By Himanshu V. Kishnadwala
Chartered Accountant
KEY AUDIT
MATTERS PARAGRAPH FOR A COMPANY WHERE RESOLUTION PLAN IMPLEMENTED PURSUANT TO
CORPORATE INSOLVENCY RESOLUTION PROCESS
TATA STEEL BSL LTD.
(31-3-2019) (FORMERLY KNOWN AS BHUSHAN STEEL LTD.)
From auditors’ report
We have determined
the matters described below to be the key audit matters to be communicated in
our report:
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Key audit matter
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How our audit addressed the key audit
matter
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Accounting
treatment for the effects of the Resolution Plan
(a) Refer Note 43
to the standalone financial statements for the details regarding the
Resolution Plan implemented in the company pursuant to a Corporate Insolvency
Resolution Process concluded during the year under Insolvency and Bankruptcy
Code, 2016
On 17th
May, 2018, prior to the implementation of the Resolution Plan, the Company
had outstanding credit facilities from several financial institutions,
aggregating to Rs. 6,054,746.50 lakhs. The Company also had accrued dues
amounting to Rs. 110,627.58 lakhs towards operational creditors
Owing to the size
of the overdue credit facilities, multiplicity of contractual arrangements
and large number of operational creditors, determination of the carrying
amount of related liabilities at the date of approval of Resolution Plan was
a complex exercise
Further, comprehending the provisions
of the Resolution Plan and determining the appropriateness of the accounting
treatment thereof, more particularly the accounting treatment of de-recognition
of liabilities, required significant judgement and estimates, including
consideration of accounting principles to be applied for presentation of
difference between carrying amount of novated debt and consideration paid
there for
Accounting for
the effects of the Resolution Plan is considered by us to be a matter of most
significance due to its importance to intended users’ understanding of the
financial statements as a whole and materiality thereof
(b) Refer Note 43
to the standalone financial statements
Prior to the
approval of the Resolution Plan on 15th May, 2018, the Company was
a party to certain litigations. Pursuant to the approval of the Resolution
Plan, it was determined that no amounts are payable in respect of those
litigations as they stand extinguished
The Company had
also made certain payments to the relevant authorities in respect of those
litigations which were presented as recoverable under ‘Other non-current
assets’ in the standalone financial statements
The estimates
related to expected outcome of litigations and recoverability
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(a) We have performed the following
procedures to determine whether the effect of Resolution Plan has been
appropriately recognised in the financial statements:
- Reviewed management’s process for
review and implementation of the Resolution Plan
- Reviewed the provisions of the
Resolution Plan to understand the requirements of the said plan and evaluated
the possible impact of the same on the financial statements
- Verified the balances of
liabilities as on the date of approval of Resolution Plan from supporting
documents and computations on a test check basis
- Verified the underlying documents
supporting the receipt and payment of funds as per the Resolution Plan
- Tested the implementation of
provisions of the Resolution Plan in computation of balances of liabilities
owed to financial and operational creditors
- Evaluated whether the accounting
principles applied by the management fairly present the effects of the
Resolution Plan in financial statements in accordance with the principles of
Ind AS
- Tested the related disclosures made
in notes to the financial statements in respect of the implementation of the
resolution plan
(b) We have performed the following
procedures to test the recoverability of payments made by the Company in
relation to litigations instituted against it prior to the approval of the
Resolution Plan:
- Verified the underlying documents
related to litigations and other correspondences with the statutory
authorities
- Involved direct and indirect tax
specialists to review the process used by the management to determine
estimates and to test the judgements applied by management in developing the
accounting estimates
- Assessed management’s estimate of
recoverability, supported by an opinion obtained by the management from a
legal expert, by determining whether:
• The method of measurement used is
appropriate in the circumstances; and
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of payments made in respect thereof have
high degree of inherent uncertainty due to insufficient judicial precedents
in India in respect of disposal of litigations involving companies admitted
to Corporate Insolvency Resolution Process
The application of significant
judgement in the aforementioned matters required substantial involvement of
senior personnel on the audit engagement including individuals with expertise
in accounting of financial instruments
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• The assumptions used by management are
reasonable in light of the measurement principles of Ind AS
- Determined whether the methods for
making estimates have been applied consistently
- Evaluated whether the accounting
principles applied by the management fairly present the amounts recoverable from
relevant authorities in financial statements in accordance with the
principles of Ind AS
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From Notes to Financial Statements
29. Exceptional Items
(Rs. in lakhs)
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Particulars
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Year ended 31st March,
2019
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Year ended 31st March,
2018
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(a)
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Effects of implementation of Resolution Plan (refer sub-note [i])
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315,927.27
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–
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(b)
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Provision for impairment on property, plant and equipment and other
assets
(refer sub-note [ii])
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(18,326.60)
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(2,075,901.76)
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(c)
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Provision for impairment on financial assets
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–
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(23,833.52)
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(d)
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Other exceptional items
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–
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(2,34,732.49)
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297,600.67
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(2,334,467.77)
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i) Effects of implementation of Resolution
Plan (refer Note 43 for details of effects of Resolution Plan)
Pursuant
to CIRP proceedings and implementation of Resolution Plan, there has been a
gain of Rs. 315,927.27 lakhs on account of the following:
(a) Operational creditors extinguishment –
Rs. 55,212.35 lakhs,
(b) Redemption of preference shares and
waiver of related interest obligation – Rs. 242,557.34 lakhs,
(c) Extinguishment of dues towards financial
creditors on account of pledged shares invocation – Rs. 18,157.58 lakhs.
ii) Provision for impairment on property,
plant and equipment and other assets
(a) Provision for impairment of property,
plant and equipment – Rs. 5,219.23 lakhs [refer Note 3],
(b) Provision for impairment of certain
non-current advances – Rs. 17,837.52 lakhs,
(c) Net reversal of provision for impairment
made in earlier year – Rs. 4,730.14 lakhs [refer Note 3]
iii) Exceptional items recognised in previous
year financial statements
(A) Provision for impairment on property, plant
and equipment and other assets includes:
(a) Provision for impairment of property,
plant and equipment (including CWIP) – Rs. 1,911,279.90 lakhs,
(b) De-recognition of Minimum Alternate Tax
credit Rs. 80,605.55 lakhs,
(c) Provision for impairment of investment
in associates – Bhushan Energy Limited and others Rs. 36,880.62 lakhs,
(d) Certain non-current advances Rs.
