REPORTS

Investment Strategy: Under pressure- Part I

Auditors of many mid caps note non-provision for derivatives losses, pressure on cash flows and diminution in value of investments

Most companies are out with their annual reports this time of the year. Annual reports carry one short but important inclusion: auditors' report. Probably, the report by the statutory auditors is the most important component of the annual report. Auditors act as representatives of the shareholders to check and crosscheck the books of accounts prepared by the company.

Indeed, statutory auditors take care of the inherent conflict of interest between the shareholders and the management. This is important, particularly in India, as promoters, who own a majority equity stake in most Indian companies, also look after the day-to-day operational affairs of the company, apart from taking broad decisions on strategies and policies. Even in professionally managed companies, auditors play a crucial role. Professional managers also have incentive to undertake window-dressing to please the board of directors or owners. Professional managers can draw higher compensation by reporting superior financial results.

The shareholders, too, would like the company they invest in to display robust financial performance so as to fetch good valuation from the market. As neutral observers and whistle blowers, it is the responsibility of the auditors to ensure that the financial statement presented by the company is complete and accurate so as to serve the interests of all the stakeholders. Not doing so will hurt their credibility. Collaboration and collusion with any of the stakeholders to fudge financial numbers can be at the peril of the auditors. As auditors are independent of owners and managers of a company, they have full rights to be vocal about its accounting practices. Auditor comments let investors know of imminent disasters or potential challenges and threats that a company could face.

Interestingly, auditors' qualifications and comments can also throw light on inherent risks associated with the businesses of a company. In such cases, investors need to be cautious while considering the value they should offer to such stocks. For instance, the auditors' report of a Delhi-based construction and real estate firm is full of qualifications and comments and it is difficult to take a call on their impact on financials. This particular company has defaulted in repayment of dues to financial institutions, banks and debenture holders.

Capital Market had a look at the auditors' reports of over 2,000 companies. The attempt was to capture auditors' qualifications, comments, observation, information, and facts and figures. Along with the main audit report, the notes to the audit report tagged as annexure to the auditors' report were also examined.

For convenience of readers, the article is being published in parts. In the last edition, many mid-cap companies were covered. In this issue, too, make mid-cap companies are examined. This is the second and last past dedicated to mid-cap companies. Mid-cap companies have been defined as those with market capitalisation Rs 500 crore to Rs 10,000 crore. The next two issues will cover small-cap companies. Again this would be in two parts.

The repeated comments that have emerged from companies scanned by Capital Market include excess remuneration paid to top executives as against what is prescribed in the Companies Act, 1956. In such cases, approval of the Central government is required. Many companies are in the process of securing the approval from the government. In a few cases, even shareholders approval is needed.

Another common comment pertains to contingent liabilities. This could be a grey area and investors need to be cautious while evaluating the true nature of the liability. For instance, a pharmaceutical company has not made provision towards premium payable for possible redemption of foreign currency convertible bonds (FCCBs) if such bonds are not converted into equity by bondholders. Considering the present volatility in the stock market, it would be prudent to provide for such liabilities. Similar is the case with a wind turbine maker, who has not provided for proportionate premium on redemption FCCBs. A company into mobile infrastructure business has given a similar treatment to premium on redemption, which could be payable in case of non-conversion. Interestingly, this company plans to adjust premium on redemption to the securities premium account (SPA) redemption. In all these three cases, the amount involved is huge and could spell trouble for companies if bondholders opt for redemption on maturity.

Another company has not provided for liabilities that could arise owing to restructuring of the loan covenants. This has been treated as contingent liability. A Mumbai-based pharmaceutical company has not made provision towards loss pertaining to derivatives contracts and bank on termination of the derivatives contracts. This has been treated as contingent liability.

Change in accounting policy is one factor that needs investors' attention. One of the Delhi-based real estate company has now been charging certain costs to the profit and loss (P&L) account against the earlier policy of treating such expenses as part of project cost to determine project inventory, revenue and debtors. Other examples of change in accounting policy pertain to recognition of revenue, capitalisation of certain special expenses instead of charging them off to the P&L account, leading to surge in profit in the fiscal ended March 2010, change in accounting policy towards stores and spare parts purchased for repairs and maintenance,

Capital Market has noticed many instances of delay in payments of undisputed statutory dues. In most cases, delays seems normal with nothing much to worry. However, in few cases, it clearly reveals the cash crunch faced by companies. A real estate company has not only delayed payment of statutory dues such as provident fund, employees' state insurance, income tax, sales tax and cess during the year but has also delayed repayment of debt and interest to banks and financial institutions.

Debt and equity exposure to subsidiary companies has emerged as an area of concern for companies, which have been adequately highlighted by the statutory auditors. In a few cases, subsidiary companies are in financial trouble: reporting losses or have witnessed substantial or complete erosion in net worth. In a few cases, diminution in value of long-term investment in subsidiaries or associates or joint ventures is treated as strategic in nature and, hence, not written off.

Other prominent areas of concern pointed out by the auditors include recovery of money from sundry debtors, pending litigation that could result in liabilities in future, funds raised for short-term needs deployed in long-term projects or issues, frauds by employee or clients, rescheduled repayment, cash losses, accounting of income on case basis, non-provision towards marked-to-market (MTM) loss on derivatives contracts, non-conformity with certain accounting standards (AS), non-confirmation of balances of debtors and creditors, and need to improve internal audit, and strengthen internal controls.

Following is company-wise comments and observations by auditors. All the auditors' reports are for the financial year ending March 2010 (FY 2010).

Coromandel International: Subsidy income includes Rs 2647.12 lakh recognised based on the management's understanding of the prevailing concession scheme. Necessary adjustments to net profit and net assets will be accounted for by the management on final announcement or determination of the subsidy receivable.

United Phosphorus: As per legal advice obtained on court order, not adjusted tax benefit on amortisation of product registrations and product acquisitions to the reserve.

* Slight delay in a few cases of payment of undisputed statutory dues.

Aurobindo Pharma: Non-provision of premium payable on zero-coupon FCCBs. The management is of the view that the liability to pay premium on redemption is contingent and the ultimate outcome cannot be presently determined. Accordingly, no provision for the liability that may result in future has been made.

