Elder Pharmaceuticals Ltd Auditor Reports

To the Members of

Elder Pharmaceuticals Limited

Report on the Financial Statements

We have audited the accompanying financial statements of Elder Pharmaceuticals Limited ("the Company") which comprise the Balance Sheet as at 30^th June, 2014, and the Statement of Profit and Loss and the Cash Flow Statement for the year ended on that date, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and presentation of financial statements that give a true and fair view of the financial position, financial performance and cash flow of the Company in accordance with applicable Accounting Standards referred to in subsection (3C) of section 211 of the Companies Act 1956 ("the Act") read with the General Circular 15/2013 dated 13 September 2013 of the Ministry of Corporate Affairs in respect of section 133 of the Companies Act, 2013. This responsibility includes the designing, implementing and maintenance of internal control relevant to the preparation and presentation of financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Standards on Auditing issued by the Institute of Chartered Accountants of India. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our modified audit opinion.

Basis for Qualified Opinion

1. Fixed Assets

Some of the company’s Plant & Machineries acquired/installed have not been put to use and some have been operational for a small fraction of the installed capacity. Further, Capital work-in-progress-being carried forward as such since previous year’s, are yet to be capitalized and put to use. On such assets, the company has not provided for impairment loss.

Non provision of impairment loss is a departure from AS-28 "Impairment of Assets" as prescribed under the Act. Management has neither provided a Technical Evaluation Report nor a Valuation Report in order to arrive at the fair value and, consequently, quantifying the possible impairment loss on these assets could not be arrived.

2. Long Term Loans & Advances

i) Writing off Trade Advances and Other Advances

Pursuant to the authorization of resolution passed by the Board of Directors, the Company has written off Trade Advances Rs. 17,624.04 lacs and other advances Rs. 85,532.10 lacs, made to various parties on current account either during the year or in earlier financial years. We have been informed that there were no stipulations for repayments thereof.

The reasons for writing off, details to ascertain financial capability of these parties and confirmation/details of these accounts were not made available to us. Also, we have not been provided any information and documentary evidence in respect of actions initiated by the company for recovery of these advances.

ii) Capital Advances, Trade Advances and Other Advances:

As regards to Capital Advances Rs. 3,041.00 lacs, Trade Advances Rs. 3,625.57 lacs and Other Advances (net) paid for Brand Building Payments Rs. 7,850.00 lacs, documentation/confirmation as also reconciliation, if any, were not made available to us for our verification and examination.

3. Trade Receivables

Pursuant to the Resolution passed by the Board of Directors, the Company has written off during the year Trade Receivables aggregating to Rs. 32,270.76 lacs since the same has not been acquired by Torrent Pharmaceuticals Limited (Refer Note No. 29). The company has stated that Trade Receivables pertaining to products transferred to Torrent Pharmaceuticals Limited cannot be recovered.

We have neither been provided confirmation to verify the balance of such accounts nor actions initiated by the company for recovery of such Trade Receivables.

4. Legal suits

As informed, various legal suits have been filed against the Company under various Acts and Statutes applicable to the Company, the same are being contested by the Company at various foras. The outcome of such suits and their impact on the affairs of the Company were not made available/explained to us.

Emphasis of Matter

Without qualifying our report, we draw attention to the following points:

1. We draw attention to Note No. 40 of the Notes annexed to and forming part of the financial statements stating that the financial statements are being prepared on a going concern basis, notwithstanding the fact that the Company has sold and transferred its branded domestic formulations business in India and Nepal to Torrent Pharmaceuticals Limited on a slump sale basis. There are major liabilities outstanding towards vendors, statutory dues and payment to fixed deposit holders and non-convertible debenture holders. These events cast significant doubt on the ability of the Company to continue as a going concern. The appropriateness of the said basis is interalia dependent on the Company’s ability to streamline its operations as well as infusing requisite finance to meet its short term and long term financial obligations and other statutory liabilities.

The Company mentions that the proceeds of such sale and transfer were used to repay financial obligations of banks/institutions. Further, for details of exceptional items and working thereof, refer Note No. 29.

2. We draw your attention to Note No. 29 of the Notes annexed to and forming part of the financial statements. With a view to reducing the debts of the Company, the Board of Directors of the Company had approved the proposal to restructure the Company’s business involving either raising of capital, hiving off of assets or other strategic options and had appointed advisors for the purpose. The Company had offered for sale on slump sale basis its business of sale, marketing and distribution of the products of Team A-2 and Team B – Gynae through sales force or otherwise, in India and Nepal (excluding exports from India and Nepal) which included amongst others, intellectual property, current assets, specified liabilities, employees, data and records, third party manufacturing contracts, C & F agreements, etc. as a going concern and a definitive Business Transfer Agreement was signed with Torrent Pharmaceuticals Limited, Ahmedabad, on 13 December 2013 for a total consideration of Rs. 200,400.00 lacs. The said slump sale transaction was consummated and closed on 29 June 2014.

