Power Finance Corporation Ltd

The Members of

Power Finance Corporation Limited,

1. We have audited the attached Balance Sheet of Power Finance Corporation Limited, NewDelhi as at 31st March 2010, the Profit and Loss Account and also the Cash Flow Statementfor the year ended on that date, annexed thereto. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements 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 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.

3. As required by the Statement on the Companies (Auditors’ Report) Order, 2003(as amended) issued by the Government of India in terms of Section 227 (4A) 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 referred to in paragraph 3 above we report as follows:

(i) Power Finance Corporation Limited (The Company) pursuant to the opinion of theExpert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI)provided "Deferred Tax Liability" (DTL) on special reserve created under section36(1) (viii) of the Income Tax Act, 1961 in the year 2004-05, by charging Profit &Loss Account with ` 142.87 crores and debiting the Free Reserves by Rs 745.14 crores (forcreating DTL for the years 1997-98 to 2003-04). Since, then the Company continued toprovide DTL till the end of March, 2008 by charging Profit & Loss Account. The totalamount towards DTL upto 31st March, 2008 comes to `1228.38 crores. The Company during theyear 2008-09 reversed the DTL provided in earlier years amounting to ` 1228.38 crores andalso did not provide DTL amounting to ` 291.21 crores (including ` 133.28 crores for theyear 2008-09)in the current year, contrary to, opinions expressed by the EAC of the ICAIon two occasions dated 23.11.2004 and 18.05.2006, clarification furnished in July,2009 bythe ICAI on the request of the Comptroller and Auditor General of India and mandatoryprovisions of Accounting Standard-22.

In view of the facts and circumstances placed before us, the profits and Free Reservesof the company are overstated by Rs 774.45 crores and Rs 745.14 crores (previous year `616.52 crores and ` 745.14 crores), respectively and DTL has been understated by ` 1519.59crores (previous year ` 1361.66 crores). (Refer Note No. 19 of Schedule 18).

Further, the amount of Capital considered in the calculation of Capital Risk AdjustedRatio (CRAR) is overstated to the above extent. (Refer Note No. 27 of Schedule 18)

(ii) As regards the liability of ` 663.49 crores (previous year ` 908.94 crores) shownas "Interest Subsidy Fund from GOI" in the Balance Sheet, received underAccelerated Generation and Supply Program (AG&SP) Scheme from the Ministry of Power,Government of India, the Company has estimated the net excess amount of ` 166.25 crores(previous year ` 283.14 crores) and ` 209.97 crores (previous year ` 44.27 crores) as at31st March 2010, for IX and X plan respectively. This net excess amount is worked out onoverall basis and not on individual basis and may vary due to change in assumptions, ifany, during the projected period such as changes in moratorium period, repayment period,loan restructuring, pre payment, interest rate reset, etc. Hence, the impact of thisexcess, if any could not be determined. As such we are not in a position to express ouropinion thereon (Note No.15 of Schedule 18).

5. Attention is drawn to the following Notes in Schedule 18:-

(a) Note No.3 regarding variation in accepted principal outstanding of a borrowerconsequent upon transfer of outstanding as per State Government Order.

(b) Note No.4 (i) and Accounting Policy No 2.1.1 read with 6.2 (i) regarding a Projectunder implementation, which has been classified as a Standard Asset.

(c) Note No.4 (ii) regarding Gas Based Power Project which is under implementation andhas been classified as a Standard Asset

(d) Note No.6 (ii) regarding default of `24.67 crores by one party in refunding theinterest subsidy under AG&SP Scheme payable to the Ministry of Power on receipt.

(e) Note No.17 regarding working as Nodal Agency for operationalisation andimplementation of the R-APDRP Scheme.

(f) Note No. 24 regarding actuarial valuation for Employee Benefits.

(g) Note No.26 regarding reconciliation/confirmation of balances.

6. Further to above:

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 appear from our examination of those books;

c) The Balance Sheet, Profit & Loss Account and Cash Flow Statement dealt with bythis report are in agreement with the books of account;

d) In our opinion, the Balance Sheet, Profit & 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 except as stated in Para 4 (i);

e) The requirements of clause (g) of Sub-Section (1) of Section 274 of the CompaniesAct, 1956 relating to disqualification of directors are not applicable to the Company,being a Government Company, in terms of Notification No.G.S.R.829 (E), dated 21.10.2003issued by Ministry of Finance, Department of Company Affairs.

7. Subject to our observations as stated in Para 4 and read with other items on whichattention is drawn vide Para 5 above, with consequential effects on the FinancialStatements, in our opinion and to the best of our information and according to theexplanations given to us, the said Accounts read with Accounting Policies and Notesthereon in Schedule No.18, 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: a) In case of Balance Sheet, of the state ofaffairs of the Company as at 31st March, 2010; b) In case of Profit & Loss Account, ofthe Profit of the Company for the period ended on that date; and c) In case of Cash FlowStatement, of the cash flows for the period ended on that date.