* Slight delays in depositing of tax deducted at source in few cases.

Jet Airways (India): No provision for diminution or recoverability made for investments in and advances of Rs 2327.07 crore given to a subsidiary. As per the explanation given in the notes, the company has equity and preference investments aggregating to Rs 1645 crore in Jet Lite (India), a wholly owned subsidiary. Rs 682.07 crore has been advanced as interest-free loan. The subsidiary has improved its financial position by earning a profit in FY 2010. However, the subsidiary continues to show a negative net worth. A reputed valuer recently valued the equity interest in the subsidiary based on its business plans, which supports the carrying value of such investment and loan outstanding. Jet Airways continues to provide financial support to subsidiary's operations to further such business plans and expects improved performance in the future.

* The matter of a claim against the company following the acquisition of Sahara Airlines (SAL) in FY 2008 being sub-judice, it is not possible to determine the impact of the outcome at this stage. The claim of Rs 999.58 crore by the Sahara Group includes acceleration of three instalments each of Rs 137.50 crore plus deduction of Rs 37.08 crore made from the first instalment paid in March 2008 and demand of further Rs 550 crore towards increase in lumpsum purchase consideration for breach of consent terms in payment of instalments by the company after deducting tax dues of earlier years of SAL.

* Possible fraudulent bookings of tickets through credit cards amounting to approximately Rs 1.21 crore is being pursued by the company.

Jagran Prakashan: The title, 'Dainik Jagran', valued at Rs 17 crore, included under intangible assets is carried at cost and is not amortised over its useful life. This is not in accordance with the provisions of AS-26. Pending amortisation, any adjustments to the financial statements that may arise is currently not quantifiable.

PNB Gilts: Change in accounting policy for transfer of a portion of government securities in the held-to-maturity (HTM) category as permitted by the Reserve Bank of India (RBI) on 31 August 2009 subject to certain conditions. As a result, further diminution of Rs 2.13 crore in market value of securities end 31 March 2010 not provided.

Swaraj Mazda: Non-provision of Rs 4.88 crore for Modvat credit receivable. If provided, loans and advances and profit for the year would have been lower by the same amount.

Seamec: Provision for commission of Rs 6 lakh to the non-executive directors is subject to shareholders' approval.

Mangalore Chemicals And Fertilizers: Concession for urea and phosphatic fertilisers recognised on the basis of estimates.

NRB Bearings: Managerial remuneration of Rs 44.26 lakh paid in FY 2009 is in excess of specified limits and is pending approval of the Central government.

Forbes & Company:

* Pursuant to standby charter agreements entered with SCI Forbes (SFL), a joint venture entity, the company and its joint venture partner, Shipping Corporation of India (SCI), have committed to charter vessels from SFL, at charter hire charges specified in the agreements, if the vessels are not on charter with a lender- approved third party, until SFL repays its borrowings spread over 12 years. As the prevailing charter market is soft and as pooling arrangements do not technically constitute a charter, the promoters of SFL, as a matter of commercial prudence, have for the time being taken on the charter themselves. Further, SFL and its promoters have proposed to the lenders of SFL restructuring of the loan covenants and terms including suspension of enforcement of the standby charter agreements. The company expects that the proposal to find favour with concerned parties.

* As per AS-29 on provisions, contingent liabilities and contingent assets, provision for loss of Rs 7.35 crore materialised subsequent to 31 March 2010 should have been made by way of a charge to the P&L account. As a result, loss before and after tax and provisions understated by Rs 7.35 crore and reserves and surplus overstated by the same amount.

* Managerial remuneration of Rs 37.35 lakh paid in excess is subject to approval of the Central government.

* Transactions for sale of goods of Rs 3.29 lakh have been entered into with two private limited companies. One of the directors of the company is also a director of those private limited companies, without obtaining previous approval of the Central government. This is not in compliance with provisions of Section 297 of the Companies Act, 1956.

Arvind: Early adopted AS-30 on financial instruments: recognition and measurement. Measured all its financial assets and liabilities at their respective fair values or at amortised cost. Accordingly AS-13 on accounting for investments and AS-11 on effects of changes in foreign exchange rates have been followed only for those transactions that are not within the scope of AS-30.If the company had followed AS-11 and AS-13 in their entirety, carrying amount of investments, secured loans and unsecured loans would have been higher by Rs 7.53 crore, Rs 1.27 crore and Rs 1.77 crore, respectively, and carrying value of hedge reserve would have been lower by Rs 33.29 crore, respectively

Chettinad Cement Corporation: Not used jute bags in packing cement as per the Jute Packaging Materials (Compulsory Use in the Packing Commodities) Act, 1897, in view of consumer preference and resistance from workers. The Supreme Court has upheld the validity of the Act. The government has not included cement for compulsory packaging in jute bags from 1 July 1997. The possible liability that may arise on non-compliance of the Act for the earlier period is not ascertainable.

Essar Shipping Ports and Logistics: Delays in depositing service tax in a few cases.

Gammon India: Recoverability of Rs 94.54 crore under, 'Sundry debtors', on recognition of contract revenue in previous years, when the company received arbitration awards in its favour. The client has preferred an appeal for setting aside the arbitration awards. The recoverability is dependent on the final outcome of the legal suit.

* One of the joint ventures (JVs) of a wholly-owned subsidiary has applied for creditors' protection in a court in Italy. The final outcome is dependent on the approval of the court.

* Recognition of variation claims and revenue for works carried out by the JV in Oman. The final outcome is dependent on the resolution of the disputes and settlement of the claims by the client.

* Many cases of delays observed in deposit of tax deducted at source (TDS), service tax and provident fund (PF) at sites. Further, the tax on dividend, too, was not paid on time but has been paid since the balancesheet date.

The Great Eastern Shipping Company: Delay in depositing PF dues of floating staff. As per the management, it is not possible to accurately ascertain PF dues of floating staff considering the nature of its activities. The company regularly makes ad-hoc payments and, on final determination, the balance, if any, is paid.

