JSW ISPAT Steel Ltd

TO THE MEMBERS

We have audited the attached Balance Sheet of Ispat Industries Limited(‘the Company’) as at 30^th June 2010 and also the Profit and Lossaccount and the cash flow statement for the fifteen months period ended on that date,annexed thereto. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statementsbased on our audit.

We conducted our audit in accordance with the 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 of material misstatement. 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.

As required by the Companies (Auditor’s Report) Order, 2003 (as amended) issued bythe 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.

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

1. We have obtained all the information and explanations, which to the best of ourknowledge and belief were necessary for the purposes of our audit.

2. In our opinion, proper books of account as required by law have been kept by theCompany so far as appears from our examination of those books and proper returns adequatefor the purposes of our audit have been received from the branches/sales depots notvisited by us.

3. The balance sheet, profit and loss account and cash flow statement dealt with bythis report are in agreement with the books of account.

4. 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, subject to our comment in Para 7(a)below.

5. On the basis of the written representations received from the directors, as on 30^thJune 2010, and taken on record by the Board of Directors, we report that none of thedirectors is disqualified as on 30^th June 2010 from being appointed as adirector in terms of clause (g) of sub-section (1) of section 274 of the Companies Act,1956.

6. Without qualifying our opinion, attention is drawn to the following Notes onSchedule 23 :-

a) The accumulated losses of the Company as per the books of accounts stand at Rs.2134.23 crores as on 30^th June 2010. However, after considering the impact ofthe qualifications mentioned in Para 7 below, the accumulated losses would stand at Rs.3082.99 crores as on 30^th June 2010, which is in excess of theShareholders’ Fund of Rs. 2748.98 crores (excluding revaluation reserve of Rs. 965.94crores) as on that date. As stated in Note No. 24, the management has a strategic plan forthe revival of the Company and it is hopeful of improvement in the financial health of theCompany in the near future. Accordingly, the financial statements for the period have beendrawn up by the management as per the going concern assumption.

b) Note No. 13 regarding Sundry Debtors of Rs. 255.61 crores (Rs. 247.73 crores)receivable from Peddar Realty Pvt. Ltd. towards sale consideration of landed propertyalong with interest thereon, which has been considered good of recovery by the management.

c) Note No. 23 regarding non-reconciliation of credit balances of Rs. 1137.17 crores(Rs. 1001.40 crores) relating to certain major parties towards raw material supplies. Themanagement does not expect any material impact on the financial statements on account ofsuch reconciliation.

7. Attention is drawn to the following Notes on Schedule 23:

a) Note No. 12(a) regarding recognition of net deferred tax asset (DTA) of Rs.964.28 crores (including Rs. 14.15 crores for the period) in the accounts upto 30^thJune 2010, based on the future profitability projections made by the management. However,we are unable to express any opinion on the above projections and their consequentialimpact, if any, on the recognition of such DTA. This had also caused us to qualify ouraudit opinion on the financial statements relating to the preceding year.

b) Note No. 15 regarding remuneration of Rs 15.52 crores (including Rs. 10.84 croresfor earlier years) paid to the managing and other whole time directors, which is in excessof the approvals received from the Ministry of Corporate Affairs during the period.However, no adjustment towards the above excess managerial remuneration recoverable fromthese directors, has been made in the accounts, pending disposal of the representationmade by the Company to the Ministry of Corporate Affairs for reconsideration of the aboveapprovals.

Had the impact of above items been considered, there would be a loss of Rs. 1271.10crores (including DTA of Rs. 950.13 crores recognized upto 31^st March 2009) asagainst the reported loss of Rs. 322.34 crores for the period and the Profit and Lossaccount debit balance would have been Rs. 3082.99 crores as against the reported figure ofRs. 2134.23 crores as on the balance sheet date.

8. Subject to the effect of the matters referred to in paragraph 7 above ,in our opinion and to the best of our information and according to the explanations givento us, the said accounts give the information required by the Companies Act, 1956, in themanner so required and give a true and fair view in conformity with the accountingprinciples generally accepted in India;

a) in the case of balance sheet, of the state of affairs of the Company as at 30^thJune 2010;

b) in the case of profit and loss account, of the loss for the period ended on thatdate; and

c) in the case of cash flow statement, of the cash flows for the period ended on thatdate.

(Referred to in our report of even date to the members of Ispat Industries Limited asat and for the fifteen months period ended 30^th June 2010)

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

(b) All fixed assets have not been physically verified by the management during theperiod but there is a regular programme of verification in a phased manner to cover allthe items of fixed assets over a period of three years which, in our opinion, isreasonable having regard to the size of the Company and the nature of its assets. Asinformed, no material discrepancies were noticed on such verification of fixed assetsduring the period.

(c) There was no substantial disposal of fixed assets during the period.

(ii) (a) The management has conducted physical verification of inventory at reasonableintervals during the period except for transit stock of materials for whichconfirmations have been furnished to us for the major amount thereof.

(b) The procedures of physical verification of inventory followed by the management arereasonable and adequate in relation to the size of the Company and the nature of itsbusiness.

