(1) We have audited the attached Balance Sheet of Daewoo Motors India
limited as at 31st March 2002 and the Profit & Loss Account for the
year ended on that date annexed thereto. These financial statements
are the responsibility of the management of the Company. 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 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 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 Manufacturing and Other Companies (Auditors
Report) Order, 1988 issued by Company Law Board in terms of Section
227(4A) or the Companies Act, 1956, we annex hereto a statement on the
matters specified in paragraphs 4 and 5 of the said Order. (Annexure
I)
(4) 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 except for the information and explanations given in Annexure
II, which were not provided by the company. Subject to above, in our
opinion, proper books of account as required by law have been kept by
the company and the Balance Sheet dealt with by this report are in
agreement with the books of account.
b) Subject to our comments in para d (i) and (xi), in our opinion, the
Balance Sheet and Profit and Loss Account comply with the accounting
standards referred to in sub section (3 C) of section 211 of the
Companies Act, 1956 to the extent applicable.
c) Based on the Written representations received from management, we
report that none of the Directors were disqualified as on March 31,
2002 from being appointed as Director in terms of clause (g) of
sub-section (1) of Section 274 of the Companies Act, 1956.
d) (i) As explained in Note No. 13 of Schedule 12, the Company has
capitalized to fixed assets, the interest incurred on foreign currency
loans taken from financial institutions upto 30th June 1985 for the
entire period of the loans including the period after the date of
commencement of commercial production and premium payable on redemption
of debentures issued against the advance of Rs. 500 Lacs received upto
30 June 1985 has also been capitalized to fixed assets. The aforesaid
method of accounting for interest adopted by the Company is not in
accordance with the method recommended by the Institute of Chartered
Accountants of India. As a result, the depreciation and loss for the
year are overstated by Rs 37.81 lacs and the accumulated debit balance
in the Profit and Loss Account and the net block of fixed assets as at
31st March 2002 are understated and overstated respectively by Rs.
239.88 lacs.
(ii) As explained in Note No. 14 of Schedule 12, the Company has
capitalized to fixed assets, the debenture issue expenses incurred on
the total issue of Rs. 1858 lacs against which advance of Rs. 500 lacs
had been received upto 30 June 1985. This is not in accordance with the
Companys policy of treating such expenditure as deferred revenue
expenditure to be written off over a period of five years. As a result,
the depreciation and loss for the year is overstated by Rs. 3.70 Lacs
and the accumulated debit balance in the Profit & Loss Account and
fixed assets as 31.03.2002 are understated and overstated respectively
by Rs. 27.17 lacs.
(iii) As explained in Note No. 15 of Schedule 12, unutilised MODVAT
balance amounting to Rs. 1120.39 lacs outstanding as at 16th March 1995
lapsed with effect from that date pursuant to a notification issued by
the Central Government. The Companys writ petition in the Supreme
Court challenging the said notifications pending for disposal, however
the Supreme Court had favourably decided a petition in the similar case
of another manufacturer in its favour. Subsequently, the Central Excise
and Salt Act, 1944 has been amended retrospectively with effect from
16th March 1995 as a result of which the said notification lapsing the
MODVAT credit is deemed to have been made under the authority of law.
The Company has been legally advised that should it challenge the
amendment in the Supreme Court, the likelihood of a decision in its
favour is high. Further, we have been informed that the Company along
with other affected manufacturers has represented to the Government of
India to withdraw the amendment and is also contemplating legal action.
In view of the aforesaid, no provision or write off has been made in
this regard. Since the final outcome of this matter is not
ascertainable at this stage, we are unable to express an opinion on the
availability or otherwise of the presently lapsed MODVAT credit.
However, had such provision been made in the accounts, the loss for the
year and the accumulated debit balance in the Profit and Loss Account
as at 31st March 2002 would have been higher by Rs. 640.44 lacs and
the net current assets would have been lower by Rs. 640.44 lacs.
