By Himanshu V. Kishnadwala
Chartered Accountant
Surana industries Ltd. (results for quarter ended 30th
June 2016 as filed with the Bombay Stock Exchange)
From Auditors’ Review report
Basis
of adverse conclusion
3. i. We
refer to note no.6 relating to investment in its subsidiary Surana Power
limited (SPL). The carrying value of the investment in
SPL as at 30th June, 2016 was Rs.41,850 lakh. In addition, the
Company has also issued a financial guarantee of Rs.10,000 lakh to the lenders
against the loans taken by SPL.
The net worth of this subsidiary
had fully eroded and its current liabilities exceed its current assets. The
independent auditor of the subsidiary had given an adverse audit opinion on its
financial statements for the year ended 31st march, 2016 stating that the going
concern assumption is not appropriate and the carrying value of the assets of
the subsidiary may also be impaired.
No
provision has been considered by the management for the diminution in the value
of the investments in this subsidiary and for the likelihood of the devolvement
of the guarantee on the Company.
ii.
Attention is invited to note no 5 regarding certain investments in subsidiaries
(having a carrying value aggregating to Rs.11,463.62 lakh) that were approved
for divestment due to continuing adverse market scenario which was impacting
the survival of the parent company. These investments are carried at cost and
have not been assessed for any impairment to the carrying values.
iii.
Inventory as at 30th June, 2016 aggregated to Rs.16,428.37 1akh, for
which the quantity, quality and
realisable value were
not assessed and determined by the management. in the
absence of evidence for
physical existence of
inventory as at 30th June,
2016 and net realisable value of inventory, we are
unable to comment on the adjustments that may be required to the carrying
values of the inventory.
iv.
The Company has not recognised recompense interest expense amounting to rs,
1,396 lakh for the quarter ended 30th June,
2016. Further, during the year
ended 31st March, 2016, the Company had
not recognised recompense interest expense amounting to Rs.5,148.36 lakh for
the year then ended and had reversed recompense interest expense amounting to
Rs.7,630.28 lakh recognised in earlier years.
v.
We refer to note no 4 relating to the non compliance with the repayment of the
loans as per the debt covenants agreed in the CDR package and paragraph (iv)
above relating to the non recognition of recompense interest for the quarter
ended 30th June, 2016 and the period then ended.
The
financial results for the quarter ended 30th June, 2016 have been prepared on a going
concern basis in
spite of negative
net worth after considering the
impact of the modifications mentioned in paragraphs (i) and (iv) above.
The
ability of the Company to continue as a going concern is significantly
dependent on the bringing in of new investor to revive the operations of the Company
and successful outcome of the ongoing negotiations with the lenders and
therefore, we are unable to comment if the going concern assumption is
appropriate and any effect it may have on the financial results for the quarter
ended 30th June, 2016.
vi.
We refer to note 7 of the results wherein it is stated that the Company has
adopted Indian accounting Standards (Ind AS) notified under the Companies (Indian
accounting Standards) rules, 2015 as amended by the Companies (Indian
accounting Standards) (amendment) rules, 2016 and is implementing the same in a
phased manner and that in the opinion of the Company, the presentation of the
results under Ind AS will not have any material impact on the recorded amounts
of income and expenditure for the quarters ended june 30, 2016 and 30th june, 2015. In the absence of adequate information
and completion of transition to Ind AS, we are unable to determine if these
results comply with the recognition and measurement principles of Ind AS 34
(“interim financial reporting”)
Paragraph
3(i) to 3(v) were matters of adverse opinion in the Audit Report issued by us
for the year ended 31st march, 2016
under the previous GAAP (in accordance with the accounting Standards specified
in the Annexure to the Companies (Accounting Standards Rules, 2006).
Adverse Conclusion
4. Based
on our review
conducted as stated
above, due to the significance and the possible effects of the matters
described in paragraph 3 above, the accompanying Statement
has not been
prepared in accordance with Ind AS and other accounting principles
generally accepted in India and has not disclosed the information required to
be disclosed in terms of regulation 33 of the SEBI (listing obligations and
disclosure requirements) regulations, 2015, as modified by Circular No.
CIR/CFD/FAC/62/2016 dated 5th July, 2016, including the manner in which it is
to be disclosed and the Statement may contain material misstatements.
