BEML Ltd

To the Members of BEML Limited,

1. We have audited the attached Balance Sheet of BEML Limited as at 31^stMarch 2011, the Profit and Loss Account and the Cash Flow Statement for the year ended onthat date annexed thereto. These financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on these financialstatements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted inIndia. Those standards require that we plan and perform the audit to obtain reasonableassurance whether the financial statements arc prepared, in all material respects, inaccordance with an identified financial reporting framework and are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our auditprovides a reasonable basis for our opinion.

3. As required by the Companies (Auditors' Report) Order, 2003 as amended by Companies(Auditor's Report) (Amendment) Order, 2004 (together 'the Order'), issued by the CentralGovernment of India in terms of subsection (4A) of Section 227 of 'The Companies Act,1956' (the 'Act') and on the basis of such checks of the books and records of the Companyas we considered appropriate and according to the information and explanations given tous, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 ofthe said Order.

4. Further to our comments in the Annexure referred to in Paragraph 3 above

We report as follows:

a) We have obtained all the information and explanations, which to the best of ourknowledge 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 theCompany so far as it appears from our examination of these books and proper returnsadequate for the purpose of audit have been received from offices not visited by us.

c) The Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with bythis report are in agreement with the books of accounts maintained by the Company.

d) In our opinion, the Balance Sheet, Profit and Loss Account and the Cash FlowStatement comply with the Accounting Standards referred "to in Sub-section (3C) ofSection 211 of the Companies Act, 1956.

e) Without qualifying our opinion reference is invited to:

1. Note No. D-3(ii) Schedule 23 in respect of claim from Railway Board in respect ofwheel sets for Rs. 1480.60 lacs. The readability of this claim depends on the outcome ofthe representation which can not be presently be determined.

2. Note No. D-7, Schedule 23 in respect of non confirmation of various nominalbalances. The impact on accounts, if any, is at present not ascertainable.

3. Note No. D-13 Schedule 23 in respect of non provision for the decline, other thantemporary, in the value of investments in BEML Midwest Limited which depends on theoutcome of legal proceedings.

4. Note No. D-1 (v) & (vi) Schedule 23 for the recognition of sales of defenceproducts to Ministry of Defence and sale of intermediary products to a Defence ResearchEstablishment due to complex nature of such contracts and other reasons stated therein.

f) Being a government company, the provisions of Sec 274(1)(g) of the Act relating todisqualification of Directors are not applicable to the company in terms of notificationno: GSR 829(E) dated 21^st October 2003.

g) In our opinion and to the best of our information and according to the explanationsgiven to us the said financial statements read with the significant accounting policiesand the notes appearing in Schedule 23 give the information as required by the Act in themanner so required, and give a true and fair view in conformity with accounting principlesgenerally accepted in India:

(A) In the case of the Balance Sheet, the state of affairs of the Company as at 31^stMarch 2011;

(B) In the case of the Profit and Loss Account of the profit for the year ended on thatdate; and

(C) In the case of the Cash Flow Statement, of the cash flows for the year ended onthat date.

Membership No.28339

Place : Bangalore

Date : 31^st May 2011

ANNEXURE TO AUDITORS' REPORT

(Referred to in Paragraph 3 of our Report of even date on the Financial Statements ofBEML Limited for the year ended 31^st March, 2011)

Auditors' Report

1. (a) The Company is maintaining proper records showing full particulars includingquantitative details and situation of fixed assets.

(b) Fixed assets have been physically verified by the management during the year. Nomaterial discrepancies have been noticed on such verification.

(c) The disposals of assets during the year were not substantial so as to affect itsgoing concern status of the Company.

2. (a) The Company has conducted physical verification of inventories (excluding nonmoving inventory, materials lying with third parties and work in progress) during theyear in accordance with the program designed to cover all items over a phased manner. Inrespect of materials with third parties these are confirmed by them in a few cases (ReferNote: D 2(b) Schedule 23). In our opinion the frequency of verification is reasonable.

(b) The procedures of physical verification of inventories followed by the managementare reasonable and adequate in relation to the size of the company and the nature of itsbusiness, except in respect of non moving inventory, materials lying with third partiesand work in progress.

(c) The Company has maintained proper records of inventories. No material discrepancieswere noticed on physical verification.

