C&C Constructions Limited Management Accounts for the year ended 30 June 2010

PURPOSE AND BASIS

Prepared for information of the management of C & C Constructions Limited and summarises certain accounting matters that have arisen during the management audit of the financial statements for the year ended 30 June 2010. This presentation includes information which has been provided to us and discussions held with the officials of the Company. It contains selected observations based on our field work. It is produced on the basis that it is for your information only and that it will not be quoted or referred to, in whole or in part, without our prior written consent.

SCOPE OF WORK

 Management audit of the Standalone Financial Statements, prepared by the Company under the Indian GAAP, for the year ended 30 June 2010.  Management audit of the Consolidated Financial Statements, prepared by the Company under the Indian GAAP, for the year ended 30 June 2010.  The audited accounts of the subsidiaries/joint ventures would be relied upon by us while auditing the consolidated financial statements.  Accounting for Mohali Bus Terminal Project and Kurali Toll Road Project

COVERAGE
 Head Office Accounts  8 largest sites, which account for around 89% of the revenues of the Company, comprising: - C&C Construction sites:  Zirakpur  Manikpur  Giriyak  Yamuna Expressway - Joint Venture sites:  BR-8 Darbhanga  Ropar JV  Ranigunj JV  Kursela JV  Desktop review of other sites: BR-9, BR-6, Sitamari and Khajuria.

Our understanding of C & C Constructions Limited

OUR UNDERSTANDING OF C & C CONSTRUCTIONS LIMITED

C & C Constructions

C and C Projects Ltd (100%) BSC C and C JV Kurali Toll Road Limited (49%)

C&C Realtors Ltd.(100%) C&C Towers Ltd.(100%)

BSC C & C JV Nepal Pvt. Ltd.(50%)

Un-incorporated joint ventures (50%)

In India

Outside (Afghanistan)

BACKGROUND
 EPC contracts: Roads/highways.  Listed: BSE and NSE. IPO in 2007  Operational sites: Bihar, Haryana, Afghanistan, etc.
Punjab,

KEY FINANCIAL DATA (Standalone)

 Sales (net): Rs.1,168 crores  Profit after tax: Rs.69 crores  Shareholders' funds: Rs.527 crores  Loan Funds: Rs.709 crores  Net fixed asset: Rs.383 crores
(Source : Annual Report: June 2010)
6

 Main clients: NHAI, RITES, JP, Railways, PWDs, and projects sponsored by ADB/World Bank/USAID, etc.

REVENUE

General comments Revenue process Practices and our observations - Revenue recognition - Cost allocations - Onerous contracts - Certain other observations Possible revisions in revenue

REVENUE
 BACKGROUND - The Company is primarily engaged in construction of roads. - A typical road construction project takes 18 to 36 months. - Revenues as per financial statements for 2009-10 are Rs. 11,700 million. - Presently, there are 30 running projects:  27 in India  3 outside India - The Company is also engaged in other projects, i.e., buildings, water, and sewage lines and laying of rail lines. - Summary of revenue recognised  Sales: Rs. 11,700 million  WIP reduced from cost: Rs. 5,036 million

Accounting for Construction Contracts

Literature Accounting Standard 7

LITERATURE AS 7
REVENUE RECOGNITION: BASIC CONCEPTS
 Contract Revenue and Contract Costs should be recognised as revenue and expenses (Para 21): - by reference to the stage of completion - when the outcome of the construction contract can be estimated reliably;  Entire expected loss to be recognised immediately (Para 35, 36) irrespective of: - whether or not work has commenced; - the stage of completion of contract activity; or - the amount of profits expected to arise on other contracts

LITERATURE AS 7
WHEN CAN OUTCOME BE ESTIMATED RELIABLY?
 Fixed Price Contracts outcome can be estimated reliably when: - total contract revenue can be measured reliably; - it is probable that the economic benefits will flow to the enterprise - the contract costs and the stage of completion can be measured reliably

- contract costs attributable to the contract can be clearly identified and

measured  Cost plus Contracts outcome can be measured reliably when: - it is probable that the economic benefits will flow to the enterprise; - contract costs attributable to the contract can be clearly identified and measured

LITERATURE AS 7
STAGE OF COMPLETION: HOW DETERMINED?
 Recognition of revenue and expense by stage of completion - referred to as percentage of completion method  Revenue is matched with costs incurred in reaching stage of completion  Percentage of completion may be determined based on (Para 29): - proportion that contract costs incurred for work performed bear to the estimated total contract costs; - surveys of work performed; or - completion of physical proportion of the contract work Progress billings/payments and advances received may not necessarily reflect the work performed

LITERATURE AS 7
WHAT CONSTITUTES CONTRACT REVENUE?
 Contract revenue comprises (Para 10): - initial amount of revenue agreed in the contract; and - variations in contract work, claims and incentive payments  Variation is change in scope of work to be performed. Included in contract revenue when (Para 12): - it is probable that the customer will approve the variation; and - amount of revenue can be measured reliably  Claims are reimbursement of costs not included in the contract price. Included in contract revenue when (Para 13): - negotiations at an advanced stage of acceptance; or - amount of revenue can be measured reliably

LITERATURE AS 7
WHAT CONSTITUTES CONTRACT REVENUE?
 Incentive payments are additional amounts receivable if specified performance standards are met.  Included in contract revenue when (Para 14): - Contract is at an advanced stage and it is probable that performance standards will be met ; and - amount of incentive can be measured reliably

LITERATURE AS 7
WHAT CONSTITUTES CONTRACT COST?
 Contract costs should comprise (Para 15): - costs that relate directly to the specific contract; - costs that are attributable to contract activity in general and can be allocated to the contract; and - such other costs as are specifically chargeable to the customer under the terms of the contract.  Costs that may be attributable to contract activity in general and can be allocated to specific contracts include (Para 17): - insurance; - costs of design and technical assistance that is not directly related to a specific contract; and - construction overheads.

