1. We have audited the accompanying Standalone Financial Statements of HINDUSTAN ORGANIC CHEMICALS LIMITED (“the Company”) which Comprises the Balance Sheet as at March 31, 2024, the Statement of Profit and Loss, including the statement of Other Comprehensive Income, the Cash Flow Statement and the Statement of Changes in Equity for the year then ended, and notes to the Standalone Financial Statements, including material accounting policies and other explanatory information (hereinafter referred to as “the Standalone Financial Statements”).
2. In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter 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 (‘Ind AS') specified under Section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015 and other accounting principles generally accepted in India, of the state of affairs of the Company as at 31 March 2024, and its profit (including other comprehensive income), its cash flows and the changes in equity for the year ended on that date.
Basis for Qualified Opinion
3. We draw attention to note no. 11 of the accompanying Standalone Financial Statements regarding the waiver of interest chargeable on loans amounting to Rs. 453.01 lakhs advanced to its subsidiary. As per the provisions of Section 186(7) of the Companies Act, 2013, no loan shall be given at a rate of interest lower than the prevailing yield of one year, three-year, five year or ten-year Government Security closest to the tenor of the loan. In our opinion, the Company has violated the provisions of section 186(7) of the Companies Act, 2013.
Had the impact of the above qualification been considered, as of 31st March 2024, ‘Interest Receivables from Related Parties' under ‘Other Financial Assets' would have increased by Rs. 57.26 lakhs, ‘Statutory Receivables - Duties & Taxes, Prepaid Taxes' under ‘Other Current Assets' would have increased by Rs. 6.36 lakhs, shareholder funds would have increased by Rs. 63.62 lakhs, and for the year ended on that date, ‘Interest Income on Loan to Subsidiary Company' and net income would have increased by Rs. 63.62 lakhs.
4. We conducted our audit of the Standalone Financial Statements in accordance with the Standards on Auditing (SAs), as 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 (“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 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 we have obtained is sufficient and appropriate to provide a basis for our opinion on the Standalone Financial Statements.
Material Uncertainty Related to Going Concern
5. We draw attention to Note No. 42 of the accompanying Standalone Financial Statements. During the year, the Company has reported a net profit, including other comprehensive income, of Rs. 388.00 lakhs (previous year net loss, including other comprehensive income, of Rs. 4,239.63 lakhs). Also, the Company has accumulated losses amounting to Rs. 1,07,999.21 lakhs (previous year Rs.
1,07,136.93 lakhs) with a negative net worth of Rs. 96,433.68 lakhs (previous year Rs. 95,571.40 lakhs), excluding other comprehensive income. The Company has a balance under current assets, cash and cash equivalents, and other bank balances amounting to Rs. 22,642.08 lakhs (previous year Rs. 16,730.48 lakhs) as at year-end.
Further, we are informed that the Company, with the approval of the Government of India, is in the process of divesting and selling off its lossmaking unit at Rasayani, Mumbai, which includes assets with a carrying amount of Rs. 94,550.32 lakhs, including 517.819 acres of land owned by the unit. This process is expected to generate sufficient cash flow for the Company. The Kochi unit of the Company is operational, and the Company is currently in the process of implementing the restructuring plan approved by the Central Government. Consequently, the Standalone Financial Statements have been prepared on a going concern basis.
Our conclusion remains unmodified in this regard.
Key Audit Matters
6. Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Standalone Financial Statements for the financial year ended March 31,2024. 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. For each matter below, our description of how our audit addressed the matter is provided in that context.
7. We have determined the matters described below to be the key audit matters to be communicated in our report. We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the Standalone Financial Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the Standalone Financial Statements. The Statements of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Standalone Financial Statements.
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The Key Audit Matter
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How the matter was addressed in our audit?
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Revenue recognition - Discounts, incentives and rebates
See Notes 2.2 (a) the Standalone Financial Statements
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• The measurement of revenue, considering discounts, incentives, and rebates provided to customers, is a critical aspect of our audit.
• The Company's extensive presence in diverse marketing regions and the dynamic nature of the competitive business environment contribute to the complexity and judgment involved in assessing various types of discounts, incentives, and rebates.
• Consequently, there is an inherent risk of revenue misstatement due to potential variations in the evaluation of these elements.
• Given the intricate nature and reliance on judgment in assessing provisions for discounts, incentives, and rebates, this constitutes a key audit matter.
