Qualifications in Audit Report on Consolidated Financial Statements (CFS)
Significant Accounting Policies :
Particulars of consolidation :
(ii) Borg Warner Morse TEC Murugappa Private Limited ceased to be a Joint Venture with effect from 30th September 2008, consequent to the sale of shares held in them by the Company. Accordingly, the Unaudited financial statements/information from 1st January 2008 to 30th September 2008 available with the Management have been considered for the purpose of the Consolidated Financial Statements.
From Notes to Accounts (CFS) :
Joint Ventures :
8(a) Provisioning for Standard Assets and Capital Reduction :
Considering the overall economic environment, CDFL has reviewed its past practice of provisioning for its loan portfolio and, as against the practice hitherto followed and, having regard to the principle of prudence and conservatism, has decided to voluntarily create a Provision for Standard Assets in respect of the Standard Assets in the Books of Account as at 31st March 2009 and apply such provisioning norms for the Standard Assets, suo moto, on an ongoing basis, though statutorily not required under the Non-Banking Financial (Non-deposit Accepting or Holding) Companies ‘Prudential Norms (Reserve Bank) Directions, 2007.
Pursuant to the Capital Reduction Proposal under Sections 78, 100 to 103 of the Companies Act, 1956 as approved by the shareholders of CDFL through postal ballot and the Capital Reduction Proposal confirmed by the Hon’ble High Court of Judicature at Madras on 29th April 2009, whose Order and minute dated 20th April 2009 was registered with the Registrar of Companies on 30th April 2009, an amount of Rs.323.53 Cr. (Share of the Group Rs.100.08 Cr.), being the balance in the Securities Premium Account of CDFL as at 31st March 2008 has been withdrawn for meeting the specific purposes as indicated below.
According to the Capital Reduction Order as approved by the Hon. High Court of Judicature at Madras, the following can be utilised/adjusted/set off against the balance of Rs.323.53 Cr. (Share of Group Rs.100.08 Cr.) available in the Securities Premium Account of CDFL as at 31st March 2008 :
- Utilisation towards creation of Provision for Standard Assets for an amount not exceeding Rs.200 Cr. (Share of the Group Rs.61.87 Cr.) in respect of the existing standard assets in the books of account of CDFL as at 31st March 2009 based on the provisioning norms approved by the Management for various categories of loan portfolios.
- Adjustments of the write-off of the bad debts/loan losses/other non-recoverable assets, if any, existing in the books of account of CDFL as at 31st March 2009, whether provided for or not, for an amount not exceeding Rs.100 Cr. (Share of the Group Rs.30.93 Cr.). Provisions existing for such bad debts/loan losses/other non-recoverable assets, if available, as at 31st March 209 will be credited back to the Profit and Loss Account on such write-off of bad debts/loan losses/other non-recoverable assets.
- Setting off of the provision for diminution, other than temporary, if any, in the value of the investments made by CDFL in one of its subsidiary companies, M/s. DBS Cholamandalam Distribution Limited, and setting off the provision for doubtful receivables, if any, from the said subsidiary in the books of account of CDFL as at 31st March 2009 for an amount not exceeding Rs.23.53 Cr. (Share of the Group Rs.7.28 Cr.).
Such utilisation/adjustment/set-off has been made by withdrawal of such sums from the Securities Premium Account of CDFL to the Provision for Standard Assets Account, Loss Assets Written Off Account and Provision for Diminution in the Value of Investments Account in the Profit and Loss Account.
Hence, for the year ended 31st March 2009, such Provision for Standard Assets amounting to Rs.200 Cr. (Share of the Group Rs.61.87 Cr.), Write-off of the Bad Debts/Loan Losses amounting to Rs.100 Cr. (Share of the Group Rs.30.93 Cr.) and Provision for Diminution in the Value of the Investments amounting to Rs.23.53 Cr. (Share of the Group Rs.7.28 Cr.), as determined by the Management, have been debited to the Profit and Loss Account and such sums have been withdrawn from the Securities Premium Account and credited to the Profit and Loss Account into the respective heads of account.