Hotel Leelaventure: The Delhi high court (HC) upheld the appeal filed by Hudco against the order of the execution court confirming the method of computation adopted by the company on interest receivable from Hudco. The special leave petition filed by the company in the Supreme Court (SC) against this order of the Delhi HC is pending and the order has been stayed. In FY 2010, the company had recognised interest income of Rs 24.85 crore (Rs 41.15 crore in FY 2009) from Hudco. The disputed amount recognised stood at Rs 67.73 crore end March 2010.

Whirlpool of India: Slight delays in payment of undisputed statutory liabilities in a few cases.

Orient Paper and Industries: Non-disclosure of the company's proportionate interest, liabilities, income and expenses in the assets of JV, Pan African Paper Mills (EA), Kenya. This is not in compliance with the disclosure requirement of AS-27. However, this does not have any impact on the profit for the year. It has 29.34% share of interest (Rs 4.13 crore) in the JV company, which manufactures paper. Accounts of the JV are not available due to suspension of operations since 30 January 2009.

* Against demand for water tax from the Water Resources Department of the government of Madhya Pradesh, aggregating to Rs 144.30 crore including compounded interest and penalty up to end March 2010, provision has been made on the basis of liability admitted by the company as demand continues to be stayed and is under reconsideration by Central government. Out of the total demand, the company has provided Rs 10.49 crore including Rs 1.15 crore in FY 2010 and the balance demand, amounting to Rs 133.81 crore, has been shown as contingent liability.

* Fixed assets at the Brajrajnagar unit in Orissa is not physically verified by the management due to suspension of production activities. Discrepancies, if any, at this unit is unascertainable.

* Slight delays in certain cases in payment of undisputed statutory dues.

Raymond: Carrying value of exposures in Raymond UCO Denim Pvt Ltd may need adjustment if the outcome of the management's estimates of profit and realisable value of assets subject to inherent uncertainties, is substantially different. As per the additional information provided in the notes, the company has an aggregate exposure net of provision of Rs 90.09 crore including investment of Rs 6.20 crore (gross Rs 313 crore less provision for diminution Rs 222.91 crore) during the year. The company has reassessed the carrying value and, based on the valuation by expert, no further provision is considered necessary. Considering the present financial position of Raymond UCO, the company has agreed to waive interest due on loans and debentures, amounting to Rs 10.67 crore, up to 31 March 2010.

Zuari Industries: Pending announcement of final rates of concession for complex fertilisers between July 2009 and March 2010, concession has been estimated based on the known policy parameters and difference between the notified base rates and estimated rates of concession, amounting to Rs158.73 crore, has been accounted as payable to government of India.

Alembic: Due to inadequate profit managerial remuneration paid of Rs 3.44 crore is in excess of the limits. The company is in process of obtaining the government approval.

VIP Industries: Undisputed statutory dues outstanding for more than six months: sales tax (Rs 5.75 lakh) and income tax (Rs 1.49 lakh).

Andrew Yule and Company: Accounts prepared on the principle applicable to a going concern after giving due consideration to the financial rehabilitation package even though the net worth of the company is fully eroded. The Board for Industrial and Financial Reconstruction (BIFR) has sanctioned rehabilitation with a cut-off date of 31 March 2006, which is under implementation.

* Non-provision against diminution in value of investments in Yule Financing & Leasing Co amounting to Rs 27.88 lakh.

Usha Martin: Excess managerial remuneration of Rs 48.84 lakh requires shareholders' approval.

Finolex Industries: Funds raised on short-term basis have been used for long-term investment. Approximately Rs 108.60 crore used for acquisition and construction of fixed assets.

Jindal Drilling and Industries: Outstanding dues of Rs 66.33 crore withheld by ONGC due to certain claims made on another corporate body. This has been considered good based on legal opinion obtained. The company has initiated legal action.

Spice Mobility: Slight delays in payment of undisputed statutory liabilities in few cases.

Anant Raj Industries: Slight delays in payment of undisputed statutory liabilities in few cases.

IL and FS Investment Managers: Remuneration aggregating to Rs 1.71 crore paid to wholetime director in FY 2009, which is in excess of the limits specified in Section 198 of the Companies Act, 1956. The company is awaiting approval from the Central government.

Hindustan Oil Exploration Company: An amount of Rs 89.44 crore, representing income tax demands under appeal end March 2010, has been disclosed as claims against the company but not acknowledged as debt. As per the management, no provision is required.

* The auditors of of one of the unincorporated JVs of the company, PY-1 filed, have emphasised on creation of site restoration fund subsequent to the year end. Approval of the management committee pending for certain transactions with an affiliate of the company. As per the notes, PY-1 field commenced commercial production in FY 2010 and a site restoration fund (Rs 1.4 crore) was created with State Bank of India on 15 May 2010. Development and production related services rendered by an affiliate stood at Rs 16.04 crore and Rs 1.62 crore, respectively, in FY 2010.

Dewan Housing Finance Corporation: Some instances of fraud by way of misrepresentation by borrowers to avail housing loans or about repayment in certain accounts involving around Rs 36.9 lakh noticed. Initiated legal proceedings and is hopeful of recoveries.

Nagarjuna Fertilizers and Chemicals: Group concession price under group concession scheme and equated freight are considered in accordance with the norms prescribed by the government's - Fertiliser Industry Co-ordination Committee (FICC).

Cholamandalam DBS Finance: Some instances of loans becoming doubtful or loss assets consequent on fraudulent misrepresentation by borrowers and others were noticed. Amounts were not material considering the size of the company and nature of its business. Outstanding amounts of such loans were adequately provided for.

Tata Communications: Few instances of receivables becoming doubtful of recovery consequent on fraudulent representation made by customers were noticed. Amount involved, which has been written off, is not material considering the size of the company and its nature of the business.

Rashtriya Chemicals and Fertilizers: Eligible to receive subsidy from FICC on urea, phosphatic and potassic fertilisers. As rates are yet to be notified due to escalations or de-escalations in cost of inputs and other costs, subsidy has been accounted on estimated basis.

* Fertiliser bonds, with carrying value of Rs 612.59 crore, were classified as current assets instead of investments as per schedule VI of the Companies Act, 1956.

* Delays in payment of undisputed statutory dues due to procedure followed for deduction and payment of income tax.

