From published accounts

26. Provision for doubtful receivable, advances and deposits

Compilers’ Note
Disclosures from Notes to Accounts, Auditors’ Report and Directors’ Report for the above were reproduced in the October 2014 issue of BCAJ. Given below are the remarks/qualifications in the CARO report, and the explanation thereof in the Directors’ Report.

FROM CARO Report
Paragraph (iii) (a)
According to the information and explanations given to us, the Company has granted an unsecured loan to a company covered in the register maintained u/s. 301 of the Companies Act, 1956 (‘the Act’) by way of conversion of certain pre-existing loans/advances/deposits due to the Company and its subsidiaries (refer paragraph 3 under ‘basis for qualified opinion’). The year-end balance of the loan and the maximum amount outstanding during the year amounted to Rs.13,374 million.

Further, as mentioned in paragraph 1 under ‘basis for qualified opinion’, certain parties alleged that they have advanced certain amounts to certain alleged UB Group entities and linked the confirmation of amounts due to the Company to repayment of such amounts to such parties by the alleged UB Group entities. Also, some of these parties stated that the dues to the Company will be paid/ refunded only upon receipt of their dues from such alleged UB Group entities. Considering the matters disclosed in paragraphs 1 and 4 of ‘basis for qualified opinion’, we are unable to comment whether any such arrangements represent transactions with any company/ firm/other party covered in the register maintained under section 301 of the Act.

Directors’ Response: Information and explanation on the qualification at paragraph (iii)(a) of Annexure to the Auditor’s report is provided in Note 26(a) to the Statement. Further, the Management has certified to the Board that, on the basis of the Management’s current information, particulars of contracts or arrangements that are required to be entered in the register maintained u/s. 301 of the Companies Act, 1956 (the Act) have been so entered. As mentioned in Note 26(c) to the financial statement, the Board has ordered a detailed and expeditious inquiry in relation to the matters disclosed in paragraphs 1 and 4 of ‘basis for qualified opinion’ in the auditor’s report. On completion of such inquiry, appropriate action if any will be taken.

Paragraph (iii)(b):
In our opinion, the rate of interest and other terms and conditions on which the above unsecured loan has been granted to the company covered in the register maintained u/s. 301 of the Act as stated in sub-Clause (a) above, are prima facie, prejudicial to the interest of the Company.

Based on its assessment of recoverability, the Company has during the current year, made a provision of Rs. 3,303 million against the loan and has not recognised any interest income (amounting to Rs. 963 million on the said loan).

Further, as mentioned in paragraph 1 under ‘basis for qualified opinion’, a provision of Rs. 6,495.4 million has been made with respect to amounts due from certain parties who alleged that they have advanced certain amounts to alleged UB Group entities.

Directors’ Response:
Management informed the Board that: (i) pursuant to a previous resolution passed by the board of directors of the Company on 11th October 2012, certain dues (together with interest) aggregating to Rs.13,374 Million were consolidated into, and recorded as, an unsecured loan by way of an agreement entered into between the Company and UBHL on 3rd July 2013; (ii) the interest rate of 9.5% p.a. was in accordance with section 372A of the Companies Act, 1956, read with the circular issued by the Reserve Bank of India publishing the bank rate in terms section 49 of the Reserve Bank of India Act, 1934.

The management and the nominee directors of the controlling shareholder have informed the Board that they will take all the necessary steps within their power and authority as management and directors of the Company to fully protect the interest of the shareholders in this regard.

Further, the Board has directed the management to review the underlying loan agreement(s) and/or other relevant documents (“Loan Documents”), to inter-alia assess: (i) whether any event of default(s) under the Loan Documents has occurred on the part of UBHL; (ii) the legal rights and remedies which the Company has under the Loan Documents; (iii) whether the Company should invoke any of the remedies available to it under the Loan Documents (including recalling of the entire loan); and (iv) whether there is any scope of renegotiating the terms and conditions under the Loan Documents.

In this regard, the management should expeditiously take all the necessary steps to fully protect the interest of the Company and shareholders.

Paragraph (iii)(c):
According to the information and explanations given to us, in case of the unsecured loan granted to the company covered in the register maintained u/s. 301 of the Act as stated in sub-Clause (a) above, no amounts were repayable during the year as per the terms of the loan agreement.

