Power Finance Corporation

1.  We have audited the attached Balance Sheet of Power Finance
 Corporation Limited, New Delhi as at 31st March, 2008 and also the
 Profit and Loss Account and the Cash Flow Statement for the period
 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 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 from material misstatement. 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 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 (Auditors’ Report) Order, 2003, issued
 by the Central Government of India in terms of sub-section (4 A) 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 above, we
 report that;
 
 i) As regards the liability of Rs.1066.75 crores, shown as “Interest
 Subsidy Fund from GOI” in the Balance Sheet, received under Accelerated
 Generation and Supply Program (AG&SP) Scheme from Ministry of Power,
 Government of India, the corporation estimated the net excess amount of
 Rs. 253.47 crores and Rs. 52.49 crores as at 31/03/2008 for IXth & Xth
 plan respectively.This net excess amount is worked out on overall basis
 & not on individual basis & may vary due to change in assumptions, if
 any during the projected period such as changes in moratorium period,
 repayment period, loan restructuring, pre payment, interest rate reset
 etc. Hence the impact of this excess, if any, could not be ascertained
 as such not commented upon. (Refer Note No 16 of Schedule 18).
 
 ii) Some of the balances shown under loans, advances and other
 debits/credits in so far as these have since not been confirmed,
 realised, discharged or adjusted are subject to reconciliation. (Refer
 Note No 28 of Schedule 18).
 
 The effect of item Nos. (i) and (ii) above on the Company’s accounts is
 not ascertainable for the reasons explained in the respective notes.
 
 5.  Attention is drawn to the following Notes in Schedule 18:- (a) Note
 No 2 regarding variation in accepted principal outstanding of a
 borrower consequent upon transfer of outstanding as per State Govt.
 Order.
 
 (b) Note No 3 regarding a Project under Implementation, which has been
 classified as standard asset in terms of RBI Circular No.
 DBS.FID.No.C-11/01.02.00/2001-02 dated 1.02.2002 read with D.O. letter
 DBS.FID No.1285/01.02.00/ 2001-02S dated 14.05.2002 though the borrower
 had not cleared its entire dues since 23.09.2000 and the above
 dispensation is available upto June, 2008 only.
 
 (c) Note No 4 regarding an amount of Rs. 25.09 crores received from a
 borrower and kept as a liability pending Final approval of a
 Restructuring proposal for which “In Principle” approval was given with
 effect from 15th July, 2004 and subsequently approved w.e.f. 15th Oct.
 2004.Moreover, the interest has been reset @ 16.84% w.e.f. 15th Oct.
 2007 as the party’s request to fix the rate @10.5% is still pending.
 
 (d) Note No.5 regarding accounting of Income of Rs.18.97 crores towards
 interest recoverable from a party on a loan rescheduled earlier on
 settlement of a long outstanding dispute though a sum of Rs 1crore was
 received before the year end.
 
 (e) Note No,7(iv) regarding defaults of Rs. 93.93 Crores by two parties
 in refunding the Interest Subsidy under AG & SP Scheme which would be
 payable to the Ministry of Power on receipt.
 
 (f) Note No.7(v) regarding classification of two rescheduled gas based
 projects having an aggregate outstanding of Rs. 587.32 crores which
 have been classified as standard asset despite of uncertainties about
 allocation of gas to these projects.
 
 (g) Note No. 11(b)(ii) regarding certain issues with regard to Sasan
 UMPP which had arisen subsequent to issuance of Letter of Indent and
 which have been contractually and legally examined but responsibility
 fixation is under examination and according to the management these
 would not have any adverse impact on the accounts of the company.
 
 (h) Note No. 11(b) (v) regarding amount of Rs.0.45 crores recoverable
 brom Bokaro Kodarma Maithon Tr. Co. Ltd.  consequent upon the decision
 of the MOP to transfer the project from PFC to Power Grid Corporation
 Ltd.
 
 (i) Note No. 15(a)(i) regarding non acceptance of commercial terms
 after the expiry of the Secondary lease period.
 
