1. Corporate Information
“HEG Limited (the ‘Company’), incorporated in 1972, is a leading manufacturer and exporter of graphite electrodes in India and operates world’s largest single-site integrated graphite electrodes plant. The Company also operates three power generation facilities with a total rated capacity of about 76.5 MW.
The Company is a public limited company incorporated and domiciled in India, having its registered office at Mandideep (Near Bhopal), Distt. Raisen, Madhya Pradesh.
2. Significant Accounting Policies
2.1 Basis of preparation of Financial Statements
In accordance with the notification issued by the Ministry of Corporate Affairs, the Company, with effect from 1 April 2016, has adopted Indian Accounting Standards (the ‘Ind AS’) notified under the Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015 as amended by Companies (Indian Accounting Standards) (Amended) Rules, 2016. For all periods up to 31st March 2016, the Company had prepared its financial statements in accordance with accounting standards as prescribed under Section 133 of the Companies Act, 2013 (the ‘Act’) read with Rule 7 of the Companies (Accounts) Rules, 2014 (referred to as ‘Indian GAAP’).
These financial statements are the Company’s first Ind AS financial statements. The Company has adopted all the Ind AS and the adoption was carried out in accordance with Ind AS 101 First time adoption of Indian Accounting Standards. Previous period figures in the financial statements have been restated to Ind AS. Reconciliations and descriptions of the effect of the transition have been summarized in Note 50. The details of the first time adoption exemptions availed by the Company are given in Note 50(a).
Accounting policies have been consistently applied except where a newly issued accounting standard is initially adopted or a revision to an existing accounting standard requires a change in the accounting policy hitherto in use.
The financial statements are presented in Indian rupees (INR) and all values are rounded to the nearest lacs and two decimals thereof, except otherwise stated.
These financial statements have been prepared under the historical cost convention on accrual basis, except for certain financial instruments which are measured at fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
3. Critical accounting estimates and judgments
The preparation of financial statements in conformity with Indian Accounting Standards (Ind AS) requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent liabilities at the end of the reporting period. Although these estimates are based upon management’s best knowledge of current events and actions, uncertainty about these assumptions and estimates could result in the outcomes requiring a material adjustment to the carrying amounts of assets or liabilities in future periods. Critical accounting estimates and Judgments
a. Property, plant and equipment
Property, plant and equipment represent a significant proportion of the asset base of the company. The charge in respect of periodic depreciation is derived after determining an estimate of an asset’s expected useful life and the expected residual value at the end of its life. The useful lives and residual values of property, plant and equipment are determined by the management based on technical assessment by internal team and external advisor. The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their life, such as changes in technology. The Company believes that the useful life best represents the period over which the Company expects to use these assets.
b. Contingent liability
Management judgement is required for estimating the possible outflow of resources, if any, in respect of contingencies/claim/ litigations against the Company as it is not possible to predict the outcome of pending matters with accuracy.
c. Income taxes
Management judgment is required for the calculation of provision for income taxes and deferred tax assets and liabilities. The Company reviews at each balance sheet date the carrying amount of deferred tax assets.
d. Defined benefit plans (gratuity and leave encashment)
The cost of the defined benefit gratuity plan and leave encashment benefit and their present value is determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of discount rate, future salary increases and mortality rates. Due to the complexities involved in the valuation and its longterm nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
a) Assets amounting to Rs.83.13 Lacs (Previous Year Rs.83.13 Lacs) (Gross) are owned jointly with RSWM Ltd.
b) The Company has opted to avail the exemption under para D13AA of Ind AS 101 and elected to continue the policy adopted for accounting for exchange difference arising from translation of long term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the transition date to Ind AS. Accordingly, an amount of Rs.219 Lacs (Unrealized Gain) & Rs.88.10 lacs (Realized Loss being adjusted against respective assets), (Previous Year Rs.1476.13 Lacs (Unrealized Loss) & Rs.62.21 (Realized Loss being adjusted against respective assets) being exchange difference arising on reporting of long term Foreign currency loans availed for acquisition of depreciable Fixed assets have been taken to respective assets and ? NIL Lacs,( Previous Year Rs.732.89) to capital work-in-progress.
