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Auditor Report of Hindustan Flurocarbons Ltd.

Mar 31, 2015

We have audited the accompanying financial statements of Hindustan Fluorocarbons Limited ("the Company"), which comprise the Balance Sheet as at 31st March 2015, the statement of Profit and Loss and the Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

2) Management's Responsibility for the Financial Statements

The Company's Board of Directors is responsible for the matters stated in Section 134(5) of the Companies Act, 2013 ("the Act") with respect to the preparation and presentation of these financial statements that give a true and fair view of the financial position, financial performance and Cash flows of the Company in accordance with the accounting principles generally accepted in India, including the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

3) Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.

4) We have taken into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the act and rules made there under.

5) We conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

6) An audit involves performing procedures to obtain audit evidence about the amounts and the disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal financial control relevant to the Company's preparation of the financial statements that give a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial controls system over financial reporting and the operating effectiveness of such controls. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company's Directors, as well as evaluating the overall presentation of the financial statements.

7) We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion on the financial statements.

Opinion

8) In our opinion and to the best of our information and according to the explanations given to us, the aforesaid financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at March 31, 2015 and its Loss and its Cash Flows for the year ended on that date.

Other Matters

Without qualifying our report we refer to:

Note No.14A regarding Trade Receivables, Trade payables, sundry balances of debit and credit of parties are subject to confirmation and review by the management;

Report on Other Legal and Regulatory Requirements

9) As required by the Companies (Auditor's Report) Order, 2015, issued by the Central Government of India in terms of sub-section (11) of section 143 of the Act ( hereinafter referred to as the "Order") ,and on the basis of such checks of the books and records of the Company as we considered appropriate and according to the information and explanations given to us, we give in the Annexure a statement on the matters specified in the paragraph 3 and 4 of the Order, to the extent applicable.

10) As required by Section 143 (3) of the Act, we report that:

(a) We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit.

(b) In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books.

(c) The Balance Sheet, the Statement of Profit and Loss and the Cash Flow Statement dealt with by this Report are in agreement with the books of account.

(d) In our opinion, the aforesaid financial statements comply with the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014.

(e) On the basis of the written representations received from the directors as on March 31, 2015 taken on record by the Board of Directors, none of the directors is disqualified as on 31 March 2015 from being appointed as a director in terms of Section 164 (2) of the Act.

(f) With respect to the other matters to be included in the Auditor's Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:

i. The Company has disclosed the impact of pending litigations as on 31st March 2015 on its financial position in its financial statements;

ii. The Company has made provision, as required under the applicable law or Accounting Standards, for material foreseeable losses, if any, on long term contracts. The Company neither entered into any derivative contract during the year nor have any outstanding derivative contract at the end of the year;

iii. The provisions relating to transferring amounts to Investor Education and Protection Fund is not applicable to the Company during the year.

(g) As required under Section 143(5) of the Companies Act, we report that: i. The Company has not been selected for disinvestment during the financial year.

ii. During the period of audit, there are no cases of waiver/write off of debts /loans/ interest etc.

iii. As per the information, explanations and records produced for our verification, there are no inventories lying with the third parties at the close of the year. Further no assets have been received as gift from the Government and other authorities.

iv. The details of the pending legal/ arbitration cases along with the quantum of amount and the present status are given under Note - 33 of the financial statements. The case of Recovery from Debtor is pending since last 4 years and case of Damages on delay payment of Provident fund is pending since 2 years. Further the company have in existence of monitoring mechanism for expenditure on legal cases.

ANNEXURE TO THE INDEPENDENT AUDITORS' REPORT:

Referred to in paragraph 9 of the Independent Auditors' Report of even date to the members of Hindustan Fluorocarbons Limited on the financial statements as of and for the year ended March 31, 2015

(i) (a) The Company is maintaining proper records showing full particulars, including quantitative details and situation, of fixed assets.

(b) The fixed assets are physically verified by the Management during the year and there is regular program of verification which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. (ii) (a) The inventory has been physically verified by the management during the year. In our opinion, the frequency of verification is reasonable.

(b) In our opinion, the procedures of physical verification of inventory followed by the management are reasonable and adequate in relation to the size of the company and the nature of its business.

(c) On the basis of our examination of the inventory records, in our opinion, the Company is maintaining proper records of inventory. The discrepancies noticed on physical verification of inventory as compared to book records were not material.

(iii) The Company has not granted any loans secured or unsecured to Companies, firms or other parties covered in the registers maintained under Section 189 of the Act.

(iv) In our opinion and according to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the company and the nature of its business for the purchase of inventory and fixed assets and for the sale of goods and services. Further, on the basis of our examination of the books and records of the Company, and according to the Information and explanations given to us, we have neither come across, nor have been informed of, any continuing failure to correct major weaknesses in the aforesaid internal control system.

(v) The Company has not accepted any deposits from the public within the meaning of Sections 73 and 74 of the Act and the rules framed there under to the extent notified.

(vi) We have broadly reviewed the books of accounts maintained by the Company pursuant to the rules made by the Central Government of India, the maintenance of cost records specified under sub-section (1) of Section 148 of the Act, and are of the opinion that, prima facie, the prescribed accounts and records have been made and maintained. We have not, however, made a detailed examination of the records with a view to determine whether they are accurate or complete.

(vii) (a) According to the information and explanations given to us and the records of the Company examined by us, in our opinion the company is regular in depositing undisputed statutory dues, including Income tax, Sales tax/CST, Wealth Tax, Service tax, duty of customs, duty of excise, cess and other material statutory dues as applicable to it, with appropriate authority. However company contribution to Provident fund and employees contribution to Provident fund amounting to Rs.233.20 lakhs (Pr. Year 307.50 lakhs) is not paid by the company of the period March 2014 to March 2015.

(b) According to the information and explanations given to us, there are no material dues of Income tax, Sales tax/ CST, Wealth Tax, Service tax, duty of customs, duty of excise, cess were in arrears, as on 31st March 2015 for a period of more than six months from the date they became payable except Company and Employees contribution to Provident Fund unpaid for the period from March 2014 amounting to Rs.73.68 lakhs (Pr. Year 106.16 lakhs).

(c) The provisions relating to transferring amounts to Investor Education and Protection Fund is not applicable to the Company during the year.

(viii) The accumulated losses of the company as at the end of the year are more than fifty percent of its net worth. Further, the company has incurred cash losses during the financial year covered by our audit and also has incurred cash losses in the immediately preceding financial year. The company is under the Scheme of BIFR and hence considered as a Sick Company as per Sick Industries Companies (Special Provisions) Act 1985.

