term purposes.
Everest Kanto Cylinder:
Short-term loan amounting to Rs 19.80 crore utilised for acquiring specific fixed assets.
Excel Industries:
Not disclosed proportionate interest in jointly controlled entity, Wexsam, as required by AS-27, Financial Reporting of Interests in Joint Ventures. No impact of this on profit and reserves and surplus in 2008-09. (As per the notes to account, Wexsam accounts for 2008-2009 are under preparation and, accordingly, the proportionate interest of the company in entity has not been disclosed.)
* Slight delays in a few cases in payment of income tax and service tax.
Finolex Industries:
Funds raised on short-term basis diverted for long-term uses, mainly for acquisition/construction of fixed assets of approximately Rs 138.43 crore.
G G Dandekar Machine Works:
Diminution in the value of investment in equity shares of Rs 1.38 crore not provided in the books as per the accounting standard. (In the opinion of the management, present fall in the value of investment is not permanent in nature and, hence, not provided.)
Geometric: The Mumbai High Court has approved a scheme of arrangement. An investment reorganisation reserve created by appropriating Rs 64.11 crore from the securities premium account, Rs 12.03 crore from the general reserve, and Rs 53.85 crore from the P&L account. In accordance with the scheme of arrangement, Rs 54.39 crore from the investment reorganization reserve utilised for writing off the loss on sale of investments and software instead of charging it to the P&L account. Had this amount been charged to the P&L account, profit after tax would have been converted into a loss of Rs 11.37 crore.
Glenmark Pharmaceuticals:
Short-term funds amounting to Rs 63.98 crore used for long-term investments.
Godrej Industries:
The recovery of advances given to certain individuals amounting to Rs 10.33 crore being contingent on the transfer and disposal of shares pledged against the loan. When lodged for transfer, the application was rejected by the investee company. Both parties are in appeal before the Company Law Board and the high court. The impact on the profit for the year and the reserves end March 2009 could not be ascertained. (As per the notes to account, loans were given to certain individuals against pledge of deposit of equity shares of Gharda Chemicals.)
* A loan of Rs 73.59 crore was given to a trust for the purchase of the company’s shares from the market equivalent to options granted under employees’ stock option plan (ESOP) end March 2009. The market value of shares held by the ESOP Trust was lower than the cost of acquisition of the shares by Rs 5331 lakh. The repayment of the loans granted to the ESOP Trust is dependent on the exercise of options by the employees and the market price of the underlying equity shares of the unexercised options at the end of the exercise period. The management contends the fall in the value of the underlying equity shares is on account of current market volatility and the loss, if any, can be determined only at the end of the exercise period. Hence, provision for diminution not considered necessary in the financial statements.
Gokaldas Exports:
In the process of updating the fixed asset records showing full particulars including quantitative details and situation of fixed assets. All fixed assets have not been physically verified. In the process of reconciling the differences observed on physical verification with the fixed-asset records. The impact of such discrepancies not expected to be material.
* Slight delays in a few cases in deposit of taxes deducted at source.
Gujarat Mineral Development Corporation:
Discrepancies noticed between physical quantity of fixed assets and quantity as per register.
GVK Power & Infrastructure:
Consolidated accounts: Not made provisions for potential liabilities in following instances:
* Pending confirmation and approval by the Central Electricity Authority for increase in capital cost and accruals of revenue, aggregating to Rs 45.12 crore, being the fixed charged components of the tariff charged by GVK Industries (subsidiary company) for the years 1997-98 to 2000-01.
* Outstanding minimum alternate tax amounts claimed for reimbursement and other amounts aggregating to Rs 17.40 crore and Rs. 75 lakh, respectively, in the subsidiary company’s books. The matters involved are interpretational in nature and sub-judice, respectively.
* Provision for income taxes net of amounts claimed for reimbursements from Transmission Corporation of Andhra Pradesh (AP Transco) and the subsidiary company’s intention to offer such amounts to tax on acceptance by AP Transco.
Hatsun Agro Product:
Certain income tax matters for financial year ended March 1996 (financial estimate by the management of Rs 1.5 crore) being contested. Matter pending with the High Court of Madras. Pending a final resolution of the uncertainties in this connection, no provision for tax and other consequential adjustment relating to this matter, if any, considered in the financial statements. Audit report qualification in the financial statements for the year ended March 2008.