c) During the Financial year 2015-16 company revised the useful life of its fixed assets in keeping with the provision of Schedule II. Accordingly, depreciation for the year is lower by Rs.372.40 Lacs.
d) The Company has reviewed its tangible fixed assets as at 1st April, 2015 and identified significant component with different useful life from the remaining parts of the assets in keeping with the provisions of Schedule II to the Companies Act, 2013. The depreciation has been computed for such components separately effective 1st April, 2015. As a result, the depreciation expense for the financial year 2015-16 is higher by Rs.552.93 Lacs.
e) During the financial year 2015-16 Company revised the useful life of its fixed assets in keeping with the provision of Schedule II. Accordingly, depreciation of Rs.294.09 Lacs on account of assets whose useful life was already exhausted on 1st April, 2015 has been adjusted against reserves.
f) Leased Assets
The lease term in respect of leasehold land generally expire with in 30 to 99 years. The ground rent shall be liable to be increased on the expiry of 10 to 30 years depending on the term of lease from the date of execution of this deed and also at subsequent interval of 10 to 30 years, provided that the increase on each occasion shall not exceed one quarter of the rent fixed for the preceeding 10 to 30 years. The above lease hold land or any part thereof or any buliding errected theron cannot be sublet, assign or otherwise transferred without any prevoius sanction in writing of the lessor.
g) Property , Plant & Equipment pledged as security
Refer to note no. 49 for information on property, plant and equipment pledged as security by the company.
Capital work in progress includes Rs.1.49 Lacs (Previous year Rs.772.11 Lacs) being preoperative expenditure and Rs.18.66 Lacs (Previous year Rs.103.46 Lacs) being capital stores.
(i) Amounts recognised in profit or loss for investment properties
(ii) Fair value of Investment property held is Rs.2,029.02 Lacs
(iii) On transition to Ind AS, the investment property are recognised at Net Block, the accumulated depreciation on transition was Rs.43.57 lacs.
Based on legal advice, discussions with the solicitors, etc., the management believes that there are fair chances of decisions in the Company’s favour in respect of all the items listed above and no value adjustment is considered necessary.
b) Direct taxes refundable represent amounts recoverable from the Income Tax Department for various assessment years. In respect of disputed demands, Company has filed appeals which are pending at various levels and for assessment years where the issues have been decided in favour of the Company. The Company is in the process of reconciling / adjusting the same with the department. Necessary value adjustments shall be made on final settlement by the department.
c) Provision for Income Tax for earlier years has been made based on Income Tax Assessment cases pending at Appellate Jurisdictions on which Income Tax demand has arisen and the cases are sub-judice.
I Inventories (Valued at Lower of Cost and Net Realizable Value)
(a) Finished goods are written down from its cost to Net Realisable value by Rs.384.51 Lacs (Previous year Rs.229.86 Lacs).
(b) Others include Renewable Eneregy Credits in hand.
Of the above
2,21,96,821 (Previous year 2,21,96,821) Equity Shares have been issued as fully paid up bonus shares by capitalisation of Reserves.
3,00,000 (Previous year 3,00,000) Equity Shares have been issued as fully paid up pursuant to a contract without payment being received in cash.
10,700 (Previous year 10,700) Equity shares have been issued at par as fully paid up to the members of erstwhile subsidiary company Bhilwara Viking Petroleum Limited pursuant to amalgamation.
a) Reconciliation of the Shares outstanding at the beginning and at the end of the reporting period
b) Terms/Rights attached to equity shares
Company has only one class of equity shares having a par value of Rs.10/-. Each holder of equity shares is entitled to one vote per share. The dividend (if any) proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting.
In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.
c) Detail of Shareholders holding more than 5% Shares in the Company
As per records of the Company, including its register of shareholders/members and other declaration received from shareholders regarding beneficial interest, the above shareholding represents both legal and beneficial ownerships of shares.
I I Other Equity
(a) During the year company revised the useful life of its fixed assets in keeping with the provision of Schedule II. Accordingly, depreciation of Rs.294.09 Lacs on account of assets whose useful life was already exhausted on 01st April, 2015 has been adjusted against reserves.
