Oil and Natural Gas Corporation

1.  We have audited the attached Balance Sheet of OIL AND NATURAL GAS
 CORPORATION LIMITED (the Company) as at 31 March, 2008, the Profit and
 Loss Account and also the Cash Flow Statement for the year ended on
 that date, annexed thereto in which are incorporated the Companys
 share in the total value of assets, liabilities, expenditure, income
 and net profit of 103 blocks under New Exploration Licensing Policy
 (NELPs) / Joint Venture (JVs) accounts for exploration and production
 out of which 91 NELPs /JVs accounts have been certified by other firms
 of Chartered Accountants and remaining 12 NELPs/JVs as certified by the
 management (Refer Note 21.1.1 to 21.1.4 of Schedule 28 of the financial
 statements). 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, evidence supporting the amount 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.  We have placed reliance on technical/commercial evaluation by the
 management in respect of categorization of wells as exploratory,
 development and producing, allocation of cost incurred on them,
 depletion of producing properties on the basis of the proved developed
 hydrocarbons reserves, liability for abandonment costs, liabilities
 under NELP for under performance against agreed Minimum Work Programme
 and allocation of depreciation on process platforms to transportation
 and facilities.
 
 4.  As required by the Statement on the Companies (Auditors Report)
 Order, 2003 (as amended) issued by the Central Government of India in
 terms of Section 227(4A) of the Companies Act, 1956, we enclose in the
 Annexure (read with paragraph 1 above) a statement on the matters
 specified in paragraph 4 and 5 of the said Order.
 
 5.  Further to our comments referred to in paragraph 4 above we report
 as follows:
 
 5.1.  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;
 
 5.2.  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;
 
 5.3.  The Balance Sheet, Profit and Loss Account and the Cash Flow
 Statement dealt with by this report are in agreement with the books of
 account;
 
 5.4.  In our opinion, the Profit and Loss Account, the Balance Sheet
 and the Cash Flow Statement comply with the accounting standards
 referred to in sub-section (3C) of Section 211 of the Companies Act,
 1956.
 
 5.5.  Disclosure in terms of clause (g) of sub-section (1) of section
 274 of the Companies Act, 1956 is not required as per notification
 number GSR 829(E) dated 21st October, 2003 issued by the Department of
 Company Affairs.
 
 5.6.  In our opinion and to the best of our information and according
 to the explanations given to us, the said accounts read with notes to
 accounts and in particular Note 2 of Schedule 28 in respect of
 recognition of Sales Revenue in respect of crude oil and natural gas,
 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 the Balance Sheet, of the state of affairs of the
 Company as at 31st March, 2008;
 
 b) in the case of the Profit & Loss Account, of the profit of the
 Company for the year ended on that date; and
 
 c) in the case of the Cash Flow Statement, of the cash flows of the
 Company for the year ended on that date.
 
 Annexure to the auditors report
 
 (Referred to in paragraph A of our report of even date)
 
 1.  a) The Company has generally maintained proper records showing full
 particulars including quantitative details and situation of fixed
 assets.
 
 b) We are informed that the fixed assets other than those which are
 underground/ submerged/ under joint venture, having substantial value
 have been physically verified by the management in phased manner. The
 reconciliation of physically verified assets with the book records is
 in progress. Discrepancies noticed on physical verification and
 consequential adjustments with regard to discrepancies are carried out
 on completion of reconciliation. According to the information and
 explanations given by the management, in our opinion, the same is not
 material.
 
 c) The Company has not disposed off substantial parts of fixed assets
 during the year.
 
 2.  a) The inventory has been physically verified (excluding inventory
 lying with third parties, at some of the site- locations, inventory
 with joint ventures and material in transit) during the year by the
 management. In our opinion, the frequency of verification is
 reasonable.
 
 b) The procedures of physical verification of inventory followed by the
 management to the extent verified were generally reasonable and
 adequate in relation to the size of the Company and nature of its
 business.
 
 c) The Company has generally maintained proper records of inventory
 except for recording of consumption at a few of its site- locations.
 The discrepancies noticed on verification between the physical stock
 and book records were not material having regard to the size of the
 operations of the Company. In case where discrepancies noticed on
 physical verification have been identified with inventory records,
 necessary adjustments have been carried out in the books. In respect of
 those cases where the reconciliation is not complete, the management
 has stated that the same would be adjusted in due course.
 
 3.  The Company has not taken nor granted any loans, secured or
 unsecured from companies, firms or other parties covered in the
 register maintained under section 301 of the Companies Act, 1956.
 Accordingly clauses 4 (iii)(a), (b) (c) and (d) of the Companies
 (Auditors Report) Order, 2003 are not applicable to the Company.
 
 4.  In our opinion, and according to the information and explanations
 given to us, the internal control procedures are generally adequate and
 commensurate with the size of the Company and the nature of its
 business with regard to purchases of inventory, fixed assets and sale
 of goods. During the course of our audit we have not observed any
 continuing failure to correct major weakness in internal controls.
 
 5.  a) According to the information and explanations given to us, there
 is no contract or arrangement referred to in section 301 of the
 Companies Act, which are required to be entered in the register
 maintained under the section.
 
 b) Accordingly, the provisions of clause 4 v (b) of the Companies
 (Auditors Report) Order, 2003 is not applicable to the Company.
 
