REPORT OF BOARD OF DIRECTORS TO THE SHAREHOLDERS OF EL FORGE LIMITED UNDER SECTION23(1)(B) OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT 1985

In terms of requirements of Section 23(1)(b) of the Sick Industrial Companies (SpecialProvisions) Act 1985 a report of the Board of Directors on erosion of more than 50% ofthe Company’s peak net worth during the immediately preceding four financial yearsalong with its causes and revival plan is being submitted herewith to the Members of theCompany.

As per audited financial accounts of the Company for the nine months ended March 312014 adopted by the Shareholders of the Company at their 78^th Annual GeneralMeeting held on September 26 2014 the accumulated losses as at the end of financialperiod March 31 2014 stood at Rs.71.34 Crores (Rs.59.99 Crores in 2012-13 Rs.26.17Crores in 2011-12 Rs16.98 Crores in 2010-11 and Rs 19.24 Crores in 2009-10) which aremore than 50% of its peak net worth of Rs.29.47 Crores during the four financial yearspreceding the financial period ended March 31 2014 calculated as per the provisions ofSICA.

Causes for erosion of Net Worth

Our company is one of the first forge shops in South India. It was set up in 1964. Thisbeing the case it was necessary for the Company to modernize the plant in order to attractworld wide customers. Towards this objective the Company decided to set up a world classplant in Chennai.

In 2005 the Company purchased land in Appur and started the construction. The area wasnear to the SIPCOT area which was to have a special power substation that would supplypower to our plant also. However due to the circumstances the sub station erection wasunduly delayed. As a result our factory had to draw a separate power line from MaraimalaiNagar at Company’s cost.. This resulted in connection being delayed for more than ayear and as a consequence the factory could not start production till January 2007 asenvisaged.

This was a major setback for the project as the interest costs and repayments hadstarted even before commencement of commercial production.

While the Company was carrying out the trial production and stabilizing for serialproduction the power cut was introduced in Tamilnadu which was another blow. By the timethe company could reorganize and manage the power position the global recession in 2008came with a big bang and the orders from overseas customers dropped to very low levels.The capacity utilization fell below 30% of total capacity leading to losses. To summarisethe reasons for losses leading to erosion of net worth are

• Delay in power connection

• Uncertain power situation in Tamilnadu

• Global financial crisis

• Significant drop in industrial production

• Non receipt of working capital on time from bankers

While there was stress on operations the world class facility and the quality of ourproduct retained our orders from customers which gave the Company hope for restructure andrevival.

The Company therefore addressed the servicing of the borrowings from banks through aCorporate Debt Restructure scheme in 2009. This Restructure envisaged infusion of equityand release of funds for working capital by the Banks. Equity infusion was made to improvethe operations and move to profitable levels. In keeping with CDR conditions forrestructuring stipulated equity was brought in by the Company.

In spite of the fresh infusion of funds through equity the bank finance was delayedand came in at different points of time such delays resulted in the funds going for debtservice rather than scaling up of the operations. The working capital support from Banksat this juncture was delayed beyond a year.

The Company was unable to reach the projected turnover leading to consecutive lossesover the years from 2008-09 till date.

The accumulated losses as on 31.03.2014 amounts to Rs.71.35 Crores. Due to this the networth of the Company has been eroded. Measures initiated by the Company to improvefinancial performance

The Customers goodwill the state of the art manufacturing facility and the quality ofthe forgings have retained the best of Customers.

The world class OEM’s have approved the Company’s facility. With the customersupport in procuring the material the Company continues its operations though at 30% levelin order to service the customers and retain the value of going concern.

The Company has repeatedly approached the banks for a further re-structure and workingcapital support.

The Company has planned to encash its non-core assets and improve the operations andalso settle the debt.

The Company is also exploring Investors willing to take over the debt from banks throsettlement plan and bring down the debt levels of the company to sustainable position andalso assist turnaround of the Company to profitable levels.

The Company has initiated cost saving measures and brought down the costs to ensurefurther profitability.

All the above measures will help the Company emerge out of the present position andsteer the business to a profitable position in the future. With the result the Companywill be able to recover the eroded net worth and gain good financial strength in the yearsto come.