(Referred to in Paragraph (3) of our report of even date)

1. (a) The Company has generally maintained proper records showing full particularsincluding quantitative details and situation of fixed assets on the basis of availableinformation.

(b) As explained to us, the management is carrying out the physical verification offixed assets at the year end in a phased manner, except certain EDP equipments andFurniture & Fixtures for which no physical verification was conducted. In ouropinion, the frequency of physical verification is reasonable having regard to the size ofthe Company and nature of its assets. No material discrepancies were noticed by themanagement on such physical verification.

(c) The Company has not disposed off substantial parts of fixed assets during the yearand the Going Concern status of the Company is not affected.

2. As the Company has not purchased / sold goods during the year nor are there anystocks, requirement of reporting on physical verification of stocks or maintenance ofinventory records does not arise.

3. As explained to us, the Company has not taken nor granted any loans, secured orunsecured from Companies, firms or other parties covered in the register maintained underSection 301 of the Companies Act, 1956. Accordingly clauses 4(iii) (a), (b), (c) and (d)of the Companies (Auditor’s Report ) Order, 2003 are not applicable to the Company.

4. Having regard to the nature of Company’s business and based on our scrutiny ofCompany’s records and the information and explanations received by us, we report thatCompany’s activities do not include purchase of inventory and sale of goods. In ouropinion and according to the information and explanations given to us, there are adequateinternal control procedures commensurate with the size of the Company and nature of itsbusiness with regards to purchase of fixed assets. During the course of our audit, we havenot observed any continuing failure to correct major weaknesses in internal controls withregard to purchase of fixed assets.

5. Based on the audit procedures applied by us and the information and explanationsprovided by the management, we are of the opinion that there was no transaction during theyear that need to be entered in the register maintained under Section 301 of the CompaniesAct 1956.

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

7. In our opinion and according to the information and explanations given to us, theCompany has an internal audit system, which is commensurate with the size and nature ofbusiness of the Company. However, the IT Audit needs to be further streamlined andstrengthened.

8. The Company is non-banking financial company, the provisions under clause (d) ofsub-section (1) of section 209 of the Companies Act, 1956 pertaining to maintenance ofcost records, does not apply.

9. In respect of statutory dues, on the basis of information and explanations given tous, we report that:

(a) The Company is generally regular in depositing with appropriate authoritiesundisputed statutory dues including Provident Fund, ESI, Income tax, Wealth tax, etc. asapplicable to it and there is no undisputed amounts payable in respect of aforesaid duesoutstanding for a period of more than six months as on 31st March 2010, as per theaccounts of the company.

(b) According to the records of the Company, there are no dues of Income tax / Wealthtax / Service tax, etc., which have not been deposited by the Company on account of anydispute, as per the accounts of the Company.

10. The Company has no accumulated losses at the end of current financial year and hasnot incurred any cash losses during the financial year covered by our audit or in theimmediately preceding financial year.

11. Based on our audit procedures and according to the information and explanationsgiven to us, we are of the opinion that the Company has not defaulted in repayment of duesto financial institutions, banks or debenture holders.

12. The Company has generally maintained adequate documents and records in respect ofloans granted by it to various State Electricity Boards, State Generation Corporations,State Governments, CPSUs and Independent Power Producers.

13. The Company is neither a chit fund nor a nidhi / mutual benefit fund / society.Hence, the requirements of clause 4(xiii) of the ‘Order’ do not apply to theCompany.

14. As per records of the Company and according to the information and explanationsprovided by the management, the Company has been maintaining proper and timely records ofthe transactions and contracts for the dealings or trading in shares, securities,debentures and other investments. As per information and explanations provided we statethat, all the Investments have been held by the Company in its own name.

15. The Company has given guarantees in connection with loans taken by others frombanks or financial institutions. According to information & explanations given to uswe are of the opinion that, the terms and conditions on the guarantee given are notprima-facie prejudicial to the interest of the Company.

16. The term loans obtained by the Company have generally been utilized for the purposefor which they were raised.

17. 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 prima-facie been used for long-term investment by the Company.

18. According to the records of the Company and the information and explanations givento us, the Company has not made any preferential allotment of shares, to parties andCompanies covered in the Register maintained under Section 301 of the Companies Act, 1956.Therefore the provisions of clause 4(xviii) of the Companies (Auditor’s Report )Order, 2003 are not applicable to the Company.

19. According to the records of the Company all debentures issued by the Company areunsecured bonds and, hence creation of securities is not required by the terms of issue ofdebentures.

20. There is no public issue during the financial Year 2009-10.

21. Based upon the audit procedure performed and information and explanations given bythe management, we report that no fraud on or by the Company has been noticed or reportedduring the course of our audit.