Duncans Industries Ltd

TO THE MEMBERS OF DUNCANS INDUSTRIES LIMITED

We have audited the attached Balance Sheet of Duncans Industries Limited as at31st March, 2010 and also the Profit and Loss Account and the Cash Flow Statement of theCompany for the year ended on that date. These financial statements of the company are theresponsibility of the company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

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 about whether the financial statements are free from material misstatements. Anaudit includes examining, on 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.

1. As required by the Companies (Auditor’s Report) Order, 2003 ("theorder"), as amended by the Companies (Auditor’s Report) (Amendment) Order, 2004issued by the Central Government in exercise of the powers conferred by Section 227 (4A)of the Companies Act 1956, ("the Act") and according to the information andexplanations given to us and subject to non availability of certain details and records asgiven in paragraph 4 below on the basis of such checks as we considered appropriate, westate that :

I. a) The Company has maintained proper records to show full particulars includingquantitative details and situation of its fixed assets except in respect of Fertilizerdivision where such records are not accessible.

b) All the fixed assets have not been verified by the management during the year butaccording to the information and explanations given to us, there is a regular programme ofverification which, in our opinion, is reasonable having regard to the size and the natureof its assets. However, as stated in Note 9(c)(ii) of Schedule No. 12 in case ofFertiliser Division such verification has not been carried out. In respect of assetsverified during the year, no material discrepancies have been noticed.

c) In our opinion, during the year, the company has not disposed off substantial partof its fixed assets.

II. a) The inventory, as explained to us, has been physically verified by themanagement in a phased manner. In respect of Fertilizer Division as given in Note 9(c) (i)of Schedule 12 such verification could not be carried out. No confirmations with respectto stock lying with third parties were obtained. In respect of certain materials stored inheaps such verification has been done on the basis of visual estimation/survey and/orvolumetric measurement technique.

b) In our opinion, read together with Para (II) (a) above, the procedure of physicalverification of inventory followed by the management are reasonable and adequate inrelation to the size of the Company and nature of its business.

c) In our opinion, read with Note 9(c) (i) of Schedule 12 the company has maintainedproper records of its inventory and as explained to us, the discrepancies observed on suchverification between the physical stock and the book records were not material and havebeen properly dealt with in the books of account.

III. a) During the year, the Company has not granted any loan secured or unsecured toany company, firm or other party covered in the Register maintained under Section 301 ofthe Act. In respect of the unsecured loan given in earlier years to a company covered inthe register maintained under said section, the aggregate maximum amount involved and theyear end balance was Rs.1685 lacs. The said loan continues to be interest free and yet tobe repaid as indicated in Note 20 of Schedule 12.

b) The amount has been advanced as promoters’ contribution and in the absence ofany specific terms for repayment etc it is not possible to ascertain and comment whetherthe same is prima facie prejudicial to the interest of the Company. Accordingly, clauseIII (c) and (d) are not applicable to the company.

c) The Company, during the year has not taken any loan secured or unsecured fromcompanies, firms or other parties covered in the register maintained under section 301 ofthe Act. Accordingly, clause 4 (III) (e) to (g) of the order are not applicable to thecompany.

IV. In our opinion, and having regard to the nature and exigencies of business and thepractices followed and the explanation that certain items purchased are of a specialnature and therefore in certain cases alternative quotations are not available, there isan adequate internal control procedure commensurate with the size of the Company andnature of its business with regard to purchase of inventory, fixed assets and with regardto sale of goods and services. During the course of our audit, we have not observed anycontinuing failure to correct the major weaknesses in internal controls.

V. According to information and explanation given to us and as per the records of thecompany, there is no transaction that needs to be entered, in the Register maintainedunder Section 301 of the Act. Accordingly, the provisions of the clause 4 (v) (b) of thesaid order is not applicable to the Company.

VI. Deposits accepted by the company in earlier years which were in excess of thelimits prescribed for the purpose are due for repayment. The Company Law Board (CLB) on anapplication made by the Company, rescheduled the repayment of deposits vide its orderdated 18th June 2002. However, the rescheduled terms and conditions could also not beadhered to and the matter has been dealt with as stated in the Note 10 of Schedule 12.

VII. The Company’s internal audit in respect of the tea division has beenconducted in a phased manner by a firm of Chartered Accountants. In the Fertilizerdivision of the Company, no such audit was carried out during the year. Accordingly,internal audit system needs to be strengthened further.