* Slight delays in a few cases in remitting provident fund and employees’ state insurance dues.
* Used funds raised on short-term basis for long-term investment. Purchased certain fixed assets aggregating Rs 67.7 crore out of short-term loans from banks and others.
H B Estate Developers:
Loans amounting to Rs 24.72 crore in the nature of overdraft facility used for long-term investment purposes, i.e., deployment as capital for works in progress.
Hindustan Motors:
Defaulted in repayment of dues to financial institutions and banks. The details are as follows: Period of default less than 30 days Rs 1411.05 lakh and period of default from 30 to 90 days Rs 1790.21 crore.
* Short-term funds worth Rs 5045.80 lakh used for financing losses amounting to Rs 5045.80 lakh.
Hotel Leelaventure:
The auditors have expressed their inability to offer an opinion on the impact of disputed interest income. As per the notes to account, the method of computation adopted by the company relating to the interest claims from Hudco was upheld by the Execution Court, Delhi. The appeal filed by Hudco contesting it before the divisional bench of Delhi High Court is pending. The company recognised interest income of Rs 41.16 crore (previous year Rs 46.15 crore) from Hudco. The disputed interest recognised by the company amounted to Rs 151.46 crore (Previous year Rs. 110.30 crore) 31 March 2009.
Hyderabad Industries:
An employee misappropriated funds amounting to Rs 50 lakh in an earlier year but noticed in 2008-09. First information report (FIR) lodged and examination in progress. Further, incorrect accounting of some bank transactions in earlier years with net impact of Rs 2.03 crore detected during the year. This has been fully provided as doubtful recovery.
I G Petrochemicals:
From 1 April 2006, providing depreciation on plant and machinery based on the balance useful life of the assets as determined by an approved valuer instead of providing depreciation at the minimum rates specified in Schedule XIV of the Companies Act, 1956, and as required by AS-6 on depreciation accounting. As a result, depreciation charge lower by Rs 8.69 crore and accumulated depreciation charged lower at Rs 26.28 crore end March 2009. Had the impact been considered, the loss before tax would have been Rs 6.94 crore instead of the reported profit before tax of Rs 1.75 crore, and net block of fixed assets would have been Rs 211.30 crore instead of the reported figure of Rs 237.59 crore.
IDBI Bank:
Consolidated accounts: Restructuring an advance to a large public sector power project in Maharashtra, where the exposure is Rs 2599 crore. Along with the government of India, have sought special regulatory treatment from the Reserve Bank of India (RBI) for considering the asset as standard and for exemption from provisioning requirements. Pending receipt of such special regulatory treatment, has classified the asset as standard and not made provision.
IFCI:
Not defaulted in repayment of dues to any financial institution or bank or debenture holders, except the differential interest on certain bonds in the process of restructuring.
India Glycols:
Investment made in subsidiaries amount to Rs 10.29 crore. But no provision for diminution made due to the long-term nature and the intrinsic value of the assets of subsidiary companies. (As per the notes to account, the company has made investment in two subsidiary companies, amounting to Rs 10.29 crore, where the book value is lower than the carrying to cost. Considering the long-term nature and intrinsic value of the investee assets, no provision at this stage is considered necessary by the management.)
Indian Hotels Company:
Regular receipts of principal and interest as per stipulations, except in the case of a joint venture company, where the interest of Rs 4.42 crore remains overdue.
Indian Oil Corporation:
Used short-term funds aggregating to Rs 10,018.22 crore for long-term applications.
Indo Rama Synthetics (India):
Defaulted in repayment of dues to banks, financial institutions and a debenture holder. Loan defaults rescheduled by the bank, financial institution and debenture holder (principal amount Rs 23.50 crore).
* Used Rs 339.27-crore of short-term funds for long-term investments.
Ipca Laboratories:
Chosen to adopt early hedge accounting as detailed in AS-30, Financial Instruments: Recognition and Measurements, for its derivatives contracts and forward contracts entered to hedge foreign currency risk associated with the highly probable future export transactions. On account of this early adoption of AS-30, profit before tax higher by Rs 30.55 crore and profit after tax higher by Rs 20.17 crore in 2008-2009.