HMT: Erosion in value of carrying cost of long-term equity investments made in subsidiary companies HMT Machine Tools, HMT Watches, HMT Chinar Watches and HMT Bearings, whose net worth has eroded, has not been provided. This is in contravention to AS-19, which has resulted in understatement of loss. The realisability of net amounts due from these loss-making subsidiaries could not be ascertained in absence of valuation reports on the immovable properties held by these subsidiaries.

* Defaulted in repayment of dues to certain bond holders. Details are as follows: * 10% secured bonds: A, B, C and E series, principal amount of Rs 31.80 crore and interest Rs 22.78 crore. * 12% secured bonds: A, B and C series, principal amount of Rs 28.70 crore and interest Rs 25.16 crore. These had became due for redemption in June 2004 and August 2006 and are yet to be redeemed.

* Rescheduled repayment of unsecured government of India guaranteed short-term loan of Rs 93.98 crore from UCO Bank of Rs 20 crore for one year from 10 August 2009 and short-term loan from UCO Bank of rescheduled to be paid up to 10 August 2010 as approved by bank.

* Not created charge for 10% non-convertible bonds (Rs 31.8 crore) and 12% non-convertible bonds (Rs 28.70 crore). Even though the bonds were issued as secured bonds, trust deed in favour of bond holders has not been executed.

Shipping Corporation of India: Balances of sundry creditors, debtors, loans and advances and deposits subject to confirmation and reconciliation.

Gruh Finance: Few instances of loans becoming doubtful of recovery on fraudulent misrepresentation by borrowers were noticed. Amount involved not significant considering the size of the company and nature of its business.

Ansal Properties and Infrastructure: Claimed exemption of Rs 34.08 crore under Section 80IA of the Income Tax Act, 1961 on tax profit arising from sale of industrial park units, pending notification by the Central Board of Direct Taxes. The company has taken opinion from a senior counsel that its application satisfies all the conditions specified in the scheme of industrial park.

* Carrying project inventory of Rs 166.75 crore for one of its group housing projects. Applied to the authority for developing the project on the revised scheme announced by the authority, which is pending approval. The management is of the view that there is no impairment in value of land or project. The auditors have relied on management contention.

* Given advances to land-owning companies, collaborators and others for purchase of land of Rs 366.24 crore. In the absence of details of land purchased or end use for intended purposes and financial position of these parties, auditors have relied on management representation that such advances are given for ongoing transactions and are regarded as being in the normal course of business.

* Sundry creditors of Rs 191.99 crore outstanding for purchase of land, services and others, whose details or reconciliations with parties are not available with the company. As per the management, desired information is being complied and will not have material impact.

* Due to initial delays in starting the project and slow pace of construction, the collaborator for developing a project has suffered financial and other business losses. As per the settlement deed, the company has paid Rs 62.80 crore towards compensation for these losses and considered them as part of project cost. As per the management, such settlements arise in the normal course of business for purchase of collaborator's right, project land and, consequently, transfer of licence in the name of the company.

* Not considered estimated cost of land to be incurred in future for one of its large township projects and also borrowing costs to be incurred in future for determining project revenues, project inventory and debtors. According to the management, the amount cannot be determined at this stage.

* Changed accounting policy for accounting of certain costs in the nature of administration and selling costs by charging them off to the P&L account in FY 2010 as against the earlier policy of treating them as part of project cost for determining project inventory, revenue and debtors. Such expenditures, incurred in earlier years and considered as part of project inventories under projects or contract work in progress up to 31 March 2009, have been carried forward as these amounts have not been determined by the management in view of the practical difficulties involved.

* Defaulted in repayment of dues to financial institutions, banks and debenture holders. Details about few defaults are as follows: LIC six instances of Rs 8.29 crore with delays ranging from one to 89 days. IDBI Bank 13 instances of Rs 7.23 crore with delays ranging from one to 87 days. Central Bank of India 10 instances of Rs 4.43 crore with delays ranging from one to 69 days. LIC Mutual Fund 15 instances of Rs 34.47 crore with delays ranging from one to 127 days. HDFC India Real Estate Fund two instances of Rs 13.99 crore with delays ranging from one to 180 days.

Havells India: Diminution in value of long-term investment in wholly-owned subsidiary company, Havell's Holdings. Invested Rs 531.40 crore. Accumulated loss of the subsidiary stood at Rs 751.74 crore. The management is of the opinion that diminution is temporary in nature and, hence, no provision is necessary.

* Pursuant to the scheme of arrangement under the Companies Act, 1956, and as approved by the HC of Delhi in August 2010, a separate reserve account (business reconstruction reserve) has been created by transferring Rs 400 crore from the securities premium account (SPA) for adjustment of certain expenses and other items. Otherwise, net profit after tax inclusive of the effect of deferred tax would have been lower by Rs 0.17 crore, SPA would have been higher by Rs 400 crore and capital reserve account would have been lower by Rs 1.11 crore in FY 2010. Further provision for deferred tax and current tax would have been lower by Rs 4 lakh each.

Mercator Lines: Remuneration of Rs 48 lakh paid to managerial personnel subject to shareholders' approval.

Spicejet: Suffered recurring losses from operations in the past. Although, earned a profit of Rs 61.44 crore in FY 2010, accumulated losses stood at Rs 822.37 crore end March 2010 as against share capital and reserves of Rs 480.19 crore. These conditions raise doubt about the company's ability to continue as a going concern.

* Not accrued interest on outstanding inter-corporate deposits of Rs 5 crore, which amounted to Rs 7.47 crore end March 2010. Otherwise, net profit after tax would have been lower by Rs 6.2 crore, accumulated losses higher by Rs 6.2 crore, current liabilities higher by Rs 7.47 crore, and provisions lower by Rs 1.27 crore for 2009-10.

* Slight delay in a few cases in payment of undisputed statutory dues.

* Not been able to recover Rs 57 lakh of sales including travel tickets purchased by passengers through unauthorised usage of credit card. The amount has been recorded as expense.

Kalpataru Power Transmission: In collusion with persons of the contractors, a supervisor prepared forged weighment slips and goods received notes of input material at the collection center of the bio-mass division, resulting in loss of Rs 10.66 lakh in FY 2010. The loss has been accounted and a police complaint has been lodged, for which investigations are in progress.

