Report on the Audit of the Standalone Financial Statements Qualified Opinion
We have audited the standalone financial statements of PTC India Financial Services Limited (“the Company”), which comprise the Balance Sheet as at March 31, 2022, and the Statement of Profit and Loss, Statement of Changes in Equity and Statement of Cash Flows for the year then ended, and notes to the standalone financial statements, including a summary of significant accounting policies and other explanatory information.
In our opinion and to the best of our information and according to the explanations given to us, except for the possible effect of the matters described in the Basis for Qualified Opinion section of our report, the aforesaid standalone financial statements give the information required by the Companies Act, 2013 (“the Act”) in the manner so required and give a true and fair view in conformity with the Indian Accounting Standards prescribed under section 133 of the Act read with Companies (Indian Accounting Standards) Rules, 2015 as amended and other accounting principles generally accepted in India, of the state of affairs of the Company as at March 31, 2022, and its total comprehensive income (comprising of profits and other comprehensive income), changes in equity and its cash flows for the year ended on that date.
Basis for Qualified Opinion
On January 19, 2022, three independent directors of the Company resigned mentioning lapses in governance and compliance. The Company, basis directions of the audit committee in its meeting held on April 26, 2022, appointed an independent firm (the “Forensic auditor”), vide engagement letter dated July 18, 2022, to undertake a forensic audit in relation to the allegations raised by exIndependent directors.
On November 4, 2022, the Forensic auditor submitted its final report to the Company which included, in addition to other observations, instances of modification of critical sanction terms post sanction approval from the Board, non-compliance with pre-disbursement conditions, disbursements made for clearing overdues (evergreening), disproportionate disbursement of funds and delayed presentation of critical information to the Board. The Company’s management has appointed a professional services firm (the “External Consultant”) to assist the management in responding to such observations and subsequently, also obtained a legal opinion contesting certain matters with respect to the contents, including matters highlighted as evergreening in the Forensic audit report, and approach adopted by the Forensic Auditor. Accordingly, the management, has rebutted the observations made by the Forensic auditor and has confirmed that, in their view, there is no additional impact on the Company’s standalone financial statements for financial year 2021-22 and that there are no indications of any fraud or suspected fraud. The Company has uploaded Forensic audit report, the management’s responses, report from External Consultant and legal opinion on the website of stock exchanges.
In the adjourned audit committee meeting held on Nov 13, 2022, the committee considered the Forensic audit report and management’s responses thereon and accepted the findings in the report, by majority but with dissent of two directors out of five directors. We have been informed about the discussions held in the meeting and reasons for dissent expressed by two directors as set out in the Company’s communication to us dated November 15, 2022, as attached in Annexure A accompanying our report.
In the board meeting held on November 13, 2022, the board of directors of the Company (with the absence of Chairperson of the Audit Committee in the meeting, who recorded a dissent on the matters being discussed in his absence) considered the Forensic audit report, Management’s
responses, Report of External Consultant and legal opinions. We have been informed about the observations and views expressed in the meeting as set out in the Company’s communication to us dated November 16, 2022, as attached in Annexure B accompanying our report.
Due to resignation of the former independent directors, the Company has not complied with the various provisions of Companies Act, 2013 and Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 related to constitution of committees and sub-committees of the Board, timely conduct of their meetings and filing of annual and quarterly results with respective authorities. The Company intends to file for condonation of delay for non-compliance of such provisions with respective authorities. The Company has also not finalized the minutes of audit committee meetings held since November 9, 2021, which results in non-compliance with applicable provisions. (Refer Note 55(c) of the Standalone Financial Statements)
In light of the constraints and limitations highlighted by the Forensic auditor while preparing the Forensic audit report and as also noted by the Audit Committee, several concerns raised therein as described in the second paragraph above (including observations around evergreening) and lack of specific procedures and conclusions thereon, divergent views among directors regarding forensic audit report (as further detailed in Annexure A and B, accompanying our report), we are unable to satisfy ourselves in relation to the extent of forensic audit procedures and conclusion thereon, including remediation of the additional concerns raised therein.