IRB Infrastructure Developers:
Undisputed statutory dues including provident fund, Investor Education and Protection Fund, employees’ state insurance, income tax, wealth tax, profession tax and cess and other material statutory dues applicable have generally been regularly deposited with the appropriate authorities though there have been delays in a few cases in depositing tax deducted at source and provident fund.
ITD Cementation India:
End December 2008, sundry debtors included Rs 12.25 crore comprising a claim and a write-back of a provision for doubtful debts of earlier years. Based on the payment schedule originally agreed by the customer, this claim expected to be received over a period of time, commencing from 2008-2009. No amounts received against these dues till date and further payments being rescheduled. Realisation of this amount dependent on finalisation of the rescheduled payment plan and the customer adhering to it.
* Recognised price escalation claims on two road contracts, disputed by the customer, in prior years. For the period from inception of the contract to end December 2008, the aggregate claims recognised as revenue amounted to Rs 20.28 crore. Sundry debtors included Rs 11.40 crore end December 2008. Received favourable verdicts in the Dispute Redressal Board and, thereafter, in arbitration for these amounts. Till date not recovered these amounts. The customer has appealed against the arbitration award and realisation of this amount dependent on this matter being resolved.
* Delays in depositing tax deducted at source in a few cases. In some of these cases, the number of days of delay significant.
IVP:
The auditors have commented on impairment of assets. As per the notes to account, no provision for impairment of assets of the discontinued business of Reay Road, Mumbai, unit has been made as, in the opinion of the management, assets of the Reay Road unit, taken as a whole, will realise at least the value at which they appear in the books of accounts in aggregate.
* The auditors have also commented on workers’ liability pertaining to discontinued operations at Reay Road. As the matter is sub-judicious the liability is not ascertainable.
J K Sugar:
Accounting for cane purchases done at Rs 110 per quintal for crushing season 2007-08 as per the interim order of the Supreme Court. Necessary adjustment, if any, to be made in accordance with the subsequent order of the court.
Jindal Drilling and Industries:
Outstanding dues of Rs 74.89 crore withheld by ONGC considered good based on legal opinion.
K Sera Sera Productions:
Tax liability, if any, for searches conducted by the income-tax authorities in 2007-08 to be recognised on conclusion of assessment proceedings.
* Internal control procedures for purchase of inventory and for sale of goods and services required to be further strengthened to commensurate with the size and nature of business.
Lanco Infratech:
For purchase of inventory, existing internal control system required to be strengthened to commensurate with size and nature of business.
Lok Housing and Constructions:
Non-accounting of sales returns of Rs 282.14 crore effected in 2008-09 (instead sales return being accounted in earlier years). Sales overstated by Rs 282.14 crore and the net loss after tax understated by Rs 169.01 crore. However, reserves and surplus and inventories remain the same.
* Financial statements for 2008-09 subject to the approval of the revised financial statements of 2006-07 and 2007-08 by the shareholders at the forthcoming general meeting of the shareholders.
* Non-provision of impairment in value of inventories of Rs 7.67 crore resulted in overstatement of inventories and profit before tax by the same amount.
* Non-provision of doubtful debts of Rs 9 crore resulted in overstatement of receivable and profit before tax by the same amount.
* Nonprovision of doubtful advances of Rs 3.70 crore resulted in overstatement of loans and advances and profit before tax by Rs 3.70 crore.
Mahindra Lifespace Developers:
Write-back of deprecation of Rs 8.17 crore on change in the method of charging depreciation from writtendown value to straightline method due to which profit and reserves were higher by Rs 8.70 crore in 2008-09.
* Management representation relied on to determine readiness of construction work in progress. Project advances and interest accrued of Rs 68.73 crore due to a project, where commencement of construction has been delayed on account of a dispute between the land owner and the company and now referred to arbitration.
Meghmani Organics:
Generally regular in depositing undisputed statutory dues. Despite delays in some cases, provident fund and professional tax payments not in arrears end of the year.
Melstar Information Technologies:
Accumulated losses not in excess of 50% of net worth. Recorded losses in 2007-08 as well.
Micro Inks: Inter alia written off investments of a carrying value of Rs 158.78 crore in the stepdown wholly owned subsidiary Hostmann-Steinberg Inc., USA, by utilising the credit balances in the securities premium account/capital redemption reserve in accordance with the requisite approvals. Subsequently, made a further investment of Rs 48.81 crore in that subsidiary. Also, outstanding of Rs 79.62 crore due from the subsidiary on account of debtors and given corporate guarantee for loans of Rs 48.73 crore taken by the subsidiary from a bank. Notwithstanding the subsidiary being dependent for financial support, no losses on these accounts expected to occur and, accordingly, no provision made.
