Bharat Heavy Electricals Ltd

TO THE MEMBERS OF BHARAT HEAVY ELECTRICALS LIMITED

1. We have audited the attached Balance Sheet of Bharat Heavy Electricals Limitedas at March 31, 2011, the Profit and Loss Account and also the Cash Flow Statement for theyear ended on that date annexed thereto. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

2. We conducted our audit in accordance with the Auditing Standards generally acceptedin India. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatements. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements. An audit also includes assessing the accounting principlesused and significant estimates made by the management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides a reasonable basisfor our opinion.

3. As required by the Companies (Auditor’s Report) Order, 2003, as amended, issuedby the Central Government of India in terms of sub-section (4A) of Section 227 of theCompanies Act, 1956, we enclose in the Annexure a statement on the matters specified inparagraphs 4 and 5 of the said Order.

4. Further to our comments in the Annexure referred to in paragraph 3 above, we reportthat:

(a) We have obtained all the information and explanations which to the best of ourknowledge 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 theCompany so far as appears from our examination of the books and proper returns adequatefor the purposes of our audit have been received from the branches not visited by us.

(c) The Branch Auditor’s Reports have been furnished to us and have beenappropriately dealt with while preparing our report.

(d) The Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with bythis report are in agreement with the books of account and with the audited returnsreceived from the branches.

(e) In our opinion, the Balance Sheet, Profit and Loss Account and Cash Flow Statementdealt with by this report comply with the Accounting Standards referred to in sub Section(3C) of Section 211 of the Companies Act, 1956.

(f) In terms of Notification No. GSR 829(E) dated 21.10.2003 issued by the Departmentof Company Affairs, Government of India, the provisions of Section 274(1)(g) of theCompanies Act, 1956 are not applicable to the Company.

(g) In our opinion and to the best of our information and according to the explanationsgiven to us, the said accounts read together with the Significant Accounting Policies andNotes to Accounts thereon, give the information required by the Companies Act, 1956, inthe manner so required and give a true and fair view in conformity with the accountingprinciples generally accepted in India:

(i) In the case of the Balance Sheet, of the state of affairs of the Company as atMarch 31, 2011;

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

(iii) In the case of Cash Flow Statement of the cash flows for the year ended on thatdate.

Annexure to the Auditors’ Report

(Referred to in Para 3 of our repor t of even date on the accounts of Bharat HeavyElectricals Limited for the year ended March 31^st, 2011)

i) (a) The Company has maintained proper records showing full particulars includingquantitative details and situation of its fixed assets.

(b) According to the information and explanations given to us, physical verification offixed assets is being conducted in a phased manner by the management under a programmedesigned to cover all the fixed assets over a period of three years, which, in ouropinion, is reasonable having regard to the size of the Company and nature of its businessand no material discrepancies were noticed on such verification to the extent verificationwas made during the year. In respect of 65 locomotives given to Indian Railways on leaseinstead of physical verification a certificate confirming physical possession of theselocomotives has been obtained from Indian Railways as per the lease agreement.

(c) According to the information and explanations given to us, the Company has notdisposed off any substantial part of its fixed assets during the year.

ii) (a) As explained to us physical verification of inventory has been conducted by themanagement under Perpetual Inventory Programme at regular intervals during the year exceptfor stock of work in progress and finished goods in few units where these are verified atthe year end with reference to the inspection reports and production reports of theProduction Planning Department of such units. In regard to stocks lying withcontractors/fabricators and other parties, confirmations were received in a few casesonly. In our opinion the frequency of verification is reasonable.

(b) In our opinion and according to the information and explanations given to us, theprocedures of physical verification of inventories followed by the management arereasonable and adequate in relation to the size of the Company and the nature of itsbusiness.

(c) In our opinion and according to the information and explanations given to us, theCompany has maintained proper records of its inventories and discrepancies noticed onphysical verification of inventories with regard to the size and nature of operations ofthe Company were not material and have been properly dealt with in the books of account.

iii) (a) According to the information given to us, the Company has not granted anyloans, secured or unsecured to companies, firms and other parties covered in the registermaintained under section 301 of the Companies Act, 1956. Therefore clauses (iii)(b) to(iii)(d) of Paragraph 4 of the Order are not applicable to the Company.