From Notes below Unaudited Financial Results
The
auditors have modified their limited review report on the above results. The
management responses are as under:
i. Observation
As
above
Our Submission:
Based
on the preliminary negotiations with prospective buyers, the company currently
is of the opinion that actual realisable value of the current assets of the
subsidiary company will be sufficient to discharge its current liabilities. The
company is also in discussions with some financial institutions who have
evinced interest in restarting the project by pumping in additional equity and
debt required for completing the project. These
discussions are being held at tripartite level between the prospective
financial institution, leader of the
Consortium and the Company. Consequently, the company does not envisage any
prospective devolvement of liability on account of revocation of guarantee.
Accordingly, the company has not made any provision in this regard.
In
view of the ongoing negotiations with the prospective buyers and the lenders
and also considering the expected realisable value of the assets the Company
will be able to realise the carrying value of the said investment.
The
audit report for the year ended
31st march, 2016 was also modified in
respect of the above matter under the previous GAAP (in accordance with the accounting Standards
specified in the Annexure to the Companies (Accounting Standards) Rules, 2006).
ii. Observation
As
above
Our Submission:
In
view of the ongoing negotiations with the prospective buyers and the lenders
and also considering the expected realizable value of the assets the Company
will be able to realize the carrying value of the said investments in SGPL and
SMML.
The
Audit Report for the year ended
31st march, 2016 was also modified in
respect of the above matter under the previous GAAP (in accordance with the accounting Standards
specified in the Annexure to the Companies (Accounting Standards) Rules, 2006).
iii. Observation
As
above
Our Submission
During
the previous year the physical verification of stock has been carried out by
the stock auditors appointed by the lenders based on which the stocks have been
provided to the extent of deterioration identified on a scientific basis.
With
regard to the balance stock, the same shall be assessed at the time of
resumption of production and appropriate adjustments as required shall be done.
We are of the opinion that any such adjustment so arising will not be material.
The
audit report for the year ended
31st march, 2016 was also modified in
respect of the above matter under the previous GAAP (in accordance with the accounting Standards
specified in the Annexure to the Companies (Accounting Standards) Rules, 2006).
iv. Observation:
As
above
Our Submission
The Company has not provided for recompense
interest of Rs. 14,174.64 lakh (including Rs. 1,396 lakh for the quarter ended
30th June 30, 2016) because as per master circular of RBI on CDR and also as
per the MRA occurs only when the company has generated cash surplus after
paying out all its obligations.
Further, as
per the master
restructuring agreement under
article viii para 8.1
“Right
to Recompense
If
in the opinion of the lenders, the profitability and the cash flows of the
Borrower so warrant, the Lenders shall be entitled to receive recompense for
the reliefs and sacrifices extended by them within the CDR parameters with the
approval of the CDR-Empowered Group.”
Accordingly,
as the lenders have not formed any opinion about the profitability and cash
flows of the company to service the recompense interest as on date, the need to
recognize the recompense interest does not arise.
Also
considering the factors stated in note
(2) above, the Company is of the opinion that the going concern
assumption is appropriate.
The
Audit Report for the year ended 31st
march, 2016 was also modified in respect of the above matter under the
previous GAAP” (in accordance with
the Accounting Standards Specified in the Annexure to the Companies (Accounting
Standards) Rules, 2006)
v. Observation:
As
above
Our Submission:
Company
could not comply with debt repayment schedule as embedded in the CDR package
for want of non release of sufficient working capital funding by the lenders as
per the package. Consequently, the company was not in a position to restart its
operations in Raichur in time and could not adhere to the debt repayment
schedule.
As
mentioned in response to observation (v), there is no non-compliance of debt
covenants as per the CDR package and the need to recognize recompense interest
does not arise.
The
negotiations with the concerned parties, including the consortium of lenders,
are on for restarting the operations of the Raichur Plant and further the
operational capabilities of the Gummidipoondi Plant have been improving over
the past years. Accordingly, the company is of the opinion that the assumption
of going concern is appropriate.
The
Audit Report for the year ended 31st March, 2016 was also modified in respect
of the above matter under the previous GAAP
(in Accordance with the Accounting Standards specified in the Annexure
to the Companies (Accounting Standards) Rules, 2006).
vi. Observation:
As
above
Our Submission:
Covered
by note 7 above and the responses to the individual items as mentioned above.
vii. Observation:
As
above
Our Submission
Covered
by responses to the individual items as mentioned above.