Considering the above and indeterminate impact of potential fines and/ or penalties due to noncompliance of various provisions as mentioned above, we are unable to obtain sufficient and appropriate audit evidence to determine the extent of adjustments, if any, that may be required to the standalone financial statements for the year ended March 31, 2022.
We conducted our audit in accordance with the Standards on Auditing (SAs) specified under section 143(10) of the Act. Our responsibilities under those Standards are further described in the Auditor’s Responsibilities for the Audit of the Standalone Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India together with the ethical requirements that are relevant to our audit of the standalone financial statements under the provisions of the Act and the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence obtained by us is sufficient and appropriate to provide a basis for our qualified opinion.
Emphasis of Matter
We draw attention to the following matters in the Notes to the standalone financial statements:
1. SEBI vide its email dated March 2, 2022, did not accede the Company’s request for conducting Board Meeting without an independent director. Subsequent to this, with recommendation of the Holding Company, the Company appointed four independent directors through circular resolution who have been also the independent directors on the Board of PTC India Limited (the “Holding Company”). The Company, basis email from SEBI acknowledging Company’s email which summarised the mode of appointment of these directors through circular resolution and opinion received from external legal firm, believes that there is no non-compliance with SEBI’s directions vide its email dated March 2, 2022. (Refer Note 55(b) of the Standalone Financial Statements)
2. The Company had received a communication from ROC on March 28, 2018, pursuant to complaints received from identified third parties, alleging mismanagement in the Company’s operations. The Company had submitted a reply dated April 18, 2018, after
discussion with the audit committee, and denied all allegations and regarded them as frivolous attempt made by such identified third parties. On September 24, 2021, the Company received another notice from ROC u/s 206(4) of the Companies Act, 2013, pursuant to its previous communication in 2017-18 and reference to complaints received by them in 2017-18, seeking further information on certain matters including details about erosion of investments made in associate companies and actions taken by the management including other details and details about NPA accounts. While the Company responded to this notice on October 22, 2021 and no further intimation from ROC has been received till date, the Company does not expect any action by ROC on this matter. (Refer Note 57 of the Standalone Financial Statements)
3. In assessing the recoverability of loans and advances, the Company has considered internal and external sources of information (i.e. valuation report from Resolution Professional for loan assets under IBC proceedings or otherwise, one time settlement (OTS) proposal, asset value as per latest available financials of the borrowers with appropriate haircut as per ECL policy). The Company expects to recover the net carrying value of these assets, basis assessment of current facts and ECL methodology which factors in future economic conditions as well. However, the eventual recovery from these loans may be different from those estimated as on the date of approval of these standalone financial statements. (Refer Note 56 of the Standalone Financial Statements)
4. As at March 31, 2022, the Company has assessed its financial position, including expected realization of assets and payment of liabilities including borrowings, and believes that sufficient funds will be available to pay-off the liabilities through availability of High Quality Liquid Assets (HQLA) and undrawn lines of credit to meet its financial obligations in atleast 12 months from the reporting date. (Refer Note 58 of the Standalone Financial Statements)
5. We have been informed by the Company that RBI’s officials visited the premises of the Company in May, 2022 and reviewed few documents, in context of allegations made by former Independent directors of the Company. The management has represented that while the Company has satisfactorily responded to queries of officials, no formal response has come from RBI, so far, in this regard. (Refer Note 55(a) of the Standalone Financial Statements)
Our opinion is not modified in respect of these matters.
Information Other than the Standalone Financial Statements and Auditor’s Report Thereon
The Company’s Board of Directors is responsible for the other information. The other information comprises the information included in the Chairman’s Statement, Director’s Report etc, but does not include the standalone financial statements and our auditor’s report thereon.