The said adjustments are not in accordance with the Accounting Standards notified by the Government of India under Section 211(3C) of the Companies Act, 1956 and other relevant Pronouncements of the Institute of Chartered Accountants of India.
Had CDFL not made Provision for Standard Assets in accordance with its revised provisioning policy and had the aforesaid adjustments to Securities Premium not been effected, the consequent impact on the consolidated results of the Group would have been as indicated in the table below under the head ‘Proforma Results of the Group’ :
Notes:
(i) During the current year, the Gujarat High Court, in the case of
Kotak Mahindra Bank v. O.L. of M/s. APS Star India Limited, held that Banks are prohibited from transferring or purchasing debts. Consequent to the above, the petitioners have filed a Special Leave Petition (SLP) with the Supreme Court. In its interim order, the Supreme Court has held that in the event of dismissal of the SLP, the assignment deals entered into by banks would be deemed not to have materialised.
However, CDFL is hopeful (If a favourable outcome to the aforesaid Special Leave Petition (SLP) filed in the Supreme Court given: that such deals are widely prevalent in the banking and financial services industry and the RBI has itself issued specific guidelines in respect of Securitisation transactions and hence, no adjustments to the financial statements have been considered necessary at this stage by the Management in this regard.
ii) There have been no Securitisation of Receivables during the current year as well as the previous year and hence the disclosure requirements under RBI Circular No. DBOD. NO.BP.BC.60/21.04.048/2005-06 have not been given. The details given above relate to Securitisation transactions prior to 31st March 2007.
d) Change in Accounting Estimates for Non-Performing Assets Provisions:
During the year, the Management of CDFL has reviewed the provisioning norms applied for Non-Performing Assets and has streamlined the same duly taking into account the stipulated minimum provisioning requirements of the Reserve Bank of India (RBI), the current economic environment and the voluntary Provision for Standard Assets of Rs.200 Cr. (Share of the Group Rs.61.87 Cr.) as at 31st March 2009 [Refer Note 8(a) above]. Such changes in the provisioning estimates by the Management used for the year ended 31st March 2009 in respect of assets identified for 100% provision as compared to the previous year ended 31.3.2008 has resulted in the share of the Group in the Provision for Non-Performing Assets for the current year being lower by Rs.20.70 Cr. and, consequently, the profit before tax for the year ended 31.3.2009 of the Group is higher by that amount.
e) Exceptional items:
The year 2008-2009 saw a global financial crisis, both in terms of liquidity and volatile interest movement. The schemes of DBS Chola Mutual Fund also were impacted as there were redemption pressures at various points of time. Therefore to protect the interest of unit holders, one of the subsidiaries of CDFL – DBS Cholamandalam Asset Management Limited absorbed the losses of Rs16.12 Cr. on account of securities (including loss of Rs.8.37 crores on Non-Convertible Debentures purchased and sold back to Mutual Fund Schemes) to correct the valuation of the securities. Accordingly the Group’s share of .such losses amounting to Rs.4.99 Cr. has been shown under Exceptional Items in the Consolidated Financial Statements.
From Auditors’ Report on CFS :
4. As stated in Note 2(ii) of Schedule 17, in the case of one of the JVs which ceased to be a JV with effect from 30.9.2008, the figures used for the consolidation are based on the unaudited financials statements/information available with the management. The Company’s share of total revenues and net profit after tax for the period 1.01.2008 to 30.9.2008 relating to the said JV considered in the Consolidated Financials Statements is Rs.6.75 crores and Rs.0.12 crores, respectively.
