1.  We have audited the attached Balance Sheet of M/s. Bellary Steels &
 Alloys Limited, as at 31st March 2009; the Profit & Loss Account; and
 the Cash Flow Statement for the year ended as on that date, annexed
 thereto. These financial statements are the responsibility of the
 companys management. Our responsibility is to express an opinion on
 these financial statements based on our audit.
 
 2.  We conducted our audit in accordance with auditing standards
 generally accepted in India. Those Standards require that we plan and
 perform the audit to obtain reasonable assurance about whether the
 financial statements are free of material misstatement. An audit
 includes examining, on a test basis, evidences supporting the amounts
 and disclosures in the financial statements. An audit also includes
 assessing the accounting principles used and significant estimates made
 by the management, as well as evaluating the overall financial
 statements presentation. We believe that our audit provides a
 reasonable basis for our opinion.
 
 3.  As required by the Companies (Auditors Report) Order, 2003, duly
 amended by the DCA notification GSR 766(E) dated 25th November 2004,
 (hereinafter to be referred to as the Order) issued by the Central
 Government of India in terms of sub-section (4A) of section 227 of the
 Companies Act, 1956, we enclose in the Annexure a statement on the
 matters specified in paragraphs 4 and 5 of the said Order, to the
 extent applicable.
 
 4.  Further to our comments in the Annexure referred to above, we
 report that:
 
 i) We have obtained all the information and explanations which to the
 best of our knowledge and belief were necessary for the purpose of our
 audit;
 
 ii) 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;
 
 iii) The Balance Sheet, Profit & Loss Account and Cash Flow Statement
 dealt with by this report are in agreement with books of account;
 
 iv) In our opinion, the Balance Sheet, Profit & Loss Account and Cash
 Flow Statement dealt with by this report comply with Accounting
 Standards referred-, to in sub section (3C) of section 211 of the
 companies Act 1956, except as stated in Notes on accounts No. 20,26 and
 27.
 
 v) On the basis of written representations received from the directors
 as on 31 st March 2009 and taken on record by the Board of Directors,
 we report that none of the directors are disqualified as on 31st March
 2009, from being appointed as directors in terms of clause (g) of Sub-
 Section (1) of Section 274 of the Companies Act 1956;
 
 vi) In the year 2002-03, the company has created Deferred Tax Asset in
 pursuance of AS-22, Accounting for taxes on Income amounting to Rs
 85.50 crores. As the virtual certainty does not exist to substantiate
 that the company would generate sufficient taxable income in future, we
 are of the view that the continuation of deferred tax asset shall be
 discontinued by the company.
 
 vii) Subject to the above, in our opinion and to the best of our
 information and according to the explanations given to us, the said
 accounts read with significant accounting policies and notes to
 accounts, give the information required by the Companies Act, 1956, in
 the manner so required and give a true and fair view in conformity with
 the accounting principles generally accepted in India;
 
 a.  In the case of Balance Sheet, of the state of affairs of the
 Company as at 31 st March 2009;
 
 b.  In the case of Profit and Loss Account, of the loss for the year
 ended on that date; and
 
 c.  In the case of Cash flow Statement, of the Cash Flows for the year
 ended on that date.
 
 THE ANNEXURE REFERRED TO IN PARAGRAPH-3 OF OUR REPORT TO THE MEMBERS OF
 M/S. BELLARY STEELS AND ALLOYS LIMITED, BELLARY FOR THE PERIOD ENDED 31
 ST MARCH 2009.
 
 WE REPORT THAT;
 
 1.  a) The Company has maintained records showing full particulars
 including quantitative details and situation  % of Fixed Assets.
 However, item-wise value in respect of assets other than land and
 buildings are not available since the assets acquired are added to the
 block value of the assets.
 
 b) Verification of fixed assets is being conducted in a phased manner
 by the management designed to cover all assets over a period of three
 years, which in our opinion is reasonable having regard to the size of
 the Company and the nature of assets. The discrepancies noticed on such
 verification were not material and have been properly dealt with in the
 books of account.
 
 c) Some of the fixed assets have been disposed of during the year.
 However, in our opinion and according to the information and
 explanations given to us, the ability of the Company to continue as a
 going concern is not affected.
 
 2.  a) The inventory of the Company (excluding consignment stocks with
 third parties) has been physically verified by the management during
 the year according to a phased manner normally so designed that each
 material item is physically verified at least once in a year and at
 more frequent intervals in appropriate cases. We are given to
 understand that there yvas no consignment stock lying with the third
 party at the end of the year. In our opinion the frequency of
 verification is reasonable.
 
 b) The procedures of physical verification of Inventory followed by the
 management are reasonable and adequate in relation to the size of
 company and nature of its business.
 
 c) The company is maintaining proper records of inventory. The
 discrepancies noticed on verification between the physical stocks and
 book records were not material and accordingly dealt in the books.
 