LITERATURE AS 7
WHAT CONSTITUTES CONTRACT COST?
 Costs that are excluded and cannot be attributed to contract activity or cannot be allocated to a contract include (Para 19): - general administration costs for which reimbursement is not specified in the contract; - selling costs; - research and development costs for which reimbursement is not specified in the contract; and - depreciation of idle plant and equipment that is not used on a particular contract.

LITERATURE AS 7
AMOUNTS DUE FROM CUSTOMERS (PARAS 26, 42) *
 Amounts due from customers represent: - costs incurred which relate to future activity (Para 26) - costs incurred plus recognised profits; - less: the sum of recognised losses and progress billings for all contracts in progress for which the costs incurred plus recognised profits (less recognised losses) exceed progress billings

* Generally referred to as Work in progress and/or Unbilled revenue.

LITERATURE AS 7
AMOUNTS DUE TO CUSTOMERS (PARA 43)
 Amounts due to customers represent: - the sum of recognised losses and progress billings; less - costs incurred plus recognised profits for all contracts in progress for which progress billings exceed the costs incurred plus recognised profits (less recognised losses)

Amounts due to customers and amounts due from customers are to be determined for each construction contract separately, without setting off.

LITERATURE AS 7
DISCLOSURES TO BE MADE (PARA 38, 39)
 Amount of contract revenue recognised;  Method used to determine contract revenue; and  Method used to determine stage of completion of contracts in progress  For contracts in progress at the reporting date: - aggregate amount of costs incurred and recognised profits (less recognised losses) upto reporting date; - amount of advances received; and - amount of retentions.

ONEROUS CONTRACTS AS 29
As per Accounting Standard 29 Provisions, Contingent Liabilities and Contingent Assets, an onerous contract is defined as follows:  An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Thus, for a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligation under the contract should exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.  If an enterprise has a contract that is onerous, the present obligation under the contract is recognised and measured as a provision as per this Statement.

LITERATURE AS 7
PRESENTATION
PROFIT AND LOSS ACCOUNT  Billed Revenue Income:  Work Executed BALANCE SHEET Assets:  Sundry Debtors Inventories:  Work in Progress (due from customers) at estimated realisable value  Less: Progress bills raised Net amounts due from/to customers  Inventories (WIP at cost or under)

 Inventories Income: (WIP)  Work Executed (At realisable value)  Inventories  Inventories (Part of (WIP) increase / decrease in construction expenses) (At cost)

RECAP

RECAP: ACCOUNTING FOR CONSTRUCTION CONTRACTS

 Revenue should be based on work performed and not just billed  Any unbilled revenue for work performed should be at sales value, to be taken to revenues and to WIP at realisable value  Other work in progress, comprises contract costs relating to future activity on contract, e.g., material delivered though not installed or applied during contract performance, unless specially made for the contract to be valued at costs  Presentation/Disclosure - Revenue to be presented at realisable value - WIP in the form of:  Unbilled revenue (WIP at realisable value)  Increase/decrease in construction cost (WIP at cost or under)

Construction Contracts Certain Illustrative Practices

CONSTRUCTION CONTRACTS- CERTAIN ILLUSTRATIVE PRACTICES

Larsen & Toubro: 31 March 2009 Accounting Policy Revenue Recognition

Accounting Policy Work in progress

Inventories

CONSTRUCTION CONTRACTS- CERTAIN ILLUSTRATIVE PRACTICES

Gammon India Limited: 31 March 2009 Accounting Policy Revenue Recognition

Accounting Policy- Work in Progress

Inventories

CONSTRUCTION CONTRACTS- CERTAIN ILLUSTRATIVE PRACTICES

Gammon India Limited: 31 March 2009 Disclosures

Companys Practice

REVENUE PROCESS WORKFLOW IN C&C

Work executed

Request For Inspection (RFI) raised Work inspected and RFIs certified by Engineer For approved RFIs during a month, a Interim Payment Advice (IPA) is raised at the end of the month Interim Payment Certificate (IPC) granted by the customer
After inspection of IPC, final invoice is raised

Revenue recognised in books

True up the revenue recognised earlier

ACCOUNTING POLICY
As per the financial statements for the year ended 30 June 2010:  Contract revenue is recognised by adding the aggregate cost and proportionate margin, using the percentage completion method. Percentage of completion is determined as a proportion of cost incurred to date to the total estimated contract cost. Foreseeable losses are accounted for as and when they are determined except to the extent they are expected to be recovered through claims presented or to be presented to the customer or in arbitration.  Claims are accounted as income in the year of receipt of arbitration award or acceptance by client. OBSERVATION: Accounting policy is not followed to the extent of the following:  Revenue is recognised based on IPCs raised. There is no evidence of assessing and recognising foreseeable losses with respect to onerous contracts.

REVENUE RECOGNITION: COMPANY PRACTICES

 REVENUE  Revenue is recognized based on the monthly invoices raised (IPA/IPC)
 Advances received for material delivered at site are not considered as revenue.

 WORK IN PROGRESS  Project wise costs incurred are compared with expected cost till completion to determine percentage of completion
 Percentage of completion is applied to total contract value to determine sales price of work performed  Sales value of work performed less revenue recognised is considered as work in progress  WIP is adjusted against cost resulting in margin being adjusted against cost.