(iv) Reference is drawn to Note No. 19 of Schedule 12 regarding change
in accounting policy of accounting of interest regarding change in
accounting policy of accounting of interest on external commercial
borrowings from Daewoo Corporation and Daewoo Motor Co. Ltd., Korea
which was previously accounted for on accrual basis. During the last
year the Company has decided to account for the interest on external
commercial borrowings on payment basis. As a result, loss for the year
is lower by Rs. 11920.99 lacs and the debit balance in the Profit &
Loss Account as on 31st March 2002 is lower by the same amount.
(v) Reference is drawn to Note No. 20 of Schedule 12 regarding change
in accounting policy of accounting for running royalty from accrual
basis to cash basis in the last year. As a result, loss for the year is
lower by Rs. 301.03 lacs and the debit balance in the Profit & Loss
Account as on 31st March 2002 is lower by 1609.05 lacs.
vi) Reference is drawn to Note No. 21 of Schedule 12 regarding change
in accounting policy of accounting for interest on DA (Supplier Credit)
from accrual basis to cash basis in the last year. As a result, loss
for the year is lower by Rs. 1546.35 Lacs and the debit balance in the
Profit & Loss Account as on 31st March 2002 is lower by the same
amount.
vii) Reference is drawn to Note No. 26 in the Schedule 12, wherein it
is mentioned that there is a difference of Rs. 809.71 lacs between the
interest on secured loans provided by the company and as stated by the
financial institutions in their loan recall letters. Had the company
provided the interest as per loan recall letters of the financial
institutions, the amount of interest on secured loans would be higher
by Rs. 809.71 lacs and the loss for the year would have been higher by
the same amount. The company has not been following the consistent
policy in reconciliation of its loans outstanding with the financial
institutions.
(viii) Of the total Inter Corporate Deposits, no provision has been
made against deposits aggregating to Rs. 358.62 lacs placed with public
limited companies. In addition, an amount of Rs. 4.24 lacs is
recoverable on account of interest on some of the aforesaid deposits.
The recoverability, or otherwise, of these amounts is not determinable.
We are, therefore, unable to express an opinion on recoverability or
otherwise of these deposit, the interest accrued thereon and the
consequential effect, if any, on the loss for the year and the
accumulated debit balance in the Profit and Loss Account as 31st March
2002. However, had the provision been made for such deposits, and
interest accrued thereon, the loss for the year, and the accumulated
losses would have been higher by Rs. 392.86 lacs and net current assets
lower by Rs. 392.86 lacs;
(ix) Out of total loans and advances granted by the company, no
provision has been made against advances of Rs. 140 lacs the
recoverability of which in our opinion is doubtful. However, had the
provision been made for such advances, the loss for the year, and the
accumulated losses would have been higher by Rs. 140 lacs and net
current assets lower by Rs. 140 lacs;
(x) The company has not charged depreciation on its Engine and
Transaxle Plant during the year. Had the company provided depreciation
on all its assets, the loss for the year would have been higher by Rs.
11465.45 lacs and the net block of the fixed assets would have been
lower by the same amount.
(xi) As per Accounting Standard 10 issued by the Institute of Chartered
Accountants of India, items of fixed assets that have been retired from
active use and are held for disposal should be stated at lower of their
net book value and net realizable value and shown separately in the
financial statements. The company has shutdown its Engine and
Transaxle Plant during the year. Since we have no details of the net
realizable value of the Engine and Transaxle Plant, we are unable to
quantify the impact of non-compliance of the above accounting standard.
The net block of the engine and Transaxle plant is Rs. 234384.34 lacs.
as on 31st March 2002.
(xii) Reference is drawn to Note No. 23 of Schedule 12 regarding the
non-fulfillment of obligation for export and the consequent possible
liability towards payment of customs duty, interest and penalty, if
levied. The company has not made any provision in this regard.
Considering the available trends till date and other relevant factors,
we are unable to assess whether the company would be able to meet the
entire future obligations in this regard and, therefore we are unable
to quantify the consequent shortfall/liability on this account, if any.
(xiii) The Company has written off certain assets treating these as
scrap by De-capitalization of Plant & Machinery of Light Commercial
Vehicles Plant (LCVP). The gross block of these assets was originally
shown as Rs. 2660.38 lacs and on inquiry the amount was revised to Rs.
