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McNally Bharat Engineering Company Ltd.

BSE: 532629 Sector: Engineering
NSE: MBECL ISIN Code: INE748A01016
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VOLUME 13892
52-Week high 13.13
52-Week low 4.38
P/E
Mkt Cap.(Rs cr) 151
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
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OPEN 7.10
CLOSE 7.47
VOLUME 13892
52-Week high 13.13
52-Week low 4.38
P/E
Mkt Cap.(Rs cr) 151
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00

McNally Bharat Engineering Company Ltd. (MBECL) - Auditors Report

Company auditors report

Adverse Opinion

We have audited the accompanying standalone financial statements of McNally Bharat Engineering Company Limited (the Company) which comprise the Balance Sheet as at March 31 2019 and the Statement of Profit and Loss (including Other Comprehensive Income) the Statement of Changes in Equity the Statement of Cash Flows for the year then ended and notes to the financial statements including a summary of significant accounting policies and other explanatory information (herein after referred to as Standalone Financial Statements).

In our opinion and to the best of our information and according to the explanations given to us because of the significance of the matters discussed in the Basis for Adverse Opinion section of our report the aforesaid Standalone Financial Statements do not give the information required by the Companies Act 2013 (the Act) in the manner so required and do not give a true and fair view in conformity with the Indian Accounting Standards prescribed under Section 133 of the Act read with the Companies (Indian Accounting Standards) Rules 2015 as amended (Ind AS) and other accounting principles generally accepted in India of the state of affairs of the Company as at 31st March 2019 and its loss including other comprehensive income its cash flows and the changes in equity for the year ended on that date.

Basis for Adverse Opinion

(a) The Company has recognised deferred tax assets amounting to Rs. 51706.60 Lakhs as at 31st March 2019. Considering the material uncertainty related to going concern that exists in the Company the threshold of reasonable certainty for recognising the deferred tax assets as per Ind AS 12- Income Taxes has not been met. Consequently deferred tax assets is overstated and losses for the year is understated by Rs. 51706.60 Lakhs and accumulated deficit is understated by Rs. 51706.60 Lakhs.

(b) We draw attention to note no 41 to the standalone financial statements which relates to the recognition of Fair Value Gain amounting to Rs 87482.00 Lakhs in Other Equity on deferment of payment of amounts received from certain Companies on conversion of those amounts into interest free long term loans. We are unable to obtain sufficient and appropriate audit evidence to substantiate the contractual validity of the transaction and the accounting treatment in the Standalone Financial Statements.

Further interest expense during the year on the aforementioned amounts up to the date of conversion aggregating to Rs 9216.88 Lakhs has not been recognised in the Statement of Profit and Loss.

(c) Trade receivables and otherfinancial assets includes certain old balances related to completed projects amounting to Rs. 8785.37 Lakhs which are outstanding for more than two years and are unconfirmed and claims recoverable [representing bank guarantees invoked by customers] amounting to Rs. 14461.21 Lakhs resulting from alleged performance default events and hence doubtful of recovery. We are unable to comment upon the recoverability of these balances.

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 Responsibility 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 (ICAI) 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 made thereunder and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ICAI's Code of Ethics. We believe that the audit evidence obtained by us is sufficient and appropriate to provide a basis for our adverse opinion on the Standalone Financial Statements.

Material Uncertainty related to Going Concern

We draw attention to note 40 to the Standalone Financial Statements the Company has incurred net loss of Rs. 46599.85 Lakhs during the year ended 31st March 2019 and current liabilities exceed current assets by Rs. 11544.96 Lakhs as on March 31 2019. During the year ended March 31 2019 the Company was unable to discharge its obligations for repayment of loans and settlement of other financial and non-financial liabilities including statutory liabilities. The Company's management is currently in discussion with the lenders for carrying out a debt restructuring proposal. These events and conditions indicate a material uncertainty which cast a significant doubt on the Company's ability to continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities including potential liabilities in the normal course of business. The ability of the Company to continue as a going concern is solely dependent on the acceptance of the debt restructuring proposal which is not wholly within the control of the Company.

The Management of the Company has prepared the Standalone Financial Statements on going concern basis based on their assessment of the successful outcome of the restructuring proposal and accordingly no adjustments have been made to the carrying value of the assets and liabilities and their presentation/classitication in the Balance Sheet.

Our opinion is not modified in respect of this matter.

