1.  We have audited the attached Balance Sheet of Bharat Heavy
 Electricals Limited as at 31st March, 2012, the Statement of Profit and
 Loss and also the Cash Flow Statement for the year ended on that date
 annexed thereto. These financial statements are the responsibility of
 the Company''s management. Our responsibility is to express an opinion
 on these financial statements based on our audit.
 
 2.  We conducted our audit in accordance with the 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 misstatements. An audit
 includes examining, on a test basis, evidence 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
 statement presentation. We believe that our audit provides a reasonable
 basis for our opinion.
 
 3.  As required by the Companies (Auditor''s Report) Order, 2003, as
 amended, 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.
 
 4.  Further to our comments in the Annexure referred to in paragraph 3
 above, we report that:
 
 (a) We have obtained all the information and explanations which to the
 best of our knowledge and belief were necessary for the purposes of our
 audit.
 
 (b) In our opinion, proper books of account as required by law have
 been kept by the Company so far as appears from our examination of the
 books and proper returns adequate for the purposes of our audit have
 been received from the branches not visited by us.
 
 (c) The Branch Auditor''s Reports have been furnished to us and have
 been appropriately dealt with while preparing our report.
 
 (d) The Balance Sheet, the Statement of Profit and Loss and Cash Flow
 Statement dealt with by this report are in agreement with the books of
 account and with the audited returns received from the branches.
 
 (e) In our opinion, the Balance Sheet, the Statement of Profit and Loss
 and Cash Flow Statement dealt with by this report comply with the
 Accounting Standards referred to in sub Section (3C) of Section 211 of
 the Companies Act, 1956.
 
 (f) In terms of Notification No. GSR 829(E) dated 21.10.2003 issued by
 the Department of Company Affairs, Government of India, the provisions
 of Section 274(1)(g) of the Companies Act, 1956 are not applicable to
 the Company.
 
 (g) In our opinion and to the best of our information and according to
 the explanations given to us, the said accounts read together with the
 Significant Accounting Policies and Notes thereon, 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:
 
 (i) In the case of the Balance Sheet, of the state of affairs of the
 Company as at 31st March, 2012;
 
 (ii) In the case of the Statement of Profit & Loss of the profit for
 the year ended on that date; and
 
 (iii) In the case of Cash Flow Statement of the cash flows for the year
 ended on that date.
 
 Annexure to the Auditors'' Report
 
 (Referred to in paragraph 3 of our report of even date on the accounts
 of Bharat Heavy Electricals Limited for the year ended 31st March,
 2012)
 
 i) (a) The Company has maintained proper records showing full
 particulars including quantitative details and situation of its fixed
 assets.
 
 (b) According to the information and explanations given to us, physical
 verification of fixed assets is being conducted in a phased manner by
 the management under a programme designed to cover all the fixed assets
 over a period of three years, which, in our opinion, is reasonable
 having regard to the size of the Company and nature of its business and
 no material discrepancies were noticed on such verification to the
 extent verification was made during the year. In respect of 65
 locomotives given to Indian Railways on lease instead of physical
 verification a certificate confirming physical possession of these
 locomotives has been obtained from Indian Railways as per the lease
 agreement.
 
 (c) According to the information and explanations given to us, the
 Company has not disposed off any substantial part of its fixed assets
 during the year.
 
 ii) (a) As explained to us physical verification of inventory has been
 conducted by the management under Perpetual Inventory Programme at
 regular intervals during the year except for stock of work in progress
 and finished goods in few units where these are verified at the year
 end with reference to the inspection reports and production reports of
 the Production Planning Department of such units. In regard to stocks
 lying with contractors/fabricators and other parties, confirmations
 were received in a few cases only. In our opinion the frequency of
 verification is reasonable.
 
 (b) In our opinion and according to the information and explanations
 given to us, the procedures of physical verification of inventories
 followed by the management are reasonable and adequate in relation to
 the size of the Company and the nature of its business.
 