1976.47 lacs. By scrapping the plant the company has incurred an
unusual loss of Rs. 1269.25 lacs. These assets have also been sold as
scrap. However compliance with the requirements of law has not been
observed, such as the company needs the approval of the board as well
as shareholders under section 293 (1)(a) of the Companies Act, 1956.
The accounting practices followed were not in conformity with the usual
practice. We were not provided a copy of accounting manual to verify
the procedure to be adopted for decapitalization and disposal of these
assets. These assets are also subject to charge in respect of the loans
taken from the financial institutions. The requirements of the
Companies Act, as well as loan agreements have not been complied with.
(xiv) Attention is invited to Note No. 25 of Schedule 12, wherein
Daewoo Corporation, Korea had assigned all shares held by it to Daewoo
Motors Co. Ltd., Korea by virtue of which, Daewoo Motors Co. Ltd.,
Korea had now become the holding company. This assignment has not yet
been registered. Further this year and last year we had issued a going
concern questionnaire to the companys management. No reply has been
received for this year. Replies received for last year are reproduced
below:
A 1 & 2. There are recurring losses to the entity. There are adverse
key financial ratios.
As on 31.03.2001 our accumulated losses stand at Rs. 390.53 Cr as
compared with accumulated depreciation on 478.46 Cr. This shows that
predepreciation our accumulated profit is Rs. 87.93 Crores. Current
year loss of Rs. 196.41 Crore has arisen primarily on account of drop
in turnover due to the news of financial difficulties that affected
Daewoo, Korea in mid 200. However with the signing of MOU between
General Motors Corporation and Daewoo, Korea it is expected that the
customer confidence will be restored and we will achieve growing
production volume and turnover.
We are working on a Restructuring package comprising financial supports
including waiver/restructuring/conversion from Daewoo, Korea.
A3. There have been instances, of late of default in payment of
institutional dues.
In the first nine-month of financial year, there have been no defaults
in payments of interest and in the repayment of principal. Defaults
started only in last quarter of financial year due to liquidity crunch.
However, the company is still making part payments and is closely
working with financial institutions on rescheduling/assistance
package. Financial Institutions are positively inclined towards this
proposal.
A4. The company is carrying excessive and obsolete stocks.
As regard the excessive stock we would like to highlight that in the
year 200-01 our inventory level has gone down from 2.46 months in 1999-
00 to 1.99 months in 2000-01. This level of inventory is essential for
supporting market needs & building customer confidence.
Inventory of the company is not obsolete and is usable for existing and
proposed models.
A5 What are the terms of carrying out transactions with GM. Will they
not be less favourable than what they are now.
As part of MOU between GM and Daewoo, Korea Chownwon plant has been
taken over by GM, which is the main source of supply for CKD, parts and
materials to DMIL. This will ensure continuity and viability of
supplies of components/materials to DMIL. GM has also agreed for
supplies of technology/parts/CKD to us.
B1. There has been loss of key management and staff.
The company is fully equipped with quality manpower to surmount the
challenging being faced by the company. All the key positions are held
by professionals having requisite quality and international experience.
Certain reduction in manpower has been made with conscious efforts for
rightsizing the organisation strength.
B2. The company is dependent on Korea for its supplies. What is the
assurance that the raw materials and spares would be available to the
company so that production of the car is not affected? Will GM honour
the commitments of erstwhile Korean Company
Please refer to our observation at A.5 above.
C1. What are the conditions that led to closure of the engine and
transaxle plant? Have all the legal issues regarding closure and
employees dues etc. have been settled. How much the company wishes to
values its investment of around Rs. 2200 crores in the ETA plant as on
date. How the short fall is to be provided.
The decline in export demand has resulted in closure of engine & TA
plant. All legal issues regarding closure and employees dues has been
settled with necessary approvals from appropriate Government
authorities. The company is exploring options including sale of ETA
plant and negotiation in this regard are on with respective parties.
C2. The company has considerable export obligations to fulfil
Non-fulfillment of the export obligations would involve stringent
financial pressure on the company. In the current scenario the
fulfilment of export obligations looks difficult by Aug 2003.