3. Balances under Trade Receivables, Inter-division balances, Loans & Advances in several cases as also in case of a few Bank Accounts have not been reconciled / confirmed and consequently reconciliation / adjustments, if any, required upon such confirmation are not ascertainable. (Refer Note No. 33)

4. The company provides gratuity benefit to its employees as per AS 15 "Employee Benefits". Based on actuarial valuation as at March 31, 2014, the Company was having plan assets of Rs. 965.58 lacs against the actuarial liability of Rs. 1,293.94 lacs. (Refer to Note No. 37).

Our opinion is not qualified in respect of these matters.

Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matters described in the Basis for Qualified Opinion paragraph and Emphasis of Matter paragraph, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:

I. In the case of Balance Sheet, of the state of affairs of the Company as at 30^th June, 2014;

II. In the case of Statement of Profit and Loss, of the Profit of the Company for the year ended on that date; and

III. In the case of Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

Report on Other Legal and Regulatory Requirements

1) As required by the Companies (Auditors’ Report) Order, 2003 ("the Order") issued by the Central Government of India in terms of sub-section (4A) of the section 227 of the Act, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said order.

2) As required by section 227 (3) of the Act, we report that:

a) we have obtained all the information and explanations, which to the best of our knowledge 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 the Company so far as appears from our examination of those books;

c) the Balance Sheet, the Statement of Profit and Loss and the Cash Flow Statement referred to in this report are in agreement with the books of account;

d) in our opinion, the Balance Sheet, the Statement of Profit and Loss and the Cash Flow Statement comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Companies Act 1956 read with the General Circular 15/2013 dated 13 September 2013 of the Ministry of Corporate Affairs in respect of section 133 of the Companies Act, 2013;

e) in absence of written representation from the Directors as on 30^th June, 2014, we could not ascertain whether any of the Director is disqualified as on 30^th June, 2014 from being appointed as director in terms of Clause (g) of sub- section (1) of section 274 of the Act.

Other Matters

1. The company has not deposited or invested a sum not less than 15% of the amount of debentures maturing during the year ending on the 31st day of March next following in one or more of the methods as specified in clarification issued by Ministry of Corporate Affairs vide circular no. 04/2013 dated 11/02/2013 regarding Debenture Redemption Reserve

2. Pursuant to the authorization of resolution passed by the Board of Directors, the Company has excluded inventories aggregating to Rs. 9,575.92 lacs from the closing stock during the year. The company has stated that Inventories pertaining to products transferred which were not acquired by Torrent Pharmaceuticals Limited, are to be destroyed and cannot be carried forward in closing stock.

Our opinion is not qualified in respect of these matters.

	For S.S.KHANDELWAL & CO.
	Chartered Accountants
	(Firm Registration No.105064W)
	S.S. Khandelwal
	Proprietor
	Membership No. 031487
Mumbai, 27 August, 2014

Annexure to the Independent Auditors’ Report

(Referred to paragraph 1 under ‘Report on Other Legal and Regulatory Requirements’ section of our report of even date)

Based on the audit procedures performed for the purpose of reporting a true and fair view on the financial statements of the Company and taking in to consideration, the information and explanations given to us during the course of audit, we report that:

I. a) The Company has maintained proper records to show full particulars, including quantitative details and situation of fixed assets.

b) As explained to us, some of the fixed assets of the Company have been physically verified by the management during the year in accordance with a phased program of verification designed to cover all the fixed assets over a period of three years, which in our opinion, is reasonable having regard to the size of the Company and nature of its assets. The discrepancies noticed on such physical verification were not material and have been properly dealt with in the books of account.

c) The fixed assets disposed off during the year were not substantial and therefore do not affect the going concern status of the Company.

II. a) As explained to us, the inventories have been physically verified by the management at regular intervals during the year. The intervals at which the inventories have been verified are, in our opinion, reasonable in relation to the size of the Company and nature of its business.

b) In our opinion and according to the information and explanations given to us, the procedures of physical verification of inventories followed by the management are reasonable and adequate in relation to the size of the Company and nature of its business.

c) The Company has maintained proper records of inventories. As explained to us, there was no material discrepancies noticed on physical verification of inventory.