5. In the case of one of the joint ventures of the Company, M/ s. Cholamandalam DBS Finance Limited (CDFL) :
a) Attention is invited to Note 8(b) of Schedule 18 regarding certain outstanding open items in some of the Bank Reconciliations of CDFL, which CDFL is in the process of resolving. The Management of CDFL is of the opinion that adjustments, if any, arising out of clearance of such reconciling items should not have a material impact on the reported amounts of assets, liabilities, income and expenses and, consequently, on the financial statements for the year. Pending clearance of such outstanding open items and completion of the said Reconciliations we are unable to form an opinion in the matter.
b) Without qualifying our report, we invite attention to Note 8(a) of Schedule 18 on capital reduction by CDFL regarding utilisation/ adjustment/set-off of the Securities Premium Account towards creation of Provision for Standard Assets for an amount of Rs.200 crores, adjustment of write-off the bad debts/loan losses and other non-recoverable assets for an amount of Rs.I00 crores and setting off of the provision of diminution, other than temporary, in the value of investments in one of CDFL’s subsidiaries, M/ s. DBS Cholamandalam Distribution Limited amounting to Rs.23.53 crores, by withdrawal of such sums from the Securities Premium Account to the Profit and Loss Account of CDFL, made in accordance with the Capital Reduction Proposal under Sections 78, 100 to 103 of the Companies Act, 1956 and confirmed by the Hon. High Court of Judicature at Madras on 29th April 2009, whose Order and minute dated 20th April 2009 was registered with the Registrar of Companies, Chennai on 30.4.2009. This is not in accordance with the Accounting Standards referred to in Section 211(3C) of the Companies Act, 1956 and the relevant Pronouncements of the Institute of Chartered Accountants of India.
As stated in the aforesaid Note, had CDFL not made Provision for Standard Assets in accordance with its revised provisioning policy and had the aforesaid adjustments to Securities Premium not been effected, the profit after tax of the Group for the year would have been Rs.16.22 crores as against the profit after tax of the Group of Rs.54.43 crores.
c) Without qualifying our report, we invite attention to Note 8(d) of Schedule 18 regarding the change in the provisioning norms of certain loan portfolios of CDFL during the year ended 31 March 2009 by the Management of CDFL for the reasons stated therein.
6. In the case of one of CDFL’s subsidiaries, M/ s. DBS Cholamandalam Asset Management Limited (DCAML):
Without qualifying our report, we invite attention to Note 8(e) of Schedule 18 regarding the Group’s share of loss of RS.2.59 crores relating to the purchase and sale back of securities to the Mutual Fund Schemes by DCAML for the reasons stated therein.
7. In the case of one of the subsidiaries, M/ s. Cholamandalam MS General Insurance Company Limited (CMSGICL), the other auditors’ report on its financial statements for the year ended 31.3.2009 includes the following matters:
a) The actuarial valuation in respect of Incurred But Not Reported (IBNR) Claims and Incurred But Not Enough Reported (ffiNER) Claims, included under Sundry Creditors in the financial statements as at 31.3.2009, is the responsibility of the subsidiary’s appointed actuary. The actuarial valuation of liabilities as at 31.3.2009 has assumptions considered by him for such valuation are appropriate and are in accordance with the requirements of Insurance Regulatory and Development Authority (IRDA) and Actuarial Society of India in concurrence with IRDA. The auditors have relied upon the actuary’s certificate in this regard.
b) Without qualifying the opinion, attention is invited to Note 1(n) of Schedule 18 regarding a fire claim repudiated by the Company and accordingly no provision is considered necessary based on legal opinion.
8. We report that the Consolidated Financial Statements have been prepared by the Company’s Management in accordance with the requirements of Accounting Standard 21 Consolidated Financial Statements and Accounting Standard 27 Financial Reporting of Interests in Joint Ventures and on the basis of the separate audited financial statements of the Company, its subsidiaries and joint ventures included in the Consolidated Financial Statements except for the unaudited financial statements in the case of one of the joint ventures as indicated in Para above.
9. Subject to our comments in paragraphs 5(a) above and the consequential effects thereof, if any, which are not determinable at this stage, based on our audit and on consideration of the reports of the other auditors on the separate financial statements and other financial information of the entities referred to in paragraph 3 above and read with our comments in paragraphs 4, 5(b), 5(c), 6 & 7 above, and to the best of our information and according to the explanations given to us, we are of the opinion that the aforesaid Consolidated Financial Statements give a true and fair view in conformity with the accounting principles generally accepted in India.