Our opinion on the standalone financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the standalone financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. The other information has not been shared with us upto the date of this report and therefore, at this stage, we have nothing to report in this regard.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements for the year ended March 31, 2022. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
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Sr.
No
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Key Audit Matter
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How the Key Audit Matter was addressed in our audit
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1
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Expected Credit Losses (ECL) model
As described in the notes to the standalone financial statements, the impairment losses have been determined in accordance with Ind AS 109 Financial Instruments requiring considerable judgment and interpretation in its implementation, which also involved significant judgement by management in measuring the expected credit losses. Key areas of judgment included:
• Determining the criteria for a significant increase in credit risk ('SICR’)
• Techniques used to determine the Probability of Default (TD’) and Loss Given Default ('LGD’)
• Assumptions used in the expected credit loss model such as the financial condition of the counterparty, expected future cash flows etc.
Refer Notes 2 (g), 2 (q), 7 and 44A.2 to the standalone financial statements.
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Audit Procedures
We assessed the appropriateness of the Company’s policy on Expected Credit Loss recognition on financial instruments with reference to the applicable accounting standards and prudential norms laid down by RBI.
Our audit approach consisted testing of the design and operating effectiveness of the internal controls and substantive testing:
• We evaluated and tested the design and tested the operating effectiveness of Company’s controls over the data used to determine the impairment reserve, internal credit quality assessments, external credit ratings and methodology followed for computation of ECL.
• For Expected Credit Losses computed by the management, we performed the following procedures:
(a) Assessed the reasonableness of assumptions and judgement made by management on model adoption and parameters selection;
(b) Examined the key data inputs (valuation of collateral, the timing of cash flows and realisations) to the ECL model on a sample basis to assess their accuracy and completeness;
(c) Evaluated and tested on sample basis the appropriateness of staging including determination of significant increase in credit risk.
(d) Assessed the Company’s methodology for ECL provisioning, Classification and
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Measurement with the assistance of our internal experts;
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(e) Assessed accuracy and completeness of disclosures made as required by relevant accounting standards.
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2
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Impairment of loans to customers
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Audit Procedures
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Allowance for impairment losses on loans to customers involves significant judgement by management to determine the timing and amount of the asset to be impaired.
Refer Notes 2 (g), 2 (q), 7 and 44A.2 to the standalone financial statements
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We assessed the appropriateness of the Company’s impairment review and provisioning policy by comparing with the RBI prudential norms and applicable accounting standards;
Our audit approach consisted testing of the design and operating effectiveness of the internal controls and substantive testing:
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•
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We evaluated and tested the design and operating effectiveness of the relevant controls over the impairment assessments and impairment allowance computations for loans and advances to customers.
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•
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We tested the management assumptions, estimates and judgements, which could give rise to material misstatement:
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a.
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The completeness and timing of recognition of loss events;
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b.
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The measurement of provisions for individual instances of loans which is dependent on the valuation of security provided and the collaterals against each loan, the timing of cash flows and realisations;
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c.
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We discussed with management and scrutinised the appropriateness of those key assumptions applied in management’s impairment assessment, and compared them with available external evidence where necessary.
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d.
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The measurement of modelled provisions, which is dependent upon key assumptions relating to probability of
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default, loss given default and expected future recoveries;
e. Performed procedures to obtain comfort on the accuracy of the impairment calculation process through recalculation of the provision charge based on inputs;
f. Assessed accuracy and completeness of disclosures made as required by relevant accounting standards.
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3
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Evaluation of uncertain tax positions for Income taxes
The Company has material uncertain tax positions relating to matters under litigation for Income taxes. These matters involve significant management judgement to determine the possible outcome of disputes.
Refer Note 2 (j), 2 (q) and 34 to the standalone financial statements.