 (j) Note No. 20 regarding the suggestion of the Expert Advisory
 Committee of the ICAI suggesting the rectification by creating the
 Deferred Tax Liability on “Special Reserve created and maintained”
 under section 36(1)(viii) of the Income Tax Act, 1961 for the period
 2001-02 to 2003-04 , by charging the Profit & Loss Account (Prior
 Period Items) and crediting the Reserves by Rs. 539.39 crores, has not
 been carried out by the company pending the decision of the ICAI on the
 company’s request for total withdrawal of provision of AS-22 regarding
 creation of Deferred Tax Liability for the Special Reserve Created and
 Maintained under section 36(1)(viii) of the Income Tax Act,1961.
 Pending the decision of the ICAI ,the company has not given effect to
 the suggestion of the Expert Advisory Committee of the ICAI.
 
 (k) Note No. 27 regarding actuarial valuation of employees benefits on
 the basis of present emoluments without considering the expected wage
 revision.
 
 (l) Appropriation of recoveries in respect of some accounts on the
 basis of original agreements as against specific instructions of the
 borrowers.
 
 Further to above:
 
 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
 those books;
 
 c) The Balance Sheet, Profit & Loss Account and Cash Flow Statement
 dealt with by this report are in agreement with the books of account;
 
 d) In our opinion, the Balance Sheet, Profit & Loss Account 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.
 
 e) The requirements of clause (g) of sub-section (1) of section 274 of
 the Companies Act, 1956 relating to disqualification of directors are
 not applicable to the Company, being a Government Company, in terms of
 Notification No.G.S.R.829(E), dated 21.10.2003 issued by Ministry of
 Finance, Department of Company Affairs.
 
 7. Subject to our observations as stated in para 4 and read with other
 items on which attention is drawn vide para 5 above, in our opinion and
 to the best of our information and according to the explanations given
 to us, the said Accounts read with Accounting Policies and Notes
 thereon in Schedule No.18, 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 case of Balance Sheet, of the state of affairs of the Company as
 at 31st March,2008 and
 
 b) In case of Profit & Loss Account, of the Profit of the Company for
 the period ended on that date.
 
 c) In case of the Cash Flow Statement, of the cash flows for the period
 ended on that date.
 
 ANNEXURE TO AUDITORS’ REPORT
 
 (Referred to in Paragraph (3) of our report of even date)
 
 1.  (a) The Company has maintained proper records showing full
 particulars including quantitative details and situation of fixed
 assets on the basis of available information.
 
 (b) The management is carrying out the physical verification of fixed
 assets at the year end in a phased manner. In our opinion, the
 frequency of physical verification is reasonable having regard to the
 size of the company and nature of its assets.
 
 (c) In our opinion, the company has not disposed of substantial part of
 fixed assets during the year and hence the going concern status of the
 company is not affected.
 
 2.  As the Company has not purchased/sold goods during the year nor are
 there any stocks, requirement of reporting on physical verification of
 stocks or maintenance of inventory records, in our opinion, does not
 arise.
 
 3.  The Company has neither taken nor granted any loans or advances in
 the nature of loan to parties covered in the register maintained under
 Section 301 of the Companies Act, 1956. Hence, the question of
 reporting whether the terms and conditions of such loans are prudential
 to the interest of the company, whether reasonable steps for
 recovery/repayment of overdues on such loans are taken, does not arise.
 
 4.  Having regard to the nature of company’s business and based on our
 scrutiny of company’s records and the information and explanations
 received by us, we report that company’s activities do not include
 purchase of inventory and sale of goods. In 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 regards to purchase of fixed assets.
 During the course of our audit, we have not observed any continuing
 failure to correct major weaknesses in internal controls with regard to
 purchase of fixed assets. However, internal controls with regard to
 awarding of Consultancy assignments by the corporation were found to be
 lacking.
 