(b) NATURE & PURPOSE OF RESERVES
1) Capital Reserve:
The Company created part of Capital Reserve on account of warrant money forfeited and part on profit made on hive off of Steel business .
2) Securities Premium Reserve:
Securities Premium reserve is used to record the premium on issue of shares. The reserve can be utilised in accordance with the provision of the Companies Act 2013.
3) Capital Redemption Reserve:
The Company created Capital Redemption Reserve at the time of redemption of Preference Shares and buy back of its own shares. The reserve can be utilised for issuing bonus shares.
Term Loans from Financial Institutions and Banks/other lending Institutions are / shall be secured by way of joint equitable mortgage of all the immovable properties (present and future) of Graphite & Thermal Power units at Mandideep and Hydel unit at Tawa Nagar ranking on pari-passu basis and hypothecation of all movable assets of the Company ( except book debts) subject to prior charge of the company’s bankers on specified movable assets in respect of working capital borrowings. (Refer Note No. 49 for carrying amount of assets pledged as security for borrowings.)
a) Working Capital Borrowings from Banks are secured by hypothecation of all stocks present and future, stores, spare parts, packing materials, raw materials, finished goods, goods in transit / process, book debts, outstanding monies receivable, claims, bills etc.
b) Second charge by way of joint equitable mortgage of immovable properties of the Company in respect of Graphite & Thermal Power units at Mandideep and Hydel unit at Tawanagar. The said charge in favour of bank shall rank sub-ordinate and subservient to the existing charges created by the Company in favour of financial Institutions and banks for their term loans.
(Refer Note No. 49 for carrying amount of assets pledged as security for borrowings.)
The information as required to be disclosed under the Micro, Small and Medium Enterprises (Development) Act, 2006 (“the Act”) has been determined to the extent such parties have been identified by the company, on the basis of information and records available with them. This information has been relied upon by the auditors. Disclosure in respect of interest due on delayed payment has been determined only in respect of payments made after the receipt of information, with regards to filing of memorandum, from the respective suppliers. Disclosure as required under Section 22 of the Act, is as under:
The Company’s Chief Operational Decision Makers consisting of chief executive officer and chief finance officer examines the company’s performance both from product and geographic perspective and has identified two segments, i.e., Graphite electrodes and power.The business segments are monitored separately for the purpose of making decisions about resource allocation and performance assessment.
The Reportable Segments are:
- Graphite Electrodes - The segment comprises of manufacturing of graphite electrodes
- Power Generation - The segment comprises of generation of power for captive consumption and sale.
The measurement principles for segment reporting are based on Ind AS 108. Segment’s performance is evaluated based on segment revenue and profit and loss from operating activities. Operating revenues and expenses related to both third party and inter-segment transactions are included in determining the segment results of each respective segment.
Sales between segments are carried out at arm’s length price and are eliminated on consolidation.
Based on legal advice, discussions with the solicitors, etc., the management believes that there is fair chance of decisions in the company’s favour in respect of all the items listed above and hence no provision is considered necessary against the same. The management believes that the ultimate outcome of these proceedings will not have a material adverse effect on the company’s financial position and results of operations.
Defined Contribution Plan
Contribution to Defined Contribution Plan, recognised as expense for the year are as under :
Defined Benefit Plan
The employees’ gratuity fund scheme managed by a trust is a defined benefit plan. The present value of obligation is determined based on actuarial valuation using the Projected Unit Credit Method, which recognises each period of service as giving rise to additional unit of employee benefit entitlement and measures each unit separately to build up the final obligation. The obligation for leave encashment is recognised in the same manner as gratuity. The Company has maintained a fund with LIC, ICICI Prudential Life Insurance Company Ltd and Relaince Insurance Company Ltd.
The Following table summarizes the components of net benefit expense recognised in the statement of profit and loss and the funded status amounts recognised in the balance sheet:
The estimates of future salary increases, considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.
Note : 4
The Company had entered into operating leases on premises. These leasing arrangements are cancellable,range between 3 to 5 years and usually renewable by mutual consent on mutually agreeable terms.
