Murli Industries Ltd Auditors Report.

AUDITOR

Independent Auditors’ Report to the Members of Murli Industries Limited

1. Report on the Financial Statements

We have audited the accompanying financial statements of MURLI INDUSTRIES LIMITED, which comprise the Balance Sheet as at 31st March 2014, and the Statement of Profit and Loss for the period of nine months ended, and a summary of the significant accounting policies and other explanatory information.

2. Management’s Responsibility for the Financial Statements

The Company’s Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the accounting principles generally accepted in India including Accounting Standards referred to in subsection (3C) of section 211 of the Companies Act, 1956. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

3. Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with the 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 the 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 the internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by the 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 audit opinion.

4. Basis of Qualified Opinion

i. As mentioned in note no. 48, forming an integral part of the financial statements of the company have been prepared on the going concern basis notwithstanding the fact that the networth of the company is completely eroded and the company has a negative networth of ( Rs 418.14 crores) as on balance sheet date. (Note No. 49) The company may be restrained from any excavation of limestone from mines since Royalty on limestone amounting to Rs 9.33 Crores remains to be paid to the government. (Note No.51) The Sales Tax Department has attached the movable & immoveable properties & assets of the Cement Unit of the company, for the recovery of its Statutory Sales Tax Dues (including interest) worth Rs 63.08 Crores. All such moveable & immovable assets are listed separately by the Sales Tax Department and prohibited their transfer, sale, mortgage, gift, transfer etc. At the same time Royalty on Limestone & Sales Tax is refundable under Mega Project PSI, 2007 subject to payment of liability. (Note No. 57) The consortium banks have also recalled their debts to the company. The borrowings outstanding to the consortium banks as at 31.03.2014 have been classified as long term without taking cognizance of the recall of loans by bank. This is deviation from requirements of the new Schedule VI of the Companies Act. The appropriateness of the going concern basis is interalia dependent on the companys ability to infuse requisite funds for meeting its obligations, rescheduling of its debts, other liabilities and resuming normal operations, (Note No.50) & on the decision and order of the BIFR.

ii. As mentioned in note no. 31 and 32, the company has not complied with Accounting Standards-15 (Employee Benefits) & Accounting Standards-11(Effects of changes in Foreign exchange Rates). Amount remains to be unascertained for both.

iii. As mentioned in note no. 39, the balances of trade receivables and payables, lenders, loans and advances & deposits are subject to confirmation / reconciliation and subsequent adjustments if any. As such, we are unable to express any opinion as to effect thereof on the financial statements of the period under audit.

iv. As mentioned in note no. 44, regarding recognition of deferred tax credit on account of unabsorbed losses and depreciation, up till date is Rs 226.95 crores( last balance sheet date Rs 226.95 Crores). This does not satisfy the virtual certainty test for recognition of deferred tax credit as laid down in Accounting Standard-22. As such we do not express our opinion on the reasonability of recognition of the income.

v. The company has written off a sum of Rs 43.39 Crores (also refer Pt. No. (ii) (c) of the Annexure to the Auditors Report) pertaining to the stock of Soya bean have been written off under the head Quality Rebate & Shortages in the profit & loss account.

vi. Advances given to suppliers of machineries amounting to Rs 11.06 Crores should have been written off on account of the violations of the conditions mentioned under the agreement and as informed by supplier of machinery.

vii. The Company has Capitalized expenses to the tune of Rs 25.40 Crores in ‘Pulp Mill Unit’ till the date of last balance sheet, which also appears as on the balance sheet date, the same should have been written off to the Profit & Loss Account. As a result of above the negative reserves of the company on the balance sheet date is understated by Rs 25.40 Crores. viii. The company has no policy of ascertaining impairment losses, which is in contravention of Accounting Standard 28. As such, we are unable to express any opinion as to effect thereof on the financial statements of the period under audit.