Mukand:
Delays in depositing undisputed income tax, income tax deducted at source, service tax, sales tax and cess. However, no amounts were outstanding for more than six months other than income tax of Rs 1.62 crore and custom duty of Rs 240,016 end March 2009, from the date they became payable.
Mukand Engineers:
Loans aggregating Rs 17.94 crore and interest receivable aggregating Rs 6.23 crore due from companies at the close of the year will erode net worth. Loss not quantifiable at present and to depend on the amount to be realised from the financial assets of these companies. Therefore, no provision on this account quantifiable.
* Delays in depositing undisputed service tax dues. Further, taxes at sources (TCS) on sale of scrap not collected. These were, however, deposited after the close of the year. TCS amounting to Rs 16118 outstanding end March 2009 for a period exceeding six months from the date these became payable. Reconciling service tax balances relating to earlier years. Amounts due, if any, to be ascertained on completion of such reconciliations.
Navin Fluorine International:
Auditors have commented on disclosure under AS- 24, Discontinuing Operations, for plant at Dewas in Madhya Pradesh. (As per the notes to accounts, the company is restructuring its organic chemicals activities including redeploying some of the assets of its Dewas unit in other projects currently under implementation. It has appointed a firm of consultants. Due to lack of market demand and pending finalisation of its plans, it is in the process of dismantling its plants at Dewas other than the common facilities. Accordingly, it is of the view that disclosure is not required under AS-24, Discontinuing Operations. Necessary provision for impairment made on the basis of valuation done by a firm of registered valuers.)
Neuland Laboratories:
Adequate internal control system commensurate with the size and nature of its business for the purchases of inventory and fixed assets and for the sale of goods and services. However, further strengthening of these controls recommended in the environment of ERP.
New Delhi Television:
Accumulated losses less than 50% of net worth end March 2009. Incurred cash losses. However, did not incur cash losses in the immediately preceding financial year.
Neyveli Lignite Corporation:
AS-6 for depreciation accounting for unamortised depreciable amount not charged over the revised remaining useful life of specialised mining equipment (SME) existing on 31 August 2007 (the date of the order of the ministry of company affairs reducing the rate of depreciation for SME from 11.31% to 6.33%). Had this method of accounting been followed, the provision for depreciation would have been lower by Rs147.33 crore. Accordingly, profit and fixed assets understated to that extent. This treatment is supported by a circular issued by the department of company affairs, giving option to apply old rates to existing assets and revised rate for assets commissioned on or after the date of approval.
Oracle Financial Services Software:
Considerable delays in few cases of service tax, fringe benefit tax and foreign tax.
Orient Paper & Industries:
Non-disclosure of proportionate interest in the joint ventures (Pan African Paper Mills) assets, liabilities, income, expenses end March 2009. Though this is not in compliance with the disclosure requirement of AS-27 notified under the Companies Accounting Standards Rule, 2006, it does not have any impact on the profit for the year. (The company has 29.34% share of interest valuing paper manufacturer Pan African Paper Mills, Kenya, at Rs 4.13 crore. The relevant information is not available due to suspension of operations since 30 January 2009.)
* Slight delays in certain cases (undisputed statutory dues). Also, certain payments not yet made: industrial licence fees (Rs 16.88 lakh) and duty on own generation of power and interest (Rs 1 crore).
* Approximately Rs 75 crore raised on short-term basis used for long-term investment (without considering permanent working capital).
Oriental Hotels:
Funds raised on short-term basis amounting to Rs 65.06 crore used for acquisition of fixed assets and long-term investments in the year.
Panacea Biotec:
Non-provision of proportionate premium on redemption of US$ 50 million zero coupon convertible bonds amounting to Rs 47.09 crore due in 2011. Disclosed as contingent liability. Redemption premium will be offset against the securities premium account and, hence, no adjustments considered in the accounts.
* The auditors have commented on capitalisation of expenditure on clinical trials amounting to Rs 12.39 crore. The ultimate approval of such products, considered as highly likely by the management, not in direct control of the company. Pending such final approval, no adjustments made to the accompanying financial statements.