WAY FORWARD: REVENUE RECOGNITION TO BE EFFORT BASED AND NOT INVOICE BASED
 IF WORK HAS BEEN PERFORMED:  Recognise revenue as per percentage of completion method
 Difference between revenue recognised and IPC raised: account for as Unbilled revenue, at realisable value.  Unbilled revenue to be disclosed under WIP, at realisable value

 IF NO (REASONABLE) WORK HAS BEEN PERFORMED:  Materials issued at site, though no work performed, to be considered as Work in progress, at cost.

Work in progress to be disclosed under Inventories.

ADJUSTMENTS EXPECTED IN THE AMOUNT OF REVENUE RECOGNISED

Particulars REVENUE AS PER FINANCIAL STATEMENTS ADD / LESS: adjustments on account of: - Unbilled revenue (presently considered as WIP, including margin, and adjusted from cost) - Contract inventory (WIP, at cost or under, presently considered at sales value and adjusted from cost) - Rationalisation of HO cost allocations - Assessment of onerous contracts/foreseeable losses - Revision in estimated costs to complete ADJUSTED REVENUE XX XX XX XX XX XX Amount (Rs. Millions) 11,684

REVENUE (CONTD)

ALLOCATION OF COSTS TO CONTRACTS: COMPANY PRACTICES:  All HO costs are allocated to project sites: - Excluding interest (Rs.625 million) - Including Rs.347 million related to Port Blair - Including Rs.722 million related to central material purchase  Allocation based on the ratio of amount of IPC billed by a site to total amount of IPCs raised by all sites. Does not consider WIP for this.  There is no evidence of classification of cost for allocation purposes. WAY FORWARD:     Cost attributable to contract activity in general should only be allocated. Need for classification of costs for allocation. Different costs may have different allocation base. Allocation methods to be systematic and rational, and are applied consistently to all costs having similar characteristics.

REVENUE (CONTD)

ONEROUS CONTRACTS As per Accounting Standard 29 Provisions, Contingent Liabilities and Contingent Assets, an onerous contract is defined as follows:  An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Thus, for a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligation under the contract should exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.  If an enterprise has a contract that is onerous, the present obligation under the contract is recognised and measured as a provision as per this Statement.

REVENUE (CONTD)
CERTAIN SIGNIFICANT CONTRACTS CLOSED IN RECENT PAST: Project name Kapurthala Tarn Taran Taluqan Afghanistan Amritsar
* As per Trial Balance

Period Apr 2005 to Nov 2010 Apr 2005 to Sep 2010 Apr 2003 to October 2010 Apr 2003 to June 2008

Profit/ (loss) (Rs. Millions) * (38) (15) (1) (1) 11

Jalalabad Afghanistan Apr 2003 to October 2010

COMPANY PRACTICE:  Assessment to identify onerous contracts on an ongoing basis is not done.

WAY FORWARD:  Contract costs and contract revenues need to be revisited periodically and revised to identify onerous contracts.

REVENUE (CONTD)

CERTAIN OTHER OBSERVATIONS  Documented evidence/assessment of total costs and profit percentage at the time of acceptance of the project is not present.  In case of project extensions, revised estimated costs to complete are not computed. Instead expected revised profit margin is used to calculate costs to complete. Back up for revised profit margins were not made available.  Cost of closing WIP is the balance amount of unbilled work performed/material issued, though not substantiated by physical verification/confirmation.  Supporting documents for Port Blair and Central Purchase Cost were not made available for review.

Fixed Assets

FIXED ASSETS
 COMPOSITION OF FIXED ASSETS

Particulars Gross block Less: Accumulated depreciation Net block Capital work in progress Total

Amount (Rs. Millions) as at 30 June 2010 4,983 1,246 3,737 96 3,833

FIXED ASSETS

 BACKGROUND Fixed assets mainly comprise:  land, buildings, plant and machinery, tippers and tractors, computers and software, office equipment, vehicle, intangible assets, and furniture and fixtures. Additions/deletions:  Total additions for the year Rs. 1,046 million  Total deletions/adjustments Rs. 63 million. Substantial amount of assets are at sites.

FIXED ASSETS (CONTD)

OBSERVATIONS:  PHYSICAL VERIFICATION  No documented policy for physical verification of fixed assets  Certificate for physical verification by the Statutory Auditors is available  A list of assets physically verified has been provided, though not reconciled to the fixed assets register to ensure completeness and to identify discrepancies, if any.  Several assets are not physically numbered. We observed instances of assets being incorrectly numbered.  No process for identification of idle or unusable assets.  Inter transfer of assets are not tracked

FIXED ASSETS (CONTD)

 ADDITIONS DURING THE YEAR  In most of the cases quotations have not been obtained from different parties as required by the SOP.  Instances of Purchase Orders not raised or not authorised as per Authority Matrix (Details in annexure).  Instances of gate entry record not made.  Differences in date of receiving assets and date of capitalization.  CAPITALIZATION OF REVENUE EXPENSES  Financing charges, e.g., LC charges of Rs. 2.76 millions.  Repairs and maintenance, e.g., Rs. 3 millions incurred on hot mix plate repairing

FIXED ASSETS (CONTD)

 DEPRECIATION - Since transfer of fixed assets among different sites is not tracked, depreciation for projects may not be accurate. - Instances of depreciation being charged from the date of receipt of assets instead of date of capitalization in the books, which was delayed.  CAPITAL WORK IN PROGRESS (Rs. 96 millions) - No explanations for:  Advances of Rs.95 millions to "B N B Investment & Properties.  Opening balance of CWIP at BR-8 site amounting to Rs 10 million charged off. Refer Annexure for instances.