Financial Technologies (India): Auditors have commented on treatment of cancellation of equity investments in MCX-Stock Exchange (MCX-SX), aggregating to Rs 56.24 crore, and issuance of 56.24 crore transferable warrants to the company, following court approved composite scheme of reduction-cum -arrangement between MCX-SX and its shareholders including the company. The company has obtained independent legal and tax counsels' opinion that no tax liability arises on this transaction. No tax liability is recognised.

* Provision of diminution of Rs 56.9 crore against investment in certain subsidiaries and JV and loans and advances of Rs 923.81 crore, aggregating to Rs 28.66 crore, due from some of these entities, which have continuing losses (share of cumulative losses Rs 251.92 crore) considered adequate based on their business plans.

Kwality Dairy (India): Delays in depositing undisputed advance income tax. Amount outstanding for a period exceeding six months from the date they become payable stood at Rs 4.67 crore end March 2010 (Rs 2.06 crore in the previous year).

Uco Bank: Accounting of certain income on cash basis, which is not in accordance with AS-9 on revenue recognition. The quantum of such income has not been ascertained. Commission earned on letter of credit and guarantees issued accounted on cash basis.

* Classification of credit-linked notes (CLNs) as loans and advances instead of investments. As per the notes to accounts, the bank has CLNs, aggregating to Rs 728.49 crore, participated through its overseas branches in Singapore and Hong Kong and classified as loans and advances, and has made provisions as required for standard assets under, 'advances'. However, such assets need to be treated as financial instrument for local reporting in Singapore. Clarification on the issue of classification in India, sought from the RBI by the management, is still awaited.

Bank of Maharashtra: As per the RBI circular of July 2008, treated the eligible accounts of Rs 124.87 crore under the Debt Relief Scheme, which otherwise would have slipped to non-performing assets, on outstanding balance end March 2010. These were classified as performing assets, as per the Income Recognition and Asset Classification norms, during the previous financial year by making provision of Rs 10.66 crore for loss in present value terms. Consequently, net profit after tax and reserves would have decreased Rs 12.56 crore.

* Following the policy of recognising income from commission and locker rent on cash basis instead of accrual basis. This is not in conformity with the AS-9 on revenue recognition.

* Inherent bugs noticed in the software system used by the bank. The impact of this on accounts is not ascertainable. As per the additional information provided in the notes to account the bank is using Cream software for identifying and monitoring of advances, as per the IRAC prudential norms. Though most of the bugs noticed have been rectified, further refinement in the software is in process. However, as per the management, overall impact will not be significant.

State Bank of Mysore: In some of the branches, there were mismatches of data in Buckets of Basel II statements. However, the impact on the capital to risk asset ratio is not material.

* Considering the difficulty in computing diminution in fair value of restructured accounts below Rs 1 crore individually, the bank has opted to provide Rs 17.92 crores (5% of exposure) as provision for diminution in all branches, other than the top 20 branches audited by satutory central auditors, as per the RBI circular released in August 2008.

IVRCL Infrastructures and Projects: Claim for benefit of Rs 140.9 crore for which no provision had been made in the previous year as the matter was under appeal. Necessary provision made in FY 2010 by transfer from the special reserve account as the tax relief available was withdrawn with retrospective effect.

Indian Overseas Bank: Certain accounting policies regarding revenue recognition not in conformity with AS-9. As per notes, interest on bills purchased or mortgage-backed securities, commission except on letter of credit, letter of guarantee or government business, exchange, locker rent and dividend accounted for on realisation basis. For matured term deposits, interest accounted for as and when deposits renewed.

* Guarantee institutions identified by branches considered for provisioning requirements for advances, claims pending settlement and claims yet to be lodged on the basis that such claims are valid and recoverable.

* Write-off of Rs 82.7 crore, which is one-third of the deficit arising on takeover of specific assets and liabilities of a bank as permitted by the RBI as against writing off the entire deficit of Rs 246.52 crore, as per the generally accepted accounting practice.

Vijaya Bank: Provision of Rs 114 crore made for wage arrears on estimated basis pending finalisation of industry-level settlement and wage revision.

* Claims of Rs 36.14 crore from the government of India eligible under the agricultural debt.

Emami: Based on expert's report, useful life of goodwill reviewed, leading to increase in amount of amortisation of goodwill. As per additional information given in the notes to accounts, the management has reviewed the useful life of various intangible assets embedded in goodwill, accounted for in FY 2009 after the scheme of arrangement with Zandu, from 20 years to five years. Due to this, there is excess amortisation of goodwill of Rs 78.14 crore for the year and simultaneous increase in transfer from the general reserve to the P&L account by equivalent amount.

Wockhardt: Outstanding liabilities are being restructured under the corporate debt restructuring scheme (CDR) from 15 April 2009. Certain lenders have filed winding up petitions against the company in the Bombay HC and the company has filed affidavit in reply. The matter is sub-judice and its outcome cannot be currently ascertained. The company's ability to continue, as a going concern is dependent on its ability to successfully implement the actions proposed in the CDR scheme and outcome of winding-up petition in favour of the company.

* Premiums aggregating Rs 184.37 crore are unconfirmed on outstanding derivatives contracts end March 2010. The company is in the process of putting in place the relevant documents. Hence, the effect on relevant assets and liabilities and loss for the period not ascertainable.

* Crystallised derivatives losses of Rs 1130.38 crore as part of exceptional items. The auditors have relied on written representation.

* On certain derivatives contracts with banks, the company had stopped payment of margin called by banks. Based on the early termination clause in the agreement, terminated these contracts and claimed Rs 848.32 crore as loss incurred on termination of such contracts, which the company has disputed and not acknowledged as debt. No provision has been made and it has been considered as contingent liability.

* The scope of internal audit system needs to be enlarged for treasury operations.

Tamil Nadu Newsprint and Papers: Temporarily utilised short-term loan funds of Rs 50.67 crore for long-term purpose, that is funding mill expansion plan during the year.

Page Industries: Considered erstwhile limit of Rs 3.5 lakh instead of enhanced limit of Rs 10 lakh for ascertaining gratuity provision as per the actuarial valuation. In the absence of actuarial valuation certificate under the new enhanced limit, additional amount of provision required not ascertainable.