(ix) According to the records of the examined by us, the Company has not defaulted in repayment of dues to financial institutions during the current financial year. There are no overdue as on 31st March 2015.

(x) In our opinion and according to the information and the explanations given to us, the company has not given any guarantees for loans taken by others from banks and financial institutions.

(xi) In our opinion and according to the information and explanations given to us, the term loans have been applied on an overall basis for the purposes for which they were obtained.

(xii) According to the information and explanations given to us, no material fraud on or by the Company has been noticed or reported during the course of our audit nor have been informed of such case by the Management.

For S Daga & Co.,

Chartered Accountants

(FRN 000669S)

Sd/-

Place: Hyderabad (Pavan Kumar Bihani) Date: 25.05.2015 M.No.225603


Mar 31, 2014

We have audited the accompanying financial statements of HINDUSTAN FLUOROCARBONS LIMITED ("the Company"), which comprise the Balance Sheet as at March 31, 2014, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management''s Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956 ("the Act") read with the General Circular 15/2013 dated September 13, 2013 of the Ministry of Corporate Affairs in respect of Section 133 of the Companies Act, 2013. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. Auditor''s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor''s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company''s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity''s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion and to the best of our information and according to the explanations given to us, the financial statement give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India;

(a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31,2014;

(b) in the case of the Statement of Profit and Loss, of the loss for the year ended on that date; and

(c) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date. Other Matters Without qualifying our report we refer to:

Note No. 14A regarding Trade Receivables, Trade payables, sundry balances of debit and credit of parties are subject to confirmation and review by the management;

Report on Other Legal and Regulatory Requirements

1. As required by the Companies (Auditor''s Report) Order, 2003 ("the Order"), as amended, issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Act, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the Order.

2. As required by section 227(3) of the Act, we report that:

a. we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;

b. in our opinion proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;

c. the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by this Report are in agreement with the books of account;

d. in our opinion, the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement comply with the Accounting Standards referred to in subsection (3C) of section 211 of the Companies Act, 1956 read with the General Circular 15/2013 dated September 13, 2013 of the Ministry of Corporate Affairs in respect of Section 133 of the Companies Act, 2013;

e. on the basis of written representations received from the directors as on March 31, 2014, and taken on record by the Board of Directors, none of the directors is disqualified as on March 31, 2014, from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956.

ANNEXURE TO AUDITORS REPORT: (Annexure referred to in Point 1 of Other Legal and Regulatory Requirements of the Report of the Auditors)

1. (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets.

(b) All the fixed assets have been physically verified by management during the year and there is regular program of verification which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. As informed no major material discrepancies were noticed on such verification.

(c) During the year, the Company has not disposed off substantial part of its fixed assets.

2. (a) As explained to us, the stocks of finished products, stock-in-process and raw materials have been physically verified by the management during the year. Stock of stores and spare parts are reported to be physically verified in accordance with the procedure followed by the management. In our opinion, the frequency of such physical verification of stocks is reasonable.

(b) In our opinion, the procedure of physical verification of stocks followed by the management is reasonable and adequate in relation to the size of the Company and the nature of its business.

(c) The Company is maintaining proper records of inventory and no material discrepancies have been noticed on physical verification of stocks compared to the books/records.

3. (a) The company has not granted any loans secured or unsecured to Companies, Firms or other parties covered in the registers maintained under section 301 of the Companies Act, 1956.

(b) The Company has taken secured loan from its holding company, Hindustan Organics Company Limited, covered in the register maintained under section 301 of the Companies Act 1956 and the maximum amount involved during the year was Rs. 3759.14 lakhs (Pr. Year Rs.3956.23 lakhs) and the year - end balance is Rs. 3759.14 lakhs (Pr. Year Rs. 3701.43 lakhs )

(c) In our opinion, the rate of interest and other terms and conditions on which loans have been taken from the holding company, are not prima facie prejudicial to the interest of the company.

(d) The Company is irregular in repaying the principal amount as stipulated and also irregular in payment of interest. The overdue of principal and interest at the close of the year is Rs.2431.82 lakhs (Pr. Year Rs. 1830.83 lakhs)

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures, commensurate with the size of the Company and the nature of its business with regard to the purchase of inventory, fixed assets and with regard to the sale of goods. Further, on the basis of our examination of the books and records of the company and according to the information and explanations given to us, we have neither come across nor have been informed of any continuing failure to correct major weaknesses in the aforesaid internal control procedures.

5. (a) According to the information and explanations given to us, we are of the opinion that the transactions that need to be entered in the register maintained u/s 301 of the Companies Act, 1956 have been so entered.

(b) In our opinion and according to the information and explanations given to us, the transactions made in pursuance of contracts and arrangements entered in the register maintained under section 301 of the Companies Act 1956 in respect of transactions during the year, have been made at prices which are reasonable having regard to the prevailing market price at the relevant time.

6. The Company has not accepted any deposits from the public within the meaning of section 58A, 58AA of the Companies Act 1956 or any other relevant provisions of the act and the rules made there under.

7. The internal audit of the company has been entrusted to an independent firm of Chartered Accountants to carry out the functions as Internal Auditors. In our opinion the company has internal audit system commensurate with the size and nature of business.

8. We have broadly reviewed the books of accounts maintained by the Company pursuant to the rules made by the Central Government for the maintenance of cost records u/s 209 (1) (d) of the Companies Act. 1956 and we are of the opinion that prima facie the prescribed accounts and records have been made and maintained. We have not however made a detailed examination of the records with a view to determine whether they are accurate or complete.

9. (a) The company is generally regular in depositing with appropriate authorities undisputed statutory dues including Income-tax, CST/VAT, Wealth-tax, Service- tax, Customs duty, Excise duty, Cess and other material statutory dues applicable to it. However company contribution towards Provident Fund amounting to Rs.129.86 lakhs (Pr. Year Nil) is not paid since March 2013. The arrears of CST/VAT outstanding at the close of previous year have been deposited during the year.

(b) According to the information and explanations given to us, no undisputed amounts payable in respect of income-tax, wealth tax, service tax, sales tax, customs duty, excise duty and cess were in arrears, as at 31st March 2014 for a period of more than six months from the date they became payable except contribution to Provident Fund unpaid since March, 2013 amounting to Rs.129.86 lakhs (Pr. Year Nil);

10. The accumulated losses of the company as at the end of the year are more than fifty percent of its net worth. Further, the company has incurred cash losses during the financial year covered by our audit and also has incurred cash losses in the immediately preceding financial year. The company is under the Scheme of BIFR and hence considered as a Sick Company as per Sick Industries Companies (Special Provisions) Act, 1985.