FIXED ASSETS (CONTD)

Instances of quotations not found
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Instances of gate entry not found

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Instances of PO not found and / or not authorized

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Instances of differences in capitalization date and gate inward date

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FIXED ASSETS (CONTD)

 ACCOUNTING POLICY Inward freight and incidental expenses related to acquisition and installation of fixed assets are not capitalised. As per the AS 10 on Fixed Assets any directly attributable cost of bringing the asset to its working condition for its intended use is included in the cost of the asset. Examples of directly attributable costs as given in the standard are site preparation, initial delivery and handling costs, installation cost, such as special foundations for plant and professional fees, for example fees of architects and engineers. As informed, the policy has been changed with effect from 1 July 2010, where in the other incidental costs and freight inward has been included in the cost of assets.

Inventories

INVENTORIES

INFORMATION NOT MADE AVAILABLE  Supporting documents for computation of weighted rate for valuation of stores (Rs. 325 million).  Defined inventory provisioning policy, if any

INVESTMENTS

SUMMARY OF INVESTMENTS
COMPOSITION Particulars Equity shares of Jaypee Infratech Ltd. (listed) Equity shares of C&C Projects Ltd. (Subsidiary) Equity shares of C&C Realtors Ltd. (Subsidiary) Equity shares of BSC C&C JV Nepal Ltd. (Associate) Application money pending allotment in SBI Mutual Fund Others Total Amount (Rs. Millions) as at 30 June 2010 206 447 783 50 15 0.2 1,501

INVESTMENTS

 OBSERVATIONS AND PENDING INFORMATION: - Disclosure deficiency  Classification between trade and non trade investments (Schedule VI)

Sundry Debtors

SUNDRY DEBTORS
SUMMARY OF DEBTORS AGEING AND SUBSEQUENT RECEIPTS (Rs. Millions) Aging (days) 0-30 31-90 91-180 181-360 Total Due as at 30 June10 1,425 115 3 17 1,560 Subsequent receipt# 711 115 11 837 Subsequent reversal* 611 611

# Upto 30 December 2010 * Pending completion of IPC as at 30 June10, debtors are recorded on the basis of IPAs raised. Subsequently, these IPAs are reversed and IPC is raised.

SUNDRY DEBTORS
OBSERVATIONS:  No defined provisioning policy for doubtful debtors.  No provision against debtors of Rs. 6 million outstanding for more than 180 days. These have not been collected subsequently but have been reversed.  No process of debtors reconciliation/ confirmation. IPC / IPA are considered adequate confirmation from debtors.  Debtors should be recognised on final invoice (i.e. IPC) and not based on IPA. Subsequent changes in ageing needs attention

Cash and Bank Balances

CASH

OBSERVATIONS:  Instances of cash payments made but delay in recording the same at BR-8 (Darbhanga) site entry for Rs 281 thousand was made on 12 August 2009.

BANK BALANCES

OBSERVATIONS:  Direct bank confirmations were generally not received though confirmation is available with the Company.  Interest accrued on fixed deposits with SBI, ICICI Bank and State Bank of Patiala: not recorded in books (approximately Rs. 225 thousands)  Instance of TDS certificate Rs. 59 thousands from Andhra Bank that bears name of Transport Commissioner of NCT of Delhi instead of BSC C&C JV. INFORMATION NOT MADE AVAILABLE  Fixed deposit receipt for Rs. 4.4 million with ICICI bank.

Loans and Advances

LOANS AND ADVANCES

SUMMARY OF LOANS AND ADVANCES

Particulars Retention Money Advances recoverable in cash or in kind or for value to be received Balances with Joint Ventures Advance Tax (net of provision) Security Deposits Amount Due from Subsidiaries Companies Total

Amount (Rs. Millions) 838 769 398 206 47 1 2,259

LOANS AND ADVANCES

ADVANCE TAX (NET OF PROVISIONS) (Rs. 206 Milllion)  PENDING TDS CERTIFICATES  TDS Certificates amounting to Rs. 63 million pertaining to C&C (April 2010 to June 2010)  TDS Certificates amounting to Rs. 72 million pertaining to BSCC&C JV (April 2010 to June 2010). Details in Taxation section.

Current Liabilities

SUMMARY OF CURRENT LIABILITIES

Particulars Mobilization and Materials advances Sundry Creditors Acceptances Other liabilities Interest accrued but not due Unclaimed dividends Total

Amount (Rs. Millions) 2,037 1,638 1,386 605 23 0.3 5,689

CURRENT LIABILITIES

SUNDRY CREDITORS (Rs.1638 Mill.)

 OBSERVATIONS:  Debit balances in creditors account at HO not reclassified as advances Rs. 351 millions.
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 Subsequent payment to creditors not made available - Ropar, Yamuna Expressway and Zirakpur  Balance confirmations from creditors - generally not available.  Reasons for debit balances and overdue balances at few sites were not available.

CURRENT LIABILITIES

OTHER LIABILITIES (Rs.605 Mill.)

 OBSERVATIONS: - Non compliances with respect to regulators requirements  Delays in deposit of service tax and interest thereon at C&C standalone sites and BSC C&C JV sites.  Delays in deposit of TDS and interest thereon at C&C standalone sites and BSC C&C JV sites.  Delays/non submission of TDS and Service tax returns at C&C standalone sites and BSC C&C JV sites. Refer annexure for details. TDS payable as per schedule needs reconciliation with the ledger.

CURRENT LIABILITIES

OTHER LIABILITIES (Rs.605 Mill.) (contd..)