(c) The Company is maintaining proper records of inventory. As informed, no materialdiscrepancies were noticed on physical verification of inventories during the period.

(iii) (a) As informed, the Company has not granted any loans, secured or unsecured tocompanies, firms or other parties covered in the register maintained under section 301 ofthe Companies Act, 1956. Therefore, the provisions of clauses 4(iii)(b) to (d) of theOrder are not applicable.

(b) As informed, the Company has not taken any loans, secured or unsecured fromcompanies, firms or other parties covered in the register maintained under section 301 ofthe Companies Act, 1956. Therefore, the provisions of clauses 4(iii)(f) and (g) of theOrder are not applicable.

(iv) In our opinion and according to the information and explanations given to us, andhaving regard to the explanation that some of the items purchased are of a special natureand alternative sources do not exist for obtaining quotations thereof, it appears thatthere is an adequate internal control system commensurate with the size of the Company andthe nature of its business, for the purchase of inventory and fixed assets and for thesale of goods and services. During the course of our audit, no major weakness has beennoticed in the internal control system in respect of these areas and we have not observedany continuing failure to correct major weakness in internal control system of thecompany.

(v) According to the information and explanations provided by the management, therehave been no transactions during the period that need to be entered into the registermaintained under Section 301 of the Companies Act, 1956.

(vi) As informed, the Company has not accepted any deposit from the public.

(vii) The Company has an internal audit system, which in our opinion, is commensuratewith the size and nature of its business.

(viii) We have broadly reviewed the books of account maintained by the Company pursuantto the rules made by the Central Government for the maintenance of cost records in respectof the company’s products under section 209(1)(d) of the Companies Act, 1956, and areof the opinion that prima facie, the prescribed accounts and records have been maintained.

(ix) (a) The Company has been generally regular in depositing undisputed statutory duesincluding provident fund, investor education and protection fund, income-tax, sales-tax,wealth-tax, service tax, custom duty, excise duty, cess and other material statutory duesapplicable to it, with the appropriate authorities though there have been delays in afew cases. The provisions relating to employees’ state insurance are notapplicable to the Company.

Further, since the Central Government has till date not prescribed the amount of cesspayable under section 441 A of the Companies Act, 1956, we are not in a position tocomment upon the regularity or otherwise of the Company in depositing the same.

(b) According to the information and explanations given to us, no undisputed amountspayable in respect of provident fund, investor education and protection fund, income-tax,sales-tax, wealth-tax, service tax, custom duty, excise duty, cess and other undisputedstatutory dues were outstanding, as on the Balance Sheet date for a period of more thansix months from the date they became payable.

(c) According to the records of the Company, the dues in respect of income tax, salestax, wealth-tax, service tax, custom duty, excise duty and cess etc. on account of anydispute are as follows :

(x) The Company’s accumulated losses at the period-end are more than fiftypercent of its net worth. The Company has not incurred cash loss in the current periodbut had incurred cash loss in the immediately preceding financial year.

(xi) Based on our audit procedures and as per the information and explanations givenby the management, the Company has delayed in repayment of dues to domestic financialinstitutions, banks [excluding Rs.12.38 Crores, the repayment of which has beenre-scheduled as indicated in Note No. 11 on Schedule 23] and debenture holders during theperiod to the extent of Rs. 2942.24 crores, which includes Rs.1937.40 crores towardsworking capital facilities (the delay in such repayments for more than 60 days being Rs.553.23 crores). Further Rs. 377.37 crores of such dues were in arrears as on the balancesheet date (the delay for more than 60 days being Rs.80.22 crores).

(xii) According to the information and explanations given to us and based on thedocuments and records produced, the Company has not granted loans and advances on thebasis 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 and therefore, the provisions of clause 4(xiii) of the Order are not applicable.

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

(xv) According to the information and explanations given to us, the Company has givencorporate guarantees of Rs. 130 crores and has also pledged investments of Rs. 110 croresin its wholly owned subsidiary "Ispat Energy Limited", for loans to be taken bythe above investee Company from banks and financial institutions, the terms and conditionswhereof, in our opinion, based on the management representation are not prima-facieprejudicial to the interest of the Company.

(xvi) Based on the information and explanations given to us by the management, termloans were applied for the purpose for which these were obtained.

(xvii) According to the information and explanations given to us and on an overallexamination of the balance sheet of the Company, we report that the Company has usedfunds to the extent of Rs 882.65 crores approximately, raised on short-term basis forre-payment of long term loans and financing of operating losses.

(xviii) The Company has not made any preferential allotment of shares during the periodto parties or companies covered in the register maintained under section 301 of theCompanies Act, 1956.

(xix) The Company did not have any outstanding debentures as on the Balance Sheet date.

(xx) The Company has not raised any money through a public issue during the period.

(xxi) Based upon the audit procedures performed for the purpose of reporting the trueand fair view of the financial statements and as per the information and explanationsgiven by the management, we report that no fraud on or by the Company has been noticed orreported during the course of our audit.

Dated: 28^th August, 2010.