Considering the matters disclosed in paragraphs 1 and 4 under ‘basis for qualified opinion’, we are unable to comment on the regularity in the receipt of the principal amount and interest relating to any other loan, secured or unsecured, that may have been granted to any company/ firm/other party covered in the register maintained u/s. 301 of the Act, as a result of the transactions disclosed in paragraphs 1 and 4 under ‘basis for qualified opinion’

Directors’ Response: The Management has certified to the Board that, on the basis of the Management’s current information, particulars of contracts or arrangements that are required to be entered in the register maintained u/s. 301 of the Act have been so entered. As mentioned in Note 8 to the Statement, the Board has ordered a detailed and expeditious inquiry in relation to the matters disclosed in paragraphs 1 and 4 of ‘Basis for Qualified opinion’ in the auditor’s report. On completion of such inquiry, appropriate action, if any, will be taken.

Paragraph (iii)(d):
According to the information and explanations given to us, in case of the unsecured loan granted to the company covered in the register maintained u/s. 301 as stated in sub-Clause (a) above, there is no overdue amount of more than Rs. 1 lakh in respect of the said loan.

Considering the matters disclosed in paragraphs 1 and 4 under ‘basis for qualified opinion’, we are unable to comment whether there is overdue amount of more than Rs. 1 lakh in respect of any other loan, secured or unsecured, that may have been granted to any company/ firm/ other party covered in the register maintained u/s. 301 of the Act, as a result of the transactions disclosed in paragraphs 1 and 4 under ‘basis for qualified opinion’.

Directors’ Response: The Management has certified to the Board that, on the basis of the Management’s current information, particulars of contracts or arrangements that are required to be entered in the register maintained u/s. 301 of the Act have been so entered. As mentioned in Note 8 to the Statement, the Board has ordered a detailed and expeditious inquiry in relation to the matters disclosed in paragraphs1 and 4 of ‘Basis for qualified opinion’ in the auditor’s report. On completion of such inquiry, appropriate action, if any, will be taken.

Paragraph (iv):

In our opinion and according to the information and explanations given to us, and having regard to the explanation that purchases of certain items of inventories and fixed assets are for the Company’s specialised requirements and suitable alternative sources are not available to obtain comparable quotations, there is an adequate internal control system commensurate with the size of the Company and the nature of its business with regard to purchase of inventories and fixed assets and with regard to the sale of goods and services during the year.

Except for the matter discussed below, we have not observed any major weaknesses in the internal control system during the course of the audit.

Considering the matters stated under ‘basis for qualified opinion’, we are unable to comment on the adequacy of the internal control system of the Company at certain points in time during the earlier years with respect to such instances as stated under ‘basis for qualified opinion.’

Directors’ Response: The matters stated under ‘basis for qualified opinion’ relate to the period prior to 1st April 2013. The Management believes that the Company has an internal control system commensurate with the size of the Company and the nature of its business. The Board has instructed the Management that, depending on the outcome of the inquiry, further strengthening of the internal control system should be carried out, as may be required.

Paragraph (v)(a):

In our opinion and according to the information and explanations given to us, the particulars of contracts or arrangements entered into during the year referred to in section 301 of the Act have been entered in the register required to be maintained under that section.

However, considering the matters stated under ‘basis for qualified opinion’, particularly paragraphs 1 and 4 thereof, we are unable to comment whether the particulars of any such contracts or arrangements that may result from the transactions disclosed under ‘basis for qualified opinion’ and that need to be entered in the register maintained u/s. 301 of the Act, have been so entered.

Directors’ Response: The Management has certified to the Board that, on the basis of the Management’s current information, particulars of contracts or arrangements that are required to be entered in the register maintained u/s. 301 of the Act have been so entered. As mentioned in Notes 26(a), 26(b) and 30(f) to the Statement, the Board has ordered a detailed and expeditious inquiry in relation to the matters disclosed in paragraphs 1 and 4 of ‘Basis for qualified opinion’ in the auditor’s report. On completion of such inquiry, appropriate action, if any will be taken.