The export obligation is excessive. In view of the India becoming the
member of WTO and also having regard to liberalization measures taken
by the government. We hope that the Govt. will appreciate real concern
of the company and allow either further extension or reduction in
export obligations. In the past also Govt. has extended time for
fulfillment of export obligations, which reflects Govt.s objectivity
and concern on the subject.
The company would have turned a potentially sick company had the
accounts been made on accrual basis.
Accounts have been made up on accrual basis except for interest and
royalty to Korea. Rationale behind adopting cash basis for these items
is:
a. No interest has been ever paid or demanded in the past.
b. In the past interest has been waived.
c. The company is vigorously following up for waivers, which has been
delayed due to current restructuring going on in Korea.
We are hopeful forgetting these waivers in due course.
We are strongly of the opinion that accounting these items on cash
basis will be more reflective of true and fair view of the company
financial position.
What are the terms in the agreement with GM for Upgradation of
technology so that the cars of company do not become obsolete?
Please refer to our observation at B2 above.
Whether the terms of the loans from the parent company regarding
repayment of interest and principal etc. would now be strictly enforced
by the new company.
In the current scenario, loans and investments by Daewoo Korea to/in
DMIL have not been taken over by GM. DMILs restructuring effort are
being considered by Daewoo Korea and are expected to be fructified in
near future.
D1. What are the management plants to mitigate the hardships faced by
the company. What are the chances of success of such a plan?
The Company is working vigorously on restructuring/rehabilitation
package with Daewoo Korea as well as with Indian FIs and Banks. We are
very hopeful of waivers/restructuring from Korea and
re-schedulement/conversion form Indian FIs and Banks.
D2. Confirmation of existence, legality and enforceability of
arrangements to provide or maintain financial support with related and
third parties, and assessment of the financial abilities of such
parties to provide additional funds.
The company is working on restructuring and rehabilitation package with
Daewoo, Korea as well as Indian FIs and Banks. We are not seeking, at
present, any additional fund from any related parties.
D3. What is the management plan to counter the negative image of Daewoo
as a company in market.
The company is coming out with media campaign to disseminate awareness
about GM, Daewoo collaboration at Korea. And consequent rehabilitation
of DWMC, Korea with a view to allay any fear or confusion regarding
long term viability of the company and its products.
In view of the fact that all the managements perceptions regarding the
company have not proved true, and the production in the car plant of
the company having been stopped during the year under audit and taking
cognizance of public notice dated 20th November 2002 of Mumbai Debt
Recovery Tribunal No. Ill, in original application No. 162 of 2002, in
the matter of ICICI Bank Limited Versus Daewoo Motors India Limited and
Ors., where offers have been invited for bid of suit properties of
Daewoo Motors India Limited on "as is where is basis" and "as is what
is basis" subject to the sanction of the Debt Recovery Tribunal, Mumbai
and taking other qualifications in this report in totality, we are of
the opinion that the company does no longer conform to the concept of
going concern.
(xv) Notwithstanding the observations in d (xi) to d (xiv) above, we
further report that had the observations made by us in paragraphs d (i)
to d (x) above been considered, the loss for the year would have been
Rs. 59663.88 lacs (as against the reported figure of Rs. 32518.86
lacs) and the accumulated losses would have been Rs. 86919.81 lacs (as
against the reported figure of Rs. 71571.71 lacs). The net block of
fixed assets would have been Rs. 347728.93 lacs (as against the
reported figure of Rs. 359461.43 lacs). The net current assets would
have been Rs. 4921.93 lacs (as against the reported figure of Rs.
6065.23 lacs) and the secured loans would have been Rs. 311496.7 lacs
as against the reported figure of Rs. 310686.90 lacs.
(xvi) Subject to above, in our opinion and to the best of our
information and according to the explanations given to us, the said
accounts give the information required by the Companies Act, 1956 in
the manner so required. However in view of substantial uncertainties as
explained in preceding paras, we are unable to state whether the
accounts give a true and fair view.
(i) In the case of the Balance Sheet, of the state of affairs of the
Company as at 31 March 2002, and
(ii) In the case of the Profit and Loss Account of the loss of the
Company for the year ended on that date.
