Rama Krishna Vadlamudi November 17th, 2009
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Which is the most popular ice cream flavour in the world?
Not surprisingly, vanilla ice cream is still the most extensively consumed flavour in the world with a share of more than 30 per cent cutting across all ages. When we go to an ice cream kiosk, a variety of flavours are available on the platter. The variety puts us in a quandary. (It seems more than a thousand flavours are made available by Baskin-Robbins, the leading ice cream manufacturer in the US.) After looking at the choices for a few minutes, we end up buying mostly the vanilla variety or at best a chocolate or a strawberry flavour.
Though picking up mutual funds (MFs) is not so easy; keeping it simple is the best strategy as far as selecting equity MF investment is concerned, through a selection of well-diversified equity MFs. The all-time favourites are the plain vanilla version of equity MFs, i.e., well-diversified equity schemes providing consistent & steady returns in all market phases.
There are more than 500 equity mutual fund schemes from 39 fund houses in India. Picking up the right equity fund from a bevy of schemes to meet one’s investment objectives is apparently a difficult job, if not a Himalayan task.
Diversified equity mutual fund schemes offer good diversification, sound money management skills, experienced money managers, good investor-friendly practices, advantage of thorough research teams and others. As such, investors will be better off considering diversified equity mutual funds for their equity portfolio within their overall asset allocation, risk profile and risk appetite.
For the benefit of my SCRIBD readers, I’ve done some number crunching of more than 500 diversified equity mutual funds to arrive at some good schemes worth considering for an investment horizon of three to five years even when the Sensex is hovering between 16,000 and 17,000. A number of factors have been considered while selecting these funds. The important parameters considered are: the experience of a strong fund management team, the track record of the fund manager in different market cycles and the methodology and processes followed by the fund house, among others.
The selected list is given in the next page:
CONTENTS PAGE
1) List of good and well-diversified equity mutual funds 3
2) Filters used while selecting the list of good equity MFs 4
3) Profiles of some top-notch mutual fund money managers 4
4) How to choose equity mutual fund schemes 7
5) Some caveats before investing in equity MFs 8
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LIST OF GOOD AND WELL-DIVERSIFIED EQUITY MUTUAL FUNDS
Sl.No. NAME OF THE FUND LARGE/MID CAP RISK GRADE NAV as on 16.11.09
Rs
1 Birla Sun Life Frontline Equity Plan A Large 71%, Mid 29% AVERAGE 77.37
2 DSPBR Equity Large 42%, Mid 40% LOW 52.78
3 DSPBR Top 100 Equity Regular Large 91%, Mid 9% LOW 88.05
4 Fidelity Equity Large 69%, Mid 22% LOW 29.10
5 Franklin India Prima Plus Large 51%, Mid 40% LOW 185.94
6 HDFC TOP 200 Large 71%, Mid 28% LOW 178.63
7 ICICI Pru Infrastructure Large 73%, Mid 22% Above Average 27.79
8 IDFC Imperial Equity Plan A Large 86%, Mid 14% LOW 17.36
9 Magnum Contra SBIMF Large 67%, Mid 27% AVERAGE 53.00
10 Quantum Long-term Equity Large 42%, Mid 41% LOW 17.67
11 Reliance Growth Large 45%, Mid 41% Below Average 402.64
12 Tata Pure Equity Large 55%, Mid 45% LOW 87.29
13 UTI Opportunities Large 80%, Mid 20% Below Average 23.26
Notes: 1. All are growth plans and NAV is for growth plans – all are open-ended schemes
2. All are diversified equity schemes
Sl.No. NAME OF THE FUND AAUM as on 31.10.09 CAGR No. of stocks
Rs crore 3-year % 5-year % 7-year %
1 Birla Sun Life Frontline Equity Plan A 1,304 16.28 29.13 35.89 58
2 DSPBR Equity 1,521 17.35 32.57 42.37 82
3 DSPBR Top 100 Equity Reg. 2,198 16.96 29.55 NA 42
4 Fidelity Equity 2,849 13.27 NA NA 62
5 Franklin India Prima Plus 1,742 12.00 27.23 36.22 67
6 HDFC TOP 200 5,298 18.28 31.59 41.80 66
7 ICICI Pru Infrastructure 4,293 15.56 NA NA 41
8 IDFC Imperial Equity Plan A 352 14.07 NA NA 27
9 Magnum Contra SBIMF 3,188 13.22 34.13 45.53 80
10 Quantum Long-term Equity 43 14.99 NA NA 25
11 Reliance Growth 6,162 16.22 33.13 47.03 38
12 Tata Pure Equity 418 13.38 27.16 38.58 44
13 UTI Opportunities 787 18.27 NA NA 38
Notes: AAUM-Average Assets Under Management
CAGR-Compounded Annual Growth Rate
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FILTERS USED FOR SELECTION OF FUNDS
The following filters have been applied while arriving at the above set of funds:
1) The reputation of the particular fund house is considered before picking up individual schemes of that fund house
2) Experience and long-term track record of the fund manager
3) Consistency of returns during bear phases as well as bull markets
4) Long-term track record of the fund, say, more than three/five years
5) Only growth plans of open-ended, diversified equity mutual fund schemes are considered
6) Thematic, sectoral, fund of funds-FOFs and balanced funds are not considered as the scope of this article is confined only to diversified equity mutual fund schemes
7) Individual MF scheme size of more than Rs 100 crore (the only exception is Quantum Long-term Equity Fund due to its good, steady and long-term performance)
Quantum Mutual Fund charges heavy exit loads of up to four per cent if investors redeem their units within one year from the date of purchase. This is to prevent frequent churning of mutual fund schemes by some investors. Now, most of the mutual funds are charging higher exit loads as the entry load is banned by SEBI.