 (c) In our opinion and according to the information and explanations
 given to us, the Company has maintained proper records of its
 inventories and discrepancies noticed on physical verification of
 inventories with regard to the size and nature of operations of the
 Company were not material and have been properly dealt with in the
 books of account.
 
 iii) (a) According to the information given to us, the Company has not
 granted any loans, secured or unsecured to companies, firms and other
 parties covered in the register maintained under section 301 of the
 Companies Act, 1956. Therefore clauses (iii)(b) to (iii)(d) of
 Paragraph 4 of the Order are not applicable to the Company.
 
 (b) According to the information given to us, the Company has not taken
 any loans, secured or unsecured, from companies, firms or other parties
 covered in the register maintained under Section 301 of the Companies
 Act, 1956. Therefore clauses (iii) (f) and (iii) (g) of Paragraph 4
 Order are not applicable to the Company.
 
 iv) In our opinion and according to the information and explanations
 given to us, 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 inventory and fixed assets and for the sale of goods and
 services. Further on the basis of our examination of the books and
 records of the Company, and according to the information and
 explanations given to us, we have neither come across nor have been
 informed of any continuing failure to correct major weaknesses in the
 internal control systems.
 
 v) According to the information and explanations given to us, we are of
 the opinion that during the year there are no contracts and
 arrangements that need to be entered in the register maintained under
 Section 301 of the Companies Act, 1956. Therefore clause (v) (b) of
 Paragraph 4 of the Order is not applicable to the Company.
 
 vi) According to the information and explanations given to us, the
 Company has not accepted any deposits from public during the year
 within the meaning of sections 58A and 58AA or any other relevant
 provisions of the Companies Act, 1956 and the Companies (Acceptance of
 Deposits) Rules 1975.
 
 vii) According to the information and explanations given to us, the
 Company has an internal audit department responsible for carrying out
 internal audit of various sections at head office, regional offices and
 units at periodical intervals as per the approved audit plan. In our
 opinion, the internal audit system of the Company is generally
 commensurate with size and nature of its business.
 
 viii) We have broadly reviewed the books of account and records
 maintained by the Company pursuant to the Companies (Cost Accounting
 Records) Rules 2011 prescribed by the Central Government under section
 209(1)(d) of the Companies Act, 1956 and are of the opinion that prima
 facie the prescribed accounts and records have been made and
 maintained. We have, however, not made a detailed examination of the
 cost records with a view to determine whether they are accurate &
 complete.
 
 ix (a) According to the information and explanations given to us, in
 our opinion, the Company is generally regular in depositing with
 appropriate authorities undisputed statutory dues including Provident
 Fund, Investor Education and Protection Fund, Employees State
 Insurance, Income Tax, Sales Tax, Wealth Tax, Service Tax, Excise Duty,
 Customs Duty, Cess and any other material statutory dues as applicable
 to it.
 
 (b) According to the information and explanations given to us, no
 undisputed amounts payable in respect of Provident Fund, Investor
 Education and Protection Fund, Employees State Insurance, Income Tax,
 Sales Tax, Wealth Tax, Service Tax, Excise Duty, Customs Duty, Cess and
 other statutory dues outstanding as at 31st March, 2012 for a period of
 more than six months from the date they become payable except in the
 case of Libya project, where as per the agreement, the income tax
 liability has to be discharged by the customer, directly to the Libyan
 Government. The amount outstanding for more than six months is r 31.94
 Crore pertaining to financial year 2008-09 & 2009-10.
 
 (c) According to the information and explanations given to us, the
 particulars of Sales Tax, Income Tax, Excise Duty, Service Tax, Custom
 Duty and Cess which have not been deposited on account of dispute are
 as under:
 
 Sl.    Name of the Statute           Nature of            Pending Amount
 No.                                  the Dues            (Rs in Crore)
 
 1      Central Sales Tax Act, Work   Sales Tax,                25.28 
        Contract Tax Act, Lease       Entry Tax                258.23 
        Tax, Entry Tax Act and        & Work
        Sales Tax Act of various      Contract                 218.44
        States Tax                                             119.75
 