ANNEXURE I TO THE AUDITORS REPORT (REFERRED TO IN PARAGRAPH 1 OF OUR
REPORT OF EVEN DATE)
1. The company has maintained proper records, including quantitative
details and situation of its fixed assets, but not to the full extent.
As explained to us, the Company has a programme of physically verifying
its fixed assets once in every three years. However the details
relating to certain assets are not updated as to when they are
scrapped, sold, disposed off, transferred to other locations and plants
or otherwise consumed. The verification of fixed assets was also
carried out by the receiver appointed by the Debt Recovery Tribunal but
we do not have details of the same hence we are unable to comment on
the quantitative details of the fixed assets.
2. None of the fixed assets of the Company have been revalued during
the year.
3. The stocks of finished goods, stores, spare parts, raw materials and
components, other than stocks lying with third parties at the year-end
for which confirmations have been obtained and physically verified
during the year by the managements and also by the Receiver appointed
by the Debt Recovery Tribunal No. Ill, we do not have details of the
same.
4. In our opinion, the procedures of physical verification of stocks
followed by the management are reasonable and adequate in relation to
the size of the Company and the nature of its business. We have been
explained that the stocks were also verified by the Receiver appointed
by Debt Recovery Tribunal No. Ill but we do not have the details of the
same.
5. Due to the considerably large number of items, individuals issue of
raw materials, stores, spare parts and components, are not recorded and
hence book balances are not available for comparison with physical
balances of these items. However, since inventories have been valued on
the basis of physically verified stocks, the discrepancies, if any,
have been adjusted in the accounts. In respect of finished goods, the
discrepancies between physical balances and book records were not
material and have been properly dealt with in the books of account.
6. In our opinion, the valuation of stocks is fair and proper in
accordance with normally accepted accounting principles and is on the
same basis as in the preceding year.
7. We have informed that no loans have been taken from companies, firms
and other parties listed in the Register maintained under section 301
of the Companies Act, 1956. Further, in our opinion and according to
the information and explanations given to us, the rate of interest and
other terms and conditions on which the Company has taken loans from
companies under the same management as defined under section 370 (1-B)
of the Companies Act, 1956, are not prima facie, prejudicial to the
interests of the Company.
8. In our opinion and according to the information and explanations
given to us, the rate of interest and other terms and conditions on
which loans have been granted to companies, firms and other parties
listed in the register maintained under section 301 of the Companies
Act, 1956 are not, prima facie, prejudicial to the interests of the
company. We have been informed that no loans have been granted to
companies under the same management as defined under section 370(1-B)
of the Companies Act.
9. The parties to whom loans or advances in the nature of loans have
been given by the Company are generally repaying the principal amounts
as stipulated and are also generally regular in the payment of interest
where applicable, except in respect of inter-corporate deposits and
loans given to employees who are no longer in employment with the
Company, aggregating to Rs. 2601.85 lacs and interest of Rs. 832.85
lacs accrued thereon as at the year-end, where the recoveries have not
been as per stipulated terms. We have been informed that appropriate
steps have been/are being taken by the Company for recovery of the
principal amounts and/or interest thereon.
10. In our opinion and according to the information and explanations
given to us, considering the fact that certain items of inventory are
for specific requirements of the Company and no alternative quotations
are available, there are adequate internal control procedures
commensurate with the size of the Company and the nature of its
business for the purchase of stores, raw materials including
components, plant and machinery, equipment and other assets, and for
the sale of goods.
11. In our opinion and according to the information and explanations
given to us, the transactions of purchase of goods and materials and
sale of goods, materials and services made in pursuance of contracts or
arrangements entered in the Register maintained under section 301 of
the Companies Act, 1956 and aggregating during the year to Rs. 50000
or more in respect of each party, have been made at prices which are
reasonable having regard to prevailing market prices for such goods and
materials or the prices at which transactions for similar goods or
materials have been made with other parties, except for items stated to
be of a specialised nature for which there are not alternate sources of
supply to enable a comparison of the prices paid.