Patel Engineering:
Delay in a few cases in payment of income tax and sale tax outstanding for more than six months end March 2009.
Polaris Software:
Without qualifying their opinion, the auditors have drawn attention to the management’s assessment of the carrying value of its investments in Adrenalin e5ystems, an associate company, end March 2009. The associate company has been incurring losses on account of initial stage of operations. The management believes this is a strategic investment and the losses are not permanent in nature. Accordingly, such investments have been carried at cost.
Punj Lloyd:
Standalone accounts: Deductions made and amounts withheld by some customers amount to Rs 60.50 crore (previous year Rs. 46.12 crore). Also carrying accrued income of Rs 9.54 crore relating to these customers. The ultimate outcome of these matters cannot be determined although such amounts viewed as recoverable and, hence, no provision required.
R S Software:
Change in the accounting policy to account for effects of change in foreign exchange for foreign enterprises in accordance with AS-11(revised). Foreign exchange difference arising due to transition from integral operations to non-integral operations of foreign branch taken to the inter-branch foreign fluctuation reserve account, due to which profit overstated by Rs 1.14 crore.
Ranbaxy Laboratories:
Paid Rs 27.72 crore as managerial remuneration to its directors. Had the company accounted for the remuneration in accordance with the Companies Act, the loss after tax would have been lower by Rs 18.30 crore and loans and advances higher by Rs 27.72 crore.
* Incurred cash losses in 2008-09 but not in 2007-08.
Raymond:
Investments in loans and other receivables from subsidiaries whose net worth have a substantially eroded.
* Provision for diminution in the value of exposure to Raymond UCO Denim Pvt Ltd based on a valuer’s report and management’s judgment upon which the auditors have placed their reliance.
RPG Cables:
Not received consideration for assignment of loans and advances in earlier years from its erstwhile subsidiary company. Net worth of the subsidiary is negative as per the latest available audited financial statements (for 2007-08). In the absence of sufficient information on the financial position of that company, the auditors were unable to ascertain the recovery of non-provided amount of Rs 57.77 crore outstanding as on the balancesheet date. The impact of such non-provision not ascertainable.
* Accumulated losses exceeded 50% of net worth on the balancesheet date. Further, incurred cash loss in 2008-09 and also in the immediately preceding financial year.
Sakthi Sugars:
Standalone accounts: Delays, though not serious, in depositing tax deducted at source. Income tax amounting to Rs 3.32 crore outstanding for more than six months end December 2008.
* Utilised short-term funds for long-term investments of Rs 55.81 crore.
* The balance sheet, P&L account, the report of the board of directors, and the report of the auditors of subsidiaries, and statement of holding company’s interest in subsidiaries not attached as required under Section 212(1) of the Companies Act, 1956.
Consolidated accounts: Interim dividend of Rs 30.81 crore declared and paid to preference shareholders of Sakthi Auto Component, is in contravention of Section 205 of the Companies Act, 1956, as there was no profit for dividend. Recovery from the preference shareholders subject to their agreement or recovery proceedings. (Sakthi Auto Component is subsidiary of Sakthi Sugars.)
Shrenuj & Company: Adoption of principles of hedge accounting mentioned in AS-30, Financial Instruments Recognition and Measurement, for derivatives transaction entered to hedge foreign currency risk. Accordingly, net notional loss amounting to Rs 32.70 crore on such derivative transactions has been designated as effective cash-flow hedge and recorded in the hedging reserve account.
Simplex Infrastructures:
Non-provision of year-end exchange fluctuation loss of Rs 11.36 crore on a foreign currency loan as required under AS-11, The Effects of Changes in Foreign Exchange Rates.
Spice Communication:
Maintained proper records showing full particulars including quantitative details and situation of fixed assets, except for the networking equipment purchased during the year, and taken on trial basis earlier. Is in the process of updating the fixed assets records of its Karnataka circle.
* Accumulated losses at the end of the financial period exceed 50% of net worth. Not incurred cash losses in 2008-09 and immediately preceding financial year.
* Used funds raised on short-term basis amounting to Rs 669.27 crore for long-term investment.
Suzlon Energy:
No provision of proportionate premium on redemption of’ US$ 500 million zero coupon convertible bonds due 2012 amounting to Rs 226.11 crore. This has been considered as a contingent liability. (In the notes to account, the management has stated the likelihood of redemption cannot presently be ascertained. Accordingly, no provision for any liability has been made in the financial statements and, hence, the proportionate premium on redemption has been disclosed as a contingent liability.)