 OBSERVATIONS (Contd.): Examples of such delays:  Service tax/interest for the month of Jan 2010 and Jun 2010 of around Rs. 27 millions not paid.  Service tax returns for April 2010 to Sep 2010 have not been filed  Service tax return for the period April 2010 to Sep 2010 for BSC C&C JV and SE C&C JV have not been filed.

OTHER LIABILITIES (CONTD)

Instances of delays in deposit of service tax and interest

Micr s ft ffic xc l r s t

Instances of delays in deposit of TDS and interest

Micr s ft ffic xc l r s t

Instances of delays / non submission of TDS and service tax returns

Micr s ft ffic xc l r s t

CURRENT LIABILITIES

FURTHER INFORMATION REQUIRED   Supporting documents to verify service tax on transport bills in certain cases. Refer Annexure. Regarding goods transport, amount of service tax has been deducted from the party account rather than it being booked as an expense. As explained, this is in accordance with the agreement with these parties regarding deduction of service tax from their accounts. We have been provided the agreement of Competent Carriers & Structure which states that all taxes are the borne by the transporter. However, other agreements have not provided.

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Expenses

EXPENSES

Particulars Construction expenses Staff expenses General and administration expenses Interest Depreciation Total

Amount (Rs. Millions) 7,669 1,223 607 729 448 10,676

CONSTRUCTION EXPENSES

 FURTHER INFORMATION REQUIRED  Vouchers as per attached list.

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STAFF EXPENSES

FURTHER INFORMATION REQUIRED: Copy of PAN and resignation letters in few instances at Raniganj site. Details of PF deducted on full and final settlement of employees

 Copy of PAN no. and ID proof were not on record in few instances for new joiners at Kursela site.

GENERAL AND ADMINISTRATION EXPENSES

 FURTHER INFORMATION REQUIRED:  Supporting documents for certain expenses like BG Commission, construction expenses, hire charges, miscellaneous expenses, rates and taxes, repairs and maintenance, telecommunication, traveling and conveyance expenses are pending. Details per Annexure.

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INTEREST EXPENSES

OBSERVATION  No review of interest expense on cash credit and overdraft accounts. Company accepts the charge as debited by the bank.

Taxation

TAXES
 OBSERVATION:  Income tax provision for the year ended 31 Mar 2010 has been considered as tax provision for year ended 30 June 2010. Tax charge has not been adjusted for 3 months ended 30 June 2010.  Needs correction  ASSESSMENT STATUS IS AS BELOW: Assessment Nature Year 2003-04 Disallowance of depreciation on temporary shed 2004-05 Disallowance of additional depreciation and losses on India projects 2004-05 Stay order under section 147 2007-08 Information not provided

Status of apeal CIT(A) CIT(A)

Amount (Rs. Mill.) 1 56

CIT CIT(A)

33 5

Secured Loans

SUMMARY OF SECURED LOANS

Particulars

Amount (Rs. Millions) 4,309 2,176 606 7,091

Working Capital Borrowings Term loans Hire Purchase Finance Total

SECURED LOANS

WORKING CAPITAL BORROWINGS AND TERM LOANS  OBSERVATIONS: Basis of inter allocation of interest between C&C and BSC-C&C JV need explanation. Following amounts have been adjusted against interest charge of the company  Rs 84 million towards BSC-C&C JV.  Rs.111 million towards group company. Interest on working capital borrowings has been included under interest on term loans. Demand term loans, cash credit account, short term loan, working capital loan have been clubbed together under working capital borrowings.

SECURED LOANS
HIRE PURCHASE FINANCE  OBSERVATIONS:

 Interest per books is pending reconciliation with interest payment schedule.  Supplier balance per books are subject to reconciliation with repayment schedule. Refer Annexure-1 and 2 for detail .  Balance payable to HP financer and interest charge as per books is pending reconciliation with repayment schedule. As explained, settlement is under process.  Majority of Magma and SREI agreements are not available. Therefore, repayment of principal and interest cannot be mapped to repayment schedules . As explained, the settlement is under process.  Since EMI payments are due at different dates accrual of interest is required at the year end.  Claims made by the Company for short disbursement is yet to be recovered Rs 3 million.

SECURED LOANS

Annexure 1 Variance in supplier balance as per books and as per the repayment schedule C&C Constructions (As explained settlement is under process)
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Annexure 2 Variance in supplier balance as per books and as per the repayment schedule BSC C&C JV (As explained settlement is under process)

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Other Income

OTHER INCOME

Particulars Profit on sale of assets (net) Exchange gain (net) Sale of scrap Insurance claim Others Total

Amount (Rs. Millions) 8.20 31.91 24.98 7.81 1.78 74.67

 Only Miscellaneous Income has been disclosed as an aggregate amount in the schedule for Other Income for the year ended 30 June 2010.

Other Disclosure Requirements under Accounting Standards and Schedule VI

DISCLOSURES UNDER ACCOUNTING STANDARDS

 No disclosure of effect of exchange rate changes on cash and cash equivalents held in foreign currency.  No disclosure of accounting policy for Earnings Per Share  Disclosure as to the jointly controlled/owned assets  No segregation of restricted cash, if any, in the cash flow statement  To elaborate accounting policy for employee benefits/leave encashment  Disclosure of amounts recognised as defined contribution plans.  Disclosures relating to defined benefit plans.  Disclosures relating to operating leases.