11. The Company has not defaulted in repayment of dues to financial institutions during the current financial year. There are no over dues as on 31st March, 2014.

12. The Company has not granted any loans and advances on the basis of shares, debentures and other securities of a similar nature and hence maintenance of documents and records relating to such items are not applicable.

13. In our opinion the Company is not a chit fund or a nidhi/mutual benefit fund/society. Therefore, clause-4 (iii) of the Companies (Auditor''s Report) Order, 2003, is not applicable to the Company.

14. The Company has not dealt in or traded in shares, securities, debentures and other investments.

15. The Company has not given any guarantee for loans taken by others from banks and financial institutions.

16. In our opinion, the term loans have been applied for the purpose of which they were raised.

17. In our opinion and as per the explanations given to us, no funds raised on short term basis have not been used for long term purposes and vice-versa.

18. The Company has not made any preferential allotment of the shares during the year.

19. The Company has not issued any debentures during the year.

20. The Company has not raised any money by public issues during the year.

21. Based upon the audit procedures performed and explanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit.

For S Daga & Co.,

Chartered Accountants (FRN 000669S)

Sd/-

Place: Hyderabad (Pavan Kumar Bihani)

Date : 19.05.2014 M.No. 225603


Mar 31, 2013

Report on the Financial Statements

We have audited the accompanying financial statements of HINDUSTAN FLUOROCARBONS LIMITED ("the Company"), which comprise the Balance Sheet as at March 31, 2013, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management''s Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956 ("the Act"). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditors'' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor''s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company''s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that, the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for Qualified Opinion

(I) The Company had incurred Rs.284.14 lakhs and Rs. 17.83 lakhs as refurbishment expenditure on Plant & Machinery during the Financial Year 2008-09 & 2009-10 respectively. As per the guidelines laid down in scheme of BIFR, Modified Draft Rehabilitation Scheme (MDRS), it has been stipulated that this sum shall be written off in 5 equal annual installments. Accordingly, during the current financial year, a sum of the Rs.61.49 lakhs has been written off on pro- rata basis. This accounting treatment is a deviation from Accounting Standard (AS- 6) notified as a mandatory accounting standard in Section 211(3C) of the Companies Act 1956;

(II) The arrears payable on account of pay fixation in the revised scale with effect from January 2007 vide wage revision settlement as per DPE guidelines, had not been provided for in the books of the company. The arrears payable at the close of the year was Rs.1070.34 lakhs (Pr. year Rs.1160 Lakhs). The company has implemented the wage revision for officers and non officers'' with effect from January 2007 as per BIFR- MDRS, but has not been provided/charged to statement of profit and loss on account of categorically stipulation made under the scheme, that arrears are to be released subject to availability of funds. This liability has been disclosed under contingent liability in the financial statements and not provided for;

(III) "Creditors for capital advance of SRF Limited has been written back in books amounting to Rs.342.35 lakhs which in the opinion of management had ceased to be a liability in terms of agreement at the close of year. This sum of Rs.342.35 lakhs has been shown in ''Other non-operating income'' instead of reducing the amount from the value of the concerned asset as on 31.03.2013, as required under Accounting Standard 10 referred to in Section 211(3C) of the Companies Act 1956. The Company''s records indicate that, had the management reduced the amount written back from the value of concerned asset, the profit would have reduced to losses for the year at Rs.247.47 lakhs. Accordingly, fixed assets written down value would have reduced by 342.35 lakhs and shareholders fund would have reduced by Rs.342.35 lakhs;"

(IV)Trade Receivables, Trade payables, sundry balances of debit and credit of parties are subject to confirmation and review by the management,

Qualified Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statement give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India;

(a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2013;

(b) in the case of the Statement of Profit and Loss, of the profit for the year ended on that date; and

(c) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

Report on Other Legal and Regulatory Requirements

1. As required by the Companies (Auditor''s Report) Order, 2003 ("the Order") issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Act, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the Order.

2. As required by section 227(3) of the Act, we report that:

a. we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;

b. in our opinion proper books of accounts as required by law have been kept by the company so far as appears from our examination of those books and proper returns adequate for the purposes of our audit have been received from branches not visited by us;

c. the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by this Report are in agreement with the books of accounts and with the returns received from branches not visited by us;

d. in our opinion, the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement comply with the Accounting Standards referred to in subsection (3C) of section 211 of the Companies Act, 1956 except AS – 6 , AS – 15 & AS - 10;

e. on the basis of written representations received from the directors as on March 31, 2013, and taken on record by the Board of Directors, none of the directors is disqualified as on March 31, 2013, from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956.



ANNEXURE TO AUDITORS REPORT:

(Annexure referred to in Point 1 of other Legal and Regulatory Requirements of the Report of the Auditors)

1a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets.

1b) All the fixed assets have been physically verified by the management during the year and there is regular program of verification which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. As informed no major material discrepancies were noticed on such verification.

1c) During the year, the Company has not disposed off substantial part of its fixed assets.

2a) As explained to us, the stocks of finished products, stock-in-process and raw materials have been physically verified by the management during the year. Stock of stores and spare parts are reported to be physically verified in accordance with the procedure followed by the management. In our opinion, the frequency of such physical verification of stocks is reasonable.

2b) In our opinion, the procedure of physical verification of stocks followed by the management is reasonable and adequate in relation to the size of the Company and the nature of its business.

2c) The Company is maintaining proper records of inventory and no material discrepancies have been noticed on physical verification of stocks compared to the books/records.

3a) The company has not granted any loans secured or unsecured to Companies, Firms or other parties covered in the registers maintained under section 301 of the Companies Act, 1956.

3b) The company has taken secured loan from its holding company, Hindustan Organics Company Limited, covered in the register maintained under section 301 of the Companies Act 1956 and the maximum amount involved during the year was Rs. 3956.23 lakhs (Pr. Year Rs.4021.06 lakhs ) and the year - end balance is Rs. 3701.43 lakhs (Pr. Year Rs. 3929.33 lakhs)

3c) In our opinion, the rate of interest and other terms and conditions on which loans have been taken on the holding company, are not prima facie prejudicial to the interest of the company.