Tata Motors:
Standalone accounts: Based on an overall examination of balance sheet end March 2009, short-term funds of Rs 6,129 crore utilised for long-term application. As per the information and explanation given, this was due to the economic scenario affecting the volumes and funding plans. Steps being taken to augment long-term funds.
Consolidated accounts: The actuarial losses (net) amounting to Rs 1,457.21 crore accounted in reserves and surplus of a group of subsidiary companies’ consolidated accounts.
Tata Power:
Subject to the outcome of the appeal filed with the Supreme Court, no adjustment made for standby charges, estimated at Rs 519 crore, accounted for as revenue in earlier periods, and their consequential effects in the period ended March 2009.The impact on the results cannot presently be determined pending outcome of the matter. As legal opinion sought states the tribunal’s order can be successfully challenged, no provision or adjustment been considered necessary.
Unitech:
Delayed beyond the stipulated dates repayment of dues to debenture holders, banks and financial institutions amounting to Rs 427.31 crore, out of which necessary approvals for rescheduling/ restructuring of repayments for Rs 385.58 crore obtained from the lenders till date. Rescheduling is under way for the balance amount.
* Created security for debentures issued, except in two cases amounting to Rs 200.70 crore, where the debentures were issued at the year end, i.e., February and March 2009. Is in the process of creating security in consultation with the subscribers.
Wipro:
Consolidated accounts: Early adoption of AS-30, Financial Instruments: Recognition and Measurements, along with limited revisions to other AS issued by the ICAI. AS-30, along with limited revisions to the other accounting standards, have not currently been notified by the National Advisory Council for Accounting Standards. If AS-30 and the related limited revisions had not been adopted early, profit after taxation would have been lower by Rs 304.4 crore in 2008-09.
Wockhardt:
Consolidated accounts: Ability to repay loan and related liabilities falling due end December 2009 dependent on successful implementation of actions proposed. These liabilities amounted to approximately Rs 1441.4 crore more than the currently expected cash-flows from business and any committed or contracted sources of funds. Admitted to the Empowered Group (EG) of Corporate Debt Restructuring (CDR) cell. Ability to continue as a going concern dependent on the successful outcome of its application to the CDR scheme. Hence, no adjustments made to the accompanying financial statements.
* Stopped payment of margins on certain derivatives contracts with banks called during the year. Subsequent to the balance sheet date, banks terminated these contracts based on early termination clause in the agreement, and claimed Rs 489.52 crore as loss incurred on termination of such contracts. On unilaterally cancellation of the derivatives transactions by banks, mark-to-market losses rose on account of counter-positions advised by banks. As per legal opinion, these contracts can be disputed. No provision made in the accounts for these demands, disclosed under contingent liabilities. Quantum of mark-to-market losses as on the balance sheet date on above contracts yet to be determined. Pending final settlement, the auditors are unable to quantify the extent of provision that may be required.
Wyeth:
The government of India has demanded Rs 59.07 crore (inclusive of total interest of Rs 42.06 crore) [previous year Rs 59.07 crore] under the Drugs (Prices Control) Order, 1979. Cumulative provision on such demands amounted to Rs 2.40 crore (previous year Rs 2.40 crore) end March 2009. Further, the government has raised a demand of Rs 17.26 crore [previous year Rs 17.26 crore] under the Drugs (Prices Control) Order, 1995. Provided Rs 12.87 crore (previous year Rs 12.87 crore). The balance demand of Rs 4.38 crore (previous year Rs 4.38 crore) in dispute. Not possible to predict the outcome of these demands.
Zicom Electronic Security Systems:
Equity investment of Rs 41.01 crore in wholly owned subsidiary Zicom Retail Products Pvt. Ltd. and advanced unsecured loan of Rs 10.92 crore end March 2009. Accumulated losses of subsidiary company Rs 17.93 crore end March 2009. Management confident of generating greater business and improving profitability by retail expansion and creation of retail electronic sSecurity brand. Accordingly, the management considers such diminution to be temporary and, hence, no provision made for diminution in the value of investments and for unsecured loan.