DISCLOSURES UNDER SCHEDULE VI

 Managerial remuneration does not contain explanations as to exclusion of gratuity and leave encashment.  Separate disclosures as to repairs to buildings  Disclosures of debts due from other companies under the same management, including the names of the parties

Other Observations

OTHER OBSERVATIONS

 Significant accounting policies for Derivative and hedging instruments accounting  There are no disclosures for such transactions, if any.  Internal audit  As informed, the Company does not have an internal audit function.

Foreign Currency Transactions and Foreign Operations

FOREIGN CURRENCY TRANSACTIONS AND FOREIGN OPERATIONS

BACKGROUND  Joint Venture (BSC-C&C-JV) has its projects in Afghanistan.  Nature of projects in Afghanistan are similar to projects in India i.e. road and building construction projects.  Money is received in USD against the projects executed in Afghanistan from the awarding agency and project expenditures are also incurred in USD or local currency.  Company has classified its foreign operations as Integral as per Accounting Standard 11 The Effects of changes in Foreign Exchange Rates with effect from year ended 30 June 2010. In earlier years, it was classified as non-integral.  The reporting currency of the Company is Indian Rupee.

FOREIGN CURRENCY TRANSACTIONS AND FOREIGN OPERATIONS

ACCOUNTING POLICY AS DISCLOSED  Foreign operations have been classified as integral foreign operations and financial statement are translated as under:  Assets and liabilities (both Monetary and Non-Monetary) at the rate prevailing at the end of the year.  Revenue and Expenses at yearly average Exchange Rates prevailing during the year. Exchange difference arising on translation is recognised as income or expense of the period in which they arise.  Monetary Assets and liabilities related to foreign currency transactions remaining unsettled at the end of the year are translated at year end rates. The differences in translation of monetary assets and liabilities and unrealised gains or losses on foreign currency transactions are recognised in the profit and loss account.

FOREIGN CURRENCY TRANSACTIONS AND FOREIGN OPERATIONS

ACCOUNTING TREATMENT AS REQUIRED UNDER ACCOUNTING STANDARD 11 FOR INTEGRAL OPERATIONS  Foreign currency monetary items should be reported using the closing rate.  Non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and  Non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined.

FOREIGN CURRENCY TRANSACTIONS AND FOREIGN OPERATIONS

 OBSERVATIONS  Though the accounting policy mentions that foreign operations of the Company are classified as Integral, the accounting policy process as described in the policy is for non-integral operations and not integral operations.  Also, as explained, in practice Company has followed the process for NonIntegral operations while actually recording the transactions.

FOREIGN CURRENCY TRANSACTIONS AND FOREIGN OPERATIONS

 OBSERVATIONS  The accounting policies also give a note as follows: Change in accounting policy in respect to foreign operations in joint venture: The Joint Venture operations in Afghanistan have been reclassified in accordance with AS-27 as integral operations in lieu of nonintegral from the financial year 2009-10. Due to the change in accounting policy, the profit for the year has increased by a sum of Rs. 686 lacs.  Since, as explained, there is no practical change in accounting policy and accounting is being done as per non-integral operations, the nature of the sum of Rs 686 lacs as mentioned above cannot be readily ascertained.

FOREIGN CURRENCY TRANSACTIONS AND FOREIGN OPERATIONS

 OBSERVATIONS  As per the financial statements, the Foreign Currency Translation Reserve amounting to Rs. 10 million created under accounting for non-integral operations was released to the Profit on Loss Account on change in the method of accounting from non-integral to integral operations.  This in not in accordance with AS 11 which requires that When a nonintegral foreign operation is reclassified as an integral foreign operation, the translated amounts for non-monetary items at the date of the change are treated as the historical cost for those items in the period of change and subsequent periods. Exchange differences which have been deferred are not recognised as income or expenses until the disposal of the operation. (Paragraph 34)

Works Contract Tax / VAT

WORKS CONTRACT TAX

 BACKGROUND  The Company is primarily engaged in the construction of roads and highway projects, which is subject to works contract tax under local VAT laws.  Under a works contract, Work Contract Tax (WCT) is paid on the value of material plus value addition as applicable in a works contract.  The taxable value is usually calculated either by adding profit margin to value of materials or by deducting cost of labour and site running costs from total costs.

WORKS CONTRACT TAX (CONTD)

 OBSERVATIONS:  There is no consistency regarding determination of material value of contract price for the determination of WCT. Some sites have adopted material cost plus method while others have adopted total costs less other costs method.  Zirakpur  Basis for computation for material value of contract price for 2009-10 was not made available.  In the computation for 2008-2009, administration and other head office charges has been allocated/added to site labour while determining materials value as balancing amount. This has resulted in material vs. labour ratio of approximately 32:68. The expected ratio for material vs. labour is approximately 70:30 as evident from other sites.

WORKS CONTRACT TAX (CONTD)

 Site has considered capital goods such as computer, laptop and generator, etc. as spare parts and availed 100% input credit in the year of purchase instead of 50% in the first year as required by the state VAT laws.  Site was paying CST on branch transfers by treating it as central sales instead of issuing F Forms for the same. From April 2010 onwards the site has stopped paying tax on branch transfers. However, instead of issuing F Forms, such branch transfers have been altogether excluded from the vat returns.  Reconciliation between VAT as per books and as per Return has not been provided.

WORKS CONTRACT TAX (CONTD)

 Ropar  In WCT/VAT return for the quarters of July to September 2009, input credit amounting to Rs. 675,956 has been taken twice.  In determining material labor ratio, profit has been not been added to arrive at material price for calculation of WCT liability. This has resulted in lower payment of tax.  VAT return for quarter ending June 2009, which was required to verify the amount of balance carry forward of input tax credit, was not made available.  Yamuna express way  In the month of October 2009, WCT output tax was computed on the material purchased during the month but not on material consumed. The practice has been subsequently rectified.