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 of the current period. 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. In addition to the matter described in the Basis for Adverse Opinion section and Material Uncertainty related to Going Concern section of our report we have determined the matters described below to be the key audit matters to be communicated in our report.

Key Audit MattersAuditors' Response to Key Audit Matters
1 Estimated Cost to complete the Project: (Refer note 1(d) to the standalone financial statements)Our audit approach was combination of test of internal controls and substantive procedures which included the following:
The Company recognises revenue under percentage of completion method as specified under Indian Accounting Standard (IND AS)-115 -Revenue from contract with customers.1. Tested the design implementation and operating effectiveness of the controls surrounding determination and approval of estimated cost.
Recognition of revenue requires estimation of total contract cost which comprises of the actual cost incurred till date and estimated cost further to be incurred2. Verified the contracts with customers on test check basis including the actual cost incurred and terms and condition related to the variation of the cost.
to complete the projects. Estimation of the cost to complete involves exercise of significant judgement by management including assessment of technical data and hence identified as Key Audit Matter.3. Discussed with the project management teams for certain selected projects to assess the reasonableness of the estimated cost to be incurred for completing the respective projects.
4. Obtained and relied on the independent chartered engineer certificate for supporting the accuracy of the estimate of the total cost of the project for selected contracts on test check basis.
5. Evaluated the competencies capabilities and objectivity of the independent chartered engineers.

 

Key Audit MattersAuditors' Response to Key Audit Matters
2 Impairment of Investment in Subsidiaries:
(Refer note 5 to the standalone financial statements) Investment in Subsidiaries are measured at cost net of impairment provision if any as per the requirements of Ind AS 36 Impairment of Assets.Our audit approach was combination of test of internal controls and substantive procedures which included the following:
Impairment indicators were noted in one of the Subsidiary Companies resulted in an assessment of impairment of the Investments in the Subsidiary being required.1. Tested the design implementation and operating effectiveness of the controls surrounding management review type controls on assessment of impairment of Investments in subsidiaries.
This area was considered to be of Key Audit Matter for the following reasons:2. Send specific instruction to the Component Auditor of the Subsidiary and relied on their response to verify the appropriateness of the Cash flow projection of the Subsidiary including key assumptions considered as part of the impairment assessment.
 The magnitude of the balance of the Investments in its subsidiary with a carrying value of Rs 17923.73 Lakhs; and
 The carrying value is supported by future forecasted operating cash flows of the subsidiary which are judgmental in nature and are dependent on number of factors including volume and margin expectations.
3 Provisions and Contingent Liabilities (Refer note 1(t) to the standalone financial statements) The Company is involved in various taxes and other disputes for which final outcomes cannot be easily predicted and which could potentially result in significant liabilities. The assessment of the risks associated with the litigations is based on complex assumptions which require the use of judgements and such judgements relates primarily to the assessment of the uncertainties connected to the prediction of the outcome of the proceedings and to the adequacy of the disclosures in the financial statements. Because of the judgement required the materiality of such litigations and the complexity of the assessment process the area is a key matter for our audit.Our audit approach was combination of test of internal controls and substantive procedures which included the following:
1. Assessing the appropriateness of the design and implementation of the Company's controls over the assessment of litigations and completeness of disclosures.
2. Testing the supporting documentation for the positions taken by the management conducting meetings with in-house legal counsel and/or legal team and reviewing the minutes of Board and subcommittee to confirm the operating effectiveness of these controls.
3. Assessment of assumptions used in the evaluation of potential risk and tax risks performed by the legal and tax department of the Company considering the legal precedence and other rulings in similar cases.
4. Involving our direct and indirect tax specialists to assess relevant historical and recent judgements passed by the appropriate authorities in order to challenge the basis used for the accounting treatment and resulting disclosures.

Information Other than the 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 Annual report but does not include the Financial Statements and our Auditors' Report thereon. The Annual Report is expected to be made available to us after the date of this Auditors' Report.

Our opinion on the Standalone Financial Statements does not cover the other information and we will 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 identified above when it becomes available 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.

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 including other comprehensive income changes in equity and cash flows of the Company in accordance with the accounting principles generally accepted in India including the Indian Accounting Standards prescribed 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 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 Statements 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 management 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 management either intends to liquidate the Company or to cease operations or has no realistic alternative but to do so.