Gujarat Mineral Development Corporation: Non-provision of compensation for land acquired. As per the notes to accounts, the ex-owners of land acquired for the Akrimota project in Kutch, have filed suits for enhancement of compensation. The value of enhancement claimed is Rs 7.73 crore. Necessary adjustment would be made post final outcome of the case. In another instance, claims for additional compensation against acquisition of land at Rajpardi in Bharuch and Panandhro in Kutch, both in Gujarat for mining activities are under litigation. Pending final disposal, Rs 8.80 crore has been deposited and shown under the head, 'Advance recoverable in cash or kind or for value to be received'. Necessary adjustment would be made post final outcome of the case.

* Non-provision for lease rent and royalty. Application made for renewal of lease for extracting bauxite, lignite and fluorspar. As per the notes to accounts, in view of the SC's decision on mining activities, applications made by the company for renewal of leases covering 2,040 hectares of land is pending since FY 1994.

* Recognition of revenue from sale of electricity to Gujarat Urja Vikas Nigam (GUVNL) on the basis of amount paid by GUVNL pending execution of supplementary power purchase agreement.

* The scope of internal audit needs to be enlarged and strengthened to make it commensurate with the size of the company and nature of its business.

Suzlon Energy: Non-provision of proportionate premium on redemption of US$ 479.05 million (Rs 2150 crore end March 2010), and FCCBs amounting to Rs 377.22 crore. This has been considered as contingent liability. As the ultimate outcome of the matter cannot be presently ascertained, no provision has been made.

FDC: A slight delay in a few cases in payment of undisputed statutory dues.

Television Eighteen India: Long-term investment of Rs 277.68 crore in quoted equity shares. The market value of these quoted investments aggregated to Rs 74.72 crore end March 2010. Also, has investment of Rs 13.35 crore in a subsidiary, whose the net worth has eroded. However, in view of continued long-term strategic involvement, management is of the view that no provision is necessary for diminution in value of these investments.

Godrej Properties: For projects under long-term contracts undertaken and/or financed by the company, auditors have relied on the management's estimates of percentage of completion, costs to completion and on the projection of revenue expected, due to the technical nature of such estimates, on the basis of which P&L have been accounted, interest income accrued and realisability of the construction work in progress and project advances determined.

* A loan of Rs 37.51 crore to Godrej Properties' (GPL) Employees' Stock Option Plan (ESOP) Trust for purchase of the company's shares from Godrej Industries equivalent to options granted under ESOP. Market value of shares held by the trust lower than the cost of acquisition by Rs 11.77 crore end March 2010. The repayment of loans granted to the trust dependent on exercise of the options by employees and market price of underlying equity shares at the end of the exercise period. As per the management, fall in value of equity shares was on account of current market volatility and loss, if any, can be determined only at the end of the exercise period. Thus, provision for diminution not considered necessary.

* A loan of Rs 7.09 crore to GIL ESOP Trust for purchase of the holding company's shares from the market equivalent to options granted under an employee stock option plan. Market value of shares held by the trust was lower than cost of acquisition of shares by Rs 2.90 crore end March, 2010. Repayment of loans granted to the trust dependent on exercise of options by employees and market price of shares at the end of the exercise period. The management considers fall in value is on account of current market volatility and loss, if any, can be determined only at the end of the exercise period.

Century Plyboards (India): Exchange fluctuation gain of Rs 18.95 crore (loss of Rs 27.24 crore in the previous year) arising from creditors and debtors in specific segments included as unallocable expenses or income.

* Slight delay in payment of undisputed statutory dues in few cases.

Mahindra and Mahindra Financial Services: The management has initiated a programme to improve and rectify internal control weaknesses noticed during the course of audit.

Polaris Software Lab: Slight delay in payment of undisputed statutory dues in few cases.

Maytas Infra: Financial statements have been prepared on a going-concern basis after giving effect to the CDR package including accounting for the disposal of certain investments to an independent trust, as approved by the CDR cell in March 2010.

* Recoverability of current and fixed assets of Rs 218.27 crore qualified in the previous year's audit report: Rs 85.21 crore, charged to the P&L account, considered as recoverable or doubtful of recovery in FY 2010. Rs 63.70 crore recoverable against current and fixed assets end March 2010. Based on internal assessment and legal opinion, these have been considered good and, hence, no further adjustments made.

* Rs 48.52 crore interest on inter-corporate deposits (ICDs) up to end March 2009 qualified in the previous year's audit report. Out of this, Rs 48.10 crore charged during the year.

* Excess remuneration of Rs 1.87 crores and Rs 16 lakh paid to directors in FY 2009 and FY 2010, respectively. Approval awaited from the Central government.

* Outstanding ICDs of Rs 391.64 crore end March 2010. The company has taken steps to recover these amounts and is of the opinion that all deposits are fully recoverable. The audit report for FY 2009 was also qualified on this matter.

* In a few cases, documentation for revenue and expenditure at a few project sites was weak. This has been addressed during the year and the company is in the process of further strengthening internal controls.

* Undisputed statutory dues including PF, investor education and protection fund, employees' state insurance, income tax, sales tax, wealth tax, service tax, customs duty, excise duty and cess not been regularly deposited. There have been serious delays in a large number of cases in the earlier part of the year. However, in the later part of the year, there have been slight delays in a few cases in payment of statutory dues.

3I Infotech: Subsequent to the year end, received proceeds from a qualified institutional placement (QIP) issue amounting to Rs 179.99 crore and also sanction of term loan of Rs 350 crore. Thus, utilisation of short-term funds of Rs 391.22 crore for long-term investments end FY 2010 stands addressed.

Mahindra Lifespace Developers: Change in method of recognition of revenue due to which operating income lower by Rs 71 lakh and profit after tax lower by Rs 22 lakh in FY 2010. Recognising revenue, subject to fulfillment of other conditions, on collection of at least 5% of sales consideration till FY 2009. Recognising revenue on receipt of at least 10% of sales consideration from FY 2010 onwards.

* Construction work in progress, project advances and interest accrued of Rs 68.73 crore on account of a project, where commencement of construction has been delayed on account of dispute between the land owner and the company. Dispute has been referred to arbitration. Auditors have commented on realisability of the amount.