WORKS CONTRACT TAX (CONTD)

 In all the returns for 2009-2010, markup has not been added to spares and lubricants for calculation of taxable turnover.  Taxable turnover for April 2010-June 2010 has been considered to be inclusive of tax and tax has been calculated accordingly, which had understated the tax liability. (Rs.) Taxable turnover 6,154,042 49,953,288 56,107,329 Tax rate 13.5% 4.5% Tax amount (inclusive) 731,979 2151099 2,883,077 Tax amount Difference (correct) 830,795 (98,817) 2,247,897 3,078,693 (96,799) (195,617)

 Profit percentage considered for calculating labour price has been changed during the year but there is no supporting documentation for the same. (July 2009 to February 2010 was 15% while March to June 2010 was 20%)

WORKS CONTRACT TAX (CONTD)

 In the return for the quarter April 2010-June 2010, labour has been taken at cost only and markup has not been added to determine taxable turnover. This has resulted in higher tax.  In the return of March 2010, amount of brought forwarded input tax credit has been taken wrongly from the return of February 2010. Rs. 15,898,181 6,947,481

Closing balance of Input tax credit in February 2010 Opening balance of Input tax credit in March 2010

Detailed review by indirect tax experts is required to determine exposure of the Company under VAT / WCT, if any.

Contingent Liabilities

CONTINGENT LIABILITIES
 WAY FORWARD:  Contingent liabilities has been disclosed in two notes in the financial statements for the year ended 30 June 2010: Note 1 for the company and Note13(b) and (c) for the joint ventures. They should be referenced together to disclose the complete nature of contingent liabilities.  Details of contingent liabilities in relation to Joint Ventures should be disclosed.

Consolidated Financial Statements

CONSOLIDATION PROCESS
 DETAILS OF COMPANIES Name of company C & C Realtors Ltd. C and C Projects Ltd. C & C Towers Ltd. PERCENTAGE OF SHAREHOLDING IN DIFFERENT

Shares held by C & C Construction C & C Construction C & C Realtore

Percentage of holding 99.99% 99.99% 99.99% 50.00% 49.00% 50.00%

Status Subsidiary Subsidiary Subsidiary Joint Venture Joint Venture Joint Venture

BSC-C and C-JV Nepal (P) Ltd. C & C Construction BSC-C and C-Kurali Toll Road Ltd. C and C Projects Mokama-Munger Highways Ltd. C and C Projects and C & C Construction

CONSOLIDATION PROCESS (CONTD)

APPLICABLE ACCOUNTING STANDARDS FOR CONSOLIDATION PROCESS AS-21 (Consolidated financial statements) AS-23 (Accounting for investments in associates) AS-27 (Financial reporting of interest in joint venture)

CONSOLIDATION PROCESS (CONTD)

EXISTING PROCESS OF CONSOLIDATION  SUBSIDIARIES  According to the current share holding pattern, C &C Constructions Limited (ultimate holding company) has following subsidiaries. - C & C Realtors Limited - C and C Projects Limited - C & C Towers Limited  Above mentioned subsidiary companies have been consolidated with ultimate holding company as per AS-21.

CONSOLIDATION PROCESS (CONTD)

 JOINT VENTURES  C & C Constructions Limited (ultimate holding company) has Joint Venture agreements with B. Seenaiah & Company (Projects) Limited under which several unincorporated Jointly Controlled Operations (JCO) have been formed to execute various projects. Share of joint venture has been recognised in C &C Constructions Limited (stand alone) as per proportionate consolidation basis as prescribed in AS-27.  C &C Constructions Limited (ultimate holding company) and other group subsidiary companies also have formed Jointly Controlled Entities (JCE) with B. Seenaiah & Company (Projects) Limited under Joint Venture / Shareholders Agreements to execute specific projects. - BSC-C and C-JV Nepal (P) Ltd. - BSC-C and C-Kurali Toll Road Ltd. - Mokama-Munger Highways Ltd.  The JCEs have been treated as Associates in most cases. Details discussion follows.

CONSOLIDATION PROCESS (CONTD)

 OBSERVATIONS IN CONSOLIDATION AS PER AS-21  Share of reserve and surplus has not been identified to minority interest and only face value of shares have been shown as minority interest.  C & C Towers Limited is a step down subsidiary of C & C Constructions Limited (ultimate holding company) and direct subsidiary of C & C Realtors Limited, but the same has been consolidated as 100% with ultimate holding company without allocating for portion of shares not held by C & C Realtors Limited.

CONSOLIDATION PROCESS (CONTD)

 OBSERVATIONS IN CONSOLIDATION AS PER AS-27  BSC-C and C-Kurali Toll Road Limited has been incorrectly considered as an Associate company by C and C Projects Limited in its stand alone financials but has been consolidated proportionately in the consolidated accounts of C&C Constructions Ltd. The JCE should be consolidated proportionately as prescribed in AS-27 with C and C Projects and in turn C and C Projects will be consolidated with C & C Constructions BSC-C and C-JV Limited in accordance with AS-21.Nepal (P) Limited  BSC-C and C-JV Nepal (P) Limited has been incorrectly considered as an Associate company by C & C Constructions Limited in its stand alone financials but has been consolidated proportionately in the consolidated accounts of C&C Constructions Ltd. The JCE should be consolidated proportionately as prescribed in AS-27 with C&C Constructions Limited (stand alone).