You can choose a combination of the above schemes to meet your investment needs within the timeframe selected by you. Stick to only three or four funds – in extreme cases, five funds. More funds means more trouble of tracking their performances and more paperwork for you!
PROFILES OF SOME FUND MANAGERS
The fund manager plays a major role in portfolio selection and construction, diversification and risk containment in order to deliver superior returns for the investors. Due to the advent of new fund houses, there is a big demand for good fund managers who quit quite often for better opportunities. As such, it’s also important to select funds based on the strength of investment processes of a particular fund house. The following is a list of fund managers who have delivered consistent and superior returns over different time periods:
1. Apoorva Shah: He’s a fund manager with DSP BlackRock MF, formerly known as DSP Merrill Lynch. He is a commerce graduate and did his MBA from IIM, Ahmedabad.
He’s performed well during different market cycles and the first three funds given below have delivered superior returns for the investors. He’s overweight on energy, financials and FMCG stocks now.
He manages, DSPBR Equity, DSPBR Balanced, DSPBR Top 100 Equity, DSPBR Micro Cap and a few other funds.
2. Kenneth Andrade: He is the Chief Investment Officer of IDFC Mutual Fund. He is a commerce graduate from Bombay University. He was earlier with Standard Chartered MF which was taken over by IDFC and renamed it as IDFC MF. He manages Enterprise Equity, Imperial Equity and Premier Equity funds. He is known for protecting the downside.
He remained cautious well before the bull market frenzy peaked in January 2008 and he saved the blushes for his investors during the meltdown of 2008. As the total fund size with him is lesser than other fund managers with large MFs, he maintains lesser number of stocks in his portfolio.
3. Mahesh Patil: He’s an experienced fund manager with Birla Sun Life MF. He’s done his BE and MMS from ICFAI.
He is managing equity funds – Birla Sun Life Equity, Birla Sun Life Frontline Equity, Birla Infrastructure and Birla Intl. Equity schemes. At present, he holds around 12 per cent cash in Birla Sun Life Equity plan.
His funds have delivered consistently well during all phases of the market movements.
4. Prashant Jain: He is the Executive Director and the Chief Investment Officer (CIO) with HDFC Mutual Fund. He was earlier with Zurich AMC which was merged with HDFC MF in 2003. Since then, he’s remained steadfastly with HDFC MF. He’s got more than 17 years of rich experience with the mutual fund industry. He’s completed his B.Tech, IIT and MBA, IIM. He’s renowned in the MF industry for his research-based methodology. However, HDFC MF last year had invested in some real estate companies’ instruments which went sour in their fixed maturity plans and other debt schemes.
He’s delivered consistently good returns for the investors. The fund manager is overweight on financials, pharmaceuticals and energy stocks now. He doesn’t usually keep huge cash levels in the schemes even during bear phases. He’s known for his disciplined approach to investing.
He now manages the following equity schemes, in addition to some MIPs – HDFC Equity, HDFC Top 200, HDFC Prudence (a balanced fund) and HDFC Infrastructure (a closed-ended fund). The first three funds have delivered superior returns across all market cycles keeping the long-term investors happy.
5. Sandeep Kothari: He’s a fund manager with Fidelity MF. He’s a chartered accountant. He is a bottom-up stock picker and follows a fundamental approach while investing in stocks. Fidelity is known for its downside protection in bear markets. Veteran US fund manager, Peter Lynch, is an inspiration for them here.
The fund manager has delivered good returns from the above funds. Now, the fund manager is overweight on financials, energy and health care stocks. He doesn’t hold much cash in his funds.
He manages the following equity schemes: Fidelity Equity – with S Balakrishnan, Fidelity Growth – with S Balakrishnan, Fidelity Intl Opp – (holds 4.96 per cent stake in unlisted National Stock Exchange); and Fidelity Tax Advantage (ELSS tax savings scheme). Fidelity Equity and Fidelity Tax Advantage funds have done very well in the last two to three years providing consistent returns.