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Principal Audit Procedures
We obtained details of completed income tax assessments during the year ended March 31, 2022 from the management. We involved our internal experts to challenge the management’s underlying assumptions in estimating the tax provisions and the possible outcome of the disputes. Our internal experts also considered legal precedence and other rulings in evaluating management’s position on these uncertain tax positions relating to Income taxes.
Additionally, we considered the effect of new information in respect of uncertain tax positions to evaluate whether any change was required to management’s position on these uncertainties.
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Responsibilities of Management and Those Charged with Governance for the Standalone Financial Statements
The Company’s Board of Directors is responsible for the matters stated in section 134(5) of the Act with respect to the preparation of these standalone financial statements that give a true and fair view of the financial position, financial performance, changes in equity and cash flows of the Company in accordance with the accounting principles generally accepted in India, including the Accounting Standards specified under section 133 of the Act. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the standalone financial statement that give a true and fair view and are free from material misstatement, whether due to fraud or error.
In preparing the standalone financial statements, the Board of Directors is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. The Board of Directors are also responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Standalone Financial Statements
Our objectives are to obtain reasonable assurance about whether the standalone financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these standalone financial statements.
We give in “Annexure C” a detailed description of Auditor’s responsibilities for Audit of the Standalone Financial Statements.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor’s Report) Order, 2020 (“the Order”), issued by the Central Government of India in terms of sub-section (11) of section 143 of the Act, we give in the “Annexure D” a statement on the matters specified in paragraphs 3 and 4 of the Order, to the extent applicable.
2. As required by Section 143(3) of the Act, we report that:
(a) Except for the possible effect of the matters described in the Basis of Qualified Opinion section above, we have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit.
(b) Except for the possible effect of the matters described in the Basis of Qualified Opinion section above, 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.
(c) The Balance Sheet, the Statement of Profit and Loss, the Statement of Changes in Equity and the Statement of Cash Flow dealt with by this Report are in agreement with the books of account.
(d) Except for the matter described in the Basis of Qualified Opinion section above, in our opinion, the aforesaid standalone financial statements comply with the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014.
(e) The matter described in Basis of Qualified Opinion paragraph above, in our opinion, may have an adverse effect on the functioning of the Company.
(f) On the basis of the written representations received from the directors as on March 31, 2022 taken on record by the Board of Directors, none of the directors are disqualified as on March 31, 2022 from being appointed as a director in terms of Section 164 (2) of the Act.
(g) With respect to the adequacy of the internal financial controls with reference to standalone financial statements of the Company and the operating effectiveness of such controls, refer to our separate Report in “Annexure E”.
(h) With respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:
i. The Company has disclosed the impact of pending litigations on its financial position in its standalone financial statements - Refer Note 52 to the standalone financial statements;
ii. The Company did not have any long-term contracts including derivative contracts for which there were any material foreseeable losses.
iii. There has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company
iv. a) The Management has represented that, to the best of its knowledge and belief, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Company to or in any other person(s) or entity(ies), including foreign entities (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;
b) The Management has represented, that, to the best of its knowledge and belief, no funds have been received by the Company from any person(s) or entity(ies), including foreign entities (Funding Parties), with the understanding, whether recorded in writing or otherwise, that the Company shall, whether directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
c) Based on such audit procedures as considered reasonable and appropriate in the circumstances, except for the possible effect of matters described in the Basis of Qualified Opinion section above, nothing has come to our notice that has caused us to believe that the representations under sub-clause iv(a) and iv(b) contain any material misstatement; and
3. As required by The Companies (Amendment) Act, 2017, in our opinion, according to information and explanations given to us, the remuneration paid by the Company to its directors is within the limits laid prescribed under Section 197 of the Act and the rules thereunder.
For M S K A & Associates
Chartered Accountants
ICAI Firm Registration No. 105047W
Sd/-
Rahul Aggarwal
Partner
Membership No. 505676
UDIN: 22505676BDGXSP5731
Place: Gurugram
Date: November 16, 2022
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