III. In respect of loans, secured or unsecured, granted or taken by the Company to/from companies, firms or parties covered in the register maintained under section 301 of the Companies Act, 1956; a) The Company has granted unsecured loans to a wholly owned subsidiary and a joint venture company covered in the register maintained under section 301 of the Companies Act, 1956. In respect of the said loans the maximum amount outstanding at any time during the year is Rs. 21,542.57 lacs and the year- end balance is Rs. 21,542.57 lacs.

The Company has also given interest free advance to related parties covered in the register maintained under section 301 of the Companies Act, 1956. In respect of the said loans the maximum amount outstanding at any time during the year is Rs. 8,426.87 lacs and the year-end balance is Rs. 8,095.47 lacs. The loans also include Rs. 1,123.48 lacs due from a company for more than three years whose net worth is negative.

b) As per the information and explanations given to us, the terms and conditions of such loan given to the subsidiary and the joint venture company covered in the register maintained under section 301 of the Companies Act, 1956 are prejudicial to the interest of the company since these loans do not have any provision for interest payment.

c) As per the information and explanations given to us, the principal amounts of the said loans are repayable on demand and there is no repayment schedule.

d) According to the information and explanations given to us the Company has not taken loans from the parties listed in the register maintained under section 301 of the Companies Act. 1956.

IV. According to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the Company and the nature of its business for the purchase of inventory, fixed assets and for the sale of goods and services.

V. a) In our opinion and according to the information and explanations given to us, the transactions made in pursuance of contracts or arrangements, that need to be entered into the register maintained under section 301 of the Companies Act, 1956 have been so entered.

b) In our opinion and according to the information and explanations given to us, transactions made in pursuance to such contracts or arrangements are specialized in nature and comparable prices are not always determinable and the price is charged are prima facie reasonable.

VI. In our opinion and according to the information and explanations given to us, the Company has accepted the deposit from the public to which the directives issued by the Reserve bank of India, provisions of sections 58A and 58AA of the Companies Act, 1956 and the Companies [Acceptance of Deposits] Rules, 1975 are applicable.

However, the Company has not complied with the provisions of Section 58A of the Companies Act, 1956 and the Companies [Acceptance of Deposits] Rules, 1975 in relation to the following issues:

a. The company has defaulted in repayment of public deposits or part thereof and interest thereupon.

b. The Company has not kept required liquid assets with scheduled bank in respect of public deposit maturing on or before 30.06.2014 as per Rule 3A of Companies [Acceptance of Deposit] Rules, 1975.

c. The Company Law Board, Mumbai Bench (CLB), vide its order dated March 29, 2014, has directed to the Company to pay principal and interest by 30.04.2014 due to 12 depositors who have made an application under section 58A (9) of the Companies Act, 1956 and to file an affidavit of compliance of the same order with the CLB by 01.05.2014.

The CLB again vide its order dated July 11, 2014, has directed to the Company to pay principal and/or interest to senior citizens by August 10,2014 and to other depositors by September 9, 2014. The CLB has directed the Company to file an affidavit by 15.09.2014 for compliance of the said order.

d. The company has also borrowed short term funds from non-corporate entities.

VII. The Company has an internal audit system which needs to be strengthened commensurate with the size and the nature of its business.

VIII. The Central Government has prescribed maintenance of Cost Records under Section 209(1)(d) of the Companies Act, 1956 in respect of certain manufacturing activities of the Company. We have broadly reviewed the accounts and records of the Company in this connection and are of the opinion, that prima facie, the prescribed accounts and records have been made and maintained.

We have not, however, made a detailed examination of the same. The cost audit report was also not available for our verification.

IX. a) As per information and explanations given to us, the Company has been irregular in depositing the undisputed statutory dues including Provident Fund, Income tax, sales tax, Service Tax and Employees State Insurance with the appropriate authorities and there has been serious delay in many cases.