Those Board of Directors are also responsible for overseeing the Company's financial reporting process.

Auditors' 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 Auditors' 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.

As part of an audit in accordance with SAs we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 Identify and assess the risks of material misstatement of the Standalone Financial Statements whether due to fraud or error design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error as fraud may involve collusion forgery intentional omissions misrepresentations or the override of internal control;

 Obtain an understanding of internal financial control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. Under Section 143(3)(i) of the Act we are also responsible for expressing our opinion on whether the Company has adequate internal financial controls system in place and the operating effectiveness of such controls;

 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management;

 Conclude on the appropriateness of management's use of the going concern basis of accounting and based on the audit evidence obtained whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists we are required to draw attention in our auditor's report to the related disclosures in the standalone financial statements or if such disclosures are inadequate to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However future events or conditions may cause the Company to cease to continue as a going concern.

 Evaluate the overall presentation structure and content of the standalone financial statements including the disclosures and whether the standalone financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Materiality is the magnitude of misstatements in the Standalone Financial Statements that individually or in aggregate makes it probable that the economic decisions of a reasonably knowledgeable user of the Standalone Financial Statements may be influenced. We consider quantitative materiality and qualitative factors in (i) planning the scope of our audit work and in evaluating the results of our work; and (ii) to evaluate the effect of any identified misstatements in the Standalone Financial Statements.

We communicate with those charged with governance regarding among other matters the planned scope and timing of the audit and significant audit findings including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and where applicable related safeguards.

From the matters communicated with those charged with governance we determine those matters that were of most significance in the audit of the Standalone Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our Auditor's Report unless law or regulation precludes public disclosure about the matter or when in extremely rare circumstances we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

1. As required by Section 143(3) of the Act based on our audit we report that:

a) 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 effects of the matters described in the Basis for Adverse 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 including Other Comprehensive Income Statement of Changes in Equity and the Statement of Cash Flows dealt with by this Report are in agreement with the relevant books of account.

d) considering the significance of the matters discussed in the Basis for Adverse Opinion section above in our opinion the aforesaid Standalone Financial Statements do not comply with the Ind AS specified under Section 133 of the Act.

e) the matter(s) described in the Basis for Adverse Opinion section 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 2019 taken on record by the Board of Directors none of the directors is disqualified as on 31st March 2019 from being appointed as a director in terms of Section 164 (2) of the Act.

g) the adverse remarks relating to the maintenance of accounts and other matters connected therewith are as stated in the Basis for Adverse Opinion section above.

h) with respect to the adequacy of the internal financial controls over financial reporting of the Company and the operating effectiveness of such controls refer to our separate Report in Annexure A. Our report expresses adverse opinion on the adequacy and operating effectiveness of the Company's internal financial controls over financial reporting for the reasons stated therein

i) with respect to the other matters to be included in the Auditor's Report in accordance with the requirements of Section 197(16) of the Act as amended in our opinion and to the best of our information and according to the explanations given to us the remuneration paid/ provided by the Company to its directors during the year is in excess of the limits laid down under Section 197 of the Act.

We draw attention to the Note 31(a) to the Standalone Financial Statements regarding waiver of recovery of excess managerial remuneration amounting to Rs. 220.09 Lakhs (Rs. 220.03 Lakhs for the year ended March 31 2018) paid/payable to the Managing Director for which the Company is in the process of obtaining approval from the banks to whom default in repayment of dues was made and from the shareholders of the Company in terms of Section 197(17) of the Act. Pending approval from the banks and from the shareholders of the Company we are unable to comment on the consequential effects of the matter on this Standalone Financial Statements.

This matter was also qualified by us in the report for the financial year ended March 31 2018.

j) 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 as amended in our opinion and to the best of our information and according to the explanations given to us:

i. except for the possible effect of the matters discussed in the Basis for Adverse Opinion section above the Company has disclosed the impact of pending litigations on its financial position in its Standalone Financial Statements (Refer Note-29 to the Standalone Financial Statements);

ii. the Company has made provisions as required under the applicable law or accounting standards for material foreseeable losses if any on long-term contracts including derivative contracts;

iii. there has been no delay in transferring amounts required to be transferred to the Investor Education and Protection Fund by the Company.

2. As required by the Companies (Auditor's Report) Order 2016 (the Order) issued by the Central Government in terms of Section 143(11) of the Act we give in Annexure B a statement on the matters specified in paragraphs 3 and 4 of the Order.