3. The Company has not granted or taken any secured or unsecured loans to or fromCompanies, firms or such parties covered in the register maintained under Section 301 ofthe Companies Act, 1956. Consequently clauses iii(a) to iii(g) of paragraph 4(iii) of theorder are not applicable to the Company.

4. In our opinion and according to the information and explanations furnished to us,there are adequate internal control procedures commensurate with the size of the Companyand the nature of its business for the purchase of Inventory and Fixed Asset and sale ofgoods and services.

5. There are no contracts or arrangement by the company with any party referred to inSec 301 of the Companies Act 1956, which are to be entered in the register required to bemaintained under that section and hence the requirement of reporting on the reasonabilityof such transactions having regard to the prevailing market prices made in pursuance ofsuch contracts does not arise.

6. The Company has not accepted any deposits from the public within the meaning ofprovisions of Sec 58A, 58AA of the Companies Act, 1956 and any other relevant provisionsof the Act and the rules framed thereunder. Therefore, the provisions of Clause 4(vi) ofthe Order are not applicable to the company.

7. In our opinion, the Company has an internal audit system, the scope and coverage ofwhich requires to be enlarged to be commensurate with the size of the Company and thenature of its business.

8. The Central Government has prescribed maintenance of cost records under Section209(1 )(d) of the Companies Act, 1956 in respect of Internal Combustion Engines and HeavyEarthmoving Equipments manufactured by the company. We have broadly reviewed the costrecords maintained by the company pursuant to the rules made by the Central Government forthe maintenance of cost records and we are of the opinion that, prima facie, theprescribed records have been made and maintained. We are not required to and, accordinglyhave not made a detailed examination of the records.

9. (a) The Company is generally regular in depositing the undisputed statutory duesincluding Sales Tax, Provident Fund, Investor Education and Protection Fund, EmployeesState Insurance, Income Tax, Wealth Tax, Service Tax, Customs Duty, Excise Duty, Cess andother statutory dues with appropriate authorities and no undisputed amounts in respect ofthese cases were outstanding for a period of more than six months from the date theybecame payable as at the end of the year.

(b) The details of disputed Income Tax/ Sales Tax/Customs Duty/Wealth Tax/ ServiceTax/Excise Duty/Cess as at the end of the year that have not been deposited are detailedhereunder:

Note: A sum of Rs. 262.35 Lacs have been paid towards the above disputed statutorydues under protest.

10. The Company does not have accumulated losses at the end of the financial year andit has not incurred cash losses in the financial year under review and in the immediatelypreceding financial year.

11. Based on our audit procedures and according to the information and explanationgiven to us and in our opinion the Company has not defaulted in repayment of dues tobanks. There are no dues to any financial institution or debenture holders.

12. In our opinion and according to the explanations given to us and based on theinformation available, the Company has not granted any loans or advances on the basis ofsecurity by way of pledge of shares/ debentures and other securities.

13. The Company is not a chit fund or a nidhi / mutual benefit company/ society.Therefore, clause 4(xiii) of the Order is not applicable to the Company.

14. In our opinion the Company is not dealing in shares, securities, debentures andother investments. Hence clause 4(xiv) of the Order is not applicable to the Company.

15. The Company has given guarantee to loan taken by another Company from banks. Thisincludes guarantee given to BEML Midwest Limited for Rs. 1912.50 Lacs to a bank. The termsand conditions, prima facie, in our opinion, are not prejudicial to the interest of theCompany. We are unable to comment on whether the guarantee given on behalf of BEML Midwestis prejudicial to the interest of the Company in view of the various developments as givenin note No D-13 of Schedule 23.

16. The term loans availed by the Company have been applied for the purposes for whichthe loans were obtained.

17. According to the information and explanation furnished to us and on an overallexamination of the Balance Sheet of the Company as at 31^st March 2011, no fundsraised on short-term basis have been used for long-term purposes.

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

19. The Company has not issued any debentures and hence clause 4(xix) of the orderrelating to creating of charge is not applicable.

20. The Company has raised monies through Follow on Public Offering in the earlier yearand the status of utilization of funds is disclosed by the management in Note No. D-6,Schedule 23 and the same has been verified by us.

21. According to the information and explanations given to us, no fraud on or by theCompany has been noticed or reported during the course of our audit.

Membership No.28339

Place : Bangalore

Date : 31^st May 2011