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Our audit procedures, among
others included:
• We have assessed the Company's accounting policies relating to revenue, discounts, incentives and rebates by comparing with applicable accounting standards.
• We have assessed the design and implementation and tested the operating effectiveness of Company's internal controls over the provisions, approvals and disbursements of discounts, incentives and rebates.
• We have assessed the Company's computations for accrual of discounts, incentives and rebates, on a sample basis, and compared the accruals made with the approved schemes and underlying documents.
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The Key Audit Matter
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How the matter was addressed in our audit?
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Revenue recognition - Discounts, incentives and rebates
See Notes 2.2 (a) the Standalone Financial Statements
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• We have compared the historical trend of payments and reversal of discounts, incentives and rebates to provisions made to assess the current year accruals
• We have examined the manual journals posted to discounts, rebates and incentives to identify unusual or irregular items.
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The Key Audit Matter
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How the matter was addressed in our audit?
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Contingencies, including litigations and tax
See Note 2.2 (d) and 34 to the Standalone Financial Statements
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• The Company routinely encounters legal complexities, encompassing disputes, lawsuits, regulatory matters, and other issues inherent in regular business operations. Many of these situations involve intricate details.
• Supported by external legal advisors, the Company meticulously evaluates each circumstance to determine whether provisions should be made or contingencies disclosed.
• This aspect is crucial for our audit due to the intricate nature of accounting and disclosure concerning potential legal and tax liabilities. The challenge lies in predicting outcomes and estimating financial impacts, especially in unfavourable scenarios.
• Furthermore, the financial implications of these legal considerations are, or have the potential to be, significant to the Standalone Financial Statements. Therefore, a thorough examination is essential in ensuring the accuracy of the financial reporting
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Our audit procedures, among
others included the following:
• We evaluated the design and tested the operating effectiveness of controls relating to identification and evaluation of claims, proceedings and investigations at different levels in the Company, and the measurement of provisions for disputes, potential claims and litigation, contingent liabilities and disclosures
• We obtained a list of ongoing litigations from the Company's in-house legal team.
• We selected a sample of litigations based on materiality and performed inquiries with the said counsel on the legal evaluation of these litigations. We compared the evaluation with the provision or disclosure in the Standalone Financial Statements.
• We tested the underlying computation of the management in relation to the measurement of provision or the contingency.
• We obtained legal letters from the Company's external legal advisors with respect to the matters included in the summary. Where appropriate, we examined correspondences connected with the cases.
• We inspected relevant communication with tax authorities.
• We involved our inhouse tax experts in assessing the nature and amount of material tax positions and assessed the technical merits based on the correspondence and assessments from the relevant tax authorities.
• We also evaluated the disclosures made in the Standalone Financial Statements.
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The Key Audit Matter
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How the matter was addressed in our audit
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Valuation of Inventory
See Note 6 to the Standalone Financial Statements
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• The verification and valuation of raw materials, semifinished, and finished goods is a meticulous manual undertaking. During this process, indirect production costs are estimated and integrated into inventory costs, involving judgment and estimation.
• The allocation of these costs is subject to uncertainty at the time of estimation. Furthermore, price fluctuations depend on multiple factors, including domestic, global, and various other external factors.
• In addition, management exercises judgment in identifying and evaluating obsolete inventories and slow-moving stock items, while also estimating the appropriateness of necessary provisions. Given the subjective nature of these judgments and the inherent uncertainties, we have identified this as a Key Audit Matter.
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Our audit approach, among others involved the following combination of tests of control design, implementation, operating effectiveness, and substantive testing in respect of verification and valuation of inventories:
• Understanding and evaluating the design and testing the operating effectiveness of controls over the physical count process and measurement of such inventory;
• We evaluated the system of inventory monitoring and control. Reviewing data from software used by the Company such as Distributed Control System for plant operations, independent Programmable Logic Controllers for the safety of the Plant, Tank Level Monitoring System (“LMS”) for detailed statistics about the stock of raw materials, finished products, and intermediate products, along with various alarms, warnings, and history of the tank operations, etc.
• Physically observing inventory measurement and count procedures carried out by management to assess its appropriateness and completeness and performing roll-backward/ roll-forward procedures.
• Obtaining and inspecting inventory measurement and physical count Statements, including assessing and evaluating the Statements of analysis performed and adjustments made by the Management in respect of differences between book and physical quantities.