For DELOITTE HASKINS & SELLS LLPFor V.SINGHI & ASSOCIATES
Chartered AccountantsChartered Accountants
Firm Registration Number:Firm Registration Number:
117366W/W-100018311017E
A. BhattacharyaV. K. Singhi
PartnerPartner
Membership Number: 054110Membership Number: 050051
Place: Kolkata
Date: May 30 2019

Annexure A to the Independent Auditors' Report

(Referred to in paragraph 1(h) under 'Report on Other Legal and Regulatory Requirements' section of our Report of even date)

Report on the Internal Financial Controls Over Financial Reporting under Clause (i) of Sub-section 3 of Section 143 of the Companies Act 2013 (the Act)

We have audited the internal financial controls over financial reporting of McNally Bharat Engineering Company Limited (the Company) as of March 31 2019 in conjunction with our audit of the Standalone Financial Statements of the Company for the year ended on that date.

Management's Responsibility for Internal Financial Controls

The Company's management is responsible for establishing and maintaining internal financial controls based on criteria established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India. These responsibilities include the design implementation and maintenance of adequate internal financial controls that were operating effectively for ensuring the orderly and efficient conduct of its business including adherence to company's policies the safeguarding of its assets the prevention and detection of frauds and errors the accuracy and completeness of the accounting records and the timely preparation of reliable financial information as required under the Act.

Auditors' Responsibility

Our responsibility is to express an opinion on the internal financial controls over financial reporting of the Company based on our audit. We conducted our audit in accordance with the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting (the Guidance Note) issued by the Institute of Chartered Accountants of India and the Standards on Auditing prescribed under Section 143(10) of the Act to the extent applicable to an audit of internal financial controls. Those Standards and the Guidance Note require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether adequate internal financial controls over financial reporting was established and maintained and if such controls operated effectively in all material respects.

Our audit involves performing procedures to obtain audit evidence about the adequacy of the internal financial controls system over financial reporting and their operating effectiveness. Our audit of internal financial controls over financial reporting included obtaining an understanding of internal financial controls over financial reporting assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. The procedures selected depend on the auditor's judgement including the assessment of the risks of material misstatement of the financial statements whether due to fraud or error.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion on the Company's internal financial controls system over financial reporting.

Meaning of Internal Financial Controls Over Financial Reporting

A company's internal financial control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal financial control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition use or disposition of the company's assets that could have a material effect on the financial statements.

Inherent Limitations of Internal Financial Controls Over Financial Reporting

Because of the inherent limitations of internal financial controls over financial reporting including the possibility of collusion or improper management override of controls material misstatements due to error or fraud may occur and not be detected. Also projections of any evaluation of the internal financial controls over financial reporting to future periods are subject to the risk that the internal financial control over financial reporting may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Basis for Adverse Opinion

According to the information and explanations given to us and based on our audit material weaknesses have been identified as at March 31 2019 with respect to the Company not establishing an internal control framework relating to all components of internal control and consequently controls have not been designed to evaluate appropriateness of the carrying amount of deferred tax Impairment of trade receivable and other financial assets recognition of gain on fair valuation of financial liabilities and payment of excess managerial remuneration for which the Company is in the process of obtaining approval from the banks and shareholders.

A 'material weakness' is a deficiency ora combination of deficiencies in internal financial controls over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

Adverse Opinion

In our opinion and to the best of our information and according to the explanations given to us because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria the Company has not maintained adequate internal financial controls over financial reporting and such internal financial controls over financial reporting were notoperating effectively as of March 31 2019 based on the criteria for internal control established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India.

We have considered the material weaknesses identified and reported above in determining the nature timing and extent of audit tests applied in our audit of the Standalone Financial Statements of the Company for the year ended March 31 2019 and these material weaknesses have affected our opinion on the said Standalone Financial Statements of the Company and we have issued an adverse opinion on the Standalone Financial Statements of the Company.

For DELOITTE HASKINS & SELLS LLPFor V.SINGHI & ASSOCIATES
Chartered AccountantsChartered Accountants
Firm Registration Number:Firm Registration Number:
117366W/W-100018311017E
A. BhattacharyaV. K. Singhi
PartnerPartner
Membership Number: 054110Membership Number: 050051
Place: Kolkata
Date: May 30 2019

   

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