VIII. We have been explained that in the absence of any production of Urea during theyear no cost records are required to be maintained. Further in respect of Tea division, onthe basis of records produced, we are of the opinion that prima facie the cost records andaccounts prescribed by the Central Government under Section 209(1) (d) of the Act havebeen maintained. However, we have not carried out any detailed examination of such recordswith a view to determine whether they are accurate or complete.

IX. a) As stated in Note 11 of Schedule 12 outstanding dues in respect of EmployeesProvident Fund is deposited in terms of repayment schedule provided by the appropriateauthorities. Having regard to this and according to the information and explanations givento us the company is generally regular in depositing with appropriate authoritiesundisputed statutory dues in respect of Provident Fund, Investor Education &Protection Fund, Sales Tax, Cess, Professional Tax and other material statutory duesapplicable to it. The details of material statutory dues outstanding for a periodexceeding six months as provided for in the accounts are given below:

b) According to the information and explanations given to us, there are no dues ofSales Tax, Income Tax, Custom Duty, Wealth Tax, Excise Duty and Cess which have not beendeposited on account of any dispute except as given below:

X. The accumulated losses of the company have exceeded fifty percent of its net worth.The Company has not incurred cash losses during the financial year covered by our auditbut had incurred cash losses in the immediately preceding financial year. The effect ofqualifications has not been taken into consideration for the purpose of making comment inrespect of this clause.

XI. As stated in Note 8.1 of schedule 12 amounts payable to Banks and Financialinstitutions have been restructured/rescheduled. The details of default in payment of duesto bank and financial institution and debenture holders considering the said restructuredterms and conditions and in cases where such restructured terms are pending acceptancesare as follows:

As given in Note 22.2 in Schedule 12 amount of additional / penal interest etc., arepresently not ascertainable and therefore the same has not been included in the aboveamounts. However, the Company’s Draft Rehabilitation Scheme (DRS) is pending with theBIFR and as given in Note 8.3 of Schedule 12, the amounts payable to Banks and financialInstitutions will finally be determined and given effect to on sanction of the scheme andas such amounts arrived as above are subject to the impact on sanction of the DRS by BIFR.

XII. The Company has not granted any loan and advances on the basis of security by wayof pledge of shares, debentures and other security.

XIII. In our opinion, the Company is not a chit fund or nidhi / mutual benefit fund /society. Therefore, the provisions of the clause 4 (XIII) of the said order are notapplicable to the Company.

XIV. In our opinion, the Company is not dealing in or trading in shares, securities,debentures and other investments. Accordingly, the provision of clause 4 (XIV) of theOrder is not applicable to the Company.

XV. The Company has not given any guarantee during the year for loan taken by others.Guarantees given in earlier years to group/associate companies in respect of loans takenby them from banks and financial institutions, considering the long term involvement withthose companies when issued was not prima facie prejudicial to the interest of theCompany.

XVI. As per the information and explanations given to us, no fresh term loan has beentaken during the year.

XVII. According to the information and explanation given to us and in view of Note 8.1of Schedule 12 and on an overall examination of the Balance Sheet of the Company, wereport that funds amounting to Rs 75,615 lacs raised on short-term basis have been usedfor long term investment, i.e., for funding losses of the Company.

XVIII. The Company has not made any preferential allotment of shares to parties andcompanies required to be covered, in the Register maintained under Section 301 of the Act,during the year.

XIX. The Company has not issued any secured debentures during the year. Accordingly,clause 4 (XIX) of the order is not applicable to the company.

XX. The Company has not raised any money through a Public issue during the year.

XXI. During the course of our examination of books and records of the Company carriedout in accordance with generally accepted auditing practices in India, we have neithercome across any instances of fraud on or by the Company, noticed and/or reported duringthe year, nor have we been informed of any such case by the management.

2. As indicated in Note 7 of schedule 12, pending approval of the Draft RehabilitationScheme (DRS) by BIFR, the accounts have been prepared on a going concern basis. However,it’s ability to continue as a going concern is dependent upon the rehabilitationmeasures which are yet to be finalized and implemented and its’ future performanceand the profitability, on which we are unable to express any opinion presently.

3. As indicated in Note 20 of Schedule 12, regarding loan given to a company andeffective recovery thereagainst and resultant impact thereof on the losses if any ispresently not ascertainable.

4. As indicated in Note 9 and 24 of Schedule 12, relevant records and details inrespect of Fertilizer Division and certain records, confirmations and reconciliation forthe purpose of the audit, were not available and certain year end verification exercisesas such could not be carried out. In view of the above and in the absence of relevantdetails/records and/or full information/ reconciliations/confirmations, we are unable toexpress any opinion on the extent of adjustments arising there from and their impact onamounts of various assets and liabilities, contingent liabilities, expenses and income andimpact thereof on the profit of the Company.