* Reliance on management, owing to technical nature, of estimates of percentage of completion, cost of completion, projection of revenue expected from projects, and realisability of construction work in progress.

Tata Teleservices (Maharashtra): Rs 1960.9 crore raised on short-term basis used during the year for long-term investment.

Reliance MediaWorks: Re-classified in FY 2008 liability towards FCCBs as non-monetary liability inter-alia on the basis of trend of earning, movement of the company's share price, and conversion option exercised by FCCB holders. The company continues to classify this liability as non-monetary liability as in its view the current fall in share price and non-conversion by bond holders is a temporary aberration. Thus, foreign exchange fluctuation gain of Rs 17.18 crore for FY 2010 (loss of Rs 11.3 crore in the previous year) has not been recognised and liability not been restated at the year-end exchange rate. An alternate view exists that the FCCB liability is a monetary liability and should be restated at the year-end exchange rate, as per AS-11 on effects of changes in foreign exchange rate. There is no specific guidance of The Institute of Chartered Accountants of India on accounting for FCCBs. If this liability is considered as monetary liability, loss before tax would have been lower by Rs 17.18 crore in FY 2010 (the loss would be higher by Rs 11.3 crore in the previous year) and reserves and surplus would be lower by Rs 12.72 crore.

B.L. Kashyap and Sons: Taking necessary steps in view of increased activities to strengthen the internal audit systems.

Chemplast Sanmar: Accumulated losses not exceeded 50% of its net worth end March 2010. Incurred cash loss in FY 2010 and in the immediately preceding financial year.

Hikal: Not provided for MTM loss on derivatives contracts of Rs 45.88 crore end March 2010 (Rs 149.85 crore in FY 2009). Without considering tax effect, profit before tax and reserves and surplus overstated and current liabilities understated by this amount.

New Delhi Television: Excess managerial remuneration of Rs 83.03 lakh in FY 2010 and Rs 9.31 lakh in the previous years is subject to approval by the Central government. In the event that the government approval is not received, these amounts are to be refunded by directors.

Rossell Tea: Non-conformity with AS-15 for liability of Rs 53.5 lakh for gratuity and superannuation for the transition period pending funding.

Chromatic India: Non-confirmation of balances for amounts due from sundry debtors, to sundry creditors and other receivables as the impact on the financial statement cannot be ascertained.

* No provision made for bill discounting from Western India Financial Services, aggregating to Rs 1.01 crore end March 2010, due to significant uncertainties in recovering the amount for which a legal case is pending since FY 1997.

* Realisabitity of deposit with Pillage Finance Investment Pvt Ltd, aggregating to Rs 1.52 crore end March 2010, due to significant uncertainties in recovery.

* Realisability of the investment, interest receivable and loan from Societa Eiducle L Con Sa (Arcoiris SA), a subsidiary company, aggregating to Rs 1.22 crore, end March 2010, where net worth has been completely eroded and no significant activities being carried out.

* Considering these points, losses are understated by Rs 3.76 crore, loans and advances by Rs 3.5 crore, and investment by Rs 26.23 lakh.

Nitesh Estates: Investment of Rs 24.49 crore in equity shares of Nitesh Indiranagar Retail Pvt Ltd (NIRPL), a wholly owned subsidiary of the company, end March 2010. NIRPL has paid non-refundable deposit of Rs 35.50 crore to the landowner under a memorandum of understanding (MoU) and incurred other project-specific expenses of Rs 24.2 crore. As per MoU, a joint development agreement (JDA) was to be executed by NIRPL on or before 30 June 2010, failing which the other party is entitled to forfeit non-refundable deposit and not continue with the JDA. NIRPL and the other party in active discussions to finalise terms of JDA. The other party has not forfeited deposit. Pending final outcome, no adjustments have been made in this regard.

* There has been significant delay in deposit of service tax and withholding tax between April 2009 and September 2009.

UTV Software Communications: As per the scheme of arrangement approved by the Bombay HC, the company has transferred Rs 750 crore from the securities premium account (SPA) to the business restructuring reserve account (BRRA). The board approved utilisation of Rs 489.74 crore during the year out of BRRA to write down certain assets (fixed assets, inventories, receivables and advances), shares to be issued to the minority shareholders of the amalgamating company for amalgamation and expenses of amalgamation. Sans this treatment, Rs 457.72 crore would have been debited to the P&L account and profit for the year would have been lower by the amount.

IVRCL Assets and Holdings: Slight delay noticed in payment of income tax and sales tax.

Orissa Minerals Development Company: A firm of chartered accountant has been appointed as internal auditors. There is scope for improvement.

Pipavav Shipyard: Payment of managerial remuneration is subject to approval of the Central government.

Parsvnath Developers: Delays in deposit of statutory dues of PF, employees' state insurance, income tax, sales tax and cess during the year. No undisputed amounts of these statutory dues payable except advance income tax of Rs 11.71 crore, which has remained outstanding end March 2010.

* A total of 118 instances of delays were noted in repayment of dues to banks ranging from four days to 89 days with amounts varying from Rs 1.51 lakh to Rs 16.67 crore and 97 instances of delays were noted ranging from one day to 178 days with amounts varying from Rs 50 lakh to Rs 12.5 crore in repayment of dues to financial institutions.

HT Media: Slight delay in payment of undisputed statutory dues in few cases. However, amount involved is not significant.

McLeod Russel India: Funds of Rs 73.71 crore raised on a short-term basis have been utilised for long-term investments, mainly fixed assets.

Puravankara Projects: Slight delay in payment of undisputed statutory dues in few cases.

* Not defaulted on repayment of dues to a financial institution or debenture holders. A lender has rescheduled repayment of Rs 25.75 crore due to banks. Approval for rescheduling repayment from bank was obtained before the year end.

GTL Infrastructure: Issued 3,000 zero-coupon FCCBs of US$ 100,000 each in FY 2008. The bonds are redeemable only if there is no conversion of bonds earlier. Hence, payment of premium on redemption is contingent in nature. The outcome is dependent on uncertain future events and, accordingly, no provision considered necessary. In case bonds are redeemed, then the company intends to adjust premium on redemption to the SPA. The pro-rata premium works out to Rs 194.06 crore end March 2010.