ix. All loan accounts of the company from Banks except vehicle loan accounts have been treated as Non Performing Assets (NPAs) by the respective banks due to non payment of dues, the consortium banks have recalled their debts to the company. The company has recorded the interest on these accounts for the period till 31st March 2014 @10.50% p.a. instead of the actual payable amount which varies from 10.50% to 18% p.a. The difference between the exact interest as chargeable by the bank and interest accounted for by the company remains unquantifiable. As such non current liabilities are overstated and current liabilities are understated. The amount of over/ under statement remains to be unascertained.

x. The Company has liability outstanding in respect of FCCB (Foreign Currency Convertible Bonds) issued of US$ 5.5 million the due date of payment of which was 6th of Feb, 2012. The lenders have not exercised option for conversion. Hence the amount is payable at the agreed enhanced value. The amount outstanding in respect of the same is being shown in the balance sheet at original conversing rate of Rs 43.94 per US$ as at the time of actual receipt of the amount. The actual liability due in respect of the same as per terms comes to 149.81% of US$5.5 Million i.e. US$ 8.27 Million and the rate as on 31st March 2014 being Rs 59.9376 per US$ ( Rs 59.52 per US $ as on 30.06.2013), the liability in respect of the same is understated by Rs 25.22 Crores ( Rs 24.88 Crores as on 30.06.13). As such loss of the company is under stated to that extent. The redemption reserve in respect of repayment of the same has also not been created.

The company has a liability of 7.52 Million USD($) as external commercial borrowing which has been booked @ 45.05 per USD($), the interest liability on the same is LIBOR + 3.9% (4.2% +3.9%), the liability on account of the same comes to Rs 3.65 Crores. Moreover the liability on account of difference in foreign exchange has also not been accounted for amounting to Rs 11.19 Crores ( Rs / USD as on 31.03.2014 is 59.9356). Total liability on this account amounting to Rs 14.84 Crores has not been provided.

xi. Accounting Standard -5, Net Profit or loss for the period, Prior Period Items & change in accounting policies requires the company to disclose the nature & amount of Prior period items to be disclosed separately in a manner that their impact on current profit or loss can be perceived. The company has not complied with the provisions thereby inflating the current periods losses by Rs 23.78 crores.

xii. The company has recognized the Mega Vat Receivable under the head Short Term Loans & Advances even though the pre-condition as mentioned under the Eligibility Certificate of its being paid prior to its claim has not been complied with.

The consequential effect of sub para [i, ii, iii, viii, ix & xii] above on the assets and liabilities as at 31st March 2014 and loss for the period of nine months ended 31st March 2014 are not ascertainable. Had the effect of above as stated in sub para [iv ,v, vi, vii, x & xi] been given, the loss for the period under audit would have been increased by Rs 31.01Crores towards the current financial year of nine months & Rs 252.35 Crores pertaining to prior periods and the negative networth would have been increased by Rs 283.86 Crores.

5. Qualified Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the matters described in the Basis of Qualified Opinion Paragraph as mentioned above read together with the other notes, give information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the principles generally accepted in India;

i. In the case of the Balance Sheet, of the state of affairs of the Company as on 31st March, 2014;

ii. In the case of the Profit and Loss Account, of the loss for a period of nine months ended on that date; and

iii. In the case of cash flow statement, of the cash flows for a period of nine months ended on that date.

6. Emphasis of Matter

Attention is drawn to :

a. The company has not shown the amounts of loans maturing shortly under the sub-head "Current Maturities of Long Term Loans" under "Other Current Liabilities", but the same are shown under the head "Long Term Borrowings" under "Non Current Liabilities" Similarly the company has not disclosed the details of loans and their terms and conditions including repayment etc including defaults. This is deviation from requirements of the new Schedule VI of the Companies Act.

b. The company has an investment of Rs 0.05 Crores in each of four, wholly owned subsidiaries namely Murli Cement Limited, Murli Cement (Karnataka) Limited, Murli Cement (Maharashtra) Limited, Murli Cement (Rajasthan) Limited. The company has not complied with Accounting Standard 21 by presenting the Consolidated Financial Statements. As explained these companies have not started operations as such Consolidated Financial Statements have not been prepared.

c. The non-current assets of the company as on balance sheet date include a sum of Rs 33.03 Crores ( Rs 31.07 Crores as on last balance sheet dated 30.06.2013) spent on Rajasthan, Karnataka, Gujarat which includes land. These should have been part of fixed assets.

d. The apparent casting error of Re 1 is on account of rounding off effect, appropriate formula for which is being implemented in the sysytem.