3d) The Company is irregular in repaying the principal amount as stipulated and also irregular in payment of interest. The overdue of principal and interest at the close of the year is Rs.1830.83 lakhs (Pr.Year Rs.1514.62 lakhs)

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures, commensurate with the size of the Company and the nature of its business with regard to the purchase of inventory, fixed assets and with regard to the sale of goods. Further, on the basis of our examination of the books and records of the company and according to the information and explanations given to us, we have neither come across nor have been informed of any continuing failure to correct major weaknesses in the aforesaid internal control procedures.

5a) According to the information and explanations given to us, we are of the opinion that the transactions that need to be entered in the register maintained u/s 301 of the Companies Act, 1956 have been so entered.

5b) In our opinion and according to the information and explanations given to us, the transactions made in pursuance of contracts and arrangements entered in the register maintained under section 301 of the Companies Act 1956 in respect of transactions during the year, have been made at prices which are reasonable having regard to the prevailing market price at the relevant time.

6. The Company has not accepted any deposits from the public within the meaning of section 58A, 58AA of the Companies Act 1956 or any other relevant provisions of the act and the rules made there under.

7. The internal audit of the company has been entrusted to an independent firm of Chartered Accountants to carry out the functions as Internal Auditors. In our opinion the company has internal audit system commensurate with the size and nature of business.

8. We have broadly reviewed the books of accounts maintained by the Company pursuant to the rules made by the Central Government for the maintenance of cost records u/s 209 (1) (d) of the Companies Act, 1956 and we are of the opinion that prima facie the prescribed accounts and records have been made and maintained. We have not however made a detailed examination of the records with a view to determine whether they are accurate or complete.

9a) The company is generally regular in depositing with appropriate authorities undisputed statutory dues including Provident fund, Employee''s State Insurance, Income- tax, CST/VAT, Wealth- tax, Service- tax, Customs duty, Excise duty, Cess and other material statutory dues applicable to it. The arrears of CST/VAT, Provident fund etc. outstanding at the close of previous year have been deposited during the year.

9b) According to the information and explanations given to us, no undisputed amounts payable in respect of Income-Tax, Wealth Tax, Service Tax, Sales Tax, Customs Duty, Excise Duty and Cess were in arrears, as at 31st March 2013 for a period of more than six months from the date they became payable;

10. The accumulated losses of the company as at the end of the year are more than fifty percent of its net worth. Further, the company has neither incurred cash losses during the financial year covered by our audit nor in the immediately preceeding financial year. The company is under the Scheme of BIFR and hence considered as a Sick Company as per Sick Industries Companies (Special Provisions) Act 1985.

11. The Company has not defaulted in repayment of dues to financial institutions during the current financial year. There are no over dues as on 31st March, 2013.

12. The Company has not granted any loans and advances on the basis of shares, debentures and other securities of a similar nature and hence maintenance of documents and records relating to such items are not applicable.

13. In our opinion the company is not a chit fund or a nidhi/mutual benefit fund/society. Therefore, clause-4 (iii) of the Companies (Auditor''s Report) Order, 2003, is not applicable to the Company.

14. The Company has not dealt in or traded in shares, securities, debentures and other investments.

15. The Company has not given any guarantee for loans taken by others from banks and financial institutions.

16. In our opinion, the term loans have been applied for the purpose of which they were raised.

17. In our opinion and as per the explanations given to us, no funds raised on short term basis have not been used for long term purposes and vice-versa.

18. The Company has not made any preferential allotment of the shares during the year.

19. The Company has not issued any debentures during the year.

20. The Company has not raised any money by public issues during the year.

21. Based upon the audit procedures performed and explanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit.

For S Daga & Co.,

Chartered Accountants

(FRN 000669S)

Sd/-

Place: Hyderabad (Pavan Kumar Bihani)

Date : 27.05.2013 M.No. 225603


Mar 31, 2011

We have audited the attached Balance Sheet of Hindustan Fluorocarbons Ltd., Hyderabad, as at March 31, 2011, the Profit and Loss Account and the Cash Flow Statement for the year ended on that date annexed thereto. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Financial Statements based on our audit.

We conducted our audit in accordance with Audit Standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall Financial Statements presentation. We believe that our audit provides a reasonable basis for our opinion.

I As required by the Companies (Auditor's Report) Order, 2003, issued by the Central Government of India in terms of subsection (4A) of section 227 of the Companies Act, 1956, we enclose in the Annexure here to a statement of the matters specified in paragraphs 4 & 5 of the said Order.

II Further to our comments in the Annexure referred to in paragraph I above, we report that:

(a) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit.

(b) In our opinion, proper books of account as required by law have been kept by the company so far as appears from our examination of the books and proper returns adequate for the purposes of our audit have been received from the branches not visited by us.

(c) In our opinion, proper books of account, as required by law, have been kept by the Company, so far as appears from our examination of those books.

(d)The Balance Sheet, Profit and Loss Account and the Cash Flow Statements dealt with by this report are in agreement with the books of accounts.

(e) In our opinion, the Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with this report comply with the Mandatory Accounting Standards referred to in subsection (3c) of Section 211 of the Companies Act. 1956.

(f) As per the Notification No. GSR. 829 (e) dated 21.10.2003 issued by the Central Government clause(G) of sub-section(l) of Section 274 of the Companies Act, 1956, is not applicable to the Government Company and hence we offer no comment as to whether any of the Directors are disqualified from being appointed as the Directors in terms of the said section.

(g) In our opinion and to the best of our information and according to the explanations given to us, the said accounts read together with the Accounts Policies and Notes to Accounts annexed to this report, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the Accounting Principles generally accepted in India subject to the following qualifications.

i. Regarding Sundry Debtors / Sundry Creditors.

Sundry Debtors /Sundry Creditors are subject to confirmation by the parties.

ii. Regarding Valuation of CERs as Closing Stock

With regard to CERs (Carbon Emission Reduc- tions), they are the Credits issued by UNFCCC (United Nations Framework Convention on Climate Change) to the company for successful reduction /incineration of R-23 gas.R-23 gas falls in the list of gases having potential of global warming and is eligible category of Carbon Credits as per the KYOTO Protocol. Hence the company is eligible for claiming Carbon Credits after the incineration of the R-23 gas. This asset is of Intangible in nature but is treated as current asset (Closing Stock) in the financial statements which is against the accepted accounting practice. During the current financial year 2010-11, UNFCCC confirmed 420793 CERs to the company in its site (www.unfccc.int) after deducting 2% i.e., 8587.62 CERs as adaptation fund deduction. Of the above CERs received, the company had transferred 210652 CERs as instalments payment to SRF Ltd (BOT contractor) for the Plant and Machinery (CDM Project) as per the agreement entered 14*, August, 2007. After the above outflows of CERs, the company is left with 210142 CERs treated as closing stock. The value of the CERs is taken at Rs. 169706945/- adopting the value of 1 CER in the International Exchange as on 31-03-2011 at 13.07 Euros and taking the Euro value at Rs. 63.05 in terms of INR valued @98% of total value.