Paragraph (vii):

In our opinion, the Company has an internal audit system commensurate with the size and nature of its business during the year, except in relation to matters stated under ‘basis for qualified opinion’, where the internal audit system needs to be strengthened. Directors’ Response: The matters stated under ‘basis for qualified opinion’ relate to the period prior to 1st April, 2013. The Management believes that the Company has an internal audit system commensurate with the size of the Company and the nature of its business. The Board has instructed the Management that, depending on the outcome of the inquiry, further strengthening of the internal audit system should be carried out, as may be required.

Paragraph (x):

The accumulated losses of the Company at the end of the year are not less than 50% of its net worth. The Company has incurred cash losses in the financial year. However, no cash losses were incurred in the immediately preceding financial year.

Directors’ Response: The Board notes that the accumulated losses of the Company at the end of the year is 52 % of its peak net worth in the previous four financial years. Therefore, the Company will be required to file a report u/s. 23 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), The Board believes this report u/s. 23 would arise as a technical requirement under SICA and does not reflect upon the long-term prospects of the Company given the profitable nature of its business and as the accumulated losses are principally on account of exceptional items during the year.

Paragraph (xi):

In our opinion and according to the information and explanations given to us, the Company has not defaulted in the repayment of dues to a bank or to any financial institution except that in case of loans due to banks, principal amounting to Rs. 410 million an interest amounting to Rs. 474 million were repaid with a delay of up to 67 days and 37 days, respectively. The Company did not have any outstanding debentures during the year.

Directors’ Response: The Management has informed the Board that as of 31st March 2014, there were no outstanding defaults by the Company of any dues to a bank or any financial institution.

Paragraph (xvi):

In our opinion and according to the information and explanations given to us, the term loans taken by the Company and applied during the year were for the purpose for which they were raised.

However, considering the matters stated under ‘basis for qualified opinion’, particular paragraphs 1, 3 and 4, we are unable to comment whether any transactions relating to such matters represent application of term loans for the purpose for which they were raised.

Directors’ Response: The Management has certified to the Board that, on the basis of the Management’s current information, the Company has applied term loans taken by the Company during the year for the purpose for which they were raised. However, as mentioned in Note 26(c) to the Statement, the Board has ordered a detailed and expeditious inquiry in relation to the matters disclosed in paragraphs 1, 3 and 4 of ‘basis for qualified opinion’ in the auditor’s report. On completion of such inquiry, appropriate action will be taken, as may be required.

Paragraph (xxi):

As mentioned in detail in paragraphs 1 and 2 under ‘basis for qualified opinion wherein it is stated that:

    Certain parties alleged that they have advanced certain amounts to certain alleged UB Group entities and linked the confirmation of amounts aggregating to Rs. 5,846.9 million due to the Company to repayment of such amounts to such parties by the alleged UB Group entities. Further, some of these parties stated that the dues to the Company will be paid/refunded only upon receipt of their dues from such alleged UB Group entities; and an alleged instance of a purported agreement to create a lien on certain investments of the Company as security against loans given by an Alleged Claimant to Kingfisher Airlines Limited (KFA) in earlier years was noted. However, in a letter dated 31st July, 2014 from the Alleged Claimant, it was stated that the allegation made earlier did not take into account an addendum to the loan agreement; and after examining the aforesaid addendum and the agreement, the Alleged Claimant does not have any claim or demand of any nature against the Company. Subsequently, in September 2014, scanned copies of the purported agreements were furnished to the Management by KFA.The Management has represented to us that the Company had no knowledge of these purported agreements; that the Board of Directors of the Company have not approved any such purported agreements; and it is not liable under any such purport agreements.

Pending the completion of the inquiry as mentioned in paragraph 4 under ‘basis for qualified opinion’, we are unable to conclude whether these instances can be termed as ‘fraud’ and whether there are other instances of a similar nature.

Directors’ Response: See responses to paragraphs 1 to 3 of the Auditor’s Report to the Financial Statement. As mentioned in the note 30(f) to the Statement, the Board has directed a detailed and expeditious inquiry in relation to the matters disclosed in paragraphs 1 to 5 of “basis for qualified opinion” in the Auditors’ Report. Pending the completion of such inquiry, the Board is unable to conclude whether there have been any instances of fraud against the Company. Based on the findings of such inquiry, appropriate action, including action for recovery of the Company’s assets or amounts owing to the company, will be taken.