6. Sankaran Naren: He is a fund manager with ICICI Prudential MF. He manages ICICI Pru Discovery, ICICI Pru Dynamic, ICICI Pru Growth, ICICI Pru Indo-Asia, ICICI Pru Infrastructure jointly with other fund managers.
He had done his B.Tech from IIT, Madras and MBA from IIM, Calcutta. The fund manager is bullish on RIL and Bharti Airtel, in addition to sectors – energy, financials and metals.
7. Sukumar Rajah: He’s the Chief Investment Officer-Equity with Franklin Templeton Mutual Fund. He’s got more than 15 year experience in MF industry having joined Kothari Pioneer MF in 1994 which was later merged with Franklin Templeton MF in 2002. He’s done his BE from Roorkee Univ and done his MBA from IIM, Bangalore.
At present, he’s overweight on financials, energy and services stocks. Usually, the fund manager doesn’t keep much cash levels in the schemes. The performance of his funds has slipped a bit in the last few months compared to the category average.
He manages the following equity schemes: Franklin India Prima Plus – with Anand Radhakrishnan, Fraklin Fexi Cap – with K N Siva Subramanian, Franklin Asian Equity – with Roshan Jain; and a few index funds and FOFs – with others.
8. Sunil B.Singhania: He is a leading fund manager from Reliance MF, India’s biggest mutual fund by assets – average AUM of more than Rs one lakh crore. He’s done his CFA (of the US) and FCA. He’s delivered decent returns as a fund manager with a large fund with a corpus of more than Rs 6,000 crore, that is, Reliance Growth fund. He has been managing this fund for the past five years.
He’s delivered superior returns for the above fund. What’s noteworthy is that with such a large corpus, he maintains a relatively concentrated portfolio with just 38 stocks in Reliance Growth fund as of October 31, 2009. However, he is holding 16 per cent cash as 31.10.09 in this fund.
His other funds include Reliance Banking, Rel. Diversified Power, Rel. Infrastructure and Rel. Long-Term Equity (closed-ended). The fund manager has been showing a tendency to hold large cash holdings of 10 to 25% in his funds. Reliance MF protected investors during last year’s bear phase with high cash levels. But, the fund house could not deliver superior returns in 2009.MUTUAL FU
HOW TO CHOOSE EQUITY MUTUAL FUNDS
Before investing in an equity mutual fund, it would be better if investors take a hard look at the following five parameters:
1) Sustainable Performance: Consider the performance of the fund during several time periods – in a bear market as well as a bull market. Don’t consider only the recent performance. Take into account the returns over three/five year time periods.
2) Suitability: The investment objective of the fund must match with the objective of the individual investor. Mid-cap funds may not be suitable for some risk-averse investors. Likewise, investors with higher risk appetite may like to invest in mid-cap oriented funds.
3) Fund Manager’s Track Record: Watch the track record of the fund manager across various funds and different fund houses (if any)
4) Diversification: Check for the number of stocks and concentration of the portfolio. Too large a number of stocks or too less may not provide optimal returns for the investors in the long run.
5) Risk parameters: Look for Sharpe Ratio – which is statistical tool measuring risk-reward ratio. This ratio measures the amount of excess return for each unit of risk taken by the fund.
For a detailed article on picking up good equity mutual funds, just click:UTUAL FUN http://www.scribd.com/doc/20712330
Some Caveats before investing in equity mutual funds
1) Read the Scheme Information Document (SID) and Statement of Additional Information (SAI) thoroughly before investing
2) MF performance is subject to market risk. During 2008, some good funds had lost only 40 to 45 per cent against the loss of around 50 to 52 per cent by the market. However, there are some funds which managed to lose more than 85 per cent of their NAV in just one year!
3) After selecting a few good schemes, watch the performance of the schemes against their benchmarks, peers or general market
4) Lesser number of funds the better: The tendency of investors is to overload on a number of schemes. They confuse mutual funds with stocks. Every mutual fund holds usually between 40 to 60 different stocks and offers good diversification. As such, it’s not advisable to hold more than three or four mutual fund schemes in one’s portfolio.
5) At the same time, avoid overloading schemes from the same fund house
6) In general, avoid sectoral or thematic funds unless you’re an expert stock picker with high risk appetite or you’re too sure about the performance of that particular sector.
