Shah Alloys Ltd

To

The Members

M/s SHAH ALLOYS LTD.

AHMEDABAD

1) We have audited the attached Balance Sheet of M/s SHAH ALLOYS LIMITED as at31^st March 2011, and the Profit and Loss A/c 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 & 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 &disclosures in the financial statements. An audit also includes assessing the accountingprinciples used & significant estimates made by management as well as evaluating theoverall financial statement presentation. We believe that our audit provides a reasonablebasis for our opinion.

3) As required by the Companies (Auditor’s Report) Order, 2003 and the Companies(Auditors Report ) (Amendment ) Order, 2004 issued by the Central Government of India interms of subsection (4A) of Section 227 of the Companies Act 1956, we annex here to astatement on the matters specified in paragraphs 4 & 5 of the said order to the extentapplicable.

4) Further to our comments in the Annexure referred to in paragraph-3 above, we reportas under:

(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.

(c) The Balance Sheet and the Profit and Loss Account & Cash flow statement dealtwith by this report are in agreement with the books of account.

(d) In our opinion the Balance Sheet, Profit & Loss Account & Cash FlowStatement comply with Accounting Standards referred to in section 211(3C) of the CompaniesAct, 1956.

(e) On the basis of the written representations received from the directors, as onMarch 31, 2011 and taken on record by the Board of Directors, we report that none of thedirectors of the company are disqualified as on March 31, 2011 from being appointed asdirector in terms of clause (g) of sub-section (1) of section 274 of the Companies Act,1956.

(f) In our opinion and to the best of our information and according to the Explanationsgiven to us, the said financial statements together with significant accounting policiesand notes thereon and attached thereto give the information required by the Companies Act,1956 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 31^stMarch, 2011 and

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 Cash Flow Statement, of the cash flows for the year ended on thatdate.

Referred to in Paragraph 3 of our report of even date

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

b) As explained to us, a major portion of the fixed assets has been physically verifiedby the management during the year in accordance with a phased program of verificationadopted by the company. In our opinion, the frequency of verification is reasonable havingregard to the size of the company & nature of its assets. As informed to us, nomaterial discrepancies were noticed on such physical verification.

c) According to the information and explanations given to us, No Fixed Assets weredisposed off during the year.

ii) a) As explained to us, inventories were physically verified by the management atreasonable intervals during the year.

b) In our opinion & according to the information & explanations given to us,the procedures of physical verification of inventories followed by the management werereasonable & adequate in relation to the size of the company & nature of itsbusiness.

c) In our opinion and according to the information and explanations given to us, thecompany is maintaining proper records of inventory. The discrepancies, noticed onverification, between the Physical stocks and the book records were not material.

iii) In respect of Loans secured or unsecured , granted or taken by company to/fromcompanies, firm or other parties covered in the register maintained under section 301 ofthe Companies Act, 1956:

a) According to the information & explanations given to us and on the basis ofrecords produced before us, during the year Company has not granted or taken any loansfrom or to any parties covered under the register maintained under section 301 of theCompanies Act, 1956 and hence sub clause b, c, d, e, f & g of clause 4(iii) are notapplicable. On the basis of information and explanation given to us and on the basis ofrecords produced in respect of loans given by the company in the year 2008 to SAL SteelLtd, the repayment of the loan given to the said party has been fixed by the CorporateDebt Restructuring (CDR) cell and thus principal amount of Rs 80.00 Crores is not due forrepayment as at 31st March, 2011.

iv) In our opinion & according to the information & explanations given to us,there are adequate internal control systems commensurate with the size of the company& nature of its business for the purchase of inventory, fixed assets & also forthe sales of goods and services. During the course of our audit, we have not observed anycontinuing failure to correct major weaknesses in internal controls systems.

v) a) In our opinion and according to the information & explanations given to us,the particulars of contracts or arrangements referred to in section 301 of the CompaniesAct, 1956 have been entered in the register required to be maintained under section 301 ofthe Companies Act, 1956.

b) In our opinion, and according to information and explanation given to us, thetransactions of Purchase of goods and materials, Sale of goods and materials and Servicesmade in pursuance of contracts or arrangements entered in the register maintained undersection 301 of the Companies Act, 1956 and aggregating during the year to Rupees Five lacsor more in respect of each party, have been made at prices which are reasonable, havingregard to the prevailing market prices for such Goods ,Materials &Services or theprices at which the transactions for similar Goods, Materials & Services have beenmade with other parties.