 5.  Based on the audit procedures applied by us and the information and
 explanation provided by the management, we are of the opinion that
 there were no transaction during the year that need to be entered in
 the register maintained under Section 301 of the Companies Act, 1956.
 
 6.  Based on our scrutiny of the company’s records and according to the
 information and explanations provided by the management, in our
 opinion, the company has not accepted any deposits from the public
 within the meaning of the Rule 2(b) of the Companies (Acceptance of
 Deposits) Rules, 1975.
 
 7.  In our opinion and according to the information and explanations
 given to us, the company has an internal audit system, which is
 commensurate with the size and nature of business of the company.
 
 8.  The company is non-banking financial company, the provisions under
 Clause (d) of sub-section (1) of Section 209 of the Companies Act,
 pertaining to maintenance of cost records, does not apply.
 
 9.  In respect of statutory dues, on the basis of information and
 explanations given to us by the company, we report that:
 
 (a) The company is generally regular in depositing undisputed statutory
 dues, with the appropriate authorities, including Provident Fund, ESI,
 Income-tax, Wealth-tax, etc. as applicable to it and there are no
 undisputed amounts payable in respect of aforesaid dues outstanding for
 a period of more than six months as on 31st March, 2008.
 
 (b) According to the records of the company, there are no dues of
 income tax/wealth tax/service tax etc., which have not been deposited
 by the company on account of any dispute. Except the unpaid demand of
 Income Tax of Rs.5.31 crores for the assessment Year 2006-07for which
 stay application has been moved.
 
 10.  The company has no accumulated losses and has not incurred any
 cash losses during the financial year covered by our audit or in the
 immediately preceding financial year.
 
 11.  Based on our audit procedures and according to the information and
 explanations given to us, we are of the opinion that the company has
 not defaulted in repayment of dues to financial institutions, banks or
 debenture holders.
 
 12.  a) The company has maintained adequate documents and records in
 respect of loans granted by it to various State Electricity Boards,
 State Generation Corporations, State Governments, CPSUs and Independent
 Power Producers.
 
 b) In one ‘finance lease’ transaction, the company had purchased and
 leased back the assets amounting to Rs.27999.22 lacs from APSEB (now
 APGENCO) However, sale-deed between PFC and APSEB was executed on
 14.02.1997 for part of the amount of Rs.26410.33 lacs and the execution
 of supplementary sale-deed for the balance amount of Rs.1588.89 lacs is
 still pending. However, the lease has since expired on 31st March,2007
 and the commercial terms for continued deployment of these assets are
 yet to be accepted by the lessee.(Refer Note No.15(a)(i) )
 
 13.  The company is neither a chit fund nor a nidhi/mutual benefit
 fund/society. Hence, the requirements of clause 4(xiii) of the ‘Order’
 do not apply to the company.
 
 14.  As per records of the company and according to the information and
 explanation provided by the management, the company has been
 maintaining proper records of the transactions and contracts for the
 dealings or trading in shares, securities, debentures and other
 investments.
 
 15.  The company has given guarantees in connection with loans taken by
 others from banks or financial institutions. In our opinion, the terms
 and conditions on the guarantees given are not prejudicial to the
 interest of the company.
 
 16.  The term loans obtained by the company have generally been
 utilized for the purpose for which they were raised.
 
 17.  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 by the company.
 
 18.  According to the records of the company and 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.
 
 19.  According to the records of the company, all the debentures issued
 by the company are unsecured bonds and, hence creation of securities is
 not required by the terms of issue of debentures.
 
 20.  The company has disclosed the end use of the money raised in
 Public issue and the same has been verified and found to be correct.
 
 21.  Based upon the audit procedures performed and information and
 explanations given by the management, we report that no fraud on or by
 the company has been noticed or reported during the course of our
 audit.
 
                                                  For Bansal Sinha & Co.
                                                   Chartered Accountants
 
 PLACE : Bangalore                                          Hari Ubriani
 DATE  : 10th May, 2008                                          Partner
                                                        (Mem. No. 84437)