7) Time you keep your money in the market is more important than TIMING the market
8) The longer the time horizon of your investments, the lesser the risk
9) Regular investments in the market during the bull as well as the bear phases will give better returns for long-term investors
10) Check out the portfolio of stocks owned by the fund, assess the strength of the portfolio and the extent of churning by the fund manager
11) Find out whether the fund is having too much exposure to a particular sector. Well-diversified funds need to have true diversification; otherwise, the fund will entail higher risks for investors
12) Investors should invest a part of their savings or surplus as per their asset allocation. Asset allocation is a process whereby every investor shall allocate (depending on their own risk appetitie, risk profile, age, time horizon, investment objective, etc) funds to different asset classes, like, fixed deposits, PPF/NSC, equities, mutual funds, real estate, gold and others; in addition to life insurance and medical insurance
13) Before jumping into equities or equity mutual funds, consult your certified financial advisor and get his/her advice based on your investment objectives and needs
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Data source: ValueResearch Photo Courtesy: BBC
AUTHOR’S DISCLAIMER: This should not be construed as a recommendation by the author. The author holds a small stake in a few mutual fund schemes and as such it’s safe to assume that the author has a vested interest in general market going up. The views of the author are personal. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.
Thursday, 31 December 2009
GOOD MONEY MARKET/LIQUID MUTUAL FUNDS IN INDIA-VRK100-25112009
Rama Krishna Vadlamudi November 25th, 2009
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Investors looking for investments in liquid mutual funds can consider the following liquid funds. Every individual needs to keep some money in liquid funds or savings banks (SB) deposits for meeting their emergency or day-to-day requirements. Experts opine rather suggest that at least six months of one’s income must be kept in liquid form for emergency/medical purposes. One can keep two months of one’s income in SB account, the remaining four months of such emergency/contingency fund can be kept in liquid funds. While SB accounts offer immense liquidity through ATM cards, mobile banking and cheque book facility; there are some good alternative to SB deposits. Even institutional investors also keep their short-term surpluses in such instruments separately floated for them by mutual funds.
There are a variety of liquid mutual funds, variously termed as, money market mutual funds or liquid mutual funds. While SB accounts are supposed to give an interest of 3.25 per cent per annum, the effective yield for a depositor works out to a meager 2.5 per cent or even less due to some peculiar features of SB accounts in India. Banks pay interest on SB accounts on the minimum balance maintained between 10th and last day of the month. Depositors lose out heavily because of this distortion. This gross aberration is being rectified by Reserve Bank of India effective April 1, 2010 – from that date banks have to pay interest on daily average balance. Though belated, this is a good and depositor-friendly intervention from the central bank.
Liquid mutual funds invest in short-term instruments with maturity of up to 91 days. As such, their returns will depend on the demand for short-term funds. For example, during 2008, due to tight liquidity conditions, liquid funds were able to deliver returns of nine to 10 per cent per annum to liquid fund investors. This was very much higher than the supposed SB deposit rate of 3.25 per cent. But this year, SEBI had directed liquid funds not to invest in instruments of more than 91-day maturity effective from May 1, 2009. As such, their returns have come down drastically for liquid funds in the last six months.
Moreover, due to benign interest rate regime in the monetary system, short-term rates of certificate of deposits and commercial papers have come down. If and when the interest rate cycle takes an upward curve, then these liquid funds will be able to generate returns of five to seven per cent in future. As of now, due to immense liquidity and subdued interest rates, the returns from liquid funds are hovering between four and five per cent, which is just half of what they paid in 2008. The returns may improve going forward depending on interest rate cycle.
Salient features of liquid mutual funds:
Liquid funds invest in debt instruments and money market instruments
Investments in liquid funds are practically risk-free, even though they carry interest rate risk and credit risk
Interest rate risk and credit risk are practically NIL as these funds invest in short-term instruments
Investments of up to Rs one lakh in SB accounts are guaranteed by DICGC (an arm of RBI) in the event of any bank going bankrupt; however, there is no such protection for investments in liquid funds
There are no entry and exit loads for liquid funds
They are easy to invest and easy to redeem, though in certain cases the redemption may take two to three working days