(b) According to the information given to us, the Company has not taken any loans,secured or unsecured, from companies, firms or other parties covered in the registermaintained under Section 301 of the Companies Act, 1956. Therefore clauses (iii) (f) and(iii) (g) of Paragraph 4 Order are not applicable to the Company.

iv) In our opinion and according to the information and explanations given to us, thereis an adequate internal control system commensurate with the size of the Company and thenature of its business with regard to purchase of inventory and fixed assets and for thesale of goods and services. Further on the basis of our examination of the books andrecords of the Company, and according to the information and explanations given to us, wehave neither come across nor have been informed of any continuing failure to correct majorweaknesses in the internal control systems.

v) According to the information and explanations given to us, we are of the opinionthat during the year there are no contracts and arrangements that need to be entered inthe register maintained under Section 301 of the Companies Act, 1956. Therefore clause (v)(b) of Paragraph 4 of the Order is not applicable to the Company.

vi) According to the information and explanations given to us, the Company has notaccepted any deposits from public during the year within the meaning of sections 58A and58AA or any other relevant provisions of the Companies Act, 1956 and the Companies(Acceptance of Deposits) Rules 1975.

vii) According to the information and explanations given to us, the Company has aninternal audit department responsible for carrying out internal audit of various sectionsat head office, regional offices and units at periodical intervals as per the approvedaudit plan. In our opinion, the internal audit system of the Company is generallycommensurate with size and nature of its business.

viii) We have broadly reviewed the books of account and records maintained by theCompany pursuant to the rules made by the Central Government for the maintenance of costrecords under section 209 (I) (d) of the Companies Act, 1956 in respect of manufacture ofElectric Motors, Seamless Steel Tubes, Electric Generator, Power Transformers, Powerdriven Pumps, Power Generation through wind mills, control instrumentation and automationequipment and are of the opinion that prima facie the prescribed accounts and records havebeen made and maintained. We have, however, not made a detailed examination of the recordswith a view to determine whether they are accurate & complete.

ix) (a) According to the information and explanation given to us, in our opinion, theCompany is generally regular in depositing with appropriate authorities undisputedstatutory dues including Provident Fund, Investor Education and Protection Fund, EmployeesState Insurance, Income Tax, Sales Tax, Wealth Tax, Service Tax, Excise Duty, CustomsDuty, Cess and any other material statutory dues as applicable to it.

(b) According to the information and explanation given to us, no undisputed amountspayable in respect of Provident Fund, Investor Education and Protection Fund, EmployeesState Insurance, Income Tax, Sales Tax, Wealth Tax, Service Tax, Excise Duty, CustomsDuty, Cess and other statutory dues outstanding as at March 31, 2011 for a period of morethan six months from the date they become payable except in one case at Libya, whereas per the agreement, the income tax liability has to be discharged by the customer,directly to the Libyan Government. The amount outstanding for more than six months is R15.55 crore pertaining to financial year 2008-09.

Further, since the Central Government has till date not prescribed the amount of cesspayable under Section 441A of the Companies Act, 1956, we are not in a position to commentupon the regularity or otherwise of the Regional Operations Division in depositing thesame.

(c) According to the information and explanation given to us, the particulars of SalesTax, Income Tax, Excise Duty, Service Tax, Custom Duty and Cess which have not beendeposited on account of dispute are as under:

x) The Company has no accumulated losses as at March 31, 2011 and has not incurred anycash losses during the financial year covered by our audit and the immediately precedingfinancial year.

xi) According to the records of the Company examined by us and the information andexplanations given to us, the Company has not defaulted in repayment of dues to financialinstitutions, banks or debenture holders.

xii) According to the information and explanations given to us, the Company has notgranted any loans and advances on the basis of security by way of pledge of shares,debentures and other securities.

xiii) In our opinion, the Company is not a chit fund or a Nidhi / mutual benefit fund/society. Therefore, provisions of clause (xiv) of Paragraph 4 of the Order are notapplicable to the Company.

xiv) In our opinion and according to the information and explanations given to us, theCompany is not dealing or trading in shares, securities, debentures and other investments.Accordingly, the provisions of clause (xiv) of the Paragraph 4 of the Order are notapplicable to the Company.

xv) In our opinion and according to the information and explanations given to us, theCompany has not given guarantees for loans taken by others from banks or financialinstitutions.

xvi) As per information and explanations given to us, the Company has not obtained anyterm loan during the year.

xvii) According to the information and explanations given to us and on an overallexamination of the Balance Sheet of the Company, we report that no funds raised onshort-term basis have been used for long-term investment.

xviii) According to the information and explanation given to us, the Company has notmade any preferential allotment of shares to parties and companies covered in the registermaintained under section 301 of the Companies Act, 1956.

xix) In our opinion, the Company has not issued any debentures during the year.Therefore, provisions of clause (xix) of Paragraph 4 of the Order are not applicable tothe Company.

xx) The Company has not raised any money by way of public issue during the year.Therefore, provisions of clause (xx) of Paragraph 4 of the Order are not applicable to theCompany.

xxi) During the course of our examinations of the books and records of the Company,carried out in accordance with the generally accepted auditing practices in India, andaccording to the information and explanations given to us, no fraud on or by the Companyhas been noticed or reported during the year.