47,135.93 lakhs.
(B) Provision
for impairment on financial assets of Rs. 23,833.52 lakhs comprises:
(a) Expenditure incurred on development of
de-allocated coal mines of Rs. 14,833.52 lakhs, and
(b) Security deposits given to Bhushan
Energy Limited of Rs. 9,000.00 lakhs.
(C) Other exceptional items for the year
ended 31st March, 2018 include prior period items of Rs. 201,909.65 lakhs comprising of the following:
(a)
Amortisation of leasehold land
accounted as operating lease – The Company has taken land properties on
operating lease in earlier years, which prior to year ended 31st
March, 2018 were accounted as finance lease. Upon change in their
classification as operating lease, the cumulative effect of amortisation from
inception until the year ended 31st March, 2017 has been recognised
in previous year’s profit or loss in ‘exceptional items’. Further, these
leasehold land properties were recognised at fair value on transition to Ind AS
as on 1st April, 2015 and such fair valuation adjustment has also
been reversed in previous year’s profit or loss in ‘exceptional items’.
(b)
Accounting effect of oxygen plant
accounted as finance lease – The Company entered into sale and lease-back
arrangement for oxygen plant in earlier years which was accounted as operating
lease. However, the terms of the lease require such arrangement to be
classified as finance lease. Consequently, the asset has been recognised with
corresponding finance lease obligation. Cumulative effect of reversal of
operating lease rentals and booking of depreciation and finance cost from
inception until the year ended 31st March, 2017 has been recognised
in previous year’s profit or loss in ‘exceptional items’.
43. The corporate insolvency resolution
process (CIRP) was initiated pursuant to a petition filed by one of its
financial creditors, State Bank of India (SBI) under section 7 of the
Insolvency and Bankruptcy Code, 2016 (IBC). SBI filed the petition before the
National Company Law Tribunal, Principal Bench, New Delhi (Adjudicating
Authority) vide Company Petition No. (IB) – 201 (PB) / 2017 on 3rd
July, 2017. The Adjudicating Authority admitted the said petition and the CIRP
for the Company commenced on 26th July, 2017. The CIRP culminated
into the approval of the Resolution Plan submitted by Tata Steel Ltd (TSL) by
the Adjudicating Authority vide its order dated 15th May, 2018
(Order).
Accordingly,
keeping in view the order dated 15th May, 2018:
i. On 18th May, 2018
(Effective Date), Bamnipal Steel Limited (wholly-owned subsidiary of TSL)
(BNPL) deposited Rs. 3,513,258 lakhs for subscription to equity shares of the
Company, payment of CIRP cost and employee-related dues and payment to
financial creditors in terms of the approved Resolution Plan.
ii. The reconstituted board of
directors in its meeting held on 17th May, 2018 approved allotment
of 794,428,986 fully-paid equity shares of Rs. 2 each to BNPL, aggregating to
Rs. 15,888.58 lakhs, representing 72.65% of the equity share capital of the
Company.
iii. The remaining amount of Rs. 3,497,369.42
lakhs was treated as Inter-Corporate Deposits.
iv. Out of the amount received from
BNPL, Rs. 3,258 lakhs was utilised towards payment of CIRP cost and
employee-related dues. The balance amount of Rs. 3,510,000 lakhs was paid to
the Financial Creditors between 18th and 31st May, 2018.
v. The financial creditors invoked the
pledge created in their favour by the erstwhile promoters of the Company over
67,654,810 equity shares of the Company held by them (Pledged Shares). The
market value of the pledged shares amounted to Rs. 18,157.58 lakhs and the same
has been recorded as an exceptional item in these financial statements. Refer
Note 29 for the details of exceptional items.
vi. The eligible financial creditors were
further allotted 72,496,036 equity shares at the face value of Rs. 2 each
aggregating to Rs. 1,449.92 lakhs.
vii. After adjusting the amounts as mentioned
in Para No. v. and vi. above, the balance due to the financial creditors,
amounting to Rs. 2,528,550.72 lakhs, was novated to BNPL for an aggregate
consideration of Rs. 10,000 lakhs. BNPL, in its capacity as the promoters of
TSBSL, has waived off the debts, less cost of novation, and the same has been
considered as capital contribution. Refer Note 14 for details of other equity.
viii.10% Redeemable Cumulative Preference shares
of Rs. 100 each amounting to Rs. 242,557.39 lakhs were redeemed for a total sum
of Rs. 4,700 only. Gain arising out of redemption of such preference shares has been recorded as an exceptional item in these financial statements. Refer
Note 29 for the details of exceptional items.
ix. In
respect of operational creditors, the Company has provided for liabilities
based on the amount of claims admitted pursuant to CIRP. Further, the Company
has proposed to pay an amount of Rs. 120,000 lakhs to operational creditors, in
the manner mentioned in the Resolution Plan, within 12 months from the closing
date (18th May, 2018), i.e., on or before 17th May, 2019.
Accordingly, the Company has recognised a gain of Rs. 55,212.35 lakhs on
account of extinguishment of such financial liabilities as an exceptional items.