One important factor to consider before investing is expenses ratio. The lower the expenses ratio, the better for investors
SUITABILITY OF LIQUID FUNDS:
Liquid funds are suitable for individual or institutional investors who are seeking returns for short-term tenure and wants to keep the funds in highly liquid form, that is, encashable easily
Instead of keeping more than required money in savings bank deposits (which give a yield of about 2.50 per cent per annum) or current accounts (which give no interest), individual/institutional investors can consider liquid funds alternatively
GOOD LIQUID FUNDS: (Table 1)
YEAR 2009 2008
LIQUID FUNDS AAUM Rs crore* Q3 Q2 Q1 Q4 Q3 Q2 Q1
Returns % #
CANARA ROBECO LIQUID
RETAIL-G 24 1.03 1.20 1.63 2.46 2.36 2.08 2.13
HDFC CASH MANAGEMENT
SAVINGS PLAN-G 5,233 1.18 1.32 1.78 2.24 2.33 2.09 2.04
LIC MF LIQUID-G 13,315 1.24 1.38 1.92 2.50 2.37 2.14 2.13
UTI MONEY MARKET
MUTUAL FUND-G 207 1.15 1.37 1.82 2.40 2.33 1.92 1.83
* AAUM-Average assets under management as on Oct. 31, 2009
# The returns in percentage are absolute, but not annualized for calendar quarter - for growth plans of open-ended schemes
From the above table, it can be observed that, LIC MF’s Liquid fund-Growth Plan has been consistently giving highest returns in the last seven quarters. In fact, the data for last 30 quarters (since Apr-Jun 2002 qtr till the latest) indicate that LIC MF’s Liquid fund has given one of the best returns in 22 quarters. Next come HDFC Cash Management Savings Plan and UTI Money Market Mutual Fund. (see tables 2 and 3 below)
Main features of these liquid funds: (Table 2)
LIQUID FUNDS Minimum (Rs) Min. (Rs) Expenses Ratio STP Port-folio RISK
subscription Balance % in 2009
LIC MF LIQUID-G 25,000 25,000 0.4 YES Good Rating LOW
CANARA ROBECO
LIQUID RETAIL-G 5,000 NA 0.42 NO Good Rating Bel. Average
HDFC CASH MANA-
GEMENT SAVINGS
PLAN-G 10,000 NA 1.27 YES Good Rating LOW
UTI Money Market
MUTUAL FUND-G 10,000 10,000 0.43 YES Good Rating Bel. Average
STP-Systematic Transfer Plan; Data as on 20.11.09; & Data source: ValueResearch
RETURNS FROM LIQUID FUNDS: (Table 3)
LIQUID FUNDS RETURN %:
1-week # 1-month # 3-month # 6-month# 1-year #
LIC MF LIQUID-G 0.09 0.40 1.20 2.52 6.42
CANARA ROBECO LIQUID RETAIL-G 0.07 0.30 0.93 2.06 5.42
HDFC cash mgmt. savings plan-G 0.08 0.37 1.12 2.38 5.98
UTI MONEY MARKET MUTUAL FUND-G 0.07 0.33 1.00 2.29 5.99
# The returns in percentage are absolute, but not annualised
Data as on Nov. 20, 2009; Data source: ValueResearch
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SOME OTHER GOOD LIQUID FUNDS:
• There are several well-known liquid mutual fund schemes, like, Templeton India Money Market Account (TIMMA is the first MMMF in India), Birla Sun Life Cash Manager, SBI Magnum InstaCash, Quantum Liquid fund (net assets are very low) and DWS Insta Cash Plus Regular.
• In the category of institutional plans of liquid schemes, the following schemes are well known: Birla Sun Life Cash Manager Inst, ICICI Prudential Liquid Super Inst, Reliance Liquidity fund, Tata Liquid Super HI, Templeton India Super Inst, and UTI Liquid Cash Inst.
Tax Treatment of Growth Plans of Liquid funds
for Resident Individuals
1. LONG-TERM CAPITAL GAINS TAX (LTCG): Suppose a resident individual has invested money in the growth plan of a liquid MF scheme. If she keeps the units for more than a year, the profit from the sale of such units will be subject to long-term capital gains tax at the rate of 20 per cent (including education cess, it comes to 20.60 per cent) with indexation benefit. Without indexation benefit, the tax liability will be 10.30 per cent including education cess.
2. SHORT-TERM CAPITAL GAINS TAX (STCG): Suppose a resident individual has invested money in the growth plan of a liquid MF scheme and she sells the units within one year from the date of investment. The profit from sale of such units will be included in her taxable income and taxed according to her individual tax slab (that is, marginal rate of tax).
Tax Treatment of Dividend Plans of Liquid funds
for Resident Individuals
Returns received from dividend plans of liquid MFs are tax-free in the hands of resident individuals; however, mutual funds deduct a dividend distribution tax (DDT) of 25 per cent (including education cess, it works out to 25.75 per cent) and pays the remaining dividend to the unitholders. To that extent, the return from dividend plans will be lesser.
Tax Treatment of Mutual Funds in India (Table 4)
LONG-TERM CAPITAL GAINS TAX *
SHORT-TERM CAP. GAINS TAX *
INIDIVIDUAL CORPORATE INIDIVIDUAL CORPORATE
Equity MFs NIL NIL 15.45% 16.995%
Debt MFs # 10.30% without indexation 11.33% without indexation Taxable as per the rate applicable to the investor
33.99%
20.60% with indexation 22.66% with indexation
* Individual - includes education cess of 3%; corporate - incl. surcharge 10% % edu. cess of 3%
# Debt MFs include liquid and money market mutual funds
Definition of long-term/short-term capital gains: If an investor holds a mutual fund for more than one year from the date of investment, gains or losses from such funds after redemption are considered as long-term capital gain or loss as the case may be. If the investor redeems a mutual fund within one year, the gain or loss from such a fund after redemption is considered as short-term capital gain or loss as the case may be.