7. Report on Other Legal and Regulatory Requirements

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

B. 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 it appears from our examination of those books.

c. The Balance Sheet and the Statement of Profit and Loss, dealt with by this Report are in agreement with the books of account.

d. In our opinion, the Balance Sheet and the Statement of Profit and Loss comply with the Accounting Standards referred to in sub-section (3C) of section 211 of the Act.

e. On the basis of the written representations received from the directors as on 31st March, 2014 taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 2014 from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Act;

FOR DEMBLE RAMANI & CO.
Chartered Accountants
Registration No. 102259W
NAGPUR Anand Deshpande
Dated: 29th May, 2014 Partner
M. No.033618

ANNEXURE TO THE AUDITOR’S REPORT

(AS REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE)

(I) a) The company has not maintained proper records showing full particulars, including quantitative details and situation of fixed assets.

b) Physical verification of the same has not been carried out by the management.

c) During the period under audit, the Company has not disposed off any of its assets.

(ii) a) As explained to us, Physical verification of inventory has been conducted by the management at reasonable intervals.

b) As also certified by management 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) As informed by the management the company is in process of making adequate records of inventory. Except for Soyabean, pending updating of records and reconciliation, book balances as at March 31, 2014 have been adopted. As of now the company is having records, which are not adequate. Material discrepancies were noticed at the time of physical verification. It is observed that the management has written off a sum of Rs 43.39 Crores on account of shortage observed in the raw material (soya bean) stock. As per the documents produced by the management and the explanations given by them, the process carried out for the physical verification of the stock is commensurate with the size & nature of the company; but as far as the valuation of the same is considered, the management was unable to explain the exact basis for the valuation hence we are unable to express our opinion on the same and hence there is a diversion to compliance of Accounting Standard 2.

(iii) a) The company has granted interest free unsecured loan to companies, firms or other parties covered in the register maintained u/s.301 of the Act. The amount involved is Rs 7.98 Crores and the number of party involved are four.

b) The rate of interest and other terms and conditions of the unsecured loans given by the Company mentioned in (a) above are prima facie prejudicial to the interest of the Company, since these loans are interest free and no specific terms have been specified for their repayment.

c) As per the information and explanation given by the management, there are no specific terms and conditions for repayment of principal and interest due there on.

d) As there is no specific repayment due dates, there are no over dues shown.

e) The company has taken unsecured loan from companies, firms and other parties concerned in the register maintained u/s 301 of the Act. The amount involved in the transactions is Rs 7.28 Crores & number of parties involved is 34.

f) As per the information and explanations given by the management, there are no specific terms and conditions for repayment of principal and interest due thereon; hence, prima facie it seems that the terms of accepting the loan are not prejudicial to the interest of the company.

(iv) In our opinion and according to the information and explanations given to us, the internal control systems needs to be strengthened considering the size of the company and the nature of its business.

(v) a) The company has entered into the Register of Contracts & arrangements referred to in section 301 of the Companies Act, 1956.

b) The transactions in pursuance of such contracts have been made at prices which are reasonable having regard to prevailing market prices at the relevant time.

(vi) The company has not accepted any deposits during the period under audit from Public within the meaning of Section 58A, Section 58AA or any other relevant provisions of the Companies Act, 1956 and the rules made there under.

(vii) The company has not appointed internal auditor for period of this audit report. This is a violation of section 227 of the Companies Act, 1956 and further the company is a listed company. We are unable to ascertain whether the company has monitored internal control policies and processes. In absence of internal audit system, the completeness, adequacy and independence will have a bearing of efficacy of internal control system and audit risk.