5. Attention is invited to the following Notes in Schedule 12 : a) Note 12 regardingnon provision of various employee related expenses amounting to Rs. 2546 lacs (includingRs.858 lacs for the year) and thereby profit for the year is higher to the extent of Rs.858 lacs and the accumulated balance is lower to the extent of Rs. 2546 lacs.

b) Note 8.1(a), 8.1 (b)and Note 22.1 regarding non-provision of interest of Rs.22888.26 lacs (including Rs. 5673.54 lacs for the year) on certain borrowings and Note 4and 22.2 regarding differential/penal interest etc. on various statutory and otherliabilities, borrowings, creditors, etc. due to the reason mentioned in Note 22.3. Impactwith respect to the same on the accounts pending finalization of DRS is presently notascertainable c) Note 23(b) regarding non ascertainment of liability related to employeebenefits under defined benefit plans pertaining to Fertilizer division and those relatedto Superannuation Fund thereof as required in terms of AS 15.

6. Further attention is also invited to the following Notes in Schedule 12, impactswhereof are presently not ascertainable:

a) Note 3.2 regarding non recognition of the liability for surcharge on electricitydemanded by Kanpur Electric Supply Co;

b) Note 6.2 regarding non availability of details regarding micro, small and mediumenterprise as defined under Micro, Small and Medium Enterprise Development Act,2006 ,

c) Note 8.3 regarding impact of the various proposals envisaged in the DRS pendingsanction thereof by BIFR.

d) Note 18.5 regarding non-provision of Rs. 811.67 lacs demanded by the appropriateauthorities as "Salami" on renewal of lease in certain circumstances; and

e) Note 32.2 regarding payment of managerial remuneration amounting to Rs 392.81 lacs(including Rs.47.54 lacs for the year) which is subject to approval of the CentralGovernment.

7. We further report that, without considering Para 2 to 4,5(b) to (d) and 6 impacts ofwhich on the company’s profit for the year and the accumulated balance thereof havenot been ascertained and as such cannot be commented upon by us, had the impact of items 5(a ) above been considered, the profit for the year would have been Rs.132.75 lacs asagainst the reported profit of Rs.990.75 lacs and accumulated balance thereof would havebeen Rs.145719.27 lacs as against the reported figures of Rs.143173.27 lacs.

8. Further to above, we report that:

a) Subject to Para 4 and Para 6(b) above, we have obtained all the information andexplanations which to the best of our knowledge and belief were necessary for the purposeof our audit;

b) The Balance Sheet, Profit and Loss Account and Cash Flow Statement referred to inthis report are in agreement with the books of account;

c) In our opinion, proper books of account as required by law have been kept by theCompany so far as appears from our examination of such books;

d) In our opinion, excepting provision/ascertainment of certain employee relatedexpenses and disclosure in terms of Accounting Standard 15 on Employee Benefits as statedin Note 23(b) of Schedule 12 and non ascertainment of contingent liabilities anddisclosures thereof in respect of Fertilizer Division as required in terms of AccountingStandard 29 on Provisions, Contingent Liabilities and Contingent Assets, the BalanceSheet, Profit and Loss Account, and Cash Flow Statement comply with the AccountingStandards referred to in sub-section 3(c) of Section 211 of the Act;

e) In view of the defaults made in repayment of deposits and interest thereon referenceis invited to Note 13 of schedule 12 regarding the Company’s contention, forapplicability of section 274(1)(g) of the Act. In view of the legal opinion received onwhich we have placed reliance, the Directors of the Company are not disqualified frombeing appointed as directors in terms of Section 274(1)(g) of the Act;

f) In our opinion and to the best of our information and according to the explanationsgiven to us, subject to our remarks as given in Para 2 to 6 above whereby excepting asgiven in Para 7 above, we are unable to ascertain the impact on these accounts and readtogether with the other Notes thereon, these accounts give the information required by theAct, in the manner so required and give a true and fair view in conformity with theaccounting principles generally accepted in India:

i. in the case of the Balance Sheet, of the State of Affairs of the Company as at 31stMarch, 2010;

ii. in the case of the Profit and Loss Account, of the loss of the Company for the yearended on that date; and

iii. in the case of the Cash Flow Statement, of the cash flows for the year ended onthat date.