As per the Accounting Standard No.2 issued by the Institute of Chartered Accountants of India, the value of stock should be taken at cost or net realizable value whichever is less. In the instant case, the cost of the CERs in books is Rs. 94.32 lacs, however the cost of CERs is taken as nil as the entire cost of Rs.94.32 lacs is absorbed into normal production cost and General expenditure. In view of the above, we are of the opinion that PAT (before Prior period adjustment) Rs.2,20,31,555.38 reported in profit and loss account is over stated to the extent of Rs.2,99,87,120.00 (closing stock of CERs Rs. 16,97,06,945.00 less Opening WIP of CERs Rs.13,97,19,825.00) had the company not valued the CERs as WIP or Stock.The current years PAT would have resulted in a loss of Rs.79,55,564.62. It is pertinent to report that the company is following the same policy of valuing CERs as WIP or Stock since financial year 2008-09. The total affect to the profit & loss account for the past three years 2008-09 to 2010-2011 is Rs. 16,97,06,945.00 (Rs.7,72,04,112.00 in F.Y 2008-09 , Rs.625,15,713.00 in F.Y2009-10 and Rs.2,99,87,120.00 in F.Y 2010-11).AII the past years audit reports are qualified in this matter. Also due to the policy of valuation of closing stock of CERs, followed by company in the year Net Current Assets in balance sheet Rs.4,19,21,328.54 would have resulted in a negative amount of Rs.12,77,85,616.46 and the Profit and Loss figure in the balance sheet under Head Miscellaneous Assets would be Rs.63,73,87,840.32 had this policy not been followed for CERs in the past years also.

However, it is evident as events occurring after the balance sheet that the balance CERs with the company realized an amount of Rs. 17,46,75,544/- to the company on 06-05-2011 in the SBH A/c No.52117754462 vide sale transaction to a party in Europe vide agreement dated 07.04.11 for sale of CERs and the expenditure pertaining to the sale amounted to Rs.87.33 lacs.

iii. Regarding Refurbishment Expenditure:

The Company has incurred Rs.284.14 lakhs as refurbishment expenditure on Plant & Machinery during the Financial Year 2008-09. As per the guidelines laid down in BIFR, Modified Draft Rehabilitation Scheme (MDRS) The amount shall be written off in 5 equal annual instalments as per the BIFR Scheme. Now, in the current financial year, the Company has written off Rs.61.49 lakhs during. This accounting treatment is a deviation from Accounting Standard (AS-6) issued by The Institute of Chartered Accountants of India (ICAI) and incorporated as a mandatory accounting standard in Section 211 (3c) of the Companies Act. As per AS-6 as any expenditure incurred for improvement in performance of the Plant & Machinery should be capitalized and depreciated accordingly as per Schedule - XIV applicable to the Company. However the Company is following the guide lines contained in the BIFR's MDRS in this matter deviating from mandatory AS-6 issued by ICAI.

iv. Regarding VRS Expenditure :

An amount of Rs.223.57 lacs had incurred towards VRS payment for 31 employees in accordance with BIFR's Modified Draft Rehabilitation Scheme(MDRS) in Jan 2009. This amount is amortized and taken to P & L Account over a period of 3 years (Rs.37.26 lacs in 2008- 09, Rs. 74.52 lacs in 2009-2010, Rs.74.52 Lacs in 2010-11 included in Schedule-15) the balance of Rs.37.27 Lacs will be amortised in the next financial year 2011-12. This is in accordance with BIFR's Modified Draft Rehabilitation Scheme (MDRS).The above accounting treatment is a deviation from the Accounting Standard (AS-15) issued by The Institute of Chartered Accountants of India (ICAI) and incorporated as a mandatory accounting standard in Section 211 (3c) of the Companies Act. As per AS-15 VRS expenditure is to be written off over the pay back period only and cannot be amortised. However the company is following the BIFR Scheme. Hence the system followed for VRS accounting is not in line with the mandatory AS-15 issued by ICAI.

v. Wage Revision : Non provision of the expenses in Profit and Loss Account

The pay scales of the Board Level and below Board level executives have been revised by the Board w.e.f 01.01.1997. In exercise of the powers conferred under Articles of Association of the company, the president had approved the pay revision and directed the company to implement the pay revision w.e.f 01.01.1997 vide wage revision settlement as per DPE guidelines. As per the presidential directive, fitment benefit shall be payable @ 15% in the first stage and the balance fitment shall be paid when the losses are fully recouped and to come into profits and the company is able to absorb the financial burden consequent to revision. As per the orders issued by the Board in pursuant to the presidential directive, the actual payment of the pay revision shall be made subject to availability of funds in the company. No provision for the above wage revision is made by the company in the books of accounts. The quantification was estimated by the company and shown as contingent liability in the notes to accounts.

vi. Contribution to PF:

The management and the employees are contributing 10% each to the PF trust instead of 12% each. The effect of difference of the same is Rs.4.90 lacs.

vii. Regarding Payment of Interest to HOCL

The Company has debited an amount of Rs.135.99 lacs as payment of Interest on Loans taken out of which the payment towards Interest on Loan taken from HOCL the (Holding Company) pursuant to BIFR Scheme is Rs.13.43 lacs. As per BIFR's MDRS the Company is not liable to pay any interest on the loan amount received from the Holding Company M/s HOCL pursuant to BIFR Scheme. Hence we are of the opinion that the company has no obligation to pass the interest entry amounting to Rs.13.43 lakhs in its Profit and Loss Account and the amount payable to HOCL shall be reduced to that extent.

viii. Retirement Benefits:

The company had provided Gratuity benefits and other retirement benefits in the books of accounts and stated as point no. 8 in notes to accounts for the current Financial year. However, no approved acturial valuation was done by the company for the Gratuity and other retirement benefits as required by AS-15 issued by ICAI. The Company calculated the provision on Actual basis.