 3.  a) According to the information and explanation given to us, the
 company has, during the year, not granted any secured or un secured
 loans to companies, firms or other parties covered in the register
 maintained under section 301 of the companies Act 1956.  Accordingly
 paragraph 4 (iii) (a), (b),(c),(d) of the order, are not applicable.
 
 e) The company has taken interest free unsecured loans from the parties
 covered in register maintained u/s. 301 of the Companies Act. The
 details of which are mentioned here below:
 
 Name of the         Maximum          Balance due
 Directors/          amount due       as at the end
 Parties             at any time      of the
                     during the year  financial year
                     Amount (Rs.)     Amount (Rs.)
 
 Mr.S.Madhava        29,49,33,086     29,45,85,496
 Smt.S.Parvathi       1,07,50,000      1,07,50,000
 
 Bellary Steel 
 Rolling Mills           8,89,256         7,83,596
 
 t) As wehave not been provided with the terms and conditions of loan
 agreement, we are unable to comment on whether the terms and conditions
 of the said loans are prejudicial to the interest of the company.
 
 g) The company has not been regular in payment of principal portion of
 loan taken from the parties referred above.
 
 4.  Iln our opinion and according to the information and explanations
 given to us there are adequate internal control procedures commensurate
 with the size of the company and nature of its business with regard to
 purchase of inventory, fixed assets and for sale of goods and services.
 During the course of our audit, we have not observed any continuing
 failure to correct major weaknesses in Internal Controls.
 
 5.  According to the information and explanation given to us, we are of
 the opinion that the transactions that need to be entered in the
 register maintained u/s. 301 of the Companies Act, 1956 have been
 entered.
 
 6.  The Company has not accepted any deposits from the public during
 the year. Consequently, the provisions of section 58A, 58AA or any
 other relevant provisions of the companies Act, 1956 and the companies
 (Acceptance of Deposits) Rules, 1975 are not applicable to the company.
 
 7.  The Company has an Internal Audit system on a quarterly reporting
 basis. However, considering the size of the company and the nature of
 its business in our opinion, the same needs to be doneon monthly basis.
 
 8.  We have broadly reviewed the books of account relating to
 materials, labour and other items of cost maintained by the company
 pursuant to the Rules made by the Central Government for the
 maintenance of cost records under sec. 209 (1) (d) of the Companies
 Act, 1956 and we are of the opinion that prima facie the prescribed
 accounts and records have been made and maintained. We have not,
 however made a detailed examination of the same.
 
 9. a) According to the records of the comapny, undisputed statutory
 dues including provident fund, employees state insurance, investor
 education and protection fund, income tax, sales tax, wealth tax,
 service tax, customs duty, excise duty and other statutory dues have
 been generally regularly deposited with the appropriate authorites.
 
 Further, since the Central Government has till date not prescribed the
 amount of cess payable under section 441A of the Companies Act, 1956,
 we are not in a position to comment upon the regularity or otherwise of
 the Company in depositing the same.
 
 b) According to the information and explanations given to us, there are
 dues of Sales Tax, Income Tax, Excise Duty, Cess, which are disputed,
 and the forums where the disputes are pending is mentioned here below.
 
 Name of the Statute      Nature of dues      Amount of Tax due (Rs.)
 
 Central Sales Tax        Disputed Turnover        4,77,292
 KST & Central Sales Tax  Disputed Turnover    10,51,83,487
 Entry Tax                Disputed Turnover          24,464
 Entry Tax                Disputed Turnover        6,50,804
 Entry Tax                Disputed Turnover        7,42,345
 Income Tax               U/s 234A, 234 B, 
                          234 C, Additional 
                          Tax U/s154, 
                          disallowance of 
                          Lease Rentals and 
                          Interest on Lease 
                          Rentals               2,17,42,739
 
 Sales Tax                Disputed Turnover       10,40,000
 Central Excise           MODVAT disallowed     2,18,14,814
 Central Excise           MODVAT disallowed     1,43,47,222
 Central Excise           MODVAT disallowed        2,74,280
 Central Excise           MODVAT disallowed       14,79,180
 Central Excise           MODVAT disallowed        7,19,511
 Central Excise           MODVAT disallowed       17,37,249
 Central Excise           Stock Variation       6,18,71,454
 Central Excise           CENVAT Utilization      28,26,587
 Central Excise           Stock Variation       7,46,24,640
 Central Excise           ISP cenvat credit 
                          disallowed           10,21,10,684
 Central Excise           ISP cenvat utilized 
                          in existing 
                          disallowed           10,21,10,684
 
 
 Name of the Statute    Period to which    Forum where dispute is pending
                        the amount Relates
 Central Sales Tax      1991-92 to 1995-96  Appeal filed before Karnataka 
                                            Appellate Tribunal
 
 KST & Central Sales    1996-97 From 1997-98 
 Tax                    to 2000-01          Supreme Court. Appeal filed 
                                            with the Tribunal and 
                                            Commissioner.
 