Definition of an equity mutual fund: If any mutual fund invests 65 per cent or more of its net assets in the equity or equity-related instruments, then such a mutual fund is considered as an Equity Mutual Fund for income tax purposes as per Income Tax Act.
DIVIDEND DISTRIBUTION TAX (DDT): (Table5)
DIVIDEND DISTRIBUTION TAX (DDT) *
As per Section 115R of the IT Act, DDT is payable by debt mutual funds including liquid funds or money market mutal funds (MMMFs) on dividends distributed by them to unitholders.
* For individuals, DDT includes education cess of 3% and for corporates, DDT includes surcharge of 10% and education cess of 3%.
INIDIVIDUAL
CORPORATE
Equity MFs NIL NIL
Debt MFs excl. liquid funds
12.875% 22.66%
Liquid MFs or MMMFs
25.75% 28.325%
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Investors looking for investments in liquid mutual funds can consider the following liquid funds. Every individual needs to keep some money in liquid funds or savings banks (SB) deposits for meeting their emergency or day-to-day requirements. Experts opine rather suggest that at least six months of one’s income must be kept in liquid form for emergency/medical purposes. One can keep two months of one’s income in SB account, the remaining four months of such emergency/contingency fund can be kept in liquid funds. While SB accounts offer immense liquidity through ATM cards, mobile banking and cheque book facility; there are some good alternative to SB deposits. Even institutional investors also keep their short-term surpluses in such instruments separately floated for them by mutual funds.
There are a variety of liquid mutual funds, variously termed as, money market mutual funds or liquid mutual funds. While SB accounts are supposed to give an interest of 3.25 per cent per annum, the effective yield for a depositor works out to a meager 2.5 per cent or even less due to some peculiar features of SB accounts in India. Banks pay interest on SB accounts on the minimum balance maintained between 10th and last day of the month. Depositors lose out heavily because of this distortion. This gross aberration is being rectified by Reserve Bank of India effective April 1, 2010 – from that date banks have to pay interest on daily average balance. Though belated, this is a good and depositor-friendly intervention from the central bank.
Liquid mutual funds invest in short-term instruments with maturity of up to 91 days. As such, their returns will depend on the demand for short-term funds. For example, during 2008, due to tight liquidity conditions, liquid funds were able to deliver returns of nine to 10 per cent per annum to liquid fund investors. This was very much higher than the supposed SB deposit rate of 3.25 per cent. But this year, SEBI had directed liquid funds not to invest in instruments of more than 91-day maturity effective from May 1, 2009. As such, their returns have come down drastically for liquid funds in the last six months.
Moreover, due to benign interest rate regime in the monetary system, short-term rates of certificate of deposits and commercial papers have come down. If and when the interest rate cycle takes an upward curve, then these liquid funds will be able to generate returns of five to seven per cent in future. As of now, due to immense liquidity and subdued interest rates, the returns from liquid funds are hovering between four and five per cent, which is just half of what they paid in 2008. The returns may improve going forward depending on interest rate cycle.
Salient features of liquid mutual funds:
Liquid funds invest in debt instruments and money market instruments
Investments in liquid funds are practically risk-free, even though they carry interest rate risk and credit risk
Interest rate risk and credit risk are practically NIL as these funds invest in short-term instruments
Investments of up to Rs one lakh in SB accounts are guaranteed by DICGC (an arm of RBI) in the event of any bank going bankrupt; however, there is no such protection for investments in liquid funds
There are no entry and exit loads for liquid funds
They are easy to invest and easy to redeem, though in certain cases the redemption may take two to three working days
One important factor to consider before investing is expenses ratio. The lower the expenses ratio, the better for investors
SUITABILITY OF LIQUID FUNDS:
Liquid funds are suitable for individual or institutional investors who are seeking returns for short-term tenure and wants to keep the funds in highly liquid form, that is, encashable easily
Instead of keeping more than required money in savings bank deposits (which give a yield of about 2.50 per cent per annum) or current accounts (which give no interest), individual/institutional investors can consider liquid funds alternatively