ix. Change in Accounting Policy -VSSC Research & Development

The company recognized amount received from VSSC Rs.20 lacs amount as prior period income and Rs.15.00 lacs as Miscellaneous Income during the year. The company entered into a MOU with Vikram Sarabhai Space Center(VSSC) in Financial Year 2009-10 for research and development of certain chemical compounds. As per the MOU it is a tripartite MOU with each party having its own milestones and responsibilities. The company income amounted to Rs.40.00 lacs in the MOU. The company raised invoice of Rs.20.00 lacs from VSSC in Financial Year 2009- 10 and received the same in the current financial year 2010-11.The second invoice was raised for Rs. 15.00 lacs during the Financial Year 2010- 11.The company treated the amount received in Financial year 2009-10 amounting to Rs.20.00 lacs as Prior period Income and Rs. 15.00 lacs received in the Year 2010-11 as "Miscellaneous Income". The above treatment of income tantamount to a change in the accounting policy as indicated in Policy no.6.1 in the Significant Accounting Policies of the company vis-a-vis the policy followed in the previous year. Had there been no change in the policy the Profit of the company for the year would have been reduced by Rs.35.00 lacs and the "Current Liabilities" of the company would have been increased by Rs.35.00 lacs as the same amount should have been treated as "Advance from customers".

i) In the case of Balance Sheet of the state of affairs of the company as at 31st March,2011.

ii) In the case of the Profit and Loss Account of the Profit for the year ended on that date and

iii) In the case of Cash Flow statement of the cash flows for the year ended on that date.

Annexure to Auditors' Report (Referred to in Paragraph 1 of our report of even date)

1. In respect of its fixed assets:

a. The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets.

b. All the fixed assets have been physically verified by management during the year and there is regular program of verification which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. As informed no major material discrepancies were noticed on such verification.

c. During the year, the Company has not disposed off substantial part of its fixed assets.

2. In respect of its inventories:

a. As explained to us, the stocks of finished products, stock-in-process and raw materials have been physically verified by the management during the year. Stock of stores and spare parts are reported to be physically verified in accordance with the procedure followed by the management. In our opinion, the frequency of such physical verification of stocks is reasonable.

b. In our opinion, the procedure of physical verification of stocks followed by the management is reasonable and adequate in relation to the size of the Company and the nature of its business.

c. The Company is maintaining proper records of inventory and no material discrepancies have been noticed on physical verification of stocks compared to the books/records.

d. There is no specific methodology of accounting for CER credits in the stock records of the company as the items are shown as closina stock.

3. The company has not granted/taken any loans secured or unsecured to/from Companies, Firms or other parties covered in the registers maintained u/s 301 of the Companies Act, 1956 except for an additional loan taken from its holding company, HOCL, of Rs. 130.00 lacs and the total amount outstanding as on 31.03.2011 is Rs. 4019.15 lacs including the loans taken in earlier years. In our opinion the rate of interest and other conditions governing the loan are prima facie not prejudicial to the interest of the Company.

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures, commensurate with the size of the Company and the nature of its business with regard to the purchase of inventory, fixed assets and with regard to the sale of goods.

5. In our opinion and according to the information and explanations given to us, there are no transactions in pursuance of contracts or arrangements entered in the register maintained u/s 301 of the Companies Act, 1956, aggregating during the year to Rs. 500000/- (Rupees Five Lacs only) or more in respect of any party.

6. The Company has not accepted any deposits from the public.

7. The Company has been getting the internal audit of it's accounts by appointing a firm of Chartered Accountants as Internal Auditors. The Internal Auditor Report was considered. During the financial year under audit the company had got a special report of verification of fixed assets from an independent chartered accountant firm which was also considered for audit.

8. We have broadly reviewed the books of accounts maintained by the Company pursuant to the rules made by the Central Government for the maintenance of cost records u/s 209 (1) (d) of the Companies Act. 1956 and we are of the opinion that prima facie the prescribed accounts and records have been made and maintained. We have not however made a detailed examination of the records with a view to determine whether they are accurate or complete.

9. As per the records of the Company, the Company is generally regular in depositing with the appropriate authorities undisputed statutory dues such as , Income Tax(TDS), Wealth Tax, Customs Duty, Income Tax, Excise Duty, Cess and other statutory dues applicable to it, but not regular in depositing periodical payments like Provident Fund, Central Sales Tax /VAT and there are arrears of provident Fund ,VAT and CST for more than 6 months. CST and VAT outstanding for a period more than 6 months amounts to Rs.45.74 lacs and Rs.17.12 lacs.PF arrears (company contribution) amounted to Rs.52.77 lacs for more than 6 months due. According to the information and explanation given to us, there are no dues of PF, IE, & PF, ESI, VAT/Sales Tax, Income Tax, Customs Duty, Wealth Tax, Excise Duty and Cess etc., which have not been deposited on account of any dispute.

10. The accumulated losses of the company as at the end of the year are more than fifty percent of its net worth. In our opinion the company has incurred cash losses during the current financial year had the CERs amounting to Rs.1697.07 lacs are not taken as Closing stock. We have qualified in our audit report for inclusion of CERs as Closing Stock which is not as per the AS-2 issued by ICAI (refer the qualification in our main report).The company is under the Scheme of BIFR and hence considered as a Sick Company as per Sick Industries Companies (Special Provisions) Act 1985. Sec 441A of companies Act is not applicable.

11. The Company has not defaulted in repayment of dues to financial institutions during the current financial year. There are no over dues as on 31st March, 2011.

12. The Company has not granted any loans and advances on the basis of shares, debentures and other securities of a similar nature and hence maintenance of documents and records relating to such items are not applicable.

13. In our opinion the Company is not a chit fund or a nidhi/mutual benefit fund/society. Therefore, clause-4 (iii) of the Companies (Auditor's Report) Order, 2003, is not applicable to the Company.

14. The Company has not dealt in or traded in shares, securities, debentures and other investments.

15. The Company has not given any guarantee for loans taken by others from banks and financial institutions.

16. The Company has taken unsecured loan during the year covered by our audit from HOCL(Parent company) to the tune of Rs. 130.00 lacs in accordance with BIFR's MDRS. The secured loans are from SBH, Gunfoundry, Hyderabad and Holding Company HOCL. We have not come across any instances where such loans were applied for the purpose other than the purpose for which the loans were obtained.

17. In our opinion and as per the explanations given to us no funds raised on short term basis have not been used for long term purposes and vice-versa.