• Testing on a sample basis the accuracy of the cost for inventory. Testing the net realizable value by comparing the actual cost with the most recent selling price.
Based on the above procedures performed, we did not identify any material exceptions in the measurement of inventory.
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Information Other than the Financial Statements and Auditor’s Report
thereon
8. The Company's Management and Board of Directors are responsible for the other information. The other information comprises the information included in the Company's annual report, but does not include the financial statements and auditor's report(s) thereon. The Company's annual report is expected to be made available to us after the date of this auditor's report.
9. Our opinion on the Standalone Financial Statements does not cover the other information and we do not express any form of assurance conclusion thereon.
10. 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
11. The Company's management and Board of Directors are 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 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.
12. 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.
13. 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.
14. 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
15. 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.
16. As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional scepticism 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 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 with reference to financial statements 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 and Board of Directors.
• Conclude on the appropriateness of the Management and Board of Directors use of the going concern basis of accounting in preparation of Standalone Financial Statements 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.
17. 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.
18. 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.
19. 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 auditors' 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 the Companies (Auditor's Report) Order, 2020 issued by the Central Government of India in terms of sub-section 11 of section 143 of the Act, we give in the “Annexure A”, a statement on the matters specified in paragraphs 3 and 4 of the Order.
2. As required by the directions and sub directions issued by the office of the Comptroller & Auditor General of India under section 143 (5) of the Act, we give in the “Annexure B” a statement on the matters referred in those directions.
3. 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) 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 Standalone Balance Sheet, the Standalone Statement of Profit and Loss including Other Comprehensive Income, the Standalone Statement of Cash Flow and Standalone Statement of Changes in Equity dealt with by this Report are in agreement with the books of account.
d) In our opinion, the aforesaid Standalone Financial Statements comply with the Ind AS specified under section 133 of the Act.
e) As per Notification No. G.S.R. 463(E) dated June 5, 2015, the Government Companies are exempted from provisions of section 164 (2) of the Act. Accordingly, we are not required to report whether any directors are disqualified in terms of provisions contained in the said section.
f) 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 C”. Our report expresses an unmodified opinion on the adequacy and operating effectiveness of the Company's internal financial controls with reference to Standalone Financial Statement.
g) Being a Government Company, pursuant to the notification number GSR 463(E) dated 5th June, 2015 issued by the Government of India, the provisions of section 197 of the Act are not applicable to the Company.
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 and disclosed in its Standalone Financial Statements - Refer Note no. 34 of the financial statements on Contingent Liabilities.
ii. The Company did not have any long-term contracts including derivative contracts for which there were any material foreseeable losses.
iii. The Company does not have any amounts required to be transferred to the Investor Education and Protection Fund.
iv. (a) The Management has represented that, to the best of
its knowledge and belief, no funds (which are material either individually or in the aggregate) 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 or entity, including foreign entity (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, 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 (which are material either individually or in the aggregate) have been received by the Company from any person or entity, including foreign entity (“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;
(c) Based on the audit procedures that have been considered reasonable and appropriate in the circumstances, nothing has come to our notice that has caused us to believe that the representations under sub-clause (i) and (ii) of Rule 11(e), as provided under (a) and (b) above, contain any material misstatement.
v. The Company has not declared or paid dividend during the year.
vi. Based on our examination, which included test checks, the Company has used accounting softwares for maintaining its books of account for the financial year ended March 31,2024 which has a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the softwares. Further, during the course of our audit we did not come across any instance of the audit trail feature being tampered with.
As proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 is applicable from April 1, 2023 reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules,2014 on preservation of audit trail as per the statutory requirements for record retention is not applicable for the financial year ended March 31,2024.
21. Non- Compliance of the SEBI Listing Obligation and Disclosure Requirements (LODR) Regulations, 2015;
The Company has not complied with the Regulations 17(1)(a) and 17(1 )(b) in respect of maintenance of an optimum combination of executive and non-executive directors with at least one-woman director and not less than fifty percent of the board of Directors comprised of Independent Directors. Our conclusion is not modified in respect of this matter.
For Paulson and Company
Chartered Accountants FRN 002620S
CA. Paulson K.P.
Partner
Kochi Membership No. 021855
22 May 2024 UDIN: 24021855BKAOAA1083
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