Note : 5
a) Claims lodged with insurance companies
b) Interest on income tax refunds granted on summary basis, pending finalization of assessments is treated as income in the year of accrual.
Final adjustments are carried out in the year of completion of assessment.
Note : 6
(a) Gross amount required to be spent by the company during the year Rs.97.73 Lacs (Rs.181.14 Lacs)
Loan, guarantee and investments made during the Financial Year 2016-17.
The Company has not given any Loan, Guarantee and not made any investments during the financial year 2016-17.
Note : 7
The company is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees the management of these risks. It is the Company’s policy that no trading in derivatives for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarized below.
(A) Market Risk:
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk:interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include loans and borrowings, deposits. The company is exposed to interest rate risk on variable rate long term borrowings.
(i) Foreign Currency Risk:
Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. Company is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to USD, EURO.
The sensitivity of profit or loss to changes in the exchange rates arises mainly from foreign currency denominated financial instruments and the impact on other components of equity arises from foreign forward exchange contracts, foreign exchange option contracts designated as cash flow hedges.
The following table demonstrates the sensitivity in the USD and Euro to the Indian Rupee with all other variables held constant. The impact on the Company’s profit before tax and other comprehensive income due to changes in the fair value of monetary assets and liabilities is given below:
(ii) Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations with floating interest rates.
(a) Interest Risk Exposure:
The exposure of the Company’s borrowings to interest rate changes at the end of the reporting period are as follows:
An analysis of the maturities is provided in note - 46 (C) below. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total.
Profit/loss is sensitive to higher/lower interest expense from borrowings as a result of changes in interest rates.
(iii) Price risk:
The company is not exposed to any price risk as there is no investment in equities outside the group and the company doesn’t deal in commodities.
(B) Credit Risk:
Credit risk arises from the possibility that the counterparty will default on its contractual obligations resulting in financial loss to the company. The Company is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions, unsecured loan to subsidiary company and other financial instruments.
To manage this, the Company periodically assesses the financial reliability of customers, taking into account the financial conditions, current economic trends, and analysis of historical bad debts and ageing of accounts receivable.
The Company considers the probability of default upon initial recognition of assets and whether there has been a significant increase in credit risk on an ongoing basis through each reporting period.
(C) Liquidity Risk:
Liquidity risk is defined as the risk that company will not be able to settle or meet its obligation on time or at a reasonable price. The company’s treasury department is responsible for liquidity, funding as well as settlement management. In addition, processes and policies related to such risk are overseen by senior management. Management monitors the company’s net liquidity position through rolling, forecast on the basis of expected cash flows.
The table below provides details regarding the remaining contractual maturities of financial liabilities at the reporting date based on contractual undiscounted payments:
Note : 8
(a) Risk Management
The Company’s objective when managing capital are to:
i) Safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and
(ii) Maintain an optimal capital structure to reduce the cost of capital
In order to maintain or adjust the capital structure, the company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
(ii) Loan Covenants:
Under the terms of the major borrowing facilities, the group is required to comply with the following financial covenants:
1) Total Outside Liability (TOL) to Tangible Net Worth (TNW) ratio to be more than 3
2) Current Ratio to be less than 1.0
3) Interest Coverage Ratio to be less than 2.0
4) Gross Debt Service Coverage Ratio (DSCR) to be less than 1.0
5) Total Debt to EBIDTA < 5.5
The company has complied with TOI/TNW (Total outside Liability to Tangible Net Worth Ratio) throughout the reporting period but was unable to comply with other covenants.
EKM Financial Instruments Accounting Classification and Fair Value Measurement
(i) Fair value hierarchy
The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair values:
1. Fair value of cash and short-term deposits, trade and other short term receivables, trade payables, other current liabilities, short term loans from banks and other financial institutions approximate their carrying value largely due to the short-term maturities of these instruments.
2. Financial instruments with fixed and variable interest rates evaluated by the Company based on the parameters such as interest rates and individual credit worthiness of the counterparty. Based on the evaluation, allowances are taken to account the expected losses of these receivables.