Great Offshore: Changed its accounting policy from 1 April 2009 for expenses incurred at the time of five yearly special surveys and/or life enhancement programmes for renewal of class certificates / operating licenses. Instead of charging it to the P&L account, these have been capitalised and would be depreciated over five years. Capitalised Rs 39.89 crore and, thus, profit is higher by Rs 35.11 crore in FY 2010.

GVK Power and Infrastructure: Slight delays in depositing of PF dues in few cases.

Sobha Developers: Purchase of material and services in the prior years from private limited companies and firms covered under Section 297 of the IT Act. This requires prior approval of the Central government. Filed an application for composition of the offence and obtaining approval from the Company Law Board. Confident of obtaining approvals. Pending approvals, no adjustments are made.

* Either repaid dues before year end or obtained necessary approvals from debenture holders and banks for reschedulement of dues, of Rs 11 crore and Rs 83.2 crore, respectively, whose repayment was delayed beyond stipulated dates.

Sun Pharma Advanced Research Company: Used funds raised on short-term basis through increase in net current liabilities and losses, aggregating to Rs 46.66 crore, towards long-term investment in fixed assets.

Network18 Media and Investments: Paid remuneration of Rs 1.09 crore to managing director, which is in excess as per the provisions of the Companies Act, 1956. Its application for approval for remuneration FY 2010 and FY 2009 is pending with the Central government.

* It losses end March 2010 did not exceed 50% of its net worth. Incurred cash losses in FY 2010 and FY 2009.

Religare Enterprises: Funds of Rs 113.9 crore raised on a short-term basis used for long-term investment.

Shriram EPC: Internal controls for purchases of fixed asset need to be strengthened.

Vascon Engineers: Funds raised by way of term loans from bank have been applied for purpose for which they have been availed, except in case of bank loan of Rs 30 crore, of which Rs 4.91 crore utilised for the purpose for which the loan was availed.

ARSS Infrastructure Projects: Provision of Rs 30.51 lakh for retirement gratuity made on ad-hoc basis without ascertaining liability through actuarial valuation, which is not in accordance with AS-15 on employee benefits.

* Profit from Harish Chandra (India) (HCIL) and PT Adhikarya Persero (ARSSPL) JV has been considered on basis of provisional accounts end March 2010 and also for earlier years instead of audited accounts. This is not in accordance with AS-27 on financial reporting of interest in JVs.

Aqua Logitics: Auditors have commented about treatment of advertisement expenditure.

* In their main audit report, the auditors have also commented on confirmation of balances in parties' accounts and the consequential effects of it on profit, assets and liabilities, which are not ascertainable.

Tata Elxsi: Few delays in depositing sales tax dues in Canada.

Transport Corporation of India: Appointed a firm of chartered accountants at the TCI shipping division for regular internal audit. At other places, the in-house internal audit department conducted internal audit. The internal audit system is being reviewed and strengthened.

Titagarh Wagons: Investments made and loans and advances, aggregating to Rs 141.45 crore, given to a subsidiary and a JV company for acquiring controlling stake in certain financial assets like leased wagons and debts of a sick company, whose rehabilitation scheme is under implementation. Pending revival of the sick company, investments and loans and advances have been considered good.

* Non-provision of Rs 3.29 crore for diminution in value of certain investments in a company based on its audited financial statements end June 2009. As per the management, diminution is temporary in nature as investment is strategic and also current realisable value of assets held by this company is likely to be significantly higher than book value of investment. Thus, no provision for diminution considered necessary.

* Debts of Rs 7.46 crore recoverable from a customer not realised since last year. The company has taken reasonable steps and is hopeful to recover these dues. Accordingly, these dues have been considered as good. Further, terminal excise duty claim of Rs 1.95 crore from the Director General of Foreign Trade also considered good of recovery.

* Appointed a firm of chartered accountants to carry out internal audit for FY 2010. But internal audit scope and coverage needs to be further strengthened.

DPSC: Managerial remuneration of Rs 2.17 lakh awaiting shareholders' approval.

Splash Media & Infra: Does not have any formal internal audit system.

Essel Propack: Managerial remuneration is subject to approval of the Central government.

Voltamp Transformers: Non-provision of Central excise duty and penalty of Rs 2.78 crore as the company has preferred an appeal.

Elecon Engineering: One case of misappropriation by employee, aggregating to Rs 33.40 lakh, reported in FY 2010. The service of the employee terminated and the company is in the process of taking legal actions. Amount has been recovered from the employee with interest and, hence, no impact on the financial results.

Jayaswal Neco Industries: Has an internal audit system, which needs further improvement.

Sundaram Clayton: Certain marginally delayed remittances for undisputed statutory dues noticed.

Nesco: Internal audit system needs to be strengthened.

GIC Housing Finance: Rs 352 crore raised on short-term basis utilised for disbursement of housing loans.

* One case of misappropriation, involving Rs 49 lakh, committed by an employee detected. The amount has been recovered.

DCM Shriram Consolidated: The sugarcane purchase liability for the sugar season 2007-08 accounted for at Rs 110 per quintal instead of the Uttar Pradesh government advised price of Rs 125 per quintal. Pending completion of legal proceedings, the effect on accounts cannot be determined at this stage.

Sanghvi Movers: Change in accounting policy on stores and spare parts purchased for repairs and maintenance resulted in increase in profit before tax by Rs 2.88 crore.

Natco Pharma: Revenue for FY 2010 includes Rs 5 crore received from a customer and recognised as revenue based on management's assessment of transfer of significant risk and rewards of ownership and completion of substantial obligations. However, as per terms of the arrangement, auditors believe that transfer of risk and rewards not completed end March 2010 and the company will be subjected to future obligations or part repayment of amounts already received under the arrangement. This is contrary to revenue recognition principles given in AS-9 on revenue recognition. Without this treatment profit, and reserves and surplus would have been lower and current liabilities would have been higher by the amount end March 2010.

* Has not recognised minimum alternative tax (MAT) credit entitlement of Rs 16.06 crore for FY 2009 and FY 2010. Had the company accounted for MAT credit, net profit, balance in loans, advances and reserves, and surplus would have been higher by Rs. 16.06 crore in FY 2010.