 Entry Tax            1994-95              Appellate Tribunal, Bangalore.
 Entry Tax            1995-96              Appellate Tribunal, Bangalore.
 Entry Tax            1996-97              Appellate Tribunal, Bangalore.
 Income Tax           A.Y.1997-98          Income Tax Appellate Tribunal 
                                           Bangalore.
 Sales Tax            1990-91              Special Appellate Tribunal 
                                           Chennai
 Central Excise       2002-03              CESTAT, Chennai
 Central Excise          1998              CESTAT,Bangalore
 Central Excise        Sep 93              CEGAT, Bangalore.
 Central Excise      April 02              CEGAT, Chennai
 Central Excise        Sep 02              Commissioner (Appeals), 
 Central Excise                            Mangalore.
 Central Excise       July 02              Commissioner of CE, Belgaum
 Central Excise       2000-01              Commissioner of CE, Belgaum
 Central Excise       2001-02              CESTAT, Chennai.
 Central Excise          2002              CESTAT, Bangalore
 Central Excise       2008-09              CESTAT, Bangalore
 Central Excise       2008-09              CESTAT, Bangalore
 
 10. In our Opinion, the accumulated losses of the company at the end of
 the financial year have eroded the entire net worth of the company.
 Further, the company has incurred cash loss in the financial year
 covered by our audit report and the immediately preceding financial
 year.
 
 11.  In our opinion and according to the information and explanations
 given to us, the company has defaulted in repayment of dues to
 financial institutions and banks. The details of defaults are as
 follows:
 
 SI.No    BANKS                  Period of default      Rs. in lacs
 
         WORKING CAPITAL LOANS
 
 1       HDFC                    7 years 3 months          5452
 2       Dhanlakshmi Bank Ltd    9 years                   6983  
 3       Central Bank of India   9 years 6 months          5938
 4       Indian Bank             9 years 7 months          3567
 5.      LOAN PORTFOLIO TAKEN
         OVER BY ARCIL
 
 a.      State Bank of India     7 years 5 months          8642
 b.      ICICI Bank              8years 4 months           8247
 c.      Punjab National Bank    8 years                   5834
 d.    The South Indian Bank Ltd.8 years 9 months          8821
 e.    State Bank of Travancore  7 years 5 months          4369
 f.    State Bank of Mysore      8 years 9 months          3306
 g.    DenaBank                  9 years 6 months          3217 
 h.    Bank of Maharashtra       7 years 10 months         5750 
 i.    Bharath Overseas Bank     8 years 8 months          4072
 
       TERM LOANS
 1     IDBI                      9 years                   1507
 2     IIBI                      9 years                     20
 
       LOAN PORT FOLIO TAKEN OVER BY ARCIL
 a.    ICICI                     9 years                   1462
 
       TERM LOANS (ISP)
 1     IDBI                      8 years 6 months         46659
 2     IFCI                      8 years 6 months         26991
 3     IIBI                      8 years 6 months          4987
 4     Exim Bank                 6 years 6 months          6703 
 
       LEASE FINANCE
 
 5     CanaraBank                10 years 3 months         3688
 6     KSFC                      10 years 3 months        10043
 
       LOAN PORT FOLIO TAKEN OVER BY ARCIL
 a.    ICICI                     7 years 6 months         34217
 b.    State Bank India          5 years 6 months         24997
 c.    Punjab National Bank      5 years 6 months          9786
 d.    State Bank of Mysore      6 years 6 months          4684
 e.    DenaBank                  6 years 6 months          9190
 f.    Bank of Maharashtra       6 years 6 months          7421
 
 12.  The Company has not granted loans or advances on the basis of
 security by way of pledge of Shares, Debentures and other  Seewities
 
 13.In our Oprntofti the company is notachit fund or a hidhi or mutual
 benefitfund/society. therefore, the provisions of clause 4(xiii) of the
 Companies (Auditors Report) Order, 2003 are not applicable tothe
 company.
 
 14.  In our opinion, the company is not dealing or trading in shares,
 Securities, Debentures and other Investments. Accordingly, the
 provisions of clause 4(xiv) of the Companies (Auditors Report) Order,
 2003 are not applicable to the company.
 
 15., The company has not given any guarantee for loans taken by others.
 
 16.  In our opinion, the company has not raised any term loans during
 the year under audit..
 
 17.  According to the information and explanations given to us and on
 the basis of overall examination of the balance sheet of the company,
 we report that no funds raised on short term basis have been used for
 long term investment.
 
 18.  According to the information and explanation given to us, during
 the year under ouraudit the company has not made any preferential
 allotment of equity shares to the parties listed in the registered
 maintained u/s. 301 of the Companies Act.
 
 19.  According to the information and explanations given to us, during
 the year under audit the company has not issued any debentures.
 
 20.  According to the information and explanations given to us, during
 the year under audit, the company has not raised any money by way of
 public issue.
 
 21.  According to the information and explanations given to us, no
 fraud on or by the company has been noticed or reported during the
 course of our audit.
 
                                 for Manohar Chowdhry & Associates
                                             Chartered Accountants,
 
                                           (CA. ASHOK KUMAR DODDI) 
 Place :Bangalore                                          Partner
 Date :31st August, 2009                               M.NO.217909