The Company uses the following hierarchy for determining and disclosing the fair value of the financial instruments by valuation techniques:
Level 1: Quoted prices (unadjusted) in the active markets for identical assets or liabilities
Level 2: Other techniques for which all the inputs which have a significant effect on the recorded fair values are observable, either directly or indirectly
Level 3: Techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data.
(ii) Valuation technique used to determine fair value
The following methods and assumptions were used to estimate the fair values
i. Fair value of cash and deposits, trade receivables, trade payables, and other current financial assets and liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.
ii. The fair values of the Company’s interest-bearing borrowings and loans are determined by using DCF method using discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk as at 31 March 2016 was assessed to be insignificant.
(a) Exemptions and Exceptions as per Ind AS 101 Exemptions:
Ind AS 101 allows first - time adopters certain exemptions from certain requirements under Ind AS. The company has applied the following exemptions:
i. Carrying value as deemed cost in Property, plant and equipment
The company has elected to apply previous GAAP carrying amount of its plant, property and equipment as deemed cost at the date of transition to IndAS.
ii. Investments in subsidiary and associate
The company has elected to apply previous GAAP carrying amount of its equity investment in associate as deemed cost as on the date of transition to Ind AS.
For investment in subsidiaries, the company has taken fair value on the date of transition to Ind AS as deemed cost.
iii. Long Term Foreign Currency Monetary Items
The company has elected to continue the policy adopted for accounting for exchange difference arising from translation of long term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the transition date to Ind AS, i.e. 01-04-2016.
iv. Business Combination
The company has elected to apply Ind AS 103 prospectively. Accordingly, the business combinations occurring prior to the date of transition have not been restated.
The Company has applied the transition provision in Appendix C of Ind AS 17, “Determining whether an arrangement contains a Lease”, and has assessed all arrangement as at the date of transition.
Ind AS 101 allows first - time adopters certain exceptions from the retrospective application of certain requirements under Ind AS. The company has applied the following exceptions:
An entity’s estimates in accordance with Ind AS at the date of transition to Ind AS shall be consistent with estimates made for the same date in accordance with previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error.
Ind AS estimates as at 1 April 2015 are consistent with the estimates as at the same date made in conformity with previous GAAP. The company made estimates for following items in accordance with Ind AS at the date of transition as theses were not required under previous GAAP:
Investment in securities carried at FVTPL;
Impairment of financial assets based on expected credit loss model.
ii. Derecognition of financial assets and financial liabilities
The company has applied the derecognition requirements for financial assets and financial liabilities in Ind AS 109 prospectively for transactions occurring on or after the date of transition to Ind AS.
iii. Classification and measurement of financial assets
The company has classified the financial assets in accordance with Ind AS 109 on the basis of facts and circumstances that exist at the date of transition to Ind AS.
The Company has opted to avail the exemption under para D13AA of Ind AS 101 and elected to continue the policy adopted for accounting for exchange difference arising from translation of long term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the transition date to Ind AS, i.e. 01-04-2016.The exchange differences on long term foreign currency monetary items are being dealt with in the following manner:
- Foreign exchange difference on acquisition of a depreciable asset, is adjusted in the cost of the depreciable asset, which would be depreciated over the balance life of the asset.
- It has transferred the difference arising out of foreign currency translation in respect of acquisition of depreciable capital assets to the respective assets account/Capital Work-in-progress.In case this accounting practice had not been adopted, the pre-tax profit for the financial year ended 31st March 2017 would have been up by Rs.131.86 lacs (Gain), (Previous year Rs.1060.00 lacs (loss)) with a consequential impact on both the Basic and Diluted EPS.
Inventories, loans & advances, trade receivables and other current / non-current assets are reviewed annually and in the opinion of the Management do not have a value on realization in the ordinary course of business, less than the amount at which they are stated in the Balance Sheet.
Note : 9
There is no general borrowings. Till 31st March, 2017, the amount of interest capitalized is Rs.423.80 Lacs (previous year Rs.1,684.12 Lacs).
Note : 10
Details of Specified Bank Note (SBN) held and transaction during the period 08th November, 2016 to 30th December, 2016 as under
Note : 11
Previous year figures have been regrouped/reclassified, wherever necessary to confirm to current year classification.