18. The Company has not made any preferential allotment of the shares during the year.

19. The Company has not issued any debentures during the year.

20. The Company has not raised any money by public issues during the year.

21. Based upon the audit procedures performed and explanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit.

For Siva Krishna & Narayan Chartered Accountants Sd/- (R.V.N. Sastry) Partner M.No.206635

Place: Hyderabad Date : 30.06.2011


Mar 31, 2010

We have audited the attached Balance Sheet of Hindustan Fluorocarbons Ltd., Hyderabad, as at march 31, 2010, the Profit and Loss Account and the Cash Flow Statement for the year ended on that date annexed thereto. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Financial Statements based on our audit.

We conducted our audit in accordance with Audit Standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall Financial Statements presentation. We believe that our audit provides a reasonable basis for our opinion.

a) As required by the Companies (Auditors Report) Order, 2003, issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Companies Act, 1956, we enclose in the Annexure here to a statement of the matters specified in paragraphs 4 & 5 of the said Order.

b) In our opinion, proper books of account, as required by law, have been kept by the Company, so far as appears from our examination of those books.

c) The Balance Sheet, Profit and Loss Account and the Cash Flow Statements dealt with by this report are In agreement with the books of accounts.

d) In our opinion, the Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with this report comply with the Mandatory Accounting Standards referred to in sub-section (3c) of Section 211 of the Companies Act. 1956.

e) As per the Notification No. GSR. 829 (e) dated 21.10.2003 issued by the Central Government

clause(G) of sub-section(l) of Section 274 of the Companies Act, 1956, is not applicable to the Government Company and hence we offer no comment as to whether any of the Directors are disqualified from being appointed as the Directors in terms of the said section.

f) In our opinion and to the best of our information and according to the explanations given to us, the said accounts read together with the Accounts Policies and Notes to Accounts annexed to this report, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the Accounting Principles generally accepted in India subject to the following qualifications.

i) Regarding Sundry Debtors / Sundry Creditors.

Sundry Debtors /Sundry Creditors are subject to confirmation by the parties.

ii) Regarding Valuation of HFC - 23 GAS.

The Company has reported a profit of Rs.306.27 lakhs after taking into account incinerated HFC - 23 GAS (CFM-23/R-23) gas as closing Work in Process, amounting to Rs.1397 lakhs

The Company has followed a policy of valuing Future Carbon Credits(CERs) as closing WIP as similar to the policy followed in previous financial year 2008-09 . The valuation of Opening WIP relating to the Future Carbon Credits ( HFC-23 gas) in Financial Year 2009-10 is Rs. 772.04 Lakhs and the Value of Future Carbon Credits (incinerated HFC-23 gas) taken in Closing Stock is Rs.1397 lakhs.

HFC-23/R-23 gas produced by HFCL through its manufacturing process has fallen into the list of gases having potential of global warming and is in the eligible category of Carbon Credits as per the Kyoto Protocol. Therefore the company is entitled to claim Carbon Credits after the incineration of the Gas and confirmation by United Nations Framework on Climatic Change UNFCCC as per the guidelines of UNFCCC.

It t is informed to us that, in the current financial year 2009-10, 42.5 Metric Tons of RG -23 Gas capable of generating a total of 497250 Carbon Credits (CERs) is incinerated by HFCL during employing external agencies M/s SRF Ltd as Built- Operate-Transfer(BOT) contractor agreeing to pay 30% share in total Carbon Credits (263800 Carbon Credits equivalent to two installments) as contract price and also to PWC as consultants giving 5% share of total Carbon Credits (i.e, 11672.5 CERs) and after the respective share apportionments the company is eligible for 221777.50 Carbon Credits.The company is yet to get confirmation from UNFCCC regarding the converted Carbon Credits as on the date of this audit report. The company has valued the 221777.50 eligible / Future Carbon Credits as closing Work in process for value of Rs.1397 lacs taking the lowest quote of Carbon Credits in past year in Carbon Credits Exchange as basis

As per AS 2 issued by ICAI in respect of valuation of inventory, the valuation of Stock should be done at cost or net realizable value of the item whichever is low. As the entire cost relating to RG-23 Gas production are absorbed in the production cost, the value to be considered for valuation of WIP of RG 23 Gas/ Future Carbon Credit should have been NIL.

The ICAI has issued an Exposure Draft and Guidance Note on valuation of Carbon Credits dated 23-06-2009. As per the guidance note the Carbon Credits can be valued as Closing Stock / WIP only after they recognized by United Nations Framework Convention on Climate Change (UNFCCC) and communicated to company. Till the Confirmation/ communication of Carbon Credits by UNFCCC to company, the company at best can consider it as a Contingent Asset.

As on date of Audit Report it is informed to us that 42.5 Metric Tons of RG -23 Gas capable of generating a total of 497250 Carbon Credits (CERs) is incinerated by HFCL employing an external agencies M/s SRF Ltd as Built-Operate-Transfer(BOT) contractor agreeing to pay the price of the contract by giving 30% share in total Carbon Credits (263800 Carbon Credits equivalent to two installments) and PWC as consultants giving 5% share of total Carbon Credits (5%of total Carbon Credits i.e, 11672.5 CERs) and after the respective share apportionments the company is eligible for 221777.50 Carbon Credits which was valued at Rs.1397 lakhs.

Therefore in our view the profit of the Company as reported by the Company for the year amounting to 307.33 lakhs and Rs.306.27lakhs before Prior period adjustment and after prior period adjustment would have been converted into a Loss of Rs 317.63 lakhs and 1090.73 Lakhs respectively had the above policy been followed.

Also due to the above effect the Net Current Asset would have been Negative i.e. (-) Rs.240.95 lakhs as against reported (+)Rs.1156.05 lakhs and the Profit and Loss Account under the Misc. Asset would have been Rs 6297.28 lakhs against the reported as Rs.4900.28 lakhs.

iii) Regarding Refurbishment Expenditure: The Company has incurred Rs.284.14 lakhs as refurbishment expenditure on Plant & Machinery during the Financial Year 2008-09. Out of the above the Company has written off Rs.61.49 lakhs during the current year as per the guidelines laid down in BIFR, Modified Draft Rehabilitation Scheme (MDRS) The amount shall be written off in 3 equal annual installments as per the BIFR Scheme. This is a deviation of A S 6 issued by ICAI as any expenditure incurred for improvement in performance of the Plant & Machinery should be capitalized and depreciated accordingly as per Schedule - XIV applicable to the Company. However the Company is following the guide lines contained in the BIFRs MDRS in this matter deviating from A S issued by ICAI.