 6.  The Company has not accepted any deposits from the public.
 
 7.  In our opinion, the Company has an internal audit system
 commensurate with the size and nature of its business.
 
 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 Rule made by the Central Government for the maintenance
 of cost records under section 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.
 
 9.  a) 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, Service Tax, Wealth Tax, Customs Duty, Excise
 Duty, Cess and other material statutory dues applicable to it. There
 are no such material outstanding statutory dues accrued in accounts as
 of the last date of the financial year concerned for a period of more
 than six months from the date they became payable.
 
 b) According to the information and explanations given to us, the
 disputed statutory dues are as under:
 
 Name of the statute           Nature of the dues          Amount
                                                          (Rs.in
                                                           million)
 
 Income tax Act, 1961          Income tax                  38,971.81
 
 Central Excise Act, 1944      Central Excise duty/         3,195.75
                               Interest/Penalty
 
 The Customs Act, 1962         Customs duty/                6,622.59
                               Penalty/Interest
 
 Oilfields (Regulation &       Royalty/Surface                381.43
 Development Act, 1948)/       rent/lnterest/Penalty
 AP Mines and Geology Act
 
 AP Mineral Bearing Lands      Cess                           726.96
 (Infrastructure) Cess
 
 Oil Industries (Development)  Cess/Interest                    8.93
 Act, 1974
 
 Central Sales Tax Act, 1956   Sales tax/                   2,827.88
 and respective States        Turnover Tax/
 Sales Tax Act                 Penalty/ Interest
 
 Municipal Corporation of      Octroi Duty                     66.89
 Greater Mumbai Act
 (Octroi Rules, 1965)
 
 Assam Specified Land          Tax on Crude oil             1,354.36
 Taxation Act                  and Natural Gas
 
 Period to which      Forum where dispute
 the amount relates   is pending
 (financial year)
 
 1996-2008            ITAT/ CCIT/ CIT(A), High Court
 
 1981-2008            CEGAT/Director of Central Excise/
                      Commisioner/Asst. Comm. of Central Excise
 
 1995-2008            Supreme Court/ High Court/
                      CBEC/Comm. Customs
 
 1992-2008            Director, Mines & Geology/
                      Dept. of Geology and Mining,
                      A. P. High Court
 
 2005-2008            Dept.of Geology & Mining,
                      A. P. High Court
 
 2000-2008            CEGAT/Supdt./Comm.(A)
 
 1977-2008            Supreme Court/High Court/
                      Tribunal/Asst.Comm/Dy.Comm./
                      Suptd. of Taxes/Commercial Tax Officer
 
 1977-2008            Supreme Court
 
 2004-2008            Guwahati High Court
 
 10.  The Company has no accumulated losses at the end of the current
 financial year and has not incurred cash losses either during the year
 or during the immediately preceding financial year.
 
 11.  The Company has not issued any debentures and not defaulted in
 repayment of dues to financial institutions or banks.
 
 12.  In our opinion and as per the information and explanation given by
 the management, the Company has not granted loans and advances on the
 basis of security by way of pledge of shares, debentures and other
 securities.
 
 13.  In our opinion, the Company is not a chit fund or a nidhi mutual
 benefit fund/ society. Accordingly, the provision of clause (xiii) of
 the Companies (Auditors Report) Order, 2003 are not applicable to the
 Company.
 
 14.  In our opinion and as per the information and explanation given by
 the management, the Company is not dealing in or trading in shares,
 securities, debentures and other investments.
 
 15.  In our opinion and as per the information and explanation given by
 the management, the terms and conditions on which the Company has given
 guarantees for loans taken by others from banks or financial
 institutions are not prejudicial to the interest of the Company, since
 these guarantees are given for the subsidiary/ company promoted by the
 Company.
 
 16.  In our opinion, the term loans have been applied for the purpose
 for which they were raised.
 
 17.  On an overall examination of the balance sheet of the Company, we
 report that no funds raised on short terms basis have been used for
 long term investment.
 
 18.  The Company has not issued any preferential allotment of shares
 during the year.
 
 19.  The Company has not issued any debentures during the year.
 
 20.  The Company has not raised any money by way of public issue during
 the year.
 
 21.  According to the information and explanations given to us, no
 fraud on or by the company which is material in amount and nature has
 been noticed or reported during the course of our audit.
 
 For K.K.Soni & Co.        For S.C.Ajmera & Co.    For Singhi & Co.
 Chartered Accountants     Chartered Accountants   Chartered Accountants
 
 K.K. Soni                 Arun Sarupria             Pradeep Kr. Singhi
 Partner (Mem. No. 07737)  Partner (Mem. No. 78398)       Partner 
                                                      (Mem.No. 50773)
 
 For P. S. D. & Associates          For Padmanabhan Ramani & Ramanujam
 Chartered Accountants              Chartered Accountants
 
 D.D. Dadhich                       Padmanabhan R.
 Partner (Mem. No. 71909)           Partner (Mem. No. 13216)
 
 New Delhi 
 25th June, 2008