CONSOLIDATION PROCESS (CONTD)

 OBSERVATIONS IN CONSOLIDATION AS PER AS-27 (Contd.)  Mokama-Munger Highways Limited has been incorrectly considered as an Associate company by C & C Constructions and C and C Project in their stand alone financials and also in consolidated financial statements. Mokama-Munger Highways Limited should be consolidated proportionately as prescribed in AS-27 with respective stand alone financials and in turn it would be consolidated as per AS-21.

Kurali Toll Road Project

KURALI TOLL ROAD PROJECT

BACKGROUND  Concession Agreement (Agreement) is entered into on 8 April 2007 between the National Highways Authority of India (NHAI) and M/s BSC C and C Kurali Toll Road Limited, a Special Purpose Vehicle (SPV), for strengthening of the existing carriageway at KuraliKiratpur section of National Highway 21 (the Project)  The rights and obligations of the SPV under the Agreement are primarily to:    Plan, design finance, construct, market and operate the Project; Manage, operate and maintain the Project Highway and regulate the use thereof by third parties; and Levy, demand, collect and appropriate the Fees from vehicles and persons liable to payment of fees for using the Project Highway.

KURALI TOLL ROAD PROJECT

BACKGROUND (Contd.)  The SPV is to construct the Project, recover its costs and profit margins through operating the project and handover the Project to NHAI after a specified period i.e. Build, Operate and Transfer (BOT).  The estimated construction period is 180 days from the appointed date and the total period of construction and operations is 20 years from the appointed date. The appointed date as per the Agreement is 25 December 2007.  The SPV is to recover its costs and profit margins through collection of tolls. The toll rate is to be prescribed by the NHAI. There is no minimum guaranteed collection though there is a process of Revenue Shortfall Loan in case of shortfall in revenue due to political causes.

KURALI TOLL ROAD PROJECT

BACKGROUND (Contd.)  NHAI would provide the SPV a cash support in the form of outright Grant based on terms and conditions given in the Agreement. The Grant is to be treated as a part of shareholders funds (Equity Support) subject to certain conditions.  The SPV is to regularly maintain the Highway Project which is subject to inspect of NHAI officials.  The SPV is required to hand over the Highway Project at the end of 20 years in good condition.

KURALI TOLL ROAD PROJECT

PRESENT ACCOUNTING BY THE SPV  The Project is still in the construction phase.  The construction costs including interest and preliminary expenses constituting a right incurred during the period have been recognized as an intangible asset and is presently disclosed as a capital work in progress.

KURALI TOLL ROAD PROJECT

ACCOUNTING LITERATURE  No mandatory accounting literature with respect to BOT / service concession arrangements.  Presently in Indian GAAP, the following literature is available:  Guidance Note on Accounting for Service Arrangements Exposure Draft issued in 2008; and Concession

 Appendix A Service Concession Arrangements to Ind AS 11 Construction Contracts issued as part of Ind AS in February 2011 but effective date is not yet announced for the Appendix.  Both the above literature are similar to each other and are based on IFRIC 12 of International Financial Reporting Standards.

KURALI TOLL ROAD PROJECT

ACCOUNTING LITERATURE SUGGESTED ACCOUNTING  Infrastructure (Project assets) shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator.  The operator acts as a service provider. The operator constructs or upgrades infrastructure (construction or upgrade services) used to provide a public service and operates and maintains that infrastructure (operation services) for a specified period of time.  The operator recognises and measures revenue for providing construction services in accordance with AS for Construction Contracts and revenue for other services in accordance with AS for Revenue.

KURALI TOLL ROAD PROJECT

ACCOUNTING LITERATURE SUGGESTED ACCOUNTING (Contd.)  The operator recognises consideration receivable from the grantor for construction services, including upgrades of existing infrastructure, as a financial asset and / or an intangible asset.  The operator recognises a financial asset to the extent that it has an unconditional right to receive cash irrespective of the usage of the infrastructure.  The operator recognises an intangible asset to the extent that it has a right to charge for usage of the infrastructure (viz. Dr. Intangible asset, Cr. Revenue, at fair value).  Any financial asset recognised is accounted for in accordance with the financial instruments standards, and any intangible asset in accordance with AS on Intangible Assets.

KURALI TOLL ROAD PROJECT

ACCOUNTING LITERATURE SUGGESTED ACCOUNTING (Contd.)  Any financial asset recognised is accounted for in accordance with the financial instruments standards, and any intangible asset in accordance with AS on Intangible Assets.  The operator recognises and measures obligations to maintain or restore infrastructure (e.g. resurfacing before transfer), in accordance with AS on Provisions, Contingent Liabilities and Contingent Assets.  The operator expenses borrowing costs as incurred, unless it has a right to receive an intangible asset and adopts a policy of capitalisation under AS on Borrowing Costs, in which case it capitalises attributable borrowing costs during construction periods.

SERVICE CONCESSION ARRANGEMENTS CERTAIN ILLUSTRATIVE PRACTICES

NOIDA TOLL BRIDGE CO. LTD.

Accounting Policies, Year ended 31 March 2010

SERVICE CONCESSION ARRANGEMENTS CERTAIN ILLUSTRATIVE PRACTICES

NOIDA TOLL BRIDGE CO. LTD.

Accounting Policies, Year ended 31 March 2010

Thank You

CONTACT

KAUSHAL KISHORE
Building No. 10, 8th Floor, Tower B DLF Cyber City, Phase II Gurgaon, Haryana 122 002 (India) Phone - Direct: +91 (124) 307-4205, 307-4000 (Board), 2549191 (Ext. 4205) Fax +91(124) 254 9195 Mobile +91 98111 03133 Email: kaushalkishore@kpmg.com