GOOD LIQUID FUNDS: (Table 1)
YEAR 2009 2008
LIQUID FUNDS AAUM Rs crore* Q3 Q2 Q1 Q4 Q3 Q2 Q1
Returns % #
CANARA ROBECO LIQUID
RETAIL-G 24 1.03 1.20 1.63 2.46 2.36 2.08 2.13
HDFC CASH MANAGEMENT
SAVINGS PLAN-G 5,233 1.18 1.32 1.78 2.24 2.33 2.09 2.04
LIC MF LIQUID-G 13,315 1.24 1.38 1.92 2.50 2.37 2.14 2.13
UTI MONEY MARKET
MUTUAL FUND-G 207 1.15 1.37 1.82 2.40 2.33 1.92 1.83
* AAUM-Average assets under management as on Oct. 31, 2009
# The returns in percentage are absolute, but not annualized for calendar quarter - for growth plans of open-ended schemes
From the above table, it can be observed that, LIC MF’s Liquid fund-Growth Plan has been consistently giving highest returns in the last seven quarters. In fact, the data for last 30 quarters (since Apr-Jun 2002 qtr till the latest) indicate that LIC MF’s Liquid fund has given one of the best returns in 22 quarters. Next come HDFC Cash Management Savings Plan and UTI Money Market Mutual Fund. (see tables 2 and 3 below)
Main features of these liquid funds: (Table 2)
LIQUID FUNDS Minimum (Rs) Min. (Rs) Expenses Ratio STP Port-folio RISK
subscription Balance % in 2009
LIC MF LIQUID-G 25,000 25,000 0.4 YES Good Rating LOW
CANARA ROBECO
LIQUID RETAIL-G 5,000 NA 0.42 NO Good Rating Bel. Average
HDFC CASH MANA-
GEMENT SAVINGS
PLAN-G 10,000 NA 1.27 YES Good Rating LOW
UTI Money Market
MUTUAL FUND-G 10,000 10,000 0.43 YES Good Rating Bel. Average
STP-Systematic Transfer Plan; Data as on 20.11.09; & Data source: ValueResearch
RETURNS FROM LIQUID FUNDS: (Table 3)
LIQUID FUNDS RETURN %:
1-week # 1-month # 3-month # 6-month# 1-year #
LIC MF LIQUID-G 0.09 0.40 1.20 2.52 6.42
CANARA ROBECO LIQUID RETAIL-G 0.07 0.30 0.93 2.06 5.42
HDFC cash mgmt. savings plan-G 0.08 0.37 1.12 2.38 5.98
UTI MONEY MARKET MUTUAL FUND-G 0.07 0.33 1.00 2.29 5.99
# The returns in percentage are absolute, but not annualised
Data as on Nov. 20, 2009; Data source: ValueResearch
(To view this table in proper alignment and in PDF format, just click the URL given above in bold letters)
SOME OTHER GOOD LIQUID FUNDS:
• There are several well-known liquid mutual fund schemes, like, Templeton India Money Market Account (TIMMA is the first MMMF in India), Birla Sun Life Cash Manager, SBI Magnum InstaCash, Quantum Liquid fund (net assets are very low) and DWS Insta Cash Plus Regular.
• In the category of institutional plans of liquid schemes, the following schemes are well known: Birla Sun Life Cash Manager Inst, ICICI Prudential Liquid Super Inst, Reliance Liquidity fund, Tata Liquid Super HI, Templeton India Super Inst, and UTI Liquid Cash Inst.
Tax Treatment of Growth Plans of Liquid funds
for Resident Individuals
1. LONG-TERM CAPITAL GAINS TAX (LTCG): Suppose a resident individual has invested money in the growth plan of a liquid MF scheme. If she keeps the units for more than a year, the profit from the sale of such units will be subject to long-term capital gains tax at the rate of 20 per cent (including education cess, it comes to 20.60 per cent) with indexation benefit. Without indexation benefit, the tax liability will be 10.30 per cent including education cess.
2. SHORT-TERM CAPITAL GAINS TAX (STCG): Suppose a resident individual has invested money in the growth plan of a liquid MF scheme and she sells the units within one year from the date of investment. The profit from sale of such units will be included in her taxable income and taxed according to her individual tax slab (that is, marginal rate of tax).
Tax Treatment of Dividend Plans of Liquid funds
for Resident Individuals
Returns received from dividend plans of liquid MFs are tax-free in the hands of resident individuals; however, mutual funds deduct a dividend distribution tax (DDT) of 25 per cent (including education cess, it works out to 25.75 per cent) and pays the remaining dividend to the unitholders. To that extent, the return from dividend plans will be lesser.
Tax Treatment of Mutual Funds in India (Table 4)
LONG-TERM CAPITAL GAINS TAX *
SHORT-TERM CAP. GAINS TAX *
INIDIVIDUAL CORPORATE INIDIVIDUAL CORPORATE
Equity MFs NIL NIL 15.45% 16.995%
Debt MFs # 10.30% without indexation 11.33% without indexation Taxable as per the rate applicable to the investor
33.99%
20.60% with indexation 22.66% with indexation
* Individual - includes education cess of 3%; corporate - incl. surcharge 10% % edu. cess of 3%
# Debt MFs include liquid and money market mutual funds
Definition of long-term/short-term capital gains: If an investor holds a mutual fund for more than one year from the date of investment, gains or losses from such funds after redemption are considered as long-term capital gain or loss as the case may be. If the investor redeems a mutual fund within one year, the gain or loss from such a fund after redemption is considered as short-term capital gain or loss as the case may be.