iv) Regarding Payment of Interest

The Company has debited an amount of Rs. 128.98 lakhs as payment of Interest on Loans taken out of which the payment towards Interest on Loan taken from HOCL the (Holding Company) pursuant to BIFR Scheme is Rs.13.43 lakhs. As per BIFRs MDRS the Company is not liable to pay any interest on the loan amount received from the Holding Company M/s HOCL pursuant to of BIFR Scheme. Hence we are of the opinion that the company has no obligation to pass the interest entry amounting to Rs.13.43 lakhs in its Profit and Loss Account and the amount payable to HOCL shall be reduced to that extent. Therefore in our view, the Profit as reported by the Company as shown in the Profit and Loss for the year 2009-10 amounting to Rs. 307.33 lakhs and Rs. 306.27 lakhs before Prior Period Adjustment and after Period Adjustment would have been converted into a Loss of Rs. 317.63 and Rs. 1090.73 Lakhs respectively had the above policy been followed. The Net current assets would have been negative i.e., Rs.240.95 lakhs (as against the reported figure of Rs. 1156.05 lakhs) and the Profit & Loss under Misc. Assets would have been Rs.6297.28 lakhs ( as against the reported figure of Rs. 4900.28 lakhs).

i) In the case of Balance Sheet of the state of affairs of the company as at 31SI March,2010.

ii) In the case of the Profit and Loss Account of the Profit for the year ended on that date and

iii) In the case of Cash Flow statement of the cash flows for the year ended on that date.

Annexure to Auditors Report

(Referred to in Paragraph 1 of our report of even date) 1. In respect of its fixed assets:

a. The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets.

b. All the fixed assets have been physically verified by management during the year and there is regular program of verification which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets.

As informed no material discrepancies were noticed on such verification. c. During the year, the Company has not disposed off substantial part of its fixed assets.

2. In respect of its inventories:

a. As explained to us, the stocks of finished products, stock-in-process and raw materials have been physically verified by the management during the year. Stock of stores and spare parts are reported to be physically verified in accordance with the procedure followed by the management. In our opinion, the frequency of such physical verification of stocks is reasonable.

b. In our opinion, the procedure of physical verification of stocks followed by the management is reasonable and adequate in relation to the size of the Company and the nature of its business.

c. The Company is maintaining proper records of inventory and no material discrepancies have been noticed on physical verification of stocks compared to the books/records.

3. The company has not granted/taken any loans secured or unsecured to/from companies, Firms or other parties covered in the registers maintained u/s 301 of the Companies Act, 1956 except for an additional loan taken from its holding company, HOCL, of Rs. 156.59 lacs and the total amount outstanding as on 31.03.2009 was Rs. 3753.17 lacs including the loans taken in earlier years. In our opinion the rate of interest and other conditions governing the loan are prima facie not prejudicial to the interest of the Company.

4. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures, commensurate with the size of the Company and the nature of its business with regard to the purchase of inventory, fixed assets and with regard to the sale of goods.

5. In our opinion and according to the information and explanations given to us, there are no transactions in pursuance of contracts or arrangements entered in the register maintained u/s 301 of the Companies Act, 1956, aggregating during the year to Rs. 500000/- (Rupees Five Lacs only) or more in respect of any party.

6. The Company has not accepted any deposits from the public.

7. The Company has been getting the internal audit of its accounts by appointing a firm of Chartered Accountants as Internal Auditors. The Internal Auditor Report was considered.

8. We have broadly reviewed the books of accounts maintained by the Company pursuant to the rules made by the Central Government for the maintenance of cost records u/s 209 (1) (d) of the Companies Act. 1956 and we are of the opinion that prima facie the prescribed accounts and records have been made and maintained. We have not however made a detailed examination of the records with a view to determine whether they are accurate or complete.

9. As per the records of the Company, the Company is generally regular in depositing with the appropriate authorities undisputed statutory dues such as VAT/Sales Tax, Income Tax, Wealth Tax, Customs Duty, Income Tax, Excise Duty, Cess and other statutory dues applicable to it, but not regular in depositing periodical payments like Provident Fund, Central Sales fax and there are arrears of provident Fund . Central Sales Tax outstanding for a period more than 6 months amounts to Rs.33.77 lacs it become payable. According to the information and explanation given to us, there are no dues of PF, IE, & PF, ESI, VAT/Sales Tax, Income Tax, Customs Duty, Wealth Tax, Excise Duty and cess etc., which have not been deposited on account of any dispute.

10. The accumulated losses of the company as at the end of the year are more than fifty percent of its net worth. In our opinion the company has incurred cash losses during the current financial year if HFC-23 gas valuation amounting to Rs. 1397 lakhs is not taken in to account and we have qualified in our audit report for inclusion of HFC-23 gas in the closing WIP valuating violating AS-2 issued by ICAI (refer the qualification in our main report).

11. The Company has not defaulted in repayment of dues to financial institutions during the current financial year. There are no over dues as on 31st March, 2010.

12. The Company has not granted any loans and advances on the basis of shares, debentures and other securities of a similar nature and hence maintenance of documents and records relating to such items are not applicable.

13. In our opinion the Company is not a chit fund or a nidhi/mutual benefit fund/society. Therefore, clause-4 (iii) of the Companies (Auditors Report) Order, 2003, is not applicable to the Company.

14. The Company has not dealt in or traded in shares, securities, debentures and other investments.

15. The Company has not given any guarantee for loans taken by others from banks and financial institutions.

16. The Company has taken secured loan during the year covered by our audit from HOCL to the tune of Rs. 156.59 lacs in accordance with BIFRs MDRS (the unsecured loans outstanding as on 31.03.2008 were converted into secured loans during the year), from SBH, Gunfoundry, Hyderabad and Rs. 100.97 lacs as Clean Credit and an additional Cash Credit for Rs.100 lacs from SBH Gunforundry. We have not come across any instances where such loans were applied for the purpose other than the purpose for which the loans were obtained.

17. In our opinion and as per the explanations given to us no funds raised on short term basis have not been used for long term purposes and vice-versa.

18. The Company has not made any preferential allotment of the shares during the year.

19. The Company has not issued any debentures during the year.

20. The Company has not raised any money by public issues during the year.

21. Based upon the audit procedures performed and explanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit.

For Siva Krishna & Narayan Chartered Accountants

Sd/- Place: Mumbai (R.V.N. Sastry)

Date : 5.5.2010 Partner

M.No.206635



 
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