vi) In our opinion and according to information & explanation given to us, companyhas complied with the provisions of Section 58A, 58AA of the Companies Act, 1956 and therules framed there under.

vii) During the year the company has appointed a firm of Chartered Accountants as aninternal auditor and in our opinion, the internal audit system of the company iscommensurate with its size & nature of its business.

viii) The Central Government has prescribed maintenance of Cost records under Section209 (I) (d) of the Companies Act, 1956. On the basis of report received from thepracticing cost accountant, appointed by the Company we are of the opinion that theCompany has prima facie maintained prescribed records & accounts. We have however notmade a detailed examination of the same.

ix) a) According to the records of undisputed Statutory dues including providentfund, Income-tax, Wealth-tax, Service Tax, Sales-tax Customs duties, excise duty, cess andother statutory dues have not been regularly deposited during the year with theappropriate authorities. On the basis of records produced before us for our verificationand according to the information & explanation given to us, no undisputed amountspayable in respect of the aforesaid dues were outstanding as at 31st March, 2011 for aperiod of more than six months from the date of becoming payable. Amount due andoutstanding for a period exceeding six months as at 31^st March, 2011 is of Rs9.02 lacs in respect of Tax deducted at source.

b) On the basis of records produced before us for our verification and according to theinformation and explanations given to us, the details of disputed Income Tax, Sales Tax,Customs and Service Tax dues aggregating to Rs 546.67 lakhs (Net of Payments) that havenot been deposited as on 31^st March, 2011 on account of matters pending beforeappropriate authorities, the details of which are as under.

x) The company’s accumulated losses at the end of financial year are more thanfifty percent of its net worth. It has incurred cash losses amounting to Rs.15246.80 lacsduring the current year and the company has incurred Rs. 5104.36 lacs cash losses in theimmediately preceding previous year.

xi) During the period under audit, the company is not required to make any paymentof installment and interest on its term loan, working capital term loan and nonconvertible debenture as per restructuring package given under CDR Mechanism by the banks& financial Institution.

On the basis of information and explanation given to us and on the basis of recordsproduced, consequent upon the sanction of restructuring package, there are no defaults inrespect of loan sanctioned by banks / institutions and debenture holders for the abovementioned loans as at 31.3.2011. However as per terms of CDR the company was required topark interest payable on above loans to a separate account, Funded Interest Term Loan(FITL), for which the payments are not due during the year. As per terms, interest wasrequired to be paid on FITL and had to be paid monthly. However the company has defaultedon payment of interest on FITL to the extent of Rs. 5,71,13,349 and period of default innumber of days is ranging from 1 day to 336 days. Apart from this there is delay inpayment of interest paid on FITL to the extent of Rs.1,60,48,928 and delay in number ofdays is ranging from 1 to 121 days .Further the company’s working capital limitsthough had became non-performing, we had been informed that due to the direction ofHonorable BIFR the company has initiated process of revival with banks and financialinstitutions and hence non performing limits are kept as hold on operation. However to theextent of interest charged on such limits of Rs. 1404.02 lacs the company has defaulted inits payment and the period of default in number of days is ranging from 1 to 305 days.

xii) In our opinion & according to the information & explanation given to us,no loans & advances have been granted by the company on the basis of security by wayof pledge of shares, debentures & other securities.

xiii) In our opinion, the company is not a chit fund or a nidhi / mutual benefit fund/society.

xiv) According to the information & explanations given to us, the company is notdealing or trading in shares, securities, debentures & other investments.

xv) In our opinion, the terms & conditions on which the company has given guaranteefor loans taken by others from Banks or financial institutions are prima facie, notprejudicial to the interest of the company.

xvi) The company has not raised any term 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 and after placing reliance on thereasonable assumptions made by the company, fund raised on short term basis to the extentof Rs. 1.26 Crores have been used for long term purpose.

xviii) During the period covered under audit report, the company has not made anypreferential allotment of shares to the parities and Companies covered in the registermaintained under section 301 of the Act.

xix) During the period covered under audit report, the company has not issued anydebentures accordingly the provisions of clause (xix) of the Companies (Auditors Report)Order, 2003 are not applicable to the company.

xx) During the period covered under audit report, the company has not raised any moneyby way of public issue during the year.

xxi) According to the information & explanations given to us, no fraud on or by thecompany has been noticed or reported during the course of our Audit.