Definition of an equity mutual fund: If any mutual fund invests 65 per cent or more of its net assets in the equity or equity-related instruments, then such a mutual fund is considered as an Equity Mutual Fund for income tax purposes as per Income Tax Act.
DIVIDEND DISTRIBUTION TAX (DDT): (Table5)
DIVIDEND DISTRIBUTION TAX (DDT) *
As per Section 115R of the IT Act, DDT is payable by debt mutual funds including liquid funds or money market mutal funds (MMMFs) on dividends distributed by them to unitholders.
* For individuals, DDT includes education cess of 3% and for corporates, DDT includes surcharge of 10% and education cess of 3%.
INIDIVIDUAL
CORPORATE
Equity MFs NIL NIL
Debt MFs excl. liquid funds
12.875% 22.66%
Liquid MFs or MMMFs
25.75% 28.325%
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1. Income Tax Slabs 2009-10 for Salaried Class 2 524
2. Goods and Services Tax-GST-an introduction 1 639
3. Direct Taxes Code Bill 2009-analysis 1 226
4. Public Provident Fund PPF ac-Little Known Facts 1 140
5. Interest Rate Futures-NSE launches IRFs 734
6. Nifty Bees-Exchange Traded Fund 634
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TOP TEN US ECONOMIC INDICATORS-VRK100-17112009
Rama Krishna Vadlamudi November 17th, 2009
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US Economy has recently come out of recession by showing a GDP growth of 0.9 per cent (3.5 per cent annualized) for the July-September 2009 quarter compared to the quarter of July-September 2008. This is seen as a sign of US economic recovery by many experts. However, US unemployment rate continues to go up touching a high of 10.2 per cent in October 2009. In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.
In the light of the above developments, it would be better to watch certain important economic indicators while the US is showing some signs of slow economic recovery. The following are some important indicators worth monitoring:
TOP TEN US MACRO-ECONOMIC INDICATORS
1 US Gross Domestic Product (GDP) growth rate
2 US Stock indices - Dow 30 and S&P 500
3 US Unemployment Rate
4 US Sales Figures like, auto, home and retail sales
5 Prices of crude oil, gold, base metals, etc
6 Interest rate & policy actions and comments from the US Fed and US Treasury Secretary
7 US Dollar Index against major currencies - Pound, Euro, Yen, etc
8 CBOE VIX Volatility Index (Chicago Board Options Exchange)
9 US Inflation Rate CPI (at this point this is not a concern)
10 US Treasury Yield Curve (difference between two-year and 10-year US Treasury note yields)
Notes:
These are not necessarily in the order given above.
The degree of seriousness depends on the prevailing situation at that particular time. Developments on the WTO front and trade protectionism also need to be monitored.
This is only an indicative list and the indicators keep changing from time to time due to the dynamic nature of world economy.
Actions of other central banks in the UK, euro zone, China, Australia and other important G-20 countries also need to be watched.
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US Economy has recently come out of recession by showing a GDP growth of 0.9 per cent (3.5 per cent annualized) for the July-September 2009 quarter compared to the quarter of July-September 2008. This is seen as a sign of US economic recovery by many experts. However, US unemployment rate continues to go up touching a high of 10.2 per cent in October 2009. In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.
In the light of the above developments, it would be better to watch certain important economic indicators while the US is showing some signs of slow economic recovery. The following are some important indicators worth monitoring:
TOP TEN US MACRO-ECONOMIC INDICATORS
1 US Gross Domestic Product (GDP) growth rate
2 US Stock indices - Dow 30 and S&P 500
3 US Unemployment Rate
4 US Sales Figures like, auto, home and retail sales
5 Prices of crude oil, gold, base metals, etc
6 Interest rate & policy actions and comments from the US Fed and US Treasury Secretary
7 US Dollar Index against major currencies - Pound, Euro, Yen, etc
8 CBOE VIX Volatility Index (Chicago Board Options Exchange)
9 US Inflation Rate CPI (at this point this is not a concern)
10 US Treasury Yield Curve (difference between two-year and 10-year US Treasury note yields)
Notes:
These are not necessarily in the order given above.
The degree of seriousness depends on the prevailing situation at that particular time. Developments on the WTO front and trade protectionism also need to be monitored.
This is only an indicative list and the indicators keep changing from time to time due to the dynamic nature of world economy.
Actions of other central banks in the UK, euro zone, China, Australia and other important G-20 countries also need to be watched.
ANNUAL REPORTS OF INDIAN COs-IRREGULARITIES-AUDITORS' QUALIFICATIONS-VRK100-14112009
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
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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