Irrational exuberance
Excess remuneration paid to directors and top managerial executives is one of the frequent comments in many reports of statutory auditors
Issue of excess remuneration paid to directors and top managerial executives is one of the frequent comments in many reports of statutory auditors. This is also because remuneration payable to top managers is linked with the financial performance of the company.
With the deterioration in the global and domestic market conditions due to the sub-prime mortgage default crisis in the US, the bottom line of Indian Inc has suffered considerably. Thus, all of a sudden, remuneration that was looking fair a couple of years ago has turned exuberant. This is in contrast with job losses and freeze on pay faced by employees.
In the past, the Central government had a major say in remuneration payable to top managers. The amended Companies Act, 1956, gives the shareholders the right to approve remuneration. This way, companies were given the liberty to decide managerial remuneration.
In certain special cases, such as companies not making adequate profit or incurring losses, companies have to seek approval of the Central government. Besides, the Companies Act also specifies the overall limit on remuneration payable based on quantum of profit. This provision attempts to keep a tab on remuneration paid to directors and ensures that extremely high remuneration is not paid. It attempts to link remuneration with financial performance. Interestingly, the directors of Classic Diamonds have refunded the excess remuneration paid to them in 2008-09.
Following are companies whose statutory auditors have commented on excess remuneration paid to the top managers:
Advanta India:
Remuneration paid to the managing director was in excess of the limits specified in Schedule XIII of the Companies Act by Rs 91.09 lakh. Steps are being taken to obtain the Central government’s approval. Pending final outcome, no adjustments have been made to the financial statements.
Alembic:
In view of inadequate profit, managerial remuneration paid to managerial persons in excess of the limits laid down under Section 198 and Schedule XIII of the Companies Act by Rs 396.30 lakh is subject to the approval of the Central government.
Asahi India Glass:
Paid Rs 83 lakh as remuneration to managing and other directors. This is in excess of the limits under the Companies Act. Had the remuneration been in accordance with the Act, the loss after tax would have been lower by Rs 83 lakh and loans and advances would have been higher by the same amount in 2008-09.
Bajaj Hindusthan:
Remuneration paid to managerial personnel in excess of the limits laid down under the Companies Act. Subject to the approval of Central government, for which an application has been made. Pending approval, the excess remuneration is being held in trust by the respective managerial personnel.
Balasore Alloys:
Excess remuneration of Rs 56.80 lakh paid to the wholetime director is pending approval of the Central government.
Batliboi:
Remuneration paid to the chairman and managing director in excess of the ceiling under Schedule XIII of the Companies Act by Rs 27.64 lakh. Pending approval of the Central government.
Bharat Gears:
Remuneration of Rs 44.90 lakh to the chairman and managing director and Rs 2.93 lakh to the joint managing director subject to approval of members by way of special resolution in the forthcoming extraordinary general meeting and of the Central government.
Classic Diamonds:
Managerial remuneration paid was more than the limits specified under Section 309 of the Companies Act. As a result, profit understated by Rs 10.96 lakh and current assets understated by corresponding amount. The directors refunded the excess managerial remuneration paid in 2008-09 on 21 July 2009.
Gabriel India:
Remuneration paid to the executive directors aggregating Rs 1.29 crore in excess of the limits prescribed under the Companies Act. Is in the process of obtaining the shareholders’ approval and applying to the Central government for obtaining requisite approvals.
New Delhi Television:
Managerial remuneration amounting to Rs 43.04 lakh for 2008-09 and Rs 48.77 lakh for 2007-08 paid to the directors subject to approval by the Central government. Additionally, 137,500 shares issued under ESPS-2009 scheme to one of the directors included above are subject to the approval by the shareholders and the Central government. In the event that the Central government approval is not received, these amounts are to be refunded by the directors. This would then result in loss after tax coming down to Rs 72.89 crore in 2008-09 as against reported figure of Rs 73.18 crore.
NRB Bearings:
Managerial remuneration of Rs 44.26 lakh paid in excess of specified limits, pending approval of the members and the Central government.
Panacea Biotec:
Incurred managerial remuneration of Rs 6.30 crore. This is in excess of the limits specified by the relevant provisions of the Companies Act by Rs 3.81 crore. Has made an application to the appropriate regulatory authorities in this regard. Pending the final outcome of the application, no adjustments have been made to the accompanying financial statements.
Source: Capitaline database
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