The following undisputed statutory dues were outstanding as on 30^th June 2014 for a period of more than six months from the date they become payable:

Sr. No	Name of the Statute	Nature of the Dues	Financial Year	Amount (Rs.)	Payment made up to the date of Auditor’s Report
1	Income Tax Act, 1961	TDS on Salaries	*2013-14	3,87,02,800/-	Not paid
		TDS on Others	*2013-14	1,16,96,009/-
		Dividend distribution tax	2011-12	99,94,521/-
2	Professional Tax Act, 1975	Profession Tax	2012-13	4,08,925/-	Not paid
			*2013-14	13,76,355/-
3	Employees’ State Insurance Act, 1948	Employees’ State	2012-13	2,654/-	Not paid
		Insurance Fund	*2013-14	3,83,451/-
4	The Finance Act, 1994	Service Tax	2012-13	19,35,990/-	Not paid
			*2013-14	11,42,320/-

* Figures for financial year 2013-2014 are in respect of period upto December 31, 2013. b) According to the information and explanations given to us, the dues in respect of Income tax, sales tax, custom duty, excise duty and service tax that has not been deposited with the appropriate authorities on account of dispute and the forum where the disputes are pending as on 30^th June, 2014 are as given below:

Sr. No.	Name of the statute	Nature of dues	Period to which the amount relates	Forum where the dispute is pending	Amount (Rs. in Lacs)
1	Income Tax	Block assessment dues	Block period 1.4.95 to 18.9.2001	High court, Mumbai	216.53
2	Income Tax	Assessment dues	Assessment Year 2002 - 2003	High court, Mumbai	23.66
3	Income Tax	Assessment dues	Assessment Year 2008 - 2009	Commissioner of Income Tax	28.39
4	Service tax	Reversal ratio of service tax attributable for manufacture of exempted goods under rule 6(5) of CENVAT Credit Rules (CCR)	September 06 to March 2012	Commissioner Service tax, Belapur	461.32
5	Service tax	The opening balance lying with Input Service Distributor (ISD) as on 1.4.2012 is not to be considered while distributing the credit by ISD to Nerul unit. The earlier Show Cause Notice (SCN) Sept 2006 to March 2012 is adjudicated on eligibility of each unit on the basis of turnover of each unit during the year and the credit lying with ISD has no relevance.	April 2012 to March 2013	Commissioner Service tax, Belapur	107.07
6	Service tax	Service Tax payable on reverse charge method.	October 06 to March 2011	Commissioner (Appeal)	40.01
7	Service tax	CENVAT availed on improper documents.	2009-10,2011-12	Commissioner (Appeal)	2.68
8	Service tax	Rebate claim sanctioned, received but reviewed by Excise Dept and disputed that one of the document is not in the name of the exporter.	2012-13	Joint secretary to Govt of India, Ministry of Finance.	0.98
9	Service tax	Protective demand in continuation to earlier SCN	April 2013 to Sept 2013	Additional Commissioner of Central Excise Belapur	22.25
10	Service tax	ISD credit	April 2007 to Mar 2008, April 2010 to March 2011	Additional Commissioner of Central Excise Belapur	5.23

X. The Company has no accumulated losses and has not incurred any cash losses during the financial year covered by our audit or in the immediately preceding financial year.

XI. According to information and explanations given to us and based on the documents and records produced before us, the Company has defaulted in repayment of principal dues to debenture holders amounting to Rs. 4,042.69 lacs as at the balance sheet date.

XII. In our opinion and according to the information and explanations given to us, the Company has not granted any loans and advances on the basis of security by way of pledge of shares, debentures and other securities.

XIII. In our opinion and according to the information and explanations given to us, the nature of activities of the company does not attract any special statute applicable to chit fund and nidhi/ mutual benefit fund/ society

XIV. As per information and explanation given to us, the Company is not dealing or trading in shares, securities and other investments.

XV. According to the information and explanations given to us and the records examined by us, the terms and conditions of the guarantee given by the company for loans taken by others from a bank are not prejudicial to the interest of the company.

XVI. To the best of our knowledge and belief and according to the information and explanation given to us by the management the term loans availed by the Company were, prima facie, applied by the Company during the year for the purpose for which the loans were obtained.

XVII. According to the Cash Flow statement and other records examined by us and the information and explanations given to us, on overall basis, funds raised on short term basis, have prima facie, not been used during the year for long term investments.

XVIII. The company has not made any preferential allotment of shares to parties or companies covered in the register maintained under section 301 of the companies act, 1956.

XIX. As per information and explanation given to us and based on records examined by us the company has created charge in respect of debentures.

XX. To the best of our knowledge and belief and according to the information and explanation given to us, the company has not raised any money through a public issue during the year.

XXI. In our opinion and according to the information and explanations given to us, read with para 2 of Basis of Qualified Opinion, no fraud on or by the Company has been noticed or reported during the year, which causes the financial statements to be materially misstated.

	For S.S.KHANDELWAL & CO.
	Chartered Accountants
	(Firm Registration No.105064W)
	S.S. Khandelwal
	Proprietor
	Membership No. 031487
Mumbai, 27 August, 2014