                                                                 3.43
 
                                                               107.57
 
 2      Income Tax Act, 1961          Income Tax                 3.18
 
                                                                26.50
 
                                                                15.52
 
 
 3      Central Excise Act, 1944      Excise Duty               30.20
 
                                                                72.96
 
                                                               174.25
 
                                                                42.88
 
 4      Service Tax under the         Service Tax               24.73
        Finance Act, 1994 
                                                                 4.53
 
                                                                97.21
 
                                                                 5.70
 
 Name of the Statute           Amount paid   Forum where dispute 
                                             is pending 
                               under 
                               protest (Rs.
                               in Crore)
 
 Central Sales Tax Act, work
 Contract Tax Act, Lease
 Tax, Entry Tax Act and 
 Sales Tax Act of Various
 States                            5.55      Assessing Officer
 
                                  11.12      Dy. Commissioner/Jt. 
                                             Commissioner Commissioner
                                             Appeals
 
                                  29.11      Appellate Tribunal
 
                                  43.47      High Court
 
                                   3.38      Supreme Court
 
                                   5.76      Various Appellate 
                                             Authorities
 
 Income Tax Act,1961                  -      High Court
 
                                      -      Appellate Tribunal
 
                                      -      Commissioner (Appeals)
 
 Central Excise Act,1944           0.06      Assessing Officer
 
                                   0.40      Commissioner (Appeals)
 
                                   3.06      Appellate Tribunal
 
                                   4.37      High Court
                                             Various Appellate 
                                             Authorities
 
 Service Tax Under the
 Finance Act,1994                     -      Commissioner (Appeals)
 
                                      -      Appellate Tribunal
 
                                      -      Assessing Officer
 
                                      -      High Court
 
 x) The Company has no accumulated losses as at 31st March, 2012 and has
 not incurred any cash losses during the financial year covered by our
 audit and the immediately preceding financial year.
 
 xi) According to the records of the Company examined by us and the
 information and explanations given to us, the Company has not defaulted
 in repayment of dues to financial institutions, banks or debenture
 holders.
 
 xii) According to the information and explanations given to us, the
 Company has not granted any loans and advances on the basis of security
 by way of pledge of shares, debentures and other securities.
 
 xiii) In our opinion, the Company is not a chit fund or a Nidhi/mutual
 benefit fund/ society. Therefore, provisions of clause (xiv) of
 Paragraph 4 of the Order are not applicable to the Company.
 
 xiv) In our opinion and according to the information and explanations
 given to us, the Company is not dealing or trading in shares,
 securities, debentures and other investments. Accordingly, the
 provisions of clause (xiv) of the Paragraph 4 of the Order are not
 applicable to the Company.
 
 xv) In our opinion and according to the information and explanations
 given to us, the Company has not given guarantees for loans taken by
 others from banks or financial institutions.
 
 xvi) As per information and explanations given to us, the Company has
 not obtained any term loan during the year.
 
 xvii) According to the information and explanations given to us and on
 an 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.
 
 xviii) According to the information and explanations given to us, the
 Company has not made any preferential allotment of shares to parties
 and companies covered in the register maintained under section 301 of
 the Companies Act, 1956.
 
 xix) In our opinion, the Company has not issued any debentures during
 the year. Therefore, provisions of clause (xix) of Paragraph 4 of the
 Order are not applicable to the Company.
 
 xx) The Company has not raised any money by way of public issue during
 the year. Therefore, provisions of clause (xx) of Paragraph 4 of the
 Order are not applicable to the Company.
 
 xxi) During the course of our examination of the books and records of
 the Company, carried out in accordance with the generally accepted
 auditing practices in India, and according to the information and
 explanations given to us, no fraud on or by the Company has been
 noticed or reported during the year.
 
                   For Gandhi Minocha & Co.    For S.N. Dhawan & Co.
 
                   Chartered Accountants       Chartered Accountants
 
                     FRN 00458N                   FRN 000050N
 
                   (Bhupinder Singh)             (Suresh Seth)
 
                     M.No. 092867                 M.No. 010577
 
 Date: May 23, 2012
 
 Place: New Delhi