(viii) We have broadly reviewed the cost records maintained by the company pursuing to the Companies (Cost Accounting Records) Rules, 2011 prescribed by the Central Government u/s. 209(1)(d) of the Companies Act, 1956 and our of the opinion that primafacie the prescribed cost records have been maintained. However, no cost auditor’s report has been provided to us. We have, however, not made a detailed examination of the cost records with a view to determine whether they are accurate or complete.

(ix) According to the information and explanation given to us in respect of statutory dues : a) The company has generally not been regular in depositing the undisputed statutory dues which are as follows:

Statute Amount ( Rs Crores)
Service Tax 1.02
Employees Share of Provident Fund 0.31
Employers Share of Provident Fund 0.89
Professional Tax 0.90
Excise Duty 1.73
VAT & CST 46.54

b) Details of dues of Income-tax, Sales Tax, Custom Duty, Excise Duty and Cess which have not been deposited as on 31st March, 2014 on account of disputes are given below:

Sr. No. Particulars Amount (Rs. in crores) Pending Since Forum
1 Central Excise & Customs 0.12 2002 High Court, Nagpur
2 Commission on FCCB 0.43 2008 CESTAT, Mumbai
3 Central Excise & Customs 0.39 2008 CESTAT, Mumbai
4 Central Excise & Customs 2.37 2007 High Court, Nagpur
5 Central Excise & Customs 3.43 2009 CESTAT, Mumbai
6 Central Excise & Customs 0.28 2010 CESTAT, Mumbai
7 SEBI Not Ascertainable 2011-2012 SEBI
8 Income Tax (A.Y -07-08) 0.67 2011-2012 ITAT
9 Income Tax (A.Y -08-09) 20.02 2011-2012 CIT(A)
10 Income Tax (A.Y -09-10) 4.48 2011-2012 CIT(A)
11 Interest on VAT 5.65 2011-2012 Appeal (for interest)
12 Central Excise & Customs 1.77 2013

(x) At the end of the period under audit, the company has accumulated losses of Rs 432.56 crores. The cash losses of the company during the period of nine months under audit are Rs 183.14 crores. The networth of the company is completely eroded and the company has a negative networth of ( Rs 418.14 crores) as on balance sheet date.

(xi) The company has defaulted in repayment of dues to financial institutions and banks amounting to Rs 1435.01 crores.

(xii) The company has not granted any loans and/or advances on the basis of securities by way of pledge of shares, debentures and other securities.

(xiii) The provisions of any special statute applicable to chit fund and nidhi/mutual benefit fund/societies are not applicable to the company.

(xiv) The company is not a dealer or trader in shares, securities, debentures and other investments.

(xv) The Company has given Guarantee to SICOM Ltd. on behalf of Nandlal Enterprises Ltd. for an Inter Corporate Deposit of Rs 20 crores. The company has assigned rights on the limestone mining lease awarded to the company, admeasuring 42.16 hectares of land. The terms of the guarantee are prejudicial to the interest of the company.

(xvi) As per the information and explanations given, the company has received forced loan amounting to Rs 4.08 Crores, during the year on account of encashment of Bank Guarantee by WCL on cancellation of fuel supply agreement.

(xvii) As in the past the company has continued to use short term loans for long term purposes.

(xviii) During the period under audit the company has not made preferential allotment of shares to parties or companies covered in the Register maintained u/s 301 of the Act.

(xix) The company has outstanding FCCBs (bonds) amounting to Rs 24.17 crores (as per balance sheet amount) which have already become due in February 2012 which are not secured. The details in respect of same are pointed out in sub point no "x" in Basis of Qualified Opinion.

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

(xxi) Based on the audit procedures performed and information and explanations given by the management, we report that no fraud on or by the company has been noticed or reported during the period under audit.

FOR DEMBLE RAMANI & CO.
Chartered Accountants
Registration No. 102259W
NAGPUR Anand Deshpande
Dated : 29th May, 2014 Partner
M. No.033618