12. As explained to us, the Company has a system for determining
unserviceable or damaged stores and spare parts, raw materials and
components and finished goods and adequate provisions have been made
for such stocks in the accounts.
13. In our opinion and according to information and explanations given
to us, the Company has complied with the provisions of section 58A of
the Companies Act, 1956 and the Companies (Acceptance of Deposits)
Rules, 1975 with regard to the deposits accepted from the public.
14. In our opinion, reasonable records have been maintained by the
Company for the sale and disposal of realisable scrap. We have been
informed that the Companys operations do not generate any realisable
by-products. However it was noticed during the course of this years
audit that the Company has scrapped certain fixed assets and sold the
same as scrap without any approvals, which is not correct accounting
policy.
15. The Company has an internal audit system, which is commensurate
with the sizes of the Company and the nature of its business.
16. We have broadly reviewed the books of accounts maintained by the
Company pursuant to the Rules made by the Central Government for the
maintenance of cost records 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 maintained.
17. According to the records of the Company examined by us, the Company
has generally been regular in depositing provident fund and Employees
State Insurance dues with the appropriate authorities.
18. We have been informed that there are no undisputed amounts payable
in respect of income tax, wealth tax, sales tax, customs duty and
excise duty as at 31 March 2002 which are outstanding for a period of
more than six months from the date they became payable.
19. According to the information and explanations given to us and the
records of the Company examined by us, no personal expenses have been
charged to the revenue account, other than those payable under
contractual obligations or in accordance with generally accepted
business practices.
20. In view of our Note No. (xv) in the auditors report, we are unable
to state whether the Company is a sick industrial company within the
meaning of clause (o) of the sub-section (1 of section 3 of the Sick
Industrial Companies (Special Provisions) Act, 1985.
21. In respect of the Companys trading activities, adequate provision
had been made for the damaged goods identified.
ANNEXURE II TO THE AUDITORS REPORT
List of information/Explanations which were not provided for
verification
Loans
1. Documentation for Working Capital Loans amounting to Rs. 15053.44
lacs have not been provided and any penalty or penal interest, which
may become due on these accounts, could not be verified.
2. Balance confirmations were not provided in respect of secured and
unsecured loans.
Debtors and creditors
1. Confirmation letters were not received from debtors amounting to Rs.
4543.10 lacs and creditors amounting to Rs. 2469.02 lacs.
At any given time the individual debtors of the company cannot be
ascertained from the computerised books of accounts maintained by the
company
Vouchers and other books keeping records
1. Certain vouchers for Chennai Branch Accounts were not produced for
verification.
2. Certain vouchers were not signed by the approving authorities,
further certain vouchers were not available for verification.
Details not provided
1. Basis for provision on inventory
2. Schedule for security paid.
3. Schedule for retention money.
4. Sales tax Expenses.
5. Wealth Tax Provision.
6. Margin Money.
7. Details of legal expenses.
8. Details of consultancy expenses.
9. Shortfalls in secretarial practices noticed during the course of
audit are highlighted below:-
a. The application for approval of remuneration of Mr. Y. C. Kim has
been rejected by the Central Govt. The application has been again
submitted to the Central Govt. on 24.05.01 but the grounds, on which
the application has been made, are no longer sustainable. It may be
further noted that he has resigned from the directorship. Therefore,
it is difficult to say whether the application will be approved by
Central Govt. or not. The board was not informed of the full
developments in this regards. During the year the company has paid Rs.
1,50,048.00 in excess of limits laid down in Schedule XIII of the
Companies Act, 1956.
b. Central Govt. has rejected the application for approval of
appointment and remuneration of Mr. Y. T. Cho, ex-Managing Director and
CEO, of the Company The company has again made the application to
Central Govt. on 26th June, 2002 and no reply has been received till
date. Practice of making application for treating the managerial
remuneration issue alive & outstanding for sanction and payment in our
opinion is not a good corporate practice. During the year, the company
has paid Rs. 5,83,538.00 in excess of limits laid down in Schedule
XIII of the Companies Act, 1956.
For V. Malik & Associates
Chartered Accountants
Place: New Delhi Vipin Malik